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Category: Category - Accounting Others

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Discy Latest Questions

  1. This answer was edited.

    Provision for Discount on Debtors The entity in order to encourage its customers to make a prompt payment allows a discount to its customers purchasing goods on credit. Thus, when the sales are made in the current reporting period on a credit basis the then the discount needs to be allowed in the neRead more

    Provision for Discount on Debtors

    The entity in order to encourage its customers to make a prompt payment allows a discount to its customers purchasing goods on credit. Thus, when the sales are made in the current reporting period on a credit basis the then the discount needs to be allowed in the next reporting period if such customer makes the payment promptly.

    The discount allowed reduces the revenue of an entity and hence, it can be said that provision for a discount is expected loss for an organization and so it needs to be given effect in the current accounting period.

    Calculation of Provision for Discount on Debtors

    ParticularsAmount
    DebtorsXXXXX
    Less: Bad Debts(XXXX)
    XXXXX
    Less: Provision for Bad and Doubtful Debts(XXXX)
    Good DebtsXXXXX
    Less: Provision for discount on debtors (Estimated % of Good Debts.)(XXXX)
    Debtors (Amount to be Shown in the Balance Sheet)XXXXX

    This can also be explained with the help of an example.

    Illustrative Example

    Calculate Debtors Balance to be shown in the Balance Sheet

    • An Entity has debtors worth 50,000
    • Bad debts throughout the year worth an amount of 4000
    • It has created a reserve for bad and doubtful debts at the end of the year worth 1000
    • The provision for discount on debtors is estimated to be 10%.

     

    Solution:

    ParticularsAmount
    Debtors50,000
    Less: Bad Debts(4,000)
    46,000
    Less: Provision for Bad and Doubtful Debts(1,000)
    Good Debts45,000
    Less: Provision for discount on debtors (45,000 X 10/100)(4,500)
    Debtors (Amount to be Shown in the Balance Sheet)40,500

    Aastha.

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  1. This answer was edited.

    In this business world, most of the transactions take place on credit rather than cash so the amount of risk involved is high. To minimize this risk many organization decides to allocate a certain portion towards provision for all the future expenses and losses. Provision is created because they accRead more

    In this business world, most of the transactions take place on credit rather than cash so the amount of risk involved is high. To minimize this risk many organization decides to allocate a certain portion towards provision for all the future expenses and losses.

    Provision is created because they account for particular company expenses and payments for the current year. This makes organization financial statements to look more precise. Provision is created from company profit to meet all the uncertain future obligations.

    Meaning of Provision for Doubtful Debts-

    The term provision for doubtful debts refers to the estimated (or) predicted value of bad debts that arises from the sundry debtors that have been issued but have turned out to be uncollectible. It takes place when a credit sale to the customer is made. Provision for Doubtful debt is a contra account and it is also known as Provision for bad debts.

    Reason for creating Provision for Doubtful Debts-

    In Accounting, Provision for Doubtful debts is created to abide with the conservatism convention and prudence principle which states that “don’t account for future anticipated profits but account for all possible losses”. Provision for Doubtful debts is an expense which occurs in the normal course of business.

    Various organizations create a provision for all the future expected expenses and losses which may arise due to the credit sales so the organization needs to create a percentage of such provision on the net value of sundry debtor for complying with all the future uncertainties.

    Example- ABC Ltd furnishes you with the following information about Total sales for the current accounting year

    ParticularsAmount
    Total Sales6,00,000
    Cash Sales2,00,000
    Credit Sales4,00,000
    Bad Debts40,000

    The company decided to create 5% provision of doubtful debts on sundry debtors. Comment upon its decision.

    Calculation of Provision for Doubtful Debts-

    Step 1– Calculate Net value of sundry debtors

    Net Sundry Debtors = Sundry Debtors – Bad Debts

    = 4,00,000 – 40,000 => 3,60,000

    Step 2 – Create 5% provision on net value of sundry debtors

    Provision for Doubtful Debts = 3,60,000 * 5/100

    = 18,000

    The decision on creating a provision for doubtful debts will help the company to mitigate (or) reduce all the future obligations and uncertainties which arise due to the bad debts.

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  1. This answer was edited.

    No, Invoice is not a receipt.  To make the concept easy and understandable I would like to first explain the meaning of Invoice and Receipt followed by an example each and Key differences between them. I would like to conclude my answer with a snippet of Invoice and Receipt. Meaning of Invoice- InvoRead more

    No, Invoice is not a receipt.  To make the concept easy and understandable I would like to first explain the meaning of Invoice and Receipt followed by an example each and Key differences between them. I would like to conclude my answer with a snippet of Invoice and Receipt.

    Meaning of Invoice-

    Invoice refers to a legal document issued by the person who is selling the goods and services to the person who is purchasing/buying these goods and services. An Invoice is issued to make payment. The person who sells goods and services is called a seller (or) vendor and the person who buys goods and services is called customer (or) buyer.

