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Sahil
  1. This answer was edited.

    Yes. But first, let me familiarize you with the meaning of Chart of Accounts. Meaning of Chart of Accounts Chart of Accounts is a numbered listing (account codes) of the various accounts that form part of the accounting records of an entity. The codes used help to group similar accounts together. FoRead more

    Yes. But first, let me familiarize you with the meaning of Chart of Accounts.

    Meaning of Chart of Accounts

    Chart of Accounts is a numbered listing (account codes) of the various accounts that form part of the accounting records of an entity. The codes used help to group similar accounts together. For eg. if you want to see only the operating expenses incurred. In this case, you need to enter only the range code assigned to operating expenses & you will get all the operating expenses transactions together at one place.

    Chart of Accounts varies from one entity to another depending on the size of the entity.

    Example of Chart of Accounts

    In the example given below, 1st digit of the numeric codes signifies different account types. “1” represents assets, “2” represents liabilities, “3” represents equity, “4” represents revenues, & “5” represents expenses.

    Sr No.Numeric rangeAccount typeFinancial Statements
    11000-1999AssetsBalance Sheet
    1000-1499Non-Current Assets
    1500-1899Current Assets
    1900-1999Contra Assets
    22000-2999LiabilitiesBalance Sheet
    2000-2499Non-Current Liabilities
    2500-2999Current Liabilities
    33000-3999EquityBalance Sheet
    44000-4999RevenuesProfit & Loss A/c
    4000-4499Operating Income
    4500-4999Non-Operating Income
    55000-5999ExpensesProfit & Loss A/c
    5000-5499Operating Expenses
    5500-5999Non-Operating Expenses
    1000-1499Non-Current Assets2000-2499Non-Current Liabilities
    1000Property, Plant & Equipment2000Long term debts
    1010Buildings2010Loan from Financial Institutions
    1020Land2020Loan from Others
    1030Plant & Machinery
    1040Furniture & Fixtures2500-2999Current Liabilities
    1050Computer & Peripherals2500Accounts Payables
    1060Leasehold Premises
    1070Vehicles2600Short term debts
    2610Loan from Financial Institutions
    1100Intangible Assets2620Loan from Others
    1110Goodwill
    1120Patent2700Other Current Liabilities
    1130Copyrights2710Pre-received Income
    1140Trademarks2720Outstanding Expenses
    1150Design
    1160Software3000-3999Equity
    3100Capital Contribution
    1200Long term Investments3200Retained Earnings
    1210Investment in shares
    1220Investment in bonds4000-4499Operating Income
    1230Investment in govt securities4100Sale of Goods
    4200Sale of Services
    1300Long term Loans & Advances
    4500-4999Non-Operating Income
    1500-1899Current Assets4600Interest from Investments
    1500Accounts Receivables4700Dividend from Investments
    4800Profit from Sale of Fixed Assets
    1600Cash & Cash Equivalent4900Profit from Sale of Investments
    1610Bank-Current A/c
    1620Bank-OD A/c5000-5499Operating Expenses
    1630Petty Cash5000Purchase of Raw Materials
    5050Employee Benefit Expenses
    1700Inventories5100Rental/Lease Expenses
    1710Work-in-Progress5150Depreciation
    1720Finished Goods5200Amortization
    1730Raw Materials5250Professional Fees
    5300Legal Expenses
    1800Other Current Assets5350Electricity Expenses
    1810Prepaid Expenses5400Repairs & Maintenance
    1820Accrued Income5450Advertising Expenses
    1900-1999Contra Assets5500-5999Non-Operating Expenses
    1910Accumulated Depreciation5500Loss from Sale of Fixed Assets
    1920Accumulated Amortization5600Loss from Sale of Investments

    A downloadable excel sheet has been attached for your reference.

    Example of Chart of Accounts

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Sahil
  1. 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/cDebit1,00,000Debit what comes into the business
    To Capital a/cCredit1,00,000Credit 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 accountDebitCredit
    CapitalDecreaseIncrease

    Example

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

    Cash a/cDebit5,00,000Debit the increase in asset
    To Capital a/cCredit5,00,000Credit the increase in capital/liability

    (being cash invested in the form of capital)

    Hope this helps.

