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Discy Latest Questions

  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/cDebitNominal accountDebit all expenses and losses
     To Bank A/cCreditPersonal accountCredit the giver

    (Being salary paid by cheque)

    2. According to the “Modern rules” of accounting

    Salary A/cDebitExpenseDebit the increase in expenses
     To Bank A/cCreditAssetCredit 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/cDebit250,000Debit the increase in expenses
     To Bank A/cCredit 250,000Credit the decrease in asset

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

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  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

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Bank a/c XXXPersonalDebit- The Receiver
     To Commission Received a/c  XXXNominalCredit- All Incomes and Gains

    (Being commission received)

    2. Modern Accounting Approach

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Bank a/c XXXAssetDebit- The Increase in Asset.
     To Commission Received a/c  XXXIncomeCredit- 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.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st MarchBank a/c 70,000AssetDebit- The Increase in Asset
      To Commission Received a/c  70,000IncomeCredit- The Increase in Income.

    (Being commission received through cheque)

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  1. Meaning of Provision for Discount on Debtors In order to receive early payment from the debtors in the succeeding period, entities provide incentives to the debtors who are ready to pay the outstanding amount before their credit period ends. So, at the end of every period, entities will have to estiRead more

    Meaning of Provision for Discount on Debtors

    In order to receive early payment from the debtors in the succeeding period, entities provide incentives to the debtors who are ready to pay the outstanding amount before their credit period ends.

    So, at the end of every period, entities will have to estimate the amount of discount which may be availed by the debtors in the succeeding period. This estimate will be based on past experience. Accordingly, provision will have to be created in the current period as the amount of discount is an expected loss for the entity. This provision is referred to as “Provision for Discount on Debtors”.

    Journal Entry for Provision for Discount on Debtors

    Profit & Loss A/cDebit
     To Provision for Discount on Debtors A/cCredit

    Treatment of Provision for Discount on Debtors in Final Accounts

    Financial StatementTreatment
    Profit & Loss AccountPresented on the Debit side of Profit & Loss account
    Balance SheetDeducted from Sundry Debtors under the head Current Assets (after deducting Bad Debts & Provision for Doubtful Debts)

    Extract of Profit & Loss account and Balance Sheet have been attached for better understanding.

    Provision for discount on debtors in P&L A/c

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  1. This answer was edited.

    Meaning of days sales outstanding Days sales outstanding (DSO) refers to the average number of days the receivables from credit sales remain outstanding in the books of accounts before they are converted to cash. A high DSO portrays that the time interval between credit sales and cash receivables isRead more

    Meaning of days sales outstanding

    Days sales outstanding (DSO) refers to the average number of days the receivables from credit sales remain outstanding in the books of accounts before they are converted to cash. A high DSO portrays that the time interval between credit sales and cash receivables is very long and might lead to problems in the cash flow of the company while on the other hand, a low DSO shows that the company is able to collect the amount in fewer days. It is important to note here that the formula for DSO is applicable only in relation to the credit sales of the company.

    The formula to calculate days sales outstanding is as follows:

    formula

    DSO can be calculated on a monthly, quarterly, or yearly basis depending on the terms of the company.

    Example

    XYZ Ltd. made credit sales amounting to 7,00,000 in October, out of which 4,00,000 are yet to be received. As there are 31 days in October, the DSO for XYZ Ltd. shall be calculated as follows:

    DSO = Accounts receivables/ Total credit sales x No. of days

    = 4,00,000/7,00,000 x 31

    = 17.7 days

    In my opinion, 17.7 days is a low average turnaround for a company to collect cash from accounts receivables in a month and hence portrays a good DSO however, it varies from company to company what they consider to be a high or low DSO.

    Hope this helps.

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  1. Accumulated Depreciation Depreciation is a wear and tear of an asset due to efflux of time and various other factors. It's basically an allocation of the cost of a tangible asset over its useful life. Accumulated depreciation is the total depreciation charged on an asset until a specified date. ItsRead more

    Accumulated Depreciation

    Depreciation is a wear and tear of an asset due to efflux of time and various other factors. It’s basically an allocation of the cost of a tangible asset over its useful life.

