Similarly, someone asked Are loose tools current assets
Similarly, someone asked Are loose tools current assets
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As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts. Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future,Read more
As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts.
Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future, its creditors and lenders report to the firm about their dues.
At that time, a firm may get to know that it had failed to record some liabilities in its books and it has settled them now.
We know that when a partnership firm is dissolved, a realisation account is created to which all the assets and liabilities of the firm are transferred. Entries are as given below:
Realisation A/c Dr. ₹ Amt
To Assets A/c ₹ Amt
( Asset transferred to realisation account)
Liabilities A/c Dr. ₹ Amt
To Realisation A/c ₹ Amt
(Liabilities transferred to realisation account)
Hence, for transferring unrecorded liabilities, the procedure is the same for the recorded liabilities:
Unrecorded Liabilities A/c Dr. ₹ Amt
To Realisation A/c ₹ Amt
( Unrecorded liabilities transferred to realisation account)
Then to pay off the unrecorded liability the entry is:
Realisation A/c Dr. ₹ Amt
To Cash / Bank A/c ₹ Amt
(Unrecorded liabilities paid off)
That’s it, I hope I was able to make you understand.
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Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares. Now let’s understand the reason behRead more
Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares.
Now let’s understand the reason behind it.
We know preference shares are those shares that carry some preferential rights:
- Dividend at a fixed rate
- Right to get repaid before equity shareholders in event of winding up of the company
- Other rights as specified in the Articles of Associations.
Also, unlike equity shares, preference shares are redeemable i.e. repaid after a period of time (which cannot be more than 20 years).
Generally, the creditors of a company have the right to be repaid first. So, in event of redemption of preference shares, the preference shareholders are repaid before creditors and the total capital of the company will but the total debt of the company is unaffected.
The gap between the debt and equity of the company will further widen and this will also increase the debt-equity ratio of the company. It will be perceived to be a risky scenario by the creditors and lenders of the company because the
So to protect the creditor and lender, Section 55 of the Companies Act comes to rescue.
Section 55 of the Companies Act ensure that the creditors and lenders of a company do not find themselves in a riskier situation when the company decides to redeem its preference shares by making it mandatory for a company to either
- issue new shares to fund the redemption of preference shares
OR
- create a capital redemption reserve if it uses profits for redemption
OR
- a combination of both
This will fill up the void created by the redemption of preference shares and the debt-equity ratio will remain unaffected. Keeping an amount aside in Capital Redemption Reserve ensures that such amount will not be used for dividend distribution and capital will be restored because it can be only used to issue bonus shares.
In this way the debt-equity ratio remains the same, the interest of the creditors and lenders secured.
Bonus shares are fully paid shares that are issued to existing shareholders at no cost.
Let’s take a numerical example for further understanding:
ABC Ltd wants to redeem its 1,000 9% Preference shares at a face value of Rs 100 per share. It has decided to issue 8,000 equity shares @Rs 10 per share and use the profit and reserves to fund the deficit.
The journal entries will be as follows:
Working note: Rs
9% preference shares due for redemption (1,000 x 10) – 1,00,000
Less: Amount of new shares issued (8,000 x 10) – 80,000
Amount to be transferred to CRR 20,000
Hence, the reduction of total capital by Rs 1,00,000 due to the redemption of preference shares is reversed by issuing equity shares of Rs 80,000 and creating a Capital Redemption Reserve of Rs 20,000.
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Depreciation is an accounting process of allocating the value of an asset over its estimated useful life. When a company purchases an asset, depreciation will be calculated at the end of every financial year on the asset. The company records the amount of depreciation in a separate ledger, i.e., AccRead more
Depreciation is an accounting process of allocating the value of an asset over its estimated useful life.
When a company purchases an asset, depreciation will be calculated at the end of every financial year on the asset. The company records the amount of depreciation in a separate ledger, i.e., Accumulated Depreciation. This expense will be debited instead of depreciation in the Asset ledger.
Accumulated Depreciation
Accumulated depreciation is the accumulated reduction in the cost of an asset over time.
Depreciation is the reduction in the value of an asset over a specific timeframe, whereas accumulated depreciation is the sum of total depreciation on an asset since we bought it.
we will understand this concept with a simple example.
suppose machinery depreciates as follows
Year 1 – Depreciation is 5,000
Year 2 – Depreciation is 5,000
Year 3 – Depreciation is 5,000
Accumulated Depreciation in Year 3 = 5,000 + 5,000 + 5,000
Therefore, overall 3 years of depreciation are accumulated at the last year-end.
Journal entry for accumulated depreciation
Example: Excellence Co. has purchased a new motor vehicle which costs $8,000 for their cab business. The motor vehicle is depreciated at @20% per annum. At the end of the year, Excellence Co. will record this accumulated depreciation journal entry.
