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Astha
AsthaLeader
In: 1. Financial Accounting > Journal Entries

How to do adjustment entry for closing stock?

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Answer
  1. PriyanshiGupta Graduated, B.Com
    Added an answer on December 9, 2021 at 2:25 pm
    This answer was edited.

    The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes: Raw Material Work-in-Progress Finished Goods Example: If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then valueRead more

    The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes:

    • Raw Material
    • Work-in-Progress
    • Finished Goods

    Example:

    If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then value of Closing Stock will be Rs (10,000 + 5,000 + 15,000) = Rs 30,000

    Adjustment entries are done on the accrual basis of accounting, that is, income is recorded when earned and not received and expenses are recorded when incurred and not paid. Adjustment entries are usually made before or after the preparation of the trial balance at the end of the accounting period.

    If the entries are made after the preparation of the trial balance, then two adjustment entries are recorded while preparing Trading and Profit & Loss A/c.

    Since closing stock is an item outside the trial balance, the double-entry would be:

    The journal entry

    Closing Stock A/c  (Dr.) Amt
    To Trading and Profit & Loss A/c Amt
    • Trading and Profit & Loss A/c is credited because it is of profit to the company and hence will be shown on the credit side.
    • Closing Stock is debited as an asset for the company and it will be recorded for the first time in accounting books, hence, will be debited.

    The second adjustment would be to show closing stock on the balance sheet and since the closing stock is an asset it is shown under the head Current Assets.  

    In case where adjustment for Closing Stock is to be done before preparation of Trial Balance, then it will be shown on the credit side of the Trial Balance, since it is an asset for the company and will have a credit brought down balance as shown in the image.

    Later, while preparing Balance Sheet, Closing Stock will be shown on the Asset side of the Balance Sheet.

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A_Team
A_Team
In: 1. Financial Accounting > Miscellaneous

Prepaid expenses is current assets or current liabilities?

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Answer
  1. Ishika Pandey Curious ca aspirant
    Added an answer on January 5, 2023 at 8:58 am
    This answer was edited.

    Definition Prepaid expenses are those expenses whose payments are done in advance which can be for the goods or services whose benefit will accrue in the subsequent accounting period. A prepaid expense is a current asset. prepaid expenses are classified under the head current assets in the balance sRead more

    Definition

    Prepaid expenses are those expenses whose payments are done in advance which can be for the goods or services whose benefit will accrue in the subsequent accounting period.

    A prepaid expense is a current asset. prepaid expenses are classified under the head current assets in the balance sheet.

    This is because they provide future economic benefits to the company. As such, they are assets that can be used to generate revenue in the future.

    For example prepaid rent, prepaid insurance, etc.

     

    Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.

    Or in other words, we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.

    For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.

     

    Current liabilities are liabilities that are payable generally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.

    For example bills payable, short-term loans, etc.

     

    Why current assets and not a  current liability?

    Now let me try to explain to you that prepaid expenses are classified as current assets  and not as a current liability which is as follows :

      • we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.
      • expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
      • In the business prepaid expense are treated as an asset which we can see on the asset side of the balance sheet.
      • Or in other words, we can say that it is initially recorded as a prepaid expense as an asset in the balance sheet and subsequently its value is expensed over time in the profit and loss account.

     

    Example

    Now let us take an example for explaining prepaid expenses which are mentioned below.

    An insurance premium of Rs 50000 has been paid for one year beginning (previous year). The financial year ends on 31st  march YYYY.

    It means the premium for 6 months i.e., 1st April, YYYY(current year) to 30th September, YYYY(current year) amounting to Rs 25000 is paid in advance.

    Thus, of premium paid in advance (Rs 25000)  is a Prepaid Expense. It will be accounted as an expense in the financial year ending  31st  march next year. In the balance sheet as of 31st march YYYY ( current year ) it will be shown as Current Asset.

    Here is an extract of the profit /loss account and balance sheet of the above example:

     

    Key points

    There are a few things to keep in mind when dealing with prepaid expenses.

    • First, is that the expenses are actually prepaid. This means that the expenses were paid for before they were used.

     

    • Second, it is essential to track the number of prepaid expenses that have been used. That is to make sure that the prepaid expenses are not overstated on the company’s financial statements. This can happen if the company pays for more goods or services than it actually

     

    • Last but not least it is important to keep in mind that changes in the value of prepaid expenses can impact the company’s net income. For example, if the company’s prepaid insurance increases in value, this will increase the company’s net income.

     

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Simerpreet
SimerpreetHelpful
In: 1. Financial Accounting > Ledger & Trial Balance

What is a ledger posting example?

  • 1 Answer
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Answer
  1. GautamSaxena Curious .
    Added an answer on August 10, 2022 at 8:15 pm
    This answer was edited.

