Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, 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.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Balance sheet
In the balance sheet either it can be shown on the asset side under head current assets by reducing from that specific assets.
For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.
Profit and loss account
Bad debts are treated as an expense and debited to the profit and loss account.
For example same as above which I have explained but before transferring to the balance sheet bad debt will be debited to the profit and loss account as an expense.
Conclusion
Therefore I can conclude that bad debts will be treated in the following ways :
On the debit side of the profit and loss account.
In the current assets side of the balance sheet, these are deducted from sundry debtors.
Reasons for bad debts
There are several reasons why businesses may have bad debts some of them are as follows:-
Offered credit to customers who were unable to pay them back, or they may have been the victim of fraud.
When there is conflicts or dispute arise with respect to product size, color, quality, delivery, credit term, price, etc therefore debts becomes bad.
Debtors have poor financial management or they are not able to pay debts on time.
Debtors’ unwillingness to pay is also a reason for debts to become bad.
Or there can be more cases where debtors are unable to collect debts and debts turns out to be bad.
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement or which is called the profit and loss account.
Second, is the allowance method which means we create provisions for doubtful debtsaccounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.
Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
Provision for doubtful debts is shown in the debit side of profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet.
Related terms
So there are a few related terms whose meanings you should know
Further bad debts :
It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.
Bad debts recovered :
It may happen that the amount written off as bad debts are recovered fully or partially.
In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
Thus amount recovered is a ‘gain’ and is credited to the profit and loss account.
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. Sometimes debtors are unable to pay the amount due either partially or fully. the amount that is not receivableRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
Sometimes debtors are unable to pay the amount due either partially or fully. the amount that is not receivable is a loss and is called bad debt.
Bad debts are neitherassets nor liabilities they are expenses that are debited to the profit and loss account and reduced from debtors in the balance sheet.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.
Related terms
So there are a few related terms whose meanings you should know
Further bad debts :
It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.
Bad debts recovered :
It may happen that the amount written off as bad debts are recovered fully or partially.
In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
Thus amount recovered is a ‘gain’ and is credited to the profit and loss account.
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement, which is called the profit and loss account.
Second, is the allowance method which means we create provisions for doubtful debtsaccounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.
Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
Provision for doubtful debts is shown in the debit side of the profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Balance sheet
In the balance sheet either it can be shown on the asset side under the head, current assets by reducing from that specific assets.
For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.
Profit and loss account
Bad debts are treated as expenses and debited to the profit and loss account.
For example, as I have explained above, before transferring to the balance sheet, bad debt will be debited to the profit and loss account as an expense.
Now let me show you the extract of the profit and loss account and balance sheet showing baddebts and bad debts recovered which are as follows:-
Definition Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business. Or in other words, we can say that the expected realization period is less than the operating cRead more
Definition
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
Or in other words, we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.
For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
List of current assets
The list of current assets is as follows:-
Cash in hand
Cash equivalents
Bills receivables
Sundry debtors
Prepaid expenses
Accrued income
Closing stock
Short-term investments ( marketable securities )
Other liquid assets
Now here are a few definitions for the above list of current assets which are as follows:-
Cash in hand
Cash comprises cash on hand and demand deposits with banks.
Cash equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Bills receivables
It means a bill of exchange accepted by the debtor, the amount of which will be received on the specific date.
Sundry debtors
A debtor is a person or entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.
Prepaid expenses
Expense that has been paid in advance and benefit of which will be available in the following years or year.
Accrued income
Income that has been earned in the accounting period but in respect of which no enforceable claim has become due in that period by the enterprise.
Closing stock
Stock or inventory at the end of the accounting period which is shown in the balance sheet and which is valued on the basis of the “ cost or net realizable value, whichever is lower “ principle is called closing stock.
Short term investment
Investments that are also known as marketable securities and are held for a temporary period of time i.e, for less than 12 months, and can be easily converted into cash are called short-term investments.
Criteria for classification
Now let us see the classification of assets in the case of companies as per Schedule III of the Companies act 2013.
