Debtors are treated as an asset. A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered. When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise. Debtors are consRead more
Debtors are treated as an asset.
A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.
When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise.
Debtors are considered assets in the balance sheet and are shown under the head of current assets.
For example – Ram Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ram because he owes the amount to Ram. This amount will be payable at a later date.
Liabilities Vs Assets
Liabilities
It means the amount owed (payable) by the business. Liability towards the owners ( proprietor or partners ) of the business is termed internal liability. For example, owner’s capital, etc
On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability.
For example creditors, bank overdrafts, etc.
Assets
An asset is a resource owned or controlled by a company. The benefit from the asset will accrue to the business in current and future periods. In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – machinery, building, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business. They are readily realizable into cash.
In other words, we can say that the expected realization period of current assets is less than the operating cycle period.
For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Why debtors are treated as assets?
Now let me explain to you why debtors are treated as assets and not as liabilities because of the following characteristics :
We can say that the expected realization period is less than the operating cycle period.
Expected to be converted into cash in the normal course of business.
In the business, debtors are treated as current assets which we can see on the asset side of the balance sheet.
Debtors have a debit balance.
Conclusion
Now after the above discussion, I can conclude that debtors are considered to be an asset and not a liability.
Yes, a creditor is a liability. Creditors are treated as current liability. A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest. Creditors may be secureRead more
Yes, a creditor is a liability. Creditors are treated as current liability.
A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.
Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.
In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.
Why are Creditors treated as a liability?
An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc
A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.
As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.
Treatment and Importance of Creditors
Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.
The significance/importance of creditors is as follows:
The amount due to creditors affects the current and acid test ratio of a company significantly.
It affects the short-term cash requirements of a company.
It affects the credit policy of the company. A company can extend longer credit periods to customers if it can avail longer credit periods from its suppliers.
Having too many creditors or a large amount due to creditors can affect investor sentiment negatively regarding the business.
We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.
Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.
Yes, the account receivable is a sub ledger account. It is an account that is used to record the payment history of each and every customer to whom the business has sold goods or provided services on credit. Accounts receivable represent the amount that the customers owe to the business with respectRead more
Yes, the account receivable is a sub ledger account. It is an account that is used to record the payment history of each and every customer to whom the business has sold goods or provided services on credit.
Accounts receivable represent the amount that the customers owe to the business with respect to the goods sold or services provided to them on credit. They are also known as trade receivable or debtors.
The accounts receivable subledger shows various details of every transaction like the invoice number, amount due, date of payment, discount allowed etc. The subledger accounts are also known as the subsidiary accounts.
Difference between general ledger and subledger accounts
Here is a list of the major differences between sub-ledgers and the general ledger:
The subsidiary accounts or the sub ledger are a subset of the general ledger. In other words we can say that subsidiary accounts are a part of the general ledger.
The trial balance is prepared with the help of the general ledger and not with the help of subsidiary accounts.
The trial balance is prepared with the help of the general ledger and not with the help of subsidiary accounts.
The subledger accounts help us to store large volumes of data. They provide us with detailed and comprehensive analysis of each item of financial statements. On the other hand, a general ledger provides us with superficial information about every item in one place.
Importance/ use of Subsidiary Account
The usefulness of an accounts receivable sub ledger account lies in the fact that it provides detailed information about the money different customers owe to the business.
For example, the general ledger account may show that the total balance of trade receivable is 1 lakh without indicating the individual amount that each customer owes to the business. The subsidiary account can help us by showing that customer A owes 50000 rupees, customer B owes 30000 rupees while customer C owes 20000 rupees.
In short, the subsidiary accounts provide detailed information about each and every transaction. They help us to find useful information quickly and easily. They help us analyze the business policies and take corrective actions.
Thus, we can conclude that accounts receivable is a subledger account that provides us detailed information about the various credit transactions and the amount that each customer owes to the business. It helps us analyze our credit policies and take corrective actions. It helps us identify and classify bad debts as such on
Yes, accounting is necessary even for not-for-profit organizations. NPOs or not-for-profit organizations are those that are created for the welfare of the society. They intend to advance some social cause. For example charities, orphanages etc Accounting for NPOs becomes necessary as the trustees ofRead more
Yes, accounting is necessary even for not-for-profit organizations.
