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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-Apr Michael started business with cash 600,000, cash at Bank of America 700,000, furniture 200,000.
    1-Apr Purchased Plant & Machinery worth 250,000 by cheque.
    25-Apr Purchased goods from ABC Ltd worth 800,000 @10% trade discount.
    5-May Cash Sales 1,000,000 @5% trade discount to XYZ Traders
    15-May Deposited cash with Bank of America 500,000.
    5-Jun Paid ABC Ltd 300,000 in cash.
    10-Jun Received commission 75,000 by cheque.
    25-Jun Cash Purchases 250,000.
    5-Jul Sold goods to XYZ Traders 475,000.
    15-Jul Received 275,000 by cheque from XYZ Traders.
    5-Aug Loan taken from Bank of America 200,000
    25-Aug Purchased goods from ABC Ltd 50,000.
    27-Aug Withdrew cash from bank 10,000.
    5-Sep Received commission 55,000 in cash.
    10-Sep Paid ABC Ltd 70,000 by cheque.
    20-Sep Received 90,000 in cash from XYZ Traders.
    1-Oct Bank loan repaid 50,000.
    25-Oct Cash Purchases 25,000.
    5-Nov Sold goods to XYZ Traders 47,000.
    15-Nov Withdrew cash from bank 15,000.
    5-Dec Received interest from bank 5,000.
    25-Dec Purchased goods from ABC Ltd 75,000.
    5-Jan Cash Sales 100,000.
    15-Jan Deposited cash with Bank of America 35,000.
    25-Feb Cash Purchases 450,000.
    28-Feb Office was taken on rent in the month of Feb. Office rent paid in cash 50,000.
    28-Feb Employees were hired in the month of Feb. Paid salary by cheque 30,000 & cash 30,000 for the month of Feb 20×2.
    5-Mar Sold goods to XYZ Traders 675,000.
    31-Mar Paid office rent by cheque 50,000.
    31-Mar Paid 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. Salary is an indirect expense incurred by every organization as consideration for the efforts undertaken by the employees of the organization. It is one of the most recurring transactions because it is paid monthly. It is usually paid by cheque or through netbanking. Here, I will explain you the jouRead more

    Salary is an indirect expense incurred by every organization as consideration for the efforts undertaken by the employees of the organization. It is one of the most recurring transactions because it is paid monthly. It is usually paid by cheque or through netbanking.

    Here, I will explain you the journal entry for salary paid by cheque.

    Journal entry for paid salary by cheque

    I will present the journal entry using both the golden rule and the modern rule of accounting.

    1. According to the “Golden rules” of accounting

    Salary A/c Debit Nominal account Debit all expenses and losses
     To Bank A/c Credit Personal account Credit the giver

    (Being salary paid by cheque)

    2. According to the “Modern rules” of accounting

    Salary A/c Debit Expense Debit the increase in expenses
     To Bank A/c Credit Asset Credit the decrease in asset

    (Being salary paid by cheque)

    Example

    Samsung Inc. paid salary amounting to 250,000 to its employees by cheque for the month of March 20xx on 31/03/20xx.

    Journal entry in the books of Samsung Inc. on 31/03/20xx will be as follows-

    Salary A/c Debit 250,000 Debit the increase in expenses
     To Bank A/c Credit  250,000 Credit the decrease in asset

    (Being salary paid by cheque for the month of March 20xx)

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  1. This answer was edited.

    Prepaid Insurance is debited. But before directly diving into the question, let me help you interpret the meaning of Prepaid Insurance, as this will help you understand the nature of this accounting term. Meaning of Prepaid Insurance Prepaid Insurance is the amount of insurance premium which has beeRead more

    Prepaid Insurance is debited.

    But before directly diving into the question, let me help you interpret the meaning of Prepaid Insurance, as this will help you understand the nature of this accounting term.

    Meaning of Prepaid Insurance

    Prepaid Insurance is the amount of insurance premium which has been paid in advance in the current accounting period. However, the related benefits corresponding to the insurance amount prepaid will be received in the next accounting period. In other words, the insurance premium is paid before it is actually incurred.

    Prepaid Insurance is an example of Prepaid Expenses. It is presented as a “current asset” in the balance sheet.

    Why is Prepaid Insurance debited?

    To make you understand this question, it is important to familiarize you with both the Golden rules and Modern rules of accounting.

