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Discy Latest Questions

  1. This answer was edited.

    Cash Withdrawn from Bank for Office Use the cash withdrawn from bank for office use shall be recorded in the books as: Journal Entry: (Using modern rules of accounting) Why is cash account debited? When we withdraw an amount from the bank we receive cash i.e the entity's cash in hand balance increasRead more

    Cash Withdrawn from Bank for Office Use

    the cash withdrawn from bank for office use shall be recorded in the books as:

    Journal Entry: (Using modern rules of accounting)

    cash withdrawn from bank for office use

    Why is cash account debited?

    When we withdraw an amount from the bank we receive cash i.e the entity’s cash in hand balance increases. As per the modern rules of accounting, we debit the increase in an asset. And so in the above entry cash account is debited.

    Why is bank account credited?

    When an amount is withdrawn from the bank the entity receives cash while the balance in his bank account reduces. Thus as per the modern rules of accounting, we credit the decrease in an asset. The bank account of an entity is shown under the head of current assets and so it’s credited since the withdrawals lead to a reduction in the balance with the bank. Hence, in the above entry bank account is credited.

    Journal Entry: (Using golden rules of accounting)

    Cash withdrawn for office use

    Why is the cash account debited?

    As per the golden rule of accounting, cash account is classified as a real account. As per the rule for a real account, we debit what comes in and credit what goes out. Hence, when the cash is withdrawn for the office use we receive cash hence, cash account is debited.

    Why is the bank account credited?

    As per the golden rule of accounting, the bank account is classified as a personal account. As per the rule for a personal account, we debit the receiver and credit the giver. Here, Bank balance reduces i.e bank is the giver hence, its credited.


    Aastha Mehta.

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  1. This answer was edited.

    In the Income Statement, Trading account represents the first part and Profit & Loss account represents the second part. Trading account gives the overall purview of all trading activities, such as purchase and sale of products. It is prepared to ascertain gross profit or gross loss. ProfitRead more

    In the Income Statement, Trading account represents the first part and Profit & Loss account represents the second part.

    Trading account gives the overall purview of all trading activities, such as purchase and sale of products. It is prepared to ascertain gross profit or gross loss. Profit & Loss account gives the final working results of the business. It is prepared to ascertain net profit or net loss.

    Steps to prepare Income Statement from Trial Balance

    All the debit side items related to expenses and credit side items related to income listed in the trial balance shall be posted on the debit side and credit side of the income statement respectively.

    1. Post opening stock on the debit side of the income statement.

    2. Post purchases and sales on the debit and credit side respectively. Deduct purchase return from Purchases and sales return from Sales to arrive at the Net Purchases and Net Sales.

    3. Post all the direct expenses incurred for the purchase & production of goods eg. wages, factory rent, custom duty, carriage inward, manufacturing expenses, etc on the debit side.

    4. Post the amount of closing stock stated in the adjustments.

    5. Make all the necessary adjustments, if any, related to outstanding and prepaid expenses, goods withdrawn for personal use, goods destroyed, etc

    6. Now, find out the gross profit or gross loss.
    If total of credit side > total of debit side ie. credit balance, then the amount of difference is gross profit.
    If total of debit side > total of credit side ie. debit balance, then the amount of difference is gross loss.

    7. Carry forward the ascertained gross profit to the credit side or gross loss to the debit side of the second part of the income statement ie. profit & loss account.

    8. Post all the indirect expenses such as office or administrative expenses, financial expenses, selling or distribution expenses, etc on the debit side of the income statement.

    9. Post all the indirect incomes such as commission received, rent received, dividend received, etc on the credit side of the income statement.

    10. Consider all the necessary adjustments, if any, such as outstanding and prepaid expenses, outstanding and pre-received income, reserve for doubtful debts.

    11. Calculate depreciation and amortization on the assets and post the amount on the debit side.

    12. Now, find out the net profit or net loss.
    If total of credit side > total of debit side ie. credit balance, then the amount of difference is net profit.
    If total of debit side > total of credit side ie. debit balance, then the amount of difference is net loss.

    These steps complete the process of preparation of income statement from trial balance.

    Illustration

    A snippet of trial balance and income statement has been attached for better understanding.