    Accumulated depreciation is the total depreciation charged on an asset until a specified date. Its a contra asset account. And since its a contra asset account it reduces the balance of an asset i.e reduces debit balance and therefore has a credit balance.

    Accumulated Depreciation is an Asset or a Liability?

    Well if you ask me I would say that its neither an asset nor a liability.

    Reasons to justify the above statement:

    Why is it not an asset?

    Assets are the resources held by an entity so that it could provide some economic value for the entity. But, in the case of accumulated depreciation, it does not generate any economic benefit for an entity rather it indicated that a certain sum of economic benefit has already been availed.

    Why is it not a liability?

    A liability is an obligation of an entity for making payment at a specified future date to a third party. Here, accumulated depreciation does not represent an obligation of an entity rather it is maintained just for the purpose of record-keeping.

    Conclusion

    According to the reasons mentioned above it can neither be called as an asset nor a liability. This would be the correct answer to this question.

    But still, if you have to compulsorily classify the same as an asset or a liability I would definitely not classify as a liability as it would not ensure fair representation of the financial statements since then it would be considered an obligation made to a third party which is not the case here.

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  1. Every entity deposits its idle cash in its bank account. Depositing cash in the bank account will fetch interest to the entity and also ensure safety of the money. Cash deposit in the bank is one of the most recurring transactions in every entity’s day-to-day business activity. So, it is important tRead more

    Every entity deposits its idle cash in its bank account. Depositing cash in the bank account will fetch interest to the entity and also ensure safety of the money. Cash deposit in the bank is one of the most recurring transactions in every entity’s day-to-day business activity. So, it is important to know the journal entry for the same.

    Journal Entry for Cash Deposit in Bank

    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

    Bank A/cDebitPersonal accountDebit the receiver
     To Cash A/cCreditReal accountCredit what goes out

    (Being cash deposited in the bank)

    2. According to the “Modern rules” of accounting

    Bank A/cDebitAssetDebit the increase in asset
     To Cash A/cCreditAssetCredit the decrease in asset

    (Being cash deposited in the bank)

    Example

    Sugar Ltd has idle cash 500,000. The finance manager deposited the idle amount in the company’s Bank of America A/c.

    Journal entry in the books of Sugar Ltd will be as follows-

    Bank of America A/cDebit500,000Debit the increase in asset
     To Cash A/cCredit 500,000Credit the decrease in asset

    (Being Cash deposited in Bank of America A/c)

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  1. This answer was edited.

    There are various operating and Non-operating expenses incurred by an organization in its ordinary course of business such as- Salaries, Legal expenses, Electricity charges etc., Therefore, it is the primary responsibility of an accountant to record all these expenses in the books of accounts for deRead more

    There are various operating and Non-operating expenses incurred by an organization in its ordinary course of business such as- Salaries, Legal expenses, Electricity charges etc., Therefore, it is the primary responsibility of an accountant to record all these expenses in the books of accounts for deriving genuine net profit at the end of the accounting year.

    Journal Entry for Electricity Bill paid

    1. Traditional Accounting Approach

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Electricity Bill a/cXXXNominalDebit- All expenses and Losses
     To Bank a/c XXXPersonalCredit- The Giver.

    (Being Electricity Bill paid).

    2. Modern Accounting Approach

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Electricity Bill a/cXXXExpenseDebit- The Increase in Expense.
     To Bank a/c XXXAssetCredit- The Decrease in Asset.

    (Being paid electricity bill).

    Example

    On 12th March, Alex Ltd. paid electricity bill amounting to 8,000 through cheque. Journalise the following transaction in the books of Alex Ltd.
    In the Books of Alex Ltd.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    12th MarchElectricity Bill a/c8,000ExpenseDebit- The Increase in Expense
     To Bank a/c 8,000AssetCredit- The Decrease in Asset.

    (Being paid electricity bill through cheque).

