Advantages of Bill of Exchange: Bill of Exchange is generally used as an instrument of credit as it offers many advantages to its users. The advantages are as follows: CONCLUSIVE EVIDENCE: It acts as a shred of conclusive evidence in case of any dispute between the parties like seller-buyer, drawer-Read more
Advantages of Bill of Exchange:
Bill of Exchange is generally used as an instrument of credit as it offers many advantages to its users. The advantages are as follows:
CONCLUSIVE EVIDENCE: It acts as a shred of conclusive evidence in case of any dispute between the parties like seller-buyer, drawer-drawee, debtors creditors, etc. Issuing the Bill of Exchange binds the party into a legal relationship. It acts as a legal document and proof in a court of law.
TERMS AND CONDITIONS: When a Bill of Exchange is issued, it mentions all the terms and conditions of payments. The terms and conditions can be like the amount of bill, date of payments, place of payment, interest amount if any, maturity period, etc.
ACT AS MEANS OF CREDIT: With the help of the Bill of Exchange, buyers can purchase goods on a credit basis and make payment after the credit period expires. If in case of emergency the drawer can also get such Bills discounted before the maturity period.
WIDER ACCEPTANCE: The Bills of Exchange carries a wide acceptance feature for the parties through which payments can be received and made without any difficulty.
RELATIONSHIP FRAMEWORK: The Bill of Exchange acts as an instrument that provides a framework enabling the smooth credit transaction between the parties as per the agreement.
MUTUAL ACCOMMODATION: Sometimes bills are mutually accommodated for the benefit of the parties. The Bill is drawn and accepted by drawer and drawee. Then the same bill is discounted by the drawer and the agreed sum is remitted to the drawee. This is basically done mutually to provide financial help to each other.
Specimen of Bill of Exchange Important points of Bill of Exchange: Date: When a bill of exchange is drawn, the drawer has to specify the date in the top right corner. The date is important for the purpose of calculating the due date of the bill. Generally, the drawee is given three days as a grace pRead more
Specimen of Bill of Exchange
Important points of Bill of Exchange:
Date: When a bill of exchange is drawn, the drawer has to specify the date in the top right corner. The date is important for the purpose of calculating the due date of the bill. Generally, the drawee is given three days as a grace period over and above the due date of maturity.
In the above specimen, the date mentioned is 25th July 2021, so the due date will be three months + 3 days( grace period) i.e. to say 28th October 2021.
Term: In the above, the term as agreed by the drawer and drawee is 3 months. So the maturity date will be after 3 months.
Stamp: The Stamp is affixed in the left corner in every bill of exchange, the value of which depends upon the amount specified in the bill.
Parties involved in Bill of Exchange:
Drawer: The one who makes the bill, i.e. the creditor.
Drawee: The one on whom the bill is drawn, i.e. the debtor.
Payee: The one to whom the amount is to be paid is the payee.
Sometimes, the drawer and the payee are the same people.
For Example,
i) A bill of exchange for Rs 10,000 is drawn by Sandy on Karan which is due after three months. Karan accepted the bill which is met at maturity and hence becomes the acceptor of the bill by putting his signature.
Here, Sandy is the drawer and Karan is the drawee. As the payment on maturity is received by Sandy so the payee will be Sandy.
ii) A bill of exchange for Rs 10,000 is drawn by Sandy on Karan which is due after three months. Karan accepted the bill. Thereafter Sandy endorsed the bill in favor of his creditor, Vikash. The bill is met at maturity.
So in this case, Sandy is the drawer, Karan is the drawee and Vikash is the payee as he received the amount at maturity.
Acceptance: Acceptance by the drawee is given on the face of the bill as-
Meaning of BOE:
In a business, in the case of credit sales, the payment is received after a certain period of time. In such a case the seller i.e. the creditor makes a credit note and the purchaser i.e. the debtor accepts the same by giving his acceptance by signing the instrument, to pay the amount of money mentioned to a certain person or the bearer of the instrument.
