Generally, Assets are classified into two types. Non-Current Assets Current Assets Non-Current Asset Noncurrent assets are also known as Fixed assets. These assets are an organization's long-term investments that are not easily converted to cash or are not expected to become cash within an acRead more
Generally, Assets are classified into two types.
Non-Current Assets
Current Assets
Non-Current Asset
Noncurrent assets are also known as Fixed assets. These assets are an organization’s long-term investments that are not easily converted to cash or are not expected to become cash within an accounting year.
In general terms, In accounting, fixed assets are assets that cannot be converted into cash immediately. They are primarily tangible assets used in production having a useful life of more than one accounting period. Unlike current assets or liquid assets, fixed assets are for the purpose of deriving long-term benefits.
Unlike other assets, fixed assets are written off differently as they provide long-term income. They are also called “long-lived assets” or “Property Plant & Equipment”.
Examples of Fixed Assets
Land
Land improvement (e.g. irrigation)
Building
Building (work in progress)
Machinery
Vehicles
Furniture
Computer hardware
Computer software
Office equipment
Leasehold improvements (e.g. air conditioning)
Intangible assets like trademarks, patents, goodwill, etc. (non-current assets)
Valuation of Fixed asset
fixed assets are recorded at their net book value, which is the difference between the “historical cost of the asset” and “accumulated depreciation”.
“Net book value = Historical cost of the asset – Accumulated depreciation”
Example:
Hasley Co. purchases Furniture for their company at a price of 1,00,000. The Furniture has a constant depreciation of 10,000 per year. So, after 5 years, the net book value of the computer will be recorded as
1,00,000 – (5 x 10,000) = 50,000.
Therefore, the furniture value should be shown as 50,000 on the balance sheet.
Presentation in the Balance Sheet
Both current assets and non-current assets are shown on the asset side(Right side) of the balance sheet.
Difference between Current Asset and Non-Current Asset
Current assets are the resources held for a short period of time and are mainly used for trading purposes whereas Fixed assets are assets that last for a long time and are acquired for continuous use by an entity.
The purpose to spend on fixed assets is to generate income over the long term and the purpose of the current assets is to spend on fixed assets to generate income over the long term.
At the time of the sale of fixed assets, there is a capital gain or capital loss but at the time of the sale of current assets, there is an operating gain or operating loss.
The main difference between the fixed asset and current asset is, although both are shown in the balance sheet fixed assets are depreciated every year and it is valued by (the cost of the asset – depreciation) and current asset is valued as per their current market value or cost value, whichever is lower.
Partnership Firm Persons who have entered into a partnership with one another to carry on a business are individually called “Partners“; collectively called a “Partnership Firm”; and the name under which their business is carried on is called the “Firm Name” In simple words, A partnership is an agreRead more
Partnership Firm
Persons who have entered into a partnership with one another to carry on a business are individually called “Partners“; collectively called a “Partnership Firm”; and the name under which their business is carried on is called the “Firm Name”
In simple words, A partnership is an agreement between two or more people who comes together to run a business on a partnership deed, which is called a Partnership firm. A Partnership Deed is a written agreement between partners who are willing to form a Partnership Firm. It is also called a Partnership Agreement.
It has no separate legal entity which cannot be separated from the members. It is merely a collective name given to the individuals composing it. This means, a partnership firm cannot hold property in its name, and neither it can sue nor be sued by others.
Contents of a Partnership Deed
A Partnership Deed shall mainly include the following contents:
Name of the Partnership firm
Address of the Partnership firm
Details of all the Partners
Date of commencement of the Business
The amount of capital contributed by each of the partners forming the Partnership firm
The Profit sharing ratio (The Business profit shared among the partners on a ratio basis)
The rate or amount of Interest on Capital & the rate or amount of Interest on drawings to each partner respectively.
The salary is payable to each of the partners of the firm.
The rights, duties, and power of each partner of the firm.
The duration of the existence of the firm
Types of Partners
The following are the various types o partners
Working partner or Active partner
Sleeping partner
Limited partner
Partner in profit only
Nominal or quasi partner
Minor as a partner
Types of Partnership Firms
There are four types of partnership which are as below.
General Partnership
Limited Partnership
Partnership at will
Particular Partnership
Essential characteristics of a partnership firm
Two or More persons: There must be at least two persons to form a partnership. A person cannot enter into a partnership with himself. The maximum number of persons in a partnership should not exceed 50.