    Ledger posting The process of entering all transactions from journal to ledger is called ledger posting. Each ledger account contains an individual asset, person, revenue, or expense. As we're aware the journal records all the transactions of the business. Posting to the ledger account not only helpRead more

    Ledger posting

    The process of entering all transactions from journal to ledger is called ledger posting. Each ledger account contains an individual asset, person, revenue, or expense. As we’re aware the journal records all the transactions of the business.

    Posting to the ledger account not only helps the proper maintenance of the ledger book but also helps in reflecting a permanent summary of all the journal accounts. In the end, all the accounts that are entered and operated in the ledger are closed, totaled, and balanced.

    Balancing the ledger means finding the difference between the debit and credit amounts of a particular account, it’s done on the day of closing of the accounting year. Sometimes journal entries are made and maintained monthly. Therefore, the balancing of the ledger’s date depends on the business’ closing date and the way a business maintains its books of accounts.

    Example

    Mr. Jack Sparrow decided to start a new clothing business. On 1st April 2021, He started the business with a total sum of $100,000 cash. He purchased furniture, including desks and shelves for $25,000. Mr. Sparrow then decided to start with women’s clothing and purchased a complete range of clothes from the wholesale market for $50,000. On the next day, he sold all the stock for $75,000. He also hired a worker for $5,000.

    We need to journalize these transactions and post them into the ledger account.

     

    Journal Entries

     

    Ledger Accounts

    Cash A/c

     

    Capital A/c

     

    Purchases A/c

     

    Sales A/c

     

    Salary A/c

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Karan
Karan
In: 1. Financial Accounting > Accounting Terms & Basics

What is the principal book of accounts?

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Answer
  1. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    Added an answer on October 16, 2021 at 11:06 am
    This answer was edited.

    The term "principal book of accounts'' refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account. So to put it simply, the principal book of accounts mean ledgers. Ledgers are prepared by posting the debits and credits of a joRead more

    The term “principal book of accounts” refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account.

    So to put it simply, the principal book of accounts mean ledgers.

    Ledgers are prepared by posting the debits and credits of a journal entry to the respective accounts.

    A ledger groups the transactions concerning the same account. For example, Mr B is a debtor of X Ltd. Hence all the transactions entered into with Mr. will be grouped into the ledger Mr B A/c in the books of X Ltd.

    Ledgers are of utmost importance because all the information to any account can be known by its ledger.

    Preparation of ledger is very important because all the information to any account can be known by its ledger. Ledgers also display the balance of each and every account which may be debit or credit. This helps in the preparation of the trial balance and subsequently the financial statements of an entity.

    Hence, it is the most important book of accounts and calling it the ‘books of final entry’ is also justified.

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Aditi
Aditi
In: 2. Accounting Standards > IFRS

What are the different methods of accounting for fixed assets according to IFRS?

  • 1 Answer
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Answer
  1. Mehak
    Added an answer on January 11, 2025 at 3:38 pm
    This answer was edited.

    To understand the accounting treatment of fixed assets under IFRS let us first understand what fixed assets are. What are Fixed Assets? Fixed assets are the assets that are purchased for long-term use by a business and not for resale. Some examples of fixed assets are land, buildings, machinery, furRead more

    To understand the accounting treatment of fixed assets under IFRS let us first understand what fixed assets are.

    What are Fixed Assets?

    Fixed assets are the assets that are purchased for long-term use by a business and not for resale. Some examples of fixed assets are land, buildings, machinery, furniture and fixtures, etc.

    Fixed assets are essential for the smooth operations of the business. It often shows the value of the business. The value of fixed assets usually decreases with time, obsolescence, damage, etc.

    As per IAS-16 Property, Plant and Equipment, an asset is identified as a fixed asset if it satisfies the following conditions:

    • the future economic benefits associated with the asset will probably flow to the entity, and
    • the cost of the asset can be measured reliably.

    What is IFRS?

    IFRS stands for International Financial Reporting Standards. It provides a set of standards to be followed globally by all companies to ensure transparency, comparability, and consistency.

    What is the accounting treatment of fixed assets under IFRS?

    Under IFRS, the first step is to measure the value of the fixed assets on cost. The cost of the fixed assets includes the following:

    1. purchase price
    2. any direct cost related to the asset (such as transportation, installation, etc.)
    3. duties/taxes

    After this step, the entity may choose any one of the following two primary methods:

    1. Cost Model: According to this model the value is first recognized on a cost basis. This includes the purchase price and direct costs attributable to the asset. Subsequently, depreciation is calculated on the cost of the asset. Depreciation spreads the cost of an asset over its useful life. Impairment checks are conducted to ensure the asset’s value on the books doesn’t exceed what it’s worth.

    For example, a company bought a piece of machinery for 60,000. 5,000 were spent on its installation. It has a useful life of 10 years. The machinery would be depreciated over its useful life of 10 years based on its cost which is 65,000.

    2. Revaluation model: As per this model, the fixed assets are valued on their fair value, as on the revaluation date. The amount of depreciation and impairment losses is subtracted from the fair value.

