In accounting, sales returns are the goods returned by the customer to the seller. This can be due to goods delivered is damaged or defective. A return can also be due to late delivery, or the wrong items being sent to the buyer. Sales return is a subsidiary book in which all the details are recordeRead more
In accounting, sales returns are the goods returned by the customer to the seller. This can be due to goods delivered is damaged or defective. A return can also be due to late delivery, or the wrong items being sent to the buyer.
Sales return is a subsidiary book in which all the details are recorded for the goods returned which were sold on credit. It is also known as return inwards.
Accounting for Sales Return
Whenever there is a sale return, the seller will debit the sales return account and credit the debtor’s account. The total amount of sales returns is deducted from the gross sales for the period giving the figure for net sales. Debtor’s account is credited because the amount receivable from debtors will reduce.
The sales return is a contra account to the sales.
Format of sales return book:
In the above format, a credit note is a statement prepared by the seller and sent to the buyer. In this statement, all the details are mentioned in respect of the goods sent by the buyer and are an indication that the buyer’s account is credited in respect of the goods received.
For example, Mr. A sold goods to Mr. B costing Rs 50,000 on 1 December. On 5 December, goods amounting to Rs 15,000 were found defective and were returned immediately to Mr. A.
The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is aRead more
The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is a contra asset account which means an account with a credit balance.
When a business first sets up a provision for doubtful debts, the full amount of the provision should be debited to bad debts expense as follows.
Bad Debts A/c
Debit
Debit the increase in expense.
To Provision for Doubtful Debts A/c
Credit
Credit the increase in liability.
In subsequent years, when provision is increased the account is credited, and when provision is decreased the account is debited. This is so because provision for doubtful debts is a contra account to debtors and has a credit balance, and is treated as a liability.
Effects of Provision for Doubtful Debts in financial statements:
Trading A/c: No effect.
Profit and Loss A/c: Debited to P&L A/c and charged as an expense.
Balance Sheet: Deducted from Debtors.
For example, ABC Ltd had debtors amounting to Rs 50,000. It creates a provision of 5% on debtors.
In the books of Rural Literacy Society Income & Expenditure A/c for the year ended 31 March 2019 Expenditure Amt Amt Income Amt Amt To General Expenses 32,000 By Subscription (W.N.1) 2,72,000 To Newspapers 18,500 By Legacy 12,500 To Electricity 30,000 By Government Grant 1,20,000 To Rent 65,000Read more
In the books of Rural Literacy Society
Income & Expenditure A/c for the year ended 31 March 2019
Expenditure
Amt
Amt
Income
Amt
Amt
To General Expenses
32,000
By Subscription (W.N.1)
2,72,000
To Newspapers
18,500
By Legacy
12,500
To Electricity
30,000
By Government Grant
1,20,000
To Rent
65,000
By Interest Received on Fixed Deposit
9,000
Less: Prepaid Rent (65,000/13)
-5,000
60,000
(1,80,000*10%*6/12)
To Salary
36,000
Add: Outstanding Salary
6,000
42,000
To Postage Charges
3,000
To Loss on Sale of Furniture (W.N.2)
13,000
To Surplus (excess of income over expenditure)
2,15,000
4,13,500
4,13,500
Balance Sheet as on 31 March 2019
Liabilities
Amt
Amt
Assets
Amt
Amt
Capital Fund (W.N.3)
3,85,500
Fixed Deposit
1,80,000
Add: Surplus
2,15,000
Advance Subscription
5,000
Books
50,000
Outstanding Salaries
6,000
Add: Purchased
70,000
1,20,000
Furniture
1,20,000
Add: Purchased
1,05,000
Less: Sold
-50,000
1,75,000
Outstanding Subscription
15,000
Prepaid Rent
5,000
Cash in Hand
30,000
Cash at Bank
82,000
Accrued Interest (W.N.4)
4,500
6,11,500
6,11,500
Working Notes:
W.N.1: Calculation of Subscription
Subscription for 2018-19
2,65,000
Add: Outstanding Subscription (31 March 2019)
15,000
Less: Outstanding Subscription (2017-18)
-8,000
Total Subscription
2,72,000
In the above calculation, for the year 2017-18 subscription amount was 12,000, and in the adjustment at the end of the year subscription was 20,000 so the difference of 8,000 is the amount of subscription that was outstanding.
