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Discy Latest Questions

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    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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    Before I answer this question of your's it would be beneficial for you to have clarity over the concept of Deferred Revenue. Meaning of a Deferred Revenue Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before renderingRead more

    Before I answer this question of your’s it would be beneficial for you to have clarity over the concept of Deferred Revenue.

    Meaning of a Deferred Revenue

    Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services.

    The concept of deferred revenue applies only if an entity follows the Accrual System of Accounting. If the entity follows the cash system of accounting it’s of no relevance as the entire amount received becomes income in the year of receipt.

    Whether the Deferred Revenue is a Liability?

    The answer to this question is  “Yes” it is a liability. Even though you got the answer that it is a liability but I believe a part of the question remains unanswered i.e why is it a liability?

    The logic for the same is- Since the entity has already received the amount even before rendering services or delivering goods the entity or a company has a sort of an obligation to deliver the goods or render such services at the predetermined future date. Failing which it may be liable to face legal proceedings or legal actions. Hence, it becomes a liability on a part of the entity to honour such a transaction.

    When the entity receives the amount before delivering goods or rendering services that amount is recorded as a “Liability” and once the goods are delivered or services are rendered the liability is reduced and the entity records it as a “Revenue”.

    For Example,

    In the case of an Educational Institutes like the Universities, Coaching Institutes etc. it charges fees even before the term commences. In such a case the entity has not yet rendered service of imparting education hence, the tuition fees so received shall become a deferred revenue and shall be recorded as a liability at the time of the receipt and at as and when it’s accrued it shall be recorded as revenue.

    Journal Entry for the same shall be:

    At the time of receipt of Tuition Fees-

    Cash  A/cDebitDebit the Increase in an Asset.
    Deferred Revenue A/cCreditCredit the Increase in a Liability.

    And at the time of recording revenue on monthly basis every month-

    Deferred Revenue A/cDebitDebit the Decrease in a Liability.
    Tuition Fees Earned A/cCreditCredit the Increase in an Income.

    Deferred Revenue is Presented in the Balance Sheet as –

    Deferred Revenue in Balance Sheet

    Conclusion

    Deferred revenue at the time of early receipt of the amount is recorded as a liability and at the time of actual income recorded as revenue in the income statement.


    Aastha Mehta.

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    First, let me help you interpret the difference between Receipts & Income along with the help of an example. Difference between Income & Receipts  Income Receipts Income refers to the amount received by an entity from its core business operations and day to day functioning. Any cash inflow rRead more

    First, let me help you interpret the difference between Receipts & Income along with the help of an example.

    Difference between Income & Receipts 

    IncomeReceipts
    Income refers to the amount received by an entity from its core business operations and day to day functioning.Any cash inflow received by an entity can be termed as receipts.
    All incomes affect the statement of profit & loss.But all receipts do not affect profit & loss statement.
    Income includes only revenue receipts.

     

    Receipts include both capital receipts & revenue receipts.
    It can be cash or non-cash in nature. For eg. non-cash items such as an unrealized gain from investments, profit on revaluation of fixed assets are also considered as income.It is only cash in nature.

    Examples of Receipts & Income

    For instance, XYZ Inc. receives the following amount in the month of January 20×1. Let us differentiate the following transactions as receipts or income.

    1. Borrowed 50,000 from a bank for establishing a new unit.
    2. Amount of 10,000 received from the disposal of an old machine.
    3. Amount of 600,000 received from the issue of new shares & debentures of XYZ Inc.
    4. 500,000 received as consideration for the sale of goods or services.
    5. Rent received 60,000 from the tenant.
    6. Interest & Dividend received 15,000 from investments in Amazon Inc.

    All the above examples can be termed as receipts but all of them cannot be termed as income. Only examples 4, 5, & 6 can be referred to as income for XYZ Inc.

    Eg. 1, 2, & 3 are capital receipts and will not affect the statement of profit & loss of XYZ Inc. Therefore they are termed only as receipts & not income.

    Whereas eg. 4, 5, & 6 are revenue receipts and will affect the profit & loss statement. Therefore, they can be referred to as income for XYZ Inc.

    Now moving forward, let me help you understand the difference between payments & expenditure, with the help of an example.

    Difference between Payments & Expenditure

    ExpenditurePayments
    Expenditure refers to the amount incurred by an entity for operating the business and for earning income.Any cash outflow incurred by an entity can be termed as payments.
    All expenses affect the statement of profit & loss.But all payments do not affect profit & loss statement.
    Expenditure includes only revenue expenditure.

