Profit refers to the excess of total revenue over total expenses. According to the rule "Debit all expenses and losses, Credit all incomes and gains", expenses are recorded on the debit side while revenues are recorded on the credit side. There is profit when Total revenue > Total expenses, whichRead more
Profit refers to the excess of total revenue over total expenses. According to the rule “Debit all expenses and losses, Credit all incomes and gains”, expenses are recorded on the debit side while revenues are recorded on the credit side.
There is profit when Total revenue > Total expenses, which means the balance of the credit side > the balance of the debit side. Since, in accounting Dr. side is always equal to the credit side, a balancing figure (representing profit or loss) is shown on the shorter side, to make both sides equal.
When Credit side > Debit side, Profit(balancing figure) is shown on the Dr. side so that both sides are equal.
PROFIT
Profit refers to the excess of total revenue over the total expenses of the business for an accounting year. In simple words, it shows how much extra the firm earned after deducting all the expenses it incurred during the year.
Profit = Total Revenue – Total Expenses
Suppose, the firm earned a total revenue of $10,000 for the accounting year 2022-23. Also, it incurred total expenses of $6,000 during the year. So, Profit for the AY 2022-23 is $4,000.
ASCERTAINING PROFIT
To ascertain profit earned or loss incurred by the firm during an accounting year, it prepares two accounts.
Trading A/c
Profit and Loss A/c
Points to be noted:
Both accounts are Nominal Account which follows the rule “Debit all expenses and losses, Credit all incomes and gains”
The debit side records expenses while the Credit side records incomes.
Both are balanced accounts, which means its Dr. side is always equal to its Cr. side.
If they are not balanced, then a balancing figure is added to the shorter side which represents profit or the loss depending on which side is greater.
If Dr. side > Cr. side, it means expenses are more than the incomes and thus, there is a loss.
If Cr. side > Dr. side, it means there are more incomes than expenses and thus, there is Profit.
TRADING ACCOUNT
It is the first final account prepared for calculating gross profit or gross loss during the year because of the trading activities of the firm.
Trading activities are related to the buying and selling of goods. In between buying and selling a lot of activities are there like transportation, warehousing, loading, unloading, etc. All expenses that are directly related to buying and selling as well as manufacturing of goods are known as Direct expenses and are also recorded in the trading accounts.
Items included on the debit side:
Opening stock
Purchases
Direct expenses like wages, import duty, royalty, manufacturing expenses, etc.
Gross Profit
Items included on the credit side:
Sales
Closing stock
Gross loss
Gross Profit is when Cr. side (incomes) > Dr. side (expenses). It is recorded on the debit side as a balancing figure.
PROFIT AND LOSS ACCOUNT
A businessman incurs a lot of expenses during the year which may be directly related or indirectly related to the business.
As the Trading account only considers direct expenses, the businessman prepares the P&L A/c which considers all the expenses incurred during a year to ascertain net profit or loss.
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.
When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.
The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.
Accounting entry for loss transferred is as follows :
Capital A/c …Dr.
To Profit & Loss A/c
(being net loss transferred to capital account)
Example
A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.
Extract of a Profit and loss a/c showing net loss is as under:
Profit and loss A/c for the year ended …..
Particulars
Amount (Dr.)
Particulars
Amount (Cr.)
To gross loss b/d
xxx
By gross profit b/d
xxx
To salaries
xxx
By bank interest
xxx
To office rent
xxx
By commission received
xxx
To printing and stationery
xxx
By rent received
xxx
To insurance
xxx
By dividend
xxx
To audit fees
xxx
By profit on sale of asset
xxx
To electricity chares
xxx
By Net Loss
xxx
To depreciation
xxx
To bad debts
xxx
To bank charges
xxx
To miscellaneous expenditure
xxx
To interest on loans
xxx
Total
xxx
The debit balance for a non-corporate entity is shown as a reduction from the capital account
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on…
Liabilities
Amount
Equity and liabilities
Capital
Less: Profit & Loss A/c
While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on..
Liabilities
Amount
Equity and liabilities
Reserves And Surplus
Less: Profit & Loss A/c
Conclusion: Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.
The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.
Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods) ACCOUNTS PAYABLE Accounts payable refers to all short-term liaRead more
Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods)
ACCOUNTS PAYABLE
Accounts payable refers to all short-term liabilities of the business that are to be paid. These are usually paid within a duration of 90 days. It includes both Trade payable (goods and services purchased on credit) as well as expenses payable (used but payment not made yet) like rent payable, electricity bill, etc.
