Realisation account A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more
Realisation account
A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.
All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.
If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.
The debit side of the realisation account
All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.
Assets: All the assets including Land and building, Plant and machinery, Furniture, Stock, sundry debtors, and investments are transferred to the debit side of the realisation account. The debit balance of profit and loss balance is not transferred.
Accounting entry for this is as follows:
Realisation A/c Dr…..
To Assets A/c …..
(All the assets transferred to the realisation account)
Cash and bank A/c: Payment for the liabilities including sundry creditors, outstanding expenses, bills payable, loans and advances, bank overdrafts and cash credit is transferred to the debit side of the realisation account.
Accounting entry for this is as follows:
Realisation A/c Dr…..
To Cash A/c …..
(Payment made for liabilities)
Profit on realisation: If the credit side of the realisation account exceeds the debit side, it results in a profit then the capital account is credited.
Accounting entry for this is as follows:
Realisation A/c Dr…..
To Capital A/c …..
(Being profit transferred to the capital account)
Credit side of realisation account:
All the liabilities and provisions are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred. Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.
Realisation account A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more
Realisation account
A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.
All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.
If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.
Credit side of realisation account
Liabilities: All the liabilities including sundry creditors, outstanding expenses, bills payable, loans and advances, bank overdrafts and cash credit are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred.
Accounting entry for this is as follows:
Liabilities A/c Dr…..
To Realisation A/c …..
(All the liabilities transferred to realisation account)
Provisions: All the provisions including provision for doubtful debts and provision for taxation are transferred to the credit side of the realisation account.
Accounting entry for this is as follows:
Provision A/c Dr…..
To Realisation A/c …..
(All the provisions transferred to the realisation account)
Cash and bank A/c: Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.
Accounting entry for this is as follows:
Bank A/c Dr…..
To Realisation A/c …..
(Asset sold for cash)
Loss on realisation: If the debit side of the realisation account exceeds the credit side, it results in loss then the capital account is debited.
Accounting entry for this is as follows:
Capital A/c Dr…..
To Realisation A/c …..
(Being loss transferred to the capital account)
The debit side of the realisation account
All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.
When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.
The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.
Accounting entry for loss transferred is as follows :
Capital A/c …Dr.
To Profit & Loss A/c
(being net loss transferred to capital account)
Example
A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.
Extract of a Profit and loss a/c showing net loss is as under:
Profit and loss A/c for the year ended …..
Particulars
Amount (Dr.)
Particulars
Amount (Cr.)
To gross loss b/d
xxx
By gross profit b/d
xxx
To salaries
xxx
By bank interest
xxx
To office rent
xxx
By commission received
xxx
To printing and stationery
xxx
By rent received
xxx
To insurance
xxx
By dividend
xxx
To audit fees
xxx
By profit on sale of asset
xxx
To electricity chares
xxx
By Net Loss
xxx
To depreciation
xxx
To bad debts
xxx
To bank charges
xxx
To miscellaneous expenditure
xxx
To interest on loans
xxx
Total
xxx
The debit balance for a non-corporate entity is shown as a reduction from the capital account
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on…
Liabilities
Amount
Equity and liabilities
Capital
Less: Profit & Loss A/c
While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on..
Liabilities
Amount
Equity and liabilities
Reserves And Surplus
Less: Profit & Loss A/c
Conclusion: Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.
The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.
Accruals Accrual means accounting for liability or revenue that is certain and has become due but is yet to be paid or received. Examples: When a product is sold or services are provided but payment has not been received. Interest on loans or advances. Insurance premium. Prepaid expenses. ProRead more
Accruals
Accrual means accounting for liability or revenue that is certain and has become due but is yet to be paid or received.
Examples:
When a product is sold or services are provided but payment has not been received.
Interest on loans or advances.
Insurance premium.
Prepaid expenses.
Provisions
Provision is accounting for liability or a loss that is uncertain but can arise in future. The exact amount is not known or is uncertain. A provision is an amount set aside for a probable future expense dependent on the happening or non-happening of an event.
Examples:
Provision for bad and doubtful debts.
Provision for depreciation.
Provision for non-performing assets.
Difference between Accrual expenses and provisions :
Title
Accrual
Provision
Definition
Recognition of expenses and revenue incurred but not yet paid or received.
Expenses which are yet to be incurred.
Amount
The amount is certain and known.
The amount is probable and not known.
Accounting principle
Matching concept.
Prudence concept.
Estimation and accuracy
The amount is not based on an estimation that can be quantified accurately.
The amount is based on estimation and cannot be quantified accurately.
Example
Prepaid expenses, insurance premiums etc
Provision for bad and doubtful debts, provision for depreciation etc
Accrual expenses are the expenses incurred but have not been paid yet. These are recognized in the accounting year in which they become due not in the accounting year in which they are paid. Accruals can be for both revenue and expenses.