It is generally a negotiable instrument i.e. can be transferred from one person to another.
Features ofBill of Exchange.
It is a written document.
It is an unconditional order to pay.
It must be signed by the maker of the bill i.e. the drawer.
It must be properly stamped.
The amount is payable either to a specified person or to his order or to the bearer.
It contains an order to pay the amount mentioned in the instrument both in figures and words.
The amount is to be paid either on the expiry of a fixed period from the date of the bill or on-demand.
The correct answer is the 1. Bank statement and bank column of the cash book, because it will help the business to verify whether amounts entered and entries recorded are correct or not. It will also help in verifying the balances of bank statements and cash books whether they tally or not. What isRead more
The correct answer is the 1. Bank statement and bank column of the cash book, because it will help the business to verify whether amounts entered and entries recorded are correct or not. It will also help in verifying the balances of bank statements and cash books whether they tally or not.
What is Reconciliation?
Reconciliation is an accounting procedure that compares two sets of records to check figures are correct and in agreement. Reconciliation can also be used for personal purposes.
What is a Bank Reconciliation Statement?
A statement showing causes of disagreement between the balance of bank statement and bank column of the cash book at the end of a specific period is called a Bank Reconciliation Statement.
Steps in preparation of Bank Reconciliation Statement
Step 1: Comparing items appearing on the debit and credit sides of the bank statement and bank column of the cash book.
Step 2: Make a list of missed entries.
Step 3: Analyse the causes of differences.
Step 4: Select the date for the preparation of the Bank Reconciliation Statement.
Step 5: Choose the starting point i.e balance as per cash book or balance as per bank statement.
Step 6: Adjust the starting point by adding or subtracting the missed entries.
Step 7: Bank Statement must match with the cash book.
To prepare a bank reconciliation statement a business will need a bank statement from its bank and cash book which it prepares to record entries.
Specimen of Ledger account This is the specimen of a ledger account. J.F. here represents the journal folio. A Ledger account is an account that consists of all the business transactions that take place during the current financial year. For Example, cash, bank, machinery, A/c receivable account, etRead more
Specimen of Ledger account
This is the specimen of a ledger account. J.F. here represents the journal folio.
A Ledger account is an account that consists of all the business transactions that take place during the current financial year.
For Example, cash, bank, machinery, A/c receivable account, etc.
After the financial data is recorded in the Journal. It is then classified according to the nature of accounts viz. Asset, liability, expenses, revenue, and capital to be posted in the ledger account.
With this head, the identification as to whether the opening balance will come under the debit side or the credit side is done.
The table below would help to understand the concept of opening balance in the ledger.
For further clarification of the concept let me give you a practical example.
Suppose, a manufacturing firm Amul purchased machinery for, say, Rs 2,50,000. The installation charges were Rs 25,000 and the opening balance of machinery during the year was Rs 5,00,000.
So as the machinery account comes under the category assets, its opening balance would come under the debit side of the ledger account.
And as purchase and installation charges mean expenses for the firm, they would also come under the debit side of the account.
And in case of any sale of a part of the machinery, it would be posted on the credit side of the account as the sales would generate revenue for the firm.
Debtors and Creditors Points of Distinction Debtors Creditors Meaning A debtor is a person or entity that owes money to the other party (the other party is also known as the creditor). A creditor is a person or entity to whom money is owed or who lends money. Nature The debtors will have a debit balRead more
Debtors and Creditors
Points of Distinction
Debtors
Creditors
Meaning
A debtor is a person or entity that owes money to the other party (the other party is also known as the creditor).
A creditor is a person or entity to whom money is owed or who lends money.
Nature
The debtors will have a debit balance.
The creditors will have a credit balance.
Receipt of payment
The payment or amount owed is received from the debtor.
The payment of the amount owed is made to the creditors.
