Depreciation refers to that portion of the value of an asset that is written off over the useful life of the asset due to wear and tear. Now, when we talk about depreciation, there are multiple methods to calculate depreciation such as: Straight Line Depreciation Method Diminishing Balance Method OrRead more
Depreciation refers to that portion of the value of an asset that is written off over the useful life of the asset due to wear and tear.
Now, when we talk about depreciation, there are multiple methods to calculate depreciation such as:
Straight Line Depreciation Method
Diminishing Balance Method Or Written Down Value Method
Sum of Years’ Digits Method
Double Declining Balance Method
Sinking Fund Method
Annuity Method
Insurance Policy Method
Discounted Cash Flow Method
Use Based Methods
Output Method
Working Hours Method
Mileage Method
Other Methods
Depletion Method
Revaluation Method
Group or Composite Method
The most commonly used methods are discussed below:
1. Straight Line Depreciation Method: This is the simplest method for calculating depreciation where a fixed amount of depreciation is charged over the useful life of the asset.
Formula:
Suppose a company Bear Ltd purchases machinery costing 8,00,000 with useful life of 10 years and salvage value 1,00,000. Then depreciation charged to the machinery each year would be:
2. Diminishing Balance Method Or Written Down Value Method: Under this method, a fixed rate of depreciation is charged every year on the opening balance of the asset which is the difference between the previous year’s opening balance and the previous year’s depreciation. Here the book value of asset reduces every year and so does the depreciation amount.
Formula:
Suppose a company Moon ltd purchases a building for 50,00,000 with a useful life of 5 years and decides to depreciate it @ 10% p.a. on Diminishing Balance Method. Then depreciation charged to the machinery would be:
3. Sum of Years’ Digits Method: In this method, the life of asset is divided by the sum of years and multiplied by the cost of the asset to determine the depreciating expense. This method allocates higher depreciation expense in the early years of the life of the asset and lower depreciation expense in the latter years.
Formula:
Suppose a company Caps Ltd purchases machinery costing 9,00,000 having a useful life of 5 years. Then the depreciation cost would be:
4. Double Declining Balance method: This method is a mixture of straight-line method and diminishing balance method. A fixed rate of depreciation is charged on the reduced value of the asset at the beginning of the year. This rate is double the rate charged under straight-line method.
Formula:
Suppose a company Paper Ltd purchases machinery for 1,00,000 with an estimated useful life of 8 years. Then the depreciation rate would be:
Straight line = 100%/8 = 12.5%
Double declining method= 2*12.5% = 25%
5. Sinking Fund Method: Under this method, the amount of depreciation keeps on accumulating till the asset is completely worn out. Depreciation is the same every year. Profits equal to the amount of depreciation is invested each year outside the company. At the time of replacement of the asset the investments and sold and the proceeds thereof are used to purchase the new asset.
6. Annuity Method: This method calculates depreciation by calculating its internal rate of return (IRR). Depreciation is calculated by multiplying the IRR with an initial book value of the asset, and the result is subtracted from the cash flow for the period.
7. Use Based Methods: Depreciation, under these methods, is based on the total estimated machine hours or total estimated units produced during the life of the machine. It is calculated by dividing the cost of the machine by the estimated total machine hours or estimated lifetime production in units and multiplying by the units produced or machine hours worked.
Formula:
Suppose a company Box Ltd purchases machinery for 25,000 (estimated life 5 years) whose estimated life production is 5,000 units. If it produces 700 units in the first year of operation then depreciation cost would be:
Miscellaneous expenditure in the balance sheet The expenses that are written off in the current financial year are shown on the debit side of the profit and loss account. However, those that are not written off during the current financial year are shown in the balance sheet on the Assets Side as MiRead more
Miscellaneous expenditure in the balance sheet
The expenses that are written off in the current financial year are shown on the debit side of the profit and loss account. However, those that are not written off during the current financial year are shown in the balance sheet on the Assets Side as Miscellaneous expenditure.
Miscellaneous expenditure are those expenses that are not categorized as Operating expenses i.e. these are not classified as manufacturing, selling, and administrative expenses.
