Definition A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions. Or in other words, we can say a group of accounts with different characteristics. It is also called the Principal Book of accounts. For example:- salary account, aRead more
Definition
A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions.
Or in other words, we can say a group of accounts with different characteristics.
It is also called the Principal Book of accounts.
For example:– salary account, and debtor account.
Sub- ledger it is defined as a group of accounts with common characteristics. And is a part of ledger accounts.
For example:- customer account, vendor account, etc.
The difference between a ledger and a sub-ledger is that ledger accounts control sub-ledger accounts whereas a sub-ledger is a part of the ledger account.
Features Of Ledger
Ledger is prepared from the journal.
Ledger is a master record of all the accounts of the business.
The Ledger account shows the current balances of all accounts.
Ledger accounts summarize the effect of transactions upon assets, liabilities, capital, incomes, and expenditures.
Features Of Sub-Ledger
Sub-ledger in accounting provides up-to-date information about the daily activities of the business.
It keeps individual track of all balances.
Help locate errors in individual accounts.
A sub-ledger is a collection of different ledgers used in an account.
Utilities of ledger
The main utilities of a ledger are summarized as follows :
• Provides complete information about a particular account: Complete information relating to a particular account is available in one place in the ledger.
• Information on income and expenses: In the ledger, a separate account is maintained for each income and expense. The amount of total income and total expenses are known from the ledger accounts.
• Preparation of trial balance: Ledger helps in preparing trial balances which ensure arithmetical accuracy of the transaction recorded in the books of account.
• Helps in preparing final accounts: After preparing the trial balance, final accounts are prepared to know the profitability and financial position of the business.
Utilities of sub-ledger
The utilities of the sub-ledger are as follows :
• Track customer information: If a client has an outstanding credit debt or needs money refunded, a company can use a sub-ledger to verify the information quickly.
• Protect financial information: A sub-ledger allows a financial supervisor to isolate certain records so that employees can view only parts of the company’s financial information. This added level of security is important for large corporations.
• Create separate databases: Large companies usually process large amounts of financial data that may be too big for one database. Software programs organize this data into isolated files to calculate financial information in the general ledger of a business.
Conclusion
So here I conclude that a ledger is compulsory in the recording process whereas a sub-ledger is optional.
The ledger is used for preparing trial balance but the sub-ledger is not used for the same.
Sub ledger is controlled by the ledger.
The sub-ledger supports the transaction of each specific account indicated on the ledger.
Definition Journal Entry is an entry made in the journal is called journal entry. And the process of recording a transaction in a journal is called journalizing. Broadly journal entries are of two types : 1. Simple entry 2. Compound entry Otherwise, they are categorized into seven types which are asRead more
Definition
Journal Entry is an entry made in the journal is called journal entry. And the process of recording a transaction in a journal is called journalizing.
Broadly journal entries are of two types :
1. Simple entry
2. Compound entry
Otherwise, they are categorized into seven types which are as follows :
1. Opening entries
2. Closing entries
3. Rectification entries
4. Transfer entries
5. Adjusting entries
6. Entries on dishonor of bills
7. Miscellaneous entries
Explanation
Now let me explain to you the above types of entries mentioned which are as follows ;
Simple entry
• Is a journal entry in which one account is debited and another account is credited with an equal amount.
• For example, the purchase of goods of Rs 5000 cash. It will affect two accounts,i.e., purchase A/C and cash A/C with the amount of Rs 5000.
Compound entry
• Is a journal entry in which one or more accounts are debited and/or one or more accounts credited or vice versa. • For example the sale of goods to Sati for Rs 5000, Rs 2000 is received in cash, and the balance is to be received later.
• This transaction of the sale has an effect on three accounts i.e cash or bank A/C, Sati A/C, and sales A/C.
Opening entries
• Are defined as when books are started for the new year, the opening balance of assets and liabilities are journalized. For example bills payable, short-term loans, etc.
Closing entries
• At the end of the year, the profit and loss account has to be prepared. For this purpose, the nominal accounts are transferred to this account. This is done through journal entries called closing entries.
Rectification entries
• If an error has been committed, it is rectification through a journal entry.