    Example- When we purchase any product from the online store (or) perform online shopping, then the seller of the goods (or) service provides an invoice to the customer thereby allowing the customer to make payment after the delivery of the goods.

    Meaning of Receipt-

    Receipt refers to the acknowledgement of payment which states that seller (or) vendor of goods and services has received payment from the customer (or) buyer of goods and services. It is conclusive proof that payment has been made by the customer. In the case of transmission of goods, it acts as proof of ownership. It is also a legal document similar to an invoice.

    Example- When you go to a grocery store (or) supermarket for purchasing various products, after making the payment the staff member gives you an acknowledgement. Thus this acknowledgement is known as a receipt.

    Key Differences between Invoice and Receipt-

    The following are the major key difference between receipt and invoice

    Sno.Point of DifferenceInvoiceReceipt
    1.MeaningInvoice refers to the request for payment.Receipt refers to acknowledgement (or) proof of payment.
    2.IssueAn Invoice is issued before the payment is made.A receipt is issued after the payment is made.
    3.AmountAn invoice displays the total amount which is due (or) to be paid.A receipt shows the detailed amount which is already paid by the buyer.
    4.PaymentAt the time of making payment, the invoice is given to the customer.A receipt may be given to the customer (or) the third party after making the payment as proof.
    5.UsageAn invoice is used to keep a record of goods and services sold to the customer.A receipt is used as an acknowledgement that the payment of goods and services is made.
    6.BenefitsI) It helps in the delivery of goods by keeping a track of goods.

    II) It helps in predicting future sales.

    III)  It helps in providing better customer service.

    IV) It helps the customers to grab amazing offers and discounts for early payment.

    I) It helps at the time of exchange or return of faulty goods.

    II) It is generated digitally which saves paper and time.

    III) It reduces the stress at the time of making tax payment.

     

    I would like to add a snippet of invoice and receipt for clear and better understanding

                                                                 Invoice

    Sample Invoice

                                                               Receipt

    Cash receipt of ABC Ltd is shown below

    Cash Receipt

     

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  1. I think you should first understand what does the provision for doubtful debt mean and then understand the calculations of the same. Provision for Bad and Doubtful Debt Provision for bad and doubtful debt is a contra asset i.e it reduces the balance of an asset specifically the receivables. When anRead more

    I think you should first understand what does the provision for doubtful debt mean and then understand the calculations of the same.

    Provision for Bad and Doubtful Debt

    Provision for bad and doubtful debt is a contra asset i.e it reduces the balance of an asset specifically the receivables.

    When an entity executes transaction of sales on a credit basis it creates and adds on to the amount due from sundry debtors.  These sundry debtors as per the agreed terms are liable to make a payment for such goods purchased before the end of the credit term.

    If such debtor continuously makes a default such debtor shall be considered as a bad debt for the organization. When an entity remains doubtful regarding the recovery of its revenue i.e it has a reason to believe that such an amount due to be received may not be realised. Thus the entity shall create a reserve or a provision for doubtful debts.

    The provision is created based on the entity’s past experience in the business and various other factors.

    How is it calculated?

    The table given below will help you to understand step by step calculations to compute provision for doubtful debts

    ParticularsAmount
    Old Bad Debts (It shall be given in the Trial Balance on the Dr side)XXXXX
    Add New Bad Debts (It shall be given in the adjustment)XXXXX
    Add New Bad Debt Reserve (Debtors x %/100) (It shall be given in the adjustment) i.e (% of Debtors – New Bad Debts)XXXXX
     XXXXX
    Less Old Provision for Bad Debts (It shall be given in the trial balance on the credit side)(XXXXX)
    New Provision/Reserve for Bad DebtsXXXXX

     

    For Example,

    Trial balance

    ParticularsDr Amount       Cr Amount
    Bad Debts400 
    Reserve for Bad Debts 1500
    Sundry Debtors16,000 

     

    Adjustment: Provide 2% reserve for bad and doubtful debts on the debtors. And it was realized that our debtor worth 1000 proved to be bad has been written off.

    ParticularsAmount
    Old Bad Debts (Given in Trial Balance)400
    Add New Bad Debts (posted from  adjustment)1,000
    Add New Bad Debt Reserve (Debtors x %/100) (It shall be given in the adjustment) i.e (% of Debtors – New Bad Debts) = (16,000 – 1,000) X 2 %  300
     1,700
    Less Old Provision for Bad Debts (Giving effect to an adjustment)(1500)
    New Provision/Reserve for Bad Debts  200

     

    I have tried to put up both explanation and numerical example for you to understand how to compute Bad Debt Reserve hoping that it would be helpful for you.


    Aastha Mehta.