Businesses cannot make every payment on the spot. There can be cases when the business is facing a shortage of funds, can have funds but doesn’t have enough cash (or liquid funds) to make payment or simply doesn’t want to make payment on the spot to reduce its capital requirement.
So, like us businessmen also purchase goods on credit or use services for which payment is to be made soon. All these are liabilities for the business.
However, they must be related to the business to be considered as accounts payable.
DEBIT BALANCE OF ACCOUNTS PAYABLE
Debit balance of accounts payable means money owed by others. There is Debit balance when
OVERPAYMENT is made to the creditors or the supplier. It happens when the wrong amount is paid or payment is made twice for the same transaction.
Suppose you need to pay $10,000 as rent within 30 days. After 25 days you mistakenly made a payment of $12,000.
In this case,
Firstly, you will record the transaction by crediting Accounts payable (as liability increased) by $10,000
When payment is made after 25 days, Accounts Payable is debited by $12,000 (as liability decreased)
So, there will be a debit balance of $2,000 (which means the creditor owes you) till the creditor returns the excess amount.
PURCHASE RETURN of already paid goods also result in debit balance of Accounts Payable.
Suppose you bought goods worth $50,000 from Mr A on credit and paid for the same. Later, you returned all the goods because they were defective. Now, there will be Debit balance of Accounts Payable till there is a full refund of $50,000 by Mr A.
How is Accounts Payable Treated Normally?
Accounts Payable are the current liabilities of the firm and are shown under the head Current Liabilities in the Balance Sheet. Its liability, thus has a credit balance which represents the amount owed by the firm to others. It is credited when increases and debited when decreases.
For example – Suppose you purchased goods worth $30,000 and agreed to pay after 30 days. So, Accounts payable will be credited by $30,000 and purchases will be debited by $30,000.
Purchases A/c – $30,000 (debit)
To Accounts Payable A/c – $30,000
After 30 days payment is made in cash, which means the liability decreased. So, Accounts Payable A/c will be debited.
Accruals Accrual means accounting for liability or revenue that is certain and has become due but is yet to be paid or received. Examples: When a product is sold or services are provided but payment has not been received. Interest on loans or advances. Insurance premium. Prepaid expenses. ProRead more
Accruals
Accrual means accounting for liability or revenue that is certain and has become due but is yet to be paid or received.
Examples:
When a product is sold or services are provided but payment has not been received.
Interest on loans or advances.
Insurance premium.
Prepaid expenses.
Provisions
Provision is accounting for liability or a loss that is uncertain but can arise in future. The exact amount is not known or is uncertain. A provision is an amount set aside for a probable future expense dependent on the happening or non-happening of an event.
Examples:
Provision for bad and doubtful debts.
Provision for depreciation.
Provision for non-performing assets.
Difference between Accrual expenses and provisions :
Title
Accrual
Provision
Definition
Recognition of expenses and revenue incurred but not yet paid or received.
Expenses which are yet to be incurred.
Amount
The amount is certain and known.
The amount is probable and not known.
Accounting principle
Matching concept.
Prudence concept.
Estimation and accuracy
The amount is not based on an estimation that can be quantified accurately.
The amount is based on estimation and cannot be quantified accurately.
Example
Prepaid expenses, insurance premiums etc
Provision for bad and doubtful debts, provision for depreciation etc
Accrual expenses are the expenses incurred but have not been paid yet. These are recognized in the accounting year in which they become due not in the accounting year in which they are paid. Accruals can be for both revenue and expenses.
For example: A business has to pay salaries for the month of April but salaries will be actually paid in the next month. So, the business will recognize the expenses in the month of April i.e. when it is actually incurred rather than in the month in which it is actually paid.
The accounting entry in the books will be:
Salary a/c ….1,000 [Dr]
To Accrued expenses a/c 1,000[Cr]
(Being entry made for salary accrued)
Accrued expenses ….1,000 [Dr]
To Bank a/c 1,000[Cr]
(Being entry accounted for payment made)
On the other hand, provisions refer to amounts set aside by a business for probable future liabilities or losses. Provisions are recognized in the financial statements when the company become aware of the potential future obligation and the amount is based on an estimate.
