Depreciation a reduction in the value of an asset over time, due in particular to wear and tear. Types of depreciation Common methods of depreciation are as follows: Straight Line Depreciation Same depreciation is charged over the entire useful life. Reducing Balance Depreciation Depreciation expense decreases at a constant rate as the life of an asset progresses. Sum of the Year' Digits Depreciation Depreciation charge declines by a constant amount as the life of the asset progresses. Units of Activity Depreciation Depreciation charge varies each period in proportion to the change in level of activity. Difference between a Public Company and a Private Company The distinction between a public company and a private company are explained in the following manner: 1. Minimum number of members The minimum number of person required to form a public company is seven, whereas in a private company their number is only two. 2. Maximum number of members There is no limit on the maximum number of member of a public company, but a private company cannot have more than fifty members excluding past and present employees.
Transcript
Depreciationa reduction in the value of an asset over time, due in particular to wear and tear.
Types of depreciation
Common methods of depreciation are as follows:
Straight Line Depreciation Same depreciation is charged over the entire useful life.Reducing Balance Depreciation
Depreciation expense decreases at a constant rate as the life of an asset progresses.
Sum of the Year' Digits Depreciation
Depreciation charge declines by a constant amount as the life of the asset progresses.
Units of Activity DepreciationDepreciation charge varies each period in proportion to the change in level of activity.
Difference between a Public Company and a Private Company
The distinction between a public company and a private company are explained in the following manner:
1. Minimum number of members
The minimum number of person required to form a public company is seven, whereas in a private company their number is only two.
2. Maximum number of members
There is no limit on the maximum number of member of a public company, but a private company cannot have more than fifty members excluding past and present employees.
3. Commencement of Business
A private company can commence its business as soon as it is incorporated. But a public company shall not commence its business immediately unless it has been granted the certificate of commencement of business.
4. Invitation to public
A public company by issuing a prospectus may invite public to subscribe to its shares whereas a private company cannot extend such invitation to the public.
5. Transferability of shares
There is no restriction on the transfer of share In the case of public company whereas a private company by its articles must restrict the right of members to transfer the share.
6. Number of Directors
A public company must have at least three directors whereas a private company may have two directors.
7. Statutory Meeting
A public company must hold a statutory meeting and file with the register a statutory report. But in a private company there are no such obligations.
8. Restrictions on the appointment of Directors
A director of a public company shall file with the register a consent to act as such. He shall sign the memorandum and enter into a contact for qualification shares. He cannot vote or take part in the discussion on a contract in which he is interested. Two-thirds of the directors of a public company must retire by rotation. These restrictions do not apply to a private company.
9. Managerial Remuneration
Total managerial remuneration in the case of public company cannot exceed 11% of net profits, but in the case of inadequacy of profit a minimum of Rs. 50, 000 can be paid. These restrictions do not apply to a private company.
10. Further Issue of Capital
A public company proposing further issue of shares must offer them to the existing members. A private company is free to allot new issue to outsiders.
11. Name
A private company has to use words ‘private limited’ at the end of its name. But a public company has to use only the word ‘Limited’ at the end of its name.
What is a contingent liability?A contingent liability is a potential liability. This means that the contingent liability might become an actual liability and a loss, or it might not. It depends on something in the future.
If your parent guarantees your loan, your parent will have a contingent liability. Your parent will have an actual liability and a loss only if you do not make the payments on the loan. On the other hand, if you make the loan payments, your parent will not have a liability and loss.
What is the formula for calculating earnings per share (EPS)? By Jean Folger AAA |
A:
Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, serving as an indicator of the company’s profitability. It is often considered to be one of the most important variables in determining a stock’s value, and it comprises the “E” part of the P/E (price-earnings) valuation ratio. EPS is calculated as:
EPS = net income / average outstanding common shares
For example, McGraw Hill Financial Inc (MHFI) reported first quarter 2014 net income of $248 million and had 277.2 million average shares outstanding. To calculate EPS, investors can insert these figures into the EPS calculation:
EPS = $248 million / 277.2 million = $0.89
Companies may choose to buy back their own shares in the open market. In doing so, a company can improve its EPS (because there are fewer shares outstanding) without actually improving net income. For example, if MHFI in the first quarter had used a share buy-back program to buy 100 million shares, its EPS would have been:
EPS = $248 million / 177.2 million = $1.40
Note: some companies have a special class of stock called preferred stock. Any dividends paid on preferred stock would be subtracted from net income when calculating EPS. The formula for calculating EPS would then be:
EPS = (net income – dividends on preferred stock) / average outstanding common shares
In our example, MHFI had and EPS of 89 cents for the first quarter of 2014. Knowing the EPS of an individual stock is not enough information to make an informed investment decision. EPS becomes meaningful when investors look at historical EPS figures for the same company, or when they compare EPS for companies within the same industry. MHFI, for example, is in the Business Services industry, so investors could consider the EPS of other stocks within that industry, such as Moody’s Corp (MCO). Since EPS is only one number, it’s important to use it in conjunction with other measures before making any investment decisions.
Three Golden Rules of Accounting with Examples Home > Business Ideas > Three Golden Rules of Accounting with Examples
Three Golden Rules of Accounting with ExamplesAtul Kumar Pandey 23/09/2015 Business Ideas 9 Comments
Creating journal entries requires some rules, such rule is named as Three Golden Rules of Accounting standards. There are three kinds of account as Personal Account, Real Account and Nominal Account. Let’s see the rules for those different account from scratch and in detail.
1. Personal Account
Personal account relates to persons with whom a business keeps dealings. A person called be a natural person or a legal person. If a person receives anything from the business, he is called receiver and his account is to debited in the books of the business. If person gives anything to business, he is called as a giver and his account is to be credited in the books of the business.
Example: Goods worth 1000 bucks sold to Mr. Smith from Mr. John. In this transaction, Mr. Smith is the receiver of goods, he is called receiver and his account is to be debited in the books of business. Mr. John is the giver of goods, he is called giver and his account is to be credited in the books of business.
2. Real Account
Real account relates to property which may either come into the business or go from business. If any property or goods comes into the business, account of that property or goods is to be debited in the books of the business. If any property or goods goes out from the business account of that property or goods is to be credited in the books of business.
The Golden Rule for Real Account is,
Debit What Comes in and Credit What Goes out
Example: Goods sold on cash for 1500 bucks. In this transaction cash, an assets for business comes into the business on sales of goods, and therefore cash account is to be debited in the books of business. On the other side, goods, an assets of business goes out of the business on sale and therefore goods account is to be debited in the books of business.
3. Nominal Account
Nominal account is an account that relates to business expenses, loss, income and gains. If business incurs expense to manage and run business, account of that expense is to be debited in the books of business. When a business earns income by rendering services or hiring business assets, an account of that income is to credited in the books of business.
On other hand, if in the case the transaction of sale or purchase of goods or assets, if any loss is incurred by the business, account of that loss is to debited in the books or assets. if in the transaction of sale or purchase of goods or assets any profit is earned by the business, then account of that profit is to be credited in the books of business.
The Golden Rule for Nominal Account is,
Debit all Expenses or Loss and Credit all Income Gains or Profit
Example: (1) Paid 50 bucks as a commission to our agent, here commission which is paid to an agent is business expense and it is to be debited in the books of business. (2) Received 100 bucks as interest on our fixed deposit, here interest which is received is business income and therefore it is to be credited in the books of business.
Basic Accounting Principles
A number of basic accounting principles have been developed through common usage. They form the basis upon which modern accounting is based. The best-known of these principles are as follows:
Accrual principle. This is the concept that accounting transactions should be recorded in the accounting periods when they actually occur, rather than in the periods when there are cash flows associated with them. This is the foundation of the accrual basis of accounting. It is important for the construction of financial statements that show what actually happened in an accounting period, rather than being artificially delayed or accelerated by the associated cash flows. For example, if you ignored the accrual principle, you would record an expense only when you paid for it, which might incorporate a lengthy delay caused by the payment terms for the associated supplier invoice.