    If the value of an asset increases, the gain goes to equity (revaluation surplus) unless it can be set off with a past loss recorded in profit or loss.
    On the other hand, if the value decreases, the loss goes to profit or loss unless it offsets a past surplus in equity.

    For example, a building was purchased for 100,000. On the revaluation date, the fair value of this building was 150,000. Hence, there is a revaluation surplus of 50,000 which shall be credited to the revaluation surplus account.

    Impact on Financial Statements

    Fixed assets are shown on the Assets side of the Balance Sheet.

    Conclusion

    From the above discussion, it may be concluded that:

    • Fixed assets are the assets that are purchased for long-term use by a business and not for resale.
    • Some examples of fixed assets are land, buildings, machinery, furniture and fixtures, etc.
    • IFRS provides a set of standards to be followed globally by all companies to ensure transparency, comparability, and consistency.
    • Under IFRS, the first step is to measure the value of the fixed assets on cost.
    • After this step, the entity may choose any one of the two primary methods which are cost model and the revaluation model.
    • Fixed assets are shown on the Assets side of the Balance Sheet.

     

     

     

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prashant06
prashant06
In: 1. Financial Accounting > Depreciation & Amortization

Depreciation of fixed capital assets refers to?

A. Normal wear and tear B. Foreseen obsolescence C. Normal wear & tear & foreseen obsolescence D. Unforeseen obsolescence  

DepreciationFixed Assets
  • 1 Answer
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Answer
  1. Vijay Curious M.Com
    Added an answer on July 14, 2021 at 2:25 pm
    This answer was edited.

    Depreciation of fixed capital assets refers to C. Normal wear & tear & foreseen obsolescence. Normal wear & tear refers to the damage caused to an asset due to its continuous usage. Even when the asset is properly maintained, wear and tear occurs. Hence, it is considered to be inevitableRead more

    Depreciation of fixed capital assets refers to C. Normal wear & tear & foreseen obsolescence.

    Normal wear & tear refers to the damage caused to an asset due to its continuous usage. Even when the asset is properly maintained, wear and tear occurs. Hence, it is considered to be inevitable and natural.

    For example, Kumar has purchased a car for 25,00,000. After five years he wishes to sell his car. Now the market price of his used car is 12,00,000. This reduction in the value of the car from 25,00,000 to 12,00,000 is because of its usage. This fall in the value of the asset due to usage is known as normal wear & tear.

    In generic terms, obsolescence means something that has become outdated or is no longer being used. Foreseen obsolescence is nothing but obsolescence that is expected.

    In the context of business, whenever the value of an asset falls because it has become outdated or is replaced by a superior version, we call it obsolescence. The fall in the value of the asset due to obsolescence expected by the purchaser of the asset is known as foreseen obsolescence.

    When an asset becomes obsolete it doesn’t mean it is not in working condition. Even when an asset is in good working condition it can become obsolete due to the following reasons:

    • Technology advancement.
    • Change in demand (change in fashion, change in taste and preferences of the consumers, etc.)

     

    For example, before the invention of computers, people used typewriters for getting their paperwork done. With the invention of computers, laptops, etc. it is easier to type as well as save our documents, spreadsheets, etc. Thus typewriters became obsolete with the invention of computers. It has become a technology of the past.

    Here is a summarised version of wear & tear and obsolescence:

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A_Team
A_Team
In: 1. Financial Accounting > Not for Profit Organizations

Prepare Income and Expenditure Account for the Year Ended 31st March, 2020 from the Following?

Receipts and Payments A/C for the year ended 31st March 2020 Receipts Amt Payments Amt To Balance b/d  (Cash)        180,000 By Salary        480,000 To Subscriptions        900,000 By Rent           50,000 To Sale of Investments        200,000 By Stationery           20,000 To Sale ...

  • 1 Answer
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Answer
  1. Radha M.Com, NET
    Added an answer on August 22, 2021 at 7:10 am
    This answer was edited.

    Here I've prepared the Income & Expenditure A/c. Income & Expenditure A/c for the year ended 31st March 2021 Expenditure Amt Income Amt To Salary      4,80,000 By Subscriptions      9,00,000 To Rent          50,000 By Donations          10,000 To Stationery          20,000 To Loss on sale ofRead more

    Here I’ve prepared the Income & Expenditure A/c.

    Income & Expenditure A/c for the year ended 31st March 2021

    Expenditure Amt Income Amt
    To Salary      4,80,000 By Subscriptions      9,00,000
    To Rent          50,000 By Donations          10,000
    To Stationery          20,000
    To Loss on sale of furniture (WN)          10,000
    To Surplus      3,50,000
         9,10,000      9,10,000

     

    Working Note: Calculation of Loss on sale of furniture

    The following calculation is made to identify the loss incurred on the sale of furniture.

    Particulars Amt
    Book Value of Furniture        40,000
    Less: Sale Value of Furniture        30,000
    Loss on Sale of Furniture        10,000

     

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