Liabilities are obligations which a business owes to external or internal parties.As per the accounting equation liabilities are equal to the difference between assets and capital. Total Outside Liabilities in relation to the Borrower can be all secured and unsecured loans, including current liabilRead more
Liabilities are obligations which a business owes to external or internal parties.As per the accounting equation liabilities are equal to the difference between assets and capital.
Total Outside Liabilities in relation to the Borrower can be all secured and unsecured loans, including current liabilities of the Borrower.
External Liability or outside liability is an obligation which a business has to pay back to external parties i.e. lenders, vendors, government, etc. Payable to Sundry creditors for the supply of any goods for the business or payable to any contractors for receiving any services or payable to the Govt. or other departments for any statutory payments like taxes or other levies. All these liabilities are known as an external liability to the business and are shown on the liability side of the Balance sheet after charging into the profit & loss account of that period.
Where, Internal Liability – All obligations which a business has to pay back to internal parties such as promoters, employees, etc. are termed as internal liabilities. Example – Capital, Salaries, Accumulated profits, etc.
Example – Borrowings, Creditors, Taxes, etc.
Where, 1) Person A takes a loan from person B (person not associated with the company), person B is an external liability to person A.
2) Person A has a tax liability of Rs.1000, here the government is an external liability to whom A has to pay the liability amount.
3) Person A got goods on credit from person C for 60 days, C is an external liability to A, which A has to pay within the time period.
Order of Liquidity Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so onRead more
Order of Liquidity
Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so on and further. In the end, we will write goodwill.
Liabilities are presented based on the order of urgency of payment. On the liabilities side, we start from short-term liabilities for example outstanding expenses, creditors and bill payable, and so on. In the end, we write capital adjusted with net profit and drawings if any.
This approach is generally used by sole traders and partnerships firms. The following is the format of Balance sheet in order of liquidity:
Order of Permanence
Under this method, while preparing a balance sheet by a company assets are listed according to their permanency. Permanent assets are shown at first and then less permanent assets are shown afterward. On the assets side of the balance sheet starts with more fixed and permanent assets i.e. it begins with goodwill, building, machinery, furniture, then investments and ends with cash in hand as the last item.
The fixed or long-term liabilities are shown first under the order of permanence method, and the current liabilities are listed afterward. On the liabilities side, we start from capital, Reserve and surplus, Long term loans and end with outstanding expenses.
The following is the format of the Balance sheet in order of permanence:
Such order or arrangement of balance sheet items are refer as ‘Marshalling of Balance Sheet’.
Based on duration, expenses can be categorized as capital expenditure and revenue expenditure. A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility inRead more
Based on duration, expenses can be categorized as capital expenditure and revenue expenditure.
A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility in the long-term i.e. more than one year.
The formula of CAPEX can be given as –
Capital expenditure = Net increase in PP & E + Depreciation Expense
. It is showed in companies’ cash flow statement and in its Balance Sheet under the head of fixed assets. These capital expenditures are capitalized.
List of some capital expenses –
Buildings (Including costs of purchase and other cost that extend the useful life of a building)
Computer equipment (Cost of purchase and installation cost)
Office equipment (Purchase cost)
Furniture and fixtures (Cost of purchase and installation cost)
Intangible assets (i.e. patent, trademark)
Land (Including the cost of purchasing and upgrading the land)
Machinery (Purchase cost and costs that bring the equipment to its location and for its intended use)
Software (Installation cost)
Vehicles
Example- If an asset costs Rs10,000 when bought and installation cost is Rs2000. The total capital expenditure will be Rs12000 and is expected to be in use for five years, Rs2,500 may be charged to depreciation in each year over the next five years.
B) Revenue expenditure or OPEX are those expenses that are incurred during its course of the operation. It can also be termed as total expenses that are incurred by firms through their production activities. Such costs do not result in asset creation, and the benefits resulting from it are limited to one accounting year. These are for managing operational activities and revenue within a given accounting period.