     

    Payments include both capital expenditure & revenue expenditure.
    It can be cash or non-cash in nature. For eg. non-cash items such as depreciation, amortization, bad debts are also considered expenses.It is only cash in nature.

    Examples of Payments & Expenditure

    For instance, ABC Inc. incurs the following payments in the month of January 20×1. Let us differentiate these transactions as payments or expenditures.

    1. Paid 40,000 for the acquisition of new machinery.
    2. Paid 200,000 for the redemption of shares and debentures issued by ABC Inc.
    3. Repaid 45,000 amount of loan taken from the financial institution.
    4. Salary & Wages paid 100,000.
    5. Purchase of Raw materials 30,000.
    6. Professional fees paid 15,000.

    All the above examples can be referred to as payments by ABC Inc. but all of them cannot be termed as expenditures. Only examples 4, 5, & 6 can be referred to as expenditures for ABC Inc.

    Eg. 1, 2, & 3 are capital expenditures and will not affect the statement of profit & loss of ABC Inc. Therefore they are termed only as payments and not expenditures.

    Whereas eg. 4, 5, & 6 are revenue expenditures and will affect the profit & loss statement. Therefore, they can be referred to as expenditure for ABC Inc.

    Conclusion

    1. All cash incomes are receipts. But all cash receipts are not income.
    2. All cash expenditures are payments. But all cash payments are not expenditure.

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    In the business world, the terms "Debt" and "Liability" are used interchangeably and are understood to be the same. But in reality, they differ. Debt Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date. For Example, Term loans acceptedRead more

    In the business world, the terms “Debt” and “Liability” are used interchangeably and are understood to be the same. But in reality, they differ.

    Debt

    Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date.

    For Example,

    • Term loans accepted from a bank or financial institutions for business expansion
    • Car loan, Home loan, Education loan

    Liability

    Liability is an obligation to render goods or services or an economic obligation to be discharged off at a future date.

    For Example,

    • Outstanding payment to suppliers of raw materials
    • Outstanding Expenses – accrued rent, outstanding professional fees, outstanding electricity expenses, unpaid salary, etc
    • Income received in advance – rent received in advance, commission received in advance, etc
    • Bills payable
    • Debts accepted by an entity

    Key differences between Debt and Liability

    Now, let me help you understand the differences between the two terms discussed above, debt and liability.

    Particulars

    Debt

    Liability

    1. Narrow/Broad aspectDebt is an integral part of liability. It is a type of liability.Liability is a broader term and it includes debt and other payables.
    2. Repayment modeDebt can be repaid back only in cash.Liabilities other than debt can be settled by rendering goods or services or by paying cash.
    3. OccurrenceDebt does not arise on a daily basis. It results only when an entity borrows money from another party.Other liabilities arise during the course of the day to day operations of the business.
    4. Formal agreementDebt involves a formal agreement between the borrower and the lender.Liabilities apart from debt may not involve such a formal agreement between the parties.
    5. UtilizationDebt helps entities for business expansion and diversification.Liabilities help entities conduct their daily business functions and processes.
    6. Interest paymentThe repayment of debt involves payment of interest along with the principal amount.Discharge of other liabilities may not involve payment of interest along with the actual amount of liability.
    7. Option of installmentsDebt repayment usually provides an option of payment in installments.Liabilities settlement may not provide such an option to the borrower.

    Conclusion

    All debts are liabilities, but not all liabilities are debts.

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    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

    DateParticularsAmountDateParticularsAmount
    31-12-yyyyBy Dep. a/c37,000
    31-12-yyyyBy Dep. a/c37,000
    31-12-yyyyBy Dep. a/c37,000
    31-12-yyyyBy Dep. a/c37,000
    Total1,48,000

    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.

    As we all know, a payment is made when we purchase a good or service on a credit or cash basis. In terms of a business, a vendor (supplier/creditor) is a person who sells goods to the company on a cash or credit basis with an agreement to receive the payment within a specified period. This in turn aRead more

    As we all know, a payment is made when we purchase a good or service on a credit or cash basis. In terms of a business, a vendor (supplier/creditor) is a person who sells goods to the company on a cash or credit basis with an agreement to receive the payment within a specified period.