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  1. Meaning of Provision for Doubtful Debts Almost every business entity has some debtors, of which recovery is doubtful. It may not be realised. For this purpose, provision is created which is known as provision/reserve for doubtful debts. This provision is created on the basis of experiences of the prRead more

    Meaning of Provision for Doubtful Debts

    Almost every business entity has some debtors, of which recovery is doubtful. It may not be realised. For this purpose, provision is created which is known as provision/reserve for doubtful debts. This provision is created on the basis of experiences of the previous years. It is an anticipated loss therefore provision for doubtful debts is necessary.

    Treatment of Provision for Doubtful Debts in Balance Sheet

    Financial StatementCalculationTreatment
    Balance SheetIt is calculated on the following amount:

    Sundry Debtors – Bad Debts

    Deducted from Accounts Receivables/Sundry Debtors under the head Current Assets

    Let me help you understand the treatment better with the help of an example using trial balance and balance sheet.

    Example

    DEbtors in TB & RDD Adjustment

    Show treatment of Provision for Doubtful Debts in the Balance Sheet of ABC Ltd.

    RDD in Balance Sheet

    5% provision for doubtful debts is calculated on 500,000 (5% * 500,000 = 25,000) & deducted from sundry debtors.

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  1. Accumulated Depreciation in a Trial Balance The accumulated depreciation is shown as a "credit item" in the trial balance. Accumulated depreciation is nothing but the sum total of depreciation charged until a specified date. Since in every reporting period, a part of a fixed asset is written off i.eRead more

    Accumulated Depreciation in a Trial Balance

    The accumulated depreciation is shown as a “credit item” in the trial balance. Accumulated depreciation is nothing but the sum total of depreciation charged until a specified date. Since in every reporting period, a part of a fixed asset is written off i.e depreciated such accumulated depreciation has a credit balance.

    You should have a glance at the image of an extract of the trial balance given- below it will definitely answer your question in a more effective way.

    Accumulated depreciation in a trial balance

    Accumulated Depreciation

    As mentioned earlier the accumulated depreciation is the sum total of depreciation that an entity has expensed in its profit and loss statement till that date. It’s basically a contra asset account as it reduces the balance in the asset account.

    Illustrative Example,

    Prepare a trial balance of Mr Allen on the basis of given heads of accounts –

    Particulars

    Amount

    Capital1,00,000
    Sales1,20,000
    Purchases1,10,000
    Sales Return20,000
    Fixed Assets1,00,000
    Cash at bank10,000
    Accumulated Depreciation20,000

    Solution :

    Accumulated Depreciation in trial balance


    Aastha Mehta.

     

     

     

     

     

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  1. Provision for Depreciation in the Trial Balance A trial balance shows provision for depreciation as a "credit item". The value of most of the assets reduces over a period of time. It's a common practice to record the assets at its historical cost but over a period of time, does the value of asset reRead more

    Provision for Depreciation in the Trial Balance

    A trial balance shows provision for depreciation as a “credit item”. The value of most of the assets reduces over a period of time. It’s a common practice to record the assets at its historical cost but over a period of time, does the value of asset remain the same as at the time of its purchase?

    Obviously “Not”. So, if the asset has a debit balance then the provision for depreciation can not have a debit balance i.e it is bound to have a credit balance.

    The below-given image would also be of great help to understand the above para.

    provision for depreciation in trial balance

    What is Provision for Depreciation?

    The fixed assets are depreciated over a period of time. Depreciation while is deducted from an income statement every year it is not deducted from an asset rather it is recorded on the liability side as accumulated depreciation or provision for depreciation. It’s a contra asset.

    To find the net book value at the time of disposal of the asset or year-end or revaluation etc. one needs to subtract the provision for depreciation account balance from the historical cost of the asset. Such provision being a contra asset has a credit balance.

    The illustrative example given below in the form of a problem might be of some help.

    Prepare a trial balance of Ms Julie from the data given below-

    ParticularsAmount
    Capital1,00,000
    Sales120,000
    Purchases110,000
    Sales Return20,000
    Fixed Assets100,000
    Cash at bank10,000
    Provision for Depreciation20,000

    Solution:

    Provision for depreciation in the Trial Balance

    I hope that your question now has been answered.


    Aastha Mehta.

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  1. This answer was edited.

    Balance of Petty Cash Book- The balance of petty cash book is an asset and not income. The logic behind the answer is that petty cash book is one of the types of cash book and petty cash book records expenses and incomes which is similar to cash book. Since cash account is considered as an Asset, peRead more

    Balance of Petty Cash Book-

    The balance of petty cash book is an asset and not income. The logic behind the answer is that petty cash book is one of the types of cash book and petty cash book records expenses and incomes which is similar to cash book. Since cash account is considered as an Asset, petty cash book which is a part of cash book is also an asset.

    The balance of petty cash book is never closed and their balances are carried forward to the next accounting period which is considered as one of the most significant qualities of an asset whereas Income doesn’t have any opening balance and their balances get closed at the end of every accounting year.

    Petty cash book is placed under the head current asset in the balance sheet. The Closing Balance of petty cash book is computed by deducting Total expenditure from Total cash receipt (as received from the head cashier).

