Any person, company, or organization that owes us money is a debtor. The amount that is owed to us is called debt. When you are unsure if a debtor is going to pay back the amount owed to you, then a provision for doubtful debts is created. Here, the debtor may or may not pay back the amount owed. WhRead more
Any person, company, or organization that owes us money is a debtor. The amount that is owed to us is called debt. When you are unsure if a debtor is going to pay back the amount owed to you, then a provision for doubtful debts is created. Here, the debtor may or may not pay back the amount owed. When the debts owed to us is irrecoverable, it is termed as bad debts.
Provision for doubtful debts may become a bad debt at some point. Usually, companies keep a small portion of their debtors as a provision for doubtful debts in accordance with the prudence concept that tells us to account for all possible losses. Provision for doubtful debts is a liability whereas bad debts are recorded as an expense.
Journal entries for Doubtful debts and bad debts are as follows:
EXAMPLE
If the balance in the debtors’ account shows an amount of Rs 20,000 and 5% of debtors are treated as doubtful, then Rs 1,000 is recorded as a provision for doubtful debts. This amount is deducted from debtors in the balance sheet.
Now if Rs 400 was recorded as actual bad debts, then it is deducted from the provision for doubtful debts instead of debtors. Further another 400 is added back to provision for doubtful debts to maintain the percentage.
The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them. Bad debts We know, debtors for a business are their assets because the business has the right to receive moneyRead more
The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them.
Bad debts
We know, debtors for a business are their assets because the business has the right to receive money from the debtors due to the goods supplied to them.
But if due to circumstances, there appears no probability that the amount due to one or more debtors will be realised to the business, then such debts are categorised as bad debts.
In short, bad debts refer to the amount of money that will not be received from some debtors of the business due to some circumstances like insolvency of debtor etc.
Bad debt is deducted from debtors account by the following journal entry:
Bad debts A/c
Dr.
Amt
To Debtors A/c
Cr.
Amt
(Being bad debts written off from debtors)
As bad debts are losses to a business, it is ultimately written off from the profit and loss account.
Profit and loss A/c
Dr.
Amt
To Bad debts A/c
Cr.
Amt
(Being bad debts written off to profit and loss account)
Write off
In layman terms, write off means to deduct something out from something. In accounting, write off means to deduct or reduce value of assets by crediting it to a liability account which is usually a reserve account or the profit and loss account.
It also refers to the elimination of an item from the books of accounts particularly losses and expenses.
Generally, writing off is associated with the following:
Bad debts.
Damaged Inventories.
Loss on issue or redemption of debentures.
Preliminary expenses.
Bad loans and advances.
Write off can be done in one of the following methods:
Direct write-off: The write off is directly done by crediting asset account or loss account and debiting the reserve or P/L account.
Indirect write-off: Here, an intermediate account is involved between the asset account and liabilities account. A common example is writing off of bad debts where the bad debts account is the intermediate account.
Hence, the following differences can be observed between bad debts and write off or writing off:
A balance sheet is a financial statement that reports the position or value of assets, liabilities and equity at a particular date, which is usually the closing date of a financial year. Formats of balance sheet A balance sheet may be presented in two formats: T-form or Horizontal format This formatRead more
A balance sheet is a financial statement that reports the position or value of assets, liabilities and equity at a particular date, which is usually the closing date of a financial year.
Formats of balance sheet
A balance sheet may be presented in two formats:
T-form or Horizontal format
This format is the same as the format of ledger accounts. There are two columns with the headings ‘Liabilities’ for the left column and ‘Assets’ for the right column and columns adjacent to both columns for amounts. The liabilities and equity (capital) are shown on the liabilities side because they both have credit balance and assets are shown on the asset side. Most of the non-corporates prepare their balance as per this format. The T-form balance sheet looks as given below:
Vertical format
The vertical format of the balance sheet is mostly prepared by corporate entities. Here, the liabilities and assets are shown in the same column as compared to two separate columns in the horizontal format. This results in having a longer shape. Hence, it is called a ‘vertical’ balance sheet. Generally, companies prepare their balance sheet as per this format.
