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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.

    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

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st May Alexa Ltd  a/c Dr 500,000 Asset Debit- The Increase in Asset
     To Sales returns a/c  500,000 Income Credit- The Increase in Income

    (Being goods sold on credit to Alexa Ltd)

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

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    25th May Sales return a/c   Dr 500,000 Income Debit- The Decrease in Income
     To Alexa Ltd a/c  500,000 Asset Credit- 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. The sale of services might be a new concept for you as we have commonly heard more about the sale of goods by the businesses. However, the treatment of the two is the same in the books of accounts. Like goods, the sale of services is made on cash as well as credit basis. There are plenty of servicesRead more

    The sale of services might be a new concept for you as we have commonly heard more about the sale of goods by the businesses. However, the treatment of the two is the same in the books of accounts. Like goods, the sale of services is made on cash as well as credit basis. There are plenty of services provided by companies such as financial, management, software, consulting, marketing services, etc. 

    Journal entry for the sale of services on credit

    The respective debtor account is debited while the sales account is credited.

    1. According to the golden rules of accounting:

    Debtors a/c Debit Debit  the receiver
    To Sales a/c Credit Credit all incomes and gains

    (being services sold on credit)

    2. According to the modern rules of accounting:

    Debtors a/c Debit Debit  the increase in asset
    To Sales a/c Credit Credit the increase in revenue

    (being services sold on credit)

    Example

    Mr. K availed the financial services of XYZ Ltd. in May amounting to 20,000 with an agreement to pay the same in the following month. The journal entry in the books of XYZ Ltd. for the month of May is as follows:

    Mr. K’s a/c Debit 20,000
    To Sales a/c Credit 20,000

    (being services sold on credit)

    Hope this helps.

     

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  1. This answer was edited.

    Salary due is the amount of salary payable for a particular period but the related services corresponding to the amount of salary payable have already been availed by the business entity. It is also known as salary outstanding. It is a liability for the business entity. Journal Entry for Salary DueRead more

    Salary due is the amount of salary payable for a particular period but the related services corresponding to the amount of salary payable have already been availed by the business entity. It is also known as salary outstanding. It is a liability for the business entity.

    Journal Entry for Salary Due

    Journal entry for salary due/payable can be recorded in the books of accounts using both the golden rule and the modern rule of accounting.

    1. According to the “Golden rules” of accounting

    a. Entry for salary due

    Salary A/c Debit Nominal account Debit all expenses and losses
     To Outstanding Salary A/c Credit Personal account (Representative) Credit the giver

    (Being salary due)

    b. Entry at the time of actual payment of the salary due

    Outstanding Salary A/c Debit Personal account (Representative) Debit the receiver
     To Cash/Bank A/c Credit Real account/Personal account Credit what goes out/Credit the giver

    (Being salary paid)

    2. According to the “Modern rules” of accounting

    a. Entry for salary due

    Salary A/c Debit Expense Debit the increase in expense
     To Outstanding Salary A/c Credit Liability Credit the increase in liability

    (Being salary due)

    b. Entry at the time of actual payment of the salary due

    Outstanding Salary A/c Debit Liability Debit the decrease in liability
     To Cash/Bank A/c Credit Asset Credit the decrease in asset

    Example

    ABC Ltd did not pay salary 100,000 for the month of March 20xx due on 31st March 20xx because of lack of funds. However, they paid the due salary on 25/04/20xx.

    1. Journal entry for salary due on 31/03/20xx

    Salary A/c Debit 100,000 Debit the increase in expense
     To Outstanding Salary A/c Credit  100,000 Credit the increase in liability

    (Being salary due for the month of March 20xx)

    2. Journal entry at the time of payment on 25/04/20xx

    Outstanding Salary A/c Debit 100,000 Debit the decrease in liability
     To Cash/Bank A/c Credit  100,000 Credit the decrease in asset

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

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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. This answer was edited.