NPOs or not-for-profit organizations are those that are created for the welfare of the society. They intend to advance some social cause. For example charities, orphanages etc
Accounting for NPOs becomes necessary as the trustees of these institutions are liable to their members, the donors and the government. They discharge this function with documenting activities of the institution.
What is a not-for-profit organization?
A not-for-profit organization is an entity that undertakes charitable activities. These institutions do not have earning profit as their primary motive. Their focus is on extending social welfare.
Every not-for-profit organization usually has a group of trustees that are responsible for handling all its operations. These trustees are accountable to the members of the NPO.
A not-for-profit organization usually relies on donations and grants as its primary source of revenue. They do not charge the stakeholders to whom they extend their services or goods.
What does accounting for Not-for-profit organizations entail
The professionals undertaking accounting of not-for-profit organizations must have a significant knowledge of statutory provisions and accounting principles. Here is a brief overview of what accounting for a not-for-profit organizations entails
Ensuring that the institution fulfills all the legal compliances necessary for it to continue functioning as a NPO.
Documenting all the activities of the institution and ensuring that the NPO has the necessary permits to carry out those activities.
Accounting for all the revenue receipts and expenses of the institution. The professional must keep in mind that the interests of the members and other stakeholders are not being subjected to any prejudice.
In India, every NPO has to compulsorily prepare a receipt and payment account, income and expenditure account and a balance sheet. These have to be submitted to the Registrar of Societies before the due dates.
Every professional undertaking the accounting of a not-for-profit organization must keep in mind that a single non-compliance or partial-compliance can result in the NPO losing out on its tax-exempt status.
In the past there have been many instances when NPOs have been used for the purpose of money laundering or tax evasion.
This has resulted in the government making the compliances for these institutions more stringent. The institutions are now required to be more transparent regarding their operations.
We can conclude that accounting is an indispensable requirements for not-for-profit organizations to be able to continue their operations and claim the statutory benefits that the government has extended to them.
A bills receivable book is a subsidiary book that shows the details of various bills receivables drawn on customers. It shows the amount, due date, date when the bill was drawn, name of the acceptor, and various other details pertaining to each bill. A bills payable book is a subsidiary book that shRead more
A bills receivable book is a subsidiary book that shows the details of various bills receivables drawn on customers. It shows the amount, due date, date when the bill was drawn, name of the acceptor, and various other details pertaining to each bill.
A bills payable book is a subsidiary book that shows the details of various bills that suppliers have drawn on the business. It shows the amount, due date, date when the bill was drawn, name of the drawer and various other details pertaining to each bill.
The total of both these books is ultimately transferred to the general ledger. From there, it is used in drafting the balance sheet.
Importance of bills receivable and bills payable books
Bills receivable books help us know the amount that each customer is liable to pay us on specific dates while bills payable books help us know the amounts that we have to pay our various suppliers on certain dates.
Together these books help us handle our cash flows in an efficient manner.
We can evaluate our credit cycle. Bills receivable books help us avoid bad debts while bills payable books help us to avoid defaults.
Difference between bills receivable and bills payable
These are the primary differences between bills payable and bills receivable:
Bills receivable represent the amounts that the business is to receive from customers while bills payable represent the amounts that the business has to pay to suppliers.
Bills receivable are recorded as an asset in the balance sheet while bills payable are recorded as a liability.
Bills receivable are drawn by the business on the customers while the bills payable are drawn by the suppliers on the business.
Bills receivable are the outcome of credit sales while bills payable are the outcome of credit purchases.
Bills receivable result in an inflow of cash while bills payable result in an outflow of cash.
The dishonor of a bill receivable is recorded as an increase in the debtors of the business. Default on payment of bills payable may occur either because the business has become bankrupt or the business may record an increase in creditors.
We can conclude that both bills receivable and bills payable books are subsidiary books. Bills receivable shows the details of every bill that the business has drawn on each credit customer. Bills payable show the details of every bill that each credit supplier has drawn on the business.
Interviews can appear daunting. But don't worry we are here for you. Here is a comprehensive list of journal entries and other technical and behavioral questions mostly asked in interviews. Journal entries for the following situations are most frequently asked: A cashier is absconding with cash wortRead more
Interviews can appear daunting. But don’t worry we are here for you. Here is a comprehensive list of journal entries and other technical and behavioral questions mostly asked in interviews.
