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Is sales return a debit or credit?

Ahuja Sahil
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Overview of Sales Return

When the customer returns the goods purchased back to the seller, the transaction is referred to as a sales return. It is also known as Return Inwards. The buyer may return the goods to the seller due to excessive purchases, defective goods, or any such reason. For recording this transaction, adjustments can be made to the Sales A/c or a separate Sale Return A/c can be created in the books of the business.

The sales account has a credit balance, so when a sales return occurs, it decreases the sales, which is why the sales return account is debited and the respective accounts receivable are credited.

When the customer returns the goods to the business, it reduces the Accounts Receivable and is a ‘loss’ or ‘expense‘ for the organization, hence sales return is a nominal account and is debited in the books of the organization.

 

As per Modern Rules

Account Increase Decrease
Expense Debit (Dr.) Credit (Cr.)

Sales Return is Debited (Dr.) when increased & credited (Cr.) when decreased.

Why is it like this?

This is a rule of accounting that is not to be broken under any circumstances.

How is it done?

For example, ABC Corporation sold goods to their customer on credit. Upon delivery of the goods, the customer found a few defective items which they returned to the organization. In the financial books, the Sales return account will be debited since it is an increase in expense for the organization.

Given below is the timeline of how it would be recorded in the financial books.

Step 1 – The following journal entry is recorded in the books of accounts when the defective items are returned. (Rule Applied – Dr. the increase in expense)

Sales Return A/c Debit
 To Debtor A/c Credit

(Goods returned by the customer.)

 

Step 2 – To transfer the expense to “Trading A/c”.

Trading A/c Debit
 To Sales Return A/c Credit

(Goods returned by the customer are transferred to the trading account)

 

As per the Golden Rules of Accounting

Account Rule for Debit Rule for Credit
Nominal All Expenses and Losses All Incomes and Gains

Sales Return (Expense) is Debited (Dr.)

As per the golden rules of accounting for (nominal accounts) expenses and losses are to be debited.

The account of expenses, losses, incomes, and gains are called Nominal accounts. The balance of these accounts is always zero at the beginning of the financial year. Since the sales return is an expense for the business, it is to be debited.

Example

For example, XYZ Corporation sold goods to their customer on credit. Upon delivery of the goods, the customer found a few defective items which they returned to the organization. In the financial books, the Sales return account will be debited since it is an expense for the organization.

Step 1 – For the above example, the journal entry for the goods returned, “Sales Return A/c” is debited. ( Rule Applied – Dr. all incomes and gains)

Sales Return A/c Debit
 To Accounts Receivable A/c Credit

(Goods returned by the customer.)

 

Step 2 – To transfer the expense to the “Trading Account”

Trading A/c Debit
 To Sales Return A/c
 Credit

(Goods returned by the customer are transferred to the trading account)

 

Sales Return Inside Trial Balance

Sales returns show a debit balance in the trial balance. A trial balance example showing a debit balance for sales return is provided below.

Sales return in trial balance

 

Read

 

How is return outwards treated in trial balance?

Ahuja Sahil
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-This question was submitted by a user and answered by a volunteer of our choice.

Return Outwards

In layman’s language, return outwards refers to the goods returned by the customer to the supplier (or) manufacturer due to various issues found in the goods (say- quality, defects, or damages). Return outwards is also known as purchase returns.

The amount of return outwards (or) purchase returns is deducted from the total purchases of the firm. It is treated as a contra-expense transaction. A Contra expense account is a ledger account where the expenses are deducted from gross revenue or sales.

Return outwards holds the credit balance and is placed on the credit side of the trial balance.

Journal Entry for Return Outwards

As per modern rules, 

a) Entry for the purchase of goods

Particulars Debit Credit Modern rules
Purchases A/c Amt Increase in expenses
   To Supplier’s A/c Amt Increase in liability

This journal entry is passed when the goods are being purchased. The purchases account is debited since it is an increase in expenses. The supplier’s account is credited since this is leading to an increase in liability.

b)Entry on the return of goods purchased

Particulars Debit Credit Modern rules
Supplier’s A/c Amt Decrease in liability
  To Purchases A/c Amt Decrease in Expenses

This journal entry is passed for purchase returns or return outwards. As there is a returns taking place, it is reducing the expenses hence the purchases account is credited. The supplier’s account is debited since there is decrease in liability as he is returning the goods.

As per traditional rules, 

a) Entry for the purchase of goods

Particulars Debit Credit Rules
Purchases A/c Amt Debit the expenses, losses
 To Supplier’s A/c Amt Credit the giver

As purchases are an expense it is a nominal account, hence it is debited. The supplier’s account is a personal account, hence the account is credited since he is the giver.

b)Entry on the return of goods purchased

Particulars Debit Credit Rules
Supplier’s A/c Amt Debit the receiver
 To purchases A/c Amt Credit the income, gain

As the purchases are being sent back to the supplier, the supplier account is debited as per the personal account rule. The purchase account is credited since it is being sent back to the supplier.

Example

Mr Alex purchases 10 washing machines for 1,00,000 from Amazon on a credit period of 30 days. On 20th April he returns all the washing machines to Amazon due to the serious defects in all of its models. Pass journal entries for the above transaction in the books of Mr. Alex.

 

In the books of Mr Alex 

a) As per traditional approch

Date Particulars L.F. Amount Nature of Account Accounting Rule
20th April Amazon A/c Dr 100,000 Personal Debit- The receiver
 To Purchases A/c  100,000 Nominal Credit- The income and gain

(Being goods returned to Amazon due to serious defects)

 

b) As per modern approch

Date Particulars L.F. Amount Nature of Account Accounting Rule
20th April Amazon a/c Dr 100,000 Liability Debit- The Decrease in Liability
 To Purchase returns a/c  100,000 Expense Credit- The Decrease in Expense

(Being goods returned to Amazon due to serious defects)

 

Placement in Trial Balance

Return Outwards

Return outwards appears on the credit side of the trial balance because it will be used to decrease total purchases (contra expense). Secondly, this will reduce inventory leading to a decrease in current assets.

A trading account consists of direct expenses and revenue. As purchases are a direct expense for the company, the purchase returns or returns outwards will be subtracted from the total purchases on the debited side.

Benefits of Returns Outwards subsidiary book

  • It helps in keeping track of purchase returns accurately and shows better inventory management.
  • This shows the company’s transparency while maintaining the books and their accountability to clear disputes related to returns. This also shows the company’s responsibilty.

 

 

 

Is sales ledger control account a debit or credit?

Ahuja Sahil
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Overview of Sales Ledger Control Account

A sales Ledger Control Account (SLCA) is a summarized ledger of all the trade debtors of the entity. This Control Account typically looks like a “T-account” or a replica of an Individual Trade Receivable (Debtor) account. But instead of containing transactions of invoices, returns, and receipts, etc related to one debtor, it contains summarized transactions of invoices, returns, and receipts, etc related to all the debtors of the business.

A sales Ledger Control Account is also referred to as a “Trade Debtors Control Account”. It indicates the total amount the debtors owe to the business entity at a particular point in time. Therefore, it is a “short-term asset” for the business entity and forms part of the balance sheet.

Thus, the Sales Ledger Control Account is debited if its balance increases & credited if its balance decreases. The balance of the SLCA should equal the sum of the balances of the individual customer accounts. If discrepancies arise, then they should be investigated.

 

As per the Modern Rules of Accounting

Account Increase Decrease
Asset Debit (Dr.) Credit (Cr.)

Sales Ledger Control Account (asset) is Debited (Dr.) when increased & Credited (Cr.) when decreased.

Why is it like this?

Since it indicates the total trade receivables, it shows a debit balance and the modern rule of accounting cannot be broken under any circumstances.

How is it done?

Suppose the following were during the year transactions with the Debtors Sugar Inc. & Chocolate Inc. along with the outstanding balance as of 31/12/20×2.

