AccountingCapital Latest Questions

Nancy Chawla
  1. This answer was edited.

    I have answered this question on the assumption that "Trading Expenses are those expenses which are covered in the Trading Account". Meaning of Trading Expenses Trading Expenses are direct expenses incurred for the purchase and production of goods. They are related to the core business operations ofRead more

    I have answered this question on the assumption that “Trading Expenses are those expenses which are covered in the Trading Account”.

    Meaning of Trading Expenses

    Trading Expenses are direct expenses incurred for the purchase and production of goods. They are related to the core business operations of the business entity and directly related to the purchase and production of the finished goods.

    So, all the expenses incurred from the time of purchasing raw materials/goods till the time the finished goods are brought to a saleable condition are referred to as trading expenses.

    Eg. carriage inward, manufacturing expenses, wages, etc.

    Presentation in Financial Statements

    Particulars Financial Statement Treatment/Presentation
    Trading Expenses (Direct Expenses) Trading Account Presented on the Debit side of Trading Account

    A snippet of the Trading account has been attached for better understanding.

    Trading expenses in Trading account

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    • 3
John Hay
  1. This answer was edited.

    In simple words, provision for doubtful debts refers to the amount set aside as a provision from the profits of the business for the amount that is doubtful to be received in the future. Based on past trends, a business determines the approximate amount of doubtful debts every year and creates a proRead more

    In simple words, provision for doubtful debts refers to the amount set aside as a provision from the profits of the business for the amount that is doubtful to be received in the future. Based on past trends, a business determines the approximate amount of doubtful debts every year and creates a provision for the same.

    Treatment of provision for doubtful debts

    It is not known by many that provision for doubtful debts can appear in the trial balance of a company. It has a credit balance as it is an accounts receivables contra account. In case it is shown in the trial balance it will be recorded in ONE place only i.e. on the credit side of the profit and loss account.

    It is important to note that provision for doubtful debts can either appear in the trial balance or as an adjustment entry. In case it appears in the trial balance the above-mentioned treatment has to be followed however, in case it appears as an adjustment entry then it will be recorded on the credit side of the profit and loss a/c  as well as on the liabilities side of the balance sheet.

    Placement of provision for doubtful debts in the trial balance

    The trial balance of XYZ Ltd. is as follows:

    trial balance

    In the Profit and loss a/c

    p/l a/c

    In the balance sheet

    balance sheet

    Hope this helps.

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    • 1
John Hay
  1. This answer was edited.

    A customer can purchase on two basis: cash or credit. In case of a cash purchase, the payment is made immediately by the customer however, in case of a credit purchase, the payment is expected to be made in the future as per the agreement. Journal entry for purchase of machinery on credit basis: MacRead more

    A customer can purchase on two basis: cash or credit. In case of a cash purchase, the payment is made immediately by the customer however, in case of a credit purchase, the payment is expected to be made in the future as per the agreement.

    Journal entry for purchase of machinery on credit basis:

    Machinery a/c Debit Debit  the increase in asset
    To Creditor/suppliers a/c Credit Credit the increase in liability

    (being machinery purchased on credit)

    Journal entry for purchase of machinery for cash:

    Machinery a/c Debit Debit  the increase in asset
    To Cash Credit Credit the decrease in asset

    (being machinery purchased for cash)

    Example

    1. Mr. K purchased machinery from ABC Ltd. amounting to 20,000 on credit. The journal entry in the books of Mr. K is as follows:

    Machinery a/c Debit 20,000
    To ABC Ltd. a/c Credit 20,000

    (being machinery purchased on credit)

    2. Mr. A purchased machinery from XYZ Ltd. amounting to 20,000 on a cash basis. The journal entry in the books of Mr. A is as follows:

    Machinery a/c Debit 40,000
    To Cash Credit 40,000

    (being machinery purchased for cash)

    Hope this helps.

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Emin Radwan
  1. This answer was edited.

    It is believed that every organization requires goods for running its business. Goods can be purchased in two different ways- on cash and credit. Most of the companies prefer credit purchase of goods over cash. I would like to explain to you the meaning of credit purchases followed by journal entryRead more

    It is believed that every organization requires goods for running its business. Goods can be purchased in two different ways- on cash and credit. Most of the companies prefer credit purchase of goods over cash. I would like to explain to you the meaning of credit purchases followed by journal entry and simple practical example.

    Purchased Goods on Credit

    In simple terms, when an organization (or) customer purchases the goods from the seller (or) supplier and agrees to pay the consideration (value or price) of the goods on some future date then it is called as credit purchases. Whenever credit purchase takes place accounts payable account/sundry creditor is created.

    Accounts payable increases when the organization keeps on purchasing goods on credit. It is considered as a short-term debt that an organization owes to another organization during the ordinary (or) normal course of business.

    Journal Entry for goods purchased on credit

    • Modern Accounting Approach-
    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st March Purchases a/c 25,000 Expense Debit The Increase in Expense
     To Accounts Payable/Supplier a/c  25,000 Liability Credit– The Increase in Liability.
    • Traditional Accounting Approach
    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st March Purchases a/c 25,000 Nominal Debit All expenses and losses.
     To Accounts Payable/Supplier a/c  25,000 Personal Credit The giver.