    To make the above explanation and logic easy. I would like to add a practical example for clear understanding.

    Example Problem

    Prepare Petty Cash Book of Alex & Max Co. from the following information as provided below

    Date ParticularsAmount
    1st AugReceived cash from head cashier5,000
    4th AugPaid Cartage expenses300
    8th AugTelephone charges paid200
    10th AugPaid Sundry expenses500

      Petty Cash Book of Alex & Max Co.

    Petty Cash Book

    Conclusion

    I would like to conclude my answer by stating that the balance of petty cash book is an asset and not income.

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  1. This answer was edited.

    For anyone who is not familiar with the term 'closing stock', in brief, it refers to the unsold goods held at the end of the financial year. To ascertain the true financial position of a company it is necessary to adjust the closing stock at the end of an accounting year. Adjustment entry of closingRead more

    For anyone who is not familiar with the term ‘closing stock’, in brief, it refers to the unsold goods held at the end of the financial year. To ascertain the true financial position of a company it is necessary to adjust the closing stock at the end of an accounting year.

    Adjustment entry of closing stock

    The closing stock generally does not appear in the trial balance and is seen as an adjustment entry. We need to pass an adjusting entry before the preparation of final accounts. It is important to note that an adjustment entry is always recorded twice in the books of accounts therefore, the two ways of recording the same for closing stock are as follows:

    1. Credit side of the trading account.

    2. The asset side of the balance sheet.

    Example

    The closing stock of ABC Ltd. amounts to 40,000. The journal entries in the books of the company are as follows:

    PARTICULARS AMOUNT
    Closing stock a/cDebit40,000
    To Trading a/cCredit40,000

    (being closing stock adjusted)

    Placement of closing stock in the trading a/c

    trading a/c

    Placement of closing stock in the balance sheet

    balance sheet

    Note: Sometimes, adjusted purchases are given in the trial balance which indicates that the opening as well the closing stock have been adjusted through purchases. It is important to note here that the closing stock will only be recorded on the asset side of the balance sheet and will not appear in the trading a/c.

    Hope this helps.

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  1. 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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  1. This answer was edited.

    Need and Importance of Final Accounts Final accounts are considered as one of the essential elements of the organization. It is prepared at the final stage of the accounting process. I would like to break the explanation into two segments. The first segment would be why do we need final accounts andRead more

    Need and Importance of Final Accounts

    Final accounts are considered as one of the essential elements of the organization. It is prepared at the final stage of the accounting process. I would like to break the explanation into two segments. The first segment would be why do we need final accounts and second would be its importance.

    Why do we need a final account?

    The main need for preparing the final account is to keep a track of all the business activities of an organization by the end of every accounting period.  Every organization is required to record financial transactions, prepare financial reports, analytics and information.

    Final accounts data is considered as extremely crucial information for the organization and administration for making informed judgments. Final accounts are needed by various users of the financial statements such as shareholders, lenders, creditors, suppliers, customers and government.

    Importance of Final Accounts

    1. Final accounts assist the shareholders to evaluate their investments which help them to make accurate decisions. Shareholders are more interested to know the liquidity position of the organization and the amount of profit and dividends earned by them.

    2. Final accounts are essential for the tax department to make sure that the organization makes the payment of various taxes and additional duties on time without any delay. Therefore preparation of final accounts (Income statement) is very important for computing tax.

    3. Final accounts provide important facts and figures regarding performance, liquidity, progress and deposition of an enterprise. This helps the internal management to make quick, informed and accurate future decisions on the various aspects of the organization.

    4. Final accounts allow lenders and creditors to have a look at the financial health and soundness of the organization. Creditors use the following information to assess the risk, credibility and its ability to repay the debt on the agreed date.

    5. Final accounts help the employees to know about the company’s profitability and its adverse effects on job security, remuneration, transfers, salary hikes, incentives and various other bonuses.

    6. Final accounts play an important role in helping the organization to achieve steady growth and development by deploying various techniques and strategies for improving revenue, developing a strong customer base and providing more employment opportunities.

    Purpose of Final Accounts

    The following are the main purpose of preparing final accounts-

    1. Final accounts are prepared to determine the net profit or net loss incurred by the organization within one accounting period.

    2. Gross Profit and Net Profit of the current accounting period are compared with the previous years’ profit. This helps in determining the progress of the business. This information further helps in framing future decisions and policies for the organization.

    3. Final accounts facilitate the preparation of trading accounts and profit & loss accounts which provides details regarding all the expenses and incomes (direct or indirect) of an organization. This helps the organization in applying various tactics for reducing the expenses and strengthening incomes.

    4. Final accounts serve as a purpose and facilitate the preparation of financial ratios by using trading and profit & loss accounts information. For example- Gross Profit Ratio, Net Profit Ratio, Operating Ratio etc.,

    5. Final accounts are prepared to ascertain the financial and liquidity position of an organization on a certain date by providing and reflecting the exact value of assets and liabilities. The current values shown under the various heads of the balance sheet is used for comparing it with the previous years’ figures to evaluate changes in the financial position.