    Trial Balance

    Prepare Income Statement from the above given Trial Balance.

    Income Statement

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  1. This answer was edited.

    Balance Sheet is a statement showing the financial position of a business entity on a particular day. It shows the liabilities and assets of the business. Steps to prepare Balance Sheet from Trial Balance All the debit side items related to assets listed in the trial balance shall be posted on the aRead more

    Balance Sheet is a statement showing the financial position of a business entity on a particular day. It shows the liabilities and assets of the business.

    Steps to prepare Balance Sheet from Trial Balance

    All the debit side items related to assets listed in the trial balance shall be posted on the assets side of the balance sheet. All the credit side items related to capital and liabilities listed in the trial balance shall be posted on the liabilities side of the balance sheet.

    1. Post the amount of capital on the liabilities side of the balance sheet under the head “capital & reserves”.

    2. Then, the net profit or net loss ascertained while preparing the income statement shall be added or reduced respectively from the amount of capital.

    3. Now, post all the “non-current liabilities” such as long-term bank loan, long-term debentures issued, etc on the liabilities side of the balance sheet.

    4. Then, post the “current liabilities” such as sundry creditors, bills payable, etc. Incorporate necessary adjustments related to outstanding expenses and pre-received income.

    5. Moving to the asset side, start with the head “non-current assets”.

    6. First, post the tangible assets under the head “non-current assets” such as plant & machinery, land & building, etc. Calculate depreciation/accumulated depreciation on the tangible assets and deduct the same to arrive at the net value.

    7. Second, post the intangible assets under the head “non-current assets” such as software, goodwill, etc. Calculate amortization/accumulated amortization on the intangible assets and deduct the same to arrive at the net value.

    8. Now, post all the long-term investments acquired such as bonds and debentures under the head “non-current assets”.

    9. After posting all the non-current assets, move forward to posting the “current assets” on the asset side of the balance sheet,

    10. Post “current assets” such as cash in hand, cash at bank, sundry debtors, bills receivable, etc. Incorporate necessary adjustments related to provision for doubtful debts, prepaid expenses, outstanding income,.

    11. Post the amount of closing stock given in the adjustments under the head “current assets”.

    12. The final step is totaling both the liability and asset side. Both sides of the balance sheet should be of equal amount.

    These steps complete the process of preparation of the balance sheet from the trial balance.

    Illustration

    A snippet of trial balance and balance sheet has been attached for better understanding.

    Trial Balance

    Prepare Balance Sheet from the above given trial balance. Net Profit for the year ended 31/03/yyyy is 610,000.

    Balance Sheet

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  1. The sale of services might be a new concept for you as we have commonly heard more about the sale of goods by the businesses. However, the treatment of the two is the same in the books of accounts. Like goods, the sale of services is made on cash as well as credit basis. There are plenty of servicesRead more

    The sale of services might be a new concept for you as we have commonly heard more about the sale of goods by the businesses. However, the treatment of the two is the same in the books of accounts. Like goods, the sale of services is made on cash as well as credit basis. There are plenty of services provided by companies such as financial, management, software, consulting, marketing services, etc. 

    Journal entry for the sale of services on credit

    The respective debtor account is debited while the sales account is credited.

    1. According to the golden rules of accounting:

    Debtors a/cDebitDebit  the receiver
    To Sales a/cCreditCredit all incomes and gains

    (being services sold on credit)

    2. According to the modern rules of accounting:

    Debtors a/cDebitDebit  the increase in asset
    To Sales a/cCreditCredit the increase in revenue

    (being services sold on credit)

    Example

    Mr. K availed the financial services of XYZ Ltd. in May amounting to 20,000 with an agreement to pay the same in the following month. The journal entry in the books of XYZ Ltd. for the month of May is as follows:

    Mr. K’s a/cDebit20,000
    To Sales a/cCredit20,000

    (being services sold on credit)

    Hope this helps.

     

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  1. This answer was edited.

    To begin with, financial reporting is mainly of two types: External and Internal. Reports are prepared for stakeholders (external) as well as the managers (internal) of the organization. The different components of financial reporting are as follows: 1. The financial statements of a company- the incRead more

    To begin with, financial reporting is mainly of two types: External and Internal. Reports are prepared for stakeholders (external) as well as the managers (internal) of the organization.
    The different components of financial reporting are as follows:

    1. The financial statements of a company- the income statement, balance sheet, cash flow statements, and the statement of shareholders equity.

