Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not in a specific period. Types of error in theRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not in a specific period.
Types of error in the trial balance
Now let me explain to you that what are the errors of trail balance which are as follows :
• Error of principle
• Compensating error
• Transactions completely omitted
• Error of recording
• Error of posting
A trial balance is not conclusive proof of the accuracy of the books of accounts since certain types of errors remain even when it tallies. They are explained below :
Error of principle
This error arises due to the incorrect application of the principle of accounting is not disclosed by the trial balance.
Compensating error
It means the group of errors committed in such a way that one mistake is compensated by another and the trial balance still agrees.
Transaction completely omitted
When the transaction is entirely omitted from recording in the books of account cannot be detected.
Error of recording
When both aspects of recording a transaction twice in the books of account take place.
Error of posting
Posting the correct amount on the correct side but in the wrong account is not reflected in the trial balance.
Steps to locate errors
Differences in the trial balance, howsoever minor they may be, must be located and rectified. The following steps are useful in locating errors are :
• Two columns of the trial balance should be totaled again.
• The list of sundry debtors and creditors should be checked to find out whether all balances of debtors and creditors have been correctly written in the trial balance or not.
• It should be checked that the balances of every account including cash and bank balances ( from the cash book ) have been written in the correct column of the trial balance.
• If the errors remain undetected, try to locate the errors by trial and error techniques such as finding an account showing a balance difference from the trial balance.
• Ledger balances should be balanced again.
• Check the totals of subsidiary books.
• Check the posting of nominal accounts.
• And at last if not possible to locate the difference in the trial balance is temporarily transferred to a suspense account.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
Purpose of trial balance
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Rules of trial balance
When we prepare a trial balance from the given list of ledger balances, the following rules to be kept in mind that are as follows :
• The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
Definition Debit balance may arise due to timing differences in which case income will be accrued at the year's end to offset the debit. The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits. The account which has debit balances are aRead more
Definition
Debit balance may arise due to timing differences in which case income will be accrued at the year’s end to offset the debit.
The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits.
The account which has debit balances are as follows:
• Assets accounts
Land, furniture, building machinery, etc
• Expenses accounts
Salary, rent, insurance, etc
• Losses
Bad debts, loss by fire, etc
• Drawings
Personal drawings of cash or assets
• Cash and bank balances
Balances of these accounts
In class 11th, we learned about all these accounts that have debit balances.
Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “
Here are some examples showing the debit balances of the accounts :
Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not on a particular period. What does trial balRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not on a particular period.
What does trial balance include?
As in each double-entry system, each account has two aspects debit and credit.
Hence the following trial balance includes:
• Debit or credit of the reporting period.
• The amount which is to be debited or credited to each account.
• The account numbers.
• The dates of the reporting period.
• The totaled sums of debits and credits entered during that time.
When we prepare a trial balance from the given list of ledger balances, these need to be included which are as follows :
The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
The purpose of the trial balance is as follows:
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Definition Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “ A furniture account that is an asset has a debit balance. Debit balance may arise due to timing differences in which case income wilRead more
Definition
Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “
A furniture account that is an asset has a debit balance.
Debit balance may arise due to timing differences in which case income will be accrued at the year’s end to offset the debit.
The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits.
The account which has debit balances are as follows:
Assets accounts
Land, furniture, building machinery, etc
Expenses accounts
Salary, rent, insurance, etc
Losses
Bad debts, loss by fire, etc
Drawings
Personal drawings of cash or assets
Cash and bank balances
Balances of these accounts
The account has credit balances as follows:
Liabilities accounts
Creditors, bills payable, etc
Income accounts
Salary received, interest received, etc
Profits
Dividends, interest, etc
Capital
Partners Capital
Here are some examples showing the debit balances and credit balances of the accounts :
Debtors are treated as an asset. A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered. When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise. Debtors are consRead more
Debtors are treated as an asset.
A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.
When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise.
Debtors are considered assets in the balance sheet and are shown under the head of current assets.