    6. Final accounts are prepared with an objective to determine the solvency position of the business. It states that business must have an ability to meet short-term solvency by calculating Current Ratio and Liquidity Ratio. Similarly, long-term solvency can be achieved by computing Debt-equity Ratio and Proprietary Ratio.

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  1. This answer was edited.

    Objectives of Bank Reconciliation Statement- Bank Reconciliation statement refers to the statement that reconciles the difference between the balances as per the bank column of cash-book and pass-book.  The following are the objectives of the bank reconciliation statement. BRS Stands for Bank ReconcRead more

    Objectives of Bank Reconciliation Statement-

    Bank Reconciliation statement refers to the statement that reconciles the difference between the balances as per the bank column of cash-book and pass-book.  The following are the objectives of the bank reconciliation statement. BRS Stands for Bank Reconciliation Statement.

    1. The primary objective for preparing BRS is to check the accuracy in the bank column of both cash book and passbook. Accountants generally prepare BRS based on transactions recorded in the cash book and bank book (passbook) on a particular time.

    2. BRS is prepared to check the cash inflows and outflows in the business and they must tally with the bank statements (or) passbook. This helps the users to easily detect the non-uniformity in cash book balance and passbook balance.

    3. BRS provides us information on the various aspects of banking transactions such as it gives information on the position of cheques, payment made by the bank on standing instructions, direct payment by debtors, bank charges, bank interest, dividends received etc.,

    4. BRS helps the accountant to keep a track on the funds available in the bank account. Hence it becomes comfortable for the company to issue a cheque for making payments to its various creditors in some future agreed date.

    5. Another main objective of preparing BRS is to control the internal management of the organization on cash inflow and outflow. BRS acts as a mechanism to keep a track on cash embezzlement, bank drafts and misuse of company’s funds by dishonest employees.

    Impact of Bank Reconciliation Statements-

    The following impact may occur if companies do not prepare bank reconciliation statements.

    1. If the bank reconciliation statements are not prepared by the companies then there will be a difference in the bank column of cashbook and passbook. Hence, there will not be any accuracy in amounts of cashbook and passbook.

    2. If the bank reconciliation statement is not prepared then the company will not have adequate information relating to the various banking transactions such as payment made to various creditors, bank interest, bank charges, dividends received etc.,

    3. If the bank reconciliation statement is not prepared then it will be very difficult for an accountant to keep a track on available funds in the bank account as per passbook. This may result in the delay of future payment to suppliers, creditors and other agents.

    4. If the bank reconciliation statement is not prepared by the companies then cash embezzlement, fraudulent transactions, misuse of company funds by the dishonest employees will increase and it cannot be easily traced by the company.

    I would like to add an example for a clear understanding of the above explanation

    Example for Bank Reconciliation Statement- 

    ABC Ltd furnishes you the following information prepare a Bank Reconciliation Statement to find out Debit Balance of Pass Book.

    SnoParticularsAmount
    IDebit Balance as per Cash Book15,000
    1.Cheques issued but not presented2,000
    2.Cheques deposited but not collected4,000
    3.Payment made by the bank as per standing instructions4,000
    4.Direct deposit by customers in the bank3,000

    Bank Reconciliation Statement of ABC Ltd.

    Bank Reconciliation Statement

    Impact of Transaction if bank reconciliation statement not prepared

    If the cheque is deposited but not collected-

    CashBook– The accountant will record the transaction and it will show an increase in the bank balance of cashbook (15,000+4,000 = 19,000).

    PassBook– If the same is not recorded by the bank at the same time. Then the bank passbook will show the same balance (say- no increase and no decrease).

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  1. This answer was edited.

    Examples of Bank Reconciliation Statement Illustration 1, From the following particulars prepare a Bank Reconciliation Statement on 31st January XXXX Debit Balance as per Cash Book 48,000. Cheque of 37,000 was deposited and collected by the bank but not recorded in Cash Book. Purchased Furniture andRead more

    Examples of Bank Reconciliation Statement

    Illustration 1,

    From the following particulars prepare a Bank Reconciliation Statement on 31st January XXXX

    1. Debit Balance as per Cash Book 48,000.
    2. Cheque of 37,000 was deposited and collected by the bank but not recorded in Cash Book.
    3. Purchased Furniture and payment by the debit card 25,000, was not recorded in Cash Book.
    4. A cash deposit of 26,000 was recorded in the cash column of Cash Book.

     

    Solution:

    Bank Reconciliation from cash book to pass book

    Illustration 2,

    From the following particulars prepare a Bank Reconciliation Statement on 31st October XXXX

    1. Pass Book of Ms Jane shows an overdraft of 50,000.
    2. Cheques issued but not presented for payment to bank 40,000.
    3. Payment side, bank column of Cash Book was undercast by 500.
    4. Interest on overdraft charged by the bank was 1,500.