Discount received is the reduction in the price of the goods and services which is received by the buyer from the seller. It is an income for the buyer and is credited to the discount received account and credited to the seller/supplier’s account. Journal entry for discount received as per modern ruRead more
Discount received is the reduction in the price of the goods and services which is received by the buyer from the seller. It is an income for the buyer and is credited to the discount received account and credited to the seller/supplier’s account.
Journal entry for discount received as per modern rules:
Creditor’s A/c
Debit
Decrease in liability
To Cash A/c
Credit
Decrease in asset
To Discount Received A/c
Credit
Increase in income
(Being goods purchased and discount received)
Discount allowed is the reduction in the price of the goods which is granted by the seller to the buyer on prompt payment of their account. It is an expense for the seller and is debited to the discount allowed account and credited to the buyer’s account.
Journal entry for discount allowed as per modern rules:
Cash A/c
Debit
Increase in asset
Discount Allowed A/c
Debit
Increase in expense
To Debtor’s A/c
Credit
Decrease in asset
(Being goods sold and discount allowed)
For example, A Ltd. offers a 10% discount to the customers who settle their debts within two weeks. Mr.B a customer purchased goods worth Rs.20,000.
According to modern rules, A Ltd will record this sale as:
Particulars
Amt
Amt
Cash A/c Dr.
8,000
Discount Allowed A/c Dr.
2,000
To Mr.B’s A/c
10,000
Mr.B will record this purchase as:
Particulars
Amt
Amt
A Ltd A/c Dr.
10,000
To Cash A/c
8,000
To Discount Received A/c
2,000
For a business, the discount received is an income, and the discount allowed is an expense. In the above example, A Ltd has granted a discount and B is the receiver of the discount. Hence, for A Ltd discount allowed is an expense and for B discount received is an income.
Bad Debt is the amount that is irrecoverable from the debtors. It is the portion of the receivables. It includes two accounts “Bad Debts A/c” and “Debtors A/c or Accounts Receivable A/c”. The amount cannot be recovered by the debtor for reasons like the debtor is no longer in the position to pay offRead more
Bad Debt is the amount that is irrecoverable from the debtors. It is the portion of the receivables. It includes two accounts “Bad Debts A/c” and “Debtors A/c or Accounts Receivable A/c”.
The amount cannot be recovered by the debtor for reasons like the debtor is no longer in the position to pay off the debt or has become insolvent.
There are two methods to write off bad debts:
Direct Method
Allowance for Doubtful Debts
1. Direct Method: In this method, the amount of bad debts is directly deducted from the total receivables and the second effect is transferred to the debit side of Profit and Loss A/c as an expense.
The journal entry for bad debts as per modern rules of accounting is as follows:
Bad Debts A/c
Debit
Increase in expenses
To Accounts Receivable A/c
Credit
Decrease in assets
(Being bad debts written off )
Journal entry for transferring bad debts to profit and loss account:
Profit and Loss A/c
Debit
To Bad Debts A/c
Credit
(Being bad debts transferred to profit and loss a/c )
For example, A Ltd had a total receivable of Rs.2,50,000 and bad debts for the period amounted to Rs.10,000.
Here, the journal entries will be:
Bad Debts A/c
Debit
10,000
To Accounts Receivable A/c
Credit
10,000
(Being bad debts written off )
Profit and Loss A/c
Debit
10,000
To Bad Debts A/c
Credit
10,000
(Being bad debts transferred to profit and loss a/c )
2. Allowance for Doubtful Debts: In this method allowance is the estimation of the debts which is doubtful to be paid. The company creates a reserve for such debts which are uncollectible.