The accounting treatment for revenue expenditure for an accounting period is shown in a companies Income Statement, but it is not recorded in the firm’s Balance Sheet. OPEX is not capitalized and depreciation is not levied on such expenses.
Examples for revenue expenditures are as follows –
Direct expenses
These types of expenses are mostly incurred directly through the production process. Common direct expenses include – direct wages, freight charge, rent, material cost, legal expenses, and electricity cost.
Indirect expenses
These expenses are indirectly related to production like during sale, distribution, and management of finished goods or services. They include expenses like selling salaries, repairs, interest, commission, depreciation, rent, and taxes, among others.
Journal Entry Prepaid Rent A/c Dr. To Cash A/C (Being rent paid in advance) "Prepaid Account" is treated as an asset and as per the modern rules debit the increase in the asset. "Cash Account" is an asset and as per the accounting rules credit the decrease in the asset. Adjustment entry: TheRead more
Journal Entry
Prepaid Rent A/c Dr.
To Cash A/C
(Being rent paid in advance)
“Prepaid Account” is treated as an asset and as per the modern rules debit the increase in the asset.
“Cash Account” is an asset and as per the accounting rules credit the decrease in the asset.
Adjustment entry: The prepaid rent entry has an adjustment entry when the rent expense account is due. The journal entry for that is
Rent Expense A/c
To Prepaid Rent A/c
(Being the rent expense due and adjusted from the prepaid expense)
Example: ABC.Ltd signs a one-year lease on an office floor for Rs 10,000 a month. The landlord requires that the Company pays the annual amount Rs 120,000 at the beginning of the year.
The journal entry for Company would be as follows:
At the beginning
Prepaid Rent A/c – 1,20,000
To Cash A/c – 1,20,000
(Being rent paid in advance for the year)
At the time rent was due (Month 1)
Rent Expense A/c – 10,000
To Prepaid Rent A/c – 10,000
(Being the rent expense due and adjusted from the prepaid expense)
The same entry done in month 1 will be repeated in the next 11 months.
What are outside liabilities?
Liabilities are obligations which a business owes to external or internal parties.As per the accounting equation liabilities are equal to the difference between assets and capital. Total Outside Liabilities in relation to the Borrower can be all secured and unsecured loans, including current liabilRead more
Liabilities are obligations which a business owes to external or internal parties.As per the accounting equation liabilities are equal to the difference between assets and capital.
Total Outside Liabilities in relation to the Borrower can be all secured and unsecured loans, including current liabilities of the Borrower.
External Liability or outside liability is an obligation which a business has to pay back to external parties i.e. lenders, vendors, government, etc. Payable to Sundry creditors for the supply of any goods for the business or payable to any contractors for receiving any services or payable to the Govt. or other departments for any statutory payments like taxes or other levies. All these liabilities are known as an external liability to the business and are shown on the liability side of the Balance sheet after charging into the profit & loss account of that period.
Where, Internal Liability – All obligations which a business has to pay back to internal parties such as promoters, employees, etc. are termed as internal liabilities. Example – Capital, Salaries, Accumulated profits, etc.
Example – Borrowings, Creditors, Taxes, etc.
Where, 1) Person A takes a loan from person B (person not associated with the company), person B is an external liability to person A.
2) Person A has a tax liability of Rs.1000, here the government is an external liability to whom A has to pay the liability amount.
3) Person A got goods on credit from person C for 60 days, C is an external liability to A, which A has to pay within the time period.
See lessWhat is order of liquidity and order of permanence related to balance sheet?
Order of Liquidity Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so onRead more
Order of Liquidity
Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so on and further. In the end, we will write goodwill.
Liabilities are presented based on the order of urgency of payment. On the liabilities side, we start from short-term liabilities for example outstanding expenses, creditors and bill payable, and so on. In the end, we write capital adjusted with net profit and drawings if any.