     

    Solution:

    Bank Reconciliation Statement

    Examples of Cash Book

    Illustration 1,

    DateParticularsAmount
    1st March XXXXCash in Hand2,500
    5th  March XXXXCash paid to Mr Allen1,000
    16th  March XXXXCash Sales1,500
    25th  March XXXXPaid Salary500

     

    Solution:

    Adjustments in the cash book

    Illustration 2,

    Prepare a 2 column cash book

    DateParticularsAmount
    1st Oct XXXXBank Balance52,000
    1st Oct XXXXCash Balance15,000
    4th  Oct XXXXPurchased goods and payment made by cheque15,000
    16th  Oct XXXXSold goods for cash8,000
    25th  Oct XXXXPaid rent by cheque500
    26th  Oct XXXXPurchased goods for cash10,000

     

    Solution:

    Cash Book with both cash and bank columns

     


    Aastha Mehta.

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  1. This answer was edited.

    Another name of Balance Sheet- There are several names given to the balance sheet such as- Statement of financial position, Statement of financial affairs, Net worth statement etc., In American history balance sheet was referred by various other names such as- Treasurer Reports, Financial StatementsRead more

    Another name of Balance Sheet-

    There are several names given to the balance sheet such as- Statement of financial position, Statement of financial affairs, Net worth statement etc., In American history balance sheet was referred by various other names such as- Treasurer Reports, Financial Statements, Statement of Assets and Liabilities, Consolidated Balance Sheet and Condensed Financial Statements.

    Apart from all the above-mentioned names, the two most popular names of Balance Sheet are- Statement of financial position and Statement of Assets and Liabilities.

    To make the concept clear, I would like to add logic behind the different names of the balance sheet followed by a snippet of a practical example.

    Statement of Financial Position-

    The balance sheet is called as a statement of financial position because it shows financial stability, liquidity and performance of the business. This statement helps the business to define its future financial goals.

    Analyzing the statement of financial position would help the users of financial data (both internal and external users) to forecast the period, value and volatility of the organization’s future earnings.

    Statement of Assets and Liabilities-

    The balance sheet is also known as the statement of assets and liabilities because it portraits what entity owns (Assets) and owes (Liabilities) along with the amount invested by the owner (or) shareholders in the form of capital for a specified period.

    The logic behind this name states that there should be a balance between total assets and total liabilities along with the owner’s equity. Hence a sound organization’s financial statements must always be balanced.

    Assets = Liabilities + Owner’s Equity

    Practical Example-

    The following are the balances of ABC Enterprises. Prepare Balance Sheet.

    ParticularsAmountParticularsAmount
    Capital14,00,000Sundry Debtors4,00,000
    Plant & Machinery8,00,000Bills Payable2,00,000
    Sundry Creditors6,00,000Bills Receivable4,00,000
    Land & Building10,00,000Bank Loan4,00,000

                                       Balance Sheet of ABC Enterprises-

    Balance Sheet

    Balance Sheet has 3 main components– Liabilities, Assets and Net Worth

    Liabilities- It refers to the debts owed by the organization which are needed to the paid before the entity is legally wound up. They are classified into two types- Current and Non- Current Liabilities. Bank Loan, Sundry Creditors, Bills Payables are its few examples.

    Assets- It refers to the economic resources owned and controlled by the organization for deriving long-term future benefits. They are classified into two types- Fixed and Current Assets. Land & Building, Sundry Debtors, Bills Receivables are its few examples.

    Owner’s Equity- It refers to the amount introduced (or) invested by the owner at the time of starting the business. This amount remains in the business until the entity is legally wounded by the law. Owner’s Equity is also known as capital (or) net worth.

    Owner’s Equity = Assets – Liabilities.

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    Yes. Let's take a set of transactions and prepare all the requisite information asked. Following are the transactions for the period April 20x1 to March 20x2 in the books of Michael Traders 1-Apr Michael started business with cash 600,000, cash at Bank of America 700,000, furniture 200,000. 1-Apr PuRead more

    Yes.

    Let’s take a set of transactions and prepare all the requisite information asked.

    Following are the transactions for the period April 20×1 to March 20×2 in the books of Michael Traders