Nature of account
Debtors are account receivables.
Creditors are accounts payable.
Status
They are shown under assets in the balance sheet under the head current assets. They are shown as an asset because the amount is receivable from them.
They are shown under liabilities in the balance sheet under the head current liabilities. They are shown as a liability because the amount is payable to them.
Credit / Loan period
Debtors are the one who takes a loan or purchase goods on credit and has to pay the money in the agreed time period, with or without interest.
Creditors are the ones who provide loans or extend the duration of the credit period.
Discounts
They are the ones who receive discounts.
They can offer discounts to debtors.
Provision for doubtful debts
Provision for doubtful debts is created for debtors.
No such provision is created for creditors.
Example:
Mr. A purchases raw materials from its supplier Mr. D on credit.
Here for Mr. D, Mr. A will be a debtor because the amount is receivable from him.
Similarly, for Mr. A, Mr. D will be his creditor because the amount is payable to him.
Profit and Gain
Points of Distinction
Profit
Gain
Meaning
The excess of revenue of a period over its expenses is termed as profit.
Profit = Total Income-Total Expenses
Gain means profit that arises from incidental events and transactions, such as capital gain.
Generation
It is generated within the operations of a business.
It is generated outside the business operation.
Nature of account
Profit calculated will appear in the Profit and Loss A/c.
The gain will appear in the income statement.
Types
Gross profit
Net profit
Operating profit
Capital gain
Long term capital gain
Short term capital gain
Example: A company’s sales for the period are $60,000 and expenses incurred are $40,000. Here the profit calculated will be $20,000 because revenue exceeds expenses.
Profit = Total Income-Total Expenses
= 60,000 – 40,000
= $20,000
Mr. X owned land worth $10,00,000 and after 10 years he sold it at a current market value of $14,00,000. So the gain he earned is $4,00,000. This gain of $4,00,000 will be termed as a capital gain since land is a capital asset.
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ARE AS FOLLOWS: 1. COMPARABILITY: Comparison of financial statements is one of the most frequently used and effective tools of financial analysis. It helps the users of accounting information to compare, analyze and take decisions accordingly. CoRead more
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ARE AS FOLLOWS:
1. COMPARABILITY: Comparison of financial statements is one of the most frequently used and effective tools of financial analysis. It helps the users of accounting information to compare, analyze and take decisions accordingly. Comparability enables inter-firm and intra-firm comparisons. It helps to ascertain the growth and progress of the business over time and in comparison to other businesses.
For example, managers of ITC ltd want to know which business of his is performing well and which needs progress so they would compare the financial statement of its different businesses and make the decision accordingly.
2. RELEVANCE: It generally means that the essential information should be easily and readily available and any irrelevant information should be avoided. The user of accounting information needs relevant accounting information for a good decision-making process, planning, and predicting future circumstances.
For example, a firm is expected to provide the total amount owed by the debtors in the balance sheet, whereas the total number of debtors is not important.
3. UNDERSTANDIBILITY: The financial statement should be presented so that every user can interpret the information without any difficulty in a meaningful and appropriate manner. To be more precise it should be complete, concise, clear, and organized.
For example, mentioning note number in the financial statement for any items which needs disclosure. This helps the users of accounting to interpret the financial statement without any difficulty.
4. RELIABILITY: This means the accounting information must be free from material error and bias. All accounting information is verifiable and can be verified from the source documents basically, information should not be vague or false.
For example, any significant matters like amount due, damages, losses, etc. which impact the financial stability shall be mentioned as disclosure since it is useful for all the users of accounting to be aware of such facts and not to be misguided by incomplete information.
Yes, I agree with your statement that accounting information should be comparable. Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company's financial statements across time and across other companies. Comparability oRead more
Yes, I agree with your statement that accounting information should be comparable.
Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company’s financial statements across time and across other companies.