Transfer entries
• If some amount is to be transferred from one account to another, the transfer will be made through a journal entry.
Adjusting entries
• At the end of the year, the number of expenses or income may have to be adjusted for amounts received in advance or for amounts not yet settled in cash.
• Such an adjustment is also made through journal entries. Usually, the entries pertain to the following :
Outstanding expenses,i.e., expenses incurred but not yet paid;
Prepared expenses,i.e., expenses paid in advance for some period in the future ;
Interest on capital is the interest proprietor’s investment in the business entity investment; and
Depreciation fall in the value of assets used on account of wear and tear. For all these, journal entries are necessary.
Entries on dishonor of bills
• If someone who accepts a promissory note ( or bill) is not able to pay in on the due date, a journal entry will be necessary to record the non–payment or dishonor.
Miscellaneous entries
The following entries will also require journalizing
• Credit purchase of things other than goods dealt in or materials required for the production of goods e.g. Credit purchase of furniture or machinery will be journalized.
• An allowance to be given to the customers or a charge to be made to them after the issue of the invoice.
• Receipt of promissory notes or issue to them if separate bills books have not been maintained.
• On an amount becoming irrecoverable, say, because, of the customer becoming insolvent.
• Effects of accidents such as loss of property by fire.
• Transfer of net profit to capital account.
Here are some examples of journal entries showing the above types :
Definition Net profit is defined as the excess of revenues over expenses during a particular period. For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits. When the result of this computationRead more
Definition
Net profit is defined as the excess of revenues over expenses during a particular period.
For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
Liabilities
It means the amount owed (payable) by the business. liability towards the owners ( proprietor or partners ) of the business is termed an internal liability.
On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability. For example – taxes owned, trade payables, etc.
For example creditors, bank overdrafts, etc.
Assets
An asset is a resource owned or controlled by a company and will benefit the business in current and future periods.
In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – cash, building, etc.
Why debtors are treated as a liability?
Now let me explain to you why net profits are treated as a liability and not as an asset because of the following characteristics :
• Net Profit shows the credit balance of the Profit And Loss Account.
• It is treated directly in the balance sheet by adding or subtracting from the capital.
• Net Profit is a measure of the profitability of the company after taking into consideration all costs incurred during the accounting period.
• Net profit is the last line in an income statement and is the figure that concerns most people who use such a statement.
• Net income is reported on the income statement (profit and loss account) and forms a key indicator of a company’s performance.
Importance Of Net Profit
Now I will let you know the importance of net profit which is as follows :
Owners
Net profit allows owners to calculate the tax to be paid and how much earnings need to be distributed to the business owners.
Investors
Investors need to see net profit as they need to access the risk before investing they basically judge the revenue-generating capacity of a firm based on net profit.
Competitors
For making the comparison competitors tend to look at the net profit of the company to know how are they performing in the industry so that they can build themselves strong.
Creditors
Creditors look at the net profit for the purpose of obtaining business loans or we can say that determines a prospective debtor’s capacity to pay future debts.
Conclusion
Now after the above explanation, we can say that,
Net Profit is shown on the liability side as it belongs to shareholders so the company has to give it to shareholders so we are showing it under the liability side.
Net Profit with respect to the company is a liability as it has to pay it to shareholders.
Net Profit with respect to shareholders is an asset.
Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. When the result of this computation is negative it is referred to as gross loss Formula : ToRead more
Definition
Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.
When the result of this computation is negative it is referred to as gross loss
Formula :
Total Revenues – Cost Of Goods Sold
Net profit is defined as the excess of revenues over expenses during a particular period.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
The basic difference between gross profit and net profit is that gross profit estimates the profitability of a company whereas net profit is to show the performance of the company.
Key points of Gross Profit
Some of the key points of as for gross profits follows :
• Stage of calculation: Gross Profit is calculated in the first stage of the Final Account.
• Purpose of calculation: It is calculated to know the total profit earned during the particular accounting
• Type of balance: Gross Profit shows the credit balance of the Trading Account.
• Dimension: It is a narrow concept as it is a part of Net Profit.
• Treatment: It is not treated directly in the balance sheet. It is transferred to the Profit And Loss Account.
