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NK Designer
In:
final accountsprovision for discount on debtorstreatment
  1. Vaishnavi

    Meaning of Provision for Discount on Debtors In order to receive early payment from the debtors in the succeeding period, entities provide incentives to the debtors who are ready to pay the outstanding amount before their credit period ends. So, at the end of every period, entities will have to estiRead more

    Meaning of Provision for Discount on Debtors

    In order to receive early payment from the debtors in the succeeding period, entities provide incentives to the debtors who are ready to pay the outstanding amount before their credit period ends.

    So, at the end of every period, entities will have to estimate the amount of discount which may be availed by the debtors in the succeeding period. This estimate will be based on past experience. Accordingly, provision will have to be created in the current period as the amount of discount is an expected loss for the entity. This provision is referred to as “Provision for Discount on Debtors”.

    Journal Entry for Provision for Discount on Debtors

    Profit & Loss A/cDebit
     To Provision for Discount on Debtors A/cCredit

    Treatment of Provision for Discount on Debtors in Final Accounts

    Financial StatementTreatment
    Profit & Loss AccountPresented on the Debit side of Profit & Loss account
    Balance SheetDeducted from Sundry Debtors under the head Current Assets (after deducting Bad Debts & Provision for Doubtful Debts)

    Extract of Profit & Loss account and Balance Sheet have been attached for better understanding.

    Provision for discount on debtors in P&L A/c

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Singh Arjun
In:
days sales outstandingexample
  1. Palak
    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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Nancy Chawla
In:
days payable outstandingexampleformula
  1. Dheeraj
    This answer was edited.

    Meaning of Days Payable Outstanding Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annRead more

    Meaning of Days Payable Outstanding

    Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annual basis. This portraits how well can a company manage its cash outflows.

    If the company takes less time to make payment to its outstanding suppliers then it states that an organization has a strong financial position. but if the company takes a more (or) longer time to pay its outstanding supplier then it could either be an action plan or else the company’s financial position is weak.

    Formula

    The following formula is used for calculating Days Payable Outstanding (DPO) of an organization.

    Formula of Days Payable Outstanding

    Where Cost of Goods Sold (COGS) = Opening Inventory + Purchases – Closing Inventory.

    Example

    ABC Ltd has furnished you with the following information. Compute Days Payable Outstanding.

    S.No.ParticularsAmount
    1.Average Accounts Payable45,000
    2.Cost of Goods Sold2,25,000
    3.Number of Days30

    Calculation Part-

    Days Payable Outstanding = Average Accounts Payable * No. of days/Cost of Goods Sold

    = 45,000 * 30/2,25,000

    = 6 Days

    In my perspective, 6 days is a low average period for an organization for making the payments to all the outstanding suppliers. Therefore it represents a fairly good DPO. Although it depends on the organization about their understandability on high or low DPO.

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Gorika Mehta
In:
purchase orderPurchase requisition
  1. Aastha
    This answer was edited.

    What is a Purchase Requisition? In the case of larger organisations, it may so happen that the procurement department places an order of purchase only once such requirement is approved by another department. When the procurement department intends to procure goods it will have to issue a purchase reRead more

    What is a Purchase Requisition?

    In the case of larger organisations, it may so happen that the procurement department places an order of purchase only once such requirement is approved by another department. When the procurement department intends to procure goods it will have to issue a purchase requisition to its financial wing. Thus the document sent to such another department for approval is called a purchase requisition.

    I am inserting the specimen of a purchase requisition you can have a glance –

    Specimen of purchase requisition

    For Example,

    ABC Ltd is engaged in manufacturing packed food products, It procures raw materials from various vendors and the company has a policy that before placing any order the department needs to seek the approval of the company’s finance wing. Hence, the procurement department for seeking such approval shall issue a Purchase requisition document.

    It includes the following:

    • Vendor Information
    • Quantity or Units
    • Description of Goods
    • Location of the Purchaser
    • Amount or Price

     

    What is a Purchase Order?

    After receipt of the Purchase Requisition from the procurement department, the financial department of an organization shall issue a purchase order to the Vendor.

    Continuing the purchase requisition example-

    When the finance department of ABC Ltd receives the purchase requisition from the Procurement department for purchase of raw materials the finance department will analyse the document and once satisfied with the content shall issue a purchase order in favour of the external vendor. And thus the order is said to be placed successfully.

    I am inserting the specimen of purchase order you can have a glance –

    Specimen of purchase requisition

    It includes the following:

    • Purchase Order Number
    • Purchaser and Vendor Information
    • Quantity or Units of Goods
    • Price or  Amount
    • Invoice Number and Invoice Related Information
    • Description of goods
    • Payment Terms

     

    Difference between Purchase Requisition and Purchase Order

    Purchase Requisition is used to simply seek permission from another department within the entity whereas such other department uses purchase order to actually place an order i.e make a purchase of specific goods required.