Conservatism principle. This is the concept that you should record expenses and liabilities as soon as possible, but to record revenues and assets only when you are sure that they will occur. This introduces a conservative slant to the financial statements that may yield lower reported profits, since revenue and asset recognition may be delayed for some time. Conversely, this principle tends to encourage the recordation of losses earlier, rather than later. This concept can be taken too far, where a business persistently misstates its results to be worse than is realistically the case.
Consistency principle. This is the concept that, once you adopt an accounting principle or method, you should continue to use it until a demonstrably better principle or method comes along. Not following the consistency principle means that a business could continually jump between different accounting treatments of its transactions that makes its long-term financial results extremely difficult to discern.
Cost principle. This is the concept that a business should only record its assets, liabilities, and equity investments at their original purchase costs. This principle is becoming less valid, as a host of accounting standards are heading in the direction of adjusting assets and liabilities to their fair values.
Economic entity principle. This is the concept that the transactions of a business should be kept separate from those of its owners and other businesses. This prevents intermingling of assets and liabilities among multiple entities, which can cause considerable difficulties when the financial statements of a fledgling business are first audited.
Full disclosure principle. This is the concept that you should include in or alongside the financial statements of a business all of the information that may impact a reader's understanding of those financial statements. The accounting standards have greatly amplified upon this concept in specifying an enormous number of informational disclosures.
Going concern principle. This is the concept that a business will remain in operation for the foreseeable future. This means that you would be justified in deferring the recognition of some expenses, such as depreciation, until later periods. Otherwise, you would have to recognize all expenses at once and not defer any of them.
Matching principle. This is the concept that, when you record revenue, you should record all related expenses at the same time. Thus, you charge inventory to the cost of goods sold at the same time that you record revenue from the sale of those inventory items. This is a cornerstone
of the accrual basis of accounting. The cash basis of accounting does not use the matching the principle.
Materiality principle. This is the concept that you should record a transaction in the accounting records if not doing so might have altered the decision making process of someone reading the company's financial statements. This is quite a vague concept that is difficult to quantify, which has led some of the more picayune controllers to record even the smallest transactions.
Monetary unit principle. This is the concept that a business should only record transactions that can be stated in terms of a unit of currency. Thus, it is easy enough to record the purchase of a fixed asset, since it was bought for a specific price, whereas the value of the quality control system of a business is not recorded. This concept keeps a business from engaging in an excessive level of estimation in deriving the value of its assets and liabilities.
Reliability principle. This is the concept that only those transactions that can be proven should be recorded. For example, a supplier invoice is solid evidence that an expense has been recorded. This concept is of prime interest to auditors, who are constantly in search of the evidence supporting transactions.
Revenue recognition principle. This is the concept that you should only recognize revenue when the business has substantially completed the earnings process. So many people have skirted around the fringes of this concept to commit reporting fraud that a variety of standard-setting bodies have developed a massive amount of information about what constitutes proper revenue recognition.
Time period principle. This is the concept that a business should report the results of its operations over a standard period of time. This may qualify as the most glaringly obvious of all accounting principles, but is intended to create a standard set of comparable periods, which is useful for trend analysis.
These principles are incorporated into a number of accounting frameworks, from which accounting standards govern the treatment and reporting of business transactions.
Balance sheets: the basics
Contents of the balance sheet
A balance sheet shows:
fixed assets - long-term possessions current assets - short-term possessions current liabilities - what the business owes and must repay in the short term long-term liabilities - including owner's or shareholders' capital
The balance sheet is so-called because there is a debit entry and a credit entry for everything (but one entry may be to the profit and loss account), so the total value of the assets is always the same value as the total of the liabilities.
Download a basic balance sheet for limited companies to use and adapt (XLS, 33K).
tangible assets - eg buildings, land, machinery, computers, fixtures and fittings - shown at their depreciated or resale value where appropriate
intangible assets - eg goodwill, intellectual property rights (such as patents, trade marks and website domain names) and long-term investments
Current assets are short-term assets whose value can fluctuate from day to day and can include:
stock work in progress money owed by customers cash in hand or at the bank short-term investments pre-payments - eg advance rents
Current liabilities are amounts owing and due within one year. These include:
money owed to suppliers short-term loans, overdrafts or other finance taxes due within the year - VAT, PAYE (Pay As You Earn) and National Insurance
Long-term liabilities include:
creditors due after one year - the amounts due to be repaid in loans or financing after one year, eg bank or directors' loans, finance agreements
capital and reserves - share capital and retained profits, after dividends (if your business is a limited company), or proprietors capital invested in business (if you are an unincorporated business)
By law the balance sheet must include the elements shown above in bold. However, what each includes will vary from business to business. The firm's external accountant will usually decide how to present the information, although if you have a qualified accountant on staff, they may make this decision.
What is the difference between gross profit and net profit?Gross profit is sales revenues minus the cost of goods sold.
The term net profit might have a variety of definitions. I assume that net profit means all revenues minus all expenses including the cost of goods sold, the selling, general, and administrative (SG&A) expenses, and the nonoperating expenses. At a corporation it may also mean after income tax expense.
Accrual concept is the most fundamental principle of accounting which requires recording revenues when they are earned and not when they are received in cash, and recording expenses when they are incurred and not when they are paid.
GAAP allows preparation of financial statements on accrual basis only (and not on cash basis). This is because under accrual concept revenues and expenses are recorded in the period to which they relate and not when they are received or paid. Application of accrual concept results in accurate reporting of net income, assets, liabilities and retained earnings which improves analysis of the company’s financial performance and financial position over different periods.
At the end of each reporting period, companies pass adjusting journal entries to record any accruals, for example accrual of utilities expense, interest expense, accrual of wages and salaries, adjustment of prepayments, etc.
Examples
The following examples elaborate the accrual concept.
1. An airline sells its tickets days or even weeks before the flight is made, but it does not record the receipts as revenue because the flight, the event on which the revenue is based has not occurred yet.The airline journalizes receipt of cash as follows:
Bank ABC
Unearned revenue ABC
2. Unearned revenue is a current liability which extinguishes when the flight is made.
Unearned revenue ABC
Revenue ABC
3. An accounting firm obtained its office on rent and paid $120,000 on January 1 as annual rent. It does not record the payment as an expense because the building is not yet used. Instead it records the cash payment as prepaid rent (which is a current asset):
4. The firm recognizes rent expense over the period. For example, in preparing its quarterly income statement on March 31, the firm expenses out three months' rent i.e. 30,00 (= $120,000/12 × 3] because 3 months equivalent of time has expired (from 1 January till 31 March).
Rent expense GHI
Prepaid rent GHI
5. A business records its utility bills as soon as it receives them and not when they are paid, because the service has already been used. The company ignores the date when the payment will be made.
Cash basis
An alternative to accrual basis is the cash basis of accounting. Under the cash basis, transactions are recorded based on their underlying cash inflows or outflows. Cash basis is normally used while preparing financial statements for tax purposes, etc.
Realization concept in accounting - topic contents:
1. Definition 2. Explanation 3. Example 4. Importance 5. MCQ
1. Definition
Realization concept in accounting, also known as revenue recognition principle, refers to the application of accruals concept towards the recognition of revenue (income). Under this principle, revenue is recognized by the seller when it is earned irrespective of whether cash from the transaction has been received or not.
2. Explanation
In case of sale of goods, revenue must be recognized when the seller transfers the risks and rewards associated with the ownership of the goods to the buyer. This is generally deemed to occur when the goods are actually transferred to the buyer. Where goods are sold on credit terms,
revenue is recognized along with a corresponding receivable which is subsequently settled upon the receipt of the due amount from the customer.