Agreement between partners: There must be an agreement between the parties in a partnership. The relation of partnership arises from the formation of a contract i.e., Partnership deed.
Mutual Agency: Partnership business can be carried on by all the partners or by any of them acting on behalf of the others. in simple words, every partner is an agent to the other partners and of the form. Each partner is liable for acts performed by other partners on behalf of the firm.
Registration of Firm: Registration of a partnership firm is not compulsory under the Act. The only document or even an oral agreement among partners required is the ‘partnership deed’ to bring the partnership into existence.
Unlimited Liability:the liability of the partners is unlimited for the debts of the firm. In case the assets of the firm are insufficient to pay the debts in full, the personal property of each partner can be attached to pay the creditors of the firm.
Non-Transferability of interest: there is a restriction in the transfer of shares of profits of the partnership without the prior consent of all other partners.
Sharing of profits: The profits must be distributed among the partners in an agreed ratio. Similarly, losses should be shared among the partners.
Lawful Business: The business carried on by the partners must be lawful. Illegal acts such as theft, dacoity, smuggling, etc., cannot be called partnerships.
Utmost good faith: A partner must observe utmost good faith in all dealings with his co-partners. He must render true accounts and make no secret profits from the business.
Expenses are of two types, are Direct Expenses Indirect Expenses Direct Expenses Direct expenses are those expenses are which are directly related to the manufacturing or production of the final goods. These expenses are also known as Manufacturing expenses. Manufacturing or production of gooRead more
Expenses are of two types, are
Direct Expenses
Indirect Expenses
Direct Expenses
Direct expenses are those expenses are which are directly related to the manufacturing or production of the final goods. These expenses are also known as Manufacturing expenses.
Manufacturing or production of goods indicates the conversion of Raw material into finished goods. the expenses incurred in the stage of conversion are treated as Direct expenses or Manufacturing expenses.
Direct expenses are shown on the Debit side of the Trading Account.
Indirect Expenses
Indirect expenses are those expenses that are incurred to run a business day-to-day and maintenance of the company. In other words, they are not directly related to making a product or service or buying a wholesale product to resell.
Indirect expenses are classified into three types, which are
Factory Expenses
Administrative Expenses
Selling & Distribution Expenses
Indirect Expenses are shown on the Debit side of the Profit and Loss Account.
Presentation of Direct Expenses in Trading Account
Examples of Direct Expenses
Gas, water, and Fuel: Gas, water, and fuel are the essentials to run a factory and are used in machinery to manufacture its final goods.
Wages: Wages are the daily payments to the workers or Labours working in the factory premises on a daily or weekly payment basis.
Freight and Carriage: Freight and Carriage are the expenses related to the importing of raw materials from the godown or from the outsiders to the Factory.
Factory Rent: Rent paid for the factory area or any payment related to the place of the factory is known as factory rent.
Factory Lighting: The expenses related to the uniform distribution of light over the working plane are obtained in the factory premises.
Factory Insurance: The payment of insurance related to the factory will come under direct expenses.
Manufacturing Expenses: Any other expenses related to the manufacturing process of finished goods are manufacturing expenses.
Cargo Expenses: These are the expenses related to goods or freight being shipped or carried by the ocean, air, or land from one place to another.
Upkeep and Maintenance: These are the expenses related to the maintenance of the factory for smooth running.
Repairs on Machinery: The expenses related to any repair on machinery which is used in the production.
Coal, Oil, and Grease: Coal, oil, and grease are the essentials to run machinery which results in the conversion of raw material to finished goods.
Custom Charges: The expenses related to the payment of any Customs duty for the material imported.
Clearing Charges: A clearing charge is a charge assessed on securities transactions by a clearing house for completing transactions using its own facilities.
Depreciation on Machinery: Generally it is a nonmonetary expense but recorded in the trading account as a direct expense as per the accrual accounting.
Import duty: any payment related to the importing of any machinery or any material from other countries is known as import duty.
Octroi: this is the tax levied by a local political unit, normally the commune or municipal authority, on certain categories of goods as they enter the area.
Shipping expenses: any expense related to the shipment charges of the raw material is known as shipping expenses.
Motive power: Motive Power basically means any power, such as electricity or steam energy, etc, used to impart motion to any source of mechanical energy.
Dock dues: a payment that a shipping company must pay for the use of a port.