For example – Ram Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ram because he owes the amount to Ram. This amount will be payable at a later date.
Liabilities Vs Assets
Liabilities
It means the amount owed (payable) by the business. Liability towards the owners ( proprietor or partners ) of the business is termed internal liability. For example, owner’s capital, etc
On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability.
For example creditors, bank overdrafts, etc.
Assets
An asset is a resource owned or controlled by a company. The benefit from the asset will accrue to the business in current and future periods. In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – machinery, building, 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. They are readily realizable into cash.
In other words, we can say that the expected realization period of current assets is less than the operating cycle period.
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.
Why debtors are treated as assets?
Now let me explain to you why debtors are treated as assets and not as liabilities because of the following characteristics :
We can say that the expected realization period is less than the operating cycle period.
Expected to be converted into cash in the normal course of business.
In the business, debtors are treated as current assets which we can see on the asset side of the balance sheet.
Debtors have a debit balance.
Conclusion
Now after the above discussion, I can conclude that debtors are considered to be an asset and not a liability.
Definition Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle. Posting helps us to classify transactions in a better manner. A journal is used to record transactions in chronological order while ledgerRead more
Definition
Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle.
Posting helps us to classify transactions in a better manner.
A journal is used to record transactions in chronological order while ledger books are used to classify transactions into assets, liabilities, expenses, and incomes.
Steps of Posting
• Create and name ledger accounts for different items of trial balance
• Identify those entries in the journal that relate to the relevant ledger book under consideration.
• Post the entry on the debit or credit side of the ledger account.
• For example, when salaries are paid a salary account is debited and a bank account is credited. When posting this transaction in the bank account we will debit the bank account and write “To salaries” under the head “particular”. This will indicate that salaries were paid from a bank account causing a reduction in the bank balance.
• After all the journal entries relevant to a particular ledger account have been posted in it, we will tally the total of the debit and the credit side of the ledger account to ascertain any balance left.
• Usually, asset accounts have the debit side exceeding the credit side. That is to say, they have a debit balance. Liability accounts usually have a credit balance.
• It is not necessary that every ledger account may have a balance left at the end. The total of the amounts on the debit side may be equal to the total of the amounts on the credit side in some ledger accounts.
• The last step is to recheck the ledger account to identify and correct any mistakes that may have occurred during the posting process.
Importance of Posting
• Posting helps us to classify transactions in a better and more efficient manner.
• Posting makes the books of accounts more readable.
• An accountant may choose to engage in posting once every month or even once every day as per the requirements of the business and the financial reporting norms.
• Posting is necessary for the creation of financial statements. A trial balance cannot be drafted without determining the balance of each ledger account.
• Posting helps us to know the balance of each account This helps to run the business smoothly by tracking balances timely and making up for any likely deficiency in advance.
• Analysis of how balances of various ledger accounts have changed over time helps us to draw valuable conclusions for the business.
Conclusion
We can conclude by saying that the process of posting refers to transferring the entries from the journal to the ledger accounts.
Posting is an essential step of the accounting cycle and without it, financial statements cannot be prepared. Any error while posting is bound to adversely affect the creation of the financial statements.
Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more
Definition
Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.
However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.
For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.
Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.
For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.
Meaning as per AS – 29
Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-
• Contingent asset
A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.
• Contingent liability
A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
A reliable estimate of the amount of obligation cannot be made.
Recognition In Financial Statements
Contingent assets and liabilities are recognized as follows:-
• Contingent Assets
As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.
It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.
However, when the realization of income is virtually certain, the related asset no longer remains contingent.
• Contingent liability
As per the rules, it is not recognized by an enterprise.
When recognized?
Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.
The assets and the related income are recognized in the financial statements of the period in which the change occurs.
Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.
And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.
A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.
Disclosure
Now we will see how contingent assets and liability are disclosed which is mentioned below:-
• Contingent asset
These contingent assets are not disclosed in financial statements.
A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.
• Contingent Assets
A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.