For example: Reliance Ltd. has an outstanding debtor – Amazon Ltd. in the books of account. The business premises of Amazon have caught a serious fire resulting in huge losses and Reliance Ltd is of the view that Amazon may not be able to repay the amount. A provision can be made in the books of Reliance Ltd. for the probable loss.
The accounting entry in the books will be:
P&L a/c [Dr]
To Provision for doubtful debts a/c [Cr]
(Being provision for doubtful debts against outstanding dues of M/s Reliance created in the books).
The main difference between accruals and provisions is the level of certainty. Accruals are the expenses which will occur and the amount of that is also known while provisions are dependent on the happening or non-happening of certain events in future and the amount is also not certain.
Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence. In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are theRead more
Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence.
In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are the expenses incurred before the incorporation of a business. The word ‘fictitious’ means fake, these are not actually the assets of a company even though they are represented in the assets of the balance sheet.
Since the benefit of a fictitious asset is received over a period of time, the whole amount is not charged to the profit and loss account. The amount is amortized over several years. These expenses are non-recurring in nature. These expenses are shown as assets under the head miscellaneous expenditure. Also known as deferred revenue expenditure.
For example: A company incurred $50,000 as promotion costs before the formation of the business. This promotion cost will be deferred over 5 years. In the first year, $10,000 will be charged to the profit and loss account and the remaining $40,000 will be shown as an asset under the heading miscellaneous expenditure. Subsequently, $10000 will be charged to profit and loss for the next 4 years. The amount of $50,000 will be deferred over a span of 5 years.
Some other examples of fictitious assets :
Promotional expenses: Expenses incurred for the promotion of business before the formation of the company such as advertising expenditures are amortized over many years.
Loss on the issue of shares or debentures: When a company issues shares or debentures at a discount, the discount is classified as a fictitious asset and is not treated as an expense or loss. It is amortized over several years.
Incorporation costs: Costs incurred during the formation of a business are incorporation costs. These include registration costs, licensing fees, legal fees and other costs incurred in setting up the business. These are fictitious assets and are amortized over several years.
Loss on Sale of Machinery: When a loss is incurred on the sale of machinery or equipment, that loss is also treated as a fictitious asset and is amortized over several years.
Goodwill
Goodwill is not a fictitious asset because goodwill has a realizable value and can be sold in the market. Goodwill is an intangible asset which does not have a physical existence but can be traded for monetary value. Goodwill has an indefinite life and is sold when the business is sold. Goodwill can be self-generated or purchased. Goodwill is shown as an intangible asset under the heading fixed asset in the financial statements.
Patents
Patents are intangible assets which do not have a physical existence but have realizable value and can be sold in the market. So, patents do not come under the category of fictitious assets. Patents are basically intellectual property. The purchase price of the patent is the initial purchase cost which is amortized over the useful life of the asset. Patents are shown as intangible assets under the heading fixed asset in the balance sheet of the company.
Claim receivable
Claim receivable is an asset if the claim has been authorized by the insurance company. Claim receivable has a monetary value, so does not come under the category of a fictitious asset. If the claim is not yet authorized by an insurance company, it will be shown as a footnote in the financial statements. Authorized claim receivable is shown as a current asset in the financial statement.
Yes, Goodwill is a fixed asset because it adds to the value of the business over a long period. Goodwill can never be calculated for a short period. GOODWILL Basically, goodwill is a premium or you can say an additional price you are paying because of the reputation of a firm or a person. YouRead more
Yes, Goodwill is a fixed asset because it adds to the value of the business over a long period. Goodwill can never be calculated for a short period.
GOODWILL
Basically, goodwill is a premium or you can say an additional price you are paying because of the reputation of a firm or a person.
You may have seen some famous shop in your locality which usually charges a higher price as compared to the other local shops selling the same product.
You may have also noticed that bigger brands like Bata, Titan, Zara, etc. charge higher prices for their products as compared to the same products available in the local market and people are even willing to pay for them. Ever wondered why?
This is because of the goodwill created by them over the years by providing quality products and services, good employee relationships, a strong customer base, social service, a brand name and so on. Customers trust them and for this trust, they are even willing to pay higher prices.
Goodwill is the quantitative value (i.e. in monetary terms) of the reputation of the firm in the market.
FIXED ASSETS
An asset is any possession or property of the business that enables the firm to get cash or any benefit in the future.
Fixed Assets are assets which are purchased for long-term use. They are for continued use in the business for producing goods or services and are not meant for resale. For example- Plant, machinery, building, goodwill, patents etc.
