1. A company incurs several expenses arising from its operating activities. For example, rent, rates, taxes, telephone bills, electricity bills, etc. It is important to record the same in the books of accounts to ascertain the true financial position of a company. Journal entry for paid telephone billRead more

    A company incurs several expenses arising from its operating activities. For example, rent, rates, taxes, telephone bills, electricity bills, etc. It is important to record the same in the books of accounts to ascertain the true financial position of a company.

    Journal entry for paid telephone bill

    The telephone charges a/c is debited and the respective cash or bank a/c is credited.

    1. According to the golden rules of accounting:

    Telephone charges a/c Debit Debit  all expenses and losses
    To Cash a/c Credit Credit what goes out

    (being telephone bill paid)

    2. According to the modern rules of accounting:

    Telephone charges a/c Debit Debit the increase in expense
    To Cash a/c Credit Credit the decrease in asset

    (being telephone bill paid)

    Example

    ABC Ltd. paid the telephone bill amounting to 10,000. The journal entry in the books of ABC Ltd is as follows:

    Telephone charges a/c Debit 10,000
    To Cash a/c Credit 10,000

    (being telephone bill paid)

    Hope this helps.

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  2. This answer was edited.

    Meaning of days sales outstanding Days sales outstanding (DSO) refers to the average number of days the receivables from credit sales remain outstanding in the books of accounts before they are converted to cash. A high DSO portrays that the time interval between credit sales and cash receivables isRead more

    Meaning of days sales outstanding

    Days sales outstanding (DSO) refers to the average number of days the receivables from credit sales remain outstanding in the books of accounts before they are converted to cash. A high DSO portrays that the time interval between credit sales and cash receivables is very long and might lead to problems in the cash flow of the company while on the other hand, a low DSO shows that the company is able to collect the amount in fewer days. It is important to note here that the formula for DSO is applicable only in relation to the credit sales of the company.

    The formula to calculate days sales outstanding is as follows:

    formula

    DSO can be calculated on a monthly, quarterly, or yearly basis depending on the terms of the company.

    Example

    XYZ Ltd. made credit sales amounting to 7,00,000 in October, out of which 4,00,000 are yet to be received. As there are 31 days in October, the DSO for XYZ Ltd. shall be calculated as follows:

    DSO = Accounts receivables/ Total credit sales x No. of days

    = 4,00,000/7,00,000 x 31

    = 17.7 days

    In my opinion, 17.7 days is a low average turnaround for a company to collect cash from accounts receivables in a month and hence portrays a good DSO however, it varies from company to company what they consider to be a high or low DSO.

    Hope this helps.

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  3. This answer was edited.

    A customer can purchase on two basis: cash or credit. In case of a cash purchase, the payment is made immediately by the customer however, in case of a credit purchase, the payment is expected to be made in the future as per the agreement. Journal entry for purchase of machinery on credit basis: MacRead more

    A customer can purchase on two basis: cash or credit. In case of a cash purchase, the payment is made immediately by the customer however, in case of a credit purchase, the payment is expected to be made in the future as per the agreement.

    Journal entry for purchase of machinery on credit basis:

    Machinery a/c Debit Debit  the increase in asset
    To Creditor/suppliers a/c Credit Credit the increase in liability

    (being machinery purchased on credit)

    Journal entry for purchase of machinery for cash:

    Machinery a/c Debit Debit  the increase in asset
    To Cash Credit Credit the decrease in asset

    (being machinery purchased for cash)

    Example

    1. Mr. K purchased machinery from ABC Ltd. amounting to 20,000 on credit. The journal entry in the books of Mr. K is as follows:

    Machinery a/c Debit 20,000
    To ABC Ltd. a/c Credit 20,000

    (being machinery purchased on credit)

    2. Mr. A purchased machinery from XYZ Ltd. amounting to 20,000 on a cash basis. The journal entry in the books of Mr. A is as follows:

    Machinery a/c Debit 40,000
    To Cash Credit 40,000

    (being machinery purchased for cash)

    Hope this helps.

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  4. This answer was edited.

    In simple words, provision for doubtful debts refers to the amount set aside as a provision from the profits of the business for the amount that is doubtful to be received in the future. Based on past trends, a business determines the approximate amount of doubtful debts every year and creates a proRead more

    In simple words, provision for doubtful debts refers to the amount set aside as a provision from the profits of the business for the amount that is doubtful to be received in the future. Based on past trends, a business determines the approximate amount of doubtful debts every year and creates a provision for the same.

    Treatment of provision for doubtful debts

    It is not known by many that provision for doubtful debts can appear in the trial balance of a company. It has a credit balance as it is an accounts receivables contra account. In case it is shown in the trial balance it will be recorded in ONE place only i.e. on the credit side of the profit and loss account.

