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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. This answer was edited.

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

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

    Steps to prepare Balance Sheet from Trial Balance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Illustration

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

    Trial Balance

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

    Balance Sheet

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  1. 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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  1. This answer was edited.

    First, let me explain you the meaning of the term Contra Assets. Meaning of Contra Assets The word contra means “opposite”. So, contra assets account have credit balance, whereas assets normally have debit balance. Contra asset is used to offset or reduce the balance of the corresponding asset accouRead more

    First, let me explain you the meaning of the term Contra Assets.

    Meaning of Contra Assets

    The word contra means “opposite”. So, contra assets account have credit balance, whereas assets normally have debit balance.

    Contra asset is used to offset or reduce the balance of the corresponding asset account in the balance sheet. Reducing or offsetting the gross value of asset with the corresponding contra asset will give us the net value of the asset. Contra asset can be referred as negative asset account.

    Examples of Contra Assets

    1. Accumulated Depreciation
    2. Accumulated Amortization
    3. Obsolete Inventory Reserve
    4. Reserve/Provision for Doubtful Debts

    Presentation in the Balance Sheet

    Contra AssetPresentation in the Balance Sheet
    Accumulated AmortizationReduced from the respective Intangible Assets under the head “Non-Current assets”
    Reserve/Provision for Doubtful DebtsReduced from Accounts Receivable/Debtors under the head “Current assets”
    Accumulated DepreciationReduced from the respective Tangible Assets under the head “Non-Current assets”
    Obsolete Inventory ReserveReduced from Inventory under the head “Current assets”

    For better understanding, let me take 2 examples from above – Accumulated Amortization & Reserve/Provision for Doubtful Debts, & demonstrate the presentation of the same in the extract of balance sheet.

    Example 1.

    Suppose ABC Ltd acquires a new computer software for 600,000 in the month of January 20×1. The estimated useful life of the software is 3 years with no scrap value.

    –As per the straight-line method, 200,000 will be written-off/reduced from the amount of computer software each year for 3 consecutive years.

    Year-endAmortizationAccumulated AmortizationNet Value of Computer Software
    20×1200,000200,000400,000 (600,000 – 200,000)
    20×2200,000400,000200,000 (600,000 – 400,000)
    20×3200,000600,000Nil (600,000 – 600,000)

    Example 2.

    The outstanding balance of debtors was 50,000 as on 31/12/20×2. Entity ABC Ltd anticipates doubtful recovery from some debtors on the basis of previous year’s experiences. Therefore, it decides to provide for 5% reserve for doubtful debts on its debtors.

    –So, 2,500 (50,000*5%) will be reduced from the amount of debtors as reserve/provision for doubtful debts as at 31/12/20×2.

    Presentation of Accumulated Amortization & Reserve/Provision for Doubtful Debts in the extract of balance sheet as at 31/12/20×2-

    Contra assets in balance sheet

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