An asset is a current asset if it satisfies any one of the following criteria which are as follows:-
It is held primarily for the purpose of being traded.
It is expected to be realized in or is intended for sale or consumption in the company’s normal operating cycle.
It is expected to be realized within 12 months from the reporting date.
It is cash and cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting date.
Here is an extract of the balance sheet showing current assets
Definition Prepaid expenses are those expenses whose payments are done in advance which can be for the goods or services whose benefit will accrue in the subsequent accounting period. A prepaid expense is a current asset. prepaid expenses are classified under the head current assets in the balance sRead more
Definition
Prepaid expenses are those expenses whose payments are done in advance which can be for the goods or services whose benefit will accrue in the subsequent accounting period.
A prepaid expense is a current asset. prepaid expenses are classified under the head current assets in the balance sheet.
This is because they provide future economic benefits to the company. As such, they are assets that can be used to generate revenue in the future.
For example prepaid rent, prepaid insurance, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
Or in other words, we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.
For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are liabilities that are payable generally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Why current assets and not a current liability?
Now let me try to explain to you that prepaid expenses are classified as current assets and not as a current liability which is as follows :
we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.
expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
In the business prepaid expense are treated as an asset which we can see on the asset side of the balance sheet.
Or in other words, we can say that it is initially recorded as a prepaid expense as an asset in the balance sheet and subsequently its value is expensed over time in the profit and loss account.
Example
Now let us take an example for explaining prepaid expenses which are mentioned below.
An insurance premium of Rs 50000 has been paid for one year beginning (previous year). The financial year ends on 31st march YYYY.
It means the premium for 6 months i.e., 1st April, YYYY(current year) to 30th September, YYYY(current year) amounting to Rs 25000 is paid in advance.
Thus, of premium paid in advance (Rs 25000) is a Prepaid Expense. It will be accounted as an expense in the financial year ending 31st march next year. In the balance sheet as of 31st march YYYY ( current year ) it will be shown as Current Asset.
Here is an extract of the profit /loss account and balance sheet of the above example:
Key points
There are a few things to keep in mind when dealing with prepaid expenses.
First, is that the expenses are actually prepaid. This means that the expenses were paid for before they were used.
Second, it is essential to track the number of prepaid expenses that have been used. That is to make sure that the prepaid expenses are not overstated on the company’s financial statements. This can happen if the company pays for more goods or services than it actually
Last but not least it is important to keep in mind that changes in the value of prepaidexpenses can impact the company’s net income. For example, if the company’s prepaid insurance increases in value, this will increase the company’s net income.
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. Importance As the tRead 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.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation offinancialstatements like balance sheet or profit and loss
Purpose of trial balance which are 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 facilitates 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.
Preparation of trial balance
To verify the correctness of the posting of ledger accounts in the terms of debit credit amounts periodically, a periodic trial balance may be prepared ( say ) at the end of the month or quarter, or half year.
There is no point in denying that a trial balance can be prepared at any time.
But it should at least be prepared at the end of the accounting period to verify the arithmetical accuracy of the ledger accounts before the preparation of financial statements.
Methods of preparation
Balance method
Total amount methods
These are two methods that you can use to prepare trail balance, now let me explain to you in detail about these methods which are as follows:-
Balance method
The balances of all the accounts ( including cash and bank account ) are incorporated in the trial balance.
When ledger accounts are balanced only this method can be used.
This method is generally used by accountants for preparation of the financial statements.
Total amount method
Under this method, the total amount of debit and credit items in each ledger account is incorporated into the trial balance.
This method can be used immediately after the completion of posting from the books of the original entry ledger.
Steps to prepare a trial balance
First, we need to decide the method to opt for the preparation of the trial balance which is mentioned above.
Then once opted, collect all the balances as per the method adopted and prepare accordingly by posting the debit and credit side of the trial balance.
After this process arrange all the accounts in order of their nature (assets, liabilities, equity, income, and expenses ).
Then you have to total debit and credit balances separately.
After the above steps if there is any difference between the total debit and credit side balances then that is adjusted through the suspense account.
