Yes, Goodwill is a fixed asset because it adds to the value of the business over a long period. Goodwill can never be calculated for a short period. GOODWILL Basically, goodwill is a premium or you can say an additional price you are paying because of the reputation of a firm or a person. YouRead more
Yes, Goodwill is a fixed asset because it adds to the value of the business over a long period. Goodwill can never be calculated for a short period.
GOODWILL
Basically, goodwill is a premium or you can say an additional price you are paying because of the reputation of a firm or a person.
You may have seen some famous shop in your locality which usually charges a higher price as compared to the other local shops selling the same product.
You may have also noticed that bigger brands like Bata, Titan, Zara, etc. charge higher prices for their products as compared to the same products available in the local market and people are even willing to pay for them. Ever wondered why?
This is because of the goodwill created by them over the years by providing quality products and services, good employee relationships, a strong customer base, social service, a brand name and so on. Customers trust them and for this trust, they are even willing to pay higher prices.
Goodwill is the quantitative value (i.e. in monetary terms) of the reputation of the firm in the market.
FIXED ASSETS
An asset is any possession or property of the business that enables the firm to get cash or any benefit in the future.
Fixed Assets are assets which are purchased for long-term use. They are for continued use in the business for producing goods or services and are not meant for resale. For example- Plant, machinery, building, goodwill, patents etc.
Fixed assets can be tangible or intangible.
Tangible assets are those assets which can be seen and touched and have physical existence like Plant and machinery, building, stock, furniture etc.
Intangible assets are those assets which cannot be seen or touched i.e. they don’t have any physical existence like goodwill, patent, trademark, prepaid expenses etc. Even though they can’t be seen or touched by they have value and are not fictitious assets.
Goodwill as a Fixed Asset
Goodwill is an intangible asset as it cannot be seen or touched but has value and adds value to the business over a long period. Thus, goodwill is a fixed asset.
It is shown in the balance sheet as a Fixed asset under the head Intangible asset.
Goodwill can be
Self-generated (Non-Purchased goodwill)
Purchased goodwill
Self-generated goodwill is created over a period due to the good reputation of the business. It is the difference between the value of the firm and the fair value of the net tangible assets of the firm.
Goodwill = Value of the firm – Fair value of net tangible assets
Here, F.V of net tangible assets = Fair value of tangible assets- Fair value of tangible liabilities
Purchased goodwill arises when one business purchases another business. It is the difference between the price paid for the purchased firm and the sum of the fair market value of the assets received and liabilities to be paid by them on behalf of the purchased firm.
Goodwill = Purchase price – (F.V of assets received + F.V of liabilities to be paid)
Only purchased goodwill is recorded in the books of accounts because it is difficult to correctly calculate the value of self-generated goodwill as the future is uncertain, also its valuation depends on the judgement of the person calculating it, which defers from person to person. Since there is no fixed standard to calculate self-generated goodwill only purchased goodwill is recorded as the price paid for it at the time of acquiring another business.
Suppose Firm A acquired Firm B.
Purchase price= $100,000
Assets received=$60,000
Liabilities (to be paid by Firm A on behalf of Firm B) = $10,000
This, goodwill of $30,000 will be recorded under the head Fixed Asset, subhead Intangible Assets in the balance sheet of Firm A (that is in the balance sheet of the acquiring firm)
Credit balance means excess of credit side over debit side. For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a creditRead more
Credit balance means excess of credit side over debit side.
For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a credit balance of 6,000 of trade payable at the end
.A Credit balance signifies all income and gains and all liabilities and capital that is there in business.
Liabilities and Capital
Account Payables– Account Payables means the amount that is due to the customer by the entity. Its credit balance will always increase when there is an increase in account payables and will decrease when there is a decrease in account payables. For eg-: The stock that has been purchased in credit from creditors of 10,000 will result in an increase in credit balance.
Bank Overdraft-Bank Overdraft means when the amount withdrawn from the bank is more than the balance left in the bank. For example, there is a bank balance of 2,000 in the bank but an amount of 4,000 has been withdrawn from the bank. So in such a case, there will be a credit balance of 2,000 which is in Bank Overdraft
Bonds– Bonds are the amount that is withdrawn from people for a specific time period which gets redeemed at a coupon rate after such a specific period. For example- A 10% bond of 10,000 is given to a group of people which will be redeemed after 5 years.