Comparability of financial statements is crucial due to the following reasons:
1. Intra-Firm Comparison:
Comparison of financial statements of two or more periods of the same firm is known as an intra-firm comparison.
Comparability of accounting information enables the users to analyze the financial statements of a business over a period of time. It helps them to monitor whether the firm’s financial performance has improved over time.
The intra-firm analysis is also known as Time Series Analysis or Trend Analysis.
To understand intra-firm analysis, I have provided an extract of the balance sheet of ABC Ltd. for two accounting periods.
2. Inter-Firm Comparison:
Comparison of financial statements of two or more firms is known as an inter-firm comparison.
Inter-firm comparison helps in analyzing the financial performance of two or more competing firms in an industry. It enables the firm to know its position in the market in comparison to its competitors.
Inter-firm comparison is also known as Cross-sectional Analysis.
I’ve provided the balance sheets of Co. A and Co.B to make an inter-firm comparison.
Here is a piece of bonus information for you,
Sector Analysis – it refers to the assessment of economical and financial conditions of a given sector of a company/industry/economy. It involves the analysis of the size, demographic, pricing, competitive, and other economic dimensions of a sector of the company/industry/economy.
One more important thing to note here is that comparability can only be achieved when the firms are consistent in the accounting principles and standards they adopt. The accounting policies and standards must be consistent across different periods of the same firm and across different firms in an industry.
Advantages of Bill of Exchange?
Advantages of Bill of Exchange: Bill of Exchange is generally used as an instrument of credit as it offers many advantages to its users. The advantages are as follows: CONCLUSIVE EVIDENCE: It acts as a shred of conclusive evidence in case of any dispute between the parties like seller-buyer, drawer-Read more
Advantages of Bill of Exchange:
Bill of Exchange is generally used as an instrument of credit as it offers many advantages to its users. The advantages are as follows:
- MUTUAL ACCOMMODATION: Sometimes bills are mutually accommodated for the benefit of the parties. The Bill is drawn and accepted by drawer and drawee. Then the same bill is discounted by the drawer and the agreed sum is remitted to the drawee. This is basically done mutually to provide financial help to each other.
See lessBill of exchange format 12th commerce?
Specimen of Bill of Exchange Important points of Bill of Exchange: Date: When a bill of exchange is drawn, the drawer has to specify the date in the top right corner. The date is important for the purpose of calculating the due date of the bill. Generally, the drawee is given three days as a grace pRead more
Specimen of Bill of Exchange
Important points of Bill of Exchange:
Date: When a bill of exchange is drawn, the drawer has to specify the date in the top right corner. The date is important for the purpose of calculating the due date of the bill. Generally, the drawee is given three days as a grace period over and above the due date of maturity.
In the above specimen, the date mentioned is 25th July 2021, so the due date will be three months + 3 days( grace period) i.e. to say 28th October 2021.
Term: In the above, the term as agreed by the drawer and drawee is 3 months. So the maturity date will be after 3 months.
Stamp: The Stamp is affixed in the left corner in every bill of exchange, the value of which depends upon the amount specified in the bill.
Parties involved in Bill of Exchange:
Sometimes, the drawer and the payee are the same people.
For Example,
i) A bill of exchange for Rs 10,000 is drawn by Sandy on Karan which is due after three months. Karan accepted the bill which is met at maturity and hence becomes the acceptor of the bill by putting his signature.
Here, Sandy is the drawer and Karan is the drawee. As the payment on maturity is received by Sandy so the payee will be Sandy.
ii) A bill of exchange for Rs 10,000 is drawn by Sandy on Karan which is due after three months. Karan accepted the bill. Thereafter Sandy endorsed the bill in favor of his creditor, Vikash. The bill is met at maturity.
So in this case, Sandy is the drawer, Karan is the drawee and Vikash is the payee as he received the amount at maturity.
