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Discy Latest Questions

  1. 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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  1. This answer was edited.

    In the Income Statement, Trading account represents the first part and Profit & Loss account represents the second part. Trading account gives the overall purview of all trading activities, such as purchase and sale of products. It is prepared to ascertain gross profit or gross loss. ProfitRead more

    In the Income Statement, Trading account represents the first part and Profit & Loss account represents the second part.

    Trading account gives the overall purview of all trading activities, such as purchase and sale of products. It is prepared to ascertain gross profit or gross loss. Profit & Loss account gives the final working results of the business. It is prepared to ascertain net profit or net loss.

    Steps to prepare Income Statement from Trial Balance

    All the debit side items related to expenses and credit side items related to income listed in the trial balance shall be posted on the debit side and credit side of the income statement respectively.

    1. Post opening stock on the debit side of the income statement.

    2. Post purchases and sales on the debit and credit side respectively. Deduct purchase return from Purchases and sales return from Sales to arrive at the Net Purchases and Net Sales.

    3. Post all the direct expenses incurred for the purchase & production of goods eg. wages, factory rent, custom duty, carriage inward, manufacturing expenses, etc on the debit side.

    4. Post the amount of closing stock stated in the adjustments.

    5. Make all the necessary adjustments, if any, related to outstanding and prepaid expenses, goods withdrawn for personal use, goods destroyed, etc

    6. Now, find out the gross profit or gross loss.
    If total of credit side > total of debit side ie. credit balance, then the amount of difference is gross profit.
    If total of debit side > total of credit side ie. debit balance, then the amount of difference is gross loss.

    7. Carry forward the ascertained gross profit to the credit side or gross loss to the debit side of the second part of the income statement ie. profit & loss account.

    8. Post all the indirect expenses such as office or administrative expenses, financial expenses, selling or distribution expenses, etc on the debit side of the income statement.

    9. Post all the indirect incomes such as commission received, rent received, dividend received, etc on the credit side of the income statement.

    10. Consider all the necessary adjustments, if any, such as outstanding and prepaid expenses, outstanding and pre-received income, reserve for doubtful debts.

    11. Calculate depreciation and amortization on the assets and post the amount on the debit side.

    12. Now, find out the net profit or net loss.
    If total of credit side > total of debit side ie. credit balance, then the amount of difference is net profit.
    If total of debit side > total of credit side ie. debit balance, then the amount of difference is net loss.

    These steps complete the process of preparation of income statement from trial balance.

    Illustration

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

    Trial Balance

    Prepare Income Statement from the above given Trial Balance.

    Income Statement

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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. 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.

    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.

    Return Outwards In the layman language, return outwards refers to the goods returned by the customer to the supplier (or) manufacturer due to various issues found in the goods (say- quality, defects or damages). Return outwards is also known as purchase returns. The amount of return outwards (or) puRead more

    Return Outwards

    In the layman language, return outwards refers to the goods returned by the customer to the supplier (or) manufacturer due to various issues found in the goods (say- quality, defects or damages). Return outwards is also known as purchase returns.

    The amount of return outwards (or) purchase returns is deducted from the total purchases of the firm. It is treated as a contra-expense transaction. Return outwards holds credit balance and is placed on the credit side of the trial balance.

    To make this concept easy and understandable, I would like to add an example and trial balance (tabular format) for the above explanation.

    Example-  Mr Alex (a dealer in the washing machines) purchases 10 washing machines for 1,00,000 from Amazon on a credit period of 30 days. On 20th April he returns all the washing machines to Amazon due to the serious defects in all of its models. Pass journal entries for the above transaction in the books of Mr Alex.

    In the books of Mr Alex (Modern Approach)

    a) Entry on the purchase of goods from Amazon

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st AprilPurchase a/c Dr100,000ExpenseDebit- The Increase in Expense
     To Amazon a/c 100,000LiabilityCredit- The Increase in Liability

    (Being goods purchased on credit from Amazon)

    b) Entry on the return of goods purchased from Amazon.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    20th AprilAmazon a/c Dr100,000LiabilityDebit- The Decrease in Liability
     To Purchase returns a/c 100,000ExpenseCredit- The Decrease in Expense

    (Being goods returned to Amazon due to serious defects)

    Placement in Trial Balance

    Return Outwards

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  1. This answer was edited.