Income Tax Payables-Income Tax Payable means the amount the company left to pay to the government in earlier periods. For example- There is a tax liability of 10,000 in FY20-21 from which 8,000 was paid in the current year and 2,000 paid in FY21-22.
Notes Payable– Notes Payable is a type of promissory note in which a person pays some amount to an entity that the entity will write in a specific period. For example Notes payable of 1,000 given by a person to an entity which will be returned in 3 months with interest
Capital– Capital means the amount that is introduced by the company at the beginning of the business for the operations and survival of the business. For example- A capital of 10,000 has been introduced by the company.
Income and Gains
Interest Received-Interest Received means the amount which is invested by the company in some other entity and interest received on it
Dividend Received– Dividend means the amount received from the entity in which amount invested by the company
Rent Received– Rent is the amount that the company receives by letting out their land to another person or entity for use
Gains on Sale of Furniture– Gain on Sale of Furniture means that the amount received from the sale of furniture is more than the amount of furniture. So the difference between the amount received from the sale and the cost of furniture is called a gain on the sale of furniture.
So after seeing all the above points we can conclude that the credit balance includes all the income in the P&L account and all the liabilities in the Balance sheet. So its balance increases when there is an increase in its account.
Debit Balance
Debit balance means excess of credit side over debit side.
For Example- At begining of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end there will be a debit balance of 6,000 of trade receivables at the end
A Debit balance basically signifies all expenses and losses and all positive balances of assets. The debit balance increases when any asset increases and decreases when any asset decreases.
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,
Closing stock of raw materials
Closing stock of semi-finished goods
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.
Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more
Debit Balance
A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.
Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.
Credit Balance
A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.
The credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.
Credit Balance in the Passbook
A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. “Credit balance in the passbook is also called bank balance”.
The bank balance is the amount available for withdrawal. A bank balance is an asset to the individual or an enterprise which can be used for the purchase of another asset or payment of liability or expenses.
All the transactions either debit or credit are recorded in the passbook. When the total amount of all credit entries in a passbook is more than the total of debit entries, it results in a credit balance. It means that the bank owes to an individual or enterprise.
The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s credit balance is a positive or favourable balance while the passbook’s debit balance is a negative balance or unfavourable balance.
For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $30,000. So here, the passbook will show a bank balance of $20,000 i.e. the credit balance of the passbook. It signifies the positive cash flow of the individual and that the bank owes $20,000 to the individual.
Debit balance in Pass Book
When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. Debit balance in the passbook is also called “Overdraft”. It means that an individual or enterprise owes to the bank.
Reconciliation
It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.
Debit Balance Reconciliation
The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.
Credit Balance Reconciliation
The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.
Conclusion
The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A credit balance signifies more deposits than withdrawals resulting in a positive bank balance.
Trading A/c is a nominal account which follows the rule "Debit all expenses and losses, Credit all incomes and gains". So, all expenses relating to the purchase or manufacturing of goods are shown on the debit side of the Trading A/c. It includes Opening Stock, Purchases, Wages, Carriage Inward, ManRead more
Trading A/c is a nominal account which follows the rule “Debit all expenses and losses, Credit all incomes and gains”.
So, all expenses relating to the purchase or manufacturing of goods are shown on the debit side of the Trading A/c. It includes Opening Stock, Purchases, Wages, Carriage Inward, Manufacturing Expenses, Dock charges, and other direct expenses that are directly related to the manufacturing or purchase.
TRADING ACCOUNT
Trading A/c is prepared for calculating the Gross Profit or Gross Lossarising 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.
DEBIT SIDE OF TRADING A/C
The items shown on the Dr. side are,
OPENING 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.
The closing stock of the last year becomes the opening stock of the current year.
Opening stock includes,
Opening Stock of Raw materials
Opening Stock of Semi-finished goods
Opening Stock of Finished goods
For example – Suppose you are in the business of manufacturing and trading shirts. On 31st March 2023, there was unused raw material worth $10,000 and shirts worth $50,000 remained unsold.
So, we have Closing Stock of Raw material – $10,000
Closing Stock of Finished Goods – $50,000
This closing stock of last year becomes your opening stock during the current year i.e. on 1st April 2023, we have
Opening Stock of raw material – $10,000
Opening Stock of Finished Goods – $50,000
PURCHASES – Goods that have been bought for resale or raw materials purchased for manufacturing 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.