In case of the rendering of services, revenue is recognized on the basis of stage of completion of the services specified in the contract. Any receipts from the customer in excess or short of the revenue recognized in accordance with the stage of completion are accounted for as prepaid income or accrued income as appropriate.
3. Example
Motors PLC is a car dealer. It receives orders from customers in advance against 20% down payment. Motors PLC delivers the cars to the respective customers within 30 days upon which it receives the remaining 80% of the list price.
In accordance with the revenue realization principle, Motors PLC must not recognize any revenue until the cars are delivered to the respective customers as that is the point when the risks and rewards incidental to the ownership of the cars are transferred to the buyers.
4. Importance
Application of the realization principle ensures that the reported performance of an entity, as evidenced from the income statement, reflects the true extent of revenue earned during a period rather than the cash inflows generated during a period which can otherwise be gauged from the cash flow statement. Recognition of revenue on cash basis may not present a consistent basis for evaluating the performance of a company over several accounting periods due to the potential volatility in cash flows.
What is closing stock?
Closing stock is the amount of inventory that a business still has on hand at the end of a reporting period. This includes raw materials, work-in-process, and finished goods inventory. The amount of closing stock can be ascertained with a physical count of the inventory. It can also be determined by using a perpetual inventory system and cycle counting to continually adjust inventory records to arrive at ending balances.
Difference Between Trading Account and Profit and Loss Account:
Learning Objectives:
1. Differentiate between trading account and profit and loss account.
Following are the main points of difference between trading account and profit and loss account:
Trading Account Profit and Loss Account
1 It is the first stage of final accounts. 1It is the second stage of the final accounts.
2It shows the gross result (gross profit or gross loss) of the business.
2It shows the net results (net profit or net loss) of the business.
3
All direct expenses (expenses connected with purchase or production of goods) are considered in it.
3All expenses connected with sales and administration (indirect expenses) of business are considered.
4It does not start with the balance of any account.
4It always starts with the balance of a trading account (gross profit or gross loss).
5Its balance (G.P or G.L) is transferred to profit and loss account.
5Its balance (N.P or N.L) is transferred to capital account in balance sheet.
Contents of an Invoice receipt
The main contents of Invoice1. From address of compay2. To address of company3. date4. invoice no.5. particulars of meterials7. prices of meterials8. total amount9. taxes details10.Tax Information Number.
Different Types of Errors in Accounting
1. Errors of PrincipleIn accounting, if accountant records any transaction against the rules of double entry system, then this mistake is called error of principle. For example, accountant takes all capital expenditures as revenue expenditures and passes the entry of machinery purchased in purchase account.
We can separate clerical mistakes with following ways:
a) Errors of Omission
If accountant forgets to pass the journal entry of any transaction or if he records only one part of transaction, then these mistakes are called errors of omission. Accountant can also forget to post any journal entry in ledger accounts.
b) Errors of Commission
If accountant passes the wrong entry or posts wrong side of ledger accounts or writes wrong amount or calculates wrong total of any account, then these types of mistakes are called errors of commission. Some of errors of commission can easy find out by making trial balance but some errors of commission can not find out through trial balance.
c) Compensating Errors
Sometime we compensate one error with any other errors. For example we write Rs. 500 less in the credit side of sales account but same time we write less Rs. 500 in the debit side of purchase account. This is the error which can not be revealed through trial balance.
Differences Between Internal Audit And Statutory Audit
An internal audit is conducted by the permanent staff of the same office to detect weakness in system, procedures and for the improvement. But statutory audit is the act of checking books of accounts as per the provision of company act. Both of them check books of account, detect errors and frauds even though they have certain differences which are as follows:
An internal auditor is generally appointed by the management but statutory auditor is appointed by the shareholders or Annual General Meeting.
2. Legal Requirement
Internal audit is the need of management but it is not legal obligation but statutory audit is the legal requirement.
3. Qualification
An internal auditor does not required specific qualification as per the provision of law but qualification of statutory auditor is specified.
4. Conducting Of Audit
Internal audit is of regular nature but final audit is conducted after the preparation of final account.
5. Status
An internal auditor is a staff who is appointed by the management but statutory auditor is an independent [person appointed by the shareholders.
6. Scope Of Work
Internal audit is related to the examination of books of accounts and other activities of an organization but statutory audit checks the books of accounts and related evidential documents. So, scope of internal audit is vague but scope of statutory audit is limited.
7. Removal
Internal auditor can be removed by the management but statutory auditor can be removed by the annual general meeting only.
8. Remuneration
Internal auditor is appointed by the management; so remuneration is fixed by the management but remuneration of statutory auditor is fixed by the shareholders.
9.Report
Internal auditor needs to give suggestions to improve weakness but no need to present report but statutory auditor requires to prepare report after the completion of work on the basis of facts found during the course of audit and present such report to the appointing authority.
Difference between provision for bad debt and reserve for bad debt?Provisions and Reserves are the amount setaside out of profits. When the amount is set aside for a particular purpose it is called a provison. Examples for this is Provision for Baddebts and provision for Depreciation and Provision for Discounts on Debtors. when the amount is setaside for particular purpose is called a provision whereas Reserve is the amount setaside out of profit but not for particular purpose. In most cases provision is incorrectly described as Reserve. One cannot create Reserve for baddebts.
company will kept some amount as reserve for bad debts in advance.if any debt becomes bad then it will realise from reserve..that is known as reserves for bad debts.
Any debit is in a position of becoming insolvent or unpaid,those debt is called provision for bad debts
What is a bank reconciliation?A bank reconciliation is a process performed by a company to ensure that the company's records (check register, general ledger account, balance sheet, etc.) are correct and that the bank's records are also correct.
The bank reconciliation for a company's checking account begins with the company noting the balance per the bank statement and then making some notations about that balance. For example, the balance on the bank statement is probably not the amount that appears in the company's records. In all likelihood the checks written by the company in the days immediately before the date of the bank statement will not have cleared (been deducted from) the checking account. These are called outstanding checks. Another possibility is that the company received money on the closing date of the bank statement and properly recorded the amount in its records. However, the money was deposited into the bank too late in the day and will appear on the next bank statement. This is known as a deposit in transit. Let's begin the bank reconciliation by assigning some amounts to the items just mentioned:
Balance per bank statement at October 31 $6,442.56; outstanding checks as of October 31 $3,400.00; deposits in transit at October 31 $1,000.00. The adjusted balance per the bank statement on October 31 is $4,042.56 ($6,442.56 + $1,000.00 - $3,400.00).
Next, the bank reconciliation requires that the amount in the company's records (for this bank
statement account) be noted. In all likelihood the amount in the company's records will not agree with the adjusted bank amount. One explanation could be the bank fees that the bank took out of the checking account, but the fees were not yet recorded in the company's records. A common example is the bank service charge for maintaining the checking account, handling returned checks, and check printing fees. The bank might also deduct loan payments or process other transactions that the company has not yet entered into its records. Let's illustrate the company's adjusted balance with some amounts:
Balance per the company's records (account register, general ledger account) $4,340.56; bank service charge $63.00; check printing charge $120.00. The adjusted balance per the company's records, or per books, is $4,157.56 ($4,340.56 - $63.00 - $120.00).
If the adjusted balance per the bank agrees with the adjusted balance per the books, the bank reconciliation is completed. In our example, the adjusted balance per the bank is $4,042.56 and the adjusted balance per the company's books is $4,157.56. The difference of $115.00 means that the bank reconciliation is not completed. The $115.00 difference must be identified. Finding the difference is likely to be tedious, but it must be done. After all differences have been identified, any adjustments to the company's balance must be entered into the company's records with a journal entry. It is the reconciled, adjusted balance that is to be reported on the company's balance sheet.