Key points of Net Profit
Some of the key points of as for gross profits follows :
• Stage of calculation: Net Profit is calculated in the second stage of the Final Account.
• Purpose of calculation: It is calculated to know the net profit earned during the particular accounting
• Type of balance: Net Profit shows the credit balance of the Profit And Loss Account.
• Dimension: It is a wider concept as it includes Gross Profit.
• Treatment: It is treated directly in the balance sheet by adding or subtracting from the capital.
Examples
Now let me explain to you by taking an example which is as follows :
In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
Then, COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.
= Rs ( 73000 + 10000+ 7000- 5000)
= Rs 85000
GROSS PROFIT = REVENUE – COST OF GOODS SOLD
= Rs ( 100000 – 85000 )
= Rs 15000
Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
Then,
Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. Gross profit and net profit are gross profit estimates of the profitability of a company. WhRead more
Definition
Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.
Gross profit and net profit are gross profit estimates of the profitability of a company.
When the result of this computation is negative it is referred to as gross loss
Formula :
Total Revenues – Cost Of Goods Sold
Net profit is defined as the excess of revenues over expenses during a particular period.
Net profit is to show the performance of the company.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
Examples
Now let me explain to you by taking an example which is as follows :
In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
Then,
COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.
= Rs ( 73000 + 10000+ 7000- 5000)
= Rs 85000
GROSS PROFIT = REVENUE – COST OF GOODS SOLD
= Rs ( 100000 – 85000 )
= Rs 15000
Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
Then,
NET PROFIT = GROSS PROFIT – INDIRECT EXPENSES + OTHER INCOMES
= Rs ( 15000 – 2000 + 1000)
= Rs 14000
Treatment
Treatment of gross profit and net profit is given as follows :
Gross profit
• Gross profit appears on the credit side of the trading account.
• Gross profit is located in the upper portion beneath revenue and cost of goods sold.
Net profit
• Net profit appears on the credit side of the profit and loss account.
• It is treated directly in the balance sheet by adding or subtracting from the capital.
Here is an extract of the trading and profit/loss account and balance sheet showing GROSS PROFIT & NET PROFIT :
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. Bad debts will be treated in the following ways : On the debit side of the profit and loss account. In the curreRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
Bad debts will be treated in the following ways :
On the debit side of the profit and loss account.
In the current assets side of the balance sheet, these are deducted from sundry debtors.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.
Now I will show you an extract of the profit and loss account and balance sheet
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or the rendering of services in the ordinary course of business.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Balance sheet
In the balance sheet either it can be shown on the asset side under head current assets by reducing from that specific assets.
For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.
Profit and loss account
Bad debts are treated as an expense and debited to the profit and loss account.
For example, as I have explained above, but before transferring to the balance sheet, bad debt will be debited to the profit and loss account as an expense.
Reasons for bad debts
There are several reasons why businesses may have bad debts some of them are as follows:-
Offered credit to customers who were unable to pay them back, or they may have been the victim of fraud.
When there is conflicts or dispute arise with respect to product size, color, quality, delivery, credit term, price, etc therefore debts becomes bad.
Debtors have poor financial management or they are not able to pay debts on time.
Debtors’ unwillingness to pay is also a reason for debts to become bad.
Or there can be more cases where debtors are unable to collect debts and debts turns out to be bad.
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement, which is called the profit and loss account.
Second, is the allowance method which means we create provisions for doubtful debtsaccounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.
Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
Provision for doubtful debts is shown in the debit side of the profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet.
Related terms
So there are a few related terms whose meanings you should know
Further bad debts :
It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.
Bad debts recovered :
It may happen that the amount written off as bad debts is recovered fully or partially.
In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
Thus amount recovered is a ‘gain’ and is credited to the profit and loss account.
Definition Bad debts is a debts owed to an enterprise which are considered to be irrecoveravle or we can say that it is owed to the business that is written off because it is irrecoverable. For example loan from bank declared as bad debt , sales made on credit and amount not received from customer eRead more
Definition
Bad debts is a debts owed to an enterprise which are considered to be irrecoveravle or we can say that it is owed to the business that is written off because it is irrecoverable.
