Expenses are of two types, are

1. Direct Expenses
2. Indirect Expenses

Direct Expenses

Direct expenses are those expenses are which are directly related to the manufacturing or production of the final goods. These expenses are also known as Manufacturing expenses.

Manufacturing or production of goods indicates the conversion of Raw material into finished goods. the expenses incurred in the stage of conversion are treated as Direct expenses or Manufacturing expenses.

Direct expenses are shown on the Debit side of the Trading Account.

Indirect Expenses

Indirect expenses are those expenses that are incurred to run a business day-to-day and maintenance of the company.  In other words, they are not directly related to making a product or service or buying a wholesale product to resell.

Indirect expenses are classified into three types, which are

1. Factory Expenses
2. Administrative Expenses
3. Selling & Distribution Expenses

Indirect Expenses are shown on the Debit side of the Profit and Loss Account.

Presentation of Direct Expenses in Trading Account

Examples of Direct Expenses

1. Gas, water, and Fuel: Gas, water, and fuel are the essentials to run a factory and are used in machinery to manufacture its final goods.
2. Wages: Wages are the daily payments to the workers or Labours working in the factory premises on a daily or weekly payment basis.
3. Freight and Carriage: Freight and Carriage are the expenses related to the importing of raw materials from the godown or from the outsiders to the Factory.
4. Factory Rent: Rent paid for the factory area or any payment related to the place of the factory is known as factory rent.
5. Factory Lighting: The expenses related to the uniform distribution of light over the working plane are obtained in the factory premises.
6. Factory Insurance: The payment of insurance related to the factory will come under direct expenses.
7. Manufacturing Expenses: Any other expenses related to the manufacturing process of finished goods are manufacturing expenses.
8. Cargo Expenses: These are the expenses related to goods or freight being shipped or carried by the ocean, air, or land from one place to another.
9. Upkeep and Maintenance: These are the expenses related to the maintenance of the factory for smooth running.
10. Repairs on Machinery: The expenses related to any repair on machinery which is used in the production.
11. Coal, Oil, and Grease: Coal, oil, and grease are the essentials to run machinery which results in the conversion of raw material to finished goods.
12. Custom Charges: The expenses related to the payment of any Customs duty for the material imported.
13. Clearing Charges: A clearing charge is a charge assessed on securities transactions by a clearing house for completing transactions using its own facilities.
14. Depreciation on Machinery: Generally it is a nonmonetary expense but recorded in the trading account as a direct expense as per the accrual accounting.
15. Import duty: any payment related to the importing of any machinery or any material from other countries is known as import duty.
16. Octroi: this is the tax levied by a local political unit, normally the commune or municipal authority, on certain categories of goods as they enter the area.
17. Shipping expenses: any expense related to the shipment charges of the raw material is known as shipping expenses.
18. Motive power: Motive Power basically means any power, such as electricity or steam energy, etc, used to impart motion to any source of mechanical energy.
19. Dock dues: a payment that a shipping company must pay for the use of a port.

The correct option is A) Cash book

let’s understand what is petty cash book:

• A petty cash book is a cash book maintained to record petty expenses.
• Petty expenses, mean small or minute expenses for which the payment is made in coins or a few notes or which are smaller denominations like tea or coffee expenses, postage, bus or taxi fare, stationery expenses, etc.
• The person who maintains the petty cash book is known as the petty cashier.
• It is a simple process that helps organizations by focusing on major transactions as petty cashiers handle all small transactions.

Generally, the petty cashbook is prepared as per the Imprest system. As per the Imprest system, the petty expenses for a period (month or week) are estimated and a fixed amount is given to the petty cashier to spend for that period.

At the end of the period, the petty cashier sends the details to the chief cashier and he is reimbursed the amount spent. In this way, the debit balance of the petty cashbook always remains the same.

The petty cash book has two columns in which

• Cash received is recorded in the Left column i.e, “Receipts” or “Debit” column.
• Cash payments are recorded in the Right column i.e, “Payment” or “Credit” column.

Balance of Petty cash book

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

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

Format for petty cash book

Only small denominations are recorded in the petty cash book. It varies with the type, quantity, and need of a business. It involves cash and checks.

• Ordinary Petty cash book:

• Analytical Petty cash book:

Conclusion

A simple petty cash book is a type of cash book because it records the small expenses which involve small transactions in the ordinary daily business.

A petty cash book is not as important as an income statement, balance sheet, or trail balance it doesn’t measure the accuracy of accounts so it is not treated as a statement.

No journal entries are made in the books of accounts while spending or purchasing using a petty cash book so, it is not treated as a journal.

Debts are of two types one is Good Debt, and another one is Bad debt.

Bad Debts

The amount which is not recoverable from the debtors is called Bad debt.  It is an uncollectable amount from the organization’s customers due to the customer’s inability to pay the amount of money taken on credit.

Example 1

Mr A borrowed $100 from Mr B for his college fee and agrees to pay in 2 months. After the time period is complete Mr A failed to repay the borrowed amount. This is a  Bad Debt for Mr B.

Example 2

XYZ Co. had made a credit sale of $50,000. A debtor who has to pay $1000 has been bankrupted. XYZ co. cannot recover the amount from the Debtor, so it records the irrecoverable amount as a bad debt.

Journal Entry

In this entry, “Bad debts are written off of Rs. 2000.”

Bad debt is the amount not recoverable from debtors, which is a loss for the organization.

Modern Rule

The Modern rules of accounting for Expenses are “Debit the increase in expenses and Credit the decrease in expenses.”

Golden Rule

The Golden rules of accounting for expenses and losses are “Debit all expenses and losses, Credit all incomes and gains.”

Bad Debts A/c Dr. 2,000

To Debtor’s A/c 2000

Bad debt is treated as a loss for the organization. As per the rule, this should be debited to the profit and loss account.

Profit and Loss A/c Dr. – 2000

To Bad Debts A/c – 2000

Instead of passing two separate entries for writing off, we can combine the entries and pass one entry.

Profit and Loss A/c Dr. 2000

To Debtor’s A/c 2000

Recovery of Bad debts

Recovery of Bad debt is the amount received for a debt that was written off in the past. It was considered uncollectable.

When we write off bad debt, it is recorded as a loss, but the recovery of bad debts is treated as an income for the business.

It is treated as an income and the recovery of bad debt is shown on the credit side of the Income statement.

Journal Entry for Recovery of Bad debts

Bank/Cash A/c Dr. – Amount

To Bad Debts Recovered A/c – Amount

Rules applied in the Journal entry are as per the Golden rules of accounting,

“Cash/Bank A/C” is a real account therefore debit what comes in and credit what goes out.

“Bad Debts Recovered A/C” is a nominal account therefore debit all expenses and losses, and credit all incomes and gains.

Treatment of “Bad Debt written off of Rs.2ooo.”

In Trial Balance: No effect

In Income Statement: It is shown on the debit side as Rs.2000 (loss)

In Balance Sheet: Rs.2000 shall be deducted from the sundry debtor account.