Particulars Sugar Inc. Chocolate Inc.
Opening balance 140,000 –
Credit Sales 250,000 400,000
Discount allowed 10,000 30,000
Sales returns 15,000 10,000
Payment received 95,000 120,000
Bad Debts 30,000 –
Interest charged on the overdue amount – 10,000
Dishonored cheques 25,000 20,000
Outstanding balance as of 31/12/20×2 265,000 270,000

Sales Ledger Control Account for the year 01/01/20×2 to 31/12/20×2 will be presented as follows-

 

Sales Ledger Control A/c modern rules example

The balance of SLCA ie. 535,000 is equal to the sum of the balance of individual outstanding debtors ie. 265,000 + 270,000 = 535,000.

You can see that the transactions which increase the balance of SLCA are debited & decrease the balance are credited. Also, it is depicting a debit balance.

 

As per the Golden Rules of Accounting

Account Rule for Debit Rule for Credit
Personal Debit the Receiver Credit the Giver

The Sales Ledger Control Account (asset) is debited as per the Golden Rules.

The individuals and other organizations that have direct transactions with the business are called personal accounts. SLCA indicates total trade receivables at a given point in time, and since trade receivables are personal accounts, SLCA also operates according to the golden rule for personal accounts.

As per the golden rules of accounting (for personal accounts), assets are debited. In other words, the giver of the benefit is a liability to the one who receives it.

Example

Suppose the following were during the year transactions with the Debtors Tea Inc. & Coffee Inc. along with the outstanding balance as of 31/12/20×2.

Particulars Tea Inc. Coffee Inc.
Opening balance 150,000 –
Credit Sales 250,000 400,000
Discount allowed 10,000 20,000
Sales returns 10,000 10,000
Payment received 100,000 110,000
Bad Debts 30,000 –
Interest charged on the overdue amount – 10,000
Dishonored cheques 25,000 20,000
Outstanding balance as of 31/12/20×2 275,000 290,000

Sales Ledger Control Account for the year 01/01/20×2 to 31/12/20×2 will be presented as follows-

Sales Ledger Control A/c golden rules example

The balance of SLCA ie. 565,000 is equal to the sum of the balance of individual outstanding debtors ie. 275,000 + 290,000 = 565,000.

You can see that SLCA is depicting a debit balance.

Sales Ledger Control Account in Trial Balance

SLCA shows a debit balance in the trial balance. A trial balance example showing a debit balance for SLCA is provided below.

Trial balance Dr balance for Sales Ledger Control Account

 

 

4 Ways Small Businesses Can Save Money by Hiring an Accountant

Ahuja Sahil
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As a small business owner, there is no doubt you are very mindful of the money being spent. Small businesses don’t always have a lot of excess cash flow, and expenses need to make sense for the company. Trying to save the company money could be one of the reasons why you’ve been doing your own bookkeeping up until this point, rather than hiring an accountant. However, did you know that doing your bookkeeping could be costing you more money than actually hiring a professional?

Here we’ll take a look at four ways in which a company can save money and benefit by hiring a small business accountant. It may surprise you just how useful an accountant can be.

 

Reduce the Errors Being Made

Unless you are a trained professional, there are bound to be errors in your bookkeeping. Even seemingly small errors can end up costing the company money, and they add up over time. By hiring a professional account, you’ll reduce the errors being made, making sure that expenses and profits are carefully tracked and recorded.

Besides accurately tracking everything, this will also give you a more complete picture of your business. You can see where the money is being spent, trends that are happening and potential areas in which you can start to cut costs.

 

An Accountant Knows the Tax Laws and Regulations

There are also plenty of tax laws, regulations and even loopholes that business owners should be aware of and take advantage of, but again, unless you are a trained professional, you won’t know these essentials. An accountant will make sure everything is on the up and up, and if there are any places for tax savings or breaks, they will find them. If you’re looking for a small business accountant, check out sanjayguptacpa.com.

 

Never Incur a Tax Penalty Again

How many times have you filed your taxes late because, let’s face it, it’s a lot of work? Unfortunately, filing late means you incur tax penalties and this is an added cost. Rather than face these penalties yearly, hire an accountant to make sure you file by the deadline.

 

They Can Help You to Plan for the Future

Then there is the fact that an accountant can offer valuable advice and insight for the future of your business. Perhaps you are thinking of expanding into new markets in the future, maybe you want to invest in new assets and equipment, or even purchase additional office or warehouse space? An accountant can help you to make those financial plans and set targets and goals you can follow. Careful planning means you won’t make costly mistakes.

If you’re on the fence about hiring a small business accountant, the facts are very clear; not only will they take a load of responsibility and work off your shoulders, but they can also help your company to save money in many different ways. It just makes smart business and financial sense to hire one.

 

 

The Digital Transformation and Benefits of Online Lending

Ahuja Sahil
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0

Traditional lending is generally a long and drawn-out process, as most borrowers can relate to. Completing all required documentation and going through approval processes within a financial institution could take weeks or even months. The stringent requirements often leave out small borrowers who don’t have collateral, a good credit score, or the income stream required by these large institutions. As a result, they often ended up going to loan sharks who are not licensed or registered, putting them at risk of predatory interest rates and even harassment.

 

From Traditional to Digital Lending

Digitalization, or the use of digital technologies to change a business model, has spawned a whole new wave of lending options in recent times. With the exponential growth of financial activities in the digital space, many financial transactions that used to require a visit to a financial institution and submission of pages of documentation are now being conducted over the internet. 

Potential borrowers were able to browse the websites of different financial institutions, compare their rates, and fill in an application form from the comfort of their homes. As the popularity of apps arose, Silicon Valley, and online technology companies in other countries, began developing lending apps that further added to the convenience of a loan application.

 

Benefits

Online lending brings several benefits for an individual needing emergency funding or an entrepreneur seeking finance for business expansion.

Increased financial inclusion

While there are still many underbanked and unbanked individuals, the growth of mobile use has allowed these people to go online, download lending apps, and apply for credit. 

Faster processing time

A Federal Reserve Bank survey conducted in 2019 found that 46% of respondents found the waiting period for their credit application too long while only 12% of those who used online lending platforms complained. 

It is not only the application process that is sped up, but also the payment of loan proceeds. In traditional lending, a loan check could go through several signatories before it can be released to the bank account of the borrower. Then the check has to be cleared before the borrower could get the money. With online lending, the loan can be approved as soon as 24 hours and the borrower’s bank account is immediately credited.

Easier comparison across lending companies

With many lending companies accessible through their websites and/or apps, it is so much easier for borrowers to compare interest rates and other information such as fees, penalties, and documentation required. Quick loans that do not require collateral have much higher interest rates than secured loans so comparing across different companies can get one the best terms.

Greater chance of loan approval

There are now licensed and registered online lending companies that cater to the borrowing sector that often has no collateral and poor credit scores. Traditional lending would likely reject these people. However, they have a greater chance of getting a personal loan when applying with an online lending company. It’s important to check that the lending company is duly registered, but there is now an opportunity for this sector to readily borrow online.

As new technologies expand what can be done online, it is also expected that online lending platforms will likewise grow. If we are to go by the current trends and as we see a digital transformation happening in many companies, there is more to look forward to with online lending platforms.

 

 

Adjustments in Final Accounts

Akriti
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What are adjustments in accounting? It all starts mainly with the accrual concept of accounting, which says that all incomes earned and expenses incurred during an accounting period should be recorded whether or not money has exchanged hands or not. This is the primary reason for the need for adjustments in final accounts.

Why are adjustments important in final accounts? If such adjustments in preparation of financial statements are missed then the numbers shown by the business in their final accounts will not be accurate and true. Journal entries are posted to reflect any necessary adjusting entries.

List of Adjustments in Final Accounts

Adjustments in final accounts refer to changes made to certain financial entries at the end of an accounting period. These adjustments are crucial for presenting a true and fair view of a company’s financial status. In this article, we have covered the following list:

  1. Closing Stock
  2. Outstanding Expenses
  3. Prepaid or Unexpired Expenses
  4. Accrued or Outstanding Income
  5. Income Received In Advance or Unearned Income
  6. Depreciation
  7. Bad Debts
  8. Provision for Doubtful Debts
  9. Provision for Discount on Debtors
  10. Manager’s Commission
  11. Interest on Capital
  12. Goods Distributed among Staff Members for Staff Welfare
  13. Drawing of Goods for Personal Use
  14. Abnormal or Accidental Losses

 

Remember: Adjustments would appear outside the trial balance.