Goodwill In Accounting Aspect, Goodwill refers to an Intangible asset that facilitates a company in making higher profits and is a result of a business’s consistent efforts over the past years which can be the business's prestige, reputation, good name, customer trust, quality service, etc. GoodwillRead more
Goodwill
In Accounting Aspect, Goodwill refers to an Intangible asset that facilitates a company in making higher profits and is a result of a business’s consistent efforts over the past years which can be the business’s prestige, reputation, good name, customer trust, quality service, etc.
Goodwill has no separate existence although the concept of goodwill comes when a company acquires another company with a willingness to pay a higher price over the fair market value of the company’s net asset in simple words the goodwill can be only realized while at the time of sale of a business.
The formula for Goodwill
Types of Goodwill
there are two types of goodwill.
1. Inherent Goodwill/Self-generated goodwill
Inherent goodwill is the internally generated goodwill that was created or generated by the business itself. it is generally generated from the good reputation of the business.
Inherent Goodwill or Self-generated goodwill is generally not shown in the books or never recognized in the books of Accounts and no journal entry for the inherent goodwill is passed.
2. Purchased Goodwill/Acquired Goodwill
At the time of acquisition of a business by another business, any amount paid over and above the net assets simply refers to the amount of Purchased Goodwill or Acquired goodwill.
A Journal entry is passed in the case of the Purchase of goodwill.
Type of Account
generally, Goodwill is considered and recorded as an Intangible asset(long-term asset) due to its physical absence like other long-term assets.
Modern rule of accounting:
as per the Modern rule of accounting, all Assets or all possessions of a business are comes under the head Asset accounts.
as Goodwill is treated as an Intangible asset it is an Asset Account.
Journal entry for purchase of goodwill as per Modern rule
Goodwill A/c Dr. – Amt
To Cash/Bank A/c – Amt
(The modern approach of accounting for the Asset account is: “Debit the increase in asset and Credit the decrease in the asset“)
The golden rule of accounting
As per the golden rule of accounting, all assets or possessions of a business other than those which are related to any person (debtor’s account) are considered Real accounts.
Such accounts don’t close by the year-end and are carried forward.
As Goodwill is an Intangible asset it is treated as a Real account as per the golden rule of accounting.
Journal entry for purchase of goodwill as per Golden rule
Goodwill A/c Dr. – Amt
To Cash/Bank A/c – Amt
(The golden rule of accounting for the Real account is: “Debit what comes in and Credit what Goes out“)
The correct option is A) Cash book let's understand what is petty cash book: A petty cash book is a cash book maintained to record petty expenses. Petty expenses, mean small or minute expenses for which the payment is made in coins or a few notes or which are smaller denominations like tea or coffeeRead more
The correct option is A) Cash book
let’s understand what is petty cash book:
A petty cash book is a cash book maintained to record petty expenses.
Petty expenses, mean small or minute expenses for which the payment is made in coins or a few notes or which are smaller denominations like tea or coffee expenses, postage, bus or taxi fare, stationery expenses, etc.
The person who maintains the petty cash book is known as the petty cashier.
It is a simple process that helps organizations by focusing on major transactions as petty cashiers handle all small transactions.
Generally, the petty cashbook is prepared as per the Imprest system. As per the Imprest system, the petty expenses for a period (month or week) are estimated and a fixed amount is given to the petty cashier to spend for that period.
At the end of the period, the petty cashier sends the details to the chief cashier and he is reimbursed the amount spent. In this way, the debit balance of the petty cashbook always remains the same.
The petty cash book has two columns in which
Cash received is recorded in the Left column i.e, “Receipts” or “Debit” column.
Cash payments are recorded in the Right column i.e, “Payment” or “Credit” column.
Balance of Petty cash book
The balance of petty cash book is never closed and their balances are carried forward to the next accounting period which is considered one of the most significant qualities of an asset whereas Income doesn’t have any opening balance and their balances get closed at the end of every accounting year.
A petty cash book is placed under the head current asset in the balance sheet. The Closing Balance of the petty cash book is computed by deducting Total expenditure from the Total cash receipt (as received from the head cashier).
Format for petty cash book
Only small denominations are recorded in the petty cash book. It varies with the type, quantity, and need of a business. It involves cash and checks.
Ordinary Petty cash book:
Analytical Petty cash book:
Conclusion
A simple petty cash book is a type of cash book because it records the small expenses which involve small transactions in the ordinary daily business.
A petty cash book is not as important as an income statement, balance sheet, or trail balance it doesn’t measure the accuracy of accounts so it is not treated as a statement.