    It is important to note that provision for doubtful debts can either appear in the trial balance or as an adjustment entry. In case it appears in the trial balance the above-mentioned treatment has to be followed however, in case it appears as an adjustment entry then it will be recorded on the credit side of the profit and loss a/c  as well as on the liabilities side of the balance sheet.

    Placement of provision for doubtful debts in the trial balance

    The trial balance of XYZ Ltd. is as follows:

    trial balance

    In the Profit and loss a/c

    p/l a/c

    In the balance sheet

    balance sheet

    Hope this helps.

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  5. This answer was edited.

    In the modern business world, sales are made on credit as well as cash basis. Even though there’s a high risk of bad debts in selling goods on a credit basis, the companies prefer the same to develop customer loyalty and meet the cut-throat competition. 'Sold goods on credit' is nothing but the saleRead more

    In the modern business world, sales are made on credit as well as cash basis. Even though there’s a high risk of bad debts in selling goods on a credit basis, the companies prefer the same to develop customer loyalty and meet the cut-throat competition.

    ‘Sold goods on credit’ is nothing but the sale of goods on a credit basis i.e. providing goods to the customer with an expectation of receiving the payment in the future. This amount owed by the debtor leads to an increase in the accounts receivables of the company and is a current asset.

    Journal entry for sold goods on credit

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

    1. According to the golden rules of accounting:

    Debtors a/c Debit Debit  the receiver
    To Sales a/c Credit Credit all incomes and gains

    (being goods sold on credit)

    2. According to the modern rules of accounting:

    Debtors a/c Debit Debit  the increase in asset
    To Sales a/c Credit Credit the increase in revenue

    (being goods sold on credit)

    Example

    XYZ Ltd. sold goods amounting to 50,000 to Mr. A on credit. The journal entry in the books of XYZ Ltd. is as follows:

    Mr. A’s a/c Debit 50,000
    To Sales a/c Credit 50,000

    (being goods sold on credit)

    Hope this helps.

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  6. 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/c Debit Debit  the receiver
    To Sales a/c Credit Credit all incomes and gains

    (being services sold on credit)

    2. According to the modern rules of accounting:

    Debtors a/c Debit Debit  the increase in asset
    To Sales a/c Credit Credit 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/c Debit 20,000
    To Sales a/c Credit 20,000

    (being services sold on credit)

    Hope this helps.

     

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  7. This answer was edited.

    The differences between cost centre and cost unit are as follows: PARTICULARS COST CENTRE COST UNIT MEANING A cost centre refers to the costs incurred about any part of the organisation such as activities, different functions, service or production location, etc. These departments or functions do noRead more

    The differences between cost centre and cost unit are as follows:

    PARTICULARS COST CENTRE COST UNIT
    MEANING A cost centre refers to the costs incurred about any part of the organisation such as activities, different functions, service or production location, etc. These departments or functions do not affect the profit of the organization directly however, monetary costs are incurred to operate the same. Cost unit refers to the cost incurred on a measurable unit of product or service of the organization.
    FUNCTION The main function of a cost centre is to classify costs as well as track expenses. It functions as a standard of measure for making comparisons with other costs.
    COST MEASURE The overall costs in a cost centre are gathered by the cost units. The unit of cost absorbs all the overhead costs. The overall costs are measured in terms of direct and indirect costs of tangible units.
     

    ASCERTAINMENT

    It is determined through the efficiency of operations, services provided to the customers, organizational structure, size, technique of production etc. It is determined as per the final products and trade practices. However, it is strictly not restricted to the same.
    RANGE Even if a single product or service is provided there are a lot of cost centres. Every individual product or service has a different cost unit.

     

     

     

    EXAMPLES

    A company’s IT, accounting, Research and development department, manufacturing activities, customer services, etc.  Automobile industry – no. of vehicles, gas – cubic metre, education – student year, etc.

     

    Hope this helps.

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  8. This answer was edited.

    Meaning The word “set-off" gives us the idea that it is something related to writing off or reduction in the value. In simple accounting terms, when a debtor can decrease the amount of one’s debt by the amount owed by the creditor to the debtor it is known as setting off. The creditor’s claim on theRead more

    Meaning

    The word “set-off” gives us the idea that it is something related to writing off or reduction in the value. In simple accounting terms, when a debtor can decrease the amount of one’s debt by the amount owed by the creditor to the debtor it is known as setting off. The creditor’s claim on the debtor is reduced by the amount of the debtor’s claim on the creditor. It is important to note that the claims are unrelated or a separate transaction.