 

Adjustment of Closing Stock

Whatever stock of goods is remaining at the end of an accounting year is known as ‘closing stock’. This becomes the opening stock of the very next period. Oftentimes closing stock is not shown in the trial balance.

Journal Entry for Adjustment of Closing Stock in Final Accounts

Closing Stock A/C Debit
 To Trading A/C Credit

(Recording ending inventory)

Closing stock is valued at cost or market value (aka net realizable value), whichever is less.

 

Treatment of Closing Stock Adjustment in Financial Statements

  • Trading Account:  Show on the credit side
  • Profit & Loss Account: No effect
  • Balance Sheet: Show on the assets side (usually under the head current assets)

 

Example

A company evaluates its closing stock at Rs 25,000, show the adjustment of closing stock in final accounts at the end of the year.

Adjustment of Closing Stock in Final Accounts

 

Adjustment of Outstanding Expenses

Expenses incurred but not paid yet are called outstanding expenses. In order to avoid overstating profits adjustments in final accounts are recorded. Examples: Outstanding Rent, Salary, Wages, Interest, etc.

Journal Entry for Adjustment of Outstanding Expenses in Final Accounts

Expense A/C Debit
Input CGST A/C Debit
Input SGST A/C Debit
 To Outstanding Expense A/C Credit

(Recording unpaid expenses)

 

Treatment of Outstanding Expenses Adjustment in Financial Statements

  • Trading Account:  Show on the debit side (add to respective direct expense)
  • Profit & Loss Account: Show the debit side (add to respective indirect expense)
  • Balance Sheet: Show on the liability side (usually under the head current liabilities)

 

Example

Suppose a company paid Rs 10,000 in salaries during the year and evaluates outstanding salaries at Rs 2,000 at the end, showing the adjustment of outstanding expenses in final accounts.

Adjustment of Outstanding Expenses in Final Accounts

 

Adjustment of Prepaid Expenses or Unexpired Expenses

Such expenses are also called expenses paid in advance. Prepaid expenses are expenses that are paid in advance for a benefit that is not received yet.

In order to avoid understating profits, it is crucial to record them towards the end of an accounting year. Examples: Prepaid rent, prepaid interest, prepaid insurance, etc.

Journal Entry for Adjustment of Prepaid Expenses in Final Accounts

Prepaid Expense A/C Debit
 To Expense A/C Credit

(Recording expenses paid in advance, GST paid is not transferred in Prepaid Expense A/C)

 

Treatment of Prepaid Expenses Adjustment in Financial Statements

  • Trading Account:  Show on the debit side (subtract from the respective direct expense)
  • Profit & Loss Account: Show the debit side (subtract from the respective indirect expense)
  • Balance Sheet: Show on the assets side (usually under the head current assets)

 

Example

A company paid Rs 10,000 in rent during the year and evaluates prepaid rent at Rs 3,000 at the end, show the adjustment of prepaid expense in final accounts.

Adjustment of Prepaid Expense in Final Accounts

 

Adjustment of Accrued Income or Outstanding Income

Such expenses are also called income earned but not yet received. Accrued income is the income that the business has already earned, however, it has not been received yet. Examples: accrued rent, commission due but not received, etc.

Journal Entry for Adjustment of Accrued Income in Final Accounts

Accrued Income A/C Debit
 To Income A/C Credit
 To Output CGST A/C Credit
 To Output SGST A/C Credit
 To Output IGST A/C Credit

(Recording income earned but not received)

 

Treatment of Accrued Income Adjustment in Financial Statements

  • Trading Account:  No effect
  • Profit & Loss Account:  Show on the credit side (Add to respective income)
  • Balance Sheet: Show on the assets side (usually under the head current assets)

 

Example

A firm received Rs 10,000 in rent during the year and estimates rent due but not received at Rs 5,000 at the period close, show the adjustment of accrued income in final accounts.

Adjustment of Accrued Income in Final Accounts

 

Adjustment of Income Received in Advance

It is also called unearned income. Income received in advance is the income that the business has already received, however, it has not been earned yet. Examples: Rent received in advance, Commission received in advance, etc.

Journal Entry for Adjustment of Income Received in Advance in Final Accounts

Income A/C Debit
 To Income Received in Advance A/C Credit
 To Output CGST A/C Credit
 To Output SGST A/C Credit

(Recording income received but not earned)

 

Treatment of Income Received in Advance in Financial Statements

  • Trading Account:  No effect
  • Profit & Loss Account:  Show on the credit side (Subtract from the respective income)
  • Balance Sheet: Show on the liability side (usually under the head current liabilities)

 

Example

A firm received Rs 10,000 in rent during the year and estimates rent received but not due Rs 6,000 at the period close, show the adjustment of income received in advance in final accounts.

Adjustment of Income Received in Advance in Final Accounts

 

Adjustment of Depreciation

It is a non-cash expense i.e. it is not paid in form of cash or a cash equivalent. Depreciation is the allocation of the cost of a fixed asset over its estimated useful life. Since fixed assets are utilized to earn revenue, a decrease in their value is treated as an expense incurred to earn the said revenue.

 

When Provision for Depreciation is Not Maintained

Journal Entry When Provision is Not Maintained

Depreciation A/C Debit
 To Asset A/C Credit

(Charging depreciation on fixed asset)

 

Profit and Loss A/C Debit
 To Depreciation A/C Credit

(Depreciation charged transferred to Profit & Loss A/C)

 

Treatment of Depreciation in Financial Statements (No Provision)

  • Trading Account:  No effect
  • Profit & Loss Account:  Show on the debit side (calculate as per % & method given)
  • Balance Sheet: Show on the asset side (subtract depreciation from the fixed asset)

 

Example

The trial balance of a business shows furniture at Rs 10,000.

Additional Information: Depreciation of 10% p.a. is charged using the straight-line method. Show the adjustment of depreciation in final accounts when provision for depreciation not maintained.

Adjustment of Depreciation in Final Accounts or Financial Statements (Without Provision)

 

When Provision for Depreciation is Maintained

Journal Entry When Provision is Maintained

Depreciation A/C Debit
 To Provision for Depreciation A/C Credit

(Being provision for depreciation made)

 

Step 2

Profit and Loss A/C Debit
 To Depreciation A/C Credit

(Depreciation charged transferred to Profit & Loss A/C)

 

Treatment of Depreciation in Financial Statements (Provision for Depreciation is Maintained)

  • Trading Account:  No effect
  • Profit & Loss Account:  Show on the debit side (calculate as below)
    • Calculation: % of Depreciation * (Fixed Asset – Provision for Fixed Asset)
  • Balance Sheet: Show on the asset side (subtract total accumulated depreciation from the fixed asset)

New accumulated depreciation = Original provision for depreciation + new depreciation amount

Note – Provision for depreciation is the same as accumulated depreciation and the terms may be used synonymously.

 

Example

The trial balance of a business shows furniture at Rs 10,000 and provision for depreciation on furniture at 2,000.

Additional Information: Depreciation of 20% p.a. is charged using the straight-line method. Show the adjustment of depreciation in final accounts when provision for depreciation is maintained.

Adjustment of Depreciation in Final Accounts or Financial Statements (When Provision Maintained)

 

Adjustment of Bad Debts

Not all the debtors of a business may be able to pay 100% of their debts at all the time. This may lead to a loss to the receiving business and is termed as bad debts.

Journal Entry for Adjustment of Bad Debts in Final Accounts

Bad Debts A/C Debit
 To Debtor’s A/C Credit

(Recording bad debts)

 

Step 2

Profit and Loss A/C Debit
 To Bad Debts A/C Credit

(Bad debts transferred to Profit & Loss A/C)

 

Treatment of Bad Debts in Financial Statements

Situation 1 – When bad debts are given inside the trial balance – No Adjustment, only show in P&L

Situation 2 – When bad debts are given outside the trial balance as an adjustment – They are called further bad debts and adjustments in final accounts are posted.