Firstly, the company will create a reserve which will be based on the accounts receivable. The journal entry will be:
Bad Debts A/c
Debit
To Allowance for Doubtful Debts A/c
Credit
(Being allowance for doubtful debts created)
When a specific receivable is uncollectible it will be charged as an expense, and Allowance for Doubtful Debts will be “Debited” and Accounts Receivable will be “Credited”.
Allowance for Doubtful Debts A/c
Debit
To Accounts Receivable A/c
Credit
(Being bad debts written off)
For example, Mr.B sold goods worth Rs.15,000 to Mr.D. He creates an allowance of Rs.15,000 in case Mr.D fails to pay the amount. At the end of the period, Mr.D defaults and does not pay the debt.
In this case, Mr.B will first record the journal entry for allowance and then will write off Mr.D’s account.
Bad Debts A/c
15,000
To Allowance for Doubtful Debts A/c
15,000
(Being allowance of Rs.10,000 created for doubtful debts)
The journal entry for the opening stock will be: Particulars Amt Amt Trading A/c INR To Opening Stock A/c INR (Being opening stock transferred to Trading A/c) Opening stock is the value of inventory that is available with the company for sale at the beginning of the accounting period. ORead more
The journal entry for the opening stock will be:
Particulars
Amt
Amt
Trading A/c
INR
To Opening Stock A/c
INR
(Being opening stock transferred to Trading A/c)
Opening stock is the value of inventory that is available with the company for sale at the beginning of the accounting period. Opening stock may include stock of raw material, semi-finished goods, and finished goods. It is a part of the cost of sales.
Closing stock is the value of unsold inventory left with the company at the end of the year. The previous year’s closing stock is the current year’s opening stock.
Trading Account is a nominal account. According to the golden rules of accounting, the nominal account is the account where “Debit” all expenses and losses, and “Credit” all income and gains.
In the above journal entry, the opening stock account is credited because it is the balance that is carried forward from the previous year and carried forward with the aim of selling it and gaining profit from it. The trading account here is debited as opening stock is carried forward to the next year from the trading account only.
According to modern rules of accounting, “Debit entry” increases assets and expenses, and decreases liability and revenue, a “Credit entry” increases liability and revenues, and decreases assets and expenses.
Here, Trading A/c is debited because an expense is incurred while bringing stock into the business. Opening Stock A/c is credited because indirectly it is creating a source of income for the business.
The formula for calculating opening stock is as follows:
Opening Stock = Cost of Goods Sold + Closing Stock – Purchases
For example, AB Ltd. started a new accounting period for dairy products and introduced opening stock worth Rs.1,00,000 in the business.
The correct answer is 2. Revenue Expenditure. An honorarium is a voluntary payment paid to a person for the services provided. It is a type of cost incurred for the expenses of guests and volunteers. This is a payment made to the person who is not an employee of the institution. Revenue expendituresRead more
The correct answer is 2. Revenue Expenditure. An honorarium is a voluntary payment paid to a person for the services provided. It is a type of cost incurred for the expenses of guests and volunteers. This is a payment made to the person who is not an employee of the institution.
Revenue expenditures are the short-term expenses and consumed within one accounting year and are also known as operating expenses.
Payment of honorarium to the secretary is treated as revenue expenditure because benefits from the expense are derived in the same accounting period. The honorarium is a type of outside expense and any outside expense is revenue in nature. It is a daily allowance incurred to cover the hotel/stay expense.
Payment of honorarium to the secretary is shown on the Expenditure side of the Income and Expenditure Account.
Capital Expenditure is the expense incurred on acquiring an asset and honorarium cannot be a capital expenditure as benefits derived from it cannot be carried forward to the next year.
It cannot be treated as cash or credit expense although it is paid in cash or credit. In this case, it will be treated as a revenue expense while preparing financial statements.
Payment of honorarium is mainly a topic of not-for-profit organizations.