Journal entries for the following situations are most frequently asked:
A cashier is absconding with cash worth 10,000.
Bad debts worth ₹10,000 have been recovered.
The Head Office received ₹ 5,000 from its Branch.
Issue of bonus shares worth 5,00,000
Depreciation on land
Contra Entries
Inventory used for personal purposes
Personal car transferred to inventory
Besides these, there are certain general questions that are almost always asked. You must be well prepared for these questions. For example,
Introduce yourself
Why do you want to join this company?
Why do you not want to join our competitors? ( prepare one or two specific competitors)
Why do you think you are fit for this role?
Behavioral Questions
Behavioral questions seek to evaluate your personality and access how you would act or react in certain situations.
Here are some of the most frequently asked behavioral questions:
Tell me about an experience where you faced stress and how you handled it.
How do you react when team members do not agree with you?
How do you react when you do not agree with the team leader?
What is the biggest challenge that you have ever faced in your life and how did you handle it?
Tell me about a time when you had to take a leadership role.
Tell me about a time when you took initiative.
Tell me about a time when you failed and how you handled it.
Tell me about a time when you used your problem-solving skills
Tell me about the biggest mistake you have committed in life.
Tell me about your strengths and weaknesses.
Have you ever worked with a team before?
Where do you see yourself in 5 years?
Tell me about the biggest mistake you committed in your life.
Technical questions
Technical questions are those that test your academic knowledge of accounting. They intend to assess your conceptual understanding and clarity of the subject. Here’s a list of technical questions related to accounting most frequently asked in interviews:
What is working capital?
What is AS 1? ( Prepare all AS)
What is the P/E ratio?
A company takes a loan of ₹5,00,000 to buy an asset. State the impact on the cash flow statement and balance sheet.
A company issues debentures worth ₹10,00,000. State the impact on the cash flow statement and balance sheet.
What is the difference between a trial balance and a balance sheet?
Differentiate between dormant and inactive accounts.
What is Acid-Test Ratio?
How can we estimate bad debts?
How can a company improve its market capitalization?
What is GAAP?
Why do we need AS?
What are fictitious assets?
What is the difference between provision and reserve?
Bad debts mean the money owed by customers who have gone bankrupt or the likelihood of who's ever returning the money is significantly low. Bad debt is a nominal account. A nominal account is an account that records the business transactions belonging to a certain category of income, expense, profitRead more
Bad debts mean the money owed by customers who have gone bankrupt or the likelihood of who’s ever returning the money is significantly low. Bad debt is a nominal account.
A nominal account is an account that records the business transactions belonging to a certain category of income, expense, profit or loss. The balances on nominal accounts are normally written off at the end of each financial year. For example, sales A/c, purchases A/c, interest income, loss from the sale of assets etc.
Why are bad debts A/c classified as a nominal account?
First of all, let us understand the other two types of accounts – personal accounts and real accounts.
Personal accounts deal with the records of the business’ transactions with a particular person or entity. For example Mukesh A/c, Mahesh A/c, Reliance A/c, Suresh and Co. A/c etc.
Real accounts deal with transactions and records related to assets. The balance in these accounts is normally carried forward from one period to another. For example “Furniture A/c “, ” Building A/c ” etc.
Now that we have understood the basic definitions of all three types of accounts, we can discuss the reason behind the classification of bad debts as nominal accounts.
A bad debt is a loss that the company has incurred. It may be due to bankruptcy of customers, customer fraud etc. The company isn’t going to receive that money. The bad debts are written off at the end of the year by transferring them to profit and loss A/c.
Thus, bad debts relate to loss and are normally not carried forward from one period to another. Hence, they are classified as nominal accounts.
Treatment of Bad Debts
Bad debts are written off at the end of each year by debiting them to the profit and loss A/c. The amount of bad debts is reduced from the amount of debtors that the company has.
A company may also choose to create a provision for bad debts for the balance amount of debtors that the company has after adjusting for bad debts. This provision represents a rough estimate of the amount due to debtors that the business expects to not receive. In other words, it is an estimate of customer bankruptcy that the business expects.
Conclusion
We can conclude that
There are primarily three types of accounts – real, personal and nominal.