    1. Modern rules of accounting

    First, we will ascertain the reason why prepaid insurance is debited considering the modern rules along with the help of an example.

    Prepaid insurance is an asset to the entity. Therefore, as per the modern rules of accounting for assets-

    An increase in assets will be debited.

    Example

    HP Inc. paid the insurance premium for its equipment’s amounting to 50,000 on 10/12/20×1. However, the amount of premium relates to the month of Jan 20×2 (Accounting period-Jan to Dec 20×1).

    Journalizing this transaction in the books of HP Inc. on 10/12/20×1-

    Prepaid Insurance A/c Debit 50,000 Debit the increase in asset
     To Cash A/c Credit  50,000 Credit the decrease in asset

    2. Golden rules of accounting

    Now, let me help you interpret why prepaid insurance is debited correlating it with the golden rules and with the help of an example.

    Prepaid Expenses are referred to as representative personal accounts (accounts which represent a certain person or group of person). Therefore, we need to follow the golden rules for personal accounts which states-

    Debit the receiver, Credit the giver

    Example

    J P Morgan Inc. paid the insurance premium for all its furniture amounting to 100,000 on 15/03/20×2. However, the entire amount of premium paid relates to the month of April 20×2. (Accounting period-April 20×1 to March 20×2).

    Journalizing this transaction in the books of J P Morgan Inc. on 15/03/20×2-

    Prepaid Insurance A/c Debit 100,000 Personal A/c (Representative) Debit the receiver of advance premium
     To Cash A/c Credit  100,000 Real A/c Credit what goes out

    Conclusion

    Prepaid Insurance will always be debited and not credited in the year of actual prepayment.

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  1. This answer was edited.

    Yes, Arjun I will provide you with an exclusive list of all the liabilities in accounting and further classify them under short-term and long-term liabilities. The major reason behind this classification is only to develop a better understanding of liabilities. I hope this list will help you and fulRead more

    Yes, Arjun I will provide you with an exclusive list of all the liabilities in accounting and further classify them under short-term and long-term liabilities. The major reason behind this classification is only to develop a better understanding of liabilities. I hope this list will help you and fulfil your requirements.

    Short-Term Liabilities

    Meaning

    The term short-term liabilities refers to the short- term financial obligations of companies, firms or enterprises to make the payments to these loans within one accounting period(i.e., within a year). These loans are generally taken to meet day to day working capital requirements of an organization such as the purchase of raw materials. Short-term liabilities are also known as current liabilities.

    Exclusive List of Items

    1. Bills payable/Trade payable
    2. Sundry creditors
    3. Accrued liabilities
    4. Term debt
    5. Advances and deposits received
    6. Short-term obligations
    7. Unearned revenue
    8. Salaries and wages payables
    9. Sales tax payable
    10. Bank loan
    11. Outstanding expenses
    12. Merchandise accounts payable
    13. Deferred revenue
    14. Commercial paper
    15. Credit-card debt
    16. Bank overdraft
    17. Dividends payable
    18. Customer deposits
    19. Current portion of long-term debt
    20. Short-term provisions and reserves
    21. Accrued payroll
    22. Notes payable to banks
    23. Short-term loans and advances
    24. Rent payable
    25. Other short-term debts

     

    Long-Term Liabilities

    Meaning

    The term long-term liabilities refers to the long-term financial obligations of the firms, companies or enterprise which remains due for more than one accounting period. Generally, such loans are either taken to acquire fixed assets or to make payment to a long-term debt such as payments to debenture holders. Long-term liabilities are also known as long-term debt or non-current liabilities.

    Exclusive List of Items

    1. Long-term borrowings/debts
    2. Specific loans for purchasing fixed assets
    3. Deferred tax liabilities
    4. Derivative liabilities
    5. Pension obligations
    6. Capital leasing
    7. Car payments
    8. Convertible debt
    9. Long-term provisions and contingencies
    10. Bonds payable
    11. Pension liabilities
    12. Debentures
    13. Mortgages payable
    14. Public deposits
    15. Long-term warrants
    16. Long-term notes payable
    17. Loans from shareholders
    18. Lease contracts
    19. Post-retirement benefits reserve
    20. Deferred long-term liability charges
    21. Deferred compensation
    22. Other non-current liabilities

     

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  1. This answer was edited.