     Practical Example

    On 1st June, Alex Co. purchases goods from Max Co. for 2,00,000 on credit period of 30 days. Pass Journal entry for credit purchases in the books of Alex Co.
                                                                In the Books of Alex Co.

    1. When Credit Purchase of goods takes place-

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st June Purchases a/c 2,00,000 Expense Debit- The Increase in Expense.
     To Accounts Payable/Max Co. a/c  2,00,000 Liability Credit- The Increase in Liability.

    (Being goods purchased from Max Co. on credit).

    2. When consideration (value or price) of the goods is being duly paid-

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st July Accounts Payable/Max Co. a/c 2,00,000 Liability Debit- The Decrease in Liability.
     To Cash/Bank a/c  2,00,000 Asset Credit- The Decrease in Asset.

    (Being consideration paid for the goods purchased on credit).

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Emin Radwan
  1. This answer was edited.

    In the modern business world, sales are made on credit as well as cash basis. Even though there’s a high risk of bad debts in selling goods on a credit basis, the companies prefer the same to develop customer loyalty and meet the cut-throat competition. 'Sold goods on credit' is nothing but the saleRead more

    In the modern business world, sales are made on credit as well as cash basis. Even though there’s a high risk of bad debts in selling goods on a credit basis, the companies prefer the same to develop customer loyalty and meet the cut-throat competition.

    ‘Sold goods on credit’ is nothing but the sale of goods on a credit basis i.e. providing goods to the customer with an expectation of receiving the payment in the future. This amount owed by the debtor leads to an increase in the accounts receivables of the company and is a current asset.

    Journal entry for sold goods on credit

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

    1. According to the golden rules of accounting:

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

    (being goods sold on credit)

    2. According to the modern rules of accounting:

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

    (being goods sold on credit)

    Example

    XYZ Ltd. sold goods amounting to 50,000 to Mr. A on credit. The journal entry in the books of XYZ Ltd. is as follows:

    Mr. A’s a/c Debit 50,000
    To Sales a/c Credit 50,000

    (being goods sold on credit)

    Hope this helps.

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    • 9
Emin Radwan
  1. This answer was edited.

    I believe that every business organization uses inventory for generating sales. If an organization manufactures products by using raw material instead of offering service then he needs to prepare accounting records for inventory. Inventory can be purchased in two ways- on cash (or) credit. In this qRead more

    I believe that every business organization uses inventory for generating sales. If an organization manufactures products by using raw material instead of offering service then he needs to prepare accounting records for inventory. Inventory can be purchased in two ways- on cash (or) credit.

    In this question, I would like to tell you about inventory purchased on credit. Starting with its meaning followed by Journal Entry and a simple practical problem.

    Purchased Inventory on Credit

    When an organization purchases raw materials for manufacturing finished products from another organization on agreed terms that consideration (price or value) of raw materials (Inventory) will be paid on some future date then it is called Credit Purchase of Inventory.

     Journal Entry for Inventory purchased on credit

    1. Modern Accounting Approach

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st Feb Inventory- Raw material a/c 1,00,000 Asset Debit- The Increase in Asset.
     To Accounts Payable/Supplier a/c  1,00,000 Liability Credit- The Increase in Liability.

    2. Traditional Accounting Approach

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st Feb Inventory- Raw material a/c 1,00,000 Real Debit- What comes into the business.
     To Accounts Payable/ Supplier a/c  1,00,000 Personal Credit- The giver.

    Practical Example

    On 1st May Alexa Co., a manufacturer of sofa sets, purchases hardwood from Anna Co. for 5,00,000 on a credit period of 2 months. Journalise the following transaction in the books of Alexa Co.
                                                                 In the books of Alexa Co.

    1. When Inventory is purchased on credit from Anna Co.-

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st May Inventory- Raw material a/c 5,00,000 Asset Debit- The Increase in Asset.
     To Accounts Payable/ Anna Co. a/c  5,00,000 Liability Credit- The Increase in Liability.

    (Being Inventory purchased on credit).

    2. When the consideration (price or value) of Inventory is duly paid-

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st Aug Accounts Payable/ Anna Co. a/c 5,00,000 Liability Debit- The Decrease in Liability.
     To Cash/Bank a/c  5,00,000 Asset Credit- The Decrease in Asset.

    (Being consideration duly paid on the due date).

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Natalia Alva
  1. This answer was edited.

    In the Income Statement, Trading account represents the first part and Profit & Loss account represents the second part. Trading account gives the overall purview of all trading activities, such as purchase and sale of products. It is prepared to ascertain gross profit or gross loss. ProfitRead more

    In the Income Statement, Trading account represents the first part and Profit & Loss account represents the second part.

    Trading account gives the overall purview of all trading activities, such as purchase and sale of products. It is prepared to ascertain gross profit or gross loss. Profit & Loss account gives the final working results of the business. It is prepared to ascertain net profit or net loss.

    Steps to prepare Income Statement from Trial Balance

    All the debit side items related to expenses and credit side items related to income listed in the trial balance shall be posted on the debit side and credit side of the income statement respectively.

    1. Post opening stock on the debit side of the income statement.

    2. Post purchases and sales on the debit and credit side respectively. Deduct purchase return from Purchases and sales return from Sales to arrive at the Net Purchases and Net Sales.