Fixed assets can be tangible or intangible.
Tangible assets are those assets which can be seen and touched and have physical existence like Plant and machinery, building, stock, furniture etc.
Intangible assets are those assets which cannot be seen or touched i.e. they don’t have any physical existence like goodwill, patent, trademark, prepaid expenses etc. Even though they can’t be seen or touched by they have value and are not fictitious assets.
Goodwill as a Fixed Asset
Goodwill is an intangible asset as it cannot be seen or touched but has value and adds value to the business over a long period. Thus, goodwill is a fixed asset.
It is shown in the balance sheet as a Fixed asset under the head Intangible asset.
Goodwill can be
Self-generated (Non-Purchased goodwill)
Purchased goodwill
Self-generated goodwill is created over a period due to the good reputation of the business. It is the difference between the value of the firm and the fair value of the net tangible assets of the firm.
Goodwill = Value of the firm – Fair value of net tangible assets
Here, F.V of net tangible assets = Fair value of tangible assets- Fair value of tangible liabilities
Purchased goodwill arises when one business purchases another business. It is the difference between the price paid for the purchased firm and the sum of the fair market value of the assets received and liabilities to be paid by them on behalf of the purchased firm.
Goodwill = Purchase price – (F.V of assets received + F.V of liabilities to be paid)
Only purchased goodwill is recorded in the books of accounts because it is difficult to correctly calculate the value of self-generated goodwill as the future is uncertain, also its valuation depends on the judgement of the person calculating it, which defers from person to person. Since there is no fixed standard to calculate self-generated goodwill only purchased goodwill is recorded as the price paid for it at the time of acquiring another business.
Suppose Firm A acquired Firm B.
Purchase price= $100,000
Assets received=$60,000
Liabilities (to be paid by Firm A on behalf of Firm B) = $10,000
This, goodwill of $30,000 will be recorded under the head Fixed Asset, subhead Intangible Assets in the balance sheet of Firm A (that is in the balance sheet of the acquiring firm)
Credit balance means excess of credit side over debit side. For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a creditRead more
Credit balance means excess of credit side over debit side.
For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a credit balance of 6,000 of trade payable at the end
.A Credit balance signifies all income and gains and all liabilities and capital that is there in business.
Liabilities and Capital
Account Payables– Account Payables means the amount that is due to the customer by the entity. Its credit balance will always increase when there is an increase in account payables and will decrease when there is a decrease in account payables. For eg-: The stock that has been purchased in credit from creditors of 10,000 will result in an increase in credit balance.
Bank Overdraft-Bank Overdraft means when the amount withdrawn from the bank is more than the balance left in the bank. For example, there is a bank balance of 2,000 in the bank but an amount of 4,000 has been withdrawn from the bank. So in such a case, there will be a credit balance of 2,000 which is in Bank Overdraft
Bonds– Bonds are the amount that is withdrawn from people for a specific time period which gets redeemed at a coupon rate after such a specific period. For example- A 10% bond of 10,000 is given to a group of people which will be redeemed after 5 years.
Income Tax Payables-Income Tax Payable means the amount the company left to pay to the government in earlier periods. For example- There is a tax liability of 10,000 in FY20-21 from which 8,000 was paid in the current year and 2,000 paid in FY21-22.
Notes Payable– Notes Payable is a type of promissory note in which a person pays some amount to an entity that the entity will write in a specific period. For example Notes payable of 1,000 given by a person to an entity which will be returned in 3 months with interest
Capital– Capital means the amount that is introduced by the company at the beginning of the business for the operations and survival of the business. For example- A capital of 10,000 has been introduced by the company.
Income and Gains
Interest Received-Interest Received means the amount which is invested by the company in some other entity and interest received on it
Dividend Received– Dividend means the amount received from the entity in which amount invested by the company
Rent Received– Rent is the amount that the company receives by letting out their land to another person or entity for use
Gains on Sale of Furniture– Gain on Sale of Furniture means that the amount received from the sale of furniture is more than the amount of furniture. So the difference between the amount received from the sale and the cost of furniture is called a gain on the sale of furniture.
So after seeing all the above points we can conclude that the credit balance includes all the income in the P&L account and all the liabilities in the Balance sheet. So its balance increases when there is an increase in its account.
Debit Balance
Debit balance means excess of credit side over debit side.