Provisional financial statements are prepared on the basis of past data i.e. for the period which is already over. For example, the bank requested for Q4 financial statement but there were still 15 days left for the quarter to get over. In this case, the business/company will prepare a provisional fRead more
Provisional financial statements are prepared on the basis of past data i.e. for the period which is already over. For example, the bank requested for Q4 financial statement but there were still 15 days left for the quarter to get over. In this case, the business/company will prepare a provisional financial statement.
Provisional financial statements can be requested by banks, investors, and large vendors while making decisions regarding business and want current financial statements which can be obtained easily.
It is prepared with the help of past actual figures on a particular date or before the end of a financial statement. The main purpose of preparing is to show the company’s financial position on a particular date. Items of the provisional financial statement are assets, liabilities, and equity/capital.
Software is not depreciated but amortized, as it is an intangible asset. As per companies act the useful life of software is 3 years. The treatment of depreciation is the same as computers. Following are the software depreciation rates as per the companies act: As of 2021 Nature of Asset Useful LifeRead more
Software is not depreciated but amortized, as it is an intangible asset. As per companies act the useful life of software is 3 years. The treatment of depreciation is the same as computers. Following are the software depreciation rates as per the companies act:
As of 2021
Nature of Asset
Useful Life
Depreciation
WDV
SLM
Servers and networks
6 years
39.30%
15.83%
End-user devices such as desktops, laptops, etc.
3 years
63.16%
31.67%
For example, XYZ Ltd purchased a new accounting software on 1 October for Rs.50,000. As per the Companies Act, the useful life of software is 3 years. Hence, the software will be amortized for 3 years and the company amortizes on the straight-line method.
Amortization amount = 50,000*31.67%
For full year = Rs.15,835
As the software was purchased on 1 October hence it will be amortized for 6 months.
For 6 months = 15,835*6/12
= Rs.7,917.50
Amortization is the same as depreciation. Hence, treatment will also be the same. The amortization amount will be transferred to the Profit & Loss A/c on the debit side as a non-cash expense.
The installation expenses for a new machinery will be debited to the "Machinery A/c". Installation expenses are the expense incurred to bring an asset to a working condition where it can be used. For example, installation charges are incurred on machinery to make it operational. Installation chargesRead more
The installation expenses for a new machinery will be debited to the “Machinery A/c“. Installation expenses are the expense incurred to bring an asset to a working condition where it can be used. For example, installation charges are incurred on machinery to make it operational.
Installation charges will be capitalized along with the cost of machinery. It is so because this expense is concerning the machinery and any expense directly related to an asset should be capitalized, as an asset will be with the business for a longer period of time.
This charge will be incurred only once as a part of bringing the machinery to its working condition, and hence it should be capitalized and should be added to the cost of the machine. The whole amount will be shown in the balance sheet on the asset side as a Fixed Asset.
This charge will not be shown in Profit and Loss A/c as it reflects all the revenue expenditure incurred in the period.
Example:
Starbucks purchased a coffee blending machine for the business purpose for $1,00,000. The installation expense incurred on it to make it operational was $20,000. How will Starbucks record this in the Balance Sheet on 31 December?
In the Balance Sheet, Starbucks will add the installation expense incurred on the machine to the cost of the machine as it is the cost incurred to make the machine operational for further business use. Hence, the cost of $20,000 will be shown along with the cost of the coffee blending machine ($1,00,000+$20,000=$1,20,000)
What is sales return book format?
In accounting, sales returns are the goods returned by the customer to the seller. This can be due to goods delivered is damaged or defective. A return can also be due to late delivery, or the wrong items being sent to the buyer. Sales return is a subsidiary book in which all the details are recordeRead more
In accounting, sales returns are the goods returned by the customer to the seller. This can be due to goods delivered is damaged or defective. A return can also be due to late delivery, or the wrong items being sent to the buyer.