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  1. A company incurs several expenses arising from its operating activities. For example, rent, rates, taxes, telephone bills, electricity bills, etc. It is important to record the same in the books of accounts to ascertain the true financial position of a company. Journal entry for paid telephone billRead more

    A company incurs several expenses arising from its operating activities. For example, rent, rates, taxes, telephone bills, electricity bills, etc. It is important to record the same in the books of accounts to ascertain the true financial position of a company.

    Journal entry for paid telephone bill

    The telephone charges a/c is debited and the respective cash or bank a/c is credited.

    1. According to the golden rules of accounting:

    Telephone charges a/cDebitDebit  all expenses and losses
    To Cash a/cCreditCredit what goes out

    (being telephone bill paid)

    2. According to the modern rules of accounting:

    Telephone charges a/cDebitDebit the increase in expense
    To Cash a/cCreditCredit the decrease in asset

    (being telephone bill paid)

    Example

    ABC Ltd. paid the telephone bill amounting to 10,000. The journal entry in the books of ABC Ltd is as follows:

    Telephone charges a/cDebit10,000
    To Cash a/cCredit10,000

    (being telephone bill paid)

    Hope this helps.

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  1. This answer was edited.

    Meaning of Days Payable Outstanding Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annRead more

    Meaning of Days Payable Outstanding

    Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annual basis. This portraits how well can a company manage its cash outflows.

    If the company takes less time to make payment to its outstanding suppliers then it states that an organization has a strong financial position. but if the company takes a more (or) longer time to pay its outstanding supplier then it could either be an action plan or else the company’s financial position is weak.

    Formula

    The following formula is used for calculating Days Payable Outstanding (DPO) of an organization.

    Formula of Days Payable Outstanding

    Where Cost of Goods Sold (COGS) = Opening Inventory + Purchases – Closing Inventory.

    Example

    ABC Ltd has furnished you with the following information. Compute Days Payable Outstanding.

    S.No.ParticularsAmount
    1.Average Accounts Payable45,000
    2.Cost of Goods Sold2,25,000
    3.Number of Days30

    Calculation Part-

    Days Payable Outstanding = Average Accounts Payable * No. of days/Cost of Goods Sold

    = 45,000 * 30/2,25,000

    = 6 Days

    In my perspective, 6 days is a low average period for an organization for making the payments to all the outstanding suppliers. Therefore it represents a fairly good DPO. Although it depends on the organization about their understandability on high or low DPO.

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  1. This answer was edited.

    Provision for Discount on Debtors The entity in order to encourage its customers to make a prompt payment allows a discount to its customers purchasing goods on credit. Thus, when the sales are made in the current reporting period on a credit basis the then the discount needs to be allowed in the neRead more

    Provision for Discount on Debtors

    The entity in order to encourage its customers to make a prompt payment allows a discount to its customers purchasing goods on credit. Thus, when the sales are made in the current reporting period on a credit basis the then the discount needs to be allowed in the next reporting period if such customer makes the payment promptly.

    The discount allowed reduces the revenue of an entity and hence, it can be said that provision for a discount is expected loss for an organization and so it needs to be given effect in the current accounting period.

    Calculation of Provision for Discount on Debtors

    ParticularsAmount
    DebtorsXXXXX
    Less: Bad Debts(XXXX)
    XXXXX
    Less: Provision for Bad and Doubtful Debts(XXXX)
    Good DebtsXXXXX
    Less: Provision for discount on debtors (Estimated % of Good Debts.)(XXXX)
    Debtors (Amount to be Shown in the Balance Sheet)XXXXX

    This can also be explained with the help of an example.

    Illustrative Example

    Calculate Debtors Balance to be shown in the Balance Sheet

    • An Entity has debtors worth 50,000
    • Bad debts throughout the year worth an amount of 4000
    • It has created a reserve for bad and doubtful debts at the end of the year worth 1000
    • The provision for discount on debtors is estimated to be 10%.

     

    Solution:

    ParticularsAmount
    Debtors50,000
    Less: Bad Debts(4,000)
    46,000
    Less: Provision for Bad and Doubtful Debts(1,000)
    Good Debts45,000
    Less: Provision for discount on debtors (45,000 X 10/100)(4,500)
    Debtors (Amount to be Shown in the Balance Sheet)40,500

    Aastha.

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