Year 1
Depreciation A/c Dr. – $1600
To Accumulated depreciation A/c – $1600
Year 2
Depreciation A/c Dr. – $1600
To Accumulated Depreciation A/c – $1600
Therefore, the Accumulated depreciation for the 2nd year end is $3200.
At the time of the sale of the motor vehicle, the amount of accumulated depreciation will be reduced from the total value of the asset.
Provision for depreciation
Provision for depreciation is very similar to accumulated depreciation. Instead of reducing the amount of depreciation from the value of an asset, a separate provision A/C will be created, and the depreciation amount will be credited to the provision account, i.e., Provision for Depreciation account every year, and the asset will be shown the same value without reducing the depreciation from it.
Journal entry for provision for depreciation
Example: Yesman Co. purchased Machinery worth $40000 at the beginning of the current year for their production. The machinery will be depreciated at @10% per annum. At the end of the year, Yesman Co. will record this provision for depreciation journal entry.
Year 1
Depreciation A/c Dr. – $4000
To Provision for Depreciation A/c – $4,000
Year 2
Depreciation A/c Dr. – $4000
To Provision for Depreciation A/c – $4000
Therefore, the Provision for depreciation balance will be $8000 at the 2nd year-end.
At the time of sale of the machinery, the amount of provision for depreciation created till the date will be reduced from the asset’s value.
Conclusion
Provision for depreciation and accumulated depreciation refers to the amount of depreciation accumulated over the useful life of an asset.
The terms accumulated depreciation and provision for depreciation are different in hearing, but these are similar from the financial perspective.
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Let me first explain the meaning of both the terms CapEx and OpEx Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or imRead more
Let me first explain the meaning of both the terms CapEx and OpEx
Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or improve an existing one or maintain the asset in use.
Capital expenditure is commonly found in the Cash flow statement under Investing activities as Investment in plant, machinery, equipment, etc.
Operating Expenditure (in short OpEx) are day-to-day expenses incurred by a firm in order to carry its normal business.
Expenses such as rent, advertisement, inventory costs, etc.
Operating Expenses are shown in the income statement of the company as expenses incurred during the period.
For Example: If a company purchases a printer, the printer would be a capital expenditure and the papers used for the printer would be operating expenditure.
Difference between CapEx and OpEx
Example 1: A company wants to lease machinery instead of buying it, in this case buying machinery would be capital expenditure, and leasing the machinery would be an Operating expense.
Example 2: Buying machinery would cost a company for 50000 and leasing the same would cost 35000. So in this case leasing will be more preferred by a company which means operating expenditure would be preferred instead of a capital expenditure.
From the point of view of tax treatment operating expenditure is more preferred over Capital expenditure because the expenses incurred during the year are deducted during the same year which reduces the tax levied on net income.
Some real Examples from the Company Amazon
This is the cash flow statement of Amazon, where the investing activities shows the capital expenditure incurred by the company during the years.
This is the income statement of Amazon, it shows the operating expenditure incurred by the company during the year.
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The term "principal book of accounts'' refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account. So to put it simply, the principal book of accounts mean ledgers. Ledgers are prepared by posting the debits and credits of a joRead more
The term “principal book of accounts” refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account.
So to put it simply, the principal book of accounts mean ledgers.
Ledgers are prepared by posting the debits and credits of a journal entry to the respective accounts.
A ledger groups the transactions concerning the same account. For example, Mr B is a debtor of X Ltd. Hence all the transactions entered into with Mr. will be grouped into the ledger Mr B A/c in the books of X Ltd.
Ledgers are of utmost importance because all the information to any account can be known by its ledger.
Preparation of ledger is very important because all the information to any account can be known by its ledger. Ledgers also display the balance of each and every account which may be debit or credit. This helps in the preparation of the trial balance and subsequently the financial statements of an entity.
Hence, it is the most important book of accounts and calling it the ‘books of final entry’ is also justified.
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The correct answer is C. Balance Sheet. A Balance Sheet is a financial statement prepared to know the financial position of a company at any particular point in time. Hence, the answer to your question is the balance sheet. It is also known as Position Statement (as it shows financial position) or SRead more
The correct answer is C. Balance Sheet.
A Balance Sheet is a financial statement prepared to know the financial position of a company at any particular point in time. Hence, the answer to your question is the balance sheet.
It is also known as Position Statement (as it shows financial position) or Statement of Affairs (when it is prepared under the Single Entry System of accounting).
The balance sheet shows the assets and liabilities of a firm at any specific point in time. It is a summary of the assets held by a firm and the liabilities owed to outsiders.
As the name suggests, a balance sheet must always be balanced i.e, the total of assets should always be equal to the total of liabilities on any single day. To put it simply,
Assets = Liabilities + Capital
In the case of a sole proprietorship or partnership, capital means the amount invested by the proprietor/partners in the business. In the case of a company, capital means the funds contributed by the shareholders in the form of shares.