Acceptance: Acceptance by the drawee is given on the face of the bill as-
Meaning of BOE:
In a business, in the case of credit sales, the payment is received after a certain period of time. In such a case the seller i.e. the creditor makes a credit note and the purchaser i.e. the debtor accepts the same by giving his acceptance by signing the instrument, to pay the amount of money mentioned to a certain person or the bearer of the instrument.
It is generally a negotiable instrument i.e. can be transferred from one person to another.
Features of Bill of Exchange.
See lessA Bank Reconciliation Statement is prepared with the help of ?
The correct answer is the 1. Bank statement and bank column of the cash book, because it will help the business to verify whether amounts entered and entries recorded are correct or not. It will also help in verifying the balances of bank statements and cash books whether they tally or not. What isRead more
The correct answer is the 1. Bank statement and bank column of the cash book, because it will help the business to verify whether amounts entered and entries recorded are correct or not. It will also help in verifying the balances of bank statements and cash books whether they tally or not.
What is Reconciliation?
Reconciliation is an accounting procedure that compares two sets of records to check figures are correct and in agreement. Reconciliation can also be used for personal purposes.
What is a Bank Reconciliation Statement?
A statement showing causes of disagreement between the balance of bank statement and bank column of the cash book at the end of a specific period is called a Bank Reconciliation Statement.
Steps in preparation of Bank Reconciliation Statement
Step 1: Comparing items appearing on the debit and credit sides of the bank statement and bank column of the cash book.
Step 2: Make a list of missed entries.
Step 3: Analyse the causes of differences.
Step 4: Select the date for the preparation of the Bank Reconciliation Statement.
Step 5: Choose the starting point i.e balance as per cash book or balance as per bank statement.
Step 6: Adjust the starting point by adding or subtracting the missed entries.
Step 7: Bank Statement must match with the cash book.
To prepare a bank reconciliation statement a business will need a bank statement from its bank and cash book which it prepares to record entries.
See lessGive a specimen of an account?
Specimen of Ledger account This is the specimen of a ledger account. J.F. here represents the journal folio. A Ledger account is an account that consists of all the business transactions that take place during the current financial year. For Example, cash, bank, machinery, A/c receivable account, etRead more
Specimen of Ledger account
This is the specimen of a ledger account. J.F. here represents the journal folio.
A Ledger account is an account that consists of all the business transactions that take place during the current financial year.
For Example, cash, bank, machinery, A/c receivable account, etc.
After the financial data is recorded in the Journal. It is then classified according to the nature of accounts viz. Asset, liability, expenses, revenue, and capital to be posted in the ledger account.
With this head, the identification as to whether the opening balance will come under the debit side or the credit side is done.
The table below would help to understand the concept of opening balance in the ledger.
For further clarification of the concept let me give you a practical example.
Suppose, a manufacturing firm Amul purchased machinery for, say, Rs 2,50,000. The installation charges were Rs 25,000 and the opening balance of machinery during the year was Rs 5,00,000.
So as the machinery account comes under the category assets, its opening balance would come under the debit side of the ledger account.
And as purchase and installation charges mean expenses for the firm, they would also come under the debit side of the account.
And in case of any sale of a part of the machinery, it would be posted on the credit side of the account as the sales would generate revenue for the firm.
See lessDistinguish between debtors and creditors profit and gain?
Debtors and Creditors Points of Distinction Debtors Creditors Meaning A debtor is a person or entity that owes money to the other party (the other party is also known as the creditor). A creditor is a person or entity to whom money is owed or who lends money. Nature The debtors will have a debit balRead more
Debtors and Creditors
Example:
Mr. A purchases raw materials from its supplier Mr. D on credit.
Here for Mr. D, Mr. A will be a debtor because the amount is receivable from him.
Similarly, for Mr. A, Mr. D will be his creditor because the amount is payable to him.