Also, many times, there are two columns for the amount in this format presenting the amount of both the current year and the previous year. This format looks like as given below:
Grouping and marshalling
Beside the structure of the balance sheet i.e. horizontal and vertical, the grouping and marshalling of the items inside the balance sheet are also very important.
Grouping refers to the presenting of similar items under a heading or group. This is done in order to present the balance sheet in a concise manner. This is very important to do. For example, a business can have numerous creditors, but they are all presented under one ‘Creditors’ heading or two or more heading specifying different types of creditors.
The assets of a business are grouped under the heading such as Plant, Property and equipment, Current assets, Non-current investments etc.
Marshalling means the arranging of items as per a particular order. We know that a balance sheet consists of many items and to make the statement more useful and easy to comprehend, the items are arranged in one of the following orders:
Order of Liquidity: The items which are more liquid i.e which can be easily converted into cash are kept at the top. Like in assets, cash is the most liquid asset and requires no conversion. Then items like current investment, inventories (in case of fast-moving goods) are placed under and so on. At the near bottom, items that require a long time of conversion into cash are placed such as land, plant and machinery.
In case of liabilities, the items which are due for repayment soon are kept at the top, like bank overdraft etc. The items which are due for repayment after a long time or at the time of winding capital are kept at the bottom, like long term loans and capital funds. Given below is a format of horizontal balance sheet in which the items are marshalled in order of liquidity:
Order of permanence: This type of arrangement is just the opposite of the order of liquidity. Here the items which are least liquid are placed at the top and the more liquid items are placed at the bottom. Like in the case of assets, cash appears at the bottom and non-current assets at the top. On the liabilities side, equity and non-current liabilities are at the top while current liabilities are at the bottom. Mostly all balance sheets are marshalled in order of permanence.
The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in: Contra accounts Contra entries The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corRead more
The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in:
Contra accounts
Contra entries
The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corresponds to.
Contra entries are entries of the debit and credit aspects related to the same parent account. Let’s discuss them in detail.
Contra accounts
Any account which is created with the purpose of reducing or offsetting the balance of another account is known as a contra account.
A contra account is just the opposite of the account to which it relates. The most common examples are the sales discount account and sales return account which is the contra account of the sales account. They are just the opposite of the sales accounts.
Contra Entries
Contra entries refer to the entries which show the movement of the amount within the same parent account. Here, the debit and credit entry is posted on the debit and credit side respectively of a single parent account. Â Mainly, contra entries are the entries involving cash and bank accounts.
The following transactions are recorded as contra entries:
Cash to Bank transactions: Deposit of cash into the bank account by the entity.
Bank to Cash transactions: Withdrawal of cash from the bank.
Cash to cash transactions: Transfer of cash to the petty cash account.
Bank to Bank transactions: Transfer of amounts from one bank account to other bank accounts of the same entity.
Contra entries are marked by the letter ‘C’ beside the postings in the ledger. Deposit of cash in to bank will be posted in cashbook as below:
The term set off in English means to offset something against something else. It thereby refers to reducing the value of an item. In accounting terms, when a debtor can reduce the amount owed to a creditor by cancelling the amount owed by the creditor to the debtor, it is termed as set off. It is coRead more
The term set off in English means to offset something against something else. It thereby refers to reducing the value of an item. In accounting terms, when a debtor can reduce the amount owed to a creditor by cancelling the amount owed by the creditor to the debtor, it is termed as set off.
It is commonly used by banks where they seize the amount in a customer’s account to set off the amount of loan unpaid by the customer.
Types
There are various types of set-offs as given below:
Transaction set-off – This is where a debtor can simply reduce the amount he is owed from the amount he owes to the creditor.
Contractual set-off – Sometimes, a debtor agrees to not set off any amount and hence he would have to pay the entire amount to the creditor even if the creditor owed some amount to the debtor.
Insolvency set-off – These rules are mandatory and have to be followed under the Insolvency rules 2016.
Bankers set-off – Here, the bank sets off the amount of a customer with another account of the customer.