Sales return is a subsidiary book in which all the details are recorded for the goods returned which were sold on credit. It is also known as return inwards.
Accounting for Sales Return
Whenever there is a sale return, the seller will debit the sales return account and credit the debtor’s account. The total amount of sales returns is deducted from the gross sales for the period giving the figure for net sales. Debtor’s account is credited because the amount receivable from debtors will reduce.
The sales return is a contra account to the sales.
Format of sales return book:
In the above format, a credit note is a statement prepared by the seller and sent to the buyer. In this statement, all the details are mentioned in respect of the goods sent by the buyer and are an indication that the buyer’s account is credited in respect of the goods received.
For example, Mr. A sold goods to Mr. B costing Rs 50,000 on 1 December. On 5 December, goods amounting to Rs 15,000 were found defective and were returned immediately to Mr. A.
Mr. A will account for this in the following way:
See lessHow to do provision for doubtful debts adjustment?
The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is aRead more
The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is a contra asset account which means an account with a credit balance.
When a business first sets up a provision for doubtful debts, the full amount of the provision should be debited to bad debts expense as follows.
In subsequent years, when provision is increased the account is credited, and when provision is decreased the account is debited. This is so because provision for doubtful debts is a contra account to debtors and has a credit balance, and is treated as a liability.
Effects of Provision for Doubtful Debts in financial statements:
For example, ABC Ltd had debtors amounting to Rs 50,000. It creates a provision of 5% on debtors.
Provision for Doubtful Debts = 50,000*5%
= 2,500
Journal entry for provision will be:
Effect on financial statements will be:
See lessFrom the following receipts and payments account and additional information given below prepare income and expenditure account and balance sheet of rural literacy society as on 31st March 2019?
In the books of Rural Literacy Society Income & Expenditure A/c for the year ended 31 March 2019 Expenditure Amt Amt Income Amt Amt To General Expenses 32,000 By Subscription (W.N.1) 2,72,000 To Newspapers 18,500 By Legacy 12,500 To Electricity 30,000 By Government Grant 1,20,000 To Rent 65,000Read more
In the books of Rural Literacy Society
Income & Expenditure A/c for the year ended 31 March 2019
Balance Sheet as on 31 March 2019
Working Notes:
W.N.1: Calculation of Subscription
In the above calculation, for the year 2017-18 subscription amount was 12,000, and in the adjustment at the end of the year subscription was 20,000 so the difference of 8,000 is the amount of subscription that was outstanding.
W.N.2: Calculation of loss on sale of furniture
W.N.3: Calculation of Capital Fund
Balance Sheet as on 31 March 2018
W.N.4: Calculation of Accrued Interest
What is the difference between discount received and discount allowed?
Discount received is the reduction in the price of the goods and services which is received by the buyer from the seller. It is an income for the buyer and is credited to the discount received account and credited to the seller/supplier’s account. Journal entry for discount received as per modern ruRead more
Discount received is the reduction in the price of the goods and services which is received by the buyer from the seller. It is an income for the buyer and is credited to the discount received account and credited to the seller/supplier’s account.
Journal entry for discount received as per modern rules:
Discount allowed is the reduction in the price of the goods which is granted by the seller to the buyer on prompt payment of their account. It is an expense for the seller and is debited to the discount allowed account and credited to the buyer’s account.
Journal entry for discount allowed as per modern rules:
For example, A Ltd. offers a 10% discount to the customers who settle their debts within two weeks. Mr.B a customer purchased goods worth Rs.20,000.
According to modern rules, A Ltd will record this sale as:
Mr.B will record this purchase as:
For a business, the discount received is an income, and the discount allowed is an expense. In the above example, A Ltd has granted a discount and B is the receiver of the discount. Hence, for A Ltd discount allowed is an expense and for B discount received is an income.
See lessWhat is the journal entry for bad debts?