    3. Post all the direct expenses incurred for the purchase & production of goods eg. wages, factory rent, custom duty, carriage inward, manufacturing expenses, etc on the debit side.

    4. Post the amount of closing stock stated in the adjustments.

    5. Make all the necessary adjustments, if any, related to outstanding and prepaid expenses, goods withdrawn for personal use, goods destroyed, etc

    6. Now, find out the gross profit or gross loss.
    If total of credit side > total of debit side ie. credit balance, then the amount of difference is gross profit.
    If total of debit side > total of credit side ie. debit balance, then the amount of difference is gross loss.

    7. Carry forward the ascertained gross profit to the credit side or gross loss to the debit side of the second part of the income statement ie. profit & loss account.

    8. Post all the indirect expenses such as office or administrative expenses, financial expenses, selling or distribution expenses, etc on the debit side of the income statement.

    9. Post all the indirect incomes such as commission received, rent received, dividend received, etc on the credit side of the income statement.

    10. Consider all the necessary adjustments, if any, such as outstanding and prepaid expenses, outstanding and pre-received income, reserve for doubtful debts.

    11. Calculate depreciation and amortization on the assets and post the amount on the debit side.

    12. Now, find out the net profit or net loss.
    If total of credit side > total of debit side ie. credit balance, then the amount of difference is net profit.
    If total of debit side > total of credit side ie. debit balance, then the amount of difference is net loss.

    These steps complete the process of preparation of income statement from trial balance.

    Illustration

    A snippet of trial balance and income statement has been attached for better understanding.

    Trial Balance

    Prepare Income Statement from the above given Trial Balance.

    Income Statement

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Natalia Alva
  1. This answer was edited.

    Balance Sheet is a statement showing the financial position of a business entity on a particular day. It shows the liabilities and assets of the business. Steps to prepare Balance Sheet from Trial Balance All the debit side items related to assets listed in the trial balance shall be posted on the aRead more

    Balance Sheet is a statement showing the financial position of a business entity on a particular day. It shows the liabilities and assets of the business.

    Steps to prepare Balance Sheet from Trial Balance

    All the debit side items related to assets listed in the trial balance shall be posted on the assets side of the balance sheet. All the credit side items related to capital and liabilities listed in the trial balance shall be posted on the liabilities side of the balance sheet.

    1. Post the amount of capital on the liabilities side of the balance sheet under the head “capital & reserves”.

    2. Then, the net profit or net loss ascertained while preparing the income statement shall be added or reduced respectively from the amount of capital.

    3. Now, post all the “non-current liabilities” such as long-term bank loan, long-term debentures issued, etc on the liabilities side of the balance sheet.

    4. Then, post the “current liabilities” such as sundry creditors, bills payable, etc. Incorporate necessary adjustments related to outstanding expenses and pre-received income.

    5. Moving to the asset side, start with the head “non-current assets”.

    6. First, post the tangible assets under the head “non-current assets” such as plant & machinery, land & building, etc. Calculate depreciation/accumulated depreciation on the tangible assets and deduct the same to arrive at the net value.

    7. Second, post the intangible assets under the head “non-current assets” such as software, goodwill, etc. Calculate amortization/accumulated amortization on the intangible assets and deduct the same to arrive at the net value.

    8. Now, post all the long-term investments acquired such as bonds and debentures under the head “non-current assets”.

    9. After posting all the non-current assets, move forward to posting the “current assets” on the asset side of the balance sheet,

    10. Post “current assets” such as cash in hand, cash at bank, sundry debtors, bills receivable, etc. Incorporate necessary adjustments related to provision for doubtful debts, prepaid expenses, outstanding income,.

    11. Post the amount of closing stock given in the adjustments under the head “current assets”.

    12. The final step is totaling both the liability and asset side. Both sides of the balance sheet should be of equal amount.

    These steps complete the process of preparation of the balance sheet from the trial balance.

    Illustration

    A snippet of trial balance and balance sheet has been attached for better understanding.

    Trial Balance

    Prepare Balance Sheet from the above given trial balance. Net Profit for the year ended 31/03/yyyy is 610,000.

    Balance Sheet

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Natalia Alva
  1. The sale of services might be a new concept for you as we have commonly heard more about the sale of goods by the businesses. However, the treatment of the two is the same in the books of accounts. Like goods, the sale of services is made on cash as well as credit basis. There are plenty of servicesRead more

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

    Journal entry for the sale of services on credit

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

    1. According to the golden rules of accounting:

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

    (being services sold on credit)

    2. According to the modern rules of accounting:

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

    (being services sold on credit)

    Example

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

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

    (being services sold on credit)

    Hope this helps.

     

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Sapna Takia
  1. Accumulated Depreciation in a Trial Balance The accumulated depreciation is shown as a "credit item" in the trial balance. Accumulated depreciation is nothing but the sum total of depreciation charged until a specified date. Since in every reporting period, a part of a fixed asset is written off i.eRead more

    Accumulated Depreciation in a Trial Balance

    The accumulated depreciation is shown as a “credit item” in the trial balance. Accumulated depreciation is nothing but the sum total of depreciation charged until a specified date. Since in every reporting period, a part of a fixed asset is written off i.e depreciated such accumulated depreciation has a credit balance.