    This in turn affects the accounts payables as the vendors are the creditors of the company as well as considered a short-term liability and are recorded under the head of current liabilities in the balance sheet.

    Journal entry for payment to vendor

    1.

    Purchase a/cDebitDebit  the increase in expense
    To Vendor a/cCreditCredit the increase in liability

    (being goods purchased from the vendor on credit)

    2.

    Vendor a/cDebitDebit  the decrease in liability
    To Cash a/cCreditCredit the decrease in asset

    (being payment made to the vendor)

    Example

    XYZ Ltd. purchased goods from a vendor amounting to 60,000 on a credit basis in May and agreed to make the due payment in July. The journal entries in the books of XYZ Ltd. are as follows:

    MayPurchase a/cDebit60,000
    To  Vendor a/cCredit60,000

    (being goods purchased on credit from the vendor)

    JulyVendor a/cDebit60,000
    To  Cash a/cCredit60,000

    (being payment made to the vendor in cash)

    Note: In case the company purchases the goods from the vendor directly for cash then only the following entry shall be passed in the books of accounts:

     

    Purchase a/c

     

    Debit

    Debit the increase in expense
     

    To Cash a/c

     

    Credit

    Credit the decrease in asset

    (being goods purchased from the vendor for cash)

    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/cDebitNominal accountDebit all expenses and losses
     To Outstanding Salary A/cCreditPersonal account (Representative)Credit the giver

    (Being salary due)

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

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

    (Being salary paid)

    2. According to the “Modern rules” of accounting

    a. Entry for salary due

    Salary A/cDebitExpenseDebit the increase in expense
     To Outstanding Salary A/cCreditLiabilityCredit the increase in liability

    (Being salary due)

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

    Outstanding Salary A/cDebitLiabilityDebit the decrease in liability
     To Cash/Bank A/cCreditAssetCredit 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/cDebit100,000Debit the increase in expense
     To Outstanding Salary A/cCredit 100,000Credit 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/cDebit100,000Debit the decrease in liability
     To Cash/Bank A/cCredit 100,000Credit the decrease in asset

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

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  1. In this modern business world, Banks performs various functions to an organization such as it accepts various deposits from the debtors, makes payment to the creditors on the standing instructions of the company. Banks provide various agency and miscellaneous services to an organization. The JournalRead more

    In this modern business world, Banks performs various functions to an organization such as it accepts various deposits from the debtors, makes payment to the creditors on the standing instructions of the company. Banks provide various agency and miscellaneous services to an organization.

    The Journal entry for cash withdrawn from the bank is a contra entry. Cash can be taken from the bank for two uses either for personal use (or) business use. I am assuming that cash is withdrawn from the bank for business use.

    Journal Entry for Cash Withdrawn from Bank

    This journal entry can be recorded in two different accounting perspectives they are-

    1. Traditional Accounting Perspective

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Cash a/c XXXRealDebit- What comes into the business.
     To Bank a/c  XXXPersonalCredit- The Giver.

    (Being cash withdrawn from the bank).

    2. Modern Accounting Perspective

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Cash a/c XXXAssetDebit- The Increase in Asset.
     To Bank a/c  XXXAssetCredit- The Decrease in Asset.

    (Being cash withdrawn from the bank).

    Example

    On 15th May, Anna Ltd withdraws 5,00,000 from their Bank account for business purpose. Journalise the following transaction.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    15th MayCash a/c 5,00,000AssetDebit- The Increase in Asset.
      To Bank a/c  5,00,000AssetCredit– The Decrease in Asset.

    (Being cash withdrawn from the bank).

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  1. This answer was edited.

    Cash Withdrawn from Bank for Office Use the cash withdrawn from bank for office use shall be recorded in the books as: Journal Entry: (Using modern rules of accounting) Why is cash account debited? When we withdraw an amount from the bank we receive cash i.e the entity's cash in hand balance increasRead more

    Cash Withdrawn from Bank for Office Use

    the cash withdrawn from bank for office use shall be recorded in the books as:

    Journal Entry: (Using modern rules of accounting)

    cash withdrawn from bank for office use

    Why is cash account debited?

    When we withdraw an amount from the bank we receive cash i.e the entity’s cash in hand balance increases. As per the modern rules of accounting, we debit the increase in an asset. And so in the above entry cash account is debited.

    Why is bank account credited?