This approach is generally used by sole traders and partnerships firms. The following is the format of Balance sheet in order of liquidity:
Order of Permanence
Under this method, while preparing a balance sheet by a company assets are listed according to their permanency. Permanent assets are shown at first and then less permanent assets are shown afterward. On the assets side of the balance sheet starts with more fixed and permanent assets i.e. it begins with goodwill, building, machinery, furniture, then investments and ends with cash in hand as the last item.
The fixed or long-term liabilities are shown first under the order of permanence method, and the current liabilities are listed afterward. On the liabilities side, we start from capital, Reserve and surplus, Long term loans and end with outstanding expenses.
The following is the format of the Balance sheet in order of permanence:
Such order or arrangement of balance sheet items are refer as ‘Marshalling of Balance Sheet’.
See lessWhat are some capital and revenue expenditure examples?
Based on duration, expenses can be categorized as capital expenditure and revenue expenditure. A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility inRead more
Based on duration, expenses can be categorized as capital expenditure and revenue expenditure.
A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility in the long-term i.e. more than one year.
The formula of CAPEX can be given as –
Capital expenditure = Net increase in PP & E + Depreciation Expense
. It is showed in companies’ cash flow statement and in its Balance Sheet under the head of fixed assets. These capital expenditures are capitalized.
List of some capital expenses –
Example- If an asset costs Rs10,000 when bought and installation cost is Rs2000. The total capital expenditure will be Rs12000 and is expected to be in use for five years, Rs2,500 may be charged to depreciation in each year over the next five years.
B) Revenue expenditure or OPEX are those expenses that are incurred during its course of the operation. It can also be termed as total expenses that are incurred by firms through their production activities. Such costs do not result in asset creation, and the benefits resulting from it are limited to one accounting year. These are for managing operational activities and revenue within a given accounting period.
The accounting treatment for revenue expenditure for an accounting period is shown in a companies Income Statement, but it is not recorded in the firm’s Balance Sheet. OPEX is not capitalized and depreciation is not levied on such expenses.
Examples for revenue expenditures are as follows –
These types of expenses are mostly incurred directly through the production process. Common direct expenses include – direct wages, freight charge, rent, material cost, legal expenses, and electricity cost.
These expenses are indirectly related to production like during sale, distribution, and management of finished goods or services. They include expenses like selling salaries, repairs, interest, commission, depreciation, rent, and taxes, among others.
See lessWhat is the journal entry for prepaid rent?
Journal Entry Prepaid Rent A/c Dr. To Cash A/C (Being rent paid in advance) "Prepaid Account" is treated as an asset and as per the modern rules debit the increase in the asset. "Cash Account" is an asset and as per the accounting rules credit the decrease in the asset. Adjustment entry: TheRead more
Journal Entry
Prepaid Rent A/c Dr.
To Cash A/C
(Being rent paid in advance)
“Prepaid Account” is treated as an asset and as per the modern rules debit the increase in the asset.
“Cash Account” is an asset and as per the accounting rules credit the decrease in the asset.
Adjustment entry: The prepaid rent entry has an adjustment entry when the rent expense account is due. The journal entry for that is
Rent Expense A/c
To Prepaid Rent A/c
(Being the rent expense due and adjusted from the prepaid expense)
Example: ABC.Ltd signs a one-year lease on an office floor for Rs 10,000 a month. The landlord requires that the Company pays the annual amount Rs 120,000 at the beginning of the year.
The journal entry for Company would be as follows:
At the beginning
Prepaid Rent A/c – 1,20,000
To Cash A/c – 1,20,000
(Being rent paid in advance for the year)
At the time rent was due (Month 1)
Rent Expense A/c – 10,000
To Prepaid Rent A/c – 10,000
(Being the rent expense due and adjusted from the prepaid expense)
The same entry done in month 1 will be repeated in the next 11 months.
See less