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Discy Latest Questions

  1. 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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  1. 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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    In my opinion, following are some of the difficult adjustments in final accounts. Sr No. Adjustments 1st effect 2nd effect 1 Uninsured goods destroyed by fire/accident Trading A/c - Credit side (Gross amount) Profit & Loss A/c - Debit side (Gross amount) 2 Insured goods destroyed by fire/accidenRead more

    In my opinion, following are some of the difficult adjustments in final accounts.

    Sr No.Adjustments1st effect2nd effect
    1Uninsured goods destroyed by fire/accidentTrading A/c – Credit side (Gross amount)Profit & Loss A/c – Debit side (Gross amount)
    2Insured goods destroyed by fire/accident (eg. 50,000 worth of goods destroyed & insurance company accepted the claim of 40,000)Trading A/c – Credit side (Gross amount ie. 50,000)a. Balance Sheet – Asset side (Claim amount ie.40,000)
    b. Profit & Loss A/c – Debit side (Amount of Loss ie.10,000)
    3Unrecorded PurchasesTrading A/c – Debit side (Add to Purchases)Balance Sheet – Liability side (Add to Creditors)
    4Unrecorded SalesTrading A/c – Credit side (Add to Sales)Balance Sheet – Asset side (Add to Debtors)
    5Provision for Discount on DebtorsProfit & Loss A/c – Debit sideBalance Sheet – Asset side (Deducted from Debtors)
    6Provision for Discount on CreditorsProfit & Loss A/c – Credit sideBalance Sheet – Liability side (Deducted from Creditors)
    7Bills Receivable dishonouredBalance Sheet – Asset side (Add the amount of bills dishonoured to Debtors)Balance Sheet – Asset side (Deduct the amount of bills dishonoured from Bills Receivable)
    8Bills Payable dishonouredBalance Sheet – Liability side (Add the amount of bills dishonoured to Creditors)Balance Sheet – Liability side (Deduct the amount of bills dishonoured from Bills Payable)
    9Deferred Expenses (eg. Advertisement expenses paid for 5 years)Profit & Loss A/c – Debit side (Advertisement expenses related to current year ie. 1/5th of Total)Balance Sheet – Asset side (Remaining amount of advertisement is shown as Prepaid advertisement ie. 4/5th of Total)
    10Revenue Receipts included in Capital Receipts (eg. Sale of Goods included in Sale of Furniture)Trading A/c – Credit side (Add to Sales)Balance Sheet – Asset side (Add back the sales amount to Furniture)
    11Revenue Expenditure included in Capital ExpenditureTrading A/c /Profit & Loss A/c – Debit side (Add to that particular Revenue Expenditure)Balance Sheet – Asset side (Deduct from that particular asset)
    12Capital Expenditure included in Revenue ExpenditureTrading A/c /Profit & Loss A/c – Debit side (Deduct from that particular Revenue Expenditure)Balance Sheet – Asset side (Add to that particular asset)
    13Manager is allowed commission at a certain % on Net Profit

    a. If commission eg.10% is quoted on “Net Profit before charging such commission”:
    Commission amount = Profit before commission * 10/100

    b. If commission eg.10% is quoted on “Net Profit after charging such commission”:
    Commission amount = Profit before commission * 10/110

    Profit & Loss A/c – Debit side (Manager’s Commission)Balance Sheet – Liability side (Outstanding Manager’s Commission), OR
    Balance Sheet – Asset side (Reduce from Cash/Bank)
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  1. This answer was edited.

    Before answering this question you should first have a glance over the concept of interest on capital. Interest on Capital An organisation or an entity is considered as separate from its partners or proprietor or shareholders for that matter. Since the capital brought in by the partners and proprietRead more

    Before answering this question you should first have a glance over the concept of interest on capital.

    Interest on Capital

    An organisation or an entity is considered as separate from its partners or proprietor or shareholders for that matter.

    Since the capital brought in by the partners and proprietor is an obligation for an entity thus the interest payable to the partners or proprietor for that matter is considered as an expense of the firm or an entity. Had not the partners or sole owner brought in the capital the firm or the organisation would have borrowed such amount externally and so, it would have to incur a certain financial charge.

    Adjustment of Interest on Capital in the Financial Statement

    Where the capital is introduced by the sole proprietor the transaction will be journalised as-

    Interest when due –

    Journal Entry

    Interest on capital transferred to profit and loss statement-

    Journal entry at the time of transferring the interest to income statement

    Thus, ultimately the profit of the firm is reduced as such interest is treated as an expense and hence debited in the profit and loss statement and it is shown in the balance sheet by increasing the capital on the liability side of the balance sheet by that amount.

    For Example,

    Mr John is a dealer in the smartphone has introduced capital worth 1,00,000 and the firm shall pay interest @ 6% p.a. at the end of the year.

    It will be displayed in the profit and loss statement as –

    Adjustment in the income statement

     

    It will be displayed in the balance sheet as –

    Adjustment in the financial statement

    Interest on capital is provided out of profits only. Thus in case of loss, no interest is provided.

    In case of a partnership firm – 

    If the firm maintains Fluctuating Capital i.e all entries in respect of salary, interest, profit earned and drawings of partners are transacted through the partner’s capital A/c.

    Thus, where an entity maintains only partners capital account the interest on capital shall be journalised as –

    Interest on capital due –

    Journal Entry for interest on capitalInterest on capital transferred to profit and loss appropriation statement –

    Adjustment in an income statement

    Some entities prefer showing the partner’s capital accounts with the same old figures i.e no entries in respect of salary, interest, profit earned and drawings of partners are transacted through the partner’s capital A/c.

    A separate account is to be opened for the same called “Partner’s Current Account”. The interest on capital here shall be calculated only on fixed capital.

    In this case, such a transaction shall be journalised as –

    Interest due on capital
    Interest on capital when an entity maintains partners current account

    Interest on capital transferred to profit and loss appropriation statement –

    Adjustment in an income statement

    Thus, ultimately the profit of the firm is reduced as such interest is treated as an expense and hence debited in the profit and loss appropriation statement and it is shown in the balance sheet by increasing the partner’s capital/ current a/c on the liability side of the balance sheet by that amount.

    The example given below will be of some help to interpret the above para

    An entity has 2 partners – Alex and Anna at the beginning of the year both have introduced a capital of 100,000  each and it was agreed in the partnership deed that the partners will charge interest @ 12% p.a. every year at the end of the year.

    Hence, the interest of 24,000 (100,000 x 12% p.a x 2 partners) shall be transacted in the balance sheet and Profit and loss statement as –

    If the firm maintains partners capital account only-
    Adjustment in profit and loss appropriation statement

    Extract of Profit and Loss Appropriation Account-

    Adjustment in the statement of accounts

    Adjustment in a balance sheet

    A snippet of the balance sheet is given below

    Interest adjustment in the balance sheet when the entity maintains only capital account

    If the firm maintains partners capital account and partners current account

    Adjustment in profit and loss statement

    Extract of Profit and Loss Appropriation Account-

    Adjustment in Financial Statements

     

    Adjustment in a balance sheet

    A snippet of the balance sheet is given below

    Adjustment in partners current account on liability side of balance sheet

    I have tried simplifying it as much as I could. I hope this helps.


    Aastha Mehta.

     

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    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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    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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