As mentioned above, performing a bank reconciliation is necessary for the accuracy of the accounting records and for the company's financial statements. Bank reconciliations are also associated with a company's internal controls over cash. If the bank reconciliation is performed by someone other than the authorized check signers and record keepers, the company has improved its internal control over cash.
What is s bank reconciliation statement? Give an ex wherethe Bank book and d cash book will not reconcile?
BRS is a statement which reconciles the bank balances as per cash book witrh the balances as per bank pass book, by showing all causes of difference between the two...
example whare the bank book and da cash bool will not reconcile.Bank chargesDirect deposited into the bank.....
Bank Reconciliation statement means the statment shows the difference between Bank Passbook bal & Cash Book Bal. It shows difference for example. Bank Charges, intrest, Cheques deposited into bank but not realised. Bank Credit entries not accounted in Cash Book.
In modern business, we complete almost all the transactions through bank. We pay off cash through check or online bank transfer. We also collect money through check. So, it is necessary to show one more column in cash book except cash column and discount column. With following example, you can understand it deeply.There are following three columns in triple column cash book.
a) Discount Columnb) Cash Columnc) Bank Column
Write out the following transactions in the Triple column cash book of Sitaram:2013Jan. 1 Sitaram commences his business with cash = Rs. 30000Jan 2 He pays into bank current account = Rs. 20000Jan. 3 He receive cheque from kulwant rai on account = Rs. 1000Jan. 7 He pays kulwant rai's cheque into bank = Rs. 1000Jan. 10 He pays Radha Sharan by Cheque = Rs. 1980and receive discount = Rs. 20Jan. 11 He receive cheque from Wasim = Rs. 970 and allow him discount = Rs. 30Jan. 15 He makes sales for cash = Rs. 2000Jan. 17 Cash deposited into bank = Rs. 3000Jan. 19 He purchased a motor car by cheque = Rs. 6500Jan. 20 He purchased goods by cheque = Rs. 1500Jan. 22 He pays jajoo traders in cash = RS. 2000and receives discount = Rs. 100Jan. 29 He withdraws from bank for office use = Rs. 500Jan. 30 He purchases furniture by cheque = Rs. 1200Jan. 30 Cheque received from sham endorsed to Ram = Rs. 5000
Remember : a) If we deposited money into bank or withdraw money from bank we have to show such amount both cash column in one side and bank column in other side. So, these are the contra entries and its double entry has completed in cash book. We show c just front of entries.
b) Before showing discount column, we have to show ledger folio column both side, due to shortage of space, we did not show.
c) When we get a cheque but we have endorsed to some other person, it is recorded in cash book because this is neither receipt nor payment from cash or our bank. Its record will be done through journal entry. So, we will not show jan. 30 endorsement transaction in cash book.
When will the cash book have a credit balance?When there is a large amount of expenses debited or no amount of cash received then it is obviously the cash book is credit balance.
cash book can never have a credit balance becoz u cant pay more than what u hold as cash..though its verrrry much
possible to have credit balance in bank account becoz dere when payments are more than receipts bank may allow overdraft facility but if its current account...
when payments is more then the receipts
Cash book should not show credit balance, if it shows credit balance either the sales not recorded properly or the cash had over drawn then the sales
What is a Trial Balance?
1. Purpose of Trial Balance 2. Example of Trial Balance 3. Limitations of Trial Balance
Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first step towards the preparation of financial statements. It is usually prepared at the end of an accounting period to assist in the drafting of financial statements. Ledger balances are segregated into debit balances and credit balances. Asset and expense accounts appear on the debit side of the trial balance whereas liabilities, capital and income accounts appear on the credit side. If all accounting entries are recorded correctly and all the ledger balances are accurately extracted, the total of all debit balances appearing in the trial balance must equal to the sum of all credit balances.
Purpose of a Trial Balance
Trial Balance acts as the first step in the preparation of financial statements. It is a working paper that accountants use as a basis while preparing financial statements.
Trial balance ensures that for every debit entry recorded, a corresponding credit entry has been recorded in the books in accordance with the double entry concept of accounting. If the totals of the trial balance do not agree, the differences may be investigated and resolved before financial statements are prepared. Rectifying basic accounting errors can be a much lengthy task after the financial statements have been prepared because of the changes that would be required to correct the financial statements.
Trial balance ensures that the account balances are accurately extracted from accounting ledgers.
Trail balance assists in the identification and rectification of errors.
Example
Following is an example of what a simple Trial Balance looks like:
Title provided at the top shows the name of the entity and accounting period end for which the trial balance has been prepared.
Account Title shows the name of the accounting ledgers from which the balances have been extracted.
Balances relating to assets and expenses are presented in the left column (debit side) whereas those relating to liabilities, income and equity are shown on the right column (credit side).
The sum of all debit and credit balances are shown at the bottom of their respective columns.
Limitations of a trial balance
Trial Balance only confirms that the total of all debit balances match the total of all credit balances. Trial balance totals may agree in spite of errors. An example would be an incorrect debit entry being offset by an equal credit entry. Likewise, a trial balance gives no proof that certain transactions have not been recorded at all because in such case, both debit and credit sides of a transaction would be omitted causing the trial balance totals to still agree. Types of accounting errors and their effect on trial balance are more fully discussed in the section on Suspense Accounts.
Reasons of Preparing Trial BalanceTrial balance is not just list of debit and credit balance of ledger's all accounts but it is very useful tool to find the mathematical correctness in the books of accounts. If trial balance's debit balances column does not match with credit balances column, it means there is big mathematical errors in our journal
entries, ledger accounts or totally or transferring the figure. With this clue, we can easily reach our mathematical mistakes. After rectifying it, we can make correct financial statements.
Following are the main reason of Preparing Trial Balance:
1. Helpful to Find Transposition Error
Sometime, we can do mistake of transposition. Trial balance can help us to find this error. Find the difference of total of debit balances of trial balance and credit balances of trial balance. If it divides with 9, it means, we wrongly write any balance in trial balance. For example, we can write wrongly 525 as 552.
2. Helpful to Find Mis-calculation Error
This error may happen due to our poor calculation power. Trial balance's both side will not match. If we do not calculate any ledger balance correctly, we can see error in trial balance. Sometime, we may wrongly calculate total of any side of trial balance.
3. Helpful to Find Duplication Error
Sometime, we can write any ledger balance two times in trial balance. At that time, our trial balance will not match. If we will not make trial balance, how can we find this error?
4. Helpful to Find Omission Error
If we forget to write any ledger balance in trial balance, at that time our trial balance will not match. Check all ledger account and see which ledger account's balance did not send to trial balance.
5. Helpful to Find Wrong Side Error
Under this error, we wrongly write debit balance as credit balance in ledger accounts or in trial balance or vise-versa.
Income and Expenditure Account vs Profit and Loss Account0 Vinod Kumar June 4, 2014
Income and expenditure account and profit and loss account both are prepared for finding net profit or net loss of organisation. Both are showing all the revenue expenditures and incomes for the year. But there are some fundamental differences between both which we are explaining with following basis.
ncome and expenditure account is created by non profit making organizations (NPO) and P&L account is created by business like trading and manufacturing etc..
What is the difference between accounts payable and accounts receivable?Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. Accounts payable are liabilities. Accounts receivable are assets.
Let's assume that Company A sells merchandise to Company B on credit. (Perhaps the invoice states that the amount is due in 30 days.) Company A will record a sale and will also record an account receivable. Company B will record the purchase (perhaps as inventory) and will also record an account payable.
Our example reminds me of an old saying, "There are two sides to every transaction." In accounting we also expect symmetry: Company A has a sale and a receivable, Company B has a purchase and a payable.