    When an amount is withdrawn from the bank the entity receives cash while the balance in his bank account reduces. Thus as per the modern rules of accounting, we credit the decrease in an asset. The bank account of an entity is shown under the head of current assets and so it’s credited since the withdrawals lead to a reduction in the balance with the bank. Hence, in the above entry bank account is credited.

    Journal Entry: (Using golden rules of accounting)

    Cash withdrawn for office use

    Why is the cash account debited?

    As per the golden rule of accounting, cash account is classified as a real account. As per the rule for a real account, we debit what comes in and credit what goes out. Hence, when the cash is withdrawn for the office use we receive cash hence, cash account is debited.

    Why is the bank account credited?

    As per the golden rule of accounting, the bank account is classified as a personal account. As per the rule for a personal account, we debit the receiver and credit the giver. Here, Bank balance reduces i.e bank is the giver hence, its credited.


    Aastha Mehta.

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  1. This answer was edited.

    Rent Paid in Advance A rent paid in advance is nothing but the prepaid rent. When an entity rents a factory it is liable to pay a pre-decided sum of money for using the premise or property of another person. Thus, when this pre-decided amount is paid for such factory even before availing the benefitRead more

    Rent Paid in Advance

    A rent paid in advance is nothing but the prepaid rent. When an entity rents a factory it is liable to pay a pre-decided sum of money for using the premise or property of another person.

    Thus, when this pre-decided amount is paid for such factory even before availing the benefits. It can be said that the rent is paid in advance.

    Journal Entry for Advance Rent Paid

    Accounting treatment of advance paid for rent by using the “Modern Rules of Accounting” –

    At the time of making an actual payment –

    Prepaid Rent using modern rules of accounting

    Why do we debit prepaid rent?

    Rental payment is basically an expense for an organization or any person for that matter hence we debit the increase in expenses. When such rent is paid in advance it can be called as an asset since it will generate some economic value to an organization or an entity in future.

    Since prepaid rent is an asset as per the modern rules of accounting we debit the increase in an asset.

    Why do we credit cash a/c?

    Cash is an asset, to be precise it’s a current asset. And when an entity makes an advance payment of rent the cash in hand balance with an entity reduces.

    Hence, as per the “Modern Rules of Accounting,” we credit the decrease in an asset hence cash being an asset is credited as such payment reduces the organization’s cash balance.

    At the time when the prepaid rent actually applies-

    Journal entry when actual rent is incurred

    For Example,

    Mr Max pays rent of 10,000 every month. Thus, the landlord and Mr Max entered into an agreement that Mr Max will pay rent at the beginning of each quarter for the entire quarter. So, Mr Max pays at the beginning of every quarter the amount of 30,000.

    The journal entries for above shall be:

    ParticularsDebit/CreditAmountAmount
    Advance Rent Paid
    Prepaid Rent A/cDebit30,000
        To Cash A/cCredit30,000
    (Being rent paid in advance)

    And at the end of every month, the journal entry to be passed shall be –

    ParticularsDebit/CreditAmountAmount
    Rent Expense When Actually Incurred
    Rental Expenses A/cDebit10,000
        To Prepaid Rent A/cCredit10,000
    (Being rental expense incurred at every month end)

    I have tried to explain the journal entry for prepaid rent as simply as I can. I hope it helped.


    Aastha Mehta.

     

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  1. In this growing competitive world, every organization needs to retain its loyal and trustworthy staff members and make a timely payment towards wages and salaries to its workers and employees. Timely payment not only motivates and built the confidence of the workers and employees but also encouragesRead more

    In this growing competitive world, every organization needs to retain its loyal and trustworthy staff members and make a timely payment towards wages and salaries to its workers and employees. Timely payment not only motivates and built the confidence of the workers and employees but also encourages them to achieve organizations short term and long term goals.

    Journal Entry for wages paid in cash

    This entry can be recorded in the books of accounts by using two different approaches of accounting. They are-

    1. Traditional Accounting Approach

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Wages a/c XXXNominalDebit- All expenses and Losses
     To Cash a/c  XXXRealCredit- What goes out of the business.

    (Being paid wages in cash)

    2. Modern Accounting Approach

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Wages a/c XXXExpenseDebit- The Increase in Expense
     To Cash a/c  XXXAssetCredit- The Decrease in Asset.

    (Being wages paid in cash)

    Example

    On 4th March, Anna Ltd. makes a payment towards wages amounting to 40,000 in cash. Journalise the following transaction in the books of Anna Ltd.

