Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not on a particular period. What does trial balRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not on a particular period.
What does trial balance include?
As in each double-entry system, each account has two aspects debit and credit.
Hence the following trial balance includes:
• Debit or credit of the reporting period.
• The amount which is to be debited or credited to each account.
• The account numbers.
• The dates of the reporting period.
• The totaled sums of debits and credits entered during that time.
When we prepare a trial balance from the given list of ledger balances, these need to be included which are as follows :
The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
The purpose of the trial balance is as follows:
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Definition Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “ A furniture account that is an asset has a debit balance. Debit balance may arise due to timing differences in which case income wilRead more
Definition
Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “
A furniture account that is an asset has a debit balance.
Debit balance may arise due to timing differences in which case income will be accrued at the year’s end to offset the debit.
The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits.
The account which has debit balances are as follows:
Assets accounts
Land, furniture, building machinery, etc
Expenses accounts
Salary, rent, insurance, etc
Losses
Bad debts, loss by fire, etc
Drawings
Personal drawings of cash or assets
Cash and bank balances
Balances of these accounts
The account has credit balances as follows:
Liabilities accounts
Creditors, bills payable, etc
Income accounts
Salary received, interest received, etc
Profits
Dividends, interest, etc
Capital
Partners Capital
Here are some examples showing the debit balances and credit balances of the accounts :
Debtors are treated as an asset. A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered. When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise. Debtors are consRead more
Debtors are treated as an asset.
A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.
When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise.
Debtors are considered assets in the balance sheet and are shown under the head of current assets.
For example – Ram Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ram because he owes the amount to Ram. This amount will be payable at a later date.
Liabilities Vs Assets
Liabilities
It means the amount owed (payable) by the business. Liability towards the owners ( proprietor or partners ) of the business is termed internal liability. For example, owner’s capital, etc
On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability.
For example creditors, bank overdrafts, etc.
Assets
An asset is a resource owned or controlled by a company. The benefit from the asset will accrue to the business in current and future periods. In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – machinery, building, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business. They are readily realizable into cash.
In other words, we can say that the expected realization period of current assets is less than the operating cycle period.
For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Why debtors are treated as assets?
Now let me explain to you why debtors are treated as assets and not as liabilities because of the following characteristics :
We can say that the expected realization period is less than the operating cycle period.
Expected to be converted into cash in the normal course of business.
In the business, debtors are treated as current assets which we can see on the asset side of the balance sheet.
Debtors have a debit balance.
Conclusion
Now after the above discussion, I can conclude that debtors are considered to be an asset and not a liability.
Definition Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle. Posting helps us to classify transactions in a better manner. A journal is used to record transactions in chronological order while ledgerRead more
Definition
Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle.
Posting helps us to classify transactions in a better manner.
A journal is used to record transactions in chronological order while ledger books are used to classify transactions into assets, liabilities, expenses, and incomes.
Steps of Posting
• Create and name ledger accounts for different items of trial balance
• Identify those entries in the journal that relate to the relevant ledger book under consideration.
• Post the entry on the debit or credit side of the ledger account.
• For example, when salaries are paid a salary account is debited and a bank account is credited. When posting this transaction in the bank account we will debit the bank account and write “To salaries” under the head “particular”. This will indicate that salaries were paid from a bank account causing a reduction in the bank balance.
• After all the journal entries relevant to a particular ledger account have been posted in it, we will tally the total of the debit and the credit side of the ledger account to ascertain any balance left.
• Usually, asset accounts have the debit side exceeding the credit side. That is to say, they have a debit balance. Liability accounts usually have a credit balance.
• It is not necessary that every ledger account may have a balance left at the end. The total of the amounts on the debit side may be equal to the total of the amounts on the credit side in some ledger accounts.
• The last step is to recheck the ledger account to identify and correct any mistakes that may have occurred during the posting process.
Importance of Posting
• Posting helps us to classify transactions in a better and more efficient manner.
• Posting makes the books of accounts more readable.
• An accountant may choose to engage in posting once every month or even once every day as per the requirements of the business and the financial reporting norms.