Continuing with the above example, suppose you bought raw material worth $ 1,00,000 for manufacturing and shirts worth $50,000 for resale (and not for personal consumption) then both these will be termed as purchases for you. So, your purchases will be $1,50,000 ($1,00,000 + $50,000)
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.
In the above example, you bought shirts worth $50,000 for resale. Out of which shirts worth $20,000 were defective. So, you returned them to the supplier. This return of $20,000 is your purchase return or return outwards (as goods are going out)
WAGES – Wages are paid to the workers who are directly engaged in the loading, unloading and production of goods.
For example – Paid $10,000 to workers for manufacturing shirts.
However, it would be included in Trading A/c only if the wages are paid for work which is directly relatedto the manufacturing or purchase of goods otherwise it will be shown in P&L A/c.
Suppose you hired a manager to take care of your business and paid him $20,000 as salary. This salary is indeed an expense for the business but is not directly related to the manufacturing of goods. Since it is an indirect expense, it can only be recorded in P&L A/c and not in the Trading A/c.
CARRIAGE or CARRIAGE INWARDS or FREIGHT – It refers to the cost of transporting goods from the supplier.
Suppose, you ordered raw material in bulk which was transported to you by a van and you paid its fare. This fare is nothing but your carriage inwards.
However, if carriage or freight is paid on bringing an asset, the amount should be added to the asset account and must not be debited to the trading account.
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.
For example – Paid $15,000 as import duty for importing shirts for resale.
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.
CREDIT SIDE OF TRADING A/C
SALES – When goods are sold to earn a profit, it is called sales. It can be cash sales or credit sales.
SALES RETURN – When the goods sold are returned by the customer, it is known as a sales return. Sales return is deducted from the sales.
CLOSING STOCK – The goods remaining unsold at the end of the year are termed as closing stock. It is valued at cost price or market price whichever is less.
GROSS LOSS – If purchases and direct expenses exceed sales, then it is a Gross loss. In other words, when Debit side > Credit side.
Debit balance means excess of credit side over debit side. For Example- At the beginning of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end therRead more
Debit balance means excess of credit side over debit side.
For Example- At the beginning of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end there will be a debit balance of 6,000 of trade receivables at the end
A Debit balance basically signifies all expenses and losses and all positive balances of assets. The debit balance increases when any asset increases and decreases when any asset decreases.
Assets
All the assets that appear in the balance sheet always have a debit balance. The debit balance under it will increase as it debits. Some of these assets can be illustrated below -:
Cash and Bank Balance: Cash and Bank Balance means the amount that is held by a person in physical form or in a current/savings account.
Property, Plant, and Equipment- Property Plant, and Equipment means assets that are used for the production of goods and services.
Account Receivables– Account Receivables means the amount that is due from debtors to whom goods were sold at credit for a specified time period.
Inventory – Inventory means goods that are used in the normal course of business.
Investments– Investments are the amount invested in other companies from which they were expecting returns in future periods.
Expenses and Losses
All expenses that appear on the debit side of the P&L account have a debit balance in their accounts.
For eg-: A rent of 10,000 is given to the landlord under which the work has been done by the entity.
For eg-: A depreciation of 10% is there on an asset of 12,000 will result in a debit balance under depreciation in the P&L Account.
Some of the following expenses can be illustrated below
Rent- Rent means a property that an entity takes on lease for business purpose and pay a certain amount to the landlord for such lease.
Depreciation– Depreciation means a fall in the value of an asset due to its usage every year
Loss on Sale of an asset- Loss on the Sale of an Asset means the sale amount of the asset is less than its WDV
Printing and stationery– Printing and Stationery means the paperwork or anything related to stationery used for business purposes
Audit fees– Audit fees are the amount which is given to an auditor for auditing the financials of an entity
Salaries and Wages– Salaries and Wages are the amount given to employees for the work they have done for the entity
Insurance– Insurance means a premium given by an entity for insurance done by them
Advertising– Advertising means any promotion that a company does of its product to increase its revenue
So after seeing all the above points we can conclude that the debit balance includes all the expenses that are in the P&L account and all the assets that are there in the Balance sheet. So its balance increases when there is an increase in its account.
CREDIT BALANCE
Credit balance means excess of credit side over debit side.