    Where Purchase requisition is a document generally used internally within an organisation whereas the purchase order is generally issued to the external vendor. The purchase order is issued after purchase requisition.

    Aastha Mehta.

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Nancy Chawla
In:
final accountstrading expenses
  1. Vaishnavi_Shetty
    This answer was edited.

    I have answered this question on the assumption that "Trading Expenses are those expenses which are covered in the Trading Account". Meaning of Trading Expenses Trading Expenses are direct expenses incurred for the purchase and production of goods. They are related to the core business operations ofRead more

    I have answered this question on the assumption that “Trading Expenses are those expenses which are covered in the Trading Account”.

    Meaning of Trading Expenses

    Trading Expenses are direct expenses incurred for the purchase and production of goods. They are related to the core business operations of the business entity and directly related to the purchase and production of the finished goods.

    So, all the expenses incurred from the time of purchasing raw materials/goods till the time the finished goods are brought to a saleable condition are referred to as trading expenses.

    Eg. carriage inward, manufacturing expenses, wages, etc.

    Presentation in Financial Statements

    ParticularsFinancial StatementTreatment/Presentation
    Trading Expenses (Direct Expenses)Trading AccountPresented on the Debit side of Trading Account

    A snippet of the Trading account has been attached for better understanding.

    Trading expenses in Trading account

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John Hay
In:
provision for doubtful debtstrial balance
  1. Palak
    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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Maneet Kaur
In:
petty cash book
  1. Palaktripathi
    This answer was edited.

    In simple words, a petty cash book which is usually prepared by the ordinary or imprest system, is a book of accounting prepared for the purpose of recording expenses of small value. For example: stamps, wages, postage, carriage, stationery, etc. The two types of petty cashbook are: Simple petty casRead more

    In simple words, a petty cash book which is usually prepared by the ordinary or imprest system, is a book of accounting prepared for the purpose of recording expenses of small value. For example: stamps, wages, postage, carriage, stationery, etc.

    The two types of petty cashbook are:

    1. Simple petty cashbook – In this type of book, receipt of any amount is recorded on the debit side cash column and the payments on the credit side cash column. It is similar to a cashbook.
    2. Analytical petty cashbook – In this type of book, a separate column is maintained for each commonly occurring expense. For miscellaneous payments, a column of sundries is added.

    The pdf containing a format for both the types of petty cashbook is attached as follows.

    Hope this helps.

    petty cashbook formats

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Dheeraj
In:
adjustmentbad debtsfinal accounts
  1. Palak
    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/cDebit
    To Sundry debtors a/cCredit

    (being bad debts written off)

    Profit and loss a/cDebit
    To Bad debts a/cCredit

    (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/cDebit
    To Sundry debtors a/cCredit

    (being bad debts written off)

    Example:

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

    PARTICULARSDEBITCREDIT
    Sundry debtors50,000 
    Bad debts8,000 

    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/cDebit4,000Debit all expenses and losses
    To Retailers a/cCredit4,000Credit the giver

    (being amount irrecoverable from the retailer)

    Extract of Profit and loss a/c

    PARTICULARSAMOUNTPARTICULARSAMOUNT
    To Bad debts a/c        8,000   
    (+) further bad debts  4,00012,000  

    Extract of balance sheet

    LiabilitiesAmountAssetsAmount
    Sundry debtors           50,000
    (-) Further bad debts   4,000    		46,000

    Hope this helps.

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Nancy Chawla
In:
allowancessales returns
  1. Aastha
    This answer was edited.

    Sales Return When the goods or commodities are sold by the dealer or a manufacturer to the customer and customer returns these goods or part thereof then such return made by the customer is called as sales return for the seller or the dealer.  It's a contra revenue account. It is reduced from the toRead more

    Sales Return

    When the goods or commodities are sold by the dealer or a manufacturer to the customer and customer returns these goods or part thereof then such return made by the customer is called as sales return for the seller or the dealer.  It’s a contra revenue account. It is reduced from the total sales amount. Generally, it is recorded in “Sales Return and Allowance Account”.

    Accounting Treatment of Sales Return in Books of Accounts:

    When initially the goods are sold on credit and later on a part of them are returned the journal entry shall be-

    Sales Returns and Allowance A/cDebitDebit the decrease in income.
    To Sundry Debtor A/cCreditCredit the decrease in an asset.

    When goods are sold initially for cash and later on a part of them are returned –

    Sales Returns and Allowance A/cDebitDebit the decrease in income.
    To Cash A/cCreditCredit the decrease in an asset.