    You should have a glance at the image of an extract of the trial balance given- below it will definitely answer your question in a more effective way.

    Accumulated depreciation in a trial balance

    Accumulated Depreciation

    As mentioned earlier the accumulated depreciation is the sum total of depreciation that an entity has expensed in its profit and loss statement till that date. It’s basically a contra asset account as it reduces the balance in the asset account.

    Illustrative Example,

    Prepare a trial balance of Mr Allen on the basis of given heads of accounts –

    Particulars

    Amount

    Capital 1,00,000
    Sales 1,20,000
    Purchases 1,10,000
    Sales Return 20,000
    Fixed Assets 1,00,000
    Cash at bank 10,000
    Accumulated Depreciation 20,000

    Solution :

    Accumulated Depreciation in trial balance


    Aastha Mehta.

     

     

     

     

     

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Sapna Takia
  1. Provision for Depreciation in the Trial Balance A trial balance shows provision for depreciation as a "credit item". The value of most of the assets reduces over a period of time. It's a common practice to record the assets at its historical cost but over a period of time, does the value of asset reRead more

    Provision for Depreciation in the Trial Balance

    A trial balance shows provision for depreciation as a “credit item”. The value of most of the assets reduces over a period of time. It’s a common practice to record the assets at its historical cost but over a period of time, does the value of asset remain the same as at the time of its purchase?

    Obviously “Not”. So, if the asset has a debit balance then the provision for depreciation can not have a debit balance i.e it is bound to have a credit balance.

    The below-given image would also be of great help to understand the above para.

    provision for depreciation in trial balance

    What is Provision for Depreciation?

    The fixed assets are depreciated over a period of time. Depreciation while is deducted from an income statement every year it is not deducted from an asset rather it is recorded on the liability side as accumulated depreciation or provision for depreciation. It’s a contra asset.

    To find the net book value at the time of disposal of the asset or year-end or revaluation etc. one needs to subtract the provision for depreciation account balance from the historical cost of the asset. Such provision being a contra asset has a credit balance.

    The illustrative example given below in the form of a problem might be of some help.

    Prepare a trial balance of Ms Julie from the data given below-

    Particulars Amount
    Capital 1,00,000
    Sales 120,000
    Purchases 110,000
    Sales Return 20,000
    Fixed Assets 100,000
    Cash at bank 10,000
    Provision for Depreciation 20,000

    Solution:

    Provision for depreciation in the Trial Balance

    I hope that your question now has been answered.


    Aastha Mehta.

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Angie
  1. This answer was edited.

    Balance of Petty Cash Book- The balance of petty cash book is an asset and not income. The logic behind the answer is that petty cash book is one of the types of cash book and petty cash book records expenses and incomes which is similar to cash book. Since cash account is considered as an Asset, peRead more

    Balance of Petty Cash Book-

    The balance of petty cash book is an asset and not income. The logic behind the answer is that petty cash book is one of the types of cash book and petty cash book records expenses and incomes which is similar to cash book. Since cash account is considered as an Asset, petty cash book which is a part of cash book is also an asset.

    The balance of petty cash book is never closed and their balances are carried forward to the next accounting period which is considered as one of the most significant qualities of an asset whereas Income doesn’t have any opening balance and their balances get closed at the end of every accounting year.

    Petty cash book is placed under the head current asset in the balance sheet. The Closing Balance of petty cash book is computed by deducting Total expenditure from Total cash receipt (as received from the head cashier).

    To make the above explanation and logic easy. I would like to add a practical example for clear understanding.

    Example Problem

    Prepare Petty Cash Book of Alex & Max Co. from the following information as provided below

    Date  Particulars Amount
    1st Aug Received cash from head cashier 5,000
    4th Aug Paid Cartage expenses 300
    8th Aug Telephone charges paid 200
    10th Aug Paid Sundry expenses 500

      Petty Cash Book of Alex & Max Co.

    Petty Cash Book

    Conclusion

    I would like to conclude my answer by stating that the balance of petty cash book is an asset and not income.

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Maneet Kaur
  1. Meaning of Unbilled Revenue Unbilled Revenue refers to the revenue earned by an entity by rendering the goods or services in the current period ie. sale has been recognized but the entity has not yet issued the corresponding invoices to the customer. Unbilled Revenue arise in situations where- a. IsRead more

    Meaning of Unbilled Revenue

    Unbilled Revenue refers to the revenue earned by an entity by rendering the goods or services in the current period ie. sale has been recognized but the entity has not yet issued the corresponding invoices to the customer.

    Unbilled Revenue arise in situations where-
    a. Issue of invoice is delayed, or
    b. Invoice is issued only after the entire project/contract is completed.

    Unbilled Revenue is presented as a current asset in the balance sheet.

    Journal Entry for Unbilled Revenue

    1. Entry for recording the revenue as per the accrual method

    Unbilled Revenue A/c Debit Increase in asset
     To Revenue (Sales) A/c Credit Increase in Income

    We have debited Unbilled Revenue A/c because it is an asset for the supplier entity as the invoice will definitely be raised in the near future for the goods or services already rendered and the corresponding consideration is still receivable from the customer.