For Example- At begining of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end there will be a debit balance of 6,000 of trade receivables at the end
A Debit balance basically signifies all expenses and losses and all positive balances of assets. The debit balance increases when any asset increases and decreases when any asset decreases.
Why is profit on debit side?
Profit refers to the excess of total revenue over total expenses. According to the rule "Debit all expenses and losses, Credit all incomes and gains", expenses are recorded on the debit side while revenues are recorded on the credit side. There is profit when Total revenue > Total expenses, whichRead more
Profit refers to the excess of total revenue over total expenses. According to the rule “Debit all expenses and losses, Credit all incomes and gains”, expenses are recorded on the debit side while revenues are recorded on the credit side.
There is profit when Total revenue > Total expenses, which means the balance of the credit side > the balance of the debit side. Since, in accounting Dr. side is always equal to the credit side, a balancing figure (representing profit or loss) is shown on the shorter side, to make both sides equal.
When Credit side > Debit side, Profit(balancing figure) is shown on the Dr. side so that both sides are equal.
PROFIT
Profit refers to the excess of total revenue over the total expenses of the business for an accounting year. In simple words, it shows how much extra the firm earned after deducting all the expenses it incurred during the year.
Profit = Total Revenue – Total Expenses
Suppose, the firm earned a total revenue of $10,000 for the accounting year 2022-23. Also, it incurred total expenses of $6,000 during the year. So, Profit for the AY 2022-23 is $4,000.
ASCERTAINING PROFIT
To ascertain profit earned or loss incurred by the firm during an accounting year, it prepares two accounts.
Points to be noted:
TRADING ACCOUNT
It is the first final account prepared for calculating gross profit or gross loss during the year because of the trading activities of the firm.
Trading activities are related to the buying and selling of goods. In between buying and selling a lot of activities are there like transportation, warehousing, loading, unloading, etc. All expenses that are directly related to buying and selling as well as manufacturing of goods are known as Direct expenses and are also recorded in the trading accounts.
Items included on the debit side:
Items included on the credit side:
Gross Profit is when Cr. side (incomes) > Dr. side (expenses). It is recorded on the debit side as a balancing figure.
PROFIT AND LOSS ACCOUNT
A businessman incurs a lot of expenses during the year which may be directly related or indirectly related to the business.
As the Trading account only considers direct expenses, the businessman prepares the P&L A/c which considers all the expenses incurred during a year to ascertain net profit or loss.
Items written on the Debit side
Items written on the Credit side
Net Profit is when the Cr. side (incomes)> Dr. side(expenses). It is recorded on the Debit side as a balancing figure.
See lessDebit balance of profit and loss account should be transferred to?
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.
When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.
The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.
Accounting entry for loss transferred is as follows :
Capital A/c …Dr.
To Profit & Loss A/c
(being net loss transferred to capital account)
Example
A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.
Extract of a Profit and loss a/c showing net loss is as under:
Profit and loss A/c for the year ended …..
The debit balance for a non-corporate entity is shown as a reduction from the capital account
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on…
Less: Profit & Loss A/c
While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on..
Less: Profit & Loss A/c
Conclusion: Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.
The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.
See lessCan accounts payable have a debit balance?
Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods) ACCOUNTS PAYABLE Accounts payable refers to all short-term liaRead more
Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods)
ACCOUNTS PAYABLE
Accounts payable refers to all short-term liabilities of the business that are to be paid. These are usually paid within a duration of 90 days. It includes both Trade payable (goods and services purchased on credit) as well as expenses payable (used but payment not made yet) like rent payable, electricity bill, etc.
Businesses cannot make every payment on the spot. There can be cases when the business is facing a shortage of funds, can have funds but doesn’t have enough cash (or liquid funds) to make payment or simply doesn’t want to make payment on the spot to reduce its capital requirement.
So, like us businessmen also purchase goods on credit or use services for which payment is to be made soon. All these are liabilities for the business.
However, they must be related to the business to be considered as accounts payable.
DEBIT BALANCE OF ACCOUNTS PAYABLE
Debit balance of accounts payable means money owed by others. There is Debit balance when
OVERPAYMENT is made to the creditors or the supplier. It happens when the wrong amount is paid or payment is made twice for the same transaction.
Suppose you need to pay $10,000 as rent within 30 days. After 25 days you mistakenly made a payment of $12,000.
In this case,
PURCHASE RETURN of already paid goods also result in debit balance of Accounts Payable.