Here is a link for the official balance sheet format as per the Companies Act 2013 (page 260 of the pdf),
https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
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The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them. Bad debts We know, debtors for a business are their assets because the business has the right to receive moneyRead more
The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them.
Bad debts
We know, debtors for a business are their assets because the business has the right to receive money from the debtors due to the goods supplied to them.
But if due to circumstances, there appears no probability that the amount due to one or more debtors will be realised to the business, then such debts are categorised as bad debts.
In short, bad debts refer to the amount of money that will not be received from some debtors of the business due to some circumstances like insolvency of debtor etc.
Bad debt is deducted from debtors account by the following journal entry:
Bad debts A/c Dr. Amt To Debtors A/c Cr. Amt (Being bad debts written off from debtors) As bad debts are losses to a business, it is ultimately written off from the profit and loss account.
Profit and loss A/c Dr. Amt To Bad debts A/c Cr. Amt (Being bad debts written off to profit and loss account) Write off
In layman terms, write off means to deduct something out from something. In accounting, write off means to deduct or reduce value of assets by crediting it to a liability account which is usually a reserve account or the profit and loss account.
It also refers to the elimination of an item from the books of accounts particularly losses and expenses.
Generally, writing off is associated with the following:
- Bad debts.
- Damaged Inventories.
- Loss on issue or redemption of debentures.
- Preliminary expenses.
- Bad loans and advances.
Write off can be done in one of the following methods:
- Direct write-off: The write off is directly done by crediting asset account or loss account and debiting the reserve or P/L account.
- Indirect write-off: Here, an intermediate account is involved between the asset account and liabilities account. A common example is writing off of bad debts where the bad debts account is the intermediate account.
Hence, the following differences can be observed between bad debts and write off or writing off:
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The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes: Raw Material Work-in-Progress Finished Goods Example: If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then valueRead more
The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes:
- Raw Material
- Work-in-Progress
- Finished Goods
Example:
If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then value of Closing Stock will be Rs (10,000 + 5,000 + 15,000) = Rs 30,000
Adjustment entries are done on the accrual basis of accounting, that is, income is recorded when earned and not received and expenses are recorded when incurred and not paid. Adjustment entries are usually made before or after the preparation of the trial balance at the end of the accounting period.
If the entries are made after the preparation of the trial balance, then two adjustment entries are recorded while preparing Trading and Profit & Loss A/c.
Since closing stock is an item outside the trial balance, the double-entry would be:
The journal entry
Closing Stock A/c (Dr.) Amt To Trading and Profit & Loss A/c Amt - Trading and Profit & Loss A/c is credited because it is of profit to the company and hence will be shown on the credit side.
- Closing Stock is debited as an asset for the company and it will be recorded for the first time in accounting books, hence, will be debited.
The second adjustment would be to show closing stock on the balance sheet and since the closing stock is an asset it is shown under the head Current Assets.
In case where adjustment for Closing Stock is to be done before preparation of Trial Balance, then it will be shown on the credit side of the Trial Balance, since it is an asset for the company and will have a credit brought down balance as shown in the image.
Later, while preparing Balance Sheet, Closing Stock will be shown on the Asset side of the Balance Sheet.
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To begin with, let me give you a brief explanation of both the terms i.e. Accounting policies and accounting principles- In order to maintain the financial statements, the company’s management adopts various Accounting Policies of its own. This generally includes the rules, the directions as to howRead more
To begin with, let me give you a brief explanation of both the terms i.e. Accounting policies and accounting principles-
In order to maintain the financial statements, the company’s management adopts various Accounting Policies of its own. This generally includes the rules, the directions as to how the financial statements will be prepared or how the valuation of depreciation would be done, and so on. These are flexible in nature and vary from company to company.
For Example 1, Johnson Co. uses FIFO (first in first out) method to value the inventory. That is to say that, while selling its product, it sells those goods or products which it has acquired or produced first.
It does not consider the LIFO or weighted average cost. The other company may adopt the other method as per its wish.
Example 2, Johnson Co. uses the straight-line method of depreciating an asset, whereas the other company can opt for a written down value method depending upon the need of the company.
So what I am trying to explain from this is that the accounting policies are flexible and can be adopted as per the needs of the company.
Accounting Principles are the rules which the accountants adopt universally for recording and reporting the financial data. It brings uniformity in accounting throughout the practice of accounting. These are generally less flexible in nature.
For Example, “Cost” is a principle. According to this accounting principle, an asset is recorded in the books at the price paid to acquire it and this cost will be the basis for all the subsequent accounting for the asset. However, asset market value may change over time, but for the accounting purpose, it continues to be shown at its book value i.e. at which it is acquired.
Some more examples would be of Matching principle, Consistency principle, Money measurement principle, etc.
Differences
Conclusion
The point is Accounting Principles are the broad direction to reach a goal and to reach that goal helps the accounting policies.
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