  • Trading Account:  No effect
  • Profit & Loss Account:  Show on the debit side (add to bad debts already written off)
  • Balance Sheet: Show on the asset side (subtract from sundry debtors)

 

Journal Entry for Adjustment of Further Bad Debts in Final Accounts

Bad Debts A/C Debit
 To Debtor’s A/C Credit

(Recording further bad debts)

 

Example

The trial balance of a business shows bad debts at Rs 5,000 & debtors at 10,000.

Additional Information: Written off 2,000 as further bad debts. Show the adjustment of further bad debts in final accounts

Adjustment of Bad Debts in Final Accounts or Financial Statements

 

Adjustment of Provision for Doubtful Debts

The accounting concept of prudence and conservatism cautions that each business should be ready to absorb all anticipated losses. Due to this, all businesses provide for possible bad debts arising due to non-payment by creditors in form of provision for doubtful debts.

 

When Provision for Doubtful Debts does not Appear in Trial Balance

Journal Entry for Adjustment of Provision for Doubtful Debts in Final Accounts

Profit and Loss A/C Debit
 To Provision for Doubtful Debts A/C Credit

(Recording provision for doubtful debts)

 

Treatment of Provision for Doubtful Debts in Financial Statements

  • Trading Account:  No effect
  • Profit & Loss Account:  Show on the debit side (calculate as % on Debtors)
  • Balance Sheet: Show on the asset side (subtract from sundry debtors)

Note: Provisions do not reduce the amount due from debtors.

 

Example

The trial balance of a business shows sundry debtors at Rs 10,000.

Additional Information: Create a provision for 5% on Debtors. Show the adjustment of provision for doubtful debts in final accounts.

Adjustment of Provision for Doubtful Debts in Final Accounts or Financial Statements

 

Adjustment of Provision for Discount on Debtors

A cash discount is provided to debtors as an encouragement for early payments. In some cases the payment may be received in the next accounting year this means that as per the accrual concept of accounting such discounts should be treated as an expense in the current year. When such a provision is created it is called a provision for discount on debtors.

Journal Entry for Adjustment of Provision for Discount on Debtors in Final Accounts

Profit and Loss A/C Debit
 To Provision for Discount on Debtors A/C Credit

(Recording provision for discount on debtors)

 

Treatment of Provision for Discount on Debtors in Financial Statements

  • Trading Account:  No effect
  • Profit & Loss Account:  Show on the debit side (calculate on good debtors i.e. after adjusting bad debts & provision for doubtful debts)
  • Balance Sheet: Show on the asset side (subtract from sundry debtors)

 

Example

The trial balance of a business shows sundry debtors at Rs 10,000.

Additional Information: Assume nil bad debts and provision for bad debts. Create a provision for a discount of 10% on debtors. Show the adjustment of provision for discount on debtors in final accounts.

Adjustment of Provision for Discount on Debtors in Final Accounts or Financial Statements

 

Adjustment of Manager’s Commission

A business may decide to share a fixed percentage of profits with the managers in the form of a commission. It is called a manager’s commission and it may be calculated on profits before or after charging such commission.

 

Manager’s Commission Payable Before Charging the Commission

In this situation, the calculation is simply done by multiplying the rate of commission with the amount of net profit earned by the business.

Formula to calculate:

Formula to calculate Manager's Commission before charging the commission

 

Journal Entry for Adjustment of Manager’s Commission in Final Accounts

Profit and Loss A/C Debit
 To Manager’s Commission Payable Credit

(Recording outstanding commission payable to managers)

 

Treatment of Manager’s Commission in Financial Statements

  • Trading Account:  No effect
  • Profit & Loss Account:  Show on the debit side as an expense
  • Balance Sheet: Show on the liability side (usually under the head current liabilities)

 

Manager’s Commission Payable After Charging the Commission

In this situation, the calculation is done on the net profit remaining after such a commission is charged.

Formula to calculate:

Formula to calculate Manager's Commission after charging the commission

Treatment in the final account remains the same in both cases.

 

Example

Net profit shown in the income statement is Rs 31,000.

Additional Information: The manager is entitled to a commission of 10% after charging such a commission. Show adjustment of the manager’s commission in final accounts.

Adjustment of Manager's Commission in Final Accounts or Financial Statements

Working Note

Net Profit = Rs 31,000

Formula (shown above) =  (Manager’s Commission Rate % / 100 + Manager’s Commission Rate) * Net Profit

(10% / 100 + 10%) * 31,000 = 2,818 Rs

 

Adjustment of Interest on Capital

When the owner of a business invests money in a business it is termed as capital. It is a common practice for the business to pay some form of (pre-decided) interest on capital. Such an interest paid is treated as an expense and is charged before determining the net profit or net loss of a business.

Journal Entry for Adjustment of Interest on Capital in Final Accounts

Interest on Capital A/C Debit
 To Capital A/C Credit

(Recording interest on capital)

 

Step 2

Profit and Loss A/C Debit
 To Interest on Capital A/C Credit

(Interest charged on capital transferred to Profit & Loss A/C)

 

Treatment of Interest on Capital Adjustment in Financial Statements

  • Trading Account:  No effect
  • Profit & Loss Account: Show the debit side
  • Balance Sheet: Show on the liability side (Add to owner’s capital)

Note: If interest on capital is given in the trial balance then it will be shown only in the Profit and Loss account as the credit entry has already been passed.

 

Example

Capital is Rs 10,000 for the business.

Additional Information: The owner is entitled to 5% interest on capital. Show adjustment of interest on capital in final accounts.

Adjustment of Interest on Capital in Final Accounts or Financial Statements

 

Adjustment of Goods Distributed among Staff Members for Staff Welfare

Employees may receive goods as a part of staff welfare, this transaction should be adjusted in monetary terms to determine the accurate net profit or net loss to the business. Adjustments in final accounts are passed to record this expense, usually against purchases.

Journal Entry for Goods Distributed among Staff Members for Staff Welfare in Final Accounts

Staff Welfare Expense A/C Debit
 To Purchases A/C Credit
 To Input CGST A/C Credit
 To Input SGST A/C Credit

(Recording staff welfare expenses for goods distributed)

Note: GST (CGST, SGST, IGST, etc. is reversed as tax paid on these goods can not be setoff against tax collected)

 

Treatment of Goods Distributed among Staff Members for Staff Welfare in Financial Statements

  • Trading Account:  Debit Side (Subtract from purchases) or Show on Credit Side
  • Profit & Loss Account: Debit side (Shown as ‘Staff Welfare Expense’)
  • Balance Sheet: Show on the liability side (Add to owner’s capital)

 

Example

Net purchases are Rs 5,000 for the business.

Additional Information: The company distributed goods among staff members for staff welfare worth Rs 1,000. Show the adjustment of goods distributed among staff members for staff welfare in final accounts.

Adjustment of Goods Distributed among Staff Members for Staff Welfare in Final Accounts or Financial Statements

 

Adjustment of Drawings of Goods for Personal Use

The owner of a business may choose to withdraw cash or goods from their own business this is not an uncommon practice. It is called drawings and it reduces the total purchases of a company.

GST is reversed on these goods as tax paid on them cannot be set off against tax collected. The entry is made at the cost price because no profit is earned.

Journal Entry for Drawings of Goods for Personal Use in Final Accounts

Drawings A/C Debit
 To Purchases A/C Credit
 To Input CGST A/C Credit
 To Input SGST A/C Credit

(Recording drawings in form of goods for personal use)

 

Treatment of Goods Taken for Personal Use in Financial Statements

  • Trading Account:  Debit Side (Subtract from purchases)
  • Profit & Loss Account: No effect
  • Balance Sheet: Show on the liability side (Subtract from owner’s capital)

 

Example

Net purchases are Rs 7,000 for the business and Capital is Rs 10,000.

Additional Information: The owner took goods from the business for personal use worth Rs 2,000. Show the adjustment of drawings of goods for personal use in final accounts.

Adjustment of Drawings of Goods for Personal Use in Final Accounts or Financial Statements

 

Adjustment of Abnormal or Accidental Loss

Accidental losses or abnormal losses are incurred when a business suffers any type of loss due to a fire, an accident, an earthquake, or some other natural calamity.