    In the Books of Anna Ltd.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    4th MarchWages a/c 40,000ExpenseDebit- The Increase in Expense
      To Cash a/c  40,000AssetCredit- The Decrease in Asset.

    (Being wages paid in cash)

    Hope this helps.

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  1. This answer was edited.

    Cash is commonly received by the business under the following situations: 1. Receipt of payment by a debtor in cash. 2. Sale of goods by the business on a cash basis. 3. Withdrawal of cash from the bank. 4. Cash received from other income. 5. Additional capital introduced by the partner, etc. It isRead more

    Cash is commonly received by the business under the following situations:

    1. Receipt of payment by a debtor in cash.

    2. Sale of goods by the business on a cash basis.

    3. Withdrawal of cash from the bank.

    4. Cash received from other income.

    5. Additional capital introduced by the partner, etc.

    It is important to note that the receipt of cash in any of the above-mentioned scenarios is always debited in the books of accounts because it is an asset for the business.

    1. Journal entry for cash received by the debtor

    Cash a/cDebitDebit the increase in asset
    To Debtor a/cCreditCredit the decrease in asset

    (being cash received from the debtor)

    2. Journal entry for cash received from the sale of goods

    Cash a/cDebitDebit the increase in asset
    To Sales a/cCreditCredit the increase in revenue

    (being goods sold)

    3. Journal entry for cash received from withdrawal

    Cash a/cDebitDebit the increase in asset
    To Bank a/cCreditCredit the decrease in asset

    (being cash received from withdrawal)

    4. Journal entry for cash received from other income

    Cash a/cDebitDebit the increase in asset
    To Other income a/cCreditCredit the increase in revenue

    (being cash received from other incomes such as commission, rent, interests, etc)

    5. Journal entry for additional capital introduced by the partner

    Cash a/cDebitDebit the increase in asset
      To Capital a/cCreditCredit the increase in revenue

    (being additional capital introduced)

    Hope this helps.

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  1. This answer was edited.

    Individuals employed in an organization receive salary but salaried individuals do not maintain books of accounts. They are not required to pass any journal entry and prepare financial statements. So, it is assumed that the question asked is “journal entry for salary paid” and not for salary receiveRead more

    Individuals employed in an organization receive salary but salaried individuals do not maintain books of accounts. They are not required to pass any journal entry and prepare financial statements.

    So, it is assumed that the question asked is “journal entry for salary paid” and not for salary received. An employer paying salary to his employees will be required to pass the journal entry in his books of accounts for salary paid.

    Journal Entry for Salary Paid

    I will present the journal entry in the books of the employer for salary paid 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 Cash/Bank A/cCreditReal account/Personal accountCredit what goes out/Credit the giver

    (Being salary paid by cash/cheque)

    2. According to the “Modern rules” of accounting

    Salary A/cDebitExpenseDebit the increase in expense
     To Cash/Bank A/cCreditAssetCredit the decrease in asset

    (Being salary paid by cash/cheque)

    Example

    1. Textile Inc. paid salary amounting to 500,000 to its employees by cheque or through online modes for the month of March 20xx on 31/03/20xx.

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

    Salary A/cDebit500,000Debit the increase in expense
     To Bank A/cCredit 500,000Credit the decrease in asset

    (Being salary paid by cheque or through online modes for the month of March 20xx)

    2. Jute Inc. paid salary amounting to 75,000 to its employees in cash for the month of March 20xx on 31/03/20xx.

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

    Salary A/cDebit75,000Debit the increase in expense
     To Cash A/cCredit 75,000Credit the decrease in asset

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

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  1. To begin with, three types of businesses can be commenced i.e. sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting. Journal entry fRead more

    To begin with, three types of businesses can be commenced i.e. sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting.

    Journal entry for started business with cash

    The cash a/c is debited as it is an asset for the business and the capital a/c is credited as it is a liability for the business according to the business entity concept.

    1. According to the golden rules of accounting:

    Cash a/cDebitDebit what comes in
    To Capital a/cCreditCredit the giver

    (being business commenced with cash)

    2. According to the modern rules of accounting:

    Cash a/cDebitDebit the increase in asset
    To Capital a/cCreditCredit the increase capital

    (being business commenced with cash)

    Example

    Mr. A commenced business with cash (capital) amounting to 1,00,000. The journal entry in the books of Mr. A is as follows

    Cash a/cDebit1,00,000
    To Capital a/cCredit1,00,000

    (being business commenced with cash)

    Hope this helps.