Bad Debt is the amount that is irrecoverable from the debtors. It is the portion of the receivables. It includes two accounts “Bad Debts A/c” and “Debtors A/c or Accounts Receivable A/c”. The amount cannot be recovered by the debtor for reasons like the debtor is no longer in the position to pay offRead more
Bad Debt is the amount that is irrecoverable from the debtors. It is the portion of the receivables. It includes two accounts “Bad Debts A/c” and “Debtors A/c or Accounts Receivable A/c”.
The amount cannot be recovered by the debtor for reasons like the debtor is no longer in the position to pay off the debt or has become insolvent.
There are two methods to write off bad debts:
1. Direct Method: In this method, the amount of bad debts is directly deducted from the total receivables and the second effect is transferred to the debit side of Profit and Loss A/c as an expense.
The journal entry for bad debts as per modern rules of accounting is as follows:
Journal entry for transferring bad debts to profit and loss account:
For example, A Ltd had a total receivable of Rs.2,50,000 and bad debts for the period amounted to Rs.10,000.
Here, the journal entries will be:
2. Allowance for Doubtful Debts: In this method allowance is the estimation of the debts which is doubtful to be paid. The company creates a reserve for such debts which are uncollectible.
Firstly, the company will create a reserve which will be based on the accounts receivable. The journal entry will be:
When a specific receivable is uncollectible it will be charged as an expense, and Allowance for Doubtful Debts will be “Debited” and Accounts Receivable will be “Credited”.
For example, Mr.B sold goods worth Rs.15,000 to Mr.D. He creates an allowance of Rs.15,000 in case Mr.D fails to pay the amount. At the end of the period, Mr.D defaults and does not pay the debt.
In this case, Mr.B will first record the journal entry for allowance and then will write off Mr.D’s account.
What is the Journal Entry for Opening Stock?
The journal entry for the opening stock will be: Particulars Amt Amt Trading A/c INR To Opening Stock A/c INR (Being opening stock transferred to Trading A/c) Opening stock is the value of inventory that is available with the company for sale at the beginning of the accounting period. ORead more
The journal entry for the opening stock will be:
Opening stock is the value of inventory that is available with the company for sale at the beginning of the accounting period. Opening stock may include stock of raw material, semi-finished goods, and finished goods. It is a part of the cost of sales.
Closing stock is the value of unsold inventory left with the company at the end of the year. The previous year’s closing stock is the current year’s opening stock.
Trading Account is a nominal account. According to the golden rules of accounting, the nominal account is the account where “Debit” all expenses and losses, and “Credit” all income and gains.
In the above journal entry, the opening stock account is credited because it is the balance that is carried forward from the previous year and carried forward with the aim of selling it and gaining profit from it. The trading account here is debited as opening stock is carried forward to the next year from the trading account only.
According to modern rules of accounting, “Debit entry” increases assets and expenses, and decreases liability and revenue, a “Credit entry” increases liability and revenues, and decreases assets and expenses.
Here, Trading A/c is debited because an expense is incurred while bringing stock into the business. Opening Stock A/c is credited because indirectly it is creating a source of income for the business.
The formula for calculating opening stock is as follows:
Opening Stock = Cost of Goods Sold + Closing Stock – Purchases
For example, AB Ltd. started a new accounting period for dairy products and introduced opening stock worth Rs.1,00,000 in the business.
Here, the journal entry will be,
Payment of honorarium to secretary is treated as?
The correct answer is 2. Revenue Expenditure. An honorarium is a voluntary payment paid to a person for the services provided. It is a type of cost incurred for the expenses of guests and volunteers. This is a payment made to the person who is not an employee of the institution. Revenue expendituresRead more
The correct answer is 2. Revenue Expenditure. An honorarium is a voluntary payment paid to a person for the services provided. It is a type of cost incurred for the expenses of guests and volunteers. This is a payment made to the person who is not an employee of the institution.
Revenue expenditures are the short-term expenses and consumed within one accounting year and are also known as operating expenses.