    We have credited the Revenue (Sales) A/c because the goods or services have been rendered by the entity. Therefore, as per accrual method it is recognized as revenue/sales by the seller entity in the current period itself.

    2. Entry when the invoice has been issued to the customer

    Unbilled Revenue is converted to Accounts Receivable once the invoice is issued.

    Accounts Receivable A/c Debit Increase in asset
     To Unbilled Revenue A/c Credit Reversal of unbilled revenue debited earlier as the invoice has now been issued

    Examples of Unbilled Revenue

    Example 1 – Issue of invoice is delayed

    Software Ltd completed a software development & installation project worth 150,000 for ABC Ltd on 10th March 20×1. But it did not immediately issue an invoice. It issued the invoice on 05th April 20×1.

    Following journal entries will be passed in the books of Software Ltd-

    1. Entry for recording the revenue on completion of the project on 10/03/20×1

    Unbilled Revenue A/c Debit 150,000
     To Revenue (Sales) A/c Credit  150,000

    2. Entry at the time of issue of invoice on 05/04/20×1

    Accounts Receivable-ABC Ltd A/c Debit 150,000
     To Unbilled Revenue A/c Credit  150,000

    Example 2 – Invoice is issued only after the entire project/ contract is completed

    R&D Ltd entered into a contract for carrying out research & development activities for Chemical Ltd. They agreed upon a contract price of 10 million which will be entirely invoiced at the end of the project. Out of 10 million, 3 million is related to research phase and 7 million for development phase.

    Research activities were completed in January 20×1 and development activities in the month of March 20×1. The invoice was raised in the month of April 20×1 for the entire project.

    Following journal entries will be passed in the books of R&D Ltd-

    1. Entry on completion of research phase in January 20×1 because it has completed its research obligation under the contract

    Unbilled Revenue A/c Debit 3 million
     To Revenue (Sales) A/c Credit  3 million

    2. Entry on completion of the development phase in March 20×1 because it has completed its development obligation under the contract

    Unbilled Revenue A/c Debit 7 million
     To Revenue (Sales) A/c Credit  7 million

    3. Entry at the time of issuance of invoice to Chemical Ltd and for recording receivable in the books in April 20×1

    Accounts Receivable-Chemical Ltd A/c Debit 10 million
     To Unbilled Revenue A/c Credit  10 million
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Maneet Kaur
  1. This answer was edited.

    In simple words, a petty cash book which is usually prepared by the ordinary or imprest system, is a book of accounting prepared for the purpose of recording expenses of small value. For example: stamps, wages, postage, carriage, stationery, etc. The two types of petty cashbook are: Simple petty casRead more

    In simple words, a petty cash book which is usually prepared by the ordinary or imprest system, is a book of accounting prepared for the purpose of recording expenses of small value. For example: stamps, wages, postage, carriage, stationery, etc.

    The two types of petty cashbook are:

    1. Simple petty cashbook – In this type of book, receipt of any amount is recorded on the debit side cash column and the payments on the credit side cash column. It is similar to a cashbook.
    2. Analytical petty cashbook – In this type of book, a separate column is maintained for each commonly occurring expense. For miscellaneous payments, a column of sundries is added.

    The pdf containing a format for both the types of petty cashbook is attached as follows.

    Hope this helps.

    petty cashbook formats

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Ajay Mady
  1. This answer was edited.

    For anyone who is not familiar with the term 'closing stock', in brief, it refers to the unsold goods held at the end of the financial year. To ascertain the true financial position of a company it is necessary to adjust the closing stock at the end of an accounting year. Adjustment entry of closingRead more

    For anyone who is not familiar with the term ‘closing stock’, in brief, it refers to the unsold goods held at the end of the financial year. To ascertain the true financial position of a company it is necessary to adjust the closing stock at the end of an accounting year.

    Adjustment entry of closing stock

    The closing stock generally does not appear in the trial balance and is seen as an adjustment entry. We need to pass an adjusting entry before the preparation of final accounts. It is important to note that an adjustment entry is always recorded twice in the books of accounts therefore, the two ways of recording the same for closing stock are as follows:

    1. Credit side of the trading account.

    2. The asset side of the balance sheet.

    Example

    The closing stock of ABC Ltd. amounts to 40,000. The journal entries in the books of the company are as follows:

    PARTICULARS   AMOUNT
    Closing stock a/c Debit 40,000
    To Trading a/c Credit 40,000

    (being closing stock adjusted)

    Placement of closing stock in the trading a/c

    trading a/c

    Placement of closing stock in the balance sheet

    balance sheet

    Note: Sometimes, adjusted purchases are given in the trial balance which indicates that the opening as well the closing stock have been adjusted through purchases. It is important to note here that the closing stock will only be recorded on the asset side of the balance sheet and will not appear in the trading a/c.

    Hope this helps.

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Palaktripathi
  1. This answer was edited.

    To begin with, let me explain to you the meaning of Subsidiary. Meaning of Subsidiary A subsidiary is a business entity in which another company termed as the parent/holding company owns & controls more than 50% of the share capital. If 100% share capital of an entity is owned by the parent compRead more

    To begin with, let me explain to you the meaning of Subsidiary.