For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at end there will be a credit balance of 6,000 for trade payable at the end
.A Credit balance signifies all income and gains and all liabilities and capital that is there in business.
Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more
Debit Balance
A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.
Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.
Credit Balance
A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.
Credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.
Debit Balance in the Passbook
A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. Debit balance in the passbook is also called “Overdraft”.
All the transactions either debit or credit are recorded in the passbook. When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. It means that an individual or enterprise owes to the bank.
The overdraft facility given by the bank has a limit i.e. only a certain amount can be withdrawn in excess of the amount deposited and if one avails overdraft facility, interest is also charged by the bank.
The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s debit balance is a negative balance or unfavourable balance while the passbook’s credit balance is a positive or favourable balance.
For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $60,000. So here, the passbook will show an overdraft of $10,000 i.e. the debit balance of the passbook. It signifies negative cash flow of the individual and that individual owes $10,000 to the bank.
Credit balance in Pass Book
On the other hand, when the total amount of all the debit entries in a passbook is less than the total amount of credit entries, it results in a credit balance. It means the amount deposited by a customer is more than the amount withdrawn indicating the positive cashflow in the account.
Reconciliation
It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.
Debit Balance Reconciliation
The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.
Credit Balance Reconciliation
The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.
Conclusion
The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A debit balance signifies more withdrawals than receipts resulting in an overdraft.
Is goodwill a fixed asset?
Yes, Goodwill is a fixed asset because it adds to the value of the business over a long period. Goodwill can never be calculated for a short period. GOODWILL Basically, goodwill is a premium or you can say an additional price you are paying because of the reputation of a firm or a person. YouRead more
Yes, Goodwill is a fixed asset because it adds to the value of the business over a long period. Goodwill can never be calculated for a short period.
GOODWILL
Basically, goodwill is a premium or you can say an additional price you are paying because of the reputation of a firm or a person.
You may have seen some famous shop in your locality which usually charges a higher price as compared to the other local shops selling the same product.
You may have also noticed that bigger brands like Bata, Titan, Zara, etc. charge higher prices for their products as compared to the same products available in the local market and people are even willing to pay for them. Ever wondered why?
This is because of the goodwill created by them over the years by providing quality products and services, good employee relationships, a strong customer base, social service, a brand name and so on. Customers trust them and for this trust, they are even willing to pay higher prices.
Goodwill is the quantitative value (i.e. in monetary terms) of the reputation of the firm in the market.
FIXED ASSETS
An asset is any possession or property of the business that enables the firm to get cash or any benefit in the future.
Fixed Assets are assets which are purchased for long-term use. They are for continued use in the business for producing goods or services and are not meant for resale. For example- Plant, machinery, building, goodwill, patents etc.
Fixed assets can be tangible or intangible.
Tangible assets are those assets which can be seen and touched and have physical existence like Plant and machinery, building, stock, furniture etc.
Intangible assets are those assets which cannot be seen or touched i.e. they don’t have any physical existence like goodwill, patent, trademark, prepaid expenses etc. Even though they can’t be seen or touched by they have value and are not fictitious assets.
Goodwill as a Fixed Asset
Goodwill is an intangible asset as it cannot be seen or touched but has value and adds value to the business over a long period. Thus, goodwill is a fixed asset.
It is shown in the balance sheet as a Fixed asset under the head Intangible asset.
Goodwill can be
Self-generated goodwill is created over a period due to the good reputation of the business. It is the difference between the value of the firm and the fair value of the net tangible assets of the firm.
Goodwill = Value of the firm – Fair value of net tangible assets
Here, F.V of net tangible assets = Fair value of tangible assets- Fair value of tangible liabilities
Purchased goodwill arises when one business purchases another business. It is the difference between the price paid for the purchased firm and the sum of the fair market value of the assets received and liabilities to be paid by them on behalf of the purchased firm.
Goodwill = Purchase price – (F.V of assets received + F.V of liabilities to be paid)
Only purchased goodwill is recorded in the books of accounts because it is difficult to correctly calculate the value of self-generated goodwill as the future is uncertain, also its valuation depends on the judgement of the person calculating it, which defers from person to person. Since there is no fixed standard to calculate self-generated goodwill only purchased goodwill is recorded as the price paid for it at the time of acquiring another business.
Suppose Firm A acquired Firm B.