Q: Accounts Receivable vs. Accounts Payable?
A: The answer to this short question is to define the two terms and see how they differ.
Accounts Receivable is an account containing all amounts owing to us. It is all the amounts we expect to receive. In other words, our debtors.
Accounts Payable is an account containing all amounts that we owe to others. It is all the amounts we expect to pay in the future. In other words, our creditors.
Enterprise resource planning (ERP) is business management software—typically a suite of integrated applications—that a company can use to collect, store, manage and interpret data from many business activities, including:
Product planning , cost Manufacturing or service delivery Marketing and sales Inventory management Shipping and payment
ERP provides an integrated view of core business processes, often in real-time, using common databases maintained by a database management system. ERP systems track business resources
—cash, raw materials, production capacity—and the status of business commitments: orders, purchase orders, and payroll. The applications that make up the system share data across the various departments (manufacturing, purchasing, sales, accounting, etc.) that provide the data.[1] ERP facilitates information flow between all business functions, and manages connections to outside stakeholders.[2]
Enterprise system software is a multi-billion dollar industry that produces components that support a variety of business functions. IT investments have become the largest category of capital expenditure in United States-based businesses over the past decade. Though early ERP systems focused on large enterprises, smaller enterprises increasingly use ERP systems.[3]
SAP definition
The original name for SAP was German: Systeme, Anwendungen, Produkte, German for "Systems Applications and Products." The original SAP idea was to provide customers with the ability to interact with a common corporate database for a comprehensive range of applications. Gradually, the applications have been assembled and today many corporations, including IBM and Microsoft, are using SAP products to run their own businesses.
SAP applications, built around their latest R/3 system, provide the capability to manage financial, asset, and cost accounting, production operations and materials, personnel, plants, and archived documents. The R/3 system runs on a number of platforms including Windows 2000 and uses the client/server model. The latest version of R/3 includes a comprehensive Internet-enabled package.
SAP has recently recast its product offerings under a comprehensive Web interface, called mySAP.com, and added new e-business applications, including customer relationship management (CRM) and supply chain management (SCM).
how do you calculates closing stock in Trading A/c
For Closing Stock we have to add Opening Stock in PurchasedStock and then substract the Sales and damages. i.e.
**(in some case the damege wont come and adjust in Profitand Loss Account and in some case it wont come into Account.It will very by nature of business to business)
to calculate closing stock fallowing step will be doneclosing stock= opening stock +(purches-purchage return)+direct expence(ex: wageslighting etc..)- net sales
opening stock +purchase -purchase return+direct exp.(direct exp are those exp which we are paying at the time of purchase of row material.like wages,coal&fuel carriage inward etc).-sales -sales return=closing stock
Generally Accepted Accounting Principles - GAAPAAA |
DEFINITION of 'Generally Accepted Accounting Principles - GAAP'
The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.
Income Statementp
The income statement, also called the profit and loss statement, is a report that shows the income, expenses, and resulting profits or losses of a company during a specific time period. The income statement is the first financial statement typically prepared during the accounting cycle because the net income or loss must be calculated and carried over to the statement of owner's equity before other financial statements can be prepared.
The income statement calculates the net income of a company by subtracting total expenses from total income. This calculation shows investors and creditors the overall profitability of the company as well as how efficiently the company is at generating profits from total revenues.
The income and expense accounts can also be subdivided to calculate gross profit and the income or loss from operations. These two calculations are best shown on a multi-step income statement. Gross profit is calculated by subtracting cost of goods sold from net sales. Operating income is calculated by subtracting operating expenses from the gross profit.
Unlike the balance sheet, the income statement calculates net income or loss over a range of time. For example annual statements use revenues and expenses over a 12-month period, while quarterly statements focus on revenues and expenses incurred during a 3-month period.
Format
There are two income statement formats that are generally prepared.
Single-step income statement – the single step statement only shows one category of income and one category of expenses. This format is less useful of external users because they can't calculate many efficiency and profitability ratios with this limited data.
Multi-step income statement - the multi-step statement separates expense accounts into more relevant and usable accounts based on their function. Cost of goods sold, operating and non-operating expenses are separated out and used to calculate gross profit, operating income, and net income.
In both income statement formats, revenues are always presented before expenses. Expenses can be listed alphabetically or by total dollar amount. Either presentation is acceptable.
Income statement expenses can also be formatted by the nature and the function of the expense.
All income statements have a heading that display's the company name, title of the statement and the time period of the report. For example, an annual income statement issued by Paul's Guitar Shop, Inc. would have the following heading:
Paul's Guitar Shop, Inc. Income Statement For the Year Ended December 31, 2015
Example
Here is an example of how to prepare an income statement from Paul's adjusted trial balance in our earlier accounting cycle examples.
As you can see, this example income statement is a single-step statement because it only lists expenses in one main category. Although this statement might not be extremely useful for investors looking for detailed information, it does accurately calculate the net income for the year.
This net income calculation can be transferred to Paul's statement of owner's equity for preparation.
What is a Funds Flow Statement?A funds flow statement is a consolidated statement of all the cross transactions over the period for which the flow is being analysed.
Cross Transactions i.e. transactions involving a current account and a non-current account bring about a change in the fund or working capital. Some bring about an increase in fund and others bring about a decrease in the available fund (working capital).
The cross transactions presented in the funds flow statement are classified/grouped into two as,
i. Sources/Inflows of funds
Transactions which bring about an increase in the available fund (working capital)
Transactions which bring about a decrease in the available fund (working capital)
Identifying Inflows/Outflows from changes in Non-Current AccountsA cross transaction which brings about a change through an inflow/outflow of fund involves a current account and a non-current account.
Of all the transactions that take place in an organisation during a period, the number of transactions involving non-current accounts would be far lesser than the transactions involving current accounts.
Therefore, in identifying cross transactions it would be easier to look out for transactions involving non-current accounts and then looking out for cross transactions within them rather than going through all the transactions.
Inflow/Sources of FundsWhere, on account of an accounting transaction, there is an increase in Fund (working capital) we say that there is an inflow/source of fund.
There will be an inflow, when, on account of the transaction, there is
a decrease in the value of a non-current asset
(Or)
an increase in the value of a non-current liability
We raise funds either by selling away assets or by taking loans (liabilities).
Illustrative Explanation Consider, the following consolidated balance sheet
Working capital has changed from 9,00,000 to 13,00,000.
Outflow/Applications of FundsWhere, on account of an accounting transaction, there is a decrease in Fund (working capital) we say that there is an outflow/application of fund.
There will be an outflow, when, on account of the transaction, there is
Working capital has changed from 9,00,000 to 7,80,000.
Doesn't the Statement of Changes in Working Capital help in analysing funds flowThe statement of changes in working capital (fund) is prepared by taking the current account balances from the balance sheet. It is prepared for the period for which funds flow is being analysed which generally is the accounting period.
It provides us the information relating to change in the values of the various current account balances by comparing the balance as on the first day (opening balance) with the balance on the last day (closing balance) of that period.
The aggregate value of the changes in the current accounts would give us the net change in working capital (fund) over the period.
Funds flow analysis not possible from the Statement of changes in Working Capital From the statement of changes in working capital, we can only say that there is a change in fund (working capital) on account of a change in so and so current account balance.
The statement only provides the information relating to the magnitude of the fund before and after the flow along with the magnitude of change in the fund.
Funds flow analysis involves analysing the flow i.e. finding the reasons for the flow. This involves dealing with the actual transactions that have caused the flow.
The statement of changes in working capital does not provide any information relating to the actual transactions that have caused that change.
For analysing Funds Flow we need additional information Cross transactions are the reason for funds flow.
Of all the accounting transactions that have brought about a change in the current accounts, only cross transactions would be relevant in analysing funds flow.