    For Example,

    You have a stationery store and a customer placed an order to buy 4 packs of blue gel pen but by mistakenly you delivered 3 packs of blue and 1 pack of black pen. Each pack is sold for an amount of 100.

    Initially, you must have recorded sales in your book as –

    Sundry debtor A/cDebit400Debit the increase in an asset.
    To Sales A/cCredit400Credit the increase in income.

    Now, the customer placed an order for 4 packs of blue gel pens and you sent 3 packs of blue gel and 1 pack of black gel pen hence, customer returns a pack of black gel pen.

    Now, you will record this return in your books as-

    Sales Returns and Allowance A/cDebit100Debit the decrease in income.
    To Sundry Debtor A/cCredit100Credit the decrease in an asset.

    Sales Allowance

    When the goods are sold by the seller or the dealer and few of them are defective or damaged or not as per the specification for that matter than to maintain the relationship with the customer the seller sometimes grants allowances. Such allowances granted are called as sales allowance. It is a contra revenue account. And hence, it’s reduced from the total sales.

    Accounting Treatment:

    When initially the goods are sold on credit and later on it was discovered that a part of them are defective the seller extends some allowance. The journal entry for this transaction shall be-

    Sales Returns and Allowance A/cDebitDebit the decrease in income
    To Sundry Debtor A/cCreditCredit the decrease in an asset.

    When initially the goods are sold on a cash basis and later on it was discovered that a part of them are defective the seller extends some allowance. The journal entry for this transaction shall be-

    Sales Returns and Allowance A/cDebitDebit the decrease in an income
    To Cash A/cCreditCredit the decrease in an asset.

    For Example,

    Mr Alex has a business of dealing in shirts. He sold 10 shirts to Mr Allen. The price of each shirt was 100 and so Mr Allen immediately paid 1000 cash.

    At the time of initial recognition of sales, Mr Alex recorded it in his books as-

    Cash  A/cDebit1000Debit the increase in an asset.
    To Sales A/cCredit1000Credit the increase in income.

    Later on, Mr Allen found that one of the shirts was defective and hence, he gave an intimation of the same to Mr Alex. Mr Alex agreed to give him an allowance and thus gave him a 50% discount on that shirt. The journal entry for the same shall be –

    Sales Returns and Allowance A/cDebit50Debit the decrease in an income
    To Cash A/cCredit50Credit the decrease in an asset.

    The sales are recorded as a net of all the returns and allowances made by the seller during the accounting period.

    It can be presented with the help of below-given formula-

    Formula for sales return and allowances

    Aastha.

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Nancy Chawla
In:
debit or creditsales return
  1. Palak
    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 accountDebitCredit
    Revenue accountDecreaseIncrease

    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/cDebit1,00,000Debit the decrease in revenue
    To Mr. K’s a/cCredit1,00,000Credit the decrease in asset

    (being goods returned by the customer)

    Hope this helps.

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John Hay
In:
financial statementspreliminary expenses
  1. Palaktripathi
    This answer was edited.

    In simple words, all the expenses that are incidental to the incorporation or commencement of a business are known as preliminary expenses. For example, statutory fees, stamp duty, registration fees, etc. Treatment in Financial Statements In case the value of preliminary expenses is less we write ofRead more

    In simple words, all the expenses that are incidental to the incorporation or commencement of a business are known as preliminary expenses. For example, statutory fees, stamp duty, registration fees, etc.

    Treatment in Financial Statements

    In case the value of preliminary expenses is less we write off the same at once however, they are shown as an intangible asset in the balance sheet and written off at regular intervals over a fiscal period when the value of the expenses is high. I would like to explain this concept further with the help of an example.

    Example

    ABC Ltd. incurs an expense of 4,00,00 before the commencement of its business. They decide to write off the preliminary expense of 4,00,000 within the next 4 financial years. The journal entries in the books of ABC Ltd. are as follows:

    Preliminary expenses a/cDebit4,00,000Debit the increase in asset
    To Bank a/cCredit4,00,000Credit the decrease in asset

    (being expenses paid)

    Preliminary expenses written off a/cDebit1,00,000Debit the increase in expenses
    To Preliminary expenses a/cCredit1,00,000Credit the decrease in asset

    (being expenses written off)

    Note: As the company has decided to write off the preliminary expenses within the next 4 financial years, therefore only 1/4th of the amount (4,00,000 x 1/4 = 1,00,000) will be recorded in the current years income statement and the remaining balance of (3,00,000) shall be recorded in the balance sheet of the same financial period.

    Profit and Loss a/cDebit1,00,000Debit the increase in expenses
    To Preliminary expenses a/cCredit1,00,000Credit the decrease in expenses

    (being expenses transferred to p/l a/c)

    Placement in Balance Sheet

    (Image to be inserted here)

    Hope this helps.