Example
Let’s say Divya owes Rs 20,000 to Sherin for the purchase of goods. But, Sherin owed Rs 6,000 to Divya already for use of her Machinery. Therefore, the amount of 6,000 can be set off against the 20,000 owed to Sherin and hence Divya would effectively owe Sherin Rs 14,000.
This helps in reducing the number of transactions and unnecessary flow of cash.
A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. The cash flow statement provides information about the flow of cash over a period of time. General reserve is a reseRead more
A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. The cash flow statement provides information about the flow of cash over a period of time.
General reserve is a reserve created by taking a portion of the profits for future requirements.
TREATMENT OF GENERAL RESERVE
As per the indirect method, Since there is no actual flow of cash, any addition to reserves is added back to net profit for calculation of net profit before tax and extraordinary items. This net profit before tax will appear under cash flow from operating activities. If there is a reduction in reserve, then they are subtracted from net profit.
As per the Direct method, an increase or decrease in general reserve will not affect the cash flow statement since non-cash items are not recorded. Only cash receipts and payments that come under operating activities are recorded. So, net profit is not shown in the direct method and hence neither is general reserve.
General reserve does not fall under the head investing activities as investing activities involve the acquisition or disposal of long-term assets or investments. They do not fit in financing activities either as financing activities relate to change in capital or borrowings of the company.
EXAMPLE
If the balance in general reserve for the period of March was Rs 4,000 and in April the balance was Rs 7,000, then its treatment in cash flow would be:
Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition. Realization of revenue means when revenue to be earned from the sale of goods or rendering oRead more
Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition.
Realization of revenue means when revenue to be earned from the sale of goods or rendering of services or any other activity or source becomes absolute and certain. An item is to be shown as revenue in the books of accounts only after it is realized.
Realization in case of sale of goods
Realization occurs in the following situations:
i) When the goods are delivered to the customer for a certain price
ii) All significant risks and rewards of ownership have been transferred to the customer and the seller retains no effective control over the goods.
Let’s take an example. Mr Peter received an order of 500 units of goods from Mr Parker on 1st April. The goods were delivered to Mr Parker on 15Th April and payment for goods was received on 30Th April.
The realization of revenue from the sale of goods will be considered to have occurred on 15th April because the goods were delivered to the customer on that date. The entry of sale of goods will be entered on this day.
Realization is not considered to have occurred on 1st April i.e the date of order because the seller had effective control on goods on that date.
Realization in case of rendering of services
The realization of revenue from the rendering of services occurs as per the performance of service.
Now there arise two situations:
Multiple acts involved in the performance of service: Here, the revenue is realized proportionately on completion of each act.
A Single act involved in the performance of service: Here, revenue is realized only when the service is completely rendered or provided.
Realization of income from other sources:
Interest Income: It is realized on a time proportion basis as per the amount outstanding and rates applicable.
Dividends: It is realized when the shareholder’s right to receive is established and when it is declared.
Realization with regards to other sources of income is considered to have occurred only when there exist no significant uncertainty as to measurability or collectability.
What is the difference between bad debts and provision for doubtful debts ?
Any person, company, or organization that owes us money is a debtor. The amount that is owed to us is called debt. When you are unsure if a debtor is going to pay back the amount owed to you, then a provision for doubtful debts is created. Here, the debtor may or may not pay back the amount owed. WhRead more
Any person, company, or organization that owes us money is a debtor. The amount that is owed to us is called debt. When you are unsure if a debtor is going to pay back the amount owed to you, then a provision for doubtful debts is created. Here, the debtor may or may not pay back the amount owed. When the debts owed to us is irrecoverable, it is termed as bad debts.
Provision for doubtful debts may become a bad debt at some point. Usually, companies keep a small portion of their debtors as a provision for doubtful debts in accordance with the prudence concept that tells us to account for all possible losses. Provision for doubtful debts is a liability whereas bad debts are recorded as an expense.
Journal entries for Doubtful debts and bad debts are as follows:
EXAMPLE
If the balance in the debtors’ account shows an amount of Rs 20,000 and 5% of debtors are treated as doubtful, then Rs 1,000 is recorded as a provision for doubtful debts. This amount is deducted from debtors in the balance sheet.