    Working of a set-off

    A set-off in terms of accounting is of the following types and applies accordingly:

    1. Contractual set-off – Many a time based on a contract or business relations a debtor agrees on excluding the right to set off. In this case, although the creditor owes some amount to the debtor it is considered nil, and the debtor is obliged to pay the entire amount of debt.

    2. Banking set-off – The bank gets the right to set off a credit balance against another debit balance when a person has more than one accounts.

    3. Insolvency set-off – There are compulsory statutory rights of set-off under the Insolvency rules 2016 for an insolvent debtor of the company against its creditor.

    4. Legal set-off – Under legal proceedings, mutually exclusive unsettled debts between the two parties, arising from transactions not related to each other can be set off.

    Example

    Mr. A purchased goods from XYZ Ltd. amounting to 40,000. However, XYZ Ltd. owes an amount of 10,000 to Mr. A as per past transactions. The working of the amount owed by Mr. A (debtor) to XYZ Ltd. (creditor) as per their agreement is as follows:

    Solution:

    Original amount owed by Mr. A = 40,000
    Amount owed by XYZ Ltd. to Mr. A as per past transactions = 10,000

    Set-off hereby allows Mr. A to pay only 30,000 (40,000 – 10,000) to XYZ Ltd. as a settlement of the claim.

    The main benefit of set-off is that ensures payment security and hassle-free settlement of disputes at both the ends.

    Hope this helps.

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  9. This answer was edited.

    Adjustment in final accounts Adjustment of bad debts is often a tedious task for the students which ultimately leads to an error and false representation of the financial position of the business. They are adjusted in two ways depending on their record in the books of accounts, which is as follows:Read more

    Adjustment in final accounts

    Adjustment of bad debts is often a tedious task for the students which ultimately leads to an error and false representation of the financial position of the business. They are adjusted in two ways depending on their record in the books of accounts, which is as follows:

    1. Treatment of bad debts before preparation of trial balance

    As a debtor fails to pay the due amount his account is credited and closed as well as a new account is opened known as the Bad debts account.

    In the trial balance:
    The net amount of bad debts incurred during the financial period and the Sundry debtors excluding the amount of bad debts appear as a separate item in the Trial balance on the debit side.

    In the Income statement or the Profit and loss a/c:

    Bad debts being an expense are recorded under operating expenses in the income statement or on the debit side of the Profit and loss a/c.

    Journal entries for adjustment of bad debts:

    Bad debts a/c Debit
    To Sundry debtors a/c Credit

    (being bad debts written off)

    Profit and loss a/c Debit
    To Bad debts a/c Credit

    (being bad debts transferred to p/l a/c)

    2. Treatment of bad debts after the preparation of trial balance

    Sometimes the amount of bad debts may be mentioned as an adjustment item outside the Trial balance. These types of debts are often referred to as further bad debts and have not yet been written off. To provide a true financial position of the company it is necessary to include these bad debts while preparing the Final accounts.

    In the profit and loss a/c:

    They are added to the already written off bad debts and appear on the debit side of the profit and loss a/c.

    In the balance sheet:

    They are deducted from the adjusted sundry debtors on the asset side of the balance sheet.

    Journal entry for adjustment of further bad debts:

    Bad debts a/c Debit
    To Sundry debtors a/c Credit

    (being bad debts written off)

    Example:

    The extract of the trial balance of XYZ Ltd. is as follows:

    PARTICULARS DEBIT CREDIT
    Sundry debtors 50,000  
    Bad debts 8,000  

    XYZ Ltd. sells goods to a retailer at 50 days credit. However, after 50 days, the company realizes that the retailer has been declared insolvent and only an amount of 4,000 will be received against the total amount of 8,000. The adjustment in the final accounts is as follows:

    Bad debts a/c Debit 4,000 Debit all expenses and losses
    To Retailers a/c Credit 4,000 Credit the giver

    (being amount irrecoverable from the retailer)

    Extract of Profit and loss a/c

    PARTICULARS AMOUNT PARTICULARS AMOUNT
    To Bad debts a/c        8,000      
    (+) further bad debts  4,000 12,000    

    Extract of balance sheet

    Liabilities Amount Assets Amount
    Sundry debtors           50,000
    (-) Further bad debts   4,000
    46,000

    Hope this helps.

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  10. In a layman’s language, a trade discount refers to a reduction/fall in the original price of a commodity. This type of discount is usually granted on the list price of the products by the supplier or wholesaler to the retailer for considerations such as buying goods in bulk, trade relations, etc. NoRead more

    In a layman’s language, a trade discount refers to a reduction/fall in the original price of a commodity. This type of discount is usually granted on the list price of the products by the supplier or wholesaler to the retailer for considerations such as buying goods in bulk, trade relations, etc.