No journal entries are made in the books of accounts while spending or purchasing using a petty cash book so, it is not treated as a journal.
Depreciation is an accounting process of allocating the value of an asset over its estimated useful life. When a company purchases an asset, depreciation will be calculated at the end of every financial year on the asset. The company records the amount of depreciation in a separate ledger, i.e., AccRead more
Depreciation is an accounting process of allocating the value of an asset over its estimated useful life.
When a company purchases an asset, depreciation will be calculated at the end of every financial year on the asset. The company records the amount of depreciation in a separate ledger, i.e., Accumulated Depreciation. This expense will be debited instead of depreciation in the Asset ledger.
Accumulated Depreciation
Accumulated depreciation is the accumulated reduction in the cost of an asset over time.
Depreciation is the reduction in the value of an asset over a specific timeframe, whereas accumulated depreciation is the sum of total depreciation on an asset since we bought it.
we will understand this concept with a simple example.
suppose machinery depreciates as follows
Year 1 – Depreciation is 5,000
Year 2 – Depreciation is 5,000
Year 3 – Depreciation is 5,000
Accumulated Depreciation in Year 3 = 5,000 + 5,000 + 5,000
Therefore, overall 3 years of depreciation are accumulated at the last year-end.
Journal entry for accumulated depreciation
Example: Excellence Co. has purchased a new motor vehicle which costs $8,000 for their cab business. The motor vehicle is depreciated at @20% per annum. At the end of the year, Excellence Co. will record this accumulated depreciation journal entry.
Year 1
Depreciation A/c Dr. – $1600
To Accumulated depreciation A/c – $1600
Year 2
Depreciation A/c Dr. – $1600
To Accumulated Depreciation A/c – $1600
Therefore, the Accumulated depreciation for the 2nd year end is $3200.
At the time of the sale of the motor vehicle, the amount of accumulated depreciation will be reduced from the total value of the asset.
Provision for depreciation
Provision for depreciation is very similar to accumulated depreciation. Instead of reducing the amount of depreciation from the value of an asset, a separate provision A/C will be created, and the depreciation amount will be credited to the provision account, i.e., Provision for Depreciation account every year, and the asset will be shown the same value without reducing the depreciation from it.
Journal entry for provision for depreciation
Example: Yesman Co. purchased Machinery worth $40000 at the beginning of the current year for their production. The machinery will be depreciated at @10% per annum. At the end of the year, Yesman Co. will record this provision for depreciation journal entry.
Year 1
Depreciation A/c Dr. – $4000
To Provision for Depreciation A/c – $4,000
Year 2
Depreciation A/c Dr. – $4000
To Provision for Depreciation A/c – $4000
Therefore, the Provision for depreciation balance will be $8000 at the 2nd year-end.
At the time of sale of the machinery, the amount of provision for depreciation created till the date will be reduced from the asset’s value.
Conclusion
Provision for depreciation and accumulated depreciation refers to the amount of depreciation accumulated over the useful life of an asset.
The terms accumulated depreciation and provision for depreciation are different in hearing, but these are similar from the financial perspective.
Debts are of two types one is Good Debt, and another one is Bad debt. Bad Debts The amount which is not recoverable from the debtors is called Bad debt. It is an uncollectable amount from the organization's customers due to the customer's inability to pay the amount of money taken on credit. Read more
Debts are of two types one is Good Debt, and another one is Bad debt.
Bad Debts
The amount which is not recoverable from the debtors is called Bad debt. It is an uncollectable amount from the organization’s customers due to the customer’s inability to pay the amount of money taken on credit.
Example 1
Mr A borrowed $100 from Mr B for his college fee and agrees to pay in 2 months. After the time period is complete Mr A failed to repay the borrowed amount. This is a Bad Debt for Mr B.
Example 2
XYZ Co. had made a credit sale of $50,000. A debtor who has to pay $1000 has been bankrupted. XYZ co. cannot recover the amount from the Debtor, so it records the irrecoverable amount as a bad debt.
Journal Entry
In this entry, “Bad debts are written off of Rs. 2000.”
Bad debt is the amount not recoverable from debtors, which is a loss for the organization.
Modern Rule
The Modern rules of accounting for Expenses are “Debit the increase in expenses and Credit the decrease in expenses.”
Golden Rule
The Golden rules of accounting for expenses and losses are “Debit all expenses and losses, Credit all incomes and gains.”