How to locate errors in trial balance?
Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not in a specific period. Types of error in theRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not in a specific period.
Types of error in the trial balance
Now let me explain to you that what are the errors of trail balance which are as follows :
• Error of principle
• Compensating error
• Transactions completely omitted
• Error of recording
• Error of posting
A trial balance is not conclusive proof of the accuracy of the books of accounts since certain types of errors remain even when it tallies. They are explained below :
Error of principle
This error arises due to the incorrect application of the principle of accounting is not disclosed by the trial balance.
Compensating error
It means the group of errors committed in such a way that one mistake is compensated by another and the trial balance still agrees.
Transaction completely omitted
When the transaction is entirely omitted from recording in the books of account cannot be detected.
Error of recording
When both aspects of recording a transaction twice in the books of account take place.
Error of posting
Posting the correct amount on the correct side but in the wrong account is not reflected in the trial balance.
Steps to locate errors
Differences in the trial balance, howsoever minor they may be, must be located and rectified. The following steps are useful in locating errors are :
• Two columns of the trial balance should be totaled again.
• The list of sundry debtors and creditors should be checked to find out whether all balances of debtors and creditors have been correctly written in the trial balance or not.
• It should be checked that the balances of every account including cash and bank balances ( from the cash book ) have been written in the correct column of the trial balance.
• If the errors remain undetected, try to locate the errors by trial and error techniques such as finding an account showing a balance difference from the trial balance.
• Ledger balances should be balanced again.
• Check the totals of subsidiary books.
• Check the posting of nominal accounts.
• And at last if not possible to locate the difference in the trial balance is temporarily transferred to a suspense account.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
Purpose of trial balance
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Rules of trial balance
When we prepare a trial balance from the given list of ledger balances, the following rules to be kept in mind that are as follows :
• The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
See lessWhat is debit balance class 11?
Definition Debit balance may arise due to timing differences in which case income will be accrued at the year's end to offset the debit. The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits. The account which has debit balances are aRead more
Definition
Debit balance may arise due to timing differences in which case income will be accrued at the year’s end to offset the debit.
The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits.
The account which has debit balances are as follows:
• Assets accounts
Land, furniture, building machinery, etc
• Expenses accounts
Salary, rent, insurance, etc
• Losses
Bad debts, loss by fire, etc
• Drawings
Personal drawings of cash or assets
• Cash and bank balances
Balances of these accounts
In class 11th, we learned about all these accounts that have debit balances.
Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “
Here are some examples showing the debit balances of the accounts :
See lesswhat does a trial balance include?
Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not on a particular period. What does trial balRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not on a particular period.
What does trial balance include?
As in each double-entry system, each account has two aspects debit and credit.
Hence the following trial balance includes:
• Debit or credit of the reporting period.
• The amount which is to be debited or credited to each account.
• The account numbers.
• The dates of the reporting period.
• The totaled sums of debits and credits entered during that time.
When we prepare a trial balance from the given list of ledger balances, these need to be included which are as follows :
The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
The purpose of the trial balance is as follows:
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Structure of trial balance
See lessWhich of the following accounts have a debit balance?
Definition Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “ A furniture account that is an asset has a debit balance. Debit balance may arise due to timing differences in which case income wilRead more
Definition
Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “
A furniture account that is an asset has a debit balance.
Debit balance may arise due to timing differences in which case income will be accrued at the year’s end to offset the debit.
The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits.
The account which has debit balances are as follows:
Land, furniture, building machinery, etc
Salary, rent, insurance, etc
Bad debts, loss by fire, etc
Personal drawings of cash or assets
Balances of these accounts
The account has credit balances as follows:
Creditors, bills payable, etc
Salary received, interest received, etc
Dividends, interest, etc
Partners Capital
Here are some examples showing the debit balances and credit balances of the accounts :
See lessIs debtor an asset or liability ?
Debtors are treated as an asset. A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered. When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise. Debtors are consRead more
Debtors are treated as an asset.