    Meaning of Subsidiary

    A subsidiary is a business entity in which another company termed as the parent/holding company owns & controls more than 50% of the share capital. If 100% share capital of an entity is owned by the parent company then such an entity will be referred to as wholly-owned subsidiary.

    The parent company will report the “investment in subsidiary” as an asset in its balance sheet. Whereas, the subsidiary company will report the same transaction as “equity” in its balance sheet.

    Real-world examples of Holding & Subsidiary Company

    1. Whatsapp & Instagram are subsidiaries of Facebook Inc.
    2. Skype & LinkedIn are subsidiaries of Microsoft Corporation.

    Journal Entry for Investment in Subsidiary

    Suppose, Book Ltd acquires 60% shares in Paper Ltd in the month of April 20×1 against consideration of 5,000,000. In this case, more than 50% stake has been acquired by Book Ltd in the entity Paper Ltd. Therefore, Paper Ltd will be considered as a Subsidiary of Book Ltd.

    Journal entry to be passed in the accounting records of Book Ltd at the time of acquisition-

    Investment in Paper Ltd (Subsidiary) A/c Debit 5,000,000 Increase in asset
     To Bank A/c Credit  5,000,000 Decrease in asset

    Presentation in Financial Statements

    Financial Statement Treatment
    Balance Sheet Presented separately as “Investment in Subsidiaries” under the head “Non-Current Assets”
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Palak
  1. This answer was edited.

    In my opinion, following are some of the difficult adjustments in final accounts. Sr No. Adjustments 1st effect 2nd effect 1 Uninsured goods destroyed by fire/accident Trading A/c - Credit side (Gross amount) Profit & Loss A/c - Debit side (Gross amount) 2 Insured goods destroyed by fire/accidenRead more

    In my opinion, following are some of the difficult adjustments in final accounts.

    Sr No. Adjustments 1st effect 2nd effect
    1 Uninsured goods destroyed by fire/accident Trading A/c – Credit side (Gross amount) Profit & Loss A/c – Debit side (Gross amount)
    2 Insured goods destroyed by fire/accident (eg. 50,000 worth of goods destroyed & insurance company accepted the claim of 40,000) Trading A/c – Credit side (Gross amount ie. 50,000) a. Balance Sheet – Asset side (Claim amount ie.40,000)
    b. Profit & Loss A/c – Debit side (Amount of Loss ie.10,000)
    3 Unrecorded Purchases Trading A/c – Debit side (Add to Purchases) Balance Sheet – Liability side (Add to Creditors)
    4 Unrecorded Sales Trading A/c – Credit side (Add to Sales) Balance Sheet – Asset side (Add to Debtors)
    5 Provision for Discount on Debtors Profit & Loss A/c – Debit side Balance Sheet – Asset side (Deducted from Debtors)
    6 Provision for Discount on Creditors Profit & Loss A/c – Credit side Balance Sheet – Liability side (Deducted from Creditors)
    7 Bills Receivable dishonoured Balance Sheet – Asset side (Add the amount of bills dishonoured to Debtors) Balance Sheet – Asset side (Deduct the amount of bills dishonoured from Bills Receivable)
    8 Bills Payable dishonoured Balance Sheet – Liability side (Add the amount of bills dishonoured to Creditors) Balance Sheet – Liability side (Deduct the amount of bills dishonoured from Bills Payable)
    9 Deferred Expenses (eg. Advertisement expenses paid for 5 years) Profit & Loss A/c – Debit side (Advertisement expenses related to current year ie. 1/5th of Total) Balance Sheet – Asset side (Remaining amount of advertisement is shown as Prepaid advertisement ie. 4/5th of Total)
    10 Revenue Receipts included in Capital Receipts (eg. Sale of Goods included in Sale of Furniture) Trading A/c – Credit side (Add to Sales) Balance Sheet – Asset side (Add back the sales amount to Furniture)
    11 Revenue Expenditure included in Capital Expenditure Trading A/c /Profit & Loss A/c – Debit side (Add to that particular Revenue Expenditure) Balance Sheet – Asset side (Deduct from that particular asset)
    12 Capital Expenditure included in Revenue Expenditure Trading A/c /Profit & Loss A/c – Debit side (Deduct from that particular Revenue Expenditure) Balance Sheet – Asset side (Add to that particular asset)
    13 Manager is allowed commission at a certain % on Net Profit

    a. If commission eg.10% is quoted on “Net Profit before charging such commission”:
    Commission amount = Profit before commission * 10/100

    b. If commission eg.10% is quoted on “Net Profit after charging such commission”:
    Commission amount = Profit before commission * 10/110

    Profit & Loss A/c – Debit side (Manager’s Commission) Balance Sheet – Liability side (Outstanding Manager’s Commission), OR
    Balance Sheet – Asset side (Reduce from Cash/Bank)
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Vaishnavi_Shetty
  1. This answer was edited.

    Posting Reference A posting reference column is used to indicate that the entry is posted in the respective ledger accounts and it links journal with the respective ledger account. The abbreviation used for posting reference is "PR". It is also called a folio. Purpose of PR Column When an entity traRead more

    Posting Reference

    A posting reference column is used to indicate that the entry is posted in the respective ledger accounts and it links journal with the respective ledger account. The abbreviation used for posting reference is “PR”. It is also called a folio.

