AccountingQA Latest Questions

Bonnie
BonnieCurious
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  2. Radhika
    This answer was edited.

    A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company. The Cash Flow Statement provides a picture to the sRead more

    A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company.

    The Cash Flow Statement provides a picture to the shareholders, government, and the public of how the company manages its obligations and fund its operations. It is a crucial measure to determine the financial health of a company.

    The Cash Flow Statement is created from the Income Statement and the Balance Sheet. While Income Statement shows money engaged in various transactions during the year, the Balance Sheet presents information about the opening and closing balances.

    The primary objective of a Cash Flow Statement is to present a record of inflow and outflow of cash, cash equivalents, and marketable securities through various activities of a company.

    Various activities in a company can be broadly classified into three parts or heads:

    • Cash Flow from Operating Activities: it represents how money from regular business activities is derived and spent. It includes Net Profit from Income Statement after adjusting for tax and extra-ordinary activities. Items included in Operating Activities are adjustments in Working Capital. If current liabilities are paid or current assets are bought it means outflow of cash, hence it is deducted and if liabilities are increased or assets are sold it means the inflow of cash, hence it is added. Operating Activities take into account taxation, dividend, depreciation, and other adjustments.
    • Cash Flow from Investing Activities: it represents aggregate inflow or outflow of cash due to various investments activities that the company was engaged in. Purchase and sale of non-current assets like fixed assets and long-term investments are considered under this head. If there is an investment made, it means outflow of cash, hence it is deducted and if there is an investment sold it means the inflow of cash, and hence it is added.
    • Cash Flow from Financing Activities: it represents the activities that are used to finance a company’s operations, like, issue of cash or debentures, paying dividends and interest, long-term borrowing taken by a company, etc. If these are paid, it means outflow of cash and is hence deducted and if they are acquired, it means the inflow of cash and hence ae added.

    Cash Flow Statements also present a picture of the liquidity of the company and are therefore used by the management of a company to take decisions with the help of the right information.

    Cash Flow Statements are a great source of comparison between a company’s last year’s performance to its current year or with other companies in the same industry and hence, helps shareholders and potential investors to make the right decisions.

    It also helps to differentiate between non-cash and cash items; incomes and expenditures are divided into separate heads.

     

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Anushka Lalwani
Anushka Lalwani
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Interest on capital is the interest provided on the capital invested in the business. It is calculated as a percentage on the capital invested. Interest on capital is provided if there is any rule established by the owner of the capital. Otherwise, it is not provided. We generally encounter ‘InteresRead more

    Interest on capital is the interest provided on the capital invested in the business. It is calculated as a percentage on the capital invested. Interest on capital is provided if there is any rule established by the owner of the capital. Otherwise, it is not provided.

    We generally encounter ‘Interest on capital’ in partnership accounting but a sole proprietorship can also provide interest on capital.

    Interest on capital is charged or appropriated from the profits of the firm. Hence, it appears on the debit side of the profit and loss account.

    The journal entry is as follows:

    The partners, in case the firm makes profit, are provided interest on their capital balance apart from their share of profit if provision of interest on capital is mentioned in the partnership deed.

    Hence, interest on capital is an appropriation of profit in partnership accounting. The journal in case of partnership account is as follows:

    The Interest on capital is credited to the capital/ partners’ capital account thereby increasing the capital balance.  The journal is as follows:

    In the balance sheet it is shown as an addition to the capital account.

    Numerical example

    P, Q and R are partners. Their firm reported a net profit of ₹ 20,000. Their capitals are ₹30,000, ₹45,000 and ₹60,000. It is in their partnership deed to provide the partners 4% interest on capital and a salary of ₹5,000 per annum for Q. Calculate the interest on capital.