    2. The notes to financial statements

    3. The quarterly and annual reports of a company

    4. Prospectus

    5. Management discussion & analysis

    1. The financial statements

    Income statement – The income statement of a company shows the revenues, expenses, net income, and earnings per share. It is the most important financial statement because it depicts the overall performance of a company.

    Statement of financial position – It comprises of a companies assets, liabilities, and equity.

    Cash flow statement – A cash flow statement shows the monetary position of a company with the help of cash inflows and outflows during a particular financial period.

    Statement of equity – This financial statement shows the changes in owners’ equity over a financial period.

    2. The notes to financial statement

    While recording and classifying the above mentioned financial statements in the books of accounts, the accountants have to maintain various notes to separately show the working. These notes comprise of adjustments such as depreciation, interest, dividends, prepaid expenses, accrued income, etc.

    3. The quarterly and annual reports of a company

    These types of reports are usually prepared in the case of listed companies. These reports comprise of the financial statements and their notes to accounts.

    4. Prospectus

    In terms of finance, a prospectus is a document that portrays the financial security for potential buyers. It is usually recorded in the financial reports of those companies that are going for IPOs.

    5. Management discussion and analysis

    The preparation of a financial report involves the approval at all managerial levels and close analysis to avoid any kind of mistakes. However, this usually takes place in the case of public companies.  

    Hope this helps.

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  1. This answer was edited.

    The different types of financial statements are as follows: Statement of financial position A statement of financial position is also known as a balance sheet. It comprises of a companies assets, liabilities, and equity. With the help of a balance sheet, the financial position of a company is displaRead more

    The different types of financial statements are as follows:

    • Statement of financial position

    A statement of financial position is also known as a balance sheet. It comprises of a companies assets, liabilities, and equity. With the help of a balance sheet, the financial position of a company is displayed ‘as at’ a particular date which is usually at the end of a fiscal period.

      Presentation of a balance sheet
      Balance sheet as at 31st March, yyyy

    balance sheet

    • Income statement

    Unlike a balance sheet, the income statement of a company shows the revenues, expenses, net income, and earnings per share. It is also referred to as the profit and loss a/c. It is the most important financial statement because it depicts the overall performance of a company. The sales of a company are put forward followed by the deduction of all expenses to ascertain the net profit or loss. In case the public companies issue the financial statements the earnings per share figure might also be added.

    Presentation of an Income statement

    income statement

    • Cash flow statement

    As the name suggests, a cash flow statement shows the monetary position of a company with the help of cash inflows and outflows during a particular financial period. It is broadly divided into three categories, operating activities, investing activities, and financing activities. It measures how a company pays off its liabilities, funds its expenses and investments.

    Presentation of a cash statement

    cash flow

    • Statement of changes in equity

    This financial statement shows the changes in owners’ equity over a financial period. The changes are observed through the net profit or loss in the income statement, the issuance or repayment of the share capital, payment of dividends, the gains or losses recognized in equity, etc. It Is also referred to as the statement of retained earnings.

    Hope this helps.

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  1. This answer was edited.

    Return Inwards In the layman language, return inwards refers to the goods returned by the buyer (customer) to the seller (i.e., selling entity) due to various issues which were earlier sold on credit. Return inwards is also known as sales returns. The amount of return inwards (or) sales returns is dRead more

    Return Inwards

    In the layman language, return inwards refers to the goods returned by the buyer (customer) to the seller (i.e., selling entity) due to various issues which were earlier sold on credit. Return inwards is also known as sales returns.

    The amount of return inwards (or) sales returns is deducted from the total sales of the firm. It is treated as a contra-revenue transaction. Return inwards holds the debit balance and is placed on the debit side of the trial balance.

    To make this concept easy and crispy, I would further like to add an example and trial balance (tabular format) for your better understanding.