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  1. Journal entry for an interest received from a bank The interest received from the bank can be transacted in the journal book using the modern rules of accounting as -   Why Bank A/c is Debited? when the interest income is accrued it increases the bank balance and the bank balance is recorded asRead more

    Journal entry for an interest received from a bank

    The interest received from the bank can be transacted in the journal book using the modern rules of accounting as –

     

    Journal entries for interest income received from a bank

    Why Bank A/c is Debited?

    when the interest income is accrued it increases the bank balance and the bank balance is recorded as a current asset. Hence, its debited since interest income increases the entity’s bank balance.

    Why is Interest Received Credited?

    The interest received is an income for an entity and as per the modern rules of accounting, we credit the increase in income. Therefore, we credit interest income a/c.

    The interest received from the bank can be transacted in the journal book using the golden rules of accounting as –

    Journal entries for interest on income from bank using golden rules of accounting

    Why is Bank A/c Debited?

    Bank Account is classified as a “personal account” and as per the golden rule of accounting for personal account “we debit the receiver and credit the giver.”And hence, we debit the bank account.

    Why is income received from bank credited?

    Income received from a bank can be classified as “nominal account” and as per the golden rule of accounting for nominal account “we debit all expenses and losses and credit all incomes and gains.” so, interest received from the bank is credited.

    For Example,

    Mr Alex has a savings account with ABC Bank. The balance at the end of the first quarter with the bank is 1,00,000. The bank offers 6% p.a interest on such balance. Journalise the same.

    Solution :

    Journal of Mr Alex

    ParticularsDebit/CreditAmountAmount
    Interest received from a bank
    Bank A/c DrDebit1,500
        To Interest Income A/cCredit1,500
    (Being interest @ 6% p.a received from the bank for the first quarter)

     

    I have tried to logically explain the entry for interest income from the bank. I hope it helps.


    Aastha Mehta.

     

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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/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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  1. This answer was edited.

    In this business world, most of the transactions take place on credit rather than cash so the amount of risk involved is high. To minimize this risk many organization decides to allocate a certain portion towards provision for all the future expenses and losses. Provision is created because they accRead more

    In this business world, most of the transactions take place on credit rather than cash so the amount of risk involved is high. To minimize this risk many organization decides to allocate a certain portion towards provision for all the future expenses and losses.

    Provision is created because they account for particular company expenses and payments for the current year. This makes organization financial statements to look more precise. Provision is created from company profit to meet all the uncertain future obligations.

    Meaning of Provision for Doubtful Debts-

    The term provision for doubtful debts refers to the estimated (or) predicted value of bad debts that arises from the sundry debtors that have been issued but have turned out to be uncollectible. It takes place when a credit sale to the customer is made. Provision for Doubtful debt is a contra account and it is also known as Provision for bad debts.

    Reason for creating Provision for Doubtful Debts-

    In Accounting, Provision for Doubtful debts is created to abide with the conservatism convention and prudence principle which states that “don’t account for future anticipated profits but account for all possible losses”. Provision for Doubtful debts is an expense which occurs in the normal course of business.

    Various organizations create a provision for all the future expected expenses and losses which may arise due to the credit sales so the organization needs to create a percentage of such provision on the net value of sundry debtor for complying with all the future uncertainties.

    Example- ABC Ltd furnishes you with the following information about Total sales for the current accounting year

    ParticularsAmount
    Total Sales6,00,000
    Cash Sales2,00,000
    Credit Sales4,00,000
    Bad Debts40,000

    The company decided to create 5% provision of doubtful debts on sundry debtors. Comment upon its decision.

    Calculation of Provision for Doubtful Debts-

    Step 1– Calculate Net value of sundry debtors

    Net Sundry Debtors = Sundry Debtors – Bad Debts

    = 4,00,000 – 40,000 => 3,60,000

    Step 2 – Create 5% provision on net value of sundry debtors

    Provision for Doubtful Debts = 3,60,000 * 5/100

    = 18,000

    The decision on creating a provision for doubtful debts will help the company to mitigate (or) reduce all the future obligations and uncertainties which arise due to the bad debts.