Bad Debts A/c Dr. 2,000
To Debtor’s A/c 2000
Bad debt is treated as a loss for the organization. As per the rule, this should be debited to the profit and loss account.
Profit and Loss A/c Dr. – 2000
To Bad Debts A/c – 2000
Instead of passing two separate entries for writing off, we can combine the entries and pass one entry.
Profit and Loss A/c Dr. 2000
To Debtor’s A/c 2000
Recovery of Bad debts
Recovery of Bad debt is the amount received for a debt that was written off in the past. It was considered uncollectable.
When we write off bad debt, it is recorded as a loss, but the recovery of bad debts is treated as an income for the business.
It is treated as an income and the recovery of bad debt is shown on the credit side of the Income statement.
Journal Entry for Recovery of Bad debts
Bank/Cash A/c Dr. – Amount
To Bad Debts Recovered A/c – Amount
Rules applied in the Journal entry are as per the Golden rules of accounting,
“Cash/Bank A/C” is a real account therefore debit what comes in and credit what goes out.
“Bad Debts Recovered A/C” is a nominal account therefore debit all expenses and losses, and credit all incomes and gains.
Treatment of “Bad Debt written off of Rs.2ooo.”
In Trial Balance: No effect
In Income Statement: It is shown on the debit side as Rs.2000 (loss)
In Balance Sheet: Rs.2000 shall be deducted from the sundry debtor account.
What is a non-current asset?
Generally, Assets are classified into two types. Non-Current Assets Current Assets Non-Current Asset Noncurrent assets are also known as Fixed assets. These assets are an organization's long-term investments that are not easily converted to cash or are not expected to become cash within an acRead more
Generally, Assets are classified into two types.
Non-Current Asset
Noncurrent assets are also known as Fixed assets. These assets are an organization’s long-term investments that are not easily converted to cash or are not expected to become cash within an accounting year.
In general terms, In accounting, fixed assets are assets that cannot be converted into cash immediately. They are primarily tangible assets used in production having a useful life of more than one accounting period. Unlike current assets or liquid assets, fixed assets are for the purpose of deriving long-term benefits.
Unlike other assets, fixed assets are written off differently as they provide long-term income. They are also called “long-lived assets” or “Property Plant & Equipment”.
Examples of Fixed Assets
Valuation of Fixed asset
fixed assets are recorded at their net book value, which is the difference between the “historical cost of the asset” and “accumulated depreciation”.
“Net book value = Historical cost of the asset – Accumulated depreciation”
Example:
Hasley Co. purchases Furniture for their company at a price of 1,00,000. The Furniture has a constant depreciation of 10,000 per year. So, after 5 years, the net book value of the computer will be recorded as
1,00,000 – (5 x 10,000) = 50,000.
Therefore, the furniture value should be shown as 50,000 on the balance sheet.
Presentation in the Balance Sheet
Both current assets and non-current assets are shown on the asset side(Right side) of the balance sheet.
Difference between Current Asset and Non-Current Asset
Current assets are the resources held for a short period of time and are mainly used for trading purposes whereas Fixed assets are assets that last for a long time and are acquired for continuous use by an entity.
The purpose to spend on fixed assets is to generate income over the long term and the purpose of the current assets is to spend on fixed assets to generate income over the long term.
At the time of the sale of fixed assets, there is a capital gain or capital loss but at the time of the sale of current assets, there is an operating gain or operating loss.
The main difference between the fixed asset and current asset is, although both are shown in the balance sheet fixed assets are depreciated every year and it is valued by (the cost of the asset – depreciation) and current asset is valued as per their current market value or cost value, whichever is lower.
See lessWhat are essential characteristics of a partnership firm?
Partnership Firm Persons who have entered into a partnership with one another to carry on a business are individually called “Partners“; collectively called a “Partnership Firm”; and the name under which their business is carried on is called the “Firm Name” In simple words, A partnership is an agreRead more
Partnership Firm
Persons who have entered into a partnership with one another to carry on a business are individually called “Partners“; collectively called a “Partnership Firm”; and the name under which their business is carried on is called the “Firm Name”
In simple words, A partnership is an agreement between two or more people who comes together to run a business on a partnership deed, which is called a Partnership firm. A Partnership Deed is a written agreement between partners who are willing to form a Partnership Firm. It is also called a Partnership Agreement.
It has no separate legal entity which cannot be separated from the members. It is merely a collective name given to the individuals composing it. This means, a partnership firm cannot hold property in its name, and neither it can sue nor be sued by others.