    Purpose of PR Column

    When an entity transacts in a large number on daily basis it becomes a troublesome task then for the bookkeeper to ascertain whether the entries are posted in appropriate ledgers. And it may so happen that the entry is posted twice. Later on, tracking that transaction and correcting the same becomes a tedious and time-consuming job.

    Hence, to avoid these issues its recommended to maintain a posting reference column. Thereby simplifying the job of a bookkeeper.

    It can be seen in the third column of the journal book generally. You can also see the same in the image inserted below-

     

    Posting Reference column

     

    Example

    when an entity purchases an immovable property for an amount of 100,000 it shall be recorded in the books of accounts as –

    Understanding with the help of an example

    The reference of the page number of the journal book shall be given in the respective ledger accounts to interlink the same. The ledger given below indicates the same-

    Interlinking journal book with ledger account

    Similarly, Cash Account shall also have a PR column wherein the reference of the page consisting of the primary journal entry shall be given. The below-given image presents the same

    Posting Reference

    I hope this was helpful.


    Aastha Mehta.

     

     

     

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Vaishnavi
  1. This answer was edited.

    Before answering this question you should first have a glance over the concept of interest on capital. Interest on Capital An organisation or an entity is considered as separate from its partners or proprietor or shareholders for that matter. Since the capital brought in by the partners and proprietRead more

    Before answering this question you should first have a glance over the concept of interest on capital.

    Interest on Capital

    An organisation or an entity is considered as separate from its partners or proprietor or shareholders for that matter.

    Since the capital brought in by the partners and proprietor is an obligation for an entity thus the interest payable to the partners or proprietor for that matter is considered as an expense of the firm or an entity. Had not the partners or sole owner brought in the capital the firm or the organisation would have borrowed such amount externally and so, it would have to incur a certain financial charge.

    Adjustment of Interest on Capital in the Financial Statement

    Where the capital is introduced by the sole proprietor the transaction will be journalised as-

    Interest when due –

    Journal Entry

    Interest on capital transferred to profit and loss statement-

    Journal entry at the time of transferring the interest to income statement

    Thus, ultimately the profit of the firm is reduced as such interest is treated as an expense and hence debited in the profit and loss statement and it is shown in the balance sheet by increasing the capital on the liability side of the balance sheet by that amount.

    For Example,

    Mr John is a dealer in the smartphone has introduced capital worth 1,00,000 and the firm shall pay interest @ 6% p.a. at the end of the year.

    It will be displayed in the profit and loss statement as –

    Adjustment in the income statement

     

    It will be displayed in the balance sheet as –

    Adjustment in the financial statement

    Interest on capital is provided out of profits only. Thus in case of loss, no interest is provided.

    In case of a partnership firm – 

    If the firm maintains Fluctuating Capital i.e all entries in respect of salary, interest, profit earned and drawings of partners are transacted through the partner’s capital A/c.

    Thus, where an entity maintains only partners capital account the interest on capital shall be journalised as –

    Interest on capital due –

    Journal Entry for interest on capitalInterest on capital transferred to profit and loss appropriation statement –

    Adjustment in an income statement

    Some entities prefer showing the partner’s capital accounts with the same old figures i.e no entries in respect of salary, interest, profit earned and drawings of partners are transacted through the partner’s capital A/c.

    A separate account is to be opened for the same called “Partner’s Current Account”. The interest on capital here shall be calculated only on fixed capital.

    In this case, such a transaction shall be journalised as –

    Interest due on capital
    Interest on capital when an entity maintains partners current account

    Interest on capital transferred to profit and loss appropriation statement –

    Adjustment in an income statement

    Thus, ultimately the profit of the firm is reduced as such interest is treated as an expense and hence debited in the profit and loss appropriation statement and it is shown in the balance sheet by increasing the partner’s capital/ current a/c on the liability side of the balance sheet by that amount.

    The example given below will be of some help to interpret the above para

    An entity has 2 partners – Alex and Anna at the beginning of the year both have introduced a capital of 100,000  each and it was agreed in the partnership deed that the partners will charge interest @ 12% p.a. every year at the end of the year.

    Hence, the interest of 24,000 (100,000 x 12% p.a x 2 partners) shall be transacted in the balance sheet and Profit and loss statement as –

    If the firm maintains partners capital account only-
    Adjustment in profit and loss appropriation statement

    Extract of Profit and Loss Appropriation Account-

    Adjustment in the statement of accounts

    Adjustment in a balance sheet

    A snippet of the balance sheet is given below

    Interest adjustment in the balance sheet when the entity maintains only capital account

    If the firm maintains partners capital account and partners current account

    Adjustment in profit and loss statement

    Extract of Profit and Loss Appropriation Account-

    Adjustment in Financial Statements

     

    Adjustment in a balance sheet

    A snippet of the balance sheet is given below

    Adjustment in partners current account on liability side of balance sheet

    I have tried simplifying it as much as I could. I hope this helps.


    Aastha Mehta.

     

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Dheeraj
  1. This answer was edited.