    Charging Depreciation  in the Year of the Sale The answer to your question is that yes, one can charge depreciation in the year of sale. I guess reading the below para you will be able to interpret as to why it can be charged in the year of sale. First of all, what does depreciation mean? It is a meRead more

    Charging Depreciation  in the Year of the Sale

    The answer to your question is that yes, one can charge depreciation in the year of sale.

    I guess reading the below para you will be able to interpret as to why it can be charged in the year of sale.

    First of all, what does depreciation mean?

    It is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.

    It is allocated to charge a fair proportion of depreciable amount in each accounting period during the expected useful life of an asset.

    Thus, even in the year of the sale, the asset shall continue to wear and tear and so it shall be apt to charge the depreciation from the beginning of the accounting period till the date of its sale i.e for the period it has been used in the year of sale.

    I guess the below example will be of great help for you –

    The book value of an asset as on 01 /01/ XXXX is 70,000 depreciation is charged on an asset @ 10%. on 01/07/xxxx the asset is sold for an amount of 35,000.

    The accounting treatment for the same shall be:

    Charging depreciation of an amount of 3,500 (70,000 x 10% x 6/12) for 6 months i.e for the period in use (from 01/01 to 30/06):

    Depreciation A/c Debit 3,500 Debit the increase in expenses.
    To Asset A/c Credit 3,500 Credit the decrease in an asset.

    Now at the time of sale, the entity shall record a loss of 31,500 which is nothing but the difference between the written down value and the value of sale proceeds as shown below:

    Loss on Sale of Asset A/c Debit 31,500 Debit the decrease in revenue.
    Cash A/c Debit 35,000 Debit the increase in an asset.
    To Asset A/c Credit 66,500 Credit the decrease in an asset.

    I believe now you understand as to why we should charge depreciation in the year of sale as well and also the above example will help you understand the accounting treatment for the same as well.


    Aastha Mehta

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  1. This answer was edited.

    No, Goodwill is not a fictitious asset. What is Good Will? Goodwill of an entity is an intangible asset. It can be said that it's the excess amount an entity is liable to pay when it purchases all the assets at a price higher than its fair market value of another entity. The purchasing entity is wilRead more

    No, Goodwill is not a fictitious asset.

    What is Good Will?

    Goodwill of an entity is an intangible asset. It can be said that it’s the excess amount an entity is liable to pay when it purchases all the assets at a price higher than its fair market value of another entity. The purchasing entity is willing to pay the higher amount reasons such as brand image, modernised technology, high-grade employee relationships etc.

    The goodwill is valued at the time of the merger of two or more entities or acquisition of one by another entity.

    It is generally noticed that better the organisation’s reputation higher is the value of goodwill.

    What is a Fictitious Asset?

    Fictitious means “Bogus” or “Untrue” and asset means anything beneficial for the organisation.
    Thus fictitious assets are not an asset but just the expenses or losses which can not be accounted for in the current reporting period rather are to be written off in the future reporting period.

    For Example,

    • Preliminary Expenses
    • Miscellaneous Expenses
    • Loss on Issue of Debentures
    • Discount on Share Issue.

     

    Why is goodwill not a fictitious asset?

    Goodwill is an intangible asset and not a fictitious asset. A fictitious asset does not have a realizable value as it is merely an expenditure incurred by the company. It does not have a tangible existence either. Whereas goodwill has a monetary value i.e it has a realizable value even though it has no tangible existence.  Hence, it’s an intangible asset.

    Goodwill is presented in a balance sheet as –

    Goodwill as an Intangible Asset


    Aastha.

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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.

    Sno Particulars Amount
    I Debit Balance as per Cash Book 15,000
    1. Cheques issued but not presented 2,000
    2. Cheques deposited but not collected 4,000
    3. Payment made by the bank as per standing instructions 4,000
    4. Direct deposit by customers in the bank 3,000

    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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