    Solution:

    Interest on capital to be provided to the partners:

    P – ₹30,000 x 6% = ₹1,800

    Q – ₹45,000 x 6% = ₹2,700

    R – ₹60,000 x 6% = ₹3,600

    This interest will be credited to the partners’ capital. The journals are as follows:

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Jayesh Gupta
Jayesh GuptaCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    20 Journal Entries Journal is the book of initial entry, hence the transactions are at first recorded in the journal by the way of journal entries. Journal entries are made as per the double entry system of accounting, where for each transaction one account is debited and another account is creditedRead more

    20 Journal Entries

    Journal is the book of initial entry, hence the transactions are at first recorded in the journal by the way of journal entries.

    Journal entries are made as per the double entry system of accounting, where for each transaction one account is debited and another account is credited.

    In the case of compound journal entries, one set of accounts is debited and one set of accounts is credited.

    The amount of debit and credit always remains the same.

    For example, when cash is introduced into a business, it affects two accounts: Cash A/c and Capital A/c. The accounts are debited and. credited as per the golden rules of accounting.

    The journal entries which I have provided are based on the following transactions and events:

    1. The business started with Rs. 1,00,000 
    2. Bought machinery for Rs. 15,000 and furniture for Rs. 10,000
    3. Purchased goods of Rs. 20,000 with cash 
    4. Bought Stationery for Rs. 500 
    5. Cash deposited into bank Rs. 40,000 
    6. Goods sold to Matt for Rs. 15,000 
    7. Purchased goods from Uday of Rs. 30,000 
    8. Being Rs. 5,000 rent paid for premises 
    9. Cheque received from Matt of Rs. 15,000 
    10. Defective goods returned to Uday returned of Rs. 2,000 
    11. Cash sales of Rs. 25,000 
    12. Carriage Inward paid Rs. 700
    13. Cash withdrawn from bank Rs. 15,000 
    14. Full payment made to Uday in cash. Discount received from Uday Rs. 1000.
    15. Refreshments given to customers of Rs. 200
    16. Goods sold to Shyam for Rs. 7,500 
    17. Goods purchased from Ram of Rs. 50,000 
    18. Salaries paid to employees by bank Rs. 5,000 
    19. Good sold to Suri for Rs. 25,000 
    20. Insurance premium paid of Rs. 1,500 by the bank.

    Journal Entries

    The journal entries based on the above are as follows:

     

    Ledgers

    Ledger is known as the book of final entry. It is the book where the transactions related to a specific account are posted. This posting of transactions is done from journal entries.

    The posting of journal entries into the ledger is performed in the following way:

    The journal entry of cash sales is :

    Cash A/c                                                           Dr.            Amt
          To Sales A/c            Amt

    Here, Cash A/c is debited to Sales A/c. So, in the Cash A/c ledger, posting will be made on the debit side as “To Sales A/c”

    In the Sales A/c ledger, the posting will be made on the credit as “By Cash A/c” because Sales A/c is credited to Cash A/c

    For creating ledgers, journal entries are a prerequisite.

    Now, the ledgers to be created as per the journal entries made above are as follows:

    1. Cash A/c
    2. Bank A/c
    3. Capital A/c
    4. Furniture A/c
    5. Machinery A/c
    6. Purchase a/c
    7. Sales A/c
    8. Matt A/c (Debtor)
    9. Uday A/c (Creditor)
    10. Rent A/c
    11. Purchase Return A/c
    12. Stationery A/c
    13. Carriage Inward A/c
    14. Refreshment A/c
    15. Shyam A/c (Debtor)
    16. Ram A/c (Creditor)
    17. Suri A/c (Debtor)
    18. Refreshment A/c
    19. Discount Received A/c

    The account ledgers are as follows:

    Trial Balance

    A trial balance is a statement that is prepared to check the arithmetical accuracy of books of accounts.

    In this statement, the total of all accounts having debit balance and the total of all accounts having credit balance is computed. If the total of debit and credit matches, then it can be said that the books of accounts are arithmetically accurate.

    Here also we have prepared the trial balance by computing the total of accounts  having debit balances and the total of  accounts having credit balances

    The debit column total and credit column total are matching. Hence, we can say that the books of accounts we have prepared are arithmetically accurate.