    Meaning The word “set-off" gives us the idea that it is something related to writing off or reduction in the value. In simple accounting terms, when a debtor can decrease the amount of one’s debt by the amount owed by the creditor to the debtor it is known as setting off. The creditor’s claim on theRead more

    Meaning

    The word “set-off” gives us the idea that it is something related to writing off or reduction in the value. In simple accounting terms, when a debtor can decrease the amount of one’s debt by the amount owed by the creditor to the debtor it is known as setting off. The creditor’s claim on the debtor is reduced by the amount of the debtor’s claim on the creditor. It is important to note that the claims are unrelated or a separate transaction.

    Working of a set-off

    A set-off in terms of accounting is of the following types and applies accordingly:

    1. Contractual set-off – Many a time based on a contract or business relations a debtor agrees on excluding the right to set off. In this case, although the creditor owes some amount to the debtor it is considered nil, and the debtor is obliged to pay the entire amount of debt.

    2. Banking set-off – The bank gets the right to set off a credit balance against another debit balance when a person has more than one accounts.

    3. Insolvency set-off – There are compulsory statutory rights of set-off under the Insolvency rules 2016 for an insolvent debtor of the company against its creditor.

    4. Legal set-off – Under legal proceedings, mutually exclusive unsettled debts between the two parties, arising from transactions not related to each other can be set off.

    Example

    Mr. A purchased goods from XYZ Ltd. amounting to 40,000. However, XYZ Ltd. owes an amount of 10,000 to Mr. A as per past transactions. The working of the amount owed by Mr. A (debtor) to XYZ Ltd. (creditor) as per their agreement is as follows:

    Solution:

    Original amount owed by Mr. A = 40,000
    Amount owed by XYZ Ltd. to Mr. A as per past transactions = 10,000

    Set-off hereby allows Mr. A to pay only 30,000 (40,000 – 10,000) to XYZ Ltd. as a settlement of the claim.

    The main benefit of set-off is that ensures payment security and hassle-free settlement of disputes at both the ends.

    Hope this helps.

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Aastha
  1. This answer was edited.

    Need and Importance of Final Accounts Final accounts are considered as one of the essential elements of the organization. It is prepared at the final stage of the accounting process. I would like to break the explanation into two segments. The first segment would be why do we need final accounts andRead more

    Need and Importance of Final Accounts

    Final accounts are considered as one of the essential elements of the organization. It is prepared at the final stage of the accounting process. I would like to break the explanation into two segments. The first segment would be why do we need final accounts and second would be its importance.

    Why do we need a final account?

    The main need for preparing the final account is to keep a track of all the business activities of an organization by the end of every accounting period.  Every organization is required to record financial transactions, prepare financial reports, analytics and information.

    Final accounts data is considered as extremely crucial information for the organization and administration for making informed judgments. Final accounts are needed by various users of the financial statements such as shareholders, lenders, creditors, suppliers, customers and government.

    Importance of Final Accounts

    1. Final accounts assist the shareholders to evaluate their investments which help them to make accurate decisions. Shareholders are more interested to know the liquidity position of the organization and the amount of profit and dividends earned by them.

    2. Final accounts are essential for the tax department to make sure that the organization makes the payment of various taxes and additional duties on time without any delay. Therefore preparation of final accounts (Income statement) is very important for computing tax.

    3. Final accounts provide important facts and figures regarding performance, liquidity, progress and deposition of an enterprise. This helps the internal management to make quick, informed and accurate future decisions on the various aspects of the organization.

    4. Final accounts allow lenders and creditors to have a look at the financial health and soundness of the organization. Creditors use the following information to assess the risk, credibility and its ability to repay the debt on the agreed date.

    5. Final accounts help the employees to know about the company’s profitability and its adverse effects on job security, remuneration, transfers, salary hikes, incentives and various other bonuses.

    6. Final accounts play an important role in helping the organization to achieve steady growth and development by deploying various techniques and strategies for improving revenue, developing a strong customer base and providing more employment opportunities.

    Purpose of Final Accounts

    The following are the main purpose of preparing final accounts-

    1. Final accounts are prepared to determine the net profit or net loss incurred by the organization within one accounting period.

    2. Gross Profit and Net Profit of the current accounting period are compared with the previous years’ profit. This helps in determining the progress of the business. This information further helps in framing future decisions and policies for the organization.

    3. Final accounts facilitate the preparation of trading accounts and profit & loss accounts which provides details regarding all the expenses and incomes (direct or indirect) of an organization. This helps the organization in applying various tactics for reducing the expenses and strengthening incomes.

    4. Final accounts serve as a purpose and facilitate the preparation of financial ratios by using trading and profit & loss accounts information. For example- Gross Profit Ratio, Net Profit Ratio, Operating Ratio etc.,

    5. Final accounts are prepared to ascertain the financial and liquidity position of an organization on a certain date by providing and reflecting the exact value of assets and liabilities. The current values shown under the various heads of the balance sheet is used for comparing it with the previous years’ figures to evaluate changes in the financial position.

    6. Final accounts are prepared with an objective to determine the solvency position of the business. It states that business must have an ability to meet short-term solvency by calculating Current Ratio and Liquidity Ratio. Similarly, long-term solvency can be achieved by computing Debt-equity Ratio and Proprietary Ratio.

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