To analyse funds flow using the information relevant to current accounts, we need consider all the accounting transactions that have affected current accounts and from among them we need to identify the cross transactions which have also brought about a change in the fund (working capital).
Minimizing the effort Cross transaction involves a current account and a non-current account. Cross transactions are all that we need to be able to analyse funds flow.
The magnitude of accounting transactions involving non-current accounts are generally far lesser compared to the accounting transactions involving current accounts.
Therefore, in analysing funds flow we try to identify the cross transactions using the changes in non-current accounts.
Cash Flow Statement (Explanation)
Introduction to Cash Flow Statement
The official name for the cash flow statement is the statement of cash flows. We will use both names throughout AccountingCoach.com.
The statement of cash flows is one of the main financial statements. (The other financial statements are the balance sheet, income statement, and statement of stockholders' equity.)
The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company. For example, the heading may state "For the Three Months Ended December 31, 2014" or "The Fiscal Year Ended September 30, 2014".
The cash flow statement organizes and reports the cash generated and used in the following categories:
To experience another presentation and to enhance your retention of the cash flow statement see AccountingCoach PRO for our visual tutorial, business forms to assist in preparing the statement, and exam questions.
What Can The Statement of Cash Flows Tell Us?
Because the income statement is prepared under the accrual basis of accounting, the revenues reported may not have been collected. Similarly, the expenses reported on the income statement might not have been paid. You could review the balance sheet changes to determine the facts, but the cash flow statement already has integrated all that information. As a result, savvy business people and investors utilize this important financial statement.
Here are a few ways the statement of cash flows is used.
1. The cash from operating activities is compared to the company's net income. If the cash from operating activities is consistently greater than the net income, the company's net income or earnings are said to be of a "high quality". If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash.
2. Some investors believe that "cash is king". The cash flow statement identifies the cash that is flowing in and out of the company. If a company is consistently generating more cash than it is using, the company will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire another company. All of these are perceived to be good for stockholder value.
3. Some financial models are based upon cash flow.
What are the reasons where balance sheet will not tally?Balance sheet is the summary of Assets ,Liabalities , and profit or loss from Profit and loss account. following are the common reasons
1.As Purely based on nduble entry system For each ledger debits there should a equlent ledger credit on all transactions.
2. We can divide ledgers into Balance sheet items and Profil and loss account items.
Balance sheet ledgers are ledger balances which directly reflects in Balance sheetProfit and Loss ledgers are ledgers which is reflecting only in Profit and loss account not in balance sheet.
3. Check the opening balance sheet, difference in opening balance sheet may the reason.
The Balance Sheet is consists of Assets and Liabilities, ifany asset purchase then it will have effect on balance sheetlike.1) Cash decreases if we purchase asset with cash and themeanwhile asset value is increases. then balance sheet tallied.
2) If we purchase asset by bank means bank balance decreasesand asset balance is increases. then B/S tallied.
3) If we purchase asset on credit means liability increasesand meanwhile asset values also increases but effect will be same defiantly balance tallied.
Ratio Analysis: Meaning, Classification and Limitation of Ratio AnalysisMeaning:
Ratio analysis is the process of determining and interpreting numerical relationships based on financial statements. A ratio is a statistical yardstick that provides a measure of the relationship between two variables or figures.
This relationship can be expressed as a percent or as a quotient. Ratios are simple to calculate and easy to understand. The persons interested in the analysis of financial statements can be grouped under three heads,
i) owners or investors
ii) creditors and
iii) financial executives.
Although all these three groups are interested in the financial conditions and operating results, of an enterprise, the primary information that each seeks to obtain from these statements differs materially, reflecting the purpose that the statement is to serve.
Investors desire primarily a basis for estimating earning capacity. Creditors are concerned primarily with liquidity and ability to pay interest and redeem loan within a specified period.
Management is interested in evolving analytical tools that will measure costs, efficiency, liquidity and profitability with a view to make intelligent decisions.
Classification of Ratios:
Financial ratios can be classified under the following five groups:
1) Structural
2) Liquidity
3) Profitability
4) Turnover
5) Miscellaneous.
1. Structural group:
The following are the ratios in structural group:
i) Funded debt to total capitalisation:
The term ‘total’ capitalisation comprises loan term debt, capital stock and reserves and surplus. The ratio of funded debt to total capitalisation is computed by dividing funded debt by total capitalisation. It can also be expressed as percentage of the funded debt to total capitalisation. Long term loans
Total capitalisation (Share capital + Reserves and surplus + long term loans)
ii) Debt to equity:
Due care must be given to the; computation and interpretation of this ratio. The definition of debt takes two foremost. One includes the current liabilities while the other excludes them. Hence the ratio may be calculated under the following two methods:
Long term loans + short term credit + Total debt to equity = Current liabilities and provisions Equity share capital + reserves and surplus (or)
Long-term debt to equity =
Long – term debt / Equity share capital + Reserves and surplus
iii) Net fixed assets to funded debt:
This ratio acts as a supplementary measure to determine security for the lenders. A ratio of 2:1 would mean that for every rupee of long-term indebtedness, there is a book value of two rupees of net fixed assets:
Net Fixed assets funded debt
iv) Funded (long-term) debt to net working capital:
The ratio is calculated by dividing the long-term debt by the amount of the net working capital. It helps in examining creditors’ contribution to the liquid assets of the firm.
Long term loans Net working capital
2. Liquidity group:
It contains current ratio and Acid test ratio.
i) Current ratio:
It is computed by dividing current assets by current liabilities. This ratio is generally an acceptable measure of short-term solvency as it indicates the extent to which he claims of short term creditors are covered by assets that are likely to be converted into cash in a period corresponding to the maturity of the claims. Current assets / Current liabilities and provisions + short-term credit against inventory
ii) Acid-test ratio:
It is also termed as quick ratio. It is determined by dividing “quick assets”, i.e., cash, marketable investments and sundry debtors, by current liabilities. This ratio is a bitterest of financial strength than the current ratio as it gives no consideration to inventory which may be very a low- moving.
3. Profitability Group:
It has five ratio, and they are calculated as follows:
For making a proper use of ratios, it is essential to have fixed standards for comparison. A ratio by itself has very little meaning unless it is compared to some appropriate standard. Selection of proper standards of comparison is a most important element in ratio analysis. The four most common standards used in ratio analysis are; absolute, historical, horizontal and budgeted.
Absolute standards are those which become generally recognised as being desirable regardless of the company, the time, the stage of business cycle, or the objectives of the analyst. Historical standards involve comparing a company’s own’ past performance as a standard for the present or future.
In Horizontal standards, one company is compared with another or with the average of other companies of the same nature.
The budgeted standards are arrived at after preparing the budget for a period Ratios developed from actual performance are compared to the planned ratios in the budget in order to examine the degree of accomplishment of the anticipated targets of the firm.
Limitations:
The following are the limitations of ratio analysis:
1. It is always a challenging job to find an adequate standard. The conclusions drawn from the ratios can be no better than the standards against which they are compared.
2. When the two companies are of substantially different size, age and diversified products,, comparison between them will be more difficult.
3. A change in price level can seriously affect the validity of comparisons of ratios computed for different time periods and particularly in case of ratios whose numerator and denominator are expressed in different kinds of rupees.
4. Comparisons are also made difficult due to differences of the terms like gross profit, operating profit, net profit etc.
5. If companies resort to ‘window dressing’, outsiders cannot look into the facts and affect the validity of comparison.
6. Financial statements are based upon part performance and part events which can only be guides to the extent they can reasonably be considered as dues to the future.
7. Ratios do not provide a definite answer to financial problems. There is always the question of judgment as to what significance should be given to the figures. Thus, one must rely upon one’s own good sense in selecting and evaluating the ratios.