    Note: Matt A/c and Uday A/c have not appeared in the trial balance because they do not have any carrying balance.

     

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. GautamSaxena Curious .
    This answer was edited.

    The land is a fixed asset and is treated as a long-term asset account.  Explanation The land is a fixed asset which is also referred to as a long-term asset. The fixed assets are those assets that are not expected to be cashed, consumed, last, sold, or written off within one accounting year and areRead more

    The land is a fixed asset and is treated as a long-term asset account. 

    Explanation

    The land is a fixed asset which is also referred to as a long-term asset.

    The fixed assets are those assets that are not expected to be cashed, consumed, last, sold, or written off within one accounting year and are purchased for long-term use. The fixed assets are also called non-current assets and the reason behind it is that current assets are easily converted into cash within one year and they are not.

    Fixed assets are planned by the company to be used for the long term in order to generate income.

    Example- Land, building, furniture, plants & equipment, etc.

     

    Why is land an asset?

    Although the land is not depreciated, it is still considered to be an asset because just like other assets the business spends its own money to acquire it.

    It can also be used by the business for different operations and it doesn’t create any liability for the business. Instead, reselling the land after a few years can help the company earn a huge margin of profit.

     

    Land in the balance sheet

    On the asset side of the balance sheet, the land is stated under the heading long-term assets.

    Balance Sheet (for the year…)

     

    Therefore, the land is a fixed asset and is treated as a long-term asset account.

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A_Team
A_Team
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  2. Ishika Pandey Curious ca aspirant
    This answer was edited.

    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

    • 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 debts accounts 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 bad debts and bad debts recovered which are as follows:-

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Kajal
    This answer was edited.

    Trading A/c is a Nominal A/c which follows the rule “Debit the expenses and losses, Credit the incomes and gains” So, the Credit side of Trading A/c shows income from the sale of goods. It includes Sales, Closing stock (if adjustment for it has not been made yet) and Gross Loss (if any).   TRADRead more

    Trading A/c is a Nominal A/c which follows the rule “Debit the expenses and losses, Credit the incomes and gains”

    So, the Credit side of Trading A/c shows income from the sale of goods. It includes Sales, Closing stock (if adjustment for it has not been made yet) and Gross Loss (if any).

     

    TRADING ACCOUNT

    Trading A/c is prepared for calculating the Gross Profit or Gross Loss arising from the trading activities of a business.

    Trading activities are mostly related to buying and selling of goods. However, in between buying and selling, a lot of activities are involved like transportation, warehousing, etc. So, all the expenses that are directly related to manufacturing or purchase of goods are also recorded in the Trading A/c.

     

    CREDIT SIDE OF TRADING ACCOUNT

    It includes,

    SALES – When goods are sold to earn a profit, it is called sales. It can be cash sales or credit sales.

    Suppose you are in the business of manufacturing and trading shirts. You sold shirts worth $ 20,000 during the year. This $20,000 is your sales.

    SALES RETURN – When the goods sold by you are returned by the customer, it is known as sales return. Sales return is deducted from the sales.

    Continuing with the above example, the customers returned shirts of $1,000 because they didn’t like them. This return is known as sales return or return inward (as goods are coming back i.e. in)

    CLOSING STOCK – Stock is nothing but goods that are either obtained for resale or manufactured for sale and are yet unsold on any particular date.

    The value of stock at the beginning of an accounting year is called Opening stock while the value of the stock at the end of an accounting year is called Closing stock.

    Closing stock is valued at cost price or market price whichever is less.

    It includes,

    1. Closing stock of raw materials
    2. Closing stock of semi-finished goods
    3. Closing stock of finished goods

    For example – On 31st March 2023, there was unused raw material worth $1,000 and shirts worth $5,000 remained unsold.

    So, we have Closing Stock of Raw material – $1,000

    Closing Stock of Finished Goods – $5,000

    Normally, the closing stock is given outside the Trial Balance because its valuation is made after accounts have been closed. It is incorporated in the books by transferring it to the Trading A/c. So, it is shown on the credit side of Trading A/c as well as on the assets side of the Balance sheet.