For example loan from bank declared as bad debt , sales made on credit and amount not received from customer etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Balance sheet
In the balance sheet either it can be shown on asset side under head current assets by reducing from that specific assets.
Like for example if credit sales is made to a customer and say its not recoverable or is partially recoverable then amount is bad debt. Its being loss for the business and credited to personal account of debtors or we can say reduced from debtor those are current assets of balance sheet.
Profit and loss account
Bad debts is treated as an expense and debited to profit and loss account .
For example same as above which I have explained but before transferring to balance sheet bad debt will be debited to profit and loss account as expense .
Conclusion
Therefore I can conclude that bad debts will be treated in following ways :
In the debit side of profit and loss account.
In the current assets side of the balance sheet these are deducted from sundry debtors.
Reasons for bad debts
There are a number of reasons why businesses may have bad debts some of them are as follows :-
Offered credit to customers who were unable to pay them back, or they may have been the victim of fraud.
When there is conflicts or dispute arise with respect to products size , colour , quality , delivery , credit term , price , etc therefore debts becomes bad .
Debtors have poor financial management or they are not able to pay debts on time.
Debtors unwillingness to pay is also a reason for debts to become bad .
Or there can be more cases where debtors are unable to collect debts and debts turns out to be bad .
Accounting methods
There are a two methods for accounting bad debts which are metioned below :-
First, is the direct written off method which states that bad debts will be directly treated as expense and expensed to income statement or which is called profit and loss account.
Second, is allowance method which means we create provision for doubtful debtsaccount and debtors account remains as it is since , debtor’s account and provision for doutbul debts account a two seperate accounts.
Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces current year’s profit and the amount of provision is carried forward to next year .
Next year , when debts actually become bad debts and are written off , the amount of bad debts is transferred ( debited ) to provision for doubtful debts account .
The amount of bad debts is not debited to profit and loss account since it was already debited in earlier years .
Provision for doubtful debts is shown in the debit side of profit and loss account as well as shown as deduction from sundry debtors in the assets side of balance sheet.
Related terms
So there are few related terms whose meaning you should know
Further bad debts :
It means the amount of sundry debtors in trial balance is before the deduction of bad debts . in this situation , entry for further bad debts is also passed in the books of account .
That is bad debts is debited and debtors account is credited . And the accounting treatment for them is same as bad debts which I have shown you above.
Bad debts recovered :
It may happen that the amount written off as bad debts is recovered fully or partially .
In that case , the amount is not credited to the debtors (persobal) account , but is credited to bad debts recovered account because the amount recovered had been earlier written off as loss . Thus amount recovered is a ‘gain’ and is credited to profit and loss account .
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Balance sheet
In the balance sheet either it can be shown on the asset side under head current assets by reducing from that specific assets.
For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.
Profit and loss account
Bad debts are treated as an expense and debited to the profit and loss account.
For example same as above which I have explained but before transferring to the balance sheet bad debt will be debited to the profit and loss account as an expense.
Conclusion
Therefore I can conclude that bad debts will be treated in the following ways :
On the debit side of the profit and loss account.
In the current assets side of the balance sheet, these are deducted from sundry debtors.
Reasons for bad debts
There are several reasons why businesses may have bad debts some of them are as follows:-
Offered credit to customers who were unable to pay them back, or they may have been the victim of fraud.
When there is conflicts or dispute arise with respect to product size, color, quality, delivery, credit term, price, etc therefore debts becomes bad.
Debtors have poor financial management or they are not able to pay debts on time.
Debtors’ unwillingness to pay is also a reason for debts to become bad.
Or there can be more cases where debtors are unable to collect debts and debts turns out to be bad.
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement or which is called the profit and loss account.
Second, is the allowance method which means we create provisions for doubtful debtsaccounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.
Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
Provision for doubtful debts is shown in the debit side of profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet.
Related terms
So there are a few related terms whose meanings you should know
Further bad debts :
It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.
Bad debts recovered :
It may happen that the amount written off as bad debts are recovered fully or partially.
In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
Thus amount recovered is a ‘gain’ and is credited to the profit and loss account.
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Balance sheet
In the balance sheet either it can be shown on the asset side under head current assets by reducing from that specific assets.
