Similarly, someone asked Are loose tools current assets
Similarly, someone asked Are loose tools current assets
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Yes, I agree with your statement that accounting information should be comparable. Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company's financial statements across time and across other companies. Comparability oRead more
Yes, I agree with your statement that accounting information should be comparable.
Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company’s financial statements across time and across other companies.
Comparability of financial statements is crucial due to the following reasons:
1. Intra-Firm Comparison:
Comparison of financial statements of two or more periods of the same firm is known as an intra-firm comparison.
Comparability of accounting information enables the users to analyze the financial statements of a business over a period of time. It helps them to monitor whether the firm’s financial performance has improved over time.
The intra-firm analysis is also known as Time Series Analysis or Trend Analysis.
To understand intra-firm analysis, I have provided an extract of the balance sheet of ABC Ltd. for two accounting periods.
2. Inter-Firm Comparison:
Comparison of financial statements of two or more firms is known as an inter-firm comparison.
Inter-firm comparison helps in analyzing the financial performance of two or more competing firms in an industry. It enables the firm to know its position in the market in comparison to its competitors.
Inter-firm comparison is also known as Cross-sectional Analysis.
I’ve provided the balance sheets of Co. A and Co.B to make an inter-firm comparison.
Here is a piece of bonus information for you,
Sector Analysis – it refers to the assessment of economical and financial conditions of a given sector of a company/industry/economy. It involves the analysis of the size, demographic, pricing, competitive, and other economic dimensions of a sector of the company/industry/economy.
One more important thing to note here is that comparability can only be achieved when the firms are consistent in the accounting principles and standards they adopt. The accounting policies and standards must be consistent across different periods of the same firm and across different firms in an industry.
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Sales Return is shown on the debit side of the Trial Balance. Sales Return is also called Return Inward. Sales Return refers to those goods which are returned by the customer to the seller of the goods. The goods can be returned due to various reasons. For example, due to defects, quality differenceRead more
Sales Return is shown on the debit side of the Trial Balance.
Sales Return is also called Return Inward.
Sales Return refers to those goods which are returned by the customer to the seller of the goods. The goods can be returned due to various reasons. For example, due to defects, quality differences, damaged products, and so on.
In a business, sales is a form of income as it generates revenue. So, when the customer sends back those goods sold earlier, it reduces the income generated from sales and hence goes on the debit side of the trial balance as per the modern rule of accounting Debit the increases and Credit the decreases.
For Example, Mr. Sam sold goods to Mr. John for Rs 500. Mr. John found the goods damaged and returned those goods to Mr. Sam.
So, here Sam is the seller and John is the customer.
The journal entry for sales return in the books of Mr. Sam will be
Particulars Amt Amt Sales Return A/c 500 Â Â Â Â To Mr John 500 Treatment in Trial Balance
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Personal Accounts: The accounts of persons, firms, companies, etc. are personal accounts. There is a further classification to personal accounts- Accounts of Natural Persons: The transactions relating to individual human beings fall under this category. For Example, accounts of Joseph, Richard, MorrRead more
Personal Accounts: The accounts of persons, firms, companies, etc. are personal accounts. There is a further classification to personal accounts-
- Accounts of Natural Persons: The transactions relating to individual human beings fall under this category. For Example, accounts of Joseph, Richard, Morris, etc.
- Accounts of Artificial Persons: The transactions relating to firms, organizations, companies, institutions, associations, etc. fall under this category. For Example, Oil India Ltd, Symbiosis college, Assam Tea company, etc.
- Representative Personal Accounts: The transactions relating to certain person or a group of persons, although the name of the concerned person or persons are not mentioned in the account head, such types of accounts come under this head. Such type of accounts generally include outstanding accounts or prepaid accounts. For Example, accounts like wages outstanding, outstanding salary, commission received in advance, salary prepaid, etc.
Note: When any Prefix or Suffix is used before/ after any nominal account head, such account is classified as Representative personal account under traditional approach.
For Example, Salary A/c is a nominal account whereas salary outstanding A/c is a personal account as the word outstanding is being used as a prefix to Salary A/c.
The Accounting rule for Personal Account is –
Debit the Receiver of the benefit.
Credit the Giver of the benefit.
Real Account: The transactions relating to tangible things i.e. the things that can be seen, touched and physically exchanged and the intangible things that cannot be seen, touched but the presence can be felt comes under this category. For Example, tangible things like Cash, goods, building, machinery, etc. and intangible things like goodwill, patent, trademarks, etc.
The Accounting rule for Real Account is –
Debit what comes in.
Credit what goes out.