The loss is booked in the profit and loss account and the asset account is credited. The stock of goods may be destroyed which leads to a decrease in gross and net profit of the firm. GST is reversed on these goods as tax paid on them cannot be set off against tax collected.

 

If Goods are Not Insured

Journal Entry for Abnormal or Accidental Loss in Final Accounts (Goods Not Insured)

Profit and Loss A/C Debit
 To Trading A/C Credit
 To Input CGST A/C Credit
 To Input SGST A/C Credit

(Recording total value of abnormal loss)

 

Treatment of Abnormal or Accidental Loss in Financial Statements (Goods Not Insured)

  • Trading Account: Show on the credit side (with the cost of goods destroyed)
  • Profit & Loss Account:  Show on the debit side (with the cost of goods destroyed)
  • Balance Sheet: No effect

 

If Goods are Insured

Journal Entry for Abnormal or Accidental Loss in Final Accounts (Goods Insured)

Accidental Loss A/C Debit
 To Trading A/C Credit
 To Input CGST A/C Credit
 To Input SGST A/C Credit

(Recording total value of abnormal loss)

 

Step 2

1 Insurance Claim A/C Debit
2 Profit and Loss A/C Debit
3  To Accidental Loss A/C Credit

(Adjusting the insurance claim received)

  1. Amount of insurance claim
  2. Amount of irrecoverable loss
  3. Total abnormal loss

 

Treatment of Abnormal or Accidental Loss in Financial Statements (Goods Insured)

  • Trading Account: Show on the credit side (with the cost of goods destroyed)
  • Profit & Loss Account:  Show on the debit side (with the cost of goods destroyed)
  • Balance Sheet: No effect

 

Example

Due to a fire in the storehouse, a business lost goods costing Rs 9,000 which were purchased at 5% GST. As the goods were insured the insurance company paid Rs 8000 lump sum to settle the claim. Show the adjustment of abnormal or accidental loss in final accounts.

Adjustment of Abnormal or Accidental Loss in Final Accounts or Financial Statements

 

>Read Journal Entry for Amortization

 

Accounting and Journal Entry for Salary Paid

Vaishnavi_Shetty
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Journal Entry for Salary Paid

Salary is an indirect expense incurred by every organization with employees. It is paid as a consideration for the efforts undertaken by the employees for the business. Salary expense is recorded in the books of accounts with a journal entry for salary paid.

Salary is among the most recurring transactions and paid on a periodical basis. The amount of salary payable by the employer to the employee is specified in the employment contract.

 

Journal entry for salary paid (in cash/cheque)

Salary paid journal entry

Accounting rules applied – Modern Rules

Salary Account Debit Debit the increase in expense
Cash/Bank Account Credit Credit the decrease in asset

Accounting rules applied – Three Golden Rules

Salary Account Debit Debit all expenses – Nominal A/C
Cash/Bank Account Credit Credit what goes out – Real A/C

 

Accounting Treatment for Salary Payment

The life cycle to account for payment of salary expense (in cash/cheque) goes through a couple of steps as shown below;

Step 1 – Journal entry for salary paid (in cash/cheque)

Salary A/C Debit
 To Cash/Bank A/C Credit

 

Step 2 – Transferring salary expense into income statement (profit and loss account).

Income Statement Debit
 To Salary A/C Credit

 

Presentation in the Financial Statements

It is shown on the debit side of an income statement (profit and loss account)

Salary expense in P&L

 

Example

On the last day of every month, Unreal Corporation pays salaries to its employees amounting to 250,000. The payment relates to the salary due for the same month. Show related journal entries for salary paid in the books of Unreal Corporation.

End of every month – Journal entry at the time of payment of salary

Salary A/c 250,000
 To Cash/Bank A/c  250,000

 

End of every month/year – When the business posts closing entries

Income Statement 250,000
 To Salary A/c  250,000

 

Journal Entry for Salary Paid in Advance

Salary paid in advance is also known as prepaid salary (it is a prepaid expense). It is the amount of salary paid by an entity in advance but the corresponding work-effort equivalent to the advance salary paid is yet to be received from the employee. The money paid relates to a future accounting period.

It is presented as a current asset in the balance sheet, as it is an advance payment made by the firm.

 

Journal Entry

Prepaid Salary A/C Debit Debit the increase in asset
 To Salary A/C Credit Credit the decrease in expense

(Being salary paid in advance/ prepaid salary adjusted at the end of the period)

 

Example – On 31st March ABC Co. paid salary amounting to 45,000 (15,000 x 3) for the month of March, April & May to one of its employees. Show journal entries to be posted in the books of ABC Co.

March 31 – Journal entry at the time of payment of salary.

Salary A/c 45,000
 To Cash/Bank A/c  45,000

 

March 31 – Journal entry for adjustment of prepaid salary (for April & May) at the end of March.

Prepaid Salary A/c 30,000
 To Salary A/c  30,000

 

April 1 & May 1 – Journal entry for salary obligation charged against the salary paid in advance.

Salary A/c 15,000
 To Prepaid Salary A/c  15,000

Related Topic – Inflation Accounting

 

Journal Entry for Salary to Partners

Salary is paid to the partners of the partnership firm only if it is specified in the partnership deed.

 

Journal Entry

The following are the steps to record the journal entry for salary to partners.

Step 1 – Journal entry for salary due.

Partner’s Salary A/C Debit
 To Partner’s Capital/Current A/C Credit

Partner’s Capital A/c to be credited if capitals are fluctuating.
Partner’s Current A/c to be credited if capitals are fixed in nature.

 

Step 2 – Transferring partners salary to Profit & Loss Appropriation A/c

Profit & Loss Appropriation A/C Debit
 To Partner’s Salary A/C Credit

Salary to partners is an appropriation of profits, therefore Profit & Loss Appropriation A/c is debited.

 

Step 3 – Journal entry at the time of payment of salary to partners

Partner’s Capital/Current A/C Debit
 To Cash/Bank A/C Credit

 

Example – A & B are partners of AB Ltd. As per the terms of the partnership deed, they are allowed a monthly salary of 25,000 each. Assume partner’s capitals are fluctuating. Show related journal entries to be posted in the books of AB Ltd.

End of each month – Journal entry for salary due by crediting the partner’s salary to the partner’s capital account

Partner’s Salary A/c 50,000
 To A’s Capital A/c  25,000
 To B’s Capital A/c  25,000

 

End of each month/year – Journal entry for transferring partners salary to Profit & Loss Appropriation A/c

Profit & Loss Appropriation A/c 50,000
 To Partner’s Salary A/c  50,000

 

On the date of payment – Journal entry for payment of salary to partners

A’s Capital A/c 25,000
B’s Capital A/c 25,000
 To Cash/Bank A/c  50,000

 

Short Quiz for Self-Evaluation

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>Read Accounting and Journal Entry for Rent Paid

 

Accounting and Journal Entry for Rent Received

Ahuja Sahil
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Journal Entry for Rent Received

If a business owns a property that is not being used then it may decide to rent it out and collect periodical payments as rent. Such a receipt is often treated as an indirect income and recorded in the books with a journal entry for rent received. This adds an extra source of income for the firm. The other party may post a journal entry for rent paid in their books.

Rental income received from the tenant is,

  • Recurring in nature
  • Pre-decided amount
  • Received every month
  • Likely shown as “rent received” in the financial statements.

Landlord – The legal owner of the property is called ‘landlord’.

Tenant – The party who rents the property and pays rent to the landlord is called ‘tenant’.

 

Journal entry for rent received (in cash/cheque)

Rent received journal entry

Accounting rules applied – Modern Rules

Cash/Bank Account Debit Debit the increase in asset
 To Rent Account Credit Credit the increase in income

Accounting rules applied – Three Golden Rules

Cash/Bank Account Debit Debit what comes in – Real A/c
 To Rent Account Credit Credit all incomes – Nominal A/c

 

Accounting Treatment for Rent Received

Payment of rent received (in cash/cheque) is treated with a couple of steps as shown below;

Step 1 – Journal entry for rent received (in cash/cheque)

Cash/Bank A/c Debit
 To Rent A/c Credit

 

Step 2 – Transferring receipt of rental income to the income statement (profit and loss account).