    Return Inwards In the layman language, return inwards refers to the goods returned by the buyer (customer) to the seller (i.e., selling entity) due to various issues which were earlier sold on credit. Return inwards is also known as sales returns. The amount of return inwards (or) sales returns is dRead more

    Return Inwards

    In the layman language, return inwards refers to the goods returned by the buyer (customer) to the seller (i.e., selling entity) due to various issues which were earlier sold on credit. Return inwards is also known as sales returns.

    The amount of return inwards (or) sales returns is deducted from the total sales of the firm. It is treated as a contra-revenue transaction. Return inwards holds the debit balance and is placed on the debit side of the trial balance.

    To make this concept easy and crispy, I would further like to add an example and trial balance (tabular format) for your better understanding.

    Example- On 1st May, Max Ltd. (a dealer in the refrigerator) sold 20 refrigerators for 5,00,000 on credit to Alexa Ltd. On 25th May they returned all the refrigerators to Max Ltd. due to the serious defects in a model of the refrigerators. Pass journal entries for the above transaction in the books of Max Ltd.
    In the books of Max Ltd (Modern Approach)

    a) Entry for the sale of goods

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st MayAlexa Ltd  a/c Dr500,000AssetDebit- The Increase in Asset
     To Sales returns a/c 500,000IncomeCredit- The Increase in Income

    (Being goods sold on credit to Alexa Ltd)

    b) Entry for the return of goods sold to Alexa Ltd.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    25th MaySales return a/c   Dr500,000IncomeDebit- The Decrease in Income
     To Alexa Ltd a/c 500,000AssetCredit- The Decrease in Asset

    (Being goods returned by Alexa Ltd due to serious defects)

    Placement in Trial Balance

    Return Inwards

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  1. 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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  1. 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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  1. This answer was edited.

    Trial Balance Are you facing difficulty in understanding the crux of the trial balance? I would like to help you by providing the meaning followed by items to be included on either side of the trial balance. Meaning The term trial balance refers to as the total of all the general ledger balances. ItRead more

    Trial Balance

    Are you facing difficulty in understanding the crux of the trial balance? I would like to help you by providing the meaning followed by items to be included on either side of the trial balance.

    Meaning

    The term trial balance refers to as the total of all the general ledger balances. It is a statement prepared at a certain period to check the arithmetic accuracy of the accounts (i.e., whether they are mathematically correct and balanced). It contains a list of all the general ledger accounts.

    Trading account, Profit and Loss account and Balance Sheet are prepared according to the ledger balances as posted in the trial balance.

    Now its time to learn about the various items which are placed on either side of the trial balance.

    Items that appear on the debit side of trial balance

    Generally, assets and expenses have a positive balance so they are placed on the debit side of trial balance. An asset and expense increases when it is debited and visa versa

    Exclusive List of Items

    1. Land and Buildings
    2. Plant and Machinery
    3. Furniture and Fixtures
    4. Office Tools and Equipment
    5. Cash at Bank
    6. Cash in Hand
    7. Motor Van
    8. Loss from the sale of fixed assets
    9. Travelling charges
    10. Printing and postage expenses
    11. Legal expenses
    12. Selling and distribution expenses
    13. Sundry debtors
    14. Bills receivables
    15. Commission paid
    16. Rent paid
    17. Interest paid
    18. Discount allowed
    19. Opening stock
    20. Purchases
    21. Prepaid expenses
    22. Advertisement expenses
    23. Bad Debts
    24. Wages and salaries
    25. Bank charges

    Items that appear on the credit side of trial balance

    Generally capital, revenue and liabilities have credit balance so they are placed on the credit side of trial balance. The capital, revenue and liability increases when it is credited and visa versa.

    Exclusive List of Items

    1. Sundry Creditors
    2. Bank Overdraft/Loan
    3. Bills Payables
    4. Sales (Revenue)
    5. Purchase Returns
    6. Common stock
    7. Un-earned revenues
    8. Retained earnings
    9. Rent Received
    10. Interest Received
    11. Discount from Creditors
    12. Discount on Purchases
    13. Dividend Received
    14. Interest on Drawings
    15. Bad Debts recovered
    16. Provision on Bad Debts (Cr.)
    17. Apprentice premium
    18. Miscellaneous/Sundry income
    19. Commission received
    20. Bank interest received
    21. Compensation received
    22. Outstanding income
    23. Income from investments
    24. Bonds payable
    25. Other incomes

     

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