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Natalia Alva
In:
depreciationoperating expense
  1. Aastha
    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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Natalia Alva
In:
amortizationfinancial statements
  1. Vaishnavi
    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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Sapna Takia
In:
prepaid expensetrial balance
  1. Palak
    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

    PARTICULARSDEBITCREDIT
    Debtors50,000
    Cash4,000
    Sales1,30,000
    Purchases90,000
    Bank Loan50,000
    Retained earnings2,000
    Salary5,000
    Prepaid rent4,500
    Creditors26,500
    Plant & Machinery40,000
    Investments15,000
    2,08,5002,08,500

    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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Sapna Takia
In:
depreciationyear of sale
  1. Aastha
    This answer was edited.

    Charging Depreciation  in the Year of the Sale The answer to your question is that yes, one can charge depreciation in the year of sale. I guess reading the below para you will be able to interpret as to why it can be charged in the year of sale. First of all, what does depreciation mean? It is a meRead more

    Charging Depreciation  in the Year of the Sale

    The answer to your question is that yes, one can charge depreciation in the year of sale.

    I guess reading the below para you will be able to interpret as to why it can be charged in the year of sale.

    First of all, what does depreciation mean?

    It is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.

    It is allocated to charge a fair proportion of depreciable amount in each accounting period during the expected useful life of an asset.

    Thus, even in the year of the sale, the asset shall continue to wear and tear and so it shall be apt to charge the depreciation from the beginning of the accounting period till the date of its sale i.e for the period it has been used in the year of sale.

    I guess the below example will be of great help for you –

    The book value of an asset as on 01 /01/ XXXX is 70,000 depreciation is charged on an asset @ 10%. on 01/07/xxxx the asset is sold for an amount of 35,000.

    The accounting treatment for the same shall be:

    Charging depreciation of an amount of 3,500 (70,000 x 10% x 6/12) for 6 months i.e for the period in use (from 01/01 to 30/06):

    Depreciation A/cDebit3,500Debit the increase in expenses.
    To Asset A/cCredit3,500Credit the decrease in an asset.

    Now at the time of sale, the entity shall record a loss of 31,500 which is nothing but the difference between the written down value and the value of sale proceeds as shown below:

    Loss on Sale of Asset A/cDebit31,500Debit the decrease in revenue.
    Cash A/cDebit35,000Debit the increase in an asset.
    To Asset A/cCredit66,500Credit the decrease in an asset.

    I believe now you understand as to why we should charge depreciation in the year of sale as well and also the above example will help you understand the accounting treatment for the same as well.

    Aastha Mehta

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Natalia Alva
In:
creditdebitexpense
  1. Aastha
    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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Natalia Alva
In:
outstanding expensetrial balance
  1. Palak

    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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Gorika Mehta
In:
direct expensesindirect expenseslist
  1. Dheeraj
    This answer was edited.

    Direct and Indirect expenses- Direct expenses include all those expenses which have a direct connection with the manufacture of the goods (i.e., conversion of raw materials into finished products). Such expenses are direct expenses and placed on the debit side of the trading account. These expensesRead more

    Direct and Indirect expenses-

    Direct expenses include all those expenses which have a direct connection with the manufacture of the goods (i.e., conversion of raw materials into finished products). Such expenses are direct expenses and placed on the debit side of the trading account. These expenses are also called as manufacturing expenses. The list of direct expenses is shown below-

    Indirect expenses include all those expenses that are incurred to run business activities. These expenses have no direct connection with the manufacturing of goods. Such expenses are indirect expenses and placed on the debit side of the profit & loss account. These expenses are also known as office expenses. The list of indirect expenses is shown below-

    List of Direct & Indirect Expenses-

    S.noDirect ExpensesIndirect Expenses
    1.WagesOffice rent, rates and taxes
    2.Freight and Carriage Salaries
    3.Manufacturing ExpensesLegal Charges
    4.Factory LightingAudit Fees
    5.Factory RentAdvertisement Expenses
    6.Factory InsuranceCommission Paid
    7.Gas, Water and FuelDiscount Allowed
    8.Cargo ExpensesDepreciation
    9.Import DutyBank Charges
    10.Shipping ExpensesPrinting and Stationery
    11.Dock DuesTravelling Expenses
    12.OctroiSalesmen Salaries
    13.Depreciation on machineryWarehouse Insurance
    14.Motive powerDelivery Van Expenses
    15.Clearing chargesPacking Charges
    16.Custom ChargesCarriage Outwards
    17.Coal, Oil and GreasePremises Rent
    18.Overhaul of MachineryBrokerage Charges
    19.Repairs on MachineryPostage and Cartage
    20.Upkeep and MaintenanceSelling Expenses

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