A suspense account is generated when the above case arises that is trial balance did not agree after transferring the balance of all ledger accounts including cash and bank balance.
And also errors are not located in timely, then the trial balance is tallied by transferring the difference between the debit and credit side to an account known as a suspense account.
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.
What is net credit sales? Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales. Formula The formula for net credit sales is as follows: Net credit sales = Sales on credit - Sales returns - SalRead more
What is net credit sales?
Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales.
Formula
The formula for net credit sales is as follows:
Net credit sales = Sales on credit – Sales returns – Sales allowances
In the balance sheet, you can find credit sales in the “short-term assets “section. It can be calculated from account receivables, bills receivables, and debtors of the balance sheet.
Sales return: A sales return is when a customer or client returns or sends a product back to the seller. And this can happen due to various reasons, including:
Excess quantity ordered
Not upto Customer expectations
Shipping delays ( product arrived late )
Accidentally ordered an item and there can be more such reasons.
Sales allowance: A sales allowance is a discount that a seller offers a buyer as an alternative to the buyer for returning the product.
Because of a problem or issue with the buyer’s order or we can say that he is not satisfied with the product.
Cash sales: Cash sales are sales in which the payment is done at once or I can say that buyer has obligation to make payment to the seller.
Cash sales are considered to include bills, checks, credit cards, and money orders as forms of payment.
Example
Now after understanding the terms used in the formula let me explain to you with an example which is as follows:-
First, we will calculate the Total Sales for the Period:- In the month of May, Flipkart company had cash sales of Rs 80,000. The total amount in Accounts Receivables is Rs 150,000, with Rs 30,000 as the carryover from April’s receivables.
Since you only want to know about credit sales in the current period (September), you subtract Rs 30,000 from the total. This means that for the month of September, Flipcart Company had sales totaling Rs 200,000 (80,000 + 120,000).
Second, we will subtract the Sales Returns:- During the month of September, Flipcart Company issued Rs 20,000 in refunds, because several items were damaged during shipment, so the customer could not use them.
This amount would reduce the total number of cash sales if the accounts receivable balance was from a credit customer. This reduces the total sales to Rs 180,000 (Rs 200,000 in total sales – Rs 20,000 in returns).
Thirdly we will subtract the Sales Allowances:- Sales allowances are discounts offered to customers for not asking for full refunds.
For example, an item that had been shipped to a customer was the wrong size, but the customer told that he will agree to keep the item if the price could be adjusted. Flipcart Company issued Rs 10,000 in allowances in May.
After this deduction, the total sales for May are Rs 170,000 (Rs 180,000 – Rs 10,000).
Then at last there are any cash sales then subtract:- After figuring out the total number of sales for September and then subtracting the sales returns and allowances, the cash sales are deducted since you are focusing on net credit sales for the period.
After deducting the Rs 60,000 in cash sales, Flipcart Company has Rs 110,000 as net credit sales.
Why do we need net credit sales?
Net Credit sales help to calculate the accounts receivable turnover ratio.
Net credit sales also indicate the amount of credit you offer to your customer.
Net credit sale is also used to calculate other financial analysis items like days sales outstanding.
Overview And Definition Shareholder's equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity. For example – retainRead more
Overview And Definition
Shareholder’s equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity.
For example – retained earnings, common stock, etc.
Liabilities
Liabilities are the obligation or something a company or a person owes to another party. normally it is in cash form but it can be in other forms also.
And these liabilities need to be settled as per the terms agreed upon by the party.
For example – taxes owned, trade payables, etc.
Assets
Assets are those which has ownership of a company and controlling power with the company. In other words, Or something which will generate profits today and in the future.
For example – cash, building, etc.
Conclusion
Therefore I can conclude that stockholders’ equity refers to the assets remaining in a business once all liabilities have been settled, or I can say as it is not the same thing as the company’s assets. Assets are what the business owns.