Bad debts are a nominal account.
Bad debts is a loss that the business has incurred
It may be due to bankruptcy of customers, fraud etc
Bad debts are written off each year by transferring them to the income statement
Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them. For example, X Ltd took an insurance policy on 30th September 20XX. The premium is to be paid annually on 30th SeptemRead more
Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them.
For example,
X Ltd took an insurance policy on 30th September 20XX. The premium is to be paid annually on 30th September every year for the next 20 years.
While preparing the financial statements for the year 20XX – 20XX+1, the business will recognize insurance premiums for the period 30th September, 20XX to 31st March 20XX+1 as an accrued expense. The premium would be actually paid on September 20XX+1.
As we can see, the company has already incurred the insurance premium for the period 30th September, 20XX to 31st March 20XX+1.
Thus, it has to recognize the same as an expense of that period only even though it will be actually paid in the next accounting period.
Why does the concept of accrued expenses arise in accounting?
The concept of accrued expenses arises in accounting because accounting records transactions on an accrual and not cash basis.
Accounting on an accrual basis implies recording transactions as and when they are incurred while recording transactions on a cash basis means recording them as and when cash is actually paid for receiving those services.
For example,
X Ltd ordered 5 televisions from LG. It received the delivery of all 5 televisions on 1st March, 20XX. However, it received the invoice for those televisions on 31st April, 20XX.
Now, the question arises as to whether while preparing the financial statements on 31st March, 20XX, X Ltd will recognize the cost of those 5 televisions as a purchase expenditure.
If X Ltd were recording transactions on a cash basis, they would not have recognized the cost of those 5 televisions as a purchase expenditure in the financial statements prepared on 31st March 20XX as the payment had been made in the next financial year.
Thus, in that case, that purchase would be recorded in the financial statements of the next year.
However, accounting is done on an accrual basis. As per accrual basis, as the event of purchase has occurred during the financial year ending 31st March 20XX, it must be recorded in financial statements for that period only.
Thus, due to the accrual basis, X Ltd will record that expenditure in the financial statements prepared on 31st March 20XX even though cash has been paid in the next financial year.
Treatment of Accrued Expenses
Accrued expenses are classified as current liabilities. That is because the business has a short-term obligation to pay these expenses. The other party has a legal right to receive the amount due. In other words, accrued expenses become payable in the near term.
As current liabilities, accrued expenses are carried in the balance sheet on the liabilities side. They are also recognized in the income statement as an expense as per the concept of accrual basis of accounting.
Conclusion
Accrued expenses are the expenses for which the business has already received the benefit of goods or services but which are payable in an accounting period other than the one in which such benefit is received.
As per the accrual basis of accounting, they are recognized in the year in which the expense is incurred. The expense is carried forward as a current liability until the period in which it is actually paid.
No, forensic accounting and auditing are not the same thing. Forensic accounting is a much more detailed task that is normally done when fraud or other illegal activity is suspected. The evidence collected by forensic accountants is used in the court of law. Forensic accounting is mostly done when aRead more
No, forensic accounting and auditing are not the same thing. Forensic accounting is a much more detailed task that is normally done when fraud or other illegal activity is suspected.
The evidence collected by forensic accountants is used in the court of law. Forensic accounting is mostly done when a suit has already been filed or is likely to be filed.
How Forensic Accounting Differs from Auditing?
Auditing means an inspection of financial statements done by experts with a view to obtaining reasonable assurance as to whether or not the financial statements correctly state the financial position and financial performance of the entity during the period under audit.
Forensic accounting is the use of accounting skills to detect any fraud, embezzlement or other illegal activity that may have occurred within the entity.
This is how forensic accounting differs from auditing:
Forensic accounting is different from auditing in that forensic accounting is done with an intention to identify and uncover frauds while auditing is normally done to provide the users of financial statements reasonable assurance that the statements are correct and true.
Auditing usually identifies only those misstatements that are material. Materiality is the one of the main concerns of auditors. However, in forensic auditing every type of misstatement is scrutinized as material. The forensic accountants try to identify fraud in every misstatement.
Forensic accounting is usually done only when fraud and other illegal activities are suspected and some suit has been filed or is likely to be filed while auditing of annual financial statements is mandatory for firms meeting certain threshold limits of turnover/gross receipt/revenue.