Purchase price= $100,000
Assets received=$60,000
Liabilities (to be paid by Firm A on behalf of Firm B) = $10,000
Goodwill = $100,000 – ($60,000 + $10,000) = $30,000
This, goodwill of $30,000 will be recorded under the head Fixed Asset, subhead Intangible Assets in the balance sheet of Firm A (that is in the balance sheet of the acquiring firm)
See lessWhich account has a credit balance?
Credit balance means excess of credit side over debit side. For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a creditRead more
Credit balance means excess of credit side over debit side.
For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a credit balance of 6,000 of trade payable at the end
.A Credit balance signifies all income and gains and all liabilities and capital that is there in business.
Liabilities and Capital
Income and Gains
So after seeing all the above points we can conclude that the credit balance includes all the income in the P&L account and all the liabilities in the Balance sheet. So its balance increases when there is an increase in its account.
Debit Balance
Debit balance means excess of credit side over debit side.
For Example- At begining of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end there will be a debit balance of 6,000 of trade receivables at the end
A Debit balance basically signifies all expenses and losses and all positive balances of assets. The debit balance increases when any asset increases and decreases when any asset decreases.
Asset
Expenses and Loses
- Rent
- Depreciation
- General Expenses
- Loss on Sale of asset
- Printing and stationery
- Audit fees
- Outstanding fees
- Salaries and Wages
- Insurance
- Advertising
- Promotional expenses
See lessWhat is credit side of trading account?
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,
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.
See lessWhat does credit balance in passbook represent?
Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more
Debit Balance
A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.
Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.
Credit Balance
A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.
The credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.
Credit Balance in the Passbook
A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. “Credit balance in the passbook is also called bank balance”.
The bank balance is the amount available for withdrawal. A bank balance is an asset to the individual or an enterprise which can be used for the purchase of another asset or payment of liability or expenses.
All the transactions either debit or credit are recorded in the passbook. When the total amount of all credit entries in a passbook is more than the total of debit entries, it results in a credit balance. It means that the bank owes to an individual or enterprise.
The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s credit balance is a positive or favourable balance while the passbook’s debit balance is a negative balance or unfavourable balance.
For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $30,000. So here, the passbook will show a bank balance of $20,000 i.e. the credit balance of the passbook. It signifies the positive cash flow of the individual and that the bank owes $20,000 to the individual.
Debit balance in Pass Book
When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. Debit balance in the passbook is also called “Overdraft”. It means that an individual or enterprise owes to the bank.
Reconciliation
It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.
Debit Balance Reconciliation
The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.
Credit Balance Reconciliation
The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.
Conclusion
The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A credit balance signifies more deposits than withdrawals resulting in a positive bank balance.
See lessWhat is debit side of trading account?
Trading A/c is a nominal account which follows the rule "Debit all expenses and losses, Credit all incomes and gains". So, all expenses relating to the purchase or manufacturing of goods are shown on the debit side of the Trading A/c. It includes Opening Stock, Purchases, Wages, Carriage Inward, ManRead more
Trading A/c is a nominal account which follows the rule “Debit all expenses and losses, Credit all incomes and gains”.
So, all expenses relating to the purchase or manufacturing of goods are shown on the debit side of the Trading A/c. It includes Opening Stock, Purchases, Wages, Carriage Inward, Manufacturing Expenses, Dock charges, and other direct expenses that are directly related to the manufacturing or purchase.
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.
DEBIT SIDE OF TRADING A/C
The items shown on the Dr. side are,
OPENING 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.
The closing stock of the last year becomes the opening stock of the current year.
Opening stock includes,
For example – Suppose you are in the business of manufacturing and trading shirts. On 31st March 2023, there was unused raw material worth $10,000 and shirts worth $50,000 remained unsold.
So, we have Closing Stock of Raw material – $10,000
Closing Stock of Finished Goods – $50,000
This closing stock of last year becomes your opening stock during the current year i.e. on 1st April 2023, we have
Opening Stock of raw material – $10,000
Opening Stock of Finished Goods – $50,000
PURCHASES – Goods that have been bought for resale or raw materials purchased for manufacturing 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.
Continuing with the above example, suppose you bought raw material worth $ 1,00,000 for manufacturing and shirts worth $50,000 for resale (and not for personal consumption) then both these will be termed as purchases for you. So, your purchases will be $1,50,000 ($1,00,000 + $50,000)
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.