    No journal entry is recorded separately in the books of accounts for trade discounts. The entries that are shown in the sales or purchase books are recorded as the net amount.

    This type of discount is simply utilised to determine the net amount for a customer. Since the trade discount is deducted before any exchange takes place, it does not have any accounting entry.

    Example

    A distributor sells goods to Mr. U amounting to the list price of 8,000 and offers a trade discount of 10% as the customer purchased goods in bulk. The net price will be calculated as follows:

    List price = 8,000
    Trade discount = 10%

    Net amount = 8,000 – (8,000 x 10%)
    = 8,000 – 800
    = 7,200.

    The journal entry in the books of the distributor is as follows:

      Cash a/c Debit 7,200 Debit the increase in asset
      To  Sales a/c Credit 7,2000 Credit the increase in revenue

    (being goods sold)

    The journal entry in the books of Mr. U is as follows:

      Purchase a/c Debit 7,200 Debit the increase in expenses
      To  Cash a/c Credit 7,2000 Credit the decrease in asset

    (being goods purchased)

    Note: The seller as well as the buyer will record the transactions in the books of accounts after subtracting the trade discount allowed from the original amount. As shown in the example above, both the distributor and Mr. U shall record the transaction at 7,200. No separate entry shall be shown for trade discount.

    Hope this helps.

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  11. This answer was edited.

    Purchase return is credited in the books of accounts. To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship. Rules of accounting To apply these rules of accounting we first need to analRead more

    Purchase return is credited in the books of accounts.

    To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship.

    Rules of accounting

    To apply these rules of accounting we first need to analyze the type of account in question. An account is said to be nominal when it is related to the incomes, gains, losses, or expenses of a business. The goods purchased on a cash/credit basis by the business are returned to the seller which in turn reduces the accounts payables and is a gain for the organization, hence purchase returns is a nominal account.

    Golden or the traditional rules of accounting

    Firstly, we shall consider the golden rules of accounting for a nominal account to determine why purchase return a/c has a credit balance. The rule is as follows:

    “Debit all expenses and losses,

    Credit all incomes and gains.”

    Example

    ABC Ltd. purchased raw materials from a supplier worth 60,000 on a cash basis. After complete scanning, some defects were identified and the company decided to return the damaged materials worth half of the total value. The journal entries in the books of ABC Ltd. are as follows:

     

    Purchase a/c

     

    Debit

     

    60,000

    Debit all expenses and losses
     

    To cash a/c

     

    Credit

     

    60,000

    Credit what goes out

    (being goods purchased from the supplier)

     

    Cash a/c

     

    Debit

     

    30,000

    Debit what comes in
     

    To Purchase return a/c

     

    Credit

     

    30,000

    Credit all incomes and gains

    (being goods returned to the seller)

    Note: A debit of 60,000 in the Purchase a/c and a credit of 30,000 in Purchase return a/c portrays that ABC Ltd. had a net purchase of 30,000. (60,000 – 30,000)

    Modern rules of accounting

    The modern rule is as follows:

    Type of account Debit Credit
    Expense account Increase Decrease

    Example

    XYZ Ltd. purchased goods from Mr. A, for 40,000 on a credit basis. Due to a lack of quality goods worth 10,000 were returned. The journal entries in the books of XYZ Ltd. are as follows

     

    Purchase a/c

     

    Debit

     

    40,000

    Debit the increase in expenses
     

    To Mr. A’s a/c

     

    Credit

     

    40,000

    Credit the increase in liability

    (being goods purchased on credit basis)

     

    Mr. A’s a/c

     

    Debit

     

    10,000

    Debit the decrease in liability
     

    To Purchase return a/c

     

    Credit

     

    10,000

    Credit the decrease in expenses

    (being goods returned to the supplier)

    Note: A debit of 40,000 in the Purchase a/c and a credit of 10,000 in the Purchase return a/c shows that XYZ Ltd. had a net purchase worth 30,000. (40,000 – 10,000)

    Hope this helps.

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  12. This answer was edited.

    Sales return is debited in the books of accounts. It is a contra revenue account. To make the concept simpler, I would like to introduce you to the Modern rule of accounting, which is designed to explain the debit and credit relationship. Rule of accounting Modern rules The modern rule is as followsRead more

    Sales return is debited in the books of accounts. It is a contra revenue account.

    To make the concept simpler, I would like to introduce you to the Modern rule of accounting, which is designed to explain the debit and credit relationship.