Importance of Forensic Accounting
Forensic accounting is used to detect frauds, forgery, misappropriation of assets and other illegal activities.
The evidence collected during forensic accounting can be used in a court of law. Often, those conducting forensic accounting are also called upon to testify as experts in a court.
Forensic accounting identifies loopholes in the internal controls of an entity that has been or may be exploited for conducting frauds and other illegal activities.
Forensic accountants suggest different measures that an entity can take to make it’s internal controls more effective and prevent illegal activities in the future.
Conclusion
Forensic accounting and auditing are very different from each other. While auditing is done to identify only material misstatement, forensic accounting is done with an objective of detecting possible fraud or other illegal activity. Auditing of financial statements is mandatory for firms exceeding certain threshold limits of turnover/gross receipts/revenue while financial accounting is usually done when a suit for fraud, embezzlement etc has been filed or is likely to be filed.
Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period. For example, insurance is often paid for annually on tRead more
Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period.
For example, insurance is often paid for annually on the basis of the calendar year. A business may pay insurance every year on 1st January for that entire year. While preparing the financial statements on 31st March, it will recognize the insurance premium for the period 1st April to 31st December of the next financial year as a prepaid insurance expense.
Why are prepaid expenses classified as assets?
First of all, let us understand what an asset is. An asset is anything over which the business has ownership rights and which it can sell for money. The benefits of this asset should accrue to the business.
In light of this definition, let us analyze prepaid expenses as an asset. As the business has already paid for these goods or services, it becomes a legal right of the business to receive the relevant goods or services at a later date. As the benefit of this expense would accrue to the business only at a later date, the prepaid expenses are classified as an asset.
Some examples of prepaid expenses are prepaid insurance, prepaid rent etc
Treatment of Prepaid Expenses
Prepaid expenses are recorded in the balance sheet under the heading “Current Assets” and sub-heading “Other Current Assets”
As per the Generally Accepted Accounting Principles or GAAP, expenses must be recognized in the accounting period to which they relate or in which the benefit due to them is likely to arise. Thus, we cannot recognize the prepaid expenses in the accounting period in which they are incurred.
Prepaid assets are classified as assets and carried forward in the balance sheet to be debited in the income statement of the accounting period to which they relate.
Adjusting Entries
Adjusting entries are those entries that are used to recognize prepaid expenses in the income statement of the period to which they relate. These entries are not used to record new transactions. They ensure compliance with GAAP by recognizing the expenses in the period to which they relate.
Conclusion
The GAAP and basic definition of an asset govern the treatment of prepaid expenses as an asset. The business incurs them in an accounting period different from the accounting period in which their benefit would accrue to the business. The business has a legal right to receive those goods or services.
The business carries them as a current asset on the balance sheet. In the relevant accounting period, they are recognized in the income statement.
Is debtor an asset or liability ?
Debtors are treated as an asset. A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered. When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise. Debtors are consRead more
Debtors are treated as an asset.
A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.
When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise.
Debtors are considered assets in the balance sheet and are shown under the head of current assets.
For example – Ram Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ram because he owes the amount to Ram. This amount will be payable at a later date.
Liabilities Vs Assets
Liabilities
It means the amount owed (payable) by the business. Liability towards the owners ( proprietor or partners ) of the business is termed internal liability. For example, owner’s capital, etc
On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability.
For example creditors, bank overdrafts, etc.
Assets
An asset is a resource owned or controlled by a company. The benefit from the asset will accrue to the business in current and future periods. In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – machinery, building, etc.
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business. They are readily realizable into cash.
In other words, we can say that the expected realization period of current assets is less than the operating cycle period.
For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
Why debtors are treated as assets?
Now let me explain to you why debtors are treated as assets and not as liabilities because of the following characteristics :
Conclusion
Now after the above discussion, I can conclude that debtors are considered to be an asset and not a liability.
See lessIs creditor an asset or liability ?
Yes, a creditor is a liability. Creditors are treated as current liability. A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest. Creditors may be secureRead more
Yes, a creditor is a liability. Creditors are treated as current liability.
A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.
Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.
In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.
Why are Creditors treated as a liability?
An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc
A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.
As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.
Treatment and Importance of Creditors
Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.
The significance/importance of creditors is as follows:
We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.
Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.
