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Discy Latest Questions

  1. Commission Received refers to a percentage amount received by the company (or) an individual on the total sales incurred. It is an indirect income/revenue recorded on the credit side of profit and loss account. The term "commission" is more likely used in the stock market which is paid to a broker oRead more

    Commission Received refers to a percentage amount received by the company (or) an individual on the total sales incurred. It is an indirect income/revenue recorded on the credit side of profit and loss account. The term “commission” is more likely used in the stock market which is paid to a broker on the sale of shares (or) securities.

    Journal Entry for Commission Received

    Nowadays many organization uses a bank account for every business transaction i.e., either to make or receive payment. The journal entry on the commission received can be recorded in two different approaches of accounting. They are

    1. Traditional Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Bank a/c   XXX Personal Debit- The Receiver
     To Commission Received a/c    XXX Nominal Credit- All Incomes and Gains

    (Being commission received)

    2. Modern Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Bank a/c   XXX Asset Debit- The Increase in Asset.
     To Commission Received a/c    XXX Income Credit- The Increase in Income.

    (Being Commission received)

    Example

    On 1st March, Anna Ltd. received a commission amounting to 70,000 through cheque. Journalise the following transaction.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st March Bank a/c   70,000 Asset Debit- The Increase in Asset
       To Commission Received a/c    70,000 Income Credit- The Increase in Income.

    (Being commission received through cheque)

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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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    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.

    Particulars Amount Particulars Amount
    Capital 14,00,000 Sundry Debtors 4,00,000
    Plant & Machinery 8,00,000 Bills Payable 2,00,000
    Sundry Creditors 6,00,000 Bills Receivable 4,00,000
    Land & Building 10,00,000 Bank Loan 4,00,000

                                       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.

    Meaning of Fees Earned Fees earned signifies the revenue an entity that is generally engaged in rendering services to its clients generates during the reporting period. When an entity deals in both goods and services it charges fees for the part of services rendered and for the goods delivered it chRead more

    Meaning of Fees Earned

    Fees earned signifies the revenue an entity that is generally engaged in rendering services to its clients generates during the reporting period. When an entity deals in both goods and services it charges fees for the part of services rendered and for the goods delivered it charges the predetermined price. It generally forms a major part of revenue in the service industry.

    Few Instances wherein an entity record the amount earned as fees:

    For Services Rendered –

    • Consultancy
    • Consultancy on Taxation Related Matters
    • Auditing and Assurance
    • Architectural Services
    • Accountancy and Other Legal Services.

     

    Both Goods and Services-

    • Manufacturing and repairs
    • Trading in goods and consultancy
    • Goods and transport

     

    When a combined amount is received for the cases wherein both goods and services are rendered one has to record fees earned proportionately.

    Whether it shall be Credited or Debited?

    Fees Earned shall be credited as fees form a part of the revenue and as per modern rule of accounting, the increase in an income should be “Credited”.

    Even if you follow the golden rule of accounting there will be no change in the answer this is because as per golden rule about a nominal account debit the expenses and losses and credit all incomes and gains.

    Accounting treatment

    If an entity follows Cash System of Accounting entire amount received shall form part of the fees earned. One need not distinguish fees based on actual earnings in the accounting period.

    Journal Entry for the same shall be:

    Bank A/c Debit Debit the increase in an asset.
    To Fees Earned A/c Credit Credit the increase in income.

    The accounting treatment in an income statement is given below-

    Fees received in income statement

    If an entity follows Accrual System of Accounting only that part of the receipts shall form a part of fees earned which has been accrued in the reporting period.

    The amount if received in advance shall be recorded as a liability and if received less then such a difference shall be recorded as sundry debtors under current assets.

    Journal Entry for the same shall be:

    Out of the total revenue, a part of fees is received in advance-

    Bank A/c Debit Debit the increase in an asset.
    To Advance Fees A/c Credit Credit the increase in liability.
    To Fees Earned A/c Credit Credit the increase in income.

    It appears in the income statement and balance sheet as –

    Advance Fees received in balance sheet

    Fees Earned in Income Statement

    In case if only part of fees earned is received in a reporting period:

    Bank A/c Debit Debit the increase in an asset.
    Sundry Debtors A/c Debit Debit the increase in an asset.
    To Fees Earned A/c Credit Credit the increase in income.

    It appears in the income statement and balance sheet as –

    Treatment of Fees in case of Accrual System

    Fees earned but not received

    As it can be seen in all of the cases above that fees earned being an income is credited.


    Aastha

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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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    In accounting, beginning and ending balance are used interchangeably with opening and closing. For the sake of easy understanding, I am assuming the beginning and ending balance of an account to be the opening and closing balance of a ledger account.  Opening Balance In the ledger, balance b/d meansRead more

    In accounting, beginning and ending balance are used interchangeably with opening and closing. For the sake of easy understanding, I am assuming the beginning and ending balance of an account to be the opening and closing balance of a ledger account. 