    However, if the closing stock is given inside the Trail Balance, it means that the closing stock must have already been deducted from the Purchases account. So, closing stock will only be shown on the assets side of the Balance sheet.

    GROSS LOSS – If purchases and direct expenses exceed sales, then it is a Gross loss. In other words, when Debit side > credit side.

     

    DEBIT SIDE OF TRADING ACCOUNT

    It includes

    OPENING STOCK – The value of the stock at the beginning of an accounting year is called Opening stock.

    The closing stock of the last year becomes the opening stock of the current year.

    PURCHASES – Goods that have been bought for resale or raw materials purchased for the manufacturing of the product are terms as Purchases. These goods must be related to the business you are doing. It includes cash as well as credit Purchases.

    PURCHASES RETURN – When goods bought are returned to the suppliers due to any reason. This is known as Purchase return. Purchase return is deducted from the Purchases.

    WAGES – Wages are paid to the workers who are directly engaged in the loading, unloading and production of goods.

    CARRIAGE or CARRIAGE INWARDS or FREIGHT – It refers to the cost of transporting goods from the supplier.

    MANUFACTURING EXPENSES – All expenses incurred in the manufacture of goods such as Coal, Gas, Fuel, Water, Power, Factory rent, Factory lighting etc.

    DOCK CHARGES – These are charged by port authorities when unloading goods at a dock or wharf. Such charges paid in connection with goods purchased are considered direct expenses and are debited to Trading a/c.

    IMPORT DUTY or CUSTOM DUTY – It is a tax collected on imports and specific exports by a country’s customs authorities.

    If import duty is paid on the import of goods, then they are shown on the Dr. side of the Trading A/c.

    ROYALTY – Royalty refers to the amount paid for the use of assets belonging to another person. It includes royalty for the use of intangible assets, such as copyrights, trademarks, or franchisee agreements. It is also paid for the use of natural resources, such as mining leases.

    Royalty is charged to the Trading A/c as it increases the cost of production.

    GROSS PROFIT – When sales exceed the amount of purchases and the expenses directly connected with such purchases i.e. when Credit side> Debit side.

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Sandy
Sandy
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Fictitious AssetsFinancial Statements
  2. Nistha Pursuing B.COM H (B&F) and CMA
    This answer was edited.

    Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expeRead more

    Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expenses are amortized over a period of time.

    These assets do not have any realizable value except for the cash outflow. These are created to delay the recognition of the expense and defer it to future periods.

    Fictitious assets actually qualify as an expense but are treated as assets only for the fact that they are expected to give returns over a course of more than one year. Examples are Advertisement expenses, preliminary expense, etc.

    Treatment

    Fictitious assets are shown on the assets side of the balance sheet under the head miscellaneous expenditure. A part of these expenses are shown in the profit and loss statement and the remaining amount is carried forward to the following years.

    For example, a company Timber Ltd. incurs expenses relating to advertisement of its products worth 8,000,000 and this advertisement campaign can earn revenue for the company for around 10 years. Hence, such expense of 8,000,000 would be amortized over a period of 10 years.

    For the first year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 7,200,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet.

    For the second year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 6,400,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet. And so on.

    We can say that fictitious assets are deferred revenue expenditures as well as intangible assets. But goodwill, etc are not fictitious assets. Hence, all fictitious assets are intangible assets but all intangible assets are not fictitious assets.

    Common fictitious assets that could generally be seen are:

    • Advertisement expenses
    • Preliminary expenses
    • Discount allowed on the issue of shares
    • Loss incurred on issue of debentures
    • Underwriting Commission
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Aadil
AadilCurious
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book value replacement value depreciable value market value

Depreciation
  2. Vijay Curious M.Com
    This answer was edited.

    The total depreciation of an asset cannot exceed its 3. depreciable value.  Depreciable value means the original cost of the asset minus its residual/salvage value. The asset's original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simplRead more

    The total depreciation of an asset cannot exceed its 3. depreciable value. 