For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.
Profit and loss account
Bad debts are treated as an expense and debited to the profit and loss account.
For example same as above which I have explained but before transferring to the balance sheet bad debt will be debited to the profit and loss account as an expense.
Conclusion
Therefore I can conclude that bad debts will be treated in the following ways :
On the debit side of the profit and loss account.
In the current assets side of the balance sheet, these are deducted from sundry debtors.
Reasons for bad debts
There are several reasons why businesses may have bad debts some of them are as follows:-
Offered credit to customers who were unable to pay them back, or they may have been the victim of fraud.
When there is conflicts or dispute arise with respect to product size, color, quality, delivery, credit term, price, etc therefore debts becomes bad.
Debtors have poor financial management or they are not able to pay debts on time.
Debtors’ unwillingness to pay is also a reason for debts to become bad.
Or there can be more cases where debtors are unable to collect debts and debts turns out to be bad.
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement, which is called the profit and loss account.
Second, is the allowance method which means we create provisions for doubtful debtsaccounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.
Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
Provision for doubtful debts is shown in the debit side of the profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet.
Related terms
So there are a few related terms whose meanings you should know
Further bad debts :
It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.
Bad debts recovered :
It may happen that the amount written off as bad debts are recovered fully or partially.
In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
Thus amount recovered is a ‘gain’ and is credited to the profit and loss account.
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Balance sheet
In the balance sheet either it can be shown on the asset side under head current assets by reducing from that specific assets.
For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.
Profit and loss account
Bad debts are treated as an expense and debited to the profit and loss account.
For example same as above which I have explained but before transferring to the balance sheet bad debt will be debited to the profit and loss account as an expense.
Conclusion
Therefore I can conclude that bad debts will be treated in the following ways :
On the debit side of the profit and loss account.
In the current assets side of the balance sheet, these are deducted from sundry debtors.
Reasons for bad debts
There are several reasons why businesses may have bad debts some of them are as follows:-
Offered credit to customers who were unable to pay them back, or they may have been the victim of fraud.
When there is conflicts or dispute arise with respect to product size, color, quality, delivery, credit term, price, etc therefore debts becomes bad.
Debtors have poor financial management or they are not able to pay debts on time.
Debtors’ unwillingness to pay is also a reason for debts to become bad.
Or there can be more cases where debtors are unable to collect debts and debts turns out to be bad.
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement or which is called the profit and loss account.
Second, is the allowance method which means we create provisions for doubtful debtsaccounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.
Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
Provision for doubtful debts is shown in the debit side of profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet.
Related terms
So there are a few related terms whose meanings you should know
Further bad debts :
It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.
Bad debts recovered :
It may happen that the amount written off as bad debts are recovered fully or partially.
In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
Thus amount recovered is a ‘gain’ and is credited to the profit and loss account.
What is the difference between ledger and subledger?
Definition A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions. Or in other words, we can say a group of accounts with different characteristics. It is also called the Principal Book of accounts. For example:- salary account, aRead more
Definition
A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions.
Or in other words, we can say a group of accounts with different characteristics.
It is also called the Principal Book of accounts.
For example:– salary account, and debtor account.
Sub- ledger it is defined as a group of accounts with common characteristics. And is a part of ledger accounts.
For example:- customer account, vendor account, etc.
The difference between a ledger and a sub-ledger is that ledger accounts control sub-ledger accounts whereas a sub-ledger is a part of the ledger account.
Features Of Ledger
Features Of Sub-Ledger
Utilities of ledger
The main utilities of a ledger are summarized as follows :
• Provides complete information about a particular account: Complete information relating to a particular account is available in one place in the ledger.
• Information on income and expenses: In the ledger, a separate account is maintained for each income and expense. The amount of total income and total expenses are known from the ledger accounts.
• Preparation of trial balance: Ledger helps in preparing trial balances which ensure arithmetical accuracy of the transaction recorded in the books of account.
• Helps in preparing final accounts: After preparing the trial balance, final accounts are prepared to know the profitability and financial position of the business.
Utilities of sub-ledger
The utilities of the sub-ledger are as follows :
• Track customer information: If a client has an outstanding credit debt or needs money refunded, a company can use a sub-ledger to verify the information quickly.