See lessIs account receivable a subledger ?
Yes, the account receivable is a sub ledger account. It is an account that is used to record the payment history of each and every customer to whom the business has sold goods or provided services on credit. Accounts receivable represent the amount that the customers owe to the business with respectRead more
Yes, the account receivable is a sub ledger account. It is an account that is used to record the payment history of each and every customer to whom the business has sold goods or provided services on credit.
Accounts receivable represent the amount that the customers owe to the business with respect to the goods sold or services provided to them on credit. They are also known as trade receivable or debtors.
The accounts receivable subledger shows various details of every transaction like the invoice number, amount due, date of payment, discount allowed etc. The subledger accounts are also known as the subsidiary accounts.
Difference between general ledger and subledger accounts
Here is a list of the major differences between sub-ledgers and the general ledger:
Importance/ use of Subsidiary Account
The usefulness of an accounts receivable sub ledger account lies in the fact that it provides detailed information about the money different customers owe to the business.
For example, the general ledger account may show that the total balance of trade receivable is 1 lakh without indicating the individual amount that each customer owes to the business. The subsidiary account can help us by showing that customer A owes 50000 rupees, customer B owes 30000 rupees while customer C owes 20000 rupees.
In short, the subsidiary accounts provide detailed information about each and every transaction. They help us to find useful information quickly and easily. They help us analyze the business policies and take corrective actions.
Thus, we can conclude that accounts receivable is a subledger account that provides us detailed information about the various credit transactions and the amount that each customer owes to the business. It helps us analyze our credit policies and take corrective actions. It helps us identify and classify bad debts as such on
See lessIs it necessary for non- profit organisation (NPO) to do accounting ?
Yes, accounting is necessary even for not-for-profit organizations. NPOs or not-for-profit organizations are those that are created for the welfare of the society. They intend to advance some social cause. For example charities, orphanages etc Accounting for NPOs becomes necessary as the trustees ofRead more
Yes, accounting is necessary even for not-for-profit organizations.
NPOs or not-for-profit organizations are those that are created for the welfare of the society. They intend to advance some social cause. For example charities, orphanages etc
Accounting for NPOs becomes necessary as the trustees of these institutions are liable to their members, the donors and the government. They discharge this function with documenting activities of the institution.
What is a not-for-profit organization?
A not-for-profit organization is an entity that undertakes charitable activities. These institutions do not have earning profit as their primary motive. Their focus is on extending social welfare.
Every not-for-profit organization usually has a group of trustees that are responsible for handling all its operations. These trustees are accountable to the members of the NPO.
A not-for-profit organization usually relies on donations and grants as its primary source of revenue. They do not charge the stakeholders to whom they extend their services or goods.
What does accounting for Not-for-profit organizations entail
The professionals undertaking accounting of not-for-profit organizations must have a significant knowledge of statutory provisions and accounting principles. Here is a brief overview of what accounting for a not-for-profit organizations entails
We can conclude that accounting is an indispensable requirements for not-for-profit organizations to be able to continue their operations and claim the statutory benefits that the government has extended to them.
See lessWhat is bills payable and bills receivable book ?
A bills receivable book is a subsidiary book that shows the details of various bills receivables drawn on customers. It shows the amount, due date, date when the bill was drawn, name of the acceptor, and various other details pertaining to each bill. A bills payable book is a subsidiary book that shRead more
A bills receivable book is a subsidiary book that shows the details of various bills receivables drawn on customers. It shows the amount, due date, date when the bill was drawn, name of the acceptor, and various other details pertaining to each bill.
A bills payable book is a subsidiary book that shows the details of various bills that suppliers have drawn on the business. It shows the amount, due date, date when the bill was drawn, name of the drawer and various other details pertaining to each bill.
The total of both these books is ultimately transferred to the general ledger. From there, it is used in drafting the balance sheet.
Importance of bills receivable and bills payable books
Bills receivable books help us know the amount that each customer is liable to pay us on specific dates while bills payable books help us know the amounts that we have to pay our various suppliers on certain dates.
Together these books help us handle our cash flows in an efficient manner.
We can evaluate our credit cycle. Bills receivable books help us avoid bad debts while bills payable books help us to avoid defaults.