Contents of a Partnership Deed
A Partnership Deed shall mainly include the following contents:
Types of Partners
The following are the various types o partners
Types of Partnership Firms
There are four types of partnership which are as below.
Essential characteristics of a partnership firm
See lessWhat are direct expenses examples?
Expenses are of two types, are Direct Expenses Indirect Expenses Direct Expenses Direct expenses are those expenses are which are directly related to the manufacturing or production of the final goods. These expenses are also known as Manufacturing expenses. Manufacturing or production of gooRead more
Expenses are of two types, are
Direct Expenses
Direct expenses are those expenses are which are directly related to the manufacturing or production of the final goods. These expenses are also known as Manufacturing expenses.
Manufacturing or production of goods indicates the conversion of Raw material into finished goods. the expenses incurred in the stage of conversion are treated as Direct expenses or Manufacturing expenses.
Direct expenses are shown on the Debit side of the Trading Account.
Indirect Expenses
Indirect expenses are those expenses that are incurred to run a business day-to-day and maintenance of the company. In other words, they are not directly related to making a product or service or buying a wholesale product to resell.
Indirect expenses are classified into three types, which are
Indirect Expenses are shown on the Debit side of the Profit and Loss Account.
Presentation of Direct Expenses in Trading Account
Examples of Direct Expenses
- Gas, water, and Fuel: Gas, water, and fuel are the essentials to run a factory and are used in machinery to manufacture its final goods.
- Wages: Wages are the daily payments to the workers or Labours working in the factory premises on a daily or weekly payment basis.
- Freight and Carriage: Freight and Carriage are the expenses related to the importing of raw materials from the godown or from the outsiders to the Factory.
- Factory Rent: Rent paid for the factory area or any payment related to the place of the factory is known as factory rent.
- Factory Lighting: The expenses related to the uniform distribution of light over the working plane are obtained in the factory premises.
- Factory Insurance: The payment of insurance related to the factory will come under direct expenses.
- Manufacturing Expenses: Any other expenses related to the manufacturing process of finished goods are manufacturing expenses.
- Cargo Expenses: These are the expenses related to goods or freight being shipped or carried by the ocean, air, or land from one place to another.
- Upkeep and Maintenance: These are the expenses related to the maintenance of the factory for smooth running.
- Repairs on Machinery: The expenses related to any repair on machinery which is used in the production.
- Coal, Oil, and Grease: Coal, oil, and grease are the essentials to run machinery which results in the conversion of raw material to finished goods.
- Custom Charges: The expenses related to the payment of any Customs duty for the material imported.
- Clearing Charges: A clearing charge is a charge assessed on securities transactions by a clearing house for completing transactions using its own facilities.
- Depreciation on Machinery: Generally it is a nonmonetary expense but recorded in the trading account as a direct expense as per the accrual accounting.
- Import duty: any payment related to the importing of any machinery or any material from other countries is known as import duty.
- Octroi: this is the tax levied by a local political unit, normally the commune or municipal authority, on certain categories of goods as they enter the area.
- Shipping expenses: any expense related to the shipment charges of the raw material is known as shipping expenses.
- Motive power: Motive Power basically means any power, such as electricity or steam energy, etc, used to impart motion to any source of mechanical energy.
- Dock dues: a payment that a shipping company must pay for the use of a port.
See lessIs goodwill real or nominal?
Goodwill In Accounting Aspect, Goodwill refers to an Intangible asset that facilitates a company in making higher profits and is a result of a business’s consistent efforts over the past years which can be the business's prestige, reputation, good name, customer trust, quality service, etc. GoodwillRead more
Goodwill
In Accounting Aspect, Goodwill refers to an Intangible asset that facilitates a company in making higher profits and is a result of a business’s consistent efforts over the past years which can be the business’s prestige, reputation, good name, customer trust, quality service, etc.
Goodwill has no separate existence although the concept of goodwill comes when a company acquires another company with a willingness to pay a higher price over the fair market value of the company’s net asset in simple words the goodwill can be only realized while at the time of sale of a business.
The formula for Goodwill
Types of Goodwill
there are two types of goodwill.
1. Inherent Goodwill/Self-generated goodwill
Inherent goodwill is the internally generated goodwill that was created or generated by the business itself. it is generally generated from the good reputation of the business.
Inherent Goodwill or Self-generated goodwill is generally not shown in the books or never recognized in the books of Accounts and no journal entry for the inherent goodwill is passed.