How to Calculate Shareholders’ Equity
Shareholders’ equity is the owner’s claim when assets are liquidated, and debts are paid up. It can be calculated using the following two formulas:
Formula 1:
Shareholders’ Equity = Total Assets – Total Liabilities
Let me now take the example of a small business owner who is into the business of chairs in India.
As per the balance sheet of the proprietorship firm for the financial year ending on March 31, YYYY, the following information is available. Determine the shareholders’ equity of the firm.
Where does bad debts come in the balance sheet?
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, 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.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Conclusion
Therefore I can conclude that bad debts will be treated in the following ways :
Reasons for bad debts
There are several reasons why businesses may have bad debts some of them are as follows:-
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
Related terms
So there are a few related terms whose meanings you should know
See lessIs bad debt an asset?
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. Sometimes debtors are unable to pay the amount due either partially or fully. the amount that is not receivableRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
Sometimes debtors are unable to pay the amount due either partially or fully. the amount that is not receivable is a loss and is called bad debt.
Bad debts are neither assets nor liabilities they are expenses that are debited to the profit and loss account and reduced from debtors in the balance sheet.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.
Related terms
So there are a few related terms whose meanings you should know
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Now let me show you the extract of the profit and loss account and balance sheet showing bad debts and bad debts recovered which are as follows:-
See lessCan you share a list of current assets?
Definition Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business. Or in other words, we can say that the expected realization period is less than the operating cRead more
Definition
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
Or in other words, we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.
For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
List of current assets
The list of current assets is as follows:-
Now here are a few definitions for the above list of current assets which are as follows:-
Cash in hand
Cash comprises cash on hand and demand deposits with banks.
Cash equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Bills receivables
It means a bill of exchange accepted by the debtor, the amount of which will be received on the specific date.
Sundry debtors
A debtor is a person or entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.
Prepaid expenses
Expense that has been paid in advance and benefit of which will be available in the following years or year.
Accrued income
Income that has been earned in the accounting period but in respect of which no enforceable claim has become due in that period by the enterprise.
Closing stock
Stock or inventory at the end of the accounting period which is shown in the balance sheet and which is valued on the basis of the “ cost or net realizable value, whichever is lower “ principle is called closing stock.
Short term investment
Investments that are also known as marketable securities and are held for a temporary period of time i.e, for less than 12 months, and can be easily converted into cash are called short-term investments.
Criteria for classification
Now let us see the classification of assets in the case of companies as per Schedule III of the Companies act 2013.
An asset is a current asset if it satisfies any one of the following criteria which are as follows:-
Here is an extract of the balance sheet showing current assets
See lessPrepaid expenses is current assets or current liabilities?
Definition Prepaid expenses are those expenses whose payments are done in advance which can be for the goods or services whose benefit will accrue in the subsequent accounting period. A prepaid expense is a current asset. prepaid expenses are classified under the head current assets in the balance sRead more
Definition
Prepaid expenses are those expenses whose payments are done in advance which can be for the goods or services whose benefit will accrue in the subsequent accounting period.
A prepaid expense is a current asset. prepaid expenses are classified under the head current assets in the balance sheet.
This is because they provide future economic benefits to the company. As such, they are assets that can be used to generate revenue in the future.
For example prepaid rent, prepaid insurance, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
Or in other words, we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.
For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are liabilities that are payable generally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Why current assets and not a current liability?
Now let me try to explain to you that prepaid expenses are classified as current assets and not as a current liability which is as follows :
Example
Now let us take an example for explaining prepaid expenses which are mentioned below.
An insurance premium of Rs 50000 has been paid for one year beginning (previous year). The financial year ends on 31st march YYYY.
It means the premium for 6 months i.e., 1st April, YYYY(current year) to 30th September, YYYY(current year) amounting to Rs 25000 is paid in advance.
Thus, of premium paid in advance (Rs 25000) is a Prepaid Expense. It will be accounted as an expense in the financial year ending 31st march next year. In the balance sheet as of 31st march YYYY ( current year ) it will be shown as Current Asset.
Here is an extract of the profit /loss account and balance sheet of the above example:
Key points
There are a few things to keep in mind when dealing with prepaid expenses.