Difference between bills receivable and bills payable
These are the primary differences between bills payable and bills receivable:
We can conclude that both bills receivable and bills payable books are subsidiary books. Bills receivable shows the details of every bill that the business has drawn on each credit customer. Bills payable show the details of every bill that each credit supplier has drawn on the business.
See lessWhat are some journal entries for interview?
Interviews can appear daunting. But don't worry we are here for you. Here is a comprehensive list of journal entries and other technical and behavioral questions mostly asked in interviews. Journal entries for the following situations are most frequently asked: A cashier is absconding with cash wortRead more
Interviews can appear daunting. But don’t worry we are here for you. Here is a comprehensive list of journal entries and other technical and behavioral questions mostly asked in interviews.
Journal entries for the following situations are most frequently asked:
Besides these, there are certain general questions that are almost always asked. You must be well prepared for these questions. For example,
Behavioral Questions
Behavioral questions seek to evaluate your personality and access how you would act or react in certain situations.
Here are some of the most frequently asked behavioral questions:
Technical questions
Technical questions are those that test your academic knowledge of accounting. They intend to assess your conceptual understanding and clarity of the subject. Here’s a list of technical questions related to accounting most frequently asked in interviews:
- What is working capital?
- What is AS 1? ( Prepare all AS)
- What is the P/E ratio?
- A company takes a loan of ₹5,00,000 to buy an asset. State the impact on the cash flow statement and balance sheet.
- A company issues debentures worth ₹10,00,000. State the impact on the cash flow statement and balance sheet.
- What is the difference between a trial balance and a balance sheet?
- Differentiate between dormant and inactive accounts.
- What is Acid-Test Ratio?
- How can we estimate bad debts?
- How can a company improve its market capitalization?
- What is GAAP?
- Why do we need AS?
- What are fictitious assets?
- What is the difference between provision and reserve?
See lessIs bad debt a nominal account?
Bad debts mean the money owed by customers who have gone bankrupt or the likelihood of who's ever returning the money is significantly low. Bad debt is a nominal account. A nominal account is an account that records the business transactions belonging to a certain category of income, expense, profitRead more
Bad debts mean the money owed by customers who have gone bankrupt or the likelihood of who’s ever returning the money is significantly low. Bad debt is a nominal account.
A nominal account is an account that records the business transactions belonging to a certain category of income, expense, profit or loss. The balances on nominal accounts are normally written off at the end of each financial year. For example, sales A/c, purchases A/c, interest income, loss from the sale of assets etc.
Why are bad debts A/c classified as a nominal account?
First of all, let us understand the other two types of accounts – personal accounts and real accounts.
Personal accounts deal with the records of the business’ transactions with a particular person or entity. For example Mukesh A/c, Mahesh A/c, Reliance A/c, Suresh and Co. A/c etc.
Real accounts deal with transactions and records related to assets. The balance in these accounts is normally carried forward from one period to another. For example “Furniture A/c “, ” Building A/c ” etc.
Now that we have understood the basic definitions of all three types of accounts, we can discuss the reason behind the classification of bad debts as nominal accounts.
A bad debt is a loss that the company has incurred. It may be due to bankruptcy of customers, customer fraud etc. The company isn’t going to receive that money. The bad debts are written off at the end of the year by transferring them to profit and loss A/c.
Thus, bad debts relate to loss and are normally not carried forward from one period to another. Hence, they are classified as nominal accounts.
Treatment of Bad Debts
Bad debts are written off at the end of each year by debiting them to the profit and loss A/c. The amount of bad debts is reduced from the amount of debtors that the company has.
A company may also choose to create a provision for bad debts for the balance amount of debtors that the company has after adjusting for bad debts. This provision represents a rough estimate of the amount due to debtors that the business expects to not receive. In other words, it is an estimate of customer bankruptcy that the business expects.
Conclusion
We can conclude that
- There are primarily three types of accounts – real, personal and nominal.
- Bad debts are a nominal account.
- Bad debts is a loss that the business has incurred
- It may be due to bankruptcy of customers, fraud etc
- Bad debts are written off each year by transferring them to the income statement
See lessWhat is the meaning of accrued expenses in accounting?
Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them. For example, X Ltd took an insurance policy on 30th September 20XX. The premium is to be paid annually on 30th SeptemRead more
Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them.
For example,
Why does the concept of accrued expenses arise in accounting?