2. Purchased Goodwill/Acquired Goodwill
At the time of acquisition of a business by another business, any amount paid over and above the net assets simply refers to the amount of Purchased Goodwill or Acquired goodwill.
A Journal entry is passed in the case of the Purchase of goodwill.
Type of Account
generally, Goodwill is considered and recorded as an Intangible asset(long-term asset) due to its physical absence like other long-term assets.
Modern rule of accounting:
as per the Modern rule of accounting, all Assets or all possessions of a business are comes under the head Asset accounts.
as Goodwill is treated as an Intangible asset it is an Asset Account.
Journal entry for purchase of goodwill as per Modern rule
Goodwill A/c Dr. – Amt
To Cash/Bank A/c – Amt
(The modern approach of accounting for the Asset account is: “Debit the increase in asset and Credit the decrease in the asset“)
The golden rule of accounting
As per the golden rule of accounting, all assets or possessions of a business other than those which are related to any person (debtor’s account) are considered Real accounts.
Such accounts don’t close by the year-end and are carried forward.
As Goodwill is an Intangible asset it is treated as a Real account as per the golden rule of accounting.
Journal entry for purchase of goodwill as per Golden rule
Goodwill A/c Dr. – Amt
To Cash/Bank A/c – Amt
(The golden rule of accounting for the Real account is: “Debit what comes in and Credit what Goes out“)
See lessSimply petty cash book is like a
The correct option is A) Cash book let's understand what is petty cash book: A petty cash book is a cash book maintained to record petty expenses. Petty expenses, mean small or minute expenses for which the payment is made in coins or a few notes or which are smaller denominations like tea or coffeeRead more
The correct option is A) Cash book
let’s understand what is petty cash book:
Generally, the petty cashbook is prepared as per the Imprest system. As per the Imprest system, the petty expenses for a period (month or week) are estimated and a fixed amount is given to the petty cashier to spend for that period.
At the end of the period, the petty cashier sends the details to the chief cashier and he is reimbursed the amount spent. In this way, the debit balance of the petty cashbook always remains the same.
The petty cash book has two columns in which
Balance of Petty cash book
The balance of petty cash book is never closed and their balances are carried forward to the next accounting period which is considered one of the most significant qualities of an asset whereas Income doesn’t have any opening balance and their balances get closed at the end of every accounting year.
A petty cash book is placed under the head current asset in the balance sheet. The Closing Balance of the petty cash book is computed by deducting Total expenditure from the Total cash receipt (as received from the head cashier).
Format for petty cash book
Only small denominations are recorded in the petty cash book. It varies with the type, quantity, and need of a business. It involves cash and checks.
Conclusion
A simple petty cash book is a type of cash book because it records the small expenses which involve small transactions in the ordinary daily business.
A petty cash book is not as important as an income statement, balance sheet, or trail balance it doesn’t measure the accuracy of accounts so it is not treated as a statement.
No journal entries are made in the books of accounts while spending or purchasing using a petty cash book so, it is not treated as a journal.
See lessDifference between accumulated depreciation and provision for depreciation?
Depreciation is an accounting process of allocating the value of an asset over its estimated useful life. When a company purchases an asset, depreciation will be calculated at the end of every financial year on the asset. The company records the amount of depreciation in a separate ledger, i.e., AccRead more
Depreciation is an accounting process of allocating the value of an asset over its estimated useful life.
When a company purchases an asset, depreciation will be calculated at the end of every financial year on the asset. The company records the amount of depreciation in a separate ledger, i.e., Accumulated Depreciation. This expense will be debited instead of depreciation in the Asset ledger.
Accumulated Depreciation
Accumulated depreciation is the accumulated reduction in the cost of an asset over time.
Depreciation is the reduction in the value of an asset over a specific timeframe, whereas accumulated depreciation is the sum of total depreciation on an asset since we bought it.
we will understand this concept with a simple example.
suppose machinery depreciates as follows
Year 1 – Depreciation is 5,000
Year 2 – Depreciation is 5,000
Year 3 – Depreciation is 5,000
Accumulated Depreciation in Year 3 = 5,000 + 5,000 + 5,000
Therefore, overall 3 years of depreciation are accumulated at the last year-end.
Journal entry for accumulated depreciation
Example: Excellence Co. has purchased a new motor vehicle which costs $8,000 for their cab business. The motor vehicle is depreciated at @20% per annum. At the end of the year, Excellence Co. will record this accumulated depreciation journal entry.