    Example- On 1st May, Max Ltd. (a dealer in the refrigerator) sold 20 refrigerators for 5,00,000 on credit to Alexa Ltd. On 25th May they returned all the refrigerators to Max Ltd. due to the serious defects in a model of the refrigerators. Pass journal entries for the above transaction in the books of Max Ltd.
    In the books of Max Ltd (Modern Approach)

    a) Entry for the sale of goods

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st MayAlexa Ltd  a/c Dr500,000AssetDebit- The Increase in Asset
     To Sales returns a/c 500,000IncomeCredit- The Increase in Income

    (Being goods sold on credit to Alexa Ltd)

    b) Entry for the return of goods sold to Alexa Ltd.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    25th MaySales return a/c   Dr500,000IncomeDebit- The Decrease in Income
     To Alexa Ltd a/c 500,000AssetCredit- The Decrease in Asset

    (Being goods returned by Alexa Ltd due to serious defects)

    Placement in Trial Balance

    Return Inwards

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  1. This answer was edited.

    Meaning of Fees Earned Fees earned signifies the revenue an entity that is generally engaged in rendering services to its clients generates during the reporting period. When an entity deals in both goods and services it charges fees for the part of services rendered and for the goods delivered it chRead more

    Meaning of Fees Earned

    Fees earned signifies the revenue an entity that is generally engaged in rendering services to its clients generates during the reporting period. When an entity deals in both goods and services it charges fees for the part of services rendered and for the goods delivered it charges the predetermined price. It generally forms a major part of revenue in the service industry.

    Few Instances wherein an entity record the amount earned as fees:

    For Services Rendered –

    • Consultancy
    • Consultancy on Taxation Related Matters
    • Auditing and Assurance
    • Architectural Services
    • Accountancy and Other Legal Services.

     

    Both Goods and Services-

    • Manufacturing and repairs
    • Trading in goods and consultancy
    • Goods and transport

     

    When a combined amount is received for the cases wherein both goods and services are rendered one has to record fees earned proportionately.

    Whether it shall be Credited or Debited?

    Fees Earned shall be credited as fees form a part of the revenue and as per modern rule of accounting, the increase in an income should be “Credited”.

    Even if you follow the golden rule of accounting there will be no change in the answer this is because as per golden rule about a nominal account debit the expenses and losses and credit all incomes and gains.

    Accounting treatment

    If an entity follows Cash System of Accounting entire amount received shall form part of the fees earned. One need not distinguish fees based on actual earnings in the accounting period.

    Journal Entry for the same shall be:

    Bank A/cDebitDebit the increase in an asset.
    To Fees Earned A/cCreditCredit the increase in income.

    The accounting treatment in an income statement is given below-

    Fees received in income statement

    If an entity follows Accrual System of Accounting only that part of the receipts shall form a part of fees earned which has been accrued in the reporting period.

    The amount if received in advance shall be recorded as a liability and if received less then such a difference shall be recorded as sundry debtors under current assets.

    Journal Entry for the same shall be:

    Out of the total revenue, a part of fees is received in advance-

    Bank A/cDebitDebit the increase in an asset.
    To Advance Fees A/cCreditCredit the increase in liability.
    To Fees Earned A/cCreditCredit the increase in income.

    It appears in the income statement and balance sheet as –

    Advance Fees received in balance sheet

    Fees Earned in Income Statement

    In case if only part of fees earned is received in a reporting period:

    Bank A/cDebitDebit the increase in an asset.
    Sundry Debtors A/cDebitDebit the increase in an asset.
    To Fees Earned A/cCreditCredit the increase in income.

    It appears in the income statement and balance sheet as –

    Treatment of Fees in case of Accrual System

    Fees earned but not received

    As it can be seen in all of the cases above that fees earned being an income is credited.


    Aastha

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  1. This answer was edited.

    Depreciation as an Operating Expense Yes, depreciation is an operating expense. To understand this you might want to check the illustrative case given below: You have an entity providing financial services to your clients. You had commenced it 4 years ago. At the time of commencement of the operatioRead more

    Depreciation as an Operating Expense

    Yes, depreciation is an operating expense.

    To understand this you might want to check the illustrative case given below:

    You have an entity providing financial services to your clients. You had commenced it 4 years ago. At the time of commencement of the operations you had 25 employees and laptops being the core assets of your business, were purchased by you for your team initially.

    After 4 years do you still believe that if you dispose these laptops or you decide to replace them you will get the same amount you had spent initially for purchasing them or could they have the same features and technology that a newly launched laptop currently has or uses?