For example: A business has to pay salaries for the month of April but salaries will be actually paid in the next month. So, the business will recognize the expenses in the month of April i.e. when it is actually incurred rather than in the month in which it is actually paid.
The accounting entry in the books will be:
Salary a/c ….1,000 [Dr]
To Accrued expenses a/c 1,000[Cr]
(Being entry made for salary accrued)
Accrued expenses ….1,000 [Dr]
To Bank a/c 1,000[Cr]
(Being entry accounted for payment made)
On the other hand, provisions refer to amounts set aside by a business for probable future liabilities or losses. Provisions are recognized in the financial statements when the company become aware of the potential future obligation and the amount is based on an estimate.
For example: Reliance Ltd. has an outstanding debtor – Amazon Ltd. in the books of account. The business premises of Amazon have caught a serious fire resulting in huge losses and Reliance Ltd is of the view that Amazon may not be able to repay the amount. A provision can be made in the books of Reliance Ltd. for the probable loss.
The accounting entry in the books will be:
P&L a/c [Dr]
To Provision for doubtful debts a/c [Cr]
(Being provision for doubtful debts against outstanding dues of M/s Reliance created in the books).
The main difference between accruals and provisions is the level of certainty. Accruals are the expenses which will occur and the amount of that is also known while provisions are dependent on the happening or non-happening of certain events in future and the amount is also not certain.
Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence. In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are theRead more
Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence.
In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are the expenses incurred before the incorporation of a business. The word ‘fictitious’ means fake, these are not actually the assets of a company even though they are represented in the assets of the balance sheet.
Since the benefit of a fictitious asset is received over a period of time, the whole amount is not charged to the profit and loss account. The amount is amortized over several years. These expenses are non-recurring in nature. These expenses are shown as assets under the head miscellaneous expenditure. Also known as deferred revenue expenditure.
For example: A company incurred $50,000 as promotion costs before the formation of the business. This promotion cost will be deferred over 5 years. In the first year, $10,000 will be charged to the profit and loss account and the remaining $40,000 will be shown as an asset under the heading miscellaneous expenditure. Subsequently, $10000 will be charged to profit and loss for the next 4 years. The amount of $50,000 will be deferred over a span of 5 years.
Some other examples of fictitious assets :
Promotional expenses: Expenses incurred for the promotion of business before the formation of the company such as advertising expenditures are amortized over many years.
Loss on the issue of shares or debentures: When a company issues shares or debentures at a discount, the discount is classified as a fictitious asset and is not treated as an expense or loss. It is amortized over several years.
Incorporation costs: Costs incurred during the formation of a business are incorporation costs. These include registration costs, licensing fees, legal fees and other costs incurred in setting up the business. These are fictitious assets and are amortized over several years.
Loss on Sale of Machinery: When a loss is incurred on the sale of machinery or equipment, that loss is also treated as a fictitious asset and is amortized over several years.
Goodwill
Goodwill is not a fictitious asset because goodwill has a realizable value and can be sold in the market. Goodwill is an intangible asset which does not have a physical existence but can be traded for monetary value. Goodwill has an indefinite life and is sold when the business is sold. Goodwill can be self-generated or purchased. Goodwill is shown as an intangible asset under the heading fixed asset in the financial statements.
Patents
Patents are intangible assets which do not have a physical existence but have realizable value and can be sold in the market. So, patents do not come under the category of fictitious assets. Patents are basically intellectual property. The purchase price of the patent is the initial purchase cost which is amortized over the useful life of the asset. Patents are shown as intangible assets under the heading fixed asset in the balance sheet of the company.
Claim receivable
Claim receivable is an asset if the claim has been authorized by the insurance company. Claim receivable has a monetary value, so does not come under the category of a fictitious asset. If the claim is not yet authorized by an insurance company, it will be shown as a footnote in the financial statements. Authorized claim receivable is shown as a current asset in the financial statement.
Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more
Debit Balance
A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.
Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.
Credit Balance
A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.
The credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.
Credit Balance in the Passbook
A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. “Credit balance in the passbook is also called bank balance”.
The bank balance is the amount available for withdrawal. A bank balance is an asset to the individual or an enterprise which can be used for the purchase of another asset or payment of liability or expenses.
All the transactions either debit or credit are recorded in the passbook. When the total amount of all credit entries in a passbook is more than the total of debit entries, it results in a credit balance. It means that the bank owes to an individual or enterprise.
The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s credit balance is a positive or favourable balance while the passbook’s debit balance is a negative balance or unfavourable balance.
For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $30,000. So here, the passbook will show a bank balance of $20,000 i.e. the credit balance of the passbook. It signifies the positive cash flow of the individual and that the bank owes $20,000 to the individual.