    Yes, Nancy, there are few assets which show the credit balance. Those assets generally hold zero or unfavourable balance. Assets which have a credit balance In accounting perspective assets and expenses generally have a debit balance whereas liabilities, revenue and capital have a credit balance. YeRead more

    Yes, Nancy, there are few assets which show the credit balance. Those assets generally hold zero or unfavourable balance.

    Assets which have a credit balance

    In accounting perspective assets and expenses generally have a debit balance whereas liabilities, revenue and capital have a credit balance. Yet there exist a couple of assets which do have a credit balance those assets are known as contra assets.

    Contra Asset

    A contra asset is referred to an asset which generally has a zero or negative balance. Such an asset is used to offset or reduce the balance of the respective asset account with which it is paired to. Hence reducing or offsetting the amount of the respective asset account with the contra asset account gives us the net value of the respective asset.

    It acts as an asset holding credit balance. Contra assets are useful for the organization because it allows them to follow the matching principle by initially recording an expense in the contra asset account.

    Assets with a negative balance

     

    For Example- Max purchased an air conditioner from eBay for 4,00,000. The salvage value of air- conditioner is 30,000 and has an expected useful life of 10 years. On 31-12-yyyy, how much balance will be shown in the Accumulated Depreciation account.

    Calculation Part

    Annual Depreciation = (Value of Asset – Salvage value)/Estimated life of the asset.

    = (4,00,000 – 30,000)/10  => 37,000

     Dr                                       Accumulated Depreciation a/c                                     Cr

    Date Particulars Amount Date Particulars Amount
    31-12-yyyy By Dep. a/c 37,000
    31-12-yyyy By Dep. a/c 37,000
    31-12-yyyy By Dep. a/c 37,000
    31-12-yyyy By Dep. a/c 37,000
    Total 1,48,000

    Net Asset value = Total asset value – Accumulated Depreciation

    = 4,00,000 – 1,48,000  => 2,52,000

    Placement in the Balance Sheet

    Assets with Negative Balance

    Here in the balance sheet “Accumulated Depreciation” shows a negative balance which is a contra asset and it is deducted from the respective asset account. Hence providing us with the Net value of the asset.

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  1. This answer was edited.

    Purchase return is credited in the books of accounts. To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship. Rules of accounting To apply these rules of accounting we first need to analRead more

    Purchase return is credited in the books of accounts.

    To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship.

    Rules of accounting

    To apply these rules of accounting we first need to analyze the type of account in question. An account is said to be nominal when it is related to the incomes, gains, losses, or expenses of a business. The goods purchased on a cash/credit basis by the business are returned to the seller which in turn reduces the accounts payables and is a gain for the organization, hence purchase returns is a nominal account.

    Golden or the traditional rules of accounting

    Firstly, we shall consider the golden rules of accounting for a nominal account to determine why purchase return a/c has a credit balance. The rule is as follows:

    “Debit all expenses and losses,

    Credit all incomes and gains.”

    Example

    ABC Ltd. purchased raw materials from a supplier worth 60,000 on a cash basis. After complete scanning, some defects were identified and the company decided to return the damaged materials worth half of the total value. The journal entries in the books of ABC Ltd. are as follows:

     

    Purchase a/c

     

    Debit

     

    60,000

    Debit all expenses and losses
     

    To cash a/c

     

    Credit

     

    60,000

    Credit what goes out

    (being goods purchased from the supplier)

     

    Cash a/c

     

    Debit

     

    30,000

    Debit what comes in
     

    To Purchase return a/c

     

    Credit

     

    30,000

    Credit all incomes and gains

    (being goods returned to the seller)

    Note: A debit of 60,000 in the Purchase a/c and a credit of 30,000 in Purchase return a/c portrays that ABC Ltd. had a net purchase of 30,000. (60,000 – 30,000)

    Modern rules of accounting

    The modern rule is as follows:

    Type of account Debit Credit
    Expense account Increase Decrease

    Example

    XYZ Ltd. purchased goods from Mr. A, for 40,000 on a credit basis. Due to a lack of quality goods worth 10,000 were returned. The journal entries in the books of XYZ Ltd. are as follows

     

    Purchase a/c

     

    Debit

     

    40,000

    Debit the increase in expenses
     

    To Mr. A’s a/c

     

    Credit

     

    40,000

    Credit the increase in liability

    (being goods purchased on credit basis)

     

    Mr. A’s a/c

     

    Debit

     

    10,000

    Debit the decrease in liability
     

    To Purchase return a/c

     

    Credit

     

    10,000

    Credit the decrease in expenses

    (being goods returned to the supplier)

    Note: A debit of 40,000 in the Purchase a/c and a credit of 10,000 in the Purchase return a/c shows that XYZ Ltd. had a net purchase worth 30,000. (40,000 – 10,000)

    Hope this helps.