Profit and Gain
Profit = Total Income-Total Expenses
Net profit
Operating profit
Capital gain
Long term capital gain
Short term capital gain
Example: A company’s sales for the period are $60,000 and expenses incurred are $40,000. Here the profit calculated will be $20,000 because revenue exceeds expenses.
Profit = Total Income-Total Expenses
= 60,000 – 40,000
= $20,000
Mr. X owned land worth $10,00,000 and after 10 years he sold it at a current market value of $14,00,000. So the gain he earned is $4,00,000. This gain of $4,00,000 will be termed as a capital gain since land is a capital asset.
See lessExplain the qualitative characteristics of accounting information?
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ARE AS FOLLOWS: 1. COMPARABILITY: Comparison of financial statements is one of the most frequently used and effective tools of financial analysis. It helps the users of accounting information to compare, analyze and take decisions accordingly. CoRead more
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ARE AS FOLLOWS:
1. COMPARABILITY: Comparison of financial statements is one of the most frequently used and effective tools of financial analysis. It helps the users of accounting information to compare, analyze and take decisions accordingly. Comparability enables inter-firm and intra-firm comparisons. It helps to ascertain the growth and progress of the business over time and in comparison to other businesses.
For example, managers of ITC ltd want to know which business of his is performing well and which needs progress so they would compare the financial statement of its different businesses and make the decision accordingly.
2. RELEVANCE: It generally means that the essential information should be easily and readily available and any irrelevant information should be avoided. The user of accounting information needs relevant accounting information for a good decision-making process, planning, and predicting future circumstances.
For example, a firm is expected to provide the total amount owed by the debtors in the balance sheet, whereas the total number of debtors is not important.
3. UNDERSTANDIBILITY: The financial statement should be presented so that every user can interpret the information without any difficulty in a meaningful and appropriate manner. To be more precise it should be complete, concise, clear, and organized.
For example, mentioning note number in the financial statement for any items which needs disclosure. This helps the users of accounting to interpret the financial statement without any difficulty.
4. RELIABILITY: This means the accounting information must be free from material error and bias. All accounting information is verifiable and can be verified from the source documents basically, information should not be vague or false.
For example, any significant matters like amount due, damages, losses, etc. which impact the financial stability shall be mentioned as disclosure since it is useful for all the users of accounting to be aware of such facts and not to be misguided by incomplete information.
See lessAccounting information should be comparable do you agree with this statement give two reasons?
Yes, I agree with your statement that accounting information should be comparable. Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company's financial statements across time and across other companies. Comparability oRead more
Yes, I agree with your statement that accounting information should be comparable.
Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company’s financial statements across time and across other companies.
Comparability of financial statements is crucial due to the following reasons:
1. Intra-Firm Comparison:
Comparison of financial statements of two or more periods of the same firm is known as an intra-firm comparison.
Comparability of accounting information enables the users to analyze the financial statements of a business over a period of time. It helps them to monitor whether the firm’s financial performance has improved over time.
The intra-firm analysis is also known as Time Series Analysis or Trend Analysis.
To understand intra-firm analysis, I have provided an extract of the balance sheet of ABC Ltd. for two accounting periods.
2. Inter-Firm Comparison:
Comparison of financial statements of two or more firms is known as an inter-firm comparison.
Inter-firm comparison helps in analyzing the financial performance of two or more competing firms in an industry. It enables the firm to know its position in the market in comparison to its competitors.
Inter-firm comparison is also known as Cross-sectional Analysis.
I’ve provided the balance sheets of Co. A and Co.B to make an inter-firm comparison.
Here is a piece of bonus information for you,
Sector Analysis – it refers to the assessment of economical and financial conditions of a given sector of a company/industry/economy. It involves the analysis of the size, demographic, pricing, competitive, and other economic dimensions of a sector of the company/industry/economy.
One more important thing to note here is that comparability can only be achieved when the firms are consistent in the accounting principles and standards they adopt. The accounting policies and standards must be consistent across different periods of the same firm and across different firms in an industry.
See less