    Opening Balance

    In the ledger, balance b/d means opening (or) beginning balance of an account. Balance b/d refers to that balance which is brought down (or)  forward to the current accounting period from the previous accounting period. In simple terms, the ending (or) closing balance at the end of the month becomes opening balance for the next month.

    Opening balance can be debit- To (or) credit- By. According to modern accounting approach, assets, liabilities and owner’s equity (capital) have opening balances.

    For Example- On 31st March YYYY, the closing balance of the machinery was 500,000. What will be the opening balance of machinery on 1st April YYYY?

    Dr                                                             Machinery Account                                         Cr

    Particulars J.F. Amount Particulars J.F. Amount
    To Balance b/d 500,000

    Closing Balance

    In the ledger, Balance c/d means closing (or) ending balance of an account. Balance c/d refers to the amount that is carried down (or) forward from the current accounting period to the next accounting period. Balance c/d is the difference between the debit side and credit side of the ledger used for balancing the accounts.

    If the debit side exceeds the credit side, then the balancing figure (say balance c/d) appears on the credit side of the ledger and vice-versa. Closing balance can be debit- To (or) credit- By.

    Example- Mr X purchased furniture for 200,000. Depreciation is to be charged at 10% as per the Straight Line method. What will be the closing balance as on the year-end?

    Dr                                                         Furniture Account                                            Cr

    Particulars J.F. Amount Particulars J.F. Amount
    To Bank a/c 200,000 By Depreciation a/c 20,000
    By Balance c/d 180,000
    200,000 200,000

    According to the modern rules, Assets shows opening (or) beginning balance on the debit side whereas, Liabilities and Owner’s equity (capital) shows the opening balance on the credit side. The closing balance (or) ending balance is placed on either side of the opening balance.

    For example- If the opening balance of machinery is shown on the debit side of ledger account then closing balance of the machinery will be shown on the credit side to balance the ledger account.

    To make the above concept easy and understandable, a snippet of the cash account will help you in understanding the opening and closing balance of an account.

    Cash Account

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    Outstanding Subscription Example- XYZ Club has 1200 members each paying a monthly subscription of 100. As on 31st March, Subscription due (or) outstanding subscription amounted to 25,000. Journalise the following transactions for subscription due and received in the books of XYZ Club. In the books oRead more

    Outstanding Subscription

    Example- XYZ Club has 1200 members each paying a monthly subscription of 100. As on 31st March, Subscription due (or) outstanding subscription amounted to 25,000. Journalise the following transactions for subscription due and received in the books of XYZ Club.

    In the books of XYZ Club

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    31st March Outstanding Subscription a/c  Dr 25,000 Representative Personal Debit– The Receiver
     To Subscription a/c  25,000 Nominal Credit– All Incomes and Gains

    (Being Subscription due as on 31st March)

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st April Cash/Bank a/c  Dr 25,000 Real Debit– What comes into the business
     To Outstanding Subscription a/c  25,000 Representative Personal Credit– The Giver

    (Being Subscription received)

    Accounting Treatment

    Oustanding subscription is treated as an asset to the organization and shown in the asset side of the balance sheet. It is added to the subscription and recorded on the Income side of Income and Expenditure account. It is also termed as Subscription in areas (or) Subscription due.

    Modern Accounting Approach

    We will record the same transaction by following the modern rules of accounting.
    In the books of XYZ Club

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    31st March Outstanding Subscription a/c  Dr 25,000 Asset Debit– The Increase in Asset
     To Subscription a/c  25,000 Income Credit– The Increase in Income

    (Being Subscription due as on 31st March)

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st April Cash/Bank a/c  Dr 25,000 Asset Debit– The Increase in Asset
     To Outstanding Subscription a/c  25,000 Asset Credit– The Decrease in Asset

    (Being Subscription received)

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    Retained Earnings is generally a credit. It will be "credited if its balance increases" and "debited if its balance decreases". To help you understand the statement given above, it is important for you to first interpret the meaning of retained earnings. Meaning of Retained Earnings Retained EarningRead more

    Retained Earnings is generally a credit. It will be “credited if its balance increases” and “debited if its balance decreases”.

    To help you understand the statement given above, it is important for you to first interpret the meaning of retained earnings.

    Meaning of Retained Earnings

    Retained Earnings is the accumulated net income of an entity at the end of an accounting period that is retained by it to meet any future contingencies, invest in the expansion activities, payment of dividends to its shareholders, etc.