• Protect financial information: A sub-ledger allows a financial supervisor to isolate certain records so that employees can view only parts of the company’s financial information. This added level of security is important for large corporations.
• Create separate databases: Large companies usually process large amounts of financial data that may be too big for one database. Software programs organize this data into isolated files to calculate financial information in the general ledger of a business.
Conclusion
So here I conclude that a ledger is compulsory in the recording process whereas a sub-ledger is optional.
The ledger is used for preparing trial balance but the sub-ledger is not used for the same.
Sub ledger is controlled by the ledger.
The sub-ledger supports the transaction of each specific account indicated on the ledger.
See lessWhat are 5 types of journal entries?
Definition Journal Entry is an entry made in the journal is called journal entry. And the process of recording a transaction in a journal is called journalizing. Broadly journal entries are of two types : 1. Simple entry 2. Compound entry Otherwise, they are categorized into seven types which are asRead more
Definition
Journal Entry is an entry made in the journal is called journal entry. And the process of recording a transaction in a journal is called journalizing.
Broadly journal entries are of two types :
1. Simple entry
2. Compound entry
Otherwise, they are categorized into seven types which are as follows :
1. Opening entries
2. Closing entries
3. Rectification entries
4. Transfer entries
5. Adjusting entries
6. Entries on dishonor of bills
7. Miscellaneous entries
Explanation
Now let me explain to you the above types of entries mentioned which are as follows ;
Simple entry
• Is a journal entry in which one account is debited and another account is credited with an equal amount.
• For example, the purchase of goods of Rs 5000 cash. It will affect two accounts,i.e., purchase A/C and cash A/C with the amount of Rs 5000.
Compound entry
• Is a journal entry in which one or more accounts are debited and/or one or more accounts credited or vice versa.
• For example the sale of goods to Sati for Rs 5000, Rs 2000 is received in cash, and the balance is to be received later.
• This transaction of the sale has an effect on three accounts i.e cash or bank A/C, Sati A/C, and sales A/C.
Opening entries
• Are defined as when books are started for the new year, the opening balance of assets and liabilities are journalized. For example bills payable, short-term loans, etc.
Closing entries
• At the end of the year, the profit and loss account has to be prepared. For this purpose, the nominal accounts are transferred to this account. This is done through journal entries called closing entries.
Rectification entries
• If an error has been committed, it is rectification through a journal entry.
Transfer entries
• If some amount is to be transferred from one account to another, the transfer will be made through a journal entry.
Adjusting entries
• At the end of the year, the number of expenses or income may have to be adjusted for amounts received in advance or for amounts not yet settled in cash.
• Such an adjustment is also made through journal entries. Usually, the entries pertain to the following :
Outstanding expenses,i.e., expenses incurred but not yet paid;
Prepared expenses,i.e., expenses paid in advance for some period in the future ;
Interest on capital is the interest proprietor’s investment in the business entity investment; and
Depreciation fall in the value of assets used on account of wear and tear. For all these, journal entries are necessary.
Entries on dishonor of bills
• If someone who accepts a promissory note ( or bill) is not able to pay in on the due date, a journal entry will be necessary to record the non–payment or dishonor.
Miscellaneous entries
The following entries will also require journalizing
• Credit purchase of things other than goods dealt in or materials required for the production of goods e.g. Credit purchase of furniture or machinery will be journalized.
• An allowance to be given to the customers or a charge to be made to them after the issue of the invoice.
• Receipt of promissory notes or issue to them if separate bills books have not been maintained.
• On an amount becoming irrecoverable, say, because, of the customer becoming insolvent.
• Effects of accidents such as loss of property by fire.
• Transfer of net profit to capital account.
Here are some examples of journal entries showing the above types :
See lessIs net profit an asset or liability?
Definition Net profit is defined as the excess of revenues over expenses during a particular period. For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits. When the result of this computationRead more
Definition
Net profit is defined as the excess of revenues over expenses during a particular period.
For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
Liabilities
It means the amount owed (payable) by the business. liability towards the owners ( proprietor or partners ) of the business is termed an internal liability.