    The answer to this is Obviously Not. The new laptop available in the market will have better features and might be faster. Also, these used laptops shall not possess the same value at the time of their replacement.

    I will have a quick run over the concept of “What is Depreciation?”

    Depreciation is nothing but a diminution in the value of an asset, due to natural wear and tear, exhaustion of subject matter, effluxion of time accident, obsolescence or similar causes.

    Assuming you have received an answer but you still don’t get the logic for treating it as an operating expense the below-given para may be of some help.

    An operating expense is an expense that a business incurs for carrying on its normal operations. Hence, since depreciation is charged on an asset that’s used for day to day business operations it is covered under operating expense even though its a non-cash expense.

    Based on the above para you would agree that all the operating expenses are presented on the debit side of profit and loss or an income statement. And since depreciation is related to an asset used for manufacturing or providing service or aiding business for that matter it is an operating expense and so it shall also be presented on the debit side of an income statement.

    You can check the profit and loss statement added below for a better understanding of the treatment of depreciation in the income statement.

    Depreciation in an income statement

    The depreciation can be treated as a non-operating expense only in the specific circumstances where the assets are not used for the main operations of the business. When such an asset is used for an incidental operation then we treat depreciation as a non-operating expense.


    Aastha

     

     

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  1. This answer was edited.

    What is Amortization? Amortization can be referred to as the depreciation of intangible assets such as goodwill, patent, trademarks, copyrights, computer software, etc. It is the reduction in the value of intangible assets over a period of time. Intangible assets having definite useful life lose theRead more

    What is Amortization?

    Amortization can be referred to as the depreciation of intangible assets such as goodwill, patent, trademarks, copyrights, computer software, etc. It is the reduction in the value of intangible assets over a period of time.

    Intangible assets having definite useful life lose their value over time due to technological changes, contract expirations, etc. So, finite-life intangible assets are amortized on a straight-line basis over the period of their estimated useful lives.

    Journal Entry

    The journal entry for charging amortization expenses in the books of accounts is as follows-

    Amortization Expense A/cDebitDebit the increase in expenses
     To Intangible Assets/Accumulated Amortization Expenses A/cCreditCredit the decrease in assets

    Treatment in the Financial Statements

    Amortization expenses are shown in both the Balance Sheet and Profit and Loss account.

    Financial StatementTreatment
    Profit and Loss accountPresented as Depreciation and Amortization Expenses under the head Expenses
    Balance SheetReduced from the respective Intangible Assets under the head “Non-Current assets”

    Let me also help you understand the same with the help of an example.

    Example

    Suppose Infosys Inc. acquired a new computer software for 1,000,000 in the month of January 20×1. The estimated useful life of the software is 5 years.

    In this case, computer software worth 1,000,000 will be recorded as an intangible asset at the time of acquiring the software.

    However, it will be amortized at the end of each year for 5 years on a straight-line basis ie. 200,000 will be recorded as an expense and will be written-off from the amount of software each year for 5 consecutive years.

    An extract of Profit & Loss A/c and Balance Sheet has been attached for a better understanding of the presentation of amortization expenses.

    Amortization presented in P&L A/c

    The above profit & loss extract shows 200,000 has been recorded as amortization expenses for the period Jan-Dec 20×1.

    Amortization presented in balance sheet

    The above balance sheet extract shows 200,000 amortization expenses written-off from the amount of computer software for the period Jan-Dec 20×1. The balance of 800,000 will be proportionately written-off in the next 4 years.

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  1. This answer was edited.

    Outstanding Subscription Example- XYZ Club has 1200 members each paying a monthly subscription of 100. As on 31st March, Subscription due (or) outstanding subscription amounted to 25,000. Journalise the following transactions for subscription due and received in the books of XYZ Club. In the books oRead more

    Outstanding Subscription

    Example- XYZ Club has 1200 members each paying a monthly subscription of 100. As on 31st March, Subscription due (or) outstanding subscription amounted to 25,000. Journalise the following transactions for subscription due and received in the books of XYZ Club.