Nominal Accounts: The transactions relating to losses, expenses, incomes and gains comes under this category. For Example, Rent paid, wages paid, commission received, interest paid/ received, etc.
The Accounting rule for Nominal Account is –
Debit Expenses and Losses.
Credit Gains and Incomes.
Some Common Examples under the three heads are
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Under GST, Input Tax Credit (ITC) refers to the tax already paid by a person on input, which is available as a deduction from tax payable on output. This means that if you have paid tax on some purchases, then at the time of paying tax on the sale of goods, you can reduce it by the amount you alreadRead more
Under GST, Input Tax Credit (ITC) refers to the tax already paid by a person on input, which is available as a deduction from tax payable on output. This means that if you have paid tax on some purchases, then at the time of paying tax on the sale of goods, you can reduce it by the amount you already paid on purchase and pay only the balance amount.
EXAMPLE
Suppose Ashok purchased goods worth Rs 100 while paying tax at 10%, that is Rs 10. He now sold the goods for Rs 200, with a tax payable of Rs 20. Now, Ashok can avail input tax credit of Rs 10 that he already paid for the purchase and hence the net tax payable is Rs 10 (20-10).
METHOD OF UTILISATION OF ITC
The central government collects CGST, SGST, UTGST or IGST based on whether the transactions are done intrastate or interstate.
The amount of input tax credit on IGST is first used for paying IGST and then utilised for the payment of CGST and SGST or UTGST. Similarly, the amount of ITC relating to CGST is first utilised for payment of CGST and then for the payment of IGST. It is not used for the payment of SGST or UTGST. Meanwhile, the amount of ITC relating to SGST is utilised for payment of SGST or UTGST and then for the payment of IGST. Such amounts are not used for payment of CGST.
We can see how Input Tax Credit is used from the below example and table:
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The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors. Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business. WriRead more
The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors.
Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business.
Written off means an expense, income, asset, liability is no more recorded in the books of accounts because they no longer hold relevance for the business.
When doubtful debts turn into bad debt, they are written off from the books after a stipulated time as they no longer seem recoverable.
If any cash is received against such bad debts that were written off, it is known as cash received against bad debts written off. Cash is received against bad debts usually when the debtor is declared insolvent and money is recovered from its estate.
Bad debts recovered are considered an income for the company as they were previously written off as a loss and any cash received against it is considered as income.
Journal entry for such situation is:
Cash or Bank A/c (Dr.)
To Bad Debts Recovered A/c
We debit the increase in assets, and since cash is coming into the business it is debited.
We credit the income, and since bad debts recovered is an income to the business it is credited.
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To understand why we do not record self-generated goodwill in accounting, let us first understand what goodwill is and its accounting treatment. What is Goodwill? Goodwill is an intangible asset of a business. It represents the reputation and brand value of a business built over time. It is a valueRead more
To understand why we do not record self-generated goodwill in accounting, let us first understand what goodwill is and its accounting treatment.
What is Goodwill?
Goodwill is an intangible asset of a business. It represents the reputation and brand value of a business built over time. It is a value over and above the tangible assets of the business.
Goodwill often arises when a business purchases another business and pays a premium, which means a price higher than the fair value of the business.
Characteristics of Goodwill
Goodwill has the following characteristics:
Example of Goodwill
Let us take an example to understand the concept of goodwill better.
Suppose there is a company ABC Ltd. It is planning to acquire XYZ Ltd. The fair value of the assets of XYZ is calculated to be 600,000. However, ABC has agreed to pay a sum of 650,000 to acquire the company. This difference of 50,000 is goodwill.
Impact on Financial Statements
Goodwill is shown under the assets side of the Balance Sheet.
What is self-generated goodwill?
Self-generated goodwill in simple words means the positive reputation or trust that a business earns over time through their own hard work and decisions. It’s not something bought or inherited but something built from scratch internally, like a brand’s reputation, loyal customers, strong relationships, or unique ideas.
For example, a small business that goes the extra mile to offer great customer service or always delivers high-quality products over the years will naturally build goodwill.
It is also known as internally generated goodwill.
Why do we not record sef-generated goodwill?
Self-generated goodwill is not recorded in the financial statements because of the following reasons:
Conclusion
On a concluding note, self-generated goodwill is something that adds real value to a business, but it’s not something that can easily be measured or captured in financial statements. Accounting is all about providing clear, reliable information, and including goodwill would make things murky and open to manipulation. Even though it doesn’t show up on the books, you can still see its effects in a company’s reputation and success. Maybe in the future, businesses will find a way to highlight it better, but for now, leaving it out helps keep financial reports honest and straightforward.
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