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Sahil
  1. This answer was edited.

    What is Rent Received in Advance? It's an amount received by the landlord from his tenant before such tenant has availed the benefits from the property taken on rent. It's an income received in advance. Income received in advance refers to the amount received by a person or an entity before renderinRead more

    What is Rent Received in Advance?

    It’s an amount received by the landlord from his tenant before such tenant has availed the benefits from the property taken on rent. It’s an income received in advance.

    Income received in advance refers to the amount received by a person or an entity before rendering services or transfer of title to goods.

    For Example,

    A landlord may have the policy to charge the last month’s rent in advance for his convenience to cover himself from loss of income on the expiry of the lease term. A lot of landlords across the globe follow this policy.

    Whether it is Taxable?

    The answer to this question is that it depends. It depends on the accounting policy an entity or a person follows.

    If a person follows the Accrual System of Accounting then the rent received in advance shall be treated as a liability in the year of receipt and it will be taxable in the year of accrual.

    The image shown below is the perfect example of the same:

    Advance rent when accrual system is followed

    However, If a person follows Cash System of Accounting then such rent received shall be treated as an income in the year of receipt and it would be taxable in the year of receipt itself.

    The image shown below explains the same:

    Rent in Advance treatment in Profit and Loss Account when one follows cash system of accounting.

    The accounting treatment in each of the case shall be:

    In the Accrual System of Accounting

    Cash A/c                                           Dr.AssetDebit the increase in an asset.
    To Rent Received in Advance A/cLiabilityCredit the increase in liability.

    In the above journal entry, it is reflected that rent will not be recorded in the income statement i.e it will be taxable in the year of accrual and so it shall be the taxable income in the next accounting period.

     In Cash System of Accounting

    Cash A/c                                            Dr.AssetDebit the increase in an asset.
    To Advance Rent Income A/cIncomeCredit the increase in income.

    In this case, it is reflected from the above journal entry since the cash system is followed the rent is recorded as an income and since it will be reflected in an income statement it is a taxable income in the year of receipt.


    Aastha Mehta

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Sahil
  1. Meaning of Income received in advance It refers to an income received in advance by the entity for goods or services which have not been rendered in the current accounting period. The advance income received relates to the future accounting period. It is a personal account and presented on the liabiRead more

    Meaning of Income received in advance

    It refers to an income received in advance by the entity for goods or services which have not been rendered in the current accounting period. The advance income received relates to the future accounting period. It is a personal account and presented on the liability side of the balance sheet.

    Income received in advance includes-

    1. Commission received in advance
    2. Rent received in advance
    3. Professional fees received in advance
    4. Premium received in advance

    Taxable or not?

    Taxability of Income received in advance depends on the method of accounting (Accrual method or Cash method) followed by an entity.

    So, let me help you understand the taxability considering both the approaches with an example each.

    1. Entity follows accrual method

    If accrual system of accounting is followed then income received in advance will be not be taxed in the period of receipt. It will be taxed in the accounting period to which it relates.

    For Example,

    In the month of December 20×1, Mr. Michael received professional fees in advance 50,000 which relates to the month of January 20×2.

    So, in this case, professional fees received in advance 50000 will not be taxed in the accounting period Jan-Dec 20×1. It will be taxed in the period Jan-Dec 20×2, as it belongs to January 20×2.

    2. Entity follows cash method

    If cash system of accounting is followed then income received in advance will be taxed in the period of receipt itself.

    For Example,

    Ms. Alexa received commission in advance 25,000 in the month of December 20×5, but the same relates to the month of January 20×6.

    So, in this case, the commission received 25,000 will be taxed in the accounting period Jan-Dec 20×5 itself. Eventhough it relates to a future accounting period ie. Jan-Dec 20×6, it is of no concern here, as cash system of accounting is followed.

    Conclusion

    We can conclude,

    Method of accounting

    Period of taxability

    Accrual methodPeriod to which advance income relates
    Cash methodPeriod of receipt of advance income

     

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Sahil
  1. This answer was edited.