    In the books of XYZ Club

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    31st MarchOutstanding Subscription a/c  Dr25,000Representative PersonalDebit– The Receiver
     To Subscription a/c 25,000NominalCredit– All Incomes and Gains

    (Being Subscription due as on 31st March)

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st AprilCash/Bank a/c  Dr25,000RealDebit– What comes into the business
     To Outstanding Subscription a/c 25,000Representative PersonalCredit– The Giver

    (Being Subscription received)

    Accounting Treatment

    Oustanding subscription is treated as an asset to the organization and shown in the asset side of the balance sheet. It is added to the subscription and recorded on the Income side of Income and Expenditure account. It is also termed as Subscription in areas (or) Subscription due.

    Modern Accounting Approach

    We will record the same transaction by following the modern rules of accounting.
    In the books of XYZ Club

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    31st MarchOutstanding Subscription a/c  Dr25,000AssetDebit– The Increase in Asset
     To Subscription a/c 25,000IncomeCredit– The Increase in Income

    (Being Subscription due as on 31st March)

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st AprilCash/Bank a/c  Dr25,000AssetDebit– The Increase in Asset
     To Outstanding Subscription a/c 25,000AssetCredit– The Decrease in Asset

    (Being Subscription received)

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  1. This answer was edited.

    Outstanding Salary Example- Company A Ltd pays their employees a monthly salary of 25,000. The company has a policy that it pays the previous month salary to its employees on 10th of next month. Salary for March is due and is duly to be paid by the 10th of April as per the company policy. JournaliseRead more

    Outstanding Salary

    Example- Company A Ltd pays their employees a monthly salary of 25,000. The company has a policy that it pays the previous month salary to its employees on 10th of next month. Salary for March is due and is duly to be paid by the 10th of April as per the company policy. Journalise the following transaction for salary due and paid in the books of ABC and Co.
    In the Books of ABC and Co.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    31st MarchSalary a/c       Dr25,000NominalDebit- All Expense and Losses
     To Outstanding Salary a/c 25,000Representative PersonalCredit- The Giver

    (Being salary due for March)

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st AprilOutstanding Salary a/c       Dr25,000Representative PersonalDebit- The Receiver
     To Cash/Bank a/c 25,000RealCredit- What goes out of the business

    (Being salary paid)

    Accounting Treatment

    Outstanding salary is added to the salary and shown on the debit side of profit and loss account. It is further shown under the head current liabilities in the balance sheet. Outstanding salary is also known as Salary due (or) Salary payable.

    Modern Accounting Approach

    We will record the same transaction by following the modern rules of accounting
    In the Books of ABC and Co.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    31st MarchSalary a/c       Dr25,000ExpenseDebit- The Increase in Expense
     To Outstanding Salary a/c 25,000LiabilityCredit- The Increase in Liability

    (Being salary due for March)

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st AprilOutstanding Salary a/c       Dr25,000LiabilityDebit- The Decrease in Liability
     To Cash/Bank a/c 25,000AssetCredit- The Decrease in Asset

    (Being salary paid)

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  1. This answer was edited.

    The answer to the question asked is “Liability is credited”. Now, let me help you determine the reason behind why and how is liability credited & not debited. Why and How is Liability credited? Amount payable by a business entity to others is referred to as liability. Liabilities such as creditoRead more

    The answer to the question asked is “Liability is credited”.

    Now, let me help you determine the reason behind why and how is liability credited & not debited.

    Why and How is Liability credited?

    Amount payable by a business entity to others is referred to as liability. Liabilities such as creditors, outstanding expenses, income received in advance, loan taken, etc are classified as personal accounts. So, it is important for us to know both the golden rules for personal accounts and modern rules for the treatment of liability.

    1. Golden rules

    First, we will interpret why liability is credited correlating it with the golden rules with the help of an example.

    Golden rules of accounting states-

    Debit the receiver, Credit the giver

    Example

    Lenovo Inc. acquired computer spares from its supplier XYZ Inc. for 5,00,000. The amount is still payable by Lenovo Inc. (ie.liability). As XYZ Inc. is the supplier of computer spares (ie. the giver of products & services), it is to be credited as per the golden rules.

    Journalizing this transaction in the books of Lenovo Inc. will be-

    Purchase A/cDebit5,00,000Expense A/cDebit all expenses and losses
     To XYZ Inc. A/cCredit 5,00,000Personal A/cCredit the giver

    The above journal entry shows that XYZ has been credited because he is the supplier and also a liability for Lenovo Inc.