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  1. This answer was edited.

    Meaning of Net Current Assets In simple terms, Net Current Assets refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can also be referred to as Net Working Capital. The Net Current Assets can have a positive or a negative value, wherein tRead more

    Meaning of Net Current Assets

    In simple terms, Net Current Assets refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can also be referred to as Net Working Capital.

    The Net Current Assets can have a positive or a negative value, wherein the two are an indicator of the well-being of a business. In case the current assets are greater than the current liabilities, the company possesses sufficient assets to pay off its indebtedness and is operating efficiently. However, a company is said to be facing financial difficulty and is not in a position to pay off its debts, when the value of net current assets is negative.

    The formula is as follows:

    Formula

    Difference between Net Current Assets and Current Assets

    Net Current Assets refers to the difference between the total amount of current assets and the total amount of current liabilities whereas Current Assets are a subpart of Net Current Assets and refer to those assets that are expected to be utilized, depreciated or traded through the operations of a business within the same financial year.

    For example, cash and cash equivalents, inventory, accounts receivable, etc are Current Assets whereas the summation of the same minus the total of current liabilities is termed as Net Current Assets which is further explained through an example given below.

    Numerical Example

    Calculate the Net Current Assets of ABC Ltd.

    (Extract of Balance Sheet)

    PARTICULARS AMOUNT
    CURRENT ASSETS
    Cash and Cash Equivalents 2,00,000
    Accounts Receivables 40,000
    Stock Inventory 15,000
    Marketable Securities 35,000
    Prepaid Expenses 6,000
    TOTAL CURRENT ASSETS 2,96,000
    CURRENT LIABILITIES
    Accounts Payable 15,000
    Accrued Expense 2,000
    Unearned Revenue 20,000
    Taxes Payable 40,000
    Short-term Debt 10,000
    Interest Payable 6,000
    TOTAL CURRENT LIABILITIES 93,000

    Solution:

    Total current assets = 2,96,000

    Total current liabilities= 93,000

    Net Current Assets = Total Current Assets – Total Current Liabilities

    = 2,96,000- 93,000  = 2,03,000

    Key Takeaways

    • Net Current Assets are also known as Net Working Capital.
    • Net Current Assets is the difference between the total current assets and total current liabilities.
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  1. Is Income debit or credit? Income is credited. Now, let me help you understand why and how is income credited & not debited. Why and How is Income credited? The account of expenses, losses, incomes, and gains are called as Nominal accounts. So, to ascertain the treatment of income, we need to knRead more

    Is Income debit or credit?

    Income is credited.

    Now, let me help you understand why and how is income credited & not debited.

    Why and How is Income credited?

    The account of expenses, losses, incomes, and gains are called as Nominal accounts. So, to ascertain the treatment of income, we need to know both the Golden rules and Modern rules of accounting for nominal accounts.

    1. Golden rules

    First, we will interpret why income is credited correlating it with the golden rules of nominal account along with an example. Golden rules state-

    Debit all Expenses and Losses & Credit all Incomes and Gains

    This is the reason why income is always to be credited.

    Example

    Professional fees charged by Deloitte Inc. for executing an audit of Pepsico Inc. 10,00,000.

    The journal entry for this transaction in the books of Deloitte Inc. will be-

    Pepsico Inc. A/c Debit 10,00,000 Personal A/c Debit the receiver of service
     To Professional fees A/c Credit  10,00,000 Nominal A/c Credit all incomes and gains

    The above journal entry shows that professional fees is the income for Deloitte Inc. Therefore, it has been credited.

    2. Modern rules

    Now, we will ascertain the reason why income is credited correlating it with the modern rules with the help of an example.

    Modern rules of accounting states-

    Credit the increase in Income

    Example

    Mr. Charles received rent 60,000 in cash from its tenant.

    The journal entry for this transaction in the books of Mr.Charles will be-

    Cash A/c Debit 60,000 Debit the increase in asset
     To Rent received A/c Credit  60,000 Credit the increase in income

    The above entry shows an increase in the income of Mr. Charles by receiving rent from its tenant.

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