• Posting is necessary for the creation of financial statements. A trial balance cannot be drafted without determining the balance of each ledger account.
• Posting helps us to know the balance of each account This helps to run the business smoothly by tracking balances timely and making up for any likely deficiency in advance.
• Analysis of how balances of various ledger accounts have changed over time helps us to draw valuable conclusions for the business.
Conclusion
We can conclude by saying that the process of posting refers to transferring the entries from the journal to the ledger accounts.
Posting is an essential step of the accounting cycle and without it, financial statements cannot be prepared. Any error while posting is bound to adversely affect the creation of the financial statements.
Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more
Definition
Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.
However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.
For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.
Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.
For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.
Meaning as per AS – 29
Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-
• Contingent asset
A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.
• Contingent liability
A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
A reliable estimate of the amount of obligation cannot be made.
Recognition In Financial Statements
Contingent assets and liabilities are recognized as follows:-
• Contingent Assets
As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.
It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.
However, when the realization of income is virtually certain, the related asset no longer remains contingent.
• Contingent liability
As per the rules, it is not recognized by an enterprise.
When recognized?
Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.
The assets and the related income are recognized in the financial statements of the period in which the change occurs.
Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.
And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.
A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.
Disclosure
Now we will see how contingent assets and liability are disclosed which is mentioned below:-
• Contingent asset
These contingent assets are not disclosed in financial statements.
A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.
• Contingent Assets
A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.
Yes, a creditor is a liability. Creditors are treated as current liability. A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest. Creditors may be secureRead more
Yes, a creditor is a liability. Creditors are treated as current liability.
A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.
Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.
In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.
Why are Creditors treated as a liability?
An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc
A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.
As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.
Treatment and Importance of Creditors
Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.
The significance/importance of creditors is as follows:
The amount due to creditors affects the current and acid test ratio of a company significantly.
It affects the short-term cash requirements of a company.
It affects the credit policy of the company. A company can extend longer credit periods to customers if it can avail longer credit periods from its suppliers.
Having too many creditors or a large amount due to creditors can affect investor sentiment negatively regarding the business.
We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.
Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.
Definition A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions. Or in other words, we can say a group of accounts with different characteristics. It is also called the Principal Book of accounts. For example:- salary account, aRead more
Definition
A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions.
Or in other words, we can say a group of accounts with different characteristics.
It is also called the Principal Book of accounts.
For example:– salary account, and debtor account.
Sub- ledger it is defined as a group of accounts with common characteristics. And is a part of ledger accounts.
For example:- customer account, vendor account, etc.
The difference between a ledger and a sub-ledger is that ledger accounts control sub-ledger accounts whereas a sub-ledger is a part of the ledger account.
Features Of Ledger
Ledger is prepared from the journal.
Ledger is a master record of all the accounts of the business.
The Ledger account shows the current balances of all accounts.
Ledger accounts summarize the effect of transactions upon assets, liabilities, capital, incomes, and expenditures.
Features Of Sub-Ledger
Sub-ledger in accounting provides up-to-date information about the daily activities of the business.
It keeps individual track of all balances.
Help locate errors in individual accounts.
A sub-ledger is a collection of different ledgers used in an account.
Utilities of ledger
The main utilities of a ledger are summarized as follows :
• Provides complete information about a particular account: Complete information relating to a particular account is available in one place in the ledger.
• Information on income and expenses: In the ledger, a separate account is maintained for each income and expense. The amount of total income and total expenses are known from the ledger accounts.
• Preparation of trial balance: Ledger helps in preparing trial balances which ensure arithmetical accuracy of the transaction recorded in the books of account.
• Helps in preparing final accounts: After preparing the trial balance, final accounts are prepared to know the profitability and financial position of the business.
Utilities of sub-ledger
The utilities of the sub-ledger are as follows :
• Track customer information: If a client has an outstanding credit debt or needs money refunded, a company can use a sub-ledger to verify the information quickly.
• Protect financial information: A sub-ledger allows a financial supervisor to isolate certain records so that employees can view only parts of the company’s financial information. This added level of security is important for large corporations.