    Retained Earnings = Opening Retained Earnings +/- Net Profit/(Loss) during the current period – Dividend paid in the current period +/- Prior period adjustments, etc.

    If the balance of retained earnings is negative, then it is referred to as accumulated losses/deficit, retained losses.

    Why is Retained Earnings generally credited?

    Retained Earnings are a part of “Shareholders Equity” presented on the “Liabilities side” of the balance sheet.

    This is because it indicates the company’s liability to the owners or shareholders. The company cannot utilize the retained earnings until it is approved by its shareholders.

    Also, the modern approach of accounting for liabilities states-

    Credit the increase in liability, Debit the decrease in liability.

    Therefore, considering it as a liability and following the modern approach of accounting, we can conclude that retained earnings will be generally credited.

    It will generally show a credit balance.

    Now, moving forward let me help you understand the instances in which retained earnings are credited or debited.

    When is Retained Earnings credited or debited?

    1. Retained Earnings are credited with the Net Profit earned during the current period. Crediting the retained earnings will increase its balance.

    Example

    Samsung Inc. earned a net profit of 500,000 during the accounting period Jan-Dec 20×1.

    Journalizing this transaction for transferring the net profit earned to retained earnings will be-

    Net profit Debit 500,000 Transferring net profit earned to retained earnings
     To Retained Earnings Credit  500 ,000 Credit the increase in the balance of retained earnings

    2. Some instances which reduce the balance of retained earnings are-

    a. Net loss during the current period
    b. Dividend payable
    c. Bonus Shares issued, etc.

    Retained Earnings will be debited with these transactions.

    Example

    Shareholders of Apple Inc. approve the dividend declared by the board of directors amounting to 100,000. So, the journal entry for the dividend payable by Apple Inc. will be-

    Retained Earnings Debit 100,000 Debit the decrease in the balance of retained earnings
     To Dividend Payable Credit  100,000 Credit the increase in liability
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  1. This answer was edited.

    To begin with, let me familiarize you with the meaning of the term Ledger Balancing. What is Ledger Balancing? Balancing of Ledger accounts means totalling both the sides of ledger account, finding the difference between greater total & smaller total and then recording the difference on the smalRead more

    To begin with, let me familiarize you with the meaning of the term Ledger Balancing.

    What is Ledger Balancing?

    Balancing of Ledger accounts means totalling both the sides of ledger account, finding the difference between greater total & smaller total and then recording the difference on the smaller side.

    If Debit side > Credit side, then we say that the ledger account has “Debit Balance”.
    If Credit side > Debit side, then we say that the ledger account has “Credit Balance”.

    Now, let’s move forward to discuss the question asked.

    Why should a ledger be balanced?

    Balancing a ledger account will help you with the following-

    1. Necessary for preparation of trial balance

    Trial Balance is a list of the debit and credit balances of all the ledger accounts prepared by the entity as on a specific date. Without balancing the ledger accounts, it is impossible to prepare the trial balance of an entity.

    2. Necessary for preparation of financial statements

    Balancing of ledger accounts helps to prepare profit & loss account and balance sheet so as to ascertain the profit or loss and financial position of the business.

    3. To determine the cash available

    The amount of balance in Cash A/c gives an idea of the amount of cash available with the organization. The balance determined is compared with the actual cash available in the cash box. Discrepancies, if any are further investigated.

    4. To determine the value of assets

    Organizations need to know the book value of their tangible and intangible assets eg. plant & machinery, furniture, software etc at the end of a period. So, the value of assets as at a specific date can be determined only after balancing the asset ledger accounts. Assets account usually have a debit balance.

    5. To ascertain the total expense and income

    Ledger balancing of nominal accounts such as expenses  eg. purchase, salary, professional fees, etc and incomes eg. sales, interest earned, etc will indicate the amount of expenses incurred and income earned during a specific period.

    This will help in ascertaining the profit earned or loss incurred by the entity as the balances of nominal accounts get transferred to the statement of profit & loss. Also, the entity can make strategies on reducing the expenses if the current period expenses exceed the previous period expenses.

    6. To ascertain the debt outstanding & the amount outstanding to creditors

    Balancing ledger accounts pertaining to bank loans or other loans accepted will help you determine the principal amount outstanding at a given date.

    Also, balancing the supplier’s accounts will help you ascertain whether the amount is payable to the supplier (credit balance) or whether you have already made him advance payments but the corresponding goods or services are yet to be received (debit balance).

    7. To determine the amount receivable from debtors

    Balancing the debtor’s accounts will help you ascertain the amount due from your debtor (debit balance) as at a particular date. In case, the debtors have already made advance payments but you haven’t rendered the corresponding goods or services, then the account will present a credit balance.

    Hope the above given points give you an insight of the question asked – why should a ledger be balanced.

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