A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.
When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise.
Debtors are considered assets in the balance sheet and are shown under the head of current assets.
For example – Ram Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ram because he owes the amount to Ram. This amount will be payable at a later date.
Liabilities Vs Assets
Liabilities
It means the amount owed (payable) by the business. Liability towards the owners ( proprietor or partners ) of the business is termed internal liability. For example, owner’s capital, etc
On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability.
For example creditors, bank overdrafts, etc.
Assets
An asset is a resource owned or controlled by a company. The benefit from the asset will accrue to the business in current and future periods. In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – machinery, building, 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. They are readily realizable into cash.
In other words, we can say that the expected realization period of current assets is less than the operating cycle period.
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.
Why debtors are treated as assets?
Now let me explain to you why debtors are treated as assets and not as liabilities because of the following characteristics :
Conclusion
Now after the above discussion, I can conclude that debtors are considered to be an asset and not a liability.
See lessWhat is the meaning of posting in journal entries
Definition Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle. Posting helps us to classify transactions in a better manner. A journal is used to record transactions in chronological order while ledgerRead more
Definition
Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle.
Posting helps us to classify transactions in a better manner.
A journal is used to record transactions in chronological order while ledger books are used to classify transactions into assets, liabilities, expenses, and incomes.
Steps of Posting
• Create and name ledger accounts for different items of trial balance
• Identify those entries in the journal that relate to the relevant ledger book under consideration.
• Post the entry on the debit or credit side of the ledger account.
• For example, when salaries are paid a salary account is debited and a bank account is credited. When posting this transaction in the bank account we will debit the bank account and write “To salaries” under the head “particular”. This will indicate that salaries were paid from a bank account causing a reduction in the bank balance.
• After all the journal entries relevant to a particular ledger account have been posted in it, we will tally the total of the debit and the credit side of the ledger account to ascertain any balance left.
• Usually, asset accounts have the debit side exceeding the credit side. That is to say, they have a debit balance. Liability accounts usually have a credit balance.
• It is not necessary that every ledger account may have a balance left at the end. The total of the amounts on the debit side may be equal to the total of the amounts on the credit side in some ledger accounts.
• The last step is to recheck the ledger account to identify and correct any mistakes that may have occurred during the posting process.
Importance of Posting
• Posting helps us to classify transactions in a better and more efficient manner.
• Posting makes the books of accounts more readable.
• An accountant may choose to engage in posting once every month or even once every day as per the requirements of the business and the financial reporting norms.
• Posting is necessary for the creation of financial statements. A trial balance cannot be drafted without determining the balance of each ledger account.
• Posting helps us to know the balance of each account This helps to run the business smoothly by tracking balances timely and making up for any likely deficiency in advance.
• Analysis of how balances of various ledger accounts have changed over time helps us to draw valuable conclusions for the business.
Conclusion
We can conclude by saying that the process of posting refers to transferring the entries from the journal to the ledger accounts.
Posting is an essential step of the accounting cycle and without it, financial statements cannot be prepared. Any error while posting is bound to adversely affect the creation of the financial statements.
See lessHow are contingent assets different from contingent liabilities ?
Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more
Definition
Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.
However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.
For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.
Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.
For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.
Meaning as per AS – 29
Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-
• Contingent asset
A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.
• Contingent liability
A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
A reliable estimate of the amount of obligation cannot be made.
Recognition In Financial Statements
Contingent assets and liabilities are recognized as follows:-
• Contingent Assets
As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.
It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.
However, when the realization of income is virtually certain, the related asset no longer remains contingent.
• Contingent liability
As per the rules, it is not recognized by an enterprise.
When recognized?
Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.
The assets and the related income are recognized in the financial statements of the period in which the change occurs.
Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.
And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.
A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.
Disclosure
Now we will see how contingent assets and liability are disclosed which is mentioned below:-
• Contingent asset
These contingent assets are not disclosed in financial statements.
A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.
• Contingent Assets
A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.
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