Rent A/c Debit
 To Income Statement Credit

 

Presentation in the Financial Statements

It is shown on the credit side of an income statement (profit and loss account).

Rent received in Income statement

 

Example of Receipt of Rent

On the 10th of March, Unreal Corporation received rent 20,000 via a cheque from tenant ABC for one of its property on rent. The receipt relates to the same month. Show related journal entries for office rent received in the books of Unreal Corporation.

March 10 – Journal entry at the time of rent received

Bank A/c 20,000
 To Rent Received from ABC A/c 20,000

 

March 31 – When the business books Closing entries

Rent Received from ABC A/c 20,000
 To Income Statement 20,000

 

Journal Entry for Rent received in Advance

Rent received in advance is the amount of rent received before it was actually due, however, the related benefits equivalent to the advance received are yet to be provided to the tenant. Such an intake of money belongs to the future accounting period.

It is displayed as a “current liability“ in the balance sheet, as it is income received but not earned.

 

Journal Entry

Rent A/c Debit Debit the decrease in income
 To Rent Received in Advance A/c Credit Credit the increase in liability

(Being rent received in advance/ pre-received rent adjusted at the end of the period)

 

Example – On 20th December ABC Ltd received office rent from its tenant in cash 75,000 (25,000 x 3) for the next 3 months ie. Jan, Feb & Mar. The accounting period followed by ABC Ltd is from January to December. Show journal entries to be passed in the books of ABC Ltd.

December 20 – Journal entry at the time of rent received

Cash A/c 75,000
 To Rent A/c 75,000

 

December 31 – Journal entry for adjustment of the rent received in advance at the end of the current accounting period

Rent A/c 75,000
 To Rent Received in Advance A/c 75,000

 

January 1, February 1 & March 1 – Rent income allocated to each of the 3 months

Rent Received in Advance A/c 25,000
 To Rent A/c 25,000

Related Topic – Income Received in Advance

 

Journal Entry for Rent received with TDS & GST

Entities paying GST have to charge GST on the rental services provided by them to the tenants. Also, tenants who have rented the property or office premises have to deduct TDS on the rent amount payable to the landlord.

GST and TDS will be considered taking into account the local tax requirements.

 

Journal Entry

Bank A/c Debit Debit the increase in asset
TDS Asset A/c Debit Debit the increase in asset
  To Rent A/c Credit Credit the increase in income
  To GST Liability A/c Credit Credit the increase in liability

(Being rent received taking into consideration TDS & GST)

  • GST charged is a liability for the entity because it has to be collected from the tenant and deposited with the Government.
  • TDS deducted by the tenant is an asset for the entity ie. the landlord. This is because the tenant will deposit the TDS with the government and then it may be claimed as a tax credit by the landlord.

 

Example – XYZ Ltd charges monthly office rent of 100,000 from its tenant. It also charges GST e.g. 18% on 100,000. On the 10th of every month, the tenant deducts TDS say 10% on the rent amount i.e. 100,000 at the time of payment of rent to XYZ Ltd.

Show journal entries in the books of XYZ Ltd for rent received considering TDS & GST implications.

10th of every month – Journal entry at the time of receipt with TDS & GST

Cash/Bank A/c 1,08,000
TDS Asset A/c 10,000
  To Rent A/c  100,000
  To GST Liability A/c  18,000

 

Short Quiz for Self-Evaluation

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>Read What is Authorized Capital

 

Quiz 10 – Accounts Receivable – Intermediate

Ahuja Sahil
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Quiz 9 – Accounts Payable – Intermediate

Ahuja Sahil
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Quiz 8 – Accounting Terms – Beginner

Ahuja Sahil
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Quiz 7 – Accounting Terms – Beginner

Ahuja Sahil
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Quiz 6 – Accounting Abbreviations – Beginner

Ahuja Sahil
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Quiz 5 – Accounting Abbreviations – Beginner

Ahuja Sahil
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Quiz 4 – Journal Entries – Beginner

Ahuja Sahil
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Quiz 3 – Accounting Fundamentals – Intermediate

Ahuja Sahil
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Quiz 2 – Accounting Fundamentals – Beginner

Ahuja Sahil
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Quiz 1 – Accounting Fundamentals – Beginner

Ahuja Sahil
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Key Emerging Digital Payment Trends

Ahuja Sahil
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Key Emerging Digital Payment Trends

In recent years, there has been a shift when it comes to the use of digital payments. Reuters highlights how the use of digital wallets and payments has been steadily rising since 2017. Today, these alternative payment options are now being used by billions of consumers from all over the globe. Because of its success, more and more companies have developed a number of alternative options for consumers within these channels.

Increasing adoption of cryptocurrency and digital currency

Cryptocurrency has slowly become part of everyday life. So much so that we even listed cryptocurrency as one of our ‘Hot Stocks to Watch in 2019’. This is promising as there are several reasons why cryptocurrency, particularly Bitcoin, can be a game-changer. Firstly, cryptocurrency appeals to the younger generation while providing greater security. Cryptocurrency can also largely reduce and potentially eliminate any additional transfer costs, leading to savings for consumers. In addition to all of this, they also benefit those in third-world countries who don’t have access to traditional bank accounts. These factors have to a more mainstream acceptance of cryptocurrency. In fact, the Supreme Court has even lifted The Reserve Bank of India’s ban on dealing with cryptocurrency.

 

The growing popularity of branded credit cards

With the rise of online shopping, customers are turning to credit cards as a popular payment option. A feature on how to build a good credit score by Petal explains how most major retailers often have their own store credit cards, which offer store-wide discounts at the cost of higher interest rates and lower credit limits. While they can promote greater brand loyalty, they offer limited benefits for consumers compared to regular credit cards due to their lack of flexibility. This is because they can only be used in certain locations and with certain brands. On the other hand, being co-branded does away with this problem. If the card is co-branded with Mastercard, Visa, or American Express, it can be more widely used. This is why co-branded credit cards are steadily growing in popularity, drawing in consumers with desirable reward options.

 

The rise of e-wallets and mobile payment apps

Unlike bulky physical wallets, e-wallets and apps can be electronically stored on your mobile phone making them much more convenient for travel. Entrepreneur summarizes the various benefits of digital wallets, noting how they are rapidly evolving to adapt to the needs and lifestyles of their consumers. Unlike card payments, they allow instantaneous payments online and make it easier to keep track of your spending. They also come with promotions, and cashback rewards, and enable you to avoid expensive transaction fees. One innovative feature of e-wallets is their seamless integration with fitness wearables, such as the Apple Watch and Garmin models that enable you to make payments with these devices as well. Something that users should be aware of is the possibility of cybersecurity threats when it comes to inadequate password protection or poorly encrypted payment channels.

When it comes to keeping yourself updated with the latest digital payment trends, it’s all about being careful with regard to any security threats and hidden fees that accompany these platforms. Being mindful of your spending habits and maintaining your safety and privacy are paramount to the convenience that these cashless methods provide.

 

 

Accounting and Journal Entry for Rent Paid

Ahuja Sahil
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Paid Rent Journal Entry

If a business does not own an office premise it may decide to hire a property and make periodical payments as rent. Such a cost is treated as an indirect expense and recorded in the books with a journal entry for rent paid. The party receiving the rent may book a journal entry for the rent received.

Payment for rent to the landlord is often;

    • Recurring in nature
    • Pre-decided amount
    • Paid every month
    • Likely shown as “office rent” in the financial statements.

The landlord may be an individual or another business providing their services. A rent agreement is prepared and agreed upon between the landlord and the tenant.

 

Journal entry for rent paid (in cash)

Journal Entry for Rent Paid

Accounting rules applied – Modern Rules

Rent Account Debit Debit the increase in expense
Cash Account Credit  Credit the decrease in asset

Accounting rules applied – Three Golden Rules

Rent Account Debit Dr. all expenses – Nominal A/C
Cash Account Credit  Credit what goes out – Real A/C

 

Accounting Treatment for Rent Payment

The life cycle to account for payment of rent expenses (in cash) goes through a couple of steps as shown below;

Step 1 – Journal entry for rent paid (in cash)

Rent A/C Debit
 To Cash A/C Credit

 

Step 2 – Transferring office rent expense into income statement (profit and loss account).