• Create separate databases: Large companies usually process large amounts of financial data that may be too big for one database. Software programs organize this data into isolated files to calculate financial information in the general ledger of a business.
Conclusion
So here I conclude that a ledger is compulsory in the recording process whereas a sub-ledger is optional.
The ledger is used for preparing trial balance but the sub-ledger is not used for the same.
Sub ledger is controlled by the ledger.
The sub-ledger supports the transaction of each specific account indicated on the ledger.
what does a trial balance include?
Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not on a particular period. What does trial balRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not on a particular period.
What does trial balance include?
As in each double-entry system, each account has two aspects debit and credit.
Hence the following trial balance includes:
• Debit or credit of the reporting period.
• The amount which is to be debited or credited to each account.
• The account numbers.
• The dates of the reporting period.
• The totaled sums of debits and credits entered during that time.
When we prepare a trial balance from the given list of ledger balances, these need to be included which are as follows :
The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
The purpose of the trial balance is as follows:
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Structure of trial balance
See lessWhich of the following accounts have a debit balance?
Definition Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “ A furniture account that is an asset has a debit balance. Debit balance may arise due to timing differences in which case income wilRead more
Definition
Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “
A furniture account that is an asset has a debit balance.
Debit balance may arise due to timing differences in which case income will be accrued at the year’s end to offset the debit.
The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits.
The account which has debit balances are as follows:
Land, furniture, building machinery, etc
Salary, rent, insurance, etc
Bad debts, loss by fire, etc
Personal drawings of cash or assets
Balances of these accounts
The account has credit balances as follows:
Creditors, bills payable, etc
Salary received, interest received, etc
Dividends, interest, etc
Partners Capital
Here are some examples showing the debit balances and credit balances of the accounts :
See lessIs debtor an asset or liability ?
Debtors are treated as an asset. A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered. When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise. Debtors are consRead more
Debtors are treated as an asset.
A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.
When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise.
Debtors are considered assets in the balance sheet and are shown under the head of current assets.
For example – Ram Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ram because he owes the amount to Ram. This amount will be payable at a later date.
Liabilities Vs Assets
Liabilities
It means the amount owed (payable) by the business. Liability towards the owners ( proprietor or partners ) of the business is termed internal liability. For example, owner’s capital, etc
On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability.
For example creditors, bank overdrafts, etc.
Assets
An asset is a resource owned or controlled by a company. The benefit from the asset will accrue to the business in current and future periods. In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – machinery, building, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business. They are readily realizable into cash.
In other words, we can say that the expected realization period of current assets is less than the operating cycle period.
For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Why debtors are treated as assets?
Now let me explain to you why debtors are treated as assets and not as liabilities because of the following characteristics :
Conclusion
Now after the above discussion, I can conclude that debtors are considered to be an asset and not a liability.
See lessWhat is the meaning of posting in journal entries
Definition Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle. Posting helps us to classify transactions in a better manner. A journal is used to record transactions in chronological order while ledgerRead more
Definition
Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle.
Posting helps us to classify transactions in a better manner.
A journal is used to record transactions in chronological order while ledger books are used to classify transactions into assets, liabilities, expenses, and incomes.
Steps of Posting
• Create and name ledger accounts for different items of trial balance
• Identify those entries in the journal that relate to the relevant ledger book under consideration.
• Post the entry on the debit or credit side of the ledger account.
• For example, when salaries are paid a salary account is debited and a bank account is credited. When posting this transaction in the bank account we will debit the bank account and write “To salaries” under the head “particular”. This will indicate that salaries were paid from a bank account causing a reduction in the bank balance.
• After all the journal entries relevant to a particular ledger account have been posted in it, we will tally the total of the debit and the credit side of the ledger account to ascertain any balance left.
• Usually, asset accounts have the debit side exceeding the credit side. That is to say, they have a debit balance. Liability accounts usually have a credit balance.
• It is not necessary that every ledger account may have a balance left at the end. The total of the amounts on the debit side may be equal to the total of the amounts on the credit side in some ledger accounts.
• The last step is to recheck the ledger account to identify and correct any mistakes that may have occurred during the posting process.
Importance of Posting
• Posting helps us to classify transactions in a better and more efficient manner.