For example, BlackRock has spent 5,00,000 which will be written of in 5 consecutive years as an Advertisement expense. During the current financial year, only 1,00,000 will be written off and the rest will be carried to the next year and year thereafter.
Treatment in the first year:
1,00,000 which is written off during the current financial year will be shown on the debit side of the Profit and Loss account.
4,00,000 which is carried forward will be shown on the assets side of the balance sheet as miscellaneous expenditure because all assets and expenses have a debit balance.
Treatment in the second year:
1,00,000 which is written off during the current financial year will be shown on the debit side of the Profit and Loss account.
4,00,000 which is carried forward will be shown in the assets side of the balance sheet as a miscellaneous expenditure.
The same will be done in the third, fourth, and fifth years.
Conclusion
Deferred revenue expenditure is also a long-term expenditure the benefit of which cannot be derived within the same year. So the amount that is written off during the current year is shown on the debit side of the profit and loss account and the amount which is not written off during the current financial year is shown on the assets side under the head Miscellaneous expenditure.
Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expeRead more
Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expenses are amortized over a period of time.
These assets do not have any realizable value except for the cash outflow. These are created to delay the recognition of the expense and defer it to future periods.
Fictitious assets actually qualify as an expense but are treated as assets only for the fact that they are expected to give returns over a course of more than one year. Examples are Advertisement expenses, preliminary expense, etc.
Treatment
Fictitious assets are shown on the assets sideof the balance sheet under the head miscellaneous expenditure. A part of these expenses are shown in the profit and loss statement and the remaining amount is carried forward to the following years.
For example, a company Timber Ltd. incurs expenses relating to advertisement of its products worth 8,000,000 and this advertisement campaign can earn revenue for the company for around 10 years. Hence, such expense of 8,000,000 would be amortized over a period of 10 years.
For the first year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 7,200,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet.
For the second year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 6,400,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet. And so on.
We can say that fictitious assets are deferred revenue expenditures as well as intangible assets. But goodwill, etc are not fictitious assets. Hence, all fictitious assets are intangible assets but all intangible assets are not fictitious assets.
Common fictitious assets that could generally be seen are:
Classified under advance income, Interest received in advance is unearned income that pertains to the following accounting period but is received in the current period. Such interest is not related to the current accounting period and the related benefits for such income are yet to be provided. HencRead more
Classified under advance income, Interest received in advance is unearned income that pertains to the following accounting period but is received in the current period. Such interest is not related to the current accounting period and the related benefits for such income are yet to be provided. Hence, it is a liability for the concern.
The treatment of such advance interest is based on the Accrual concept of accounting.
The journal entry for interest received in advance is:
Now suppose, a firm Star shine receives interest on loan of 5,00,000 @ 7% p.a. extended to another firm. In the current accounting period, Star shine receives 50,000 as interest, excess being advance for the following year. Then the following journal entries should be passed:
Cash received in form of interest is debited (Debit what comes in) and interest account is credited because of an increase in interest income (credit all incomes and gains).
Interest account is debited because we have to decrease the interest income since 15,000 relates to the next accounting year. Interest received in advance is credited because such interest of 15,000 is not yet earned and is a liability for the concern.
To start with let me give you a brief explanation of what a subscription is After joining a not-for-profit organization, a member is required to pay a certain amount of money every year at periodical intervals in order to keep his membership activated, such an amount of money is the subscription. FoRead more
To start with let me give you a brief explanation of what a subscription is
After joining a not-for-profit organization, a member is required to pay a certain amount of money every year at periodical intervals in order to keep his membership activated, such an amount of money is the subscription.
For accounting purposes, subscription is always taken on an accrual basis which means the amount which is received during the current year is only taken into consideration.
Now, Subscription received in advance means the amount of money that has been received during the current year but which relates to the year that is yet to come. In other words, we can say it is the unearned income by the organization.
It is recurring in nature and liability for the organization as it does not relate to the current year.
Journal Entry for Subscription received in advance
Here, the Subscription received in advance is credited to the Subscription account for the current year.
This is the adjustment entry made during the current year.
Treatment of Subscription in Financial Statements
Receipts and payment account.