Now if Rs 400 was recorded as actual bad debts, then it is deducted from the provision for doubtful debts instead of debtors. Further another 400 is added back to provision for doubtful debts to maintain the percentage.
See lessWhat is the difference between bad debt and write off?
The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them. Bad debts We know, debtors for a business are their assets because the business has the right to receive moneyRead more
The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them.
Bad debts
We know, debtors for a business are their assets because the business has the right to receive money from the debtors due to the goods supplied to them.
But if due to circumstances, there appears no probability that the amount due to one or more debtors will be realised to the business, then such debts are categorised as bad debts.
In short, bad debts refer to the amount of money that will not be received from some debtors of the business due to some circumstances like insolvency of debtor etc.
Bad debt is deducted from debtors account by the following journal entry:
As bad debts are losses to a business, it is ultimately written off from the profit and loss account.
Write off
In layman terms, write off means to deduct something out from something. In accounting, write off means to deduct or reduce value of assets by crediting it to a liability account which is usually a reserve account or the profit and loss account.
It also refers to the elimination of an item from the books of accounts particularly losses and expenses.
Generally, writing off is associated with the following:
Write off can be done in one of the following methods:
Hence, the following differences can be observed between bad debts and write off or writing off:
See lessCan you show a format of balance sheet?
A balance sheet is a financial statement that reports the position or value of assets, liabilities and equity at a particular date, which is usually the closing date of a financial year. Formats of balance sheet A balance sheet may be presented in two formats: T-form or Horizontal format This formatRead more
A balance sheet is a financial statement that reports the position or value of assets, liabilities and equity at a particular date, which is usually the closing date of a financial year.
Formats of balance sheet
A balance sheet may be presented in two formats:
T-form or Horizontal format
This format is the same as the format of ledger accounts. There are two columns with the headings ‘Liabilities’ for the left column and ‘Assets’ for the right column and columns adjacent to both columns for amounts. The liabilities and equity (capital) are shown on the liabilities side because they both have credit balance and assets are shown on the asset side. Most of the non-corporates prepare their balance as per this format. The T-form balance sheet looks as given below:
Vertical format
The vertical format of the balance sheet is mostly prepared by corporate entities. Here, the liabilities and assets are shown in the same column as compared to two separate columns in the horizontal format. This results in having a longer shape. Hence, it is called a ‘vertical’ balance sheet. Generally, companies prepare their balance sheet as per this format.
Also, many times, there are two columns for the amount in this format presenting the amount of both the current year and the previous year. This format looks like as given below:
Grouping and marshalling
Beside the structure of the balance sheet i.e. horizontal and vertical, the grouping and marshalling of the items inside the balance sheet are also very important.
Grouping refers to the presenting of similar items under a heading or group. This is done in order to present the balance sheet in a concise manner. This is very important to do. For example, a business can have numerous creditors, but they are all presented under one ‘Creditors’ heading or two or more heading specifying different types of creditors.
The assets of a business are grouped under the heading such as Plant, Property and equipment, Current assets, Non-current investments etc.
Marshalling means the arranging of items as per a particular order. We know that a balance sheet consists of many items and to make the statement more useful and easy to comprehend, the items are arranged in one of the following orders:
In case of liabilities, the items which are due for repayment soon are kept at the top, like bank overdraft etc. The items which are due for repayment after a long time or at the time of winding capital are kept at the bottom, like long term loans and capital funds. Given below is a format of horizontal balance sheet in which the items are marshalled in order of liquidity:
- Order of permanence: This type of arrangement is just the opposite of the order of liquidity. Here the items which are least liquid are placed at the top and the more liquid items are placed at the bottom. Like in the case of assets, cash appears at the bottom and non-current assets at the top. On the liabilities side, equity and non-current liabilities are at the top while current liabilities are at the bottom. Mostly all balance sheets are marshalled in order of permanence.
See lessWhat is the meaning of “Contra” in accounting?
The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in: Contra accounts Contra entries The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corRead more
The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in:
The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corresponds to.
Contra entries are entries of the debit and credit aspects related to the same parent account. Let’s discuss them in detail.