    Rule of accounting

    Modern rules

    The modern rule is as follows

    Type of account Debit Credit
    Revenue account Decrease Increase

    When a sale is made it is credited in the books of account as it leads to an increase in the revenue, however, when the goods are returned by the customer it has a debit effect because it leads to a decrease in the revenue.

    According to the modern rule of accounting, the sales return account has been debited because it leads to a fall in the revenue of the business. In case the sales were made on a credit basis the expected accounts receivable should be credited by the amount of sales returned as no amount shall be received.  However, if the sales were made on a cash basis then an accounts payable should be issued to acknowledge the liability of repaying the customer for the purchase.

    Example:

    The credit sales of 1,00,000 were returned by Mr. K to ABC Ltd. as the goods were defective. The journal entry in the books of ABC Ltd. is as follows

    Sales return a/c Debit 1,00,000 Debit the decrease in revenue
    To Mr. K’s a/c Credit 1,00,000 Credit the decrease in asset

    (being goods returned by the customer)

    Hope this helps.

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  13. This answer was edited.

    Branches of accounting The types or branches of accounting are as follows: Financial accounting - Strict compliance with the generally accepted principles of accounting (GAAP) is observed while recording and classifying the business transactions and preparing the financial statements of a company. IRead more

    Branches of accounting

    The types or branches of accounting are as follows:

    • Financial accounting – Strict compliance with the generally accepted principles of accounting (GAAP) is observed while recording and classifying the business transactions and preparing the financial statements of a company. It primarily processes historical data in a chronological order for external users.

     

    • Managerial accounting – This branch of accounting focuses on preparing data related to the operations of a company which shall be beneficial for the managers in making key decisions. It does not strictly abide by GAAP and is for the internal users.

     

    •  Cost accounting – It is similar to managerial accounting and is usually used in the manufacturing industries as they have lots of costs and resources to manage. As the name suggests, it focuses on classifying and recording the production costs (fixed as well as variable costs).

     

    • Auditing – This branch of accounting is of two types, internal and external auditing. Internal auditing comprises of how a company functions and distributes the accounting tasks among its employees, on the other hand, external auditing involves an independent third party that analyses a company’s financial statements and ensures that it abides by GAAP.

     

    • Tax accounting – This focuses on the preparation of tax returns and planning. It enables a business in determining the income and other types of taxes, and how to legally minimize the amount of tax owed.

     

    • Accounting Informations System – AIS, includes the management of accounting software, employees, and bookkeeping. It focuses on the monitoring, implementation, application, and observation of accounting systems.

     

    • Forensic accounting – It is a trending branch of accounting. Forensic accounting focuses on the legal affairs of a business such as fraud, disputes, legal charges, claim settlements, etc.

     

    • Fiduciary accounting – It refers to the management of property for a third party or business. The accountants manage the administration of a property. For example, trust accounting, estate accounting, etc.

    Hope this helps.

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  14. This answer was edited.

    LIST OF FIXED AND CURRENT ASSETS FIXED ASSETS CURRENT ASSETS 1. PLANT & MACHINERY 1. CASH 2. LAND 2. CASH EQUIVALENTS 3. EQUIPMENTS 3. SHORT- TERM DEPOSITS 4. FURNITURE & FIXTURES 4. INVENTORY 5. VEHICLES 5.MARKETABLE SECURITIES 6. LEASEHOLD IMPROVEMENTS 6.OFFICE SUPPLIES 7. COMPUTER SOFTWARRead more

    LIST OF FIXED AND CURRENT ASSETS

    FIXED ASSETS CURRENT ASSETS
    1. PLANT & MACHINERY 1. CASH
    2. LAND 2. CASH EQUIVALENTS
    3. EQUIPMENTS 3. SHORT- TERM DEPOSITS
    4. FURNITURE & FIXTURES 4. INVENTORY
    5. VEHICLES 5.MARKETABLE SECURITIES
    6. LEASEHOLD IMPROVEMENTS 6.OFFICE SUPPLIES
    7. COMPUTER SOFTWARE 7.TRADE RECEIVABLES
    8.BUILDINGS 8. SHORT TERM BORROWINGS
    9. PATENTS 9. ACCOUNTS RECEIVABLES
    10. TRADEMARKS 10. PREPAID EXPENSES

    Presentation in the balance sheet

    Balance sheet of ABC Ltd. is as follows:

    balance sheet

    Hope this helps.

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  15. This answer was edited.