See lessWhy is trial balance prepared?
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. Importance As the tRead 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.
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 sheet or profit and loss
Purpose of trial balance which are as follows:
Preparation of trial balance
Methods of preparation
These are two methods that you can use to prepare trail balance, now let me explain to you in detail about these methods which are as follows:-
Balance method
Total amount method
Steps to prepare a trial balance
A suspense account is generated when the above case arises that is trial balance did not agree after transferring the balance of all ledger accounts including cash and bank balance.
And also errors are not located in timely, then the trial balance is tallied by transferring the difference between the debit and credit side to an account known as a suspense account.
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 :
Are placed in the debit column of the trial balance.
Are placed in the credit column of the trial balance.
See lessHow to find net credit sales from balance sheet?
What is net credit sales? Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales. Formula The formula for net credit sales is as follows: Net credit sales = Sales on credit - Sales returns - SalRead more
What is net credit sales?
Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales.
Formula
The formula for net credit sales is as follows:
Net credit sales = Sales on credit – Sales returns – Sales allowances
In the balance sheet, you can find credit sales in the “short-term assets “section. It can be calculated from account receivables, bills receivables, and debtors of the balance sheet.
Credit sales = closing debtors + receipts – opening debtors
Steps to calculate net credit sales
Terms relevant to understand before calculation
Sales return: A sales return is when a customer or client returns or sends a product back to the seller. And this can happen due to various reasons, including:
Sales allowance: A sales allowance is a discount that a seller offers a buyer as an alternative to the buyer for returning the product.
Because of a problem or issue with the buyer’s order or we can say that he is not satisfied with the product.
Cash sales: Cash sales are sales in which the payment is done at once or I can say that buyer has obligation to make payment to the seller.
Cash sales are considered to include bills, checks, credit cards, and money orders as forms of payment.
Example
Now after understanding the terms used in the formula let me explain to you with an example which is as follows:-
Why do we need net credit sales?
- Net credit sale is also used to calculate other financial analysis items like days sales outstanding.
See lessIs shareholders equity a liability or asset?
Overview And Definition Shareholder's equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity. For example – retainRead more
Overview And Definition
Shareholder’s equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity.
For example – retained earnings, common stock, etc.
Liabilities
Liabilities are the obligation or something a company or a person owes to another party. normally it is in cash form but it can be in other forms also.
And these liabilities need to be settled as per the terms agreed upon by the party.
For example – taxes owned, trade payables, etc.
Assets
Assets are those which has ownership of a company and controlling power with the company. In other words, Or something which will generate profits today and in the future.
For example – cash, building, etc.
Conclusion
Therefore I can conclude that stockholders’ equity refers to the assets remaining in a business once all liabilities have been settled, or I can say as it is not the same thing as the company’s assets. Assets are what the business owns.
How to Calculate Shareholders’ Equity
Shareholders’ equity is the owner’s claim when assets are liquidated, and debts are paid up. It can be calculated using the following two formulas:
Formula 1:
Shareholders’ Equity = Total Assets – Total Liabilities
Formula 2:
Shareholders’ Equity = Share Capital + Retained Earnings – Treasury Stock
Let me now take the example of a small business owner who is into the business of chairs in India.
As per the balance sheet of the proprietorship firm for the financial year ending on March 31, YYYY, the following information is available. Determine the shareholders’ equity of the firm.
Given, Total Assets = Net property, plant & equipment + Warehouse premises + Accounts Receivable + Inventory
= Rs (1000,000 + 300,000 + 500,000 + 800,000)
Total Assets = Rs 2600,000
Again, Total liabilities = Net debt+ Accounts payable + Other current liabilities
= Rs (700,000 + 700,000 + 600,000)
Total Liabilities = Rs 2,000,000
Therefore, the shareholders’ equity of the firm as on March 31, YYYY, can be calculated as,
= Rs (2600,000 – 2,000,000)
Shareholders’ Equity = Rs 600,000
Therefore, the shareholders’ equity, as of March 31, YYYY, stood at Rs 600,000.
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