    Meaning of Core Business Operations In layman's language, the term "core business operations" refers to the organization's main or essential area of activity for which it was founded or came into existence. It does not only focuses on the mission and vision of organization but also on building betteRead more

    Meaning of Core Business Operations

    In layman’s language, the term “core business operations” refers to the organization’s main or essential area of activity for which it was founded or came into existence. It does not only focuses on the mission and vision of organization but also on building better business operations strategies by-

    • Controlling market forces and supply chain management
    • Improving the quality of technology
    • Expanding the business marketplace and acquiring new businesses
    • Increasing revenue generation
    • Better customer base acquisition and customer relationship management
    • Developing new areas of activities

     

    It means that the success of an organization does not only depends upon the functioning and performance of various departments but also the company’s coordination in managing and performing various departmental activities for conducting core business operation.

    Examples of Core business operations/models

    1. The core business model of Uber is to provide on-demand services to its users. It provides a virtual mobile platform that connects users with taxi or cab drivers. Although cab drivers use their cars while performing their services. Uber earns 20-30% of the total fare amount.

    2. The core business model of Amazon is to provide an end to end virtual or e-commerce shopping experience to its customers. It connects customers (users) with the products listed by various trusted sellers. Amazon earns money through subscriptions for prime services, retail services and web services. Amazon charges 6%-25% professional fees on every product sold by the sellers on its platform.

    3. The core business model of Walmart is to provide offline and online retail services such as health and fitness, grocery and general merchandise. Walmart charges only referral fees (based on the product category) and it does not impose any charges on maintaining seller accounts.

    Core vs Non-core business operations

    Example-

    1. Uber
    • Core business operations– The core business operations of uber are mentioned above in example (1).
    • Non-core business operations– Apart from the core business operations, uber performs few non-core business operations such as- Uber Eats which provides food delivery services to its users (customers)  is not the main/core business of Uber.

     

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Sahil
  1. 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/cDebit40,000Debit the increase in expense
    To Retailer’s a/cCredit40,000Credit the decrease in asset

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

    Profit and loss a/cDebit40,000
    To Bad debts a/cCredit40,000

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

    Bad debts as shown in the Income statement

    (Extract of Income Statement)

    PARTICULARSAMOUNTAMOUNT
    Revenue8,00,000
    Expenses:
    COGS50,000
    Insurance expense60,000
    Depreciation expense20,000
    Bad debts expense40,000
    Total Expense1,70,000

    Hope this helps.

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Sahil
  1. This answer was edited.

    We will first quickly run through the concept of equity - Equity is the capital raised by a company for the purpose of purchase of assets or for making an investment in a specific project or for the smooth functioning of operations. It's important as it represents the value of an investor's stake inRead more

    We will first quickly run through the concept of equity –

    Equity is the capital raised by a company for the purpose of purchase of assets or for making an investment in a specific project or for the smooth functioning of operations. It’s important as it represents the value of an investor’s stake in a company.

    It can also be aid that its the sum of money that the company is required to pay at the time of its liquidation to its shareholders after realising all of its assets and paying off all of its debts. Equity is presented in the financial statement as a component of a Balance Sheet.

    The formula for calculating the company’s equity –

    Shareholder’s Equity = Total Assets – Total Liabilities

    Inclusive list of items under the head” Equity”

    Particulars
    Equity Share Capital
    Reserves and surplus 
    1. Securities Premium Reserve
    2. General Reserves
    3. Capital Redemption Reserve
    4. Revaluation Reserve
    5. Debenture Redemption Reserve
    6. Share Option Outstanding Account
    7. Others- (Specify the Nature and Purpose of such reserve)
    8. Retained Earnings
    Other Comprehensive Income
    1.  Foreign Currency Translation Reserve
    2.  Cash Flow Hedge Reserve
    Vesting and Exercise of Warrants
    Issuance of Non-Controlling Interest
    Repurchase of Stock option
    Issuance of Common Stock
    Stock-Based Compensation
    Exercise of Stock Options
    Additional Paid-in Capital
    The Cumulative Effect of Changes in Accounting Principles related to Revenue Recognition, Income Taxes and Financial Instruments

    It is generally presented under two subheads – Equity and Other Equity.

    The extract shown below indicates the position of Equity in a Balance Sheet –

    Equity in Balance Sheet

     

     

     

     

     

     

     

     

     

    I hope this answers your question.

     


    Aastha

     

     

     

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