Debit balance in Pass Book
When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. Debit balance in the passbook is also called “Overdraft”. It means that an individual or enterprise owes to the bank.
Reconciliation
It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.
Debit Balance Reconciliation
The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.
Credit Balance Reconciliation
The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.
Conclusion
The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A credit balance signifies more deposits than withdrawals resulting in a positive bank balance.
Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more
Debit Balance
A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.
Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.
Credit Balance
A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.
Credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.
Debit Balance in the Passbook
A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. Debit balance in the passbook is also called “Overdraft”.
All the transactions either debit or credit are recorded in the passbook. When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. It means that an individual or enterprise owes to the bank.
The overdraft facility given by the bank has a limit i.e. only a certain amount can be withdrawn in excess of the amount deposited and if one avails overdraft facility, interest is also charged by the bank.
The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s debit balance is a negative balance or unfavourable balance while the passbook’s credit balance is a positive or favourable balance.
For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $60,000. So here, the passbook will show an overdraft of $10,000 i.e. the debit balance of the passbook. It signifies negative cash flow of the individual and that individual owes $10,000 to the bank.
Credit balance in Pass Book
On the other hand, when the total amount of all the debit entries in a passbook is less than the total amount of credit entries, it results in a credit balance. It means the amount deposited by a customer is more than the amount withdrawn indicating the positive cashflow in the account.
Reconciliation
It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.
Debit Balance Reconciliation
The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.
Credit Balance Reconciliation
The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.
Conclusion
The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A debit balance signifies more withdrawals than receipts resulting in an overdraft.
What comes in debit side of Realisation account?
Realisation account A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more
Realisation account
A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.
All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.
If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.
The debit side of the realisation account
All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.
Realisation A/c Dr…..
To Assets A/c …..
(All the assets transferred to the realisation account)
Realisation A/c Dr…..
To Cash A/c …..
(Payment made for liabilities)
Realisation A/c Dr…..
To Capital A/c …..
(Being profit transferred to the capital account)
Credit side of realisation account:
All the liabilities and provisions are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred. Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.
Format for realisation Account is as under:
What is recorded on the credit side of a Realisation account?
Realisation account A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more
Realisation account
A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.
All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.
If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.
Credit side of realisation account
Liabilities A/c Dr…..
To Realisation A/c …..
(All the liabilities transferred to realisation account)
Provision A/c Dr…..
To Realisation A/c …..
(All the provisions transferred to the realisation account)
Bank A/c Dr…..
To Realisation A/c …..
(Asset sold for cash)
Capital A/c Dr…..
To Realisation A/c …..
(Being loss transferred to the capital account)
The debit side of the realisation account
All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.
Format for realisation Account is as under:
See lessDebit balance of profit and loss account should be transferred to?
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.
When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.
The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.
Accounting entry for loss transferred is as follows :
Capital A/c …Dr.
To Profit & Loss A/c
(being net loss transferred to capital account)
Example
A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.
Extract of a Profit and loss a/c showing net loss is as under:
Profit and loss A/c for the year ended …..
The debit balance for a non-corporate entity is shown as a reduction from the capital account
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on…
Less: Profit & Loss A/c
While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on..
Less: Profit & Loss A/c
Conclusion: Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.
The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.
See lessIs accrual the same as provision?
Accruals Accrual means accounting for liability or revenue that is certain and has become due but is yet to be paid or received. Examples: When a product is sold or services are provided but payment has not been received. Interest on loans or advances. Insurance premium. Prepaid expenses. ProRead more
Accruals
Accrual means accounting for liability or revenue that is certain and has become due but is yet to be paid or received.
Examples:
Provisions
Provision is accounting for liability or a loss that is uncertain but can arise in future. The exact amount is not known or is uncertain. A provision is an amount set aside for a probable future expense dependent on the happening or non-happening of an event.
Examples:
Difference between Accrual expenses and provisions :
For example: A business has to pay salaries for the month of April but salaries will be actually paid in the next month. So, the business will recognize the expenses in the month of April i.e. when it is actually incurred rather than in the month in which it is actually paid.
The accounting entry in the books will be:
Salary a/c ….1,000 [Dr]
To Accrued expenses a/c 1,000[Cr]
(Being entry made for salary accrued)
Accrued expenses ….1,000 [Dr]
To Bank a/c 1,000[Cr]
(Being entry accounted for payment made)
For example: Reliance Ltd. has an outstanding debtor – Amazon Ltd. in the books of account. The business premises of Amazon have caught a serious fire resulting in huge losses and Reliance Ltd is of the view that Amazon may not be able to repay the amount. A provision can be made in the books of Reliance Ltd. for the probable loss.