Straight-line Method of Depreciation
In straight line depreciation method, cost of a fixed asset is reduced uniformly over the useful life of the asset. Since depreciation expense charged to income statement in each period is the same, the carrying amount of the asset on balance sheet declines in a straight line.
Due to its simplicity, straight line method of depreciation is the most commonly used depreciation method. Accounting principles require companies to depreciate its fixed assets using method that best reflects the pattern in which the assets are being used. While the straight-line method is appropriate in many situations, some fixed assets lose more value in initial years. In such situations other depreciation methods are more appropriate.
Formula
Depreciation expense under straight line method is calculated by dividing the depreciable amount of the fixed asset by the useful life of the asset.
Depreciable amount equals cost minus salvage value. Cost is the amount at which the fixed asset is capitalized. Salvage value (also called residual value or scrap value) is the estimated value of the fixed asset at the end of its useful life.
Since an amount equal to the salvage value can be recovered by selling the asset, only the difference between the cost and the salvage value is depreciated.
Useful life of a fixed asset represents the number of accounting periods within which the asset is expected to generate economic benefits.
Normally purchase of fixed assets does not coincide with the start of financial year. In such situations, some companies elect to charge the whole year depreciation to income statement in the year of purchase (and do not charge any depreciation in the year of disposal). Another more appropriate option is to charge proportionate depreciation for partial year.
Depreciation Expense: Straight-line Method for a Partial Year = DE ×N
12
WhereDE is the depreciation expense for a complete financial year.N is the number of months during which the fixed asset was available for use.
Journal entries
Depreciation expense under the straight line depreciation method is journalized as follows:
Depreciation Expense XYZ
Accumulated Depreciation XYZ
The same journal entry is posted at the end of each year of the useful life because the amount charged to expense is each full year is the same.
Examples
Example 1
On 1 Jan 2011, Company A purchased a vehicle costing $20,000. The company expects the vehicle to be operational for 4 years at the end of which it can be sold for $5,000. Calculate depreciation expense for the year ended 31 Dec 2011, 2012, 2013 and 2014.
Solution:
Depreciable amount of the vehicle is $15,000 ($20,000 cost minus $5,000 salvage value). Useful life is 4 years.
Depreciation expense for year ended 31 Dec 2011 = $15,000 ÷ 4 = $3,750 per year.
Depreciation expense shall remain the same over the useful life. Hence, an amount of $3,750 shall be the depreciation expense for year ended 31 Dec 2012, 2013 and 2014.
Example 2: Proportionate Depreciation
Assume the same data as in Example 1 above. Suppose Company A’s year end is 30th June instead of 31st December.
Under this scenario the vehicle is used only for 6 months in the financial year ended 30 June 2011. Proportionate depreciation should be charged which is calculated by multiplying the full year straight line depreciation expense by a fraction representing the part of the accounting year during which the asset was used.
Depreciation expense for year ended 30 June 2011 = [ ($20,000 − $5,000) ÷ 4 ] × 6/12 = $1,875
Full year depreciation shall be charged in financial year ended 30 June 2012, 2013 and 2014. Partial depreciation shall be charged in the year of disposal i.e. financial year ended 30 June 2015.
The following depreciation schedule presents the asset’s income statement and balance sheet presentation in each of the years.
Depreciation Carrying Value
Purchase – 20,000
Year ended 2011-06-30 1,875 18,125
Year ended 2012-06-30 3,750 14,375
Year ended 2013-06-30 3,750 10,625
Year ended 2014-06-30 3,750 6,875
Year ended 2015-06-30 1,875 5,000
Please note that the carrying amount of the asset will never fall below the salvage value because this is the amount which can be recovered even when the asset is no longer being used.
Other important methods of depreciation are the declining balance method, the units of production method and the sum of the years' digits method of depreciation.
Fixed assetFixed assets, also known as tangible assets[1] or property, plant, and equipment (PP&E), is a term used in accounting for assets and property that cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. In most cases, only tangible assets are referred to as fixed.
Difference Between Sundry Debtors and Bills Receivable1 Vinod Kumar December 13, 2011
Basis of Differences
Sundry Debtors
Bill Receivables
1. Definition Debtor is the customer of our business. He bought goods from us on credit and we have to get money from him.
Bill receivables are those bills whose amount will be received on due date from debtor or the person whose name in it as drawee.
2. Bad Debts or Dishonor
If debtor does not pay our money. It means receivable money will be converted into bad debts. It will be loss of our business. At that time, we pass following journal entry.Bad Debts Account Dr.Respective Debtor Account Cr.
If we do not get the money of bill from debtor, it will be the dishonor of bill and our debtor will be responsible for paying that money. We will pass following entry
Debtor or Drawee a/c Dr.B/R a/c Cr.
3. Discount When we give discount to our debtor for getting money fastly, it will be our loss and discount allowed account is opened.
When we discount a bill from bank at discount, this discount will be different from discount account. Still this is also our loss. At that time, we can open discount on Collection Bills.
4. Net Receivable Amount
When we get bill receivable from any debtor. At this time, debtor's direct liability will decrease. Sometime, our debtor has to take money from third party and he mentions that third party name. At that time, third party will be responsible for giving us money.
Total amount of bill will be receivable. There will not any deduction out this amount.
5. Procedure of Accounting
For recording sundry debtors in the books, we pass journal entry of credit sales.
For recording bill receivables, we maintain bill receivable books.
What is a capital expenditure versus a revenue expenditure?A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset.
A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense. Even significant repairs that do not extend the life of the asset or do not improve the asset (the repairs merely return the asset back to its previous condition) are revenue expenditures.
Working Capital
DEFINITION of 'Working Capital'
Working Capital is a measure of both a company's efficiency and its short-term financial health. Working capital is calculated as:
Working Capital = Current Assets - Current Liabilities
The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient. Also known as "net working capital".
FIFO vs. LIFO Accounting
FIFO and LIFO are cost layering methods used to value the cost of goods sold and ending inventory. FIFO is a contraction of the term "first in, first out," and means that the goods first added to inventory are assumed to be the first goods removed from inventory for sale. LIFO is a contraction of the term "last in, first out," and means that the goods last added to inventory are assumed to be the first goods removed from inventory for sale.
Why use one method over the other? Here are some considerations that take into account the fields of accounting, materials flow, and financial analysis:
Issue FIFO Method LIFO Method
Materials flow
In most businesses, the actual flow of materials follows FIFO, which makes this a logical choice.
There are few businesses where the oldest items are kept in stock whiler newer items are sold first.
Inflation
If costs are increasing, the first items sold are the least expensive, so your cost of goods sold decreases, you report more profits, and therefore pay a larger amount of income taxes in the near term.
If costs are increasing, the last items sold are the most expensive, so your cost of goods sold increases, you report fewer profits, and therefore pay a smaller amount of income taxes in the near term.
Deflation
If costs are decreasing, the first items sold are the most expensive, so your cost of goods sold increases, you report fewer profits, and therefore pay a smaller amount of income taxes in the near term.
If costs are decreasing, the last items sold are the least expensive, so your cost of goods sold decreases, you report more profits, and therefore pay a larger amount of income taxes in the near term.
Financial reporting
There are no GAAP or IFRS restrictions on the use of FIFO in reporting financial results.
IFRS does not all the use of the LIFO method at all. The IRS allows the use of LIFO, but if you use it for any subsidiary, you must also use it for all parts of the reporting entity.
Record keeping
There are usually fewer inventory layers to track in a FIFO system, since the oldest layers are continually used up. This reduces record keeping.
There are usually more inventory layers to track in a LIFO system, since the oldest layers can potentially remain in the system for years. This increases record keeping.
Reporting fluctuations
Since there are few inventory layers, and those layers reflect recent pricing, there are rarely any unusual spikes or drops in the cost of goods sold that are caused by accessing old inventory layers.