In the above example, you bought shirts worth $50,000 for resale. Out of which shirts worth $20,000 were defective. So, you returned them to the supplier. This return of $20,000 is your purchase return or return outwards (as goods are going out)
WAGES – Wages are paid to the workers who are directly engaged in the loading, unloading and production of goods.
For example – Paid $10,000 to workers for manufacturing shirts.
However, it would be included in Trading A/c only if the wages are paid for work which is directly related to the manufacturing or purchase of goods otherwise it will be shown in P&L A/c.
Suppose you hired a manager to take care of your business and paid him $20,000 as salary. This salary is indeed an expense for the business but is not directly related to the manufacturing of goods. Since it is an indirect expense, it can only be recorded in P&L A/c and not in the Trading A/c.
CARRIAGE or CARRIAGE INWARDS or FREIGHT – It refers to the cost of transporting goods from the supplier.
Suppose, you ordered raw material in bulk which was transported to you by a van and you paid its fare. This fare is nothing but your carriage inwards.
However, if carriage or freight is paid on bringing an asset, the amount should be added to the asset account and must not be debited to the trading account.
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.
For example – Paid $15,000 as import duty for importing shirts for resale.
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.
CREDIT SIDE OF TRADING A/C
SALES – When goods are sold to earn a profit, it is called sales. It can be cash sales or credit sales.
SALES RETURN – When the goods sold are returned by the customer, it is known as a sales return. Sales return is deducted from the sales.
CLOSING STOCK – The goods remaining unsold at the end of the year are termed as closing stock. It is valued at cost price or market price whichever is less.
GROSS LOSS – If purchases and direct expenses exceed sales, then it is a Gross loss. In other words, when Debit side > Credit side.
See lessWhich account has a debit balance?
Debit balance means excess of credit side over debit side. For Example- At the beginning of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end therRead more
Debit balance means excess of credit side over debit side.
For Example- At the beginning of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end there will be a debit balance of 6,000 of trade receivables at the end
A Debit balance basically signifies all expenses and losses and all positive balances of assets. The debit balance increases when any asset increases and decreases when any asset decreases.
Assets
All the assets that appear in the balance sheet always have a debit balance. The debit balance under it will increase as it debits. Some of these assets can be illustrated below -:
Expenses and Losses
All expenses that appear on the debit side of the P&L account have a debit balance in their accounts.
For eg-: A rent of 10,000 is given to the landlord under which the work has been done by the entity.
For eg-: A depreciation of 10% is there on an asset of 12,000 will result in a debit balance under depreciation in the P&L Account.
Some of the following expenses can be illustrated below
So after seeing all the above points we can conclude that the debit balance includes all the expenses that are in the P&L account and all the assets that are there in the Balance sheet. So its balance increases when there is an increase in its account.
CREDIT BALANCE
Credit balance means excess of credit side over debit side.
For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at end there will be a credit balance of 6,000 for trade payable at the end
.A Credit balance signifies all income and gains and all liabilities and capital that is there in business.
Liabilities
Income and Gains
See lessWhat does debit balance in passbook represent?
Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more
Debit Balance
A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.
Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.
Credit Balance
A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.
Credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.
Debit Balance in the Passbook
A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. Debit balance in the passbook is also called “Overdraft”.
All the transactions either debit or credit are recorded in the passbook. When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. It means that an individual or enterprise owes to the bank.
The overdraft facility given by the bank has a limit i.e. only a certain amount can be withdrawn in excess of the amount deposited and if one avails overdraft facility, interest is also charged by the bank.
The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s debit balance is a negative balance or unfavourable balance while the passbook’s credit balance is a positive or favourable balance.
For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $60,000. So here, the passbook will show an overdraft of $10,000 i.e. the debit balance of the passbook. It signifies negative cash flow of the individual and that individual owes $10,000 to the bank.
Credit balance in Pass Book
On the other hand, when the total amount of all the debit entries in a passbook is less than the total amount of credit entries, it results in a credit balance. It means the amount deposited by a customer is more than the amount withdrawn indicating the positive cashflow in the account.
Reconciliation
It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.
Debit Balance Reconciliation
The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.
Credit Balance Reconciliation
The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.
Conclusion
The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A debit balance signifies more withdrawals than receipts resulting in an overdraft.
See less