    Equity in accounting refers to the sum of money that is returned or paid to the owners/shareholders at the time of winding up of the company once all of the assets are liquidated and the liabilities are paid off. It is generally referred to as Shareholder's equity or Owner's equity. It can also be cRead more

    Equity in accounting refers to the sum of money that is returned or paid to the owners/shareholders at the time of winding up of the company once all of the assets are liquidated and the liabilities are paid off. It is generally referred to as Shareholder’s equity or Owner’s equity. It can also be calculated with the help of a formula derived from the accounting equation which is as follows:

    EQUITY = TOTAL ASSETS – TOTAL LIABILITIES 

    Treatment of equity in accounting

    Equity is shown in the balance sheet under shareholder’s equity, which is a result of the difference between the total assets and total liabilities of the company. I would like to explain this concept further with the help of an example which is as follows:

    Example

    The following is the balance sheet of XYZ Ltd. which shows their Equity, Liability, and Assets during the current financial year.

    Balance sheet as at 31st March, yyyy

    PARTICULARS NOTE NO. AMOUNT
    EQUITY AND LIABILITIES
    Shareholder’s Fund
    Share capital 1,00,000
    Reserves & Surplus 40,000
    Non-Current Liabilities
    Long- Term Borrowings 14,000
    Current Liabilities
    Short term borrowings 3,000
    Trade Payables 6,000
    Short Term provision 3,000
    Total 1,66,000
    ASSETS
    Non-Current Assets
    Fixed assets 1,10,000
    Current assets
    Inventories 20,000
    Trade Receivables 30,000
    Cash and bank balance 6,000
    Total 1,66,000

    NOTE: As mentioned earlier, equity represents the difference between the total assets and total liabilities which can be easily recognized in the balance sheet given above.

    Total Assets = 1,66,000

    Total Liabilities = 26,000

    Equity = Total assets – Total liabilities

    = 1,66,000 – 26,000

    = 1,40,000 

    Hope this helps.

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  16. This answer was edited.

    Capital is credited in the books of accounts as it is a liability for the business. To make the concept simpler, I would like to familiarize you with the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship. Rules of Accounting For the application ofRead more

    Capital is credited in the books of accounts as it is a liability for the business.

    To make the concept simpler, I would like to familiarize you with the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship.

    Rules of Accounting

    For the application of rules, we first need to determine the type of account in question. An account is said to be personal when it is related to firms, companies, individuals, etc. As I mentioned earlier, capital is a liability for the firm/company/business because it is obliged to repay its owner, hence, it is a personal account.

    Golden Rules or The Traditional Rules

    Firstly, we shall consider the golden rules of accounting for personal accounts to determine why capital a/c has a credit balance. The rule is as follows:

    “Debit the receiver,

    Credit the giver”

    Example

    Mr. A is a sole proprietor. The capital invested by him accounts for 1,00,000. The journal entries in his books of accounts are as follows:

    Cash a/c Debit 1,00,000 Debit what comes into the business
    To Capital a/c Credit 1,00,000 Credit the giver

    (being cash invested into the business in the form of capital)

    Here we have credited the capital a/c as the business is liable to repay the invested amount to the proprietor in the form of profits.

    Modern Rules

    The modern rule is as follows:

    Type of account Debit Credit
    Capital Decrease Increase

    Example

    Mr. A commenced business with a capital of 5,00,00. The journal entry is as follows

    Cash a/c Debit 5,00,000 Debit the increase in asset
    To Capital a/c Credit 5,00,000 Credit the increase in capital/liability

    (being cash invested in the form of capital)

    Hope this helps.

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  17. This answer was edited.

    In simple words, income received in advance is treated as a current liability because the income that has been received by the company before its due date, is not yet earned and the company is obliged to deliver the purchased goods or services in the future. Assume that you have received an amount fRead more

    In simple words, income received in advance is treated as a current liability because the income that has been received by the company before its due date, is not yet earned and the company is obliged to deliver the purchased goods or services in the future. Assume that you have received an amount from a customer, for the goods or services that you will provide in the future, therefore, in the current financial period it is a liability for your company. It can be referred to as Deferred revenue, Deferred income, or Unearned income.

    Example

    XYZ Ltd. has received 40,000 from a customer in March for goods that will be delivered in April.

    XYZ Ltd. will debit the Cash a/c for 40,000 and credit the Deferred Revenue a/c for 40,000. On the 31st of March, the balance sheet of XYZ Ltd. shall include 40,000 in the cash of their company and record the deferred revenue of 40,000 under current liabilities.

    The journal entries to be recorded are as follows:

    March Cash a/c  Debit 40,000 Debit the increase in asset
      To Deferred Revenue a/c Credit 40,000 Credit the increase in liability

    (being income received in advance)

    April Deferred Revenue a/c Debit 40,000 Debit the decrease in liability
       To Sales Revenue a/c Credit 40,000 Credit the increase in revenue

    (being  goods sold to the customer)

    Placement in the balance sheet

    (Extract of the balance sheet)

    balance sheet

    Hope this helps.