Suppose you bought goods worth $50,000 from Mr A on credit and paid for the same. Later, you returned all the goods because they were defective. Now, there will be Debit balance of Accounts Payable till there is a full refund of $50,000 by Mr A.
How is Accounts Payable Treated Normally?
Accounts Payable are the current liabilities of the firm and are shown under the head Current Liabilities in the Balance Sheet. Its liability, thus has a credit balance which represents the amount owed by the firm to others. It is credited when increases and debited when decreases.
For example – Suppose you purchased goods worth $30,000 and agreed to pay after 30 days. So, Accounts payable will be credited by $30,000 and purchases will be debited by $30,000.
Purchases A/c – $30,000 (debit)
To Accounts Payable A/c – $30,000
After 30 days payment is made in cash, which means the liability decreased. So, Accounts Payable A/c will be debited.
Accounts Payable A/c – $30,00
To Cash – $30,000
See lessIs accrual the same as provision?
Accruals Accrual means accounting for liability or revenue that is certain and has become due but is yet to be paid or received. Examples: When a product is sold or services are provided but payment has not been received. Interest on loans or advances. Insurance premium. Prepaid expenses. ProRead more
Accruals
Accrual means accounting for liability or revenue that is certain and has become due but is yet to be paid or received.
Examples:
Provisions
Provision is accounting for liability or a loss that is uncertain but can arise in future. The exact amount is not known or is uncertain. A provision is an amount set aside for a probable future expense dependent on the happening or non-happening of an event.
Examples:
Difference between Accrual expenses and provisions :
For example: A business has to pay salaries for the month of April but salaries will be actually paid in the next month. So, the business will recognize the expenses in the month of April i.e. when it is actually incurred rather than in the month in which it is actually paid.
The accounting entry in the books will be:
Salary a/c ….1,000 [Dr]
To Accrued expenses a/c 1,000[Cr]
(Being entry made for salary accrued)
Accrued expenses ….1,000 [Dr]
To Bank a/c 1,000[Cr]
(Being entry accounted for payment made)
For example: Reliance Ltd. has an outstanding debtor – Amazon Ltd. in the books of account. The business premises of Amazon have caught a serious fire resulting in huge losses and Reliance Ltd is of the view that Amazon may not be able to repay the amount. A provision can be made in the books of Reliance Ltd. for the probable loss.
P&L a/c [Dr]
To Provision for doubtful debts a/c [Cr]
(Being provision for doubtful debts against outstanding dues of M/s Reliance created in the books).
The main difference between accruals and provisions is the level of certainty. Accruals are the expenses which will occur and the amount of that is also known while provisions are dependent on the happening or non-happening of certain events in future and the amount is also not certain.
See lessWhich of these is a fictitious Asset?
Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence. In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are theRead more
Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence.
In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are the expenses incurred before the incorporation of a business. The word ‘fictitious’ means fake, these are not actually the assets of a company even though they are represented in the assets of the balance sheet.
Since the benefit of a fictitious asset is received over a period of time, the whole amount is not charged to the profit and loss account. The amount is amortized over several years. These expenses are non-recurring in nature. These expenses are shown as assets under the head miscellaneous expenditure. Also known as deferred revenue expenditure.
For example: A company incurred $50,000 as promotion costs before the formation of the business. This promotion cost will be deferred over 5 years. In the first year, $10,000 will be charged to the profit and loss account and the remaining $40,000 will be shown as an asset under the heading miscellaneous expenditure. Subsequently, $10000 will be charged to profit and loss for the next 4 years. The amount of $50,000 will be deferred over a span of 5 years.
Some other examples of fictitious assets :
Goodwill
Goodwill is not a fictitious asset because goodwill has a realizable value and can be sold in the market. Goodwill is an intangible asset which does not have a physical existence but can be traded for monetary value. Goodwill has an indefinite life and is sold when the business is sold. Goodwill can be self-generated or purchased. Goodwill is shown as an intangible asset under the heading fixed asset in the financial statements.
Patents
Patents are intangible assets which do not have a physical existence but have realizable value and can be sold in the market. So, patents do not come under the category of fictitious assets. Patents are basically intellectual property. The purchase price of the patent is the initial purchase cost which is amortized over the useful life of the asset. Patents are shown as intangible assets under the heading fixed asset in the balance sheet of the company.