    1-AprMichael started business with cash 600,000, cash at Bank of America 700,000, furniture 200,000.
    1-AprPurchased Plant & Machinery worth 250,000 by cheque.
    25-AprPurchased goods from ABC Ltd worth 800,000 @10% trade discount.
    5-MayCash Sales 1,000,000 @5% trade discount to XYZ Traders
    15-MayDeposited cash with Bank of America 500,000.
    5-JunPaid ABC Ltd 300,000 in cash.
    10-JunReceived commission 75,000 by cheque.
    25-JunCash Purchases 250,000.
    5-JulSold goods to XYZ Traders 475,000.
    15-JulReceived 275,000 by cheque from XYZ Traders.
    5-AugLoan taken from Bank of America 200,000
    25-AugPurchased goods from ABC Ltd 50,000.
    27-AugWithdrew cash from bank 10,000.
    5-SepReceived commission 55,000 in cash.
    10-SepPaid ABC Ltd 70,000 by cheque.
    20-SepReceived 90,000 in cash from XYZ Traders.
    1-OctBank loan repaid 50,000.
    25-OctCash Purchases 25,000.
    5-NovSold goods to XYZ Traders 47,000.
    15-NovWithdrew cash from bank 15,000.
    5-DecReceived interest from bank 5,000.
    25-DecPurchased goods from ABC Ltd 75,000.
    5-JanCash Sales 100,000.
    15-JanDeposited cash with Bank of America 35,000.
    25-FebCash Purchases 450,000.
    28-FebOffice was taken on rent in the month of Feb. Office rent paid in cash 50,000.
    28-FebEmployees were hired in the month of Feb. Paid salary by cheque 30,000 & cash 30,000 for the month of Feb 20×2.
    5-MarSold goods to XYZ Traders 675,000.
    31-MarPaid office rent by cheque 50,000.
    31-MarPaid salary in cash 30,000 for the month of March 20×2.

    You are required to:
    (i) Journalize the above transactions and post them in Ledgers and prepare a Trial Balance.

    (ii) Prepare Trading A/c, Profit & Loss A/c and Balance Sheet taking into consideration:
    1. Closing Stock as on 31st March 20×2 is 200,000.
    2. Salary outstanding for the month of March 20×2 is 30,000.
    3. [email protected]% to be charged on Furniture & Fixtures and @15% on Plant & Machinery.

    1. Journal Entries

    April & May Journal

    June-Aug Journal

    Sep-Nov Journal

    Dec-Jan Journal

    Feb-March Journal

    2. Ledgers

    Ledger-Micheal Capital A/c

    Ledger-Purchases & Sales A/c

    Ledger-Furniture A/c & Plant & Machinery A/c

    Ledger-Creditor & Debtor A/c

    Ledger-Bank Loan A/c

    Ledger-Salary & Office Rent A/c

    Ledger-Interest & Commission received A/c

    Ledger-Cash A/c

    Ledger-Bank of America A/c

    3. Trial Balance

    Trial Balance

    4. Trading A/c & Profit and Loss A/c

    Trading A/c and Profit & Loss A/c

    5. Balance Sheet

    Balance Sheet

    An excel sheet of the entire transactions along with the requisite information asked has been attached for your reference.

    30-transactions-of-Journal-Ledger-Trial-Balance-Financial-Statements

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  1. This answer was edited.

    In accounting, beginning and ending balance are used interchangeably with opening and closing. For the sake of easy understanding, I am assuming the beginning and ending balance of an account to be the opening and closing balance of a ledger account.  Opening Balance In the ledger, balance b/d meansRead more

    In accounting, beginning and ending balance are used interchangeably with opening and closing. For the sake of easy understanding, I am assuming the beginning and ending balance of an account to be the opening and closing balance of a ledger account. 

    Opening Balance

    In the ledger, balance b/d means opening (or) beginning balance of an account. Balance b/d refers to that balance which is brought down (or)  forward to the current accounting period from the previous accounting period. In simple terms, the ending (or) closing balance at the end of the month becomes opening balance for the next month.

    Opening balance can be debit- To (or) credit- By. According to modern accounting approach, assets, liabilities and owner’s equity (capital) have opening balances.

    For Example- On 31st March YYYY, the closing balance of the machinery was 500,000. What will be the opening balance of machinery on 1st April YYYY?

    Dr                                                             Machinery Account                                         Cr

    ParticularsJ.F.AmountParticularsJ.F.Amount
    To Balance b/d500,000

    Closing Balance

    In the ledger, Balance c/d means closing (or) ending balance of an account. Balance c/d refers to the amount that is carried down (or) forward from the current accounting period to the next accounting period. Balance c/d is the difference between the debit side and credit side of the ledger used for balancing the accounts.

    If the debit side exceeds the credit side, then the balancing figure (say balance c/d) appears on the credit side of the ledger and vice-versa. Closing balance can be debit- To (or) credit- By.

    Example- Mr X purchased furniture for 200,000. Depreciation is to be charged at 10% as per the Straight Line method. What will be the closing balance as on the year-end?

    Dr                                                         Furniture Account                                            Cr

    ParticularsJ.F.AmountParticularsJ.F.Amount
    To Bank a/c200,000By Depreciation a/c20,000
    By Balance c/d180,000
    200,000200,000

    According to the modern rules, Assets shows opening (or) beginning balance on the debit side whereas, Liabilities and Owner’s equity (capital) shows the opening balance on the credit side. The closing balance (or) ending balance is placed on either side of the opening balance.

    For example- If the opening balance of machinery is shown on the debit side of ledger account then closing balance of the machinery will be shown on the credit side to balance the ledger account.