On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability. For example – taxes owned, trade payables, etc.
For example creditors, bank overdrafts, etc.
Assets
An asset is a resource owned or controlled by a company and will benefit the business in current and future periods.
In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – cash, building, etc.
Why debtors are treated as a liability?
Now let me explain to you why net profits are treated as a liability and not as an asset because of the following characteristics :
• Net Profit shows the credit balance of the Profit And Loss Account.
• It is treated directly in the balance sheet by adding or subtracting from the capital.
• Net Profit is a measure of the profitability of the company after taking into consideration all costs incurred during the accounting period.
• Net profit is the last line in an income statement and is the figure that concerns most people who use such a statement.
• Net income is reported on the income statement (profit and loss account) and forms a key indicator of a company’s performance.
Importance Of Net Profit
Now I will let you know the importance of net profit which is as follows :
Owners
Net profit allows owners to calculate the tax to be paid and how much earnings need to be distributed to the business owners.
Investors
Investors need to see net profit as they need to access the risk before investing they basically judge the revenue-generating capacity of a firm based on net profit.
Competitors
For making the comparison competitors tend to look at the net profit of the company to know how are they performing in the industry so that they can build themselves strong.
Creditors
Creditors look at the net profit for the purpose of obtaining business loans or we can say that determines a prospective debtor’s capacity to pay future debts.
Conclusion
Now after the above explanation, we can say that,
Net Profit is shown on the liability side as it belongs to shareholders so the company has to give it to shareholders so we are showing it under the liability side.
Net Profit with respect to the company is a liability as it has to pay it to shareholders.
Net Profit with respect to shareholders is an asset.
See lessWhat is Gross profit versus net profit?
Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. When the result of this computation is negative it is referred to as gross loss Formula : ToRead more
Definition
Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.
When the result of this computation is negative it is referred to as gross loss
Formula :
Total Revenues – Cost Of Goods Sold
Net profit is defined as the excess of revenues over expenses during a particular period.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
The basic difference between gross profit and net profit is that gross profit estimates the profitability of a company whereas net profit is to show the performance of the company.
Key points of Gross Profit
Some of the key points of as for gross profits follows :
• Stage of calculation: Gross Profit is calculated in the first stage of the Final Account.
• Purpose of calculation: It is calculated to know the total profit earned during the particular accounting
• Type of balance: Gross Profit shows the credit balance of the Trading Account.
• Dimension: It is a narrow concept as it is a part of Net Profit.
• Treatment: It is not treated directly in the balance sheet. It is transferred to the Profit And Loss Account.
Key points of Net Profit
Some of the key points of as for gross profits follows :
• Stage of calculation: Net Profit is calculated in the second stage of the Final Account.
• Purpose of calculation: It is calculated to know the net profit earned during the particular accounting
• Type of balance: Net Profit shows the credit balance of the Profit And Loss Account.
• Dimension: It is a wider concept as it includes Gross Profit.
• Treatment: It is treated directly in the balance sheet by adding or subtracting from the capital.
Examples
Now let me explain to you by taking an example which is as follows :
In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
Then,
COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.
= Rs ( 73000 + 10000+ 7000- 5000)
= Rs 85000
GROSS PROFIT = REVENUE – COST OF GOODS SOLD
= Rs ( 100000 – 85000 )
= Rs 15000
Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
Then,
NET PROFIT = GROSS PROFIT – INDIRECT EXPENSES + OTHER INCOMES
= Rs ( 15000 – 2000 + 1000)
= Rs 14000
Conclusion
So here I conclude that gross profit is the difference between revenues from sales and/or services rendered and its direct cost.
Whereas net profit is after the deduction of total expenses from the total revenues of the enterprise.
See lessCan someone give examples of net profit and gross profit?
Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. Gross profit and net profit are gross profit estimates of the profitability of a company. WhRead more
Definition
Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.
Gross profit and net profit are gross profit estimates of the profitability of a company.
When the result of this computation is negative it is referred to as gross loss
Formula :
Total Revenues – Cost Of Goods Sold
Net profit is defined as the excess of revenues over expenses during a particular period.