Claim receivable
Claim receivable is an asset if the claim has been authorized by the insurance company. Claim receivable has a monetary value, so does not come under the category of a fictitious asset. If the claim is not yet authorized by an insurance company, it will be shown as a footnote in the financial statements. Authorized claim receivable is shown as a current asset in the financial statement.
See lessIs goodwill a fixed asset?
Yes, Goodwill is a fixed asset because it adds to the value of the business over a long period. Goodwill can never be calculated for a short period. GOODWILL Basically, goodwill is a premium or you can say an additional price you are paying because of the reputation of a firm or a person. YouRead more
Yes, Goodwill is a fixed asset because it adds to the value of the business over a long period. Goodwill can never be calculated for a short period.
GOODWILL
Basically, goodwill is a premium or you can say an additional price you are paying because of the reputation of a firm or a person.
You may have seen some famous shop in your locality which usually charges a higher price as compared to the other local shops selling the same product.
You may have also noticed that bigger brands like Bata, Titan, Zara, etc. charge higher prices for their products as compared to the same products available in the local market and people are even willing to pay for them. Ever wondered why?
This is because of the goodwill created by them over the years by providing quality products and services, good employee relationships, a strong customer base, social service, a brand name and so on. Customers trust them and for this trust, they are even willing to pay higher prices.
Goodwill is the quantitative value (i.e. in monetary terms) of the reputation of the firm in the market.
FIXED ASSETS
An asset is any possession or property of the business that enables the firm to get cash or any benefit in the future.
Fixed Assets are assets which are purchased for long-term use. They are for continued use in the business for producing goods or services and are not meant for resale. For example- Plant, machinery, building, goodwill, patents etc.
Fixed assets can be tangible or intangible.
Tangible assets are those assets which can be seen and touched and have physical existence like Plant and machinery, building, stock, furniture etc.
Intangible assets are those assets which cannot be seen or touched i.e. they don’t have any physical existence like goodwill, patent, trademark, prepaid expenses etc. Even though they can’t be seen or touched by they have value and are not fictitious assets.
Goodwill as a Fixed Asset
Goodwill is an intangible asset as it cannot be seen or touched but has value and adds value to the business over a long period. Thus, goodwill is a fixed asset.
It is shown in the balance sheet as a Fixed asset under the head Intangible asset.
Goodwill can be
Self-generated goodwill is created over a period due to the good reputation of the business. It is the difference between the value of the firm and the fair value of the net tangible assets of the firm.
Goodwill = Value of the firm – Fair value of net tangible assets
Here, F.V of net tangible assets = Fair value of tangible assets- Fair value of tangible liabilities
Purchased goodwill arises when one business purchases another business. It is the difference between the price paid for the purchased firm and the sum of the fair market value of the assets received and liabilities to be paid by them on behalf of the purchased firm.
Goodwill = Purchase price – (F.V of assets received + F.V of liabilities to be paid)
Only purchased goodwill is recorded in the books of accounts because it is difficult to correctly calculate the value of self-generated goodwill as the future is uncertain, also its valuation depends on the judgement of the person calculating it, which defers from person to person. Since there is no fixed standard to calculate self-generated goodwill only purchased goodwill is recorded as the price paid for it at the time of acquiring another business.
Suppose Firm A acquired Firm B.
Purchase price= $100,000
Assets received=$60,000
Liabilities (to be paid by Firm A on behalf of Firm B) = $10,000
Goodwill = $100,000 – ($60,000 + $10,000) = $30,000
This, goodwill of $30,000 will be recorded under the head Fixed Asset, subhead Intangible Assets in the balance sheet of Firm A (that is in the balance sheet of the acquiring firm)
See lessWhich account has a credit balance?
Credit balance means excess of credit side over debit side. For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a creditRead more
Credit balance means excess of credit side over debit side.
For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a credit balance of 6,000 of trade payable at the end
.A Credit balance signifies all income and gains and all liabilities and capital that is there in business.
Liabilities and Capital
Income and Gains
So after seeing all the above points we can conclude that the credit balance includes all the income in the P&L account and all the liabilities in the Balance sheet. So its balance increases when there is an increase in its account.
Debit Balance
Debit balance means excess of credit side over debit side.
For Example- At begining of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end there will be a debit balance of 6,000 of trade receivables at the end
A Debit balance basically signifies all expenses and losses and all positive balances of assets. The debit balance increases when any asset increases and decreases when any asset decreases.
Asset
Expenses and Loses