Payment of honorarium to the secretary is treated as revenue expenditure because benefits from the expense are derived in the same accounting period. The honorarium is a type of outside expense and any outside expense is revenue in nature. It is a daily allowance incurred to cover the hotel/stay expense.
Payment of honorarium to the secretary is shown on the Expenditure side of the Income and Expenditure Account.
Capital Expenditure is the expense incurred on acquiring an asset and honorarium cannot be a capital expenditure as benefits derived from it cannot be carried forward to the next year.
It cannot be treated as cash or credit expense although it is paid in cash or credit. In this case, it will be treated as a revenue expense while preparing financial statements.
Payment of honorarium is mainly a topic of not-for-profit organizations.
See lessExplain provisional financial statements?
Provisional financial statements are prepared on the basis of past data i.e. for the period which is already over. For example, the bank requested for Q4 financial statement but there were still 15 days left for the quarter to get over. In this case, the business/company will prepare a provisional fRead more
Provisional financial statements are prepared on the basis of past data i.e. for the period which is already over. For example, the bank requested for Q4 financial statement but there were still 15 days left for the quarter to get over. In this case, the business/company will prepare a provisional financial statement.
Provisional financial statements can be requested by banks, investors, and large vendors while making decisions regarding business and want current financial statements which can be obtained easily.
It is prepared with the help of past actual figures on a particular date or before the end of a financial statement. The main purpose of preparing is to show the company’s financial position on a particular date. Items of the provisional financial statement are assets, liabilities, and equity/capital.
See lessDepreciation on software as per companies act?
Software is not depreciated but amortized, as it is an intangible asset. As per companies act the useful life of software is 3 years. The treatment of depreciation is the same as computers. Following are the software depreciation rates as per the companies act: As of 2021 Nature of Asset Useful LifeRead more
Software is not depreciated but amortized, as it is an intangible asset. As per companies act the useful life of software is 3 years. The treatment of depreciation is the same as computers. Following are the software depreciation rates as per the companies act:
As of 2021
For example, XYZ Ltd purchased a new accounting software on 1 October for Rs.50,000. As per the Companies Act, the useful life of software is 3 years. Hence, the software will be amortized for 3 years and the company amortizes on the straight-line method.
Amortization amount = 50,000*31.67%
For full year = Rs.15,835
As the software was purchased on 1 October hence it will be amortized for 6 months.
For 6 months = 15,835*6/12
= Rs.7,917.50
Amortization is the same as depreciation. Hence, treatment will also be the same. The amortization amount will be transferred to the Profit & Loss A/c on the debit side as a non-cash expense.
See lessExpenses on installation of new machinery?
The installation expenses for a new machinery will be debited to the "Machinery A/c". Installation expenses are the expense incurred to bring an asset to a working condition where it can be used. For example, installation charges are incurred on machinery to make it operational. Installation chargesRead more
The installation expenses for a new machinery will be debited to the “Machinery A/c“. Installation expenses are the expense incurred to bring an asset to a working condition where it can be used. For example, installation charges are incurred on machinery to make it operational.
Installation charges will be capitalized along with the cost of machinery. It is so because this expense is concerning the machinery and any expense directly related to an asset should be capitalized, as an asset will be with the business for a longer period of time.
This charge will be incurred only once as a part of bringing the machinery to its working condition, and hence it should be capitalized and should be added to the cost of the machine. The whole amount will be shown in the balance sheet on the asset side as a Fixed Asset.
This charge will not be shown in Profit and Loss A/c as it reflects all the revenue expenditure incurred in the period.
Example:
Starbucks purchased a coffee blending machine for the business purpose for $1,00,000. The installation expense incurred on it to make it operational was $20,000. How will Starbucks record this in the Balance Sheet on 31 December?
In the Balance Sheet, Starbucks will add the installation expense incurred on the machine to the cost of the machine as it is the cost incurred to make the machine operational for further business use. Hence, the cost of $20,000 will be shown along with the cost of the coffee blending machine ($1,00,000+$20,000=$1,20,000)
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