P&L a/c [Dr]
To Provision for doubtful debts a/c [Cr]
(Being provision for doubtful debts against outstanding dues of M/s Reliance created in the books).
The main difference between accruals and provisions is the level of certainty. Accruals are the expenses which will occur and the amount of that is also known while provisions are dependent on the happening or non-happening of certain events in future and the amount is also not certain.
See lessWhich of these is a fictitious Asset?
Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence. In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are theRead more
Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence.
In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are the expenses incurred before the incorporation of a business. The word ‘fictitious’ means fake, these are not actually the assets of a company even though they are represented in the assets of the balance sheet.
Since the benefit of a fictitious asset is received over a period of time, the whole amount is not charged to the profit and loss account. The amount is amortized over several years. These expenses are non-recurring in nature. These expenses are shown as assets under the head miscellaneous expenditure. Also known as deferred revenue expenditure.
For example: A company incurred $50,000 as promotion costs before the formation of the business. This promotion cost will be deferred over 5 years. In the first year, $10,000 will be charged to the profit and loss account and the remaining $40,000 will be shown as an asset under the heading miscellaneous expenditure. Subsequently, $10000 will be charged to profit and loss for the next 4 years. The amount of $50,000 will be deferred over a span of 5 years.
Some other examples of fictitious assets :
Goodwill
Goodwill is not a fictitious asset because goodwill has a realizable value and can be sold in the market. Goodwill is an intangible asset which does not have a physical existence but can be traded for monetary value. Goodwill has an indefinite life and is sold when the business is sold. Goodwill can be self-generated or purchased. Goodwill is shown as an intangible asset under the heading fixed asset in the financial statements.
Patents
Patents are intangible assets which do not have a physical existence but have realizable value and can be sold in the market. So, patents do not come under the category of fictitious assets. Patents are basically intellectual property. The purchase price of the patent is the initial purchase cost which is amortized over the useful life of the asset. Patents are shown as intangible assets under the heading fixed asset in the balance sheet of the company.
Claim receivable
Claim receivable is an asset if the claim has been authorized by the insurance company. Claim receivable has a monetary value, so does not come under the category of a fictitious asset. If the claim is not yet authorized by an insurance company, it will be shown as a footnote in the financial statements. Authorized claim receivable is shown as a current asset in the financial statement.
See lessWhat does credit balance in passbook represent?
Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more
Debit Balance
A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.
Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.
Credit Balance
A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.
The credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.
Credit Balance in the Passbook
A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. “Credit balance in the passbook is also called bank balance”.
The bank balance is the amount available for withdrawal. A bank balance is an asset to the individual or an enterprise which can be used for the purchase of another asset or payment of liability or expenses.
All the transactions either debit or credit are recorded in the passbook. When the total amount of all credit entries in a passbook is more than the total of debit entries, it results in a credit balance. It means that the bank owes to an individual or enterprise.
The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s credit balance is a positive or favourable balance while the passbook’s debit balance is a negative balance or unfavourable balance.
For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $30,000. So here, the passbook will show a bank balance of $20,000 i.e. the credit balance of the passbook. It signifies the positive cash flow of the individual and that the bank owes $20,000 to the individual.
Debit balance in Pass Book
When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. Debit balance in the passbook is also called “Overdraft”. It means that an individual or enterprise owes to the bank.
Reconciliation
It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.
Debit Balance Reconciliation
The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.
Credit Balance Reconciliation
The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.
Conclusion
The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A credit balance signifies more deposits than withdrawals resulting in a positive bank balance.
See lessWhat does debit balance in passbook represent?
Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more
Debit Balance
A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.
Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.
Credit Balance
A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.
Credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.
Debit Balance in the Passbook
A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. Debit balance in the passbook is also called “Overdraft”.
All the transactions either debit or credit are recorded in the passbook. When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. It means that an individual or enterprise owes to the bank.
The overdraft facility given by the bank has a limit i.e. only a certain amount can be withdrawn in excess of the amount deposited and if one avails overdraft facility, interest is also charged by the bank.
The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s debit balance is a negative balance or unfavourable balance while the passbook’s credit balance is a positive or favourable balance.
For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $60,000. So here, the passbook will show an overdraft of $10,000 i.e. the debit balance of the passbook. It signifies negative cash flow of the individual and that individual owes $10,000 to the bank.
Credit balance in Pass Book
On the other hand, when the total amount of all the debit entries in a passbook is less than the total amount of credit entries, it results in a credit balance. It means the amount deposited by a customer is more than the amount withdrawn indicating the positive cashflow in the account.
Reconciliation
It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.
Debit Balance Reconciliation
The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.
Credit Balance Reconciliation
The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.
Conclusion
The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A debit balance signifies more withdrawals than receipts resulting in an overdraft.
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