Year 1
Depreciation A/c Dr. – $1600
To Accumulated depreciation A/c – $1600
Year 2
Depreciation A/c Dr. – $1600
To Accumulated Depreciation A/c – $1600
Therefore, the Accumulated depreciation for the 2nd year end is $3200.
At the time of the sale of the motor vehicle, the amount of accumulated depreciation will be reduced from the total value of the asset.
Provision for depreciation
Provision for depreciation is very similar to accumulated depreciation. Instead of reducing the amount of depreciation from the value of an asset, a separate provision A/C will be created, and the depreciation amount will be credited to the provision account, i.e., Provision for Depreciation account every year, and the asset will be shown the same value without reducing the depreciation from it.
Journal entry for provision for depreciation
Example: Yesman Co. purchased Machinery worth $40000 at the beginning of the current year for their production. The machinery will be depreciated at @10% per annum. At the end of the year, Yesman Co. will record this provision for depreciation journal entry.
Year 1
Depreciation A/c Dr. – $4000
To Provision for Depreciation A/c – $4,000
Year 2
Depreciation A/c Dr. – $4000
To Provision for Depreciation A/c – $4000
Therefore, the Provision for depreciation balance will be $8000 at the 2nd year-end.
At the time of sale of the machinery, the amount of provision for depreciation created till the date will be reduced from the asset’s value.
Conclusion
Provision for depreciation and accumulated depreciation refers to the amount of depreciation accumulated over the useful life of an asset.
The terms accumulated depreciation and provision for depreciation are different in hearing, but these are similar from the financial perspective.
See lessWhat is the journal entry for bad debts written off for Rs 2000?
Debts are of two types one is Good Debt, and another one is Bad debt. Bad Debts The amount which is not recoverable from the debtors is called Bad debt. It is an uncollectable amount from the organization's customers due to the customer's inability to pay the amount of money taken on credit. Read more
Debts are of two types one is Good Debt, and another one is Bad debt.
Bad Debts
The amount which is not recoverable from the debtors is called Bad debt. It is an uncollectable amount from the organization’s customers due to the customer’s inability to pay the amount of money taken on credit.
Example 1
Mr A borrowed $100 from Mr B for his college fee and agrees to pay in 2 months. After the time period is complete Mr A failed to repay the borrowed amount. This is a Bad Debt for Mr B.
Example 2
XYZ Co. had made a credit sale of $50,000. A debtor who has to pay $1000 has been bankrupted. XYZ co. cannot recover the amount from the Debtor, so it records the irrecoverable amount as a bad debt.
Journal Entry
In this entry, “Bad debts are written off of Rs. 2000.”
Bad debt is the amount not recoverable from debtors, which is a loss for the organization.
Modern Rule
The Modern rules of accounting for Expenses are “Debit the increase in expenses and Credit the decrease in expenses.”
Golden Rule
The Golden rules of accounting for expenses and losses are “Debit all expenses and losses, Credit all incomes and gains.”
Bad Debts A/c Dr. 2,000
To Debtor’s A/c 2000
Bad debt is treated as a loss for the organization. As per the rule, this should be debited to the profit and loss account.
Profit and Loss A/c Dr. – 2000
To Bad Debts A/c – 2000
Instead of passing two separate entries for writing off, we can combine the entries and pass one entry.
Profit and Loss A/c Dr. 2000
To Debtor’s A/c 2000
Recovery of Bad debts
Recovery of Bad debt is the amount received for a debt that was written off in the past. It was considered uncollectable.
When we write off bad debt, it is recorded as a loss, but the recovery of bad debts is treated as an income for the business.
It is treated as an income and the recovery of bad debt is shown on the credit side of the Income statement.
Journal Entry for Recovery of Bad debts
Bank/Cash A/c Dr. – Amount
To Bad Debts Recovered A/c – Amount
Rules applied in the Journal entry are as per the Golden rules of accounting,
“Cash/Bank A/C” is a real account therefore debit what comes in and credit what goes out.
“Bad Debts Recovered A/C” is a nominal account therefore debit all expenses and losses, and credit all incomes and gains.
Treatment of “Bad Debt written off of Rs.2ooo.”
In Trial Balance: No effect
In Income Statement: It is shown on the debit side as Rs.2000 (loss)
In Balance Sheet: Rs.2000 shall be deducted from the sundry debtor account.
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