    To make the above concept easy and understandable, a snippet of the cash account will help you in understanding the opening and closing balance of an account.

    Cash Account

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  1. 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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  1. This answer was edited.

    Principles of Accounting Sure, John, for developing a strong accounting base, I would like to share with you the five basic principles of accounting, followed by an example each. I hope this answer enhance your basic accounting knowledge. Business-Entity Principle This principle states that the orgaRead more

    Principles of Accounting

    Sure, John, for developing a strong accounting base, I would like to share with you the five basic principles of accounting, followed by an example each. I hope this answer enhance your basic accounting knowledge.

    Business-Entity Principle

    This principle states that the organization has a separate entity apart from his owner. Every accountant should consider business as distinct from its owner. This means business transactions must be recorded in business books of accounts and owner’s transactions in his books of accounts.

    For Example- Company A started a watch business by investing 1,00,000 with which he purchased raw materials for 40,000 and maintained balance in hand. He further withdrew in 8,000 for his personal use from the business.

    As per business entity principle, his capital invested will get reduced by 8,000 and these expenses should not be treated as business expenses. Now the business owes 92,000 to the owner.

    Accrual Principle

    Accrual principle states that the effects of transactions and events are identified at the time when they occur (say mercantile basis) and not on cash or cash equivalent either received or paid. Accrual principle records total revenue generated. Revenue includes gross inflow of cash, receivables and other consideration arising out of business activities.

    For Example- Mr Alex started a Jute business. He invested 10,00,000, bought raw materials for the manufacturing of Jute bags for 6,00,000. He manufactured 50,000 Jute bags and sold the same for 8,00,000 to ABC Ltd. ABC Ltd. paid in 5,00,000 in cash and assured him to pay rest of the amount in future.

    As per accrual principle, total revenue of Alex is 8,00,000 (say 5,00,000 from cash and 3,00,000 by way of receivables).

    Going Concern Principle

    Going concern principle states that the business has a long fair life and it continues its operations until it is legally wound up in the foreseeable future. Hence it is presumed at the organization has neither the intention to shut nor the need to liquidate.

    For Example- Standard Chartered Bank will close one of its bank branches in the middle east for the sake of improving its profitability and performance.

    As per the going concern principleStandard Chartered Bank will keep continuing its operations because closing down of a small portion of the business doesn’t affect the capability of the bank.

    Cost Principle

    Cost principle states that assets must be valued at historical cost (say the acquisition cost). If the machinery is acquired by paying 1,00,000 then the acquisition cost of the machinery is 1,00,000. It is highly objective and free from all bias.

    For Example- Company B purchases a motor van for 3,00,000. The market value of the motor van is 2,50,000. At the time of preparation of the balance sheet, motor-van must be valued at 3,00,000.

    As per the cost principle, it is clear that motor van must be valued at cost and not at market value.

    Conservatism Principle

    Conservatism principle states that never anticipate for future income and should account for all the possible losses. When there are various alternatives available for the valuation of the closing stock then the accountant should opt for that method which provides lesser value.

    For Example- At the time of preparation of final accounts, the value of closing inventory shown in the books is 5,00,000. Net realisable value is 2,50,000.

    As per the conservatism principle, closing inventory must be valued at cost price or net realisable value whichever is lower. Therefore, Closing stock must be shown at 2,50,000 in the books of accounts.

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  1. Yes, the cash book is both a journal and a ledger.  To make the concept simpler, I would like to familiarize you with the meaning of journals and ledgers, which shall help in determining the reasons for a cashbook to be both a journal as well as a ledger. Journal A journal is a descriptive financialRead more

    Yes, the cash book is both a journal and a ledger. 

    To make the concept simpler, I would like to familiarize you with the meaning of journals and ledgers, which shall help in determining the reasons for a cashbook to be both a journal as well as a ledger.

    Journal

    A journal is a descriptive financial record of a business that is used for future reconciling as well as a transfer to other books of accounts such as the ledger. It is a book of original entry.

    Cashbook is considered to be a journal because all the cash/bank receipts and payments are recorded in this book in a descriptive form similar to journal posting.

    Ledger

    In simple words, a ledger refers to recording individual accounts in a summarized form that are posted from a journal. It is a book of principal entry.

    A cashbook is considered to be a ledger because all the cash transactions that are made during a particular financial period are recorded in this book in a chronological order. When a cashbook is prepared there is no need for a cash a/c as the book serves the same purpose and therefore can be used as a substitute.

    Format of a Cashbook

    Cashbook

    DateParticularsV.No.L.F.CashDateParticularsV.No.L.F.Cash
     To Capital a/c    By Advertisement a/c   
     To Sales a/c    By Purchases a/c   
     To Mr. C’s a/c    By Stationery a/c   
     To Bank a/c    By Office expenses a/c   
          By Rent a/c   
          By Salary a/c   
          By balance c/d   
              

    Note: As we can see the format and posting of a cashbook are similar to that of journal and ledger accounts.

    Hope this helps.

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