Net profit is to show the performance of the company.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
Examples
Now let me explain to you by taking an example which is as follows :
In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
Then,
COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.
= Rs ( 73000 + 10000+ 7000- 5000)
= Rs 85000
GROSS PROFIT = REVENUE – COST OF GOODS SOLD
= Rs ( 100000 – 85000 )
= Rs 15000
Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
Then,
NET PROFIT = GROSS PROFIT – INDIRECT EXPENSES + OTHER INCOMES
= Rs ( 15000 – 2000 + 1000)
= Rs 14000
Treatment
Treatment of gross profit and net profit is given as follows :
Gross profit
• Gross profit appears on the credit side of the trading account.
• Gross profit is located in the upper portion beneath revenue and cost of goods sold.
Net profit
• Net profit appears on the credit side of the profit and loss account.
• It is treated directly in the balance sheet by adding or subtracting from the capital.
Here is an extract of the trading and profit/loss account and balance sheet showing GROSS PROFIT & NET PROFIT :
See lessWhere does bad debts come in the balance sheet?
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. Bad debts will be treated in the following ways : On the debit side of the profit and loss account. In the curreRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
Bad debts will be treated in the following ways :
On the debit side of the profit and loss account.
In the current assets side of the balance sheet, these are deducted from sundry debtors.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.
Now I will show you an extract of the profit and loss account and balance sheet
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or the rendering of services in the ordinary course of business.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Reasons for bad debts
There are several reasons why businesses may have bad debts some of them are as follows:-
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
Related terms
So there are a few related terms whose meanings you should know
See lessWhere does bad debts come in the balance sheet?
Definition Bad debts is a debts owed to an enterprise which are considered to be irrecoveravle or we can say that it is owed to the business that is written off because it is irrecoverable. For example loan from bank declared as bad debt , sales made on credit and amount not received from customer eRead more
Definition
Bad debts is a debts owed to an enterprise which are considered to be irrecoveravle or we can say that it is owed to the business that is written off because it is irrecoverable.
For example loan from bank declared as bad debt , sales made on credit and amount not received from customer etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Conclusion
Therefore I can conclude that bad debts will be treated in following ways :
Reasons for bad debts
There are a number of reasons why businesses may have bad debts some of them are as follows :-
Accounting methods
There are a two methods for accounting bad debts which are metioned below :-
Related terms
So there are few related terms whose meaning you should know
It means the amount of sundry debtors in trial balance is before the deduction of bad debts . in this situation , entry for further bad debts is also passed in the books of account .
That is bad debts is debited and debtors account is credited . And the accounting treatment for them is same as bad debts which I have shown you above.
It may happen that the amount written off as bad debts is recovered fully or partially .
In that case , the amount is not credited to the debtors (persobal) account , but is credited to bad debts recovered account because the amount recovered had been earlier written off as loss . Thus amount recovered is a ‘gain’ and is credited to profit and loss account .
See lessWhere does bad debts come in the balance sheet?
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Conclusion
Therefore I can conclude that bad debts will be treated in the following ways :
Reasons for bad debts
There are several reasons why businesses may have bad debts some of them are as follows:-
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
Related terms
So there are a few related terms whose meanings you should know
See lessWhere does bad debts come in the balance sheet?
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Conclusion
Therefore I can conclude that bad debts will be treated in the following ways :
Reasons for bad debts
There are several reasons why businesses may have bad debts some of them are as follows:-
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
Related terms
So there are a few related terms whose meanings you should know
See lessWhere does bad debts come in the balance sheet?
Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customRead more
Definition
Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.
For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
For example, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.
For example bills payable, short-term loans, etc.
Accounting treatment
Now let me try to explain to you the accounting treatment for bad debts which is as follows :
Conclusion
Therefore I can conclude that bad debts will be treated in the following ways :
Reasons for bad debts
There are several reasons why businesses may have bad debts some of them are as follows:-
Accounting methods
There are two methods for accounting for bad debts which are mentioned below:-
Related terms
So there are a few related terms whose meanings you should know
- Bad debts recovered :
- It may happen that the amount written off as bad debts are recovered fully or partially.
- In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
- Thus amount recovered is a ‘gain’ and is credited to the profit and loss account.
See less