Contra accounts
Any account which is created with the purpose of reducing or offsetting the balance of another account is known as a contra account.
A contra account is just the opposite of the account to which it relates. The most common examples are the sales discount account and sales return account which is the contra account of the sales account. They are just the opposite of the sales accounts.
Contra Entries
Contra entries refer to the entries which show the movement of the amount within the same parent account. Here, the debit and credit entry is posted on the debit and credit side respectively of a single parent account. Â Mainly, contra entries are the entries involving cash and bank accounts.
The following transactions are recorded as contra entries:
Contra entries are marked by the letter ‘C’ beside the postings in the ledger. Deposit of cash in to bank will be posted in cashbook as below:
See lessWhat is the meaning of “set off” in accounting?
The term set off in English means to offset something against something else. It thereby refers to reducing the value of an item. In accounting terms, when a debtor can reduce the amount owed to a creditor by cancelling the amount owed by the creditor to the debtor, it is termed as set off. It is coRead more
The term set off in English means to offset something against something else. It thereby refers to reducing the value of an item. In accounting terms, when a debtor can reduce the amount owed to a creditor by cancelling the amount owed by the creditor to the debtor, it is termed as set off.
It is commonly used by banks where they seize the amount in a customer’s account to set off the amount of loan unpaid by the customer.
Types
There are various types of set-offs as given below:
Example
Let’s say Divya owes Rs 20,000 to Sherin for the purchase of goods. But, Sherin owed Rs 6,000 to Divya already for use of her Machinery. Therefore, the amount of 6,000 can be set off against the 20,000 owed to Sherin and hence Divya would effectively owe Sherin Rs 14,000.
This helps in reducing the number of transactions and unnecessary flow of cash.
See lessWhat is the treatment of general reserve in cash flow statement?
A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. The cash flow statement provides information about the flow of cash over a period of time. General reserve is a reseRead more
A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. The cash flow statement provides information about the flow of cash over a period of time.
General reserve is a reserve created by taking a portion of the profits for future requirements.
TREATMENT OF GENERAL RESERVE
As per the indirect method, Since there is no actual flow of cash, any addition to reserves is added back to net profit for calculation of net profit before tax and extraordinary items. This net profit before tax will appear under cash flow from operating activities. If there is a reduction in reserve, then they are subtracted from net profit.
As per the Direct method, an increase or decrease in general reserve will not affect the cash flow statement since non-cash items are not recorded. Only cash receipts and payments that come under operating activities are recorded. So, net profit is not shown in the direct method and hence neither is general reserve.
General reserve does not fall under the head investing activities as investing activities involve the acquisition or disposal of long-term assets or investments. They do not fit in financing activities either as financing activities relate to change in capital or borrowings of the company.
EXAMPLE
If the balance in general reserve for the period of March was Rs 4,000 and in April the balance was Rs 7,000, then its treatment in cash flow would be:
See lessWhat is the meaning of “realization” in accounting?
Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition. Realization of revenue means when revenue to be earned from the sale of goods or rendering oRead more
Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition.
Realization of revenue means when revenue to be earned from the sale of goods or rendering of services or any other activity or source becomes absolute and certain. An item is to be shown as revenue in the books of accounts only after it is realized.
Realization in case of sale of goods
Realization occurs in the following situations:
i) When the goods are delivered to the customer for a certain price
ii) All significant risks and rewards of ownership have been transferred to the customer and the seller retains no effective control over the goods.
Let’s take an example. Mr Peter received an order of 500 units of goods from Mr Parker on 1st April. The goods were delivered to Mr Parker on 15Th April and payment for goods was received on 30Th April.
The realization of revenue from the sale of goods will be considered to have occurred on 15th April because the goods were delivered to the customer on that date. The entry of sale of goods will be entered on this day.
Realization is not considered to have occurred on 1st April i.e the date of order because the seller had effective control on goods on that date.
Realization in case of rendering of services
The realization of revenue from the rendering of services occurs as per the performance of service.
Now there arise two situations:
Realization of income from other sources:
Realization with regards to other sources of income is considered to have occurred only when there exist no significant uncertainty as to measurability or collectability.
See less