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  18. This answer was edited.

    Prepaid expenses refer to the advance payment of goods or services the benefits of which shall be received in the future. Expenses such as prepaid rent, insurance, etc. are shown in the trial balance on the debit side as they are initially an asset for the business, however, once the benefit is receRead more

    Prepaid expenses refer to the advance payment of goods or services the benefits of which shall be received in the future. Expenses such as prepaid rent, insurance, etc. are shown in the trial balance on the debit side as they are initially an asset for the business, however, once the benefit is received, the value of the asset falls. I would like to explain this further with the help of an example which is as follows:

    Example

    The trial balance of ABC Ltd. shows the rent amounting to 4,500 as a prepayment for April.

    This prepaid rent of 4,500 is shown in the trial balance as follows:

    Trial Balance as on 31st March, yyyy

    PARTICULARS DEBIT CREDIT
    Debtors 50,000
    Cash 4,000
    Sales 1,30,000
    Purchases 90,000
    Bank Loan 50,000
    Retained earnings 2,000
    Salary 5,000
    Prepaid rent 4,500
    Creditors 26,500
    Plant & Machinery 40,000
    Investments 15,000
    2,08,500 2,08,500

    Note

    • If the prepaid expenses are already shown in the trial balance it means that an adjusting entry has already been recorded in the books of accounts and they shall be further recorded only in the balance sheet of the company.
    • It shall be shown in the balance sheet of the company under current assets.
    • However, If prepaid 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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  19. 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

    PARTICULARS DEBIT CREDIT
         
    Debtors 50,000
    Cash 4,000
    Sales 1,30,000
    Purchases 90,000
    Bank Loan 50,000
    Rent 7,000
    Salary 5,000
    Outstanding Rent 4,000
    Creditors 27,000
    Plant & Machinery 40,000
    Investments 15,000
      2,11,000 2,11,000

    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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  20. This answer was edited.

    A ledger account consists of the financial transactions of a business. It is generally used by the accountants to record the summarized monetary transactions. It is also known as the principal book of accounts and books of final entry. As per my understanding, the 'Debit and Credit format' refers toRead more

    A ledger account consists of the financial transactions of a business. It is generally used by the accountants to record the summarized monetary transactions. It is also known as the principal book of accounts and books of final entry.

    As per my understanding, the ‘Debit and Credit format’ refers to a ‘Ledger account format’ which is as follows:

    (Image to be inserted here)

    Note:

    • The ledger account consists of two sides namely, debit and credit. The left-hand side represents the debit balance and the right-hand side represents the credit balance.
    • The posting into a ledger account is done from the journal entries of the company or the various subsidiary books.
    • Each Journal entry is moved into a separate ledger account.

    Example

    Considering the journal entries of ABC Ltd., post the same into ledger accounts.

    Cash a/c

    DATE PARTICULARS J.F AMOUNT DATE PARTICULARS J.F AMOUNT
     Jan1 To Capital a/c 75,000 Jan1 By Purchases a/c 40,000
     Jan3 To Sales a/c 60,000 Jan2 By Machinery a/c 25,000
     Jan4 To Commission a/c 5,000 Jan6 By Wages a/c 10,000
    Jan6 By Balance c/d 65,000
    1,40,000 1,40,000

    (The cash a/c has a debit balance as it is an asset.)

    Machinery a/c

    DATE PARTICULARS J.F AMOUNT DATE PARTICULARS J.F AMOUNT
    To cash a/c 25,0000 By Balance c/d 25,000
    25,000 25,000

    (The machinery a/c has a debit balance as it is an asset.)

    Hope this helps.

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  21. This answer was edited.

    List of Tangible and Intangible assets INTANGIBLE ASSETS TANGIBLE ASSETS 1. LEGAL FEES 1. PLANT & MACHINERY 2. PATENTS 2. CASH & CASH EQUIVALENTS 3. LICENSES 3. LAND & BUILDING 4. TRADEMARKS 4. EQUIPMENTS 5. FRANCHISES 5. FURNITURE & FIXTURES 6. GOODWILL 6. INVENTORY 7. COPYRIGHTS 7.Read more