Income and expenditure account.
Balance sheet.
Receipts and Payment account: In the receipts and payment account, the entire amount of subscription is written on the receipts side. That is to say, subscription amount relating to the previous year, current year, and the year to come (outstanding subscription, current year subscription, advance subscription).
Income and Expenditure account: In the Income and Expenditure Account, the subscription comes on the Income side. It is shown as
Here, a subscription received in advance in the current year is deducted to find the actual amount because although the money is received in advance the benefits related to it are yet to be provided by the organization.
Balance sheet: In the balance sheet, a subscription received in advance comes in the liability side under current liabilities as the benefits related to it are yet to be derived.
For Example, Lionel club received subscription from its members for the year 2020 as follows-
Subscription of 2020 was received in 2019 – 2,000
Subscription of 2021 was received in 2020 – 3,000
The total subscription was received during the year – 10,000
Here,
Subscription of 2020 was received in 2019- It is an Outstanding Subscription.
Subscription of 2021 was received in 2020- It is an advance Subscription.
Before starting with the main discussion, let me give you a brief explanation of what rent received is When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received. Rent can be monthly, quRead more
Before starting with the main discussion, let me give you a brief explanation of what rent received is
When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received.
Rent can be monthly, quarterly, half-yearly, or yearly rent depending upon the organization’s agreement.
The journal entry for rent received will be
Here, Cash account is debited due to the increase in assets or because of a real account. Rent account is credited due to the increase in income or because of the nominal account.
However, Rent received in advance means the amount of rent that is not yet due but is received in advance. It is treated as a current liability because the benefit related is yet to be provided to the tenant.
The Journal entry for Rent received in advance will be-
Here, rent is debited due to a decrease in income.
Rent received in Advance is credited due to an increase in liability.
For Example, Johnson company rented out a part of its building that was not used to earn some extra income from it. The monthly rent was fixed as 20000. Johnson company follows calendar year as their accounting year. The tenant, therefore, paid 4 months advance rent to Johnson company i.e. the tenant in January gave his advance rent for February, March, April, and May.
While receiving the rent in the month of January. The journal entry would be
Now, the adjustment entry of rent received in advance would be
The rent received in advance will also be posted individually in each month of February, March, April, and May as
Furthermore, Rent received in advance is deducted from the amount of rent in the income and expenditure account and thereafter the amount received in advance is posted on the liability side of the Balance sheet.
There are two types of ledger accounts in the accounting system – temporary and permanent. Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are traRead more
There are two types of ledger accounts in the accounting system – temporary and permanent.
Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are transferred to the profit and loss account and therefore are not balanced.
Permanent accounts are those whose balances are carried forward to the next accounting year in form of opening balances. These accounts are balanced and such balances are transferred to the balance sheet. Examples are assets, liability and capital accounts or personal and real accounts.
Balancing an account means equaling both the debit and the credit side of the account. Generally, there is a difference between the accounts recorded as a carry down balance in the case of permanent accounts and as a transfer balance in the case of temporary accounts.
Balancing serves as a check to the double-entry rule of accounting.
Balanced accounts
As discussed above, the balanced accounts are shown in the balance sheet and the balancing figure for such accounts are carried forward to the next accounting period.
Unbalanced accounts
As per the above discussion, the balancing figures of unbalanced accounts are transferred to the profit and loss account and no balances are carried forward to the next accounting period.
Suppose a company Shine Ltd. has machinery costing 5,00,000 at the beginning of the accounting period and charges depreciation of 10% on the asset. The company also has creditors amounting to 50,000 at the beginning of the period and purchases goods amounting to 30,000 on credit. It has a cash balance of 95,000 at the beginning of the period and earns interest amounting to 10,000.
Following ledgers would be prepared to record the above entries:
The above ledgers can be shown as follows:
The balance of the machinery account will be shown in the balance sheet and therefore it is a balanced account.
The balance is transferred to the profit and loss account and therefore depreciation account is an unbalanced account.
The balance of creditors account will be shown in the balance sheet and therefore it is a balanced account.
The balance is transferred to the profit and loss account and therefore purchases account is an unbalanced account.