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    No, Invoice is not a receipt.  To make the concept easy and understandable I would like to first explain the meaning of Invoice and Receipt followed by an example each and Key differences between them. I would like to conclude my answer with a snippet of Invoice and Receipt. Meaning of Invoice- InvoRead more

    No, Invoice is not a receipt.  To make the concept easy and understandable I would like to first explain the meaning of Invoice and Receipt followed by an example each and Key differences between them. I would like to conclude my answer with a snippet of Invoice and Receipt.

    Meaning of Invoice-

    Invoice refers to a legal document issued by the person who is selling the goods and services to the person who is purchasing/buying these goods and services. An Invoice is issued to make payment. The person who sells goods and services is called a seller (or) vendor and the person who buys goods and services is called customer (or) buyer.

    Example- When we purchase any product from the online store (or) perform online shopping, then the seller of the goods (or) service provides an invoice to the customer thereby allowing the customer to make payment after the delivery of the goods.

    Meaning of Receipt-

    Receipt refers to the acknowledgement of payment which states that seller (or) vendor of goods and services has received payment from the customer (or) buyer of goods and services. It is conclusive proof that payment has been made by the customer. In the case of transmission of goods, it acts as proof of ownership. It is also a legal document similar to an invoice.

    Example- When you go to a grocery store (or) supermarket for purchasing various products, after making the payment the staff member gives you an acknowledgement. Thus this acknowledgement is known as a receipt.

    Key Differences between Invoice and Receipt-

    The following are the major key difference between receipt and invoice

    Sno.Point of DifferenceInvoiceReceipt
    1.MeaningInvoice refers to the request for payment.Receipt refers to acknowledgement (or) proof of payment.
    2.IssueAn Invoice is issued before the payment is made.A receipt is issued after the payment is made.
    3.AmountAn invoice displays the total amount which is due (or) to be paid.A receipt shows the detailed amount which is already paid by the buyer.
    4.PaymentAt the time of making payment, the invoice is given to the customer.A receipt may be given to the customer (or) the third party after making the payment as proof.
    5.UsageAn invoice is used to keep a record of goods and services sold to the customer.A receipt is used as an acknowledgement that the payment of goods and services is made.
    6.BenefitsI) It helps in the delivery of goods by keeping a track of goods.

    II) It helps in predicting future sales.

    III)  It helps in providing better customer service.

    IV) It helps the customers to grab amazing offers and discounts for early payment.

    I) It helps at the time of exchange or return of faulty goods.

    II) It is generated digitally which saves paper and time.

    III) It reduces the stress at the time of making tax payment.

     

    I would like to add a snippet of invoice and receipt for clear and better understanding

                                                                 Invoice

    Sample Invoice

                                                               Receipt

    Cash receipt of ABC Ltd is shown below

    Cash Receipt

     

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  1. I think you should first understand what does the provision for doubtful debt mean and then understand the calculations of the same. Provision for Bad and Doubtful Debt Provision for bad and doubtful debt is a contra asset i.e it reduces the balance of an asset specifically the receivables. When anRead more

    I think you should first understand what does the provision for doubtful debt mean and then understand the calculations of the same.

    Provision for Bad and Doubtful Debt

    Provision for bad and doubtful debt is a contra asset i.e it reduces the balance of an asset specifically the receivables.

    When an entity executes transaction of sales on a credit basis it creates and adds on to the amount due from sundry debtors.  These sundry debtors as per the agreed terms are liable to make a payment for such goods purchased before the end of the credit term.

    If such debtor continuously makes a default such debtor shall be considered as a bad debt for the organization. When an entity remains doubtful regarding the recovery of its revenue i.e it has a reason to believe that such an amount due to be received may not be realised. Thus the entity shall create a reserve or a provision for doubtful debts.

    The provision is created based on the entity’s past experience in the business and various other factors.

    How is it calculated?

    The table given below will help you to understand step by step calculations to compute provision for doubtful debts

    ParticularsAmount
    Old Bad Debts (It shall be given in the Trial Balance on the Dr side)XXXXX
    Add New Bad Debts (It shall be given in the adjustment)XXXXX
    Add New Bad Debt Reserve (Debtors x %/100) (It shall be given in the adjustment) i.e (% of Debtors – New Bad Debts)XXXXX
     XXXXX
    Less Old Provision for Bad Debts (It shall be given in the trial balance on the credit side)(XXXXX)
    New Provision/Reserve for Bad DebtsXXXXX

     

    For Example,

    Trial balance

    ParticularsDr Amount       Cr Amount
    Bad Debts400 
    Reserve for Bad Debts 1500
    Sundry Debtors16,000 

     

    Adjustment: Provide 2% reserve for bad and doubtful debts on the debtors. And it was realized that our debtor worth 1000 proved to be bad has been written off.