Income and Expense A/C Debit
 To Rent A/C Credit

 

Presentation in the Financial Statements

It is shown on the debit side of an income statement (profit and loss account)

office rent paid shown in income statement (profit and loss account)

 

Example

On the 15th of March, Unreal Corporation paid a rent of 10,000 (in cash). The payment belongs to rent due for the same month. Show related journal entries for office rent paid in the books of Unreal Corporation.

March 15 – Journal entry at the time of payment

Rent A/C 10,000
 To Cash A/C  10,000

 

March 31 – When the business books Closing entries

Income Statement 10,000
 To Rent A/C 10,000

Related Topic – Accounting and Journal Entry for Outstanding Expenses

 

Journal Entry for Rent paid by Cheque

Small businesses pay office rent either in cash or by cheque. But larger organizations usually prefer paying it only by cheque. This is done to keep legal evidence of the accounting transaction and maintain an audit trail.

Following are the steps for recording the journal entry for rent paid by cheque. In this case, the cash account is replaced with a bank account.

Step 1 – At the time of the cheque issue,

Rent A/C Debit
 To Bank A/C Credit

 

Step 2 – When rent expense is transferred to the income statement (profit and loss account)

Income and Expense A/C Debit
 To Rent A/C Credit

 

Example – On 10th March, XYZ Ltd paid office rent to its landlord by cheque for the same month amounting to 20,000. Show journal entries for office rent paid by cheque in the books of XYZ Ltd.

March 10 – Journal entry for office rent paid by cheque

Rent A/C 20,000
 To Bank A/C 20,000

 

March 31 – Journal entry for transfer of rent expense to the income statement (profit and loss account)

Income Statement 20,000
 To Rent A/C 20,000

Related Topic – Journal Entry for Advance Received from Customer

 

Journal Entry for Rent Paid in Advance

Rent paid in advance i.e. Prepaid Rent is the amount of rent paid by a firm in advance but the related benefits equivalent to the amount of advance payment are yet to be received. The benefits are due to be received in the future accounting period.

It is displayed as a current asset in the balance sheet as it is an advance payment.

 

Journal Entry

Prepaid Rent A/C Debit Debit the increase in asset
 To Rent A/C Credit Credit the decrease in expense

(Recording rent paid in advance)

 

Example – On 1st January ABC Co. paid office rent amounting to 10,000 (5,000 x 2) for the month of January & February. Payment is made in cash. Show journal entries to be posted in the books of ABC Ltd.

 

Accounting on January 1

Prepaid Rent A/C 5,000
Rent A/C 5,000
 To Cash A/C 10,000

(5000 rent paid for January, 5000 rent paid in advance for February, all by cash)

 

Accounting on February 1

Rent Account 5,000
To Prepaid Rent Account 5,000

(5000 rent obligation for February charged against the rent paid in advance last month)

 

Short Quiz for Self-Evaluation

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Accounting and Journal Entry for Advance Received from a Customer

Ahuja Sahil
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Journal Entry for Advance Received from a Customer

In certain types of business transactions, it is a requirement for the customer to pay a part of the total amount or the entire sum in advance, for example – security deposit to rent a property, customized items, bulk orders, insurance premium, etc. As a result, journal entry for advance received from a customer is entered in the books.

Not to be confused with accrued income advance received from a customer is an ideal example of unearned income or deferred revenue. Funds collected as advance received from a customer are treated as a liability because the related revenue has not been earned by the business yet.

Customer Advances Summary

 

Journal Entry for Advance Received from a Customer

Journal entry for advance received from customer

Bookkeeping rules applied – Three golden rules

Cash A/C Debit what comes in – Real A/C
Customer Advance Account A/C Credit the giver – Personal A/C

Bookkeeping rules applied – Modern rules

Cash A/C Debit the increase – Assets
Customer Advance Account A/C Credit the increase – Liability

If the related goods or services are to be delivered within 1 year then it is treated as a current liability otherwise a long-term liability.

Related Topic – Journal Entry for Manager’s Commission

 

Accounting Treatment for Customer Advance

Following are the steps and the associated timeline to book the journal entry for advance received from a customer.

Step 1 – When customer advance is received.

Cash Account Debit Debit the increase in asset
 To Customer Advance Account Credit Credit the increase in liability

Customer advance account is shown on the liability side of the balance sheet as the related revenue is still unearned.

 

Step 2 – When an invoice is sent to the customer.

Accounts Receivable Account Debit Debit the increase in asset
 To Revenue Account Credit Credit the increase in revenue

As per accrual based accounting the revenue is earned at this step i.e. when the final product is ready for delivery. An invoice is sent to the customer, consequently, the customer advance shown as a liability on the balance sheet is removed.

 

Step 3 – Journal entry to clear the customer advance account.

Customer Advance Account Debit
 To Accounts Receivable Account Credit

Finally, the journal entry to clear the customer advance account.

 

Example – Journal Entry for Customer Advances

Unreal Corporation received 10,000 as advance from ABC on 1st January for a custom paint job for ABC’s car. The work completed, and the customer was invoiced on 1st February of the same year. Show journal entry for advance received from the customer in the books of Unreal Corp.

January 1 – When 10,000 is received from ABC as advance

Cash Account 10,000
 To ABC Advance Account 10,000

 

February 1 – When ABC is billed or invoiced for 10,000 

Accounts Receivable Account 10,000
 To Revenue Account 10,000

 

February 1 – Journal entry to clear ABC’s customer advance

ABC Advance Account 10,000
 To Accounts Receivable Account 10,000

 

Short Quiz for Self-Evaluation

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How to save money on transferring your funds between countries?

Ahuja Sahil
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How to save money on transferring your funds between countries?

 

We store our funds in different places, whether it be banks, financial platforms, currency exchanges or stock markets. In today’s age of globalization, we can easily use platforms from other countries. Therefore, we start moving our money between different countries and make frequent international transactions. It generates high transaction fees, which can quickly affect our total gains.

Try online remittance platforms

Bank fees for international payments

First of all, it may be worth to research some remittance platforms. Regular international bank transfers are very expensive compared to other online alternatives. The same applies to receiving the funds, as for example some banks charge you just to get money from an overseas account. It may come in handy if you have bank accounts in few countries and want to move your money between them in a convenient and cheap way.

On average the banks charge their users $10-$25 for international SWIFT transfers. Now, sending let’s say 100 USD and exchanging it into EUR through one of the most popular online payment platforms – PayPal, costs around $4.99. The same transfer through other platform called TransferWise would cost only $1.71. At the same time, Lloyds Bank, which is one of the top British banks, charges around $12 for an international money transfer and an international wire from Australia’s ANZ bank costs around $16. You see that the difference is quite significant.

Which money transfer platform is the best?

But as you can see from our quick example, the prices can vary even between two randomly picked platforms. So, which company is the best to handle your money transfer? Well, there is no direct answer to this question. The final transaction cost depends on many factors, such as the currency, your and your recipient’s location, exchange rates, transfer method.

A good way to find out the final costs and choose platform with the best rates at given moment is to use a compare tool. For example Wirly.com, which specialize in gathering information about various remittance companies, created a neat calculator. All you have to do is type in how much money you need to transfer, in which currency and to what country and the platform will show you how much your transfer costs in all of the available money transfer companies. That way, you can either simply choose the top position, or research the lower entries if you are interested in other features.

Some companies may offer cheap transfers, but they might be very slow. In that case, you can simply sort the list depending on the estimated transaction times. If you are looking for the most trusted service for important payments, click on the safety and customer satisfaction categories.

It’s important to research some reviews and real user experience before giving your money to some company. Google Reviews or TrustPilot seem like the places to go. Learn about the advantages and disadvantages of particular platform.