The balance of the cash account will be shown in the balance sheet and therefore it is a balanced account.
The balance is transferred to the profit and loss account and therefore interest account is an unbalanced account.
What are the different methods of charging depreciation?
Depreciation refers to that portion of the value of an asset that is written off over the useful life of the asset due to wear and tear. Now, when we talk about depreciation, there are multiple methods to calculate depreciation such as: Straight Line Depreciation Method Diminishing Balance Method OrRead more
Depreciation refers to that portion of the value of an asset that is written off over the useful life of the asset due to wear and tear.
Now, when we talk about depreciation, there are multiple methods to calculate depreciation such as:
The most commonly used methods are discussed below:
1. Straight Line Depreciation Method: This is the simplest method for calculating depreciation where a fixed amount of depreciation is charged over the useful life of the asset.
Formula:
Suppose a company Bear Ltd purchases machinery costing 8,00,000 with useful life of 10 years and salvage value 1,00,000. Then depreciation charged to the machinery each year would be:
Depreciation = (8,00,000 – 1,00,000)/10 = 7,00,000/10 = 7,000 p.a.
2. Diminishing Balance Method Or Written Down Value Method: Under this method, a fixed rate of depreciation is charged every year on the opening balance of the asset which is the difference between the previous year’s opening balance and the previous year’s depreciation. Here the book value of asset reduces every year and so does the depreciation amount.
Formula:
Suppose a company Moon ltd purchases a building for 50,00,000 with a useful life of 5 years and decides to depreciate it @ 10% p.a. on Diminishing Balance Method. Then depreciation charged to the machinery would be:
3. Sum of Years’ Digits Method: In this method, the life of asset is divided by the sum of years and multiplied by the cost of the asset to determine the depreciating expense. This method allocates higher depreciation expense in the early years of the life of the asset and lower depreciation expense in the latter years.
Formula:
Suppose a company Caps Ltd purchases machinery costing 9,00,000 having a useful life of 5 years. Then the depreciation cost would be:
4. Double Declining Balance method: This method is a mixture of straight-line method and diminishing balance method. A fixed rate of depreciation is charged on the reduced value of the asset at the beginning of the year. This rate is double the rate charged under straight-line method.
Formula:
Suppose a company Paper Ltd purchases machinery for 1,00,000 with an estimated useful life of 8 years. Then the depreciation rate would be:
Straight line = 100%/8 = 12.5%
Double declining method = 2*12.5% = 25%
5. Sinking Fund Method: Under this method, the amount of depreciation keeps on accumulating till the asset is completely worn out. Depreciation is the same every year. Profits equal to the amount of depreciation is invested each year outside the company. At the time of replacement of the asset the investments and sold and the proceeds thereof are used to purchase the new asset.
6. Annuity Method: This method calculates depreciation by calculating its internal rate of return (IRR). Depreciation is calculated by multiplying the IRR with an initial book value of the asset, and the result is subtracted from the cash flow for the period.
7. Use Based Methods: Depreciation, under these methods, is based on the total estimated machine hours or total estimated units produced during the life of the machine. It is calculated by dividing the cost of the machine by the estimated total machine hours or estimated lifetime production in units and multiplying by the units produced or machine hours worked.
Formula:
Suppose a company Box Ltd purchases machinery for 25,000 (estimated life 5 years) whose estimated life production is 5,000 units. If it produces 700 units in the first year of operation then depreciation cost would be:
Depreciation = 25,000/5,000*700 = 3,500
See lessWhy is miscellaneous expenditure shown in balance sheet?
Miscellaneous expenditure in the balance sheet The expenses that are written off in the current financial year are shown on the debit side of the profit and loss account. However, those that are not written off during the current financial year are shown in the balance sheet on the Assets Side as MiRead more
Miscellaneous expenditure in the balance sheet
The expenses that are written off in the current financial year are shown on the debit side of the profit and loss account. However, those that are not written off during the current financial year are shown in the balance sheet on the Assets Side as Miscellaneous expenditure.
Miscellaneous expenditure are those expenses that are not categorized as Operating expenses i.e. these are not classified as manufacturing, selling, and administrative expenses.