    ParticularsAmount
    Old Bad Debts (Given in Trial Balance)400
    Add New Bad Debts (posted from  adjustment)1,000
    Add New Bad Debt Reserve (Debtors x %/100) (It shall be given in the adjustment) i.e (% of Debtors – New Bad Debts) = (16,000 – 1,000) X 2 %  300
     1,700
    Less Old Provision for Bad Debts (Giving effect to an adjustment)(1500)
    New Provision/Reserve for Bad Debts  200

     

    I have tried to put up both explanation and numerical example for you to understand how to compute Bad Debt Reserve hoping that it would be helpful for you.


    Aastha Mehta.

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  1. This answer was edited.

    What is a Purchase Requisition? In the case of larger organisations, it may so happen that the procurement department places an order of purchase only once such requirement is approved by another department. When the procurement department intends to procure goods it will have to issue a purchase reRead more

    What is a Purchase Requisition?

    In the case of larger organisations, it may so happen that the procurement department places an order of purchase only once such requirement is approved by another department. When the procurement department intends to procure goods it will have to issue a purchase requisition to its financial wing. Thus the document sent to such another department for approval is called a purchase requisition.

    I am inserting the specimen of a purchase requisition you can have a glance –

    Specimen of purchase requisition

    For Example,

    ABC Ltd is engaged in manufacturing packed food products, It procures raw materials from various vendors and the company has a policy that before placing any order the department needs to seek the approval of the company’s finance wing. Hence, the procurement department for seeking such approval shall issue a Purchase requisition document.

    It includes the following:

    • Vendor Information
    • Quantity or Units
    • Description of Goods
    • Location of the Purchaser
    • Amount or Price

     

    What is a Purchase Order?

    After receipt of the Purchase Requisition from the procurement department, the financial department of an organization shall issue a purchase order to the Vendor.

    Continuing the purchase requisition example-

    When the finance department of ABC Ltd receives the purchase requisition from the Procurement department for purchase of raw materials the finance department will analyse the document and once satisfied with the content shall issue a purchase order in favour of the external vendor. And thus the order is said to be placed successfully.

    I am inserting the specimen of purchase order you can have a glance –

    Specimen of purchase requisition

    It includes the following:

    • Purchase Order Number
    • Purchaser and Vendor Information
    • Quantity or Units of Goods
    • Price or  Amount
    • Invoice Number and Invoice Related Information
    • Description of goods
    • Payment Terms

     

    Difference between Purchase Requisition and Purchase Order

    Purchase Requisition is used to simply seek permission from another department within the entity whereas such other department uses purchase order to actually place an order i.e make a purchase of specific goods required.

    Where Purchase requisition is a document generally used internally within an organisation whereas the purchase order is generally issued to the external vendor. The purchase order is issued after purchase requisition.


    Aastha Mehta.

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  1. Meaning of Provision for Doubtful Debts Almost every business entity has some debtors, of which recovery is doubtful. It may not be realised. For this purpose, provision is created which is known as provision/reserve for doubtful debts. This provision is created on the basis of experiences of the prRead more

    Meaning of Provision for Doubtful Debts

    Almost every business entity has some debtors, of which recovery is doubtful. It may not be realised. For this purpose, provision is created which is known as provision/reserve for doubtful debts. This provision is created on the basis of experiences of the previous years. It is an anticipated loss therefore provision for doubtful debts is necessary.

    Treatment of Provision for Doubtful Debts in Balance Sheet

    Financial StatementCalculationTreatment
    Balance SheetIt is calculated on the following amount:

    Sundry Debtors – Bad Debts

    Deducted from Accounts Receivables/Sundry Debtors under the head Current Assets

    Let me help you understand the treatment better with the help of an example using trial balance and balance sheet.

    Example

    DEbtors in TB & RDD Adjustment

    Show treatment of Provision for Doubtful Debts in the Balance Sheet of ABC Ltd.

    RDD in Balance Sheet

    5% provision for doubtful debts is calculated on 500,000 (5% * 500,000 = 25,000) & deducted from sundry debtors.

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