• Posting makes the books of accounts more readable.
• An accountant may choose to engage in posting once every month or even once every day as per the requirements of the business and the financial reporting norms.
• Posting is necessary for the creation of financial statements. A trial balance cannot be drafted without determining the balance of each ledger account.
• Posting helps us to know the balance of each account This helps to run the business smoothly by tracking balances timely and making up for any likely deficiency in advance.
• Analysis of how balances of various ledger accounts have changed over time helps us to draw valuable conclusions for the business.
Conclusion
We can conclude by saying that the process of posting refers to transferring the entries from the journal to the ledger accounts.
Posting is an essential step of the accounting cycle and without it, financial statements cannot be prepared. Any error while posting is bound to adversely affect the creation of the financial statements.
See lessHow are contingent assets different from contingent liabilities ?
Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more
Definition
Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.
However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.
For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.
Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.
For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.
Meaning as per AS – 29
Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-
• Contingent asset
A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.
• Contingent liability
A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
A reliable estimate of the amount of obligation cannot be made.
Recognition In Financial Statements
Contingent assets and liabilities are recognized as follows:-
• Contingent Assets
As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.
It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.
However, when the realization of income is virtually certain, the related asset no longer remains contingent.
• Contingent liability
As per the rules, it is not recognized by an enterprise.
When recognized?
Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.
The assets and the related income are recognized in the financial statements of the period in which the change occurs.
Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.
And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.
A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.
Disclosure
Now we will see how contingent assets and liability are disclosed which is mentioned below:-
• Contingent asset
These contingent assets are not disclosed in financial statements.
A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.
• Contingent Assets
A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.
See lessIs creditor an asset or liability ?
Yes, a creditor is a liability. Creditors are treated as current liability. A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest. Creditors may be secureRead more
Yes, a creditor is a liability. Creditors are treated as current liability.
A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.
Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.
In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.
Why are Creditors treated as a liability?
An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc
A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.
As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.
Treatment and Importance of Creditors
Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.
The significance/importance of creditors is as follows:
We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.
Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.
See lessWhat is the difference between ledger and subledger?
Definition A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions. Or in other words, we can say a group of accounts with different characteristics. It is also called the Principal Book of accounts. For example:- salary account, aRead more
Definition
A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions.
Or in other words, we can say a group of accounts with different characteristics.
It is also called the Principal Book of accounts.
For example:– salary account, and debtor account.
Sub- ledger it is defined as a group of accounts with common characteristics. And is a part of ledger accounts.
For example:- customer account, vendor account, etc.
The difference between a ledger and a sub-ledger is that ledger accounts control sub-ledger accounts whereas a sub-ledger is a part of the ledger account.
Features Of Ledger
Features Of Sub-Ledger
Utilities of ledger
The main utilities of a ledger are summarized as follows :
• Provides complete information about a particular account: Complete information relating to a particular account is available in one place in the ledger.
• Information on income and expenses: In the ledger, a separate account is maintained for each income and expense. The amount of total income and total expenses are known from the ledger accounts.
• Preparation of trial balance: Ledger helps in preparing trial balances which ensure arithmetical accuracy of the transaction recorded in the books of account.
• Helps in preparing final accounts: After preparing the trial balance, final accounts are prepared to know the profitability and financial position of the business.
Utilities of sub-ledger
The utilities of the sub-ledger are as follows :
• Track customer information: If a client has an outstanding credit debt or needs money refunded, a company can use a sub-ledger to verify the information quickly.
• Protect financial information: A sub-ledger allows a financial supervisor to isolate certain records so that employees can view only parts of the company’s financial information. This added level of security is important for large corporations.
• Create separate databases: Large companies usually process large amounts of financial data that may be too big for one database. Software programs organize this data into isolated files to calculate financial information in the general ledger of a business.
Conclusion
So here I conclude that a ledger is compulsory in the recording process whereas a sub-ledger is optional.
The ledger is used for preparing trial balance but the sub-ledger is not used for the same.
Sub ledger is controlled by the ledger.
The sub-ledger supports the transaction of each specific account indicated on the ledger.
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