For example, BlackRock has spent 5,00,000 which will be written of in 5 consecutive years as an Advertisement expense. During the current financial year, only 1,00,000 will be written off and the rest will be carried to the next year and year thereafter.
Treatment in the first year:
Treatment in the second year:
The same will be done in the third, fourth, and fifth years.
Conclusion
Deferred revenue expenditure is also a long-term expenditure the benefit of which cannot be derived within the same year. So the amount that is written off during the current year is shown on the debit side of the profit and loss account and the amount which is not written off during the current financial year is shown on the assets side under the head Miscellaneous expenditure.
See lessWhere are fictitious assets shown in financial statements?
Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expeRead more
Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expenses are amortized over a period of time.
These assets do not have any realizable value except for the cash outflow. These are created to delay the recognition of the expense and defer it to future periods.
Fictitious assets actually qualify as an expense but are treated as assets only for the fact that they are expected to give returns over a course of more than one year. Examples are Advertisement expenses, preliminary expense, etc.
Treatment
Fictitious assets are shown on the assets side of the balance sheet under the head miscellaneous expenditure. A part of these expenses are shown in the profit and loss statement and the remaining amount is carried forward to the following years.
For example, a company Timber Ltd. incurs expenses relating to advertisement of its products worth 8,000,000 and this advertisement campaign can earn revenue for the company for around 10 years. Hence, such expense of 8,000,000 would be amortized over a period of 10 years.
For the first year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 7,200,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet.
For the second year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 6,400,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet. And so on.
We can say that fictitious assets are deferred revenue expenditures as well as intangible assets. But goodwill, etc are not fictitious assets. Hence, all fictitious assets are intangible assets but all intangible assets are not fictitious assets.
Common fictitious assets that could generally be seen are:
- Advertisement expenses
- Preliminary expenses
- Discount allowed on the issue of shares
- Loss incurred on issue of debentures
- Underwriting Commission
See lessCan you explain interest received in advance with journal entry?
Classified under advance income, Interest received in advance is unearned income that pertains to the following accounting period but is received in the current period. Such interest is not related to the current accounting period and the related benefits for such income are yet to be provided. HencRead more
Classified under advance income, Interest received in advance is unearned income that pertains to the following accounting period but is received in the current period. Such interest is not related to the current accounting period and the related benefits for such income are yet to be provided. Hence, it is a liability for the concern.
The treatment of such advance interest is based on the Accrual concept of accounting.
The journal entry for interest received in advance is:
Now suppose, a firm Star shine receives interest on loan of 5,00,000 @ 7% p.a. extended to another firm. In the current accounting period, Star shine receives 50,000 as interest, excess being advance for the following year. Then the following journal entries should be passed:
Cash received in form of interest is debited (Debit what comes in) and interest account is credited because of an increase in interest income (credit all incomes and gains).
Interest account is debited because we have to decrease the interest income since 15,000 relates to the next accounting year. Interest received in advance is credited because such interest of 15,000 is not yet earned and is a liability for the concern.
See lessCan you explain subscription received in advance with journal entry?
To start with let me give you a brief explanation of what a subscription is After joining a not-for-profit organization, a member is required to pay a certain amount of money every year at periodical intervals in order to keep his membership activated, such an amount of money is the subscription. FoRead more
To start with let me give you a brief explanation of what a subscription is
After joining a not-for-profit organization, a member is required to pay a certain amount of money every year at periodical intervals in order to keep his membership activated, such an amount of money is the subscription.
For accounting purposes, subscription is always taken on an accrual basis which means the amount which is received during the current year is only taken into consideration.
Now, Subscription received in advance means the amount of money that has been received during the current year but which relates to the year that is yet to come. In other words, we can say it is the unearned income by the organization.
It is recurring in nature and liability for the organization as it does not relate to the current year.
Journal Entry for Subscription received in advance
Here, the Subscription received in advance is credited to the Subscription account for the current year.
This is the adjustment entry made during the current year.
Treatment of Subscription in Financial Statements
Receipts and Payment account: In the receipts and payment account, the entire amount of subscription is written on the receipts side. That is to say, subscription amount relating to the previous year, current year, and the year to come (outstanding subscription, current year subscription, advance subscription).