    Depreciable value means the original cost of the asset minus its residual/salvage value. The asset’s original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simply,

    The accumulated depreciation on an asset can never exceed its depreciable value because depreciation is a gradual fall in the value of an asset over its useful life. Only a certain percentage of the asset’s book value/original cost is shown as depreciation every year. So, it is impossible/illogical for the accumulated depreciation of an asset to exceed its depreciable value.

    Let me show you an example to make it more understandable,

    Amazon installs machines to automate the job of packing orders. The original cost of the machine is $1,000,000. Now let’s assume,

    The estimated useful life of the machine – 10 years.

    Residual value at the end of 10 years – $50,000.

    Method of depreciation – Straight-line method.

    The depreciable value of the machine will be $950,000 (1,000,000 – 50,000). The depreciation for each year under SLM will be calculated as follows:

    Depreciation = (Original cost of the asset – Residual/Salvage Value) / (Useful life of the asset)

    Applying this formula, $95,000 (1,000,000 – 50,000/10) will be charged as depreciation every year. The accumulated depreciation at the end of 10 years will be $950,000 (95,000*10). As you can see, the accumulated depreciation ($950,000) of the machine does not exceed its depreciable value ($950,000).

    Thus, the total depreciation of an asset cannot be more than its depreciable value.

     

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Simerpreet
SimerpreetHelpful
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  2. Vijay Curious M.Com
    This answer was edited.

    Sometimes a business may earn an income by delivering the goods/services within the stipulated time. But the business may not have issued an invoice to the customer. Such a scenario is what is called unbilled revenue. Note that as per the accrual concept of accounting, sales are recognized on the daRead more

    Sometimes a business may earn an income by delivering the goods/services within the stipulated time. But the business may not have issued an invoice to the customer. Such a scenario is what is called unbilled revenue.

    Note that as per the accrual concept of accounting, sales are recognized on the day it was made, irrespective of whether the business receives cash or not.

    The business records unbilled revenue by passing the following journal entry:

    Unbilled Revenue is treated as an asset because it is yet to be fully recognized as an income. Therefore it is debited. Revenue A/c is credited as there is an increase in income.

    Once the bill/invoice has been issued to the customer, the following entry is passed to close the Unbilled Revenue A/c.

    Let me explain this concept with an example,

    Luca Traders, a business dealing in stationery and office supplies receives an order on August 5th for 1,000 pens worth 10 each. On August 8th they deliver the pens but they are yet to issue an invoice to the customer. They issue the invoice only on August 13th.

    So the sales revenue of 10,000 (1,000*10) will be treated as an unbilled revenue for the period of August 8th – August 12th. On August 8th the following entry is made to record unbilled revenue.

    Unbilled Revenue A/c  10,000
       To Revenue A/c  10,000
    (Being entry for recording unbilled revenue worth 10,000)

    When the invoice is sent to the customer on August 13th, the following journal entry is posted to close the unbilled revenue A/c.

    Bills Receivable A/c  10,000
       To Unbilled Revenue A/c  10,000
    (Being invoice issued against unbilled revenue)
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Aadil
AadilCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped. It is an expense (expense of using the asset for business purposes) and it is charged toRead more

    You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped.

    It is an expense (expense of using the asset for business purposes) and it is charged to profit and loss account.

    Depreciation can be reported in the financial statement in two ways:

    1. Deduct depreciation from the asset account and show the asset at “depreciation less” value. See the journal entries below:

    1. Maintain a provision for depreciation account and show the asset account at original cost. In this method, no entry is passed through the asset account. See the journal entries below:

     

    Provision for depreciation account represents the collection of total depreciation till date on an asset. That’s why it is also called accumulated depreciation account. When an asset is sold, its accumulated depreciation is credited to the asset account. See the journal entry below:

    It is shown on the liabilities side of the balance sheet. It is a nominal account because it is shown as an expense in the statement of profit or loss.

    In case provision for depreciation account is not maintained then the balance sheet looks like this:

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