There may be many inventory layers, some with costs from a number of years ago. If one of these layers is accessed, it can result in a dramatic increase or decrease in the reported amount of cost of goods sold.
In general, LIFO accounting is not recommended, for the following reasons:
It is not allowed under IFRS, and a large part of the world uses the IFRS framework. The number of layers to track can be substantially larger than would be the case under FIFO.
If old layers are accessed, costs may be charged to expense that vary substantially from current costs.
In essence, the primary reason for using LIFO is to defer the payment of income taxes in an inflationary environment.
Basics explained: What are Direct and Indirect Taxes?
As they say, nothing is certain but death and taxes. Since we’d like to focus on the more cheerful of those two options, let’s talk about taxes.
Taxes come in many avatars – income tax, sales tax, corporate tax, service tax and so on. There are so many types of taxes that an average Indian pays that often you pay a tax without even knowing that you’re paying it!
Wouldn’t you like to know exactly what taxes we end up paying in our day to day lives, both knowingly and unknowingly? So here goes!
Direct and Indirect Taxes
The most fundamental classification of taxes is based on who collects the taxes from the tax payer.
Direct Taxes, as the name suggests, are taxes that are directly paid to the government by the taxpayer. It is a tax applied on individuals and organizations directly by the government e.g. income tax, corporation tax, wealth tax etc.
Indirect Taxes are applied on the manufacture or sale of goods and services. These are initially paid to the government by an intermediary, who then adds the amount of the tax paid to the value of the goods / services and passes on the total amount to the end user.
Examples of these are sales tax, service tax, excise duty etc.
DYK: Difference between FY and AYWhat is financial year while filing returns? In case of filing I-T returns, financial year is the previous year. It is the year in which you have earned the income. Simply put, if you are filing a return this year, the financial year will be 2012-13. For example, if you have had an income between 1 April 2012 and 31 March 2013, then 2012-13 will be referred to as FY.
What is assessment year? AY is the year in which you file returns. It is the year in which the income that you have earned in the financial year that just ended will be evaluated. For instance, if you have had an income between 1 April 2012 and 31 March 2013, 2013-14 will be the AY. Simply put, it is the year in which your tax liability will be calculated on the previous year’s income. Considering that only
when an FY is complete can the I-T department evaluate your income, you pay tax for the year that has just gone by in the current year.Why the confusion? If you look at the ITR form, only one year is mentioned, for example, AY2013-14. Typically all documents that you refer to in ITR form—tax deduced at source form, capital gains statement, your Form 16A and Form 26AS—will be of FY2012-13. It is FY that is captured in every proof that you submit for AY. If you have a confusion, just remember that your income will be assessed only after the year has ended. What should you do? AY is the terminology used by the I-T department. You should understand that AY and FY are two different periods. In case you have made a mistake in the years in the original form, you can rectify it by filing a revised ITR. But remember that it is possible only if you have filed your ITR on time. When a revised return is filed, the original one is withdrawn and it is no more valid. In case there is an error in the revised ITR form, you can revise any time during the assessment year. However, it is recommended that you double check the year with your chartered accountant or financial planner in case you are confused before filing for I-T returns.
5 Heads of Income for Computation of Income Tax
Income is classified under five heads in the Indian Income Tax Act. Each year, you or your qualified chartered accountant is expected to put all your earnings or incomes under these 5 heads of income for calculating tax.
Here is a small primer of what these 5 heads of income mean and what all they consist of.
Income from salary
Income can be charged under this head only if there is an employer employee relationship between the payer and payee. Salary includes basic salary or wages, any annuity or pension, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits.
The aggregate of the above incomes, after exemptions available, is known as Gross Salary and this is charged under the head income from salary.
Basic salary along with commissions and bonuses is fully taxable.
Allowances : An allowance is a fixed monetary amount paid by the employer to the employee for expenses related to office work. Allowances are generally included in the salary and taxed unless there are exemptions available.
The following allowances are fully taxable : dearness allowance, city compensatory allowance, overtime allowance, servant allowance and lunch allowance.
Specific exemptions are available for some allowances as shown below.
Conveyance Allowance : Upto Rs 800/- a month is exempt from tax.
House Rent Allowance (HRA) : Hop over the House Rent Allowance article to check on calculation and exemptions available.
Leave Travel Allowance (LTA) : LTA accounts for expenses for travel when you and your family go on leave. While this is paid to you, it is tax free twice in a block of 4 years.
Medical Allowance : Medical expenses to the extent of Rs 15,000/- per annum is tax free. The bills can be incurred by you or your family.
Perquisites : Perquisites (or personal advantage) are benefits in addition to normal salary to which an employee has a right by way of his employment. Examples of these are rent free accommodation or car loan. There are some perquisites that are taxable in the hands of all categories of employees, some which are taxable when the employee belongs to a specific group and some that are tax free.
Your employer will give you Form 16 which will contain all the earnings, deductions and exemptions available.
Income from house property
Any residential or commercial property that you own will be taxed as well. Even if your piece of real estate is not let out, it will be considered earning rental income and you will need to pay tax on it.
The income tax blokes are a bit easy going on this – they tax you on the capacity of the real estate to earn income and not the actual rent. This is called the property’s Annual Value and is the higher of the fair rental value, rent received or municipal rent.
The Annual Value can go through a standard deduction of 30% and if you reduce the interest on borrowed capital, then you get the value which is charged under the head income from house property.
Profits and gains of business or profession
Income earned through your profession or business is charged under the head “profits and gains of business or profession”. The income chargeable to tax is the difference between the credits received on running the business and expenses incurred.
The deductions allowed are depreciation of assets used for business; rent for premises; insurance and repairs for machinery and furniture; advertisements; traveling and many more.
Capital gains
Any profit or gain arising from transfer of capital asset held as investments are chargeable to tax under the head “capital gains”.
Hop over to the Long Term and Short Term capital gains article to read more about this. Might be worth reading to see how indexation is used in long term capital gains scenario to reduce tax outgo.
Income from other sources
Any income that does not fall under the four heads above is taxed under the head “income from other sources”. An example is interest income from bank deposits, winning from lottery, any sum of money exceeding Rs. 50,000 received from a person (other than from relative, on marriage, under a will or inheritance).
Here is a snapshot of the above 5 heads of income, courtesy Outlook Money.
Taxes - Types Of Taxes
A business must pay a variety of taxes based on the company's physical location, ownership structure and nature of the business. Business taxes can have a huge impact on the profitability of businesses and the amount of business investment. Taxation is a very important factor in the
financial investment decision-making process because a lower tax burden allows the company to lower prices or generate higher revenue, which can then be paid out in wages, salaries and/or dividends. Business may be required to remit the following types of taxes:
Federal Income Tax: A tax levied by a national government on annual income.
State and/or Local Income Tax: A tax levied by a state or local government on annual income. Not all states have implemented state level income taxes.
Payroll Tax: A tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the United States, both state and federal authorities collect some form of payroll tax. In the United States, Medicare and Social Security, also called FICA, make up the payroll tax.
Unemployment Tax: A federal tax that is allocated to state unemployment agencies to fund unemployment assistance for laid-off workers.
Sales Tax: A tax imposed by the government at the point of sale on retail goods and services. It is collected by the retailer and passed on to the state. Sales tax is based on a percentage of the selling prices of the goods and services and is set by the state. Technically, consumers pay sales taxes, but effectively, business pay them since the tax increases consumers costs and causes them to buy less.
Foreign Tax: Income taxes paid to a foreign government on income earned in that country.
Value-Added Tax: A national sales tax collected at each stage of production or consumption of a good. Depending on the political climate, the taxing authority often exempts certain necessary living items, such as food and medicine from the tax.