 

Watch out for exchange rates

Be careful with “free” transfers

Some transfer companies, as well as banks trick their customers by providing “cheap” transaction fees. In the meantime, they provide unfavorable currency exchange rates. For example, if 1USD is equal to 0.9EUR, they may exchange your dollar for only 0.6EUR, eating that 0.3 as a hidden fee. Try to use currency conversion services, which offer rates the closets to mid-market rates (which are the rates that financial institutions use to trade currencies among themselves).

Try different currency pairs

When talking about transferring funds internationally and exchanging currencies, it’s worth noting that some currencies are cheaper to transfer than others. For example, transferring GBP to EUR might be simply cheaper than sending the same amount in USD. If you own a few currencies you can research some combinations to find the perfect configuration. When talking about these pairs, the next point is also important to have in mind…

Find local services

Some companies specialize in handling money in particular regions or countries. If you look for offers to transfer your funds between specific countries, you may find a great bargain. For example, TransferGo offers transfers between UK and Poland. Their rates in that case are significantly better than any other general remittance platform. There are many other similar examples. Remit2India, as the name indicates has a good connection with India.

To sum up, if you are handling all of your international transfers through your regular bank account, it may be worth checking some online alternatives. The remittance market has grown in recent years and these companies already process millions of transactions each day. If you have at least a few dollars on each transfer, it can add up to bigger amounts in the long term.
 

 

Types of Business Investors You Need to Know

Ahuja Sahil
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0
Types of Business Investors You Need to Know

Different Types of Business Investors

The idea of being your own boss is so exciting, but the point where this idea seems like crashing is when you think about money to kick-start your startup.

Unless you are born into a millionaire family, or you have served on a higher post for a multinational company, it is difficult to imagine that you would have enough money to see the dawn of your entrepreneurship. That’s why most startups lookout for investors to fulfil their funding requirements.

But finding an investor is also not as easy as you imagine. You will not get an investor just by pitching your idea. Moreover, considering that there are so many types of investors, picking the right one for you is also so confusing.

But you can’t select an investor randomly because your selection of an investor determines whether your venture will be a hit or flop.

 

Here are some types of investment you need to consider for receiving your funding:

Personal Investors

Personal investors are people close to you, your friends, family members, or anyone in close acquaintances can turn into your personal investor. What can be better than getting a helping hand financially from your acquaintance? Most probably, all the policies and paperwork will be flexible here, but you need to consider a few things.

Personal investors might not be able to lend you a huge amount of money, and involving a personal relationship in the business can be risky. Consult a lawyer and go for detailed documentation of all matters to avoid the creation of any bad blood between you two.

 

Venture Capitalist

Venture capitalists are people who look out for startups for investment that seem to be promising and have the potential for tremendous growth. Usually, people with a lot of money, banks and other established financial institutes are venture capitalists.

They know their investment can be a risky affair which is why they only invest in startups that have different business pitches and look different from their competitors. So, to approach a venture capitalist, you really need to have a firm idea.

A VC invests in the early stage and remains in the loop throughout the process, unlike private equity – that’s the main difference between venture capital and private equity. The venture capitalist asks for equity in return for the investment and holds a say in the company.

 

Angel Investors

Angel investors are the most sought-after type of investors in the world of startups because they invest in startups and small businesses for the sake of giving them a boost. Due to their intention of wellness, they usually offer to fund on favourable terms and conditions. They are the best option for those who don’t want to see someone else dominating in their company, like in the case of the venture capitalist.

As you can see that there are diverse types of investors, you will encounter while looking out funding for your business. All these types have their own pros and cons. Make sure you consider all the dimensions before choosing your fighter because – the right selection of investor matters!

 

 

How to Put Your Business on Facebook

Ahuja Sahil
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0
How to Put Your Business on Facebook

Procedure to Put Your Business on Facebook

You know by now that Facebook is one of the most active social media platforms. With almost two billion active monthly users, it has great potential to turn into a jackpot platform for your business if you hit it right on point. Now, Facebook is no more an option for your business; it has become a necessity.

Despite the huge buzz surrounding the significance of Facebook, many businesses still consider it merely a fancy marketing tactic. But it is a lot more than that! If you are missing it from your marketing strategies, you are missing out on a big-time potential to capture a wide customer base.

Feeling motivated to land your business in the world of Facebook? Good, we are here to help you! The best thing is that putting your business on Facebook is also not rocket science. Here are given simple steps on how to create a business Facebook page without a personal account. It is just a matter of a few steps, and you will be closer to your customers – much closer.

 

Create a Page

The first step is to create your business page. Type facebook.com/business on the search bar and click on Create a Page written in the top right-hand corner of the page. Once you click it, several options will unfold, including the type of business options, services you are offering and cause, etc.

Select the required option for each category, and in case you think that your business type can be categorized in more than one mentioned option, then select the one through which you want to register your business among customers.

 

Fill in the Required Information

Once you select your business type, a box opens that requires you to mention the name of your business, your business address, and the category of your business page. These categories are sub-types of your main business category.

After mentioning all the further details, click on ‘Get Started’. You can also check out Facebook’s terms and conditions for running a business page before clicking Get Started because once you click on it, it means that you agree to them no matter what.

Nevertheless, after clicking on ‘Get Started’, you officially get your Business Facebook Page. After that, only a few steps are left.

 

Set Up a Profile Picture

Next, choose a profile and cover image for your page. Don’t forget that these pictures will be a visual representation of your brand, so you can’t go with random images. Choose the picture wisely, your brand’s logo can become a great profile picture and your products an amazing cover picture.

They will not only be relevant but also give details about your brand personality the moment your customer will land on your page.

 

Add Details for Users

Now, you already have the basic skeleton of your brand’s Facebook page. But what if your customers need to know more about you and your services? Obviously, merely your profile and cover picture can’t help them. For this, click on Add a Short Description and pitch your brand’s essential features to your customers in max. 155 characters.

Whereas, in the About section, at the top left corner, you can edit the starting date of the business, contact information, and details of other social media accounts if any. If you are running a restaurant business, you might also be able to add specific details like menu and prices.

After doing all this, you are all set to update your first post. And starting from here, you need to have a robust Facebook marketing strategy to ensure that your social media venture writes a success story for your business.

 

 

How to turn Money into Gold

Ahuja Sahil
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0
How to turn Money into Gold

Turning money into Gold is pretty simple in this day and age. There are countless ways to buy gold coins and bullion online. However, when doing so, be sure you are buying from a highly rated website. Do your research on where are the best places and what are the best practices. Gold is not all the same, there are gold items that are made of different %’s. Gold comes in coins too and you need to understand what they are and their actual worth.

The most important thing you can take away from this is, do your research! Gold coins are all over. There are old coins that were found from the ruins of sea ships and coins that are produced in modern-day mints. The rarity of a coin, as well as other things, determine the worth of a coin. How much gold is in the coin is another factor, for example. So, coins are not just an investment, but they are more of a collectable as well. This is a fun hobby for some and also a great investment at the same time.

There are some gold coins that are much easier to buy and sell. This is an important aspect that should be understood if you plan to trade a lot of coins. Do your homework and find reputable dealers. Understand what the dealers charge to sell gold coins as well.

 

The Various Ways

There are many ways to turn your money into gold. We have been speaking about turning your money into physical gold, however, there are other ways as well. You can purchase gold certificates or ETFs (Exchange Traded Funds) for example. These are not the same as the physical gold option but they are essentially trading in your cash for gold.

It really depends on what you are trying to do when turning your money into gold. Are you looking to diversify your portfolio then paper gold such as the certificates and EFT may be what you need? If you are looking to protect yourself and your assets from a falling government or falling money value then you will want the actual gold coins and bullion.

These will need to be stored properly in your safe or bank to ensure you have access to it at all times. Most like to store it in their own safety so that they feel safer and can access it should there be any sort of a crash in the market.

Today you have a couple of options for money. You can use the typical currency issued by banks or you have hard assets like gold. Having all your wealth in currency leaves you vulnerable to attacks. As the governments become unstable or they borrow and make even more debt it makes the value of money very unstable. To help with the stability of wealth, it is important to diversify your funds into assets such as gold.

As with any investment, be sure that you do your homework and research. Ensure you know and understand what it is you want to achieve and how to possibly achieve it. As with any investment, there is some risk. However, without risk, there is no reward.

 

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