The concept of accrued expenses arises in accounting because accounting records transactions on an accrual and not cash basis.
Accounting on an accrual basis implies recording transactions as and when they are incurred while recording transactions on a cash basis means recording them as and when cash is actually paid for receiving those services.
For example,
Treatment of Accrued Expenses
Accrued expenses are classified as current liabilities. That is because the business has a short-term obligation to pay these expenses. The other party has a legal right to receive the amount due. In other words, accrued expenses become payable in the near term.
As current liabilities, accrued expenses are carried in the balance sheet on the liabilities side. They are also recognized in the income statement as an expense as per the concept of accrual basis of accounting.
Conclusion
Accrued expenses are the expenses for which the business has already received the benefit of goods or services but which are payable in an accounting period other than the one in which such benefit is received.
As per the accrual basis of accounting, they are recognized in the year in which the expense is incurred. The expense is carried forward as a current liability until the period in which it is actually paid.
See lessIs forensic accounting same as audit?
No, forensic accounting and auditing are not the same thing. Forensic accounting is a much more detailed task that is normally done when fraud or other illegal activity is suspected. The evidence collected by forensic accountants is used in the court of law. Forensic accounting is mostly done when aRead more
No, forensic accounting and auditing are not the same thing. Forensic accounting is a much more detailed task that is normally done when fraud or other illegal activity is suspected.
The evidence collected by forensic accountants is used in the court of law. Forensic accounting is mostly done when a suit has already been filed or is likely to be filed.
How Forensic Accounting Differs from Auditing?
Auditing means an inspection of financial statements done by experts with a view to obtaining reasonable assurance as to whether or not the financial statements correctly state the financial position and financial performance of the entity during the period under audit.
Forensic accounting is the use of accounting skills to detect any fraud, embezzlement or other illegal activity that may have occurred within the entity.
This is how forensic accounting differs from auditing:
Importance of Forensic Accounting
Conclusion
Forensic accounting and auditing are very different from each other. While auditing is done to identify only material misstatement, forensic accounting is done with an objective of detecting possible fraud or other illegal activity. Auditing of financial statements is mandatory for firms exceeding certain threshold limits of turnover/gross receipts/revenue while financial accounting is usually done when a suit for fraud, embezzlement etc has been filed or is likely to be filed.
See lessAre prepaid expenses an asset?
Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period. For example, insurance is often paid for annually on tRead more
Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period.
For example, insurance is often paid for annually on the basis of the calendar year. A business may pay insurance every year on 1st January for that entire year. While preparing the financial statements on 31st March, it will recognize the insurance premium for the period 1st April to 31st December of the next financial year as a prepaid insurance expense.
Why are prepaid expenses classified as assets?
First of all, let us understand what an asset is. An asset is anything over which the business has ownership rights and which it can sell for money. The benefits of this asset should accrue to the business.
In light of this definition, let us analyze prepaid expenses as an asset. As the business has already paid for these goods or services, it becomes a legal right of the business to receive the relevant goods or services at a later date. As the benefit of this expense would accrue to the business only at a later date, the prepaid expenses are classified as an asset.
Some examples of prepaid expenses are prepaid insurance, prepaid rent etc
Treatment of Prepaid Expenses
Prepaid expenses are recorded in the balance sheet under the heading “Current Assets” and sub-heading “Other Current Assets”
As per the Generally Accepted Accounting Principles or GAAP, expenses must be recognized in the accounting period to which they relate or in which the benefit due to them is likely to arise. Thus, we cannot recognize the prepaid expenses in the accounting period in which they are incurred.
Prepaid assets are classified as assets and carried forward in the balance sheet to be debited in the income statement of the accounting period to which they relate.
Adjusting Entries
Adjusting entries are those entries that are used to recognize prepaid expenses in the income statement of the period to which they relate. These entries are not used to record new transactions. They ensure compliance with GAAP by recognizing the expenses in the period to which they relate.
Conclusion
The GAAP and basic definition of an asset govern the treatment of prepaid expenses as an asset. The business incurs them in an accounting period different from the accounting period in which their benefit would accrue to the business. The business has a legal right to receive those goods or services.
The business carries them as a current asset on the balance sheet. In the relevant accounting period, they are recognized in the income statement.
See less