    List of Tangible and Intangible assets

    INTANGIBLE ASSETS TANGIBLE ASSETS
    1. LEGAL FEES 1. PLANT & MACHINERY
    2. PATENTS 2. CASH & CASH EQUIVALENTS
    3. LICENSES 3. LAND & BUILDING
    4. TRADEMARKS 4. EQUIPMENTS
    5. FRANCHISES 5. FURNITURE & FIXTURES
    6. GOODWILL 6. INVENTORY
    7. COPYRIGHTS 7. MARKETABLE SECURITIES
    8. BRAND EQUITY 8. INVESTMENTS
    9. BROADCAST RIGHTS 9. RAW MATERIALS
    10. RESEARCH & DEVELOPMENT 10. VEHICLES

    Notes

    Intangible assets: (invisible)

    1. Legal fees – It is an intangible asset as it refers to the fees incurred in the registration of trademarks and patents.
    2. Patents – A patent is an exclusive right that is granted to an inventor by law which permits them to exclude anyone from producing, using, or selling their invention for a given period.
    3. Licenses – refers to a right that is purchased to operate a business.
    4. Trademark – refers to a legal right which protects the distinct identity of a company. It can comprise of a name, logo, slogan, or anything that depicts a company’s unique identity.
    5. Franchises – refers to a license/permission granted by the owner, under certain conditions, to produce or sell a product or service.
    6. Goodwill – refers to the reputation of a company which is determined by its profits and losses.
    7. Copyrights – It is an intellectual property right obtained by a creator usually in the fields of art, music, literary, etc, which restricts a person from publishing the content without the consent of the owner.
    8. Brand equity – refers to the value of the unique identity of a business. It can be positive or negative.
    9. Broadcast rights – refer to the rights obtained under a licensing agreement for broadcasting a program.
    10. Research & Development – includes the development of software and technological innovations of a company.

     

    Tangible assets: (visible)

    1. Plant & Machinery – used to convert raw materials into finished goods. They are recorded in the books of accounts at a depreciated value.
    2. Cash and Cash equivalents – It refers to the cash in hand and cash at bank. The cash equivalents are usually stated at the value they are convertible into cash.
    3. Land & Building – represents the ownership of a physical property of the business.
    4. Equipments – used in the production activities of a business.
    5. Furniture & Fixtures – refers to the movable equipment that is a part of the office layout.
    6. Inventory – refers to the valuable items which are usually stored in a warehouse with a plan of being sold or utilized in the process of production.
    7. Marketable securities – refers to the stocks, bonds, shares which can be easily converted into cash.
    8. Investments – refers to a liquid asset that is purchased with an expectation of being sold in the future.
    9. Raw materials – refers to the tangible materials used for manufacturing goods.
    10. Vehicles – The vehicles used by the proprietor such as a car or the trucks, tractors used for the operating activities of a business.

     

    Hope this helps.

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  22. This answer was edited.

    As we can see, the term ‘Bad Debt’ comprises of the word ‘bad’, which gives us a fair idea that it is something about the debtors who are not good for the business. So basically, Bad Debt is the amount owed by the customer to the business which is now irrecoverable. It is an expense for the businessRead more

    As we can see, the term ‘Bad Debt’ comprises of the word ‘bad’, which gives us a fair idea that it is something about the debtors who are not good for the business.
    So basically, Bad Debt is the amount owed by the customer to the business which is now irrecoverable. It is an expense for the business and it may arise due to reasons such as fraud, insolvency of the debtor, etc. We can also refer to it as Uncollectible Accounts Expense and Irrecoverable Debts.

    Yes, bad debts are recorded in the Income statement.  The Income statement shows the aggregate financial position of a business during a specified period by displaying the amount of revenue generated and expenses incurred by a business. Bad debts being an expense are recorded under operating expenses in the Income Statement or on the debit side in the Profit & Loss a/c.

    Example

    ABC Ltd. sells goods to a retailer for 40,000 at 50 days credit. However, after 50 days, the company realizes that the retailer has been declared insolvent and the amount is no longer recoverable. This amount of 40,000 is an expense for ABC Ltd and leads to a fall in the accounts receivable.
    The journal entries to be recorded in the books of ABC Ltd are as follows:

    Bad debts a/c Debit 40,000 Debit the increase in expense
    To Retailer’s a/c Credit 40,000 Credit the decrease in asset

    (being amounts written off as bad debts transferred to bad debts account)

    Profit and loss a/c Debit 40,000
    To Bad debts a/c Credit 40,000

    (being bad debts transferred to profit and loss a/c)

    Bad debts as shown in the Income statement

    (Extract of Income Statement)

    PARTICULARS AMOUNT AMOUNT
    Revenue 8,00,000
    Expenses:
    COGS 50,000
    Insurance expense 60,000
    Depreciation expense 20,000
    Bad debts expense 40,000
    Total Expense 1,70,000

    Hope this helps.

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