Income and Expenditure account: In the Income and Expenditure Account, the subscription comes on the Income side. It is shown as
Here, a subscription received in advance in the current year is deducted to find the actual amount because although the money is received in advance the benefits related to it are yet to be provided by the organization.
Balance sheet: In the balance sheet, a subscription received in advance comes in the liability side under current liabilities as the benefits related to it are yet to be derived.
For Example, Lionel club received subscription from its members for the year 2020 as follows-
The total subscription was received during the year – 10,000
Here,
Subscription of 2020 was received in 2019- It is an Outstanding Subscription.
Subscription of 2021 was received in 2020- It is an advance Subscription.
See lessCan you explain rent received in advance with journal entry?
Before starting with the main discussion, let me give you a brief explanation of what rent received is When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received. Rent can be monthly, quRead more
Before starting with the main discussion, let me give you a brief explanation of what rent received is
When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received.
Rent can be monthly, quarterly, half-yearly, or yearly rent depending upon the organization’s agreement.
The journal entry for rent received will be
Here, Cash account is debited due to the increase in assets or because of a real account. Rent account is credited due to the increase in income or because of the nominal account.
However, Rent received in advance means the amount of rent that is not yet due but is received in advance. It is treated as a current liability because the benefit related is yet to be provided to the tenant.
The Journal entry for Rent received in advance will be-
Here, rent is debited due to a decrease in income.
Rent received in Advance is credited due to an increase in liability.
For Example, Johnson company rented out a part of its building that was not used to earn some extra income from it. The monthly rent was fixed as 20000. Johnson company follows calendar year as their accounting year. The tenant, therefore, paid 4 months advance rent to Johnson company i.e. the tenant in January gave his advance rent for February, March, April, and May.
While receiving the rent in the month of January. The journal entry would be
Now, the adjustment entry of rent received in advance would be
The rent received in advance will also be posted individually in each month of February, March, April, and May as
Furthermore, Rent received in advance is deducted from the amount of rent in the income and expenditure account and thereafter the amount received in advance is posted on the liability side of the Balance sheet.
See lessWhich accounts are balanced and which are not?
There are two types of ledger accounts in the accounting system – temporary and permanent. Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are traRead more
There are two types of ledger accounts in the accounting system – temporary and permanent.
Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are transferred to the profit and loss account and therefore are not balanced.
Permanent accounts are those whose balances are carried forward to the next accounting year in form of opening balances. These accounts are balanced and such balances are transferred to the balance sheet. Examples are assets, liability and capital accounts or personal and real accounts.
Balancing an account means equaling both the debit and the credit side of the account. Generally, there is a difference between the accounts recorded as a carry down balance in the case of permanent accounts and as a transfer balance in the case of temporary accounts.
Balancing serves as a check to the double-entry rule of accounting.
Balanced accounts
As discussed above, the balanced accounts are shown in the balance sheet and the balancing figure for such accounts are carried forward to the next accounting period.
Unbalanced accounts
As per the above discussion, the balancing figures of unbalanced accounts are transferred to the profit and loss account and no balances are carried forward to the next accounting period.
Suppose a company Shine Ltd. has machinery costing 5,00,000 at the beginning of the accounting period and charges depreciation of 10% on the asset. The company also has creditors amounting to 50,000 at the beginning of the period and purchases goods amounting to 30,000 on credit. It has a cash balance of 95,000 at the beginning of the period and earns interest amounting to 10,000.
Following ledgers would be prepared to record the above entries:
The above ledgers can be shown as follows:
The balance of the machinery account will be shown in the balance sheet and therefore it is a balanced account.
The balance is transferred to the profit and loss account and therefore depreciation account is an unbalanced account.
The balance of creditors account will be shown in the balance sheet and therefore it is a balanced account.
The balance is transferred to the profit and loss account and therefore purchases account is an unbalanced account.
The balance of the cash account will be shown in the balance sheet and therefore it is a balanced account.
The balance is transferred to the profit and loss account and therefore interest account is an unbalanced account.
See less