    2. Modern rules

    Now, we will determine the reason why liability is credited correlating it with the modern rules along with an example.

    Modern rules of accounting states-

    Credit the increase in liability

    Example

    During the accounting period Jan-Dec 20×2, Mr. Alex has already paid rent 10000 each month for 10 months. But he could not pay the rent for 2 months until the end of the period. So, rent 20000 is still payable (ie. liability) by Mr. Alex.

    The journal entry for outstanding rent will be as follows-

    Rent A/cDebit20,000Debit the increase in expense
     To Outstanding Rent A/cCredit 20,000Credit the increase in liability

    The above entry shows an increase in liability of Mr. Alex as the amount of rent 20000 is payable by him.

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  1. This answer was edited.

    Before I answer this question I think it is necessary at your end to understand the modern rule of accounting related to the Expenses. It says - when there is an increase in an expense you will have to debit it and when there is a reduction in an expense you will have to credit it. Now, moving ontoRead more

    Before I answer this question I think it is necessary at your end to understand the modern rule of accounting related to the Expenses.

    It says – when there is an increase in an expense you will have to debit it and when there is a reduction in an expense you will have to credit it.

    Now, moving onto the question put up by you “Expense is a debit or a credit?”

    Applying the above mentioned modern rule of accounting I believe the answer to your question is that it’s a Debit. As mentioned earlier as per the modern rule of accounting an increase in an expense is Debited.

     For Example,

    You run a business of manufacturing food products and to produce the food product you need various inputs like raw materials, labour, electricity and fuel etc. now at every month end, you will have to pay electricity charges based on the units of power consumed by you. So, the electricity charges that you pay is nothing but an expense for your business.

    The accounting treatment of the same shall be:

    Electricity Charges A/cDebitDebit the increase in expenses.
    To Cash A/cCreditCredit the decrease in an asset.

    The above answer can also be justified using the Golden Rule of Accounting for nominal accounts –

    Before moving ahead and applying the golden rule we will have a quick run on the concept of nominal account.

    A nominal account is nothing but what you call profit and loss or an income statement account. At the beginning of every accounting period, the balance of such account is always Zero which is not the case in case of personal and real accounts

    The Golden rule of accounting says –

    “Debit all expenses and losses and credit all incomes and gains “.

    The accounting entry by applying the golden rule for the same example taken above shall be:

    Electricity Charges A/cDebit Debit all expenses and losses (Nominal Account Rule)
    To Cash A/cCreditCredit what goes out (Real Account Rule)

    Hence, since electricity charges are expenses for the entity so we debit it applying the rule of a nominal account.

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  1. Outstanding expenses such as outstanding salary, rent, wages, etc. are shown in the trial balance on the credit side as they are a liability for the business. I would like to explain this further with the help of an example which is as follows: Example The trial balance of XYZ Ltd. shows the amountRead more

    Outstanding expenses such as outstanding salary, rent, wages, etc. are shown in the trial balance on the credit side as they are a liability for the business. I would like to explain this further with the help of an example which is as follows:

    Example

    The trial balance of XYZ Ltd. shows the amount of rent as 7,000, however, rent amounting to 4,000 has not been paid yet for March.

    This outstanding rent of 4,000 is shown in the Trial balance as follows:

    Trial Balance as on 31st March, yyyy

    PARTICULARSDEBITCREDIT
       
    Debtors50,000
    Cash4,000
    Sales1,30,000
    Purchases90,000
    Bank Loan50,000
    Rent7,000
    Salary5,000
    Outstanding Rent4,000
    Creditors27,000
    Plant & Machinery40,000
    Investments15,000
     2,11,0002,11,000

    Note:

    • When the outstanding expenses are already shown in the Trial balance it means that the adjusting entry has already been recorded in the books of accounts.
    • It shall be shown in the balance sheet of the company under current liabilities and no adjustment is required in the Profit and loss a/c.
    • However, If outstanding expenses are not shown in the Trial balance then these expenses, shall be added to their respective account and recorded on the debit side in the Profit and loss a/c.

    Hope this helps.

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