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Let’s first interpret the meaning and importance of the month-end close checklist.

Month-end closing is an accounting procedure that accountants usually undertake at the end of the month to close the accounting records for a particular month. So, a month-end closing checklist guides the entire month-end closing procedure.

It is crucial as it helps us remember things we might otherwise skip while finalizing the monthly books of accounts. Also, you can fix any discrepancies at the earliest, rather than it getting piled up at the year-end.

Month-end Close Checklist

Excel Download

A downloadable excel sheet has also been attached for your reference.

Month-end close checklist

Hope after reading this you might have got an insight into the checklist for month-end closing.

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Meaning of Core Business Operations

In layman’s language, the term “core business operations” refers to the organization’s main or essential area of activity for which it was founded or came into existence. It does not only focus on the mission and vision of the organization but also on building better business operations strategies by;

• Controlling market forces and supply chain management
• Improving the quality of technology
• Expanding the business marketplace and acquiring new businesses
• Increasing revenue generation
• Better customer base acquisition and customer relationship management
• Developing new areas of activities

It means that the success of an organization does not only depends upon the functioning and performance of various departments but also the company’s coordination in managing and performing various departmental activities for conducting the core business operations.

Examples of Core business operations/models

1. The core business model of Uber is to provide on-demand services to its users. It provides a virtual mobile platform that connects users with taxi or cab drivers. Although cab drivers use their cars while performing their services. Uber earns 20-30% of the total fare amount.

2. The core business model of Amazon is to provide an end to end virtual or e-commerce shopping experience to its customers. It connects customers (users) with the products listed by various trusted sellers. Amazon earns money through subscriptions for prime services, retail services and web services. Amazon charges 6%-25% professional fees on every product sold by the sellers on its platform.

3. The core business model of Walmart is to provide offline and online retail services such as health and fitness, grocery and general merchandise. Walmart charges only referral fees (based on the product category) and it does not impose any charges on maintaining seller accounts.

Core vs Non-core business operations

Example

1. Uber

• Core business operations– The core business operations of uber are mentioned above in example (1).
• Non-core business operations– Apart from the core business operations, uber performs a few non-core business operations such as Uber Eats which provides food delivery services to its users (customers)  is not the main/core business of Uber.

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Let me start with the term ledger balancing.

What is Ledger Balancing?

Balancing ledger accounts means totaling both the sides of the ledger account, finding the difference between the greater total & smaller total and then recording the difference on the smaller side.

If Debit side > Credit side, then we say that the ledger account has “Debit Balance”.
If Credit side > Debit side, then we say that the ledger account has “Credit Balance”.

Now, let’s move forward to discuss the question asked.

Why should a ledger be balanced?

Balancing a ledger account will help you with the following;

1. Necessary for preparation of trial balance

Trial Balance is a list of the debit and credit balances of all the ledger accounts prepared by the entity as on a specific date. Without balancing the ledger accounts, it is impossible to prepare the trial balance of an entity.

2. Necessary for the preparation of financial statements

Balancing of ledger accounts helps to prepare profit & loss account and balance sheet so as to ascertain the profit or loss and financial position of the business.

3. To determine the cash available

The amount of balance in Cash A/c gives an idea of the amount of cash available to the organization. The balance determined is compared with the actual cash available in the cash box. Discrepancies, if any are further investigated.

4. To determine the value of assets

Organizations need to know the book value of their tangible and intangible assets eg. plant & machinery, furniture, software, etc at the end of a period. So, the value of assets at a specific date can be determined only after balancing the asset ledger accounts. Assets accounts usually have a debit balance.

5. To ascertain the total expense and income

Ledger balancing of nominal accounts such as expenses eg. purchase, salary, professional fees, etc, and incomes eg. sales, interest earned, etc will indicate the number of expenses incurred and income earned during a specific period.

This will help in ascertaining the profit earned or loss incurred by the entity as the balances of nominal accounts get transferred to the statement of profit & loss. Also, the entity can make strategies to reduce the expenses if the current period expenses exceed the previous period expenses.

6. To ascertain the debt outstanding & the amount outstanding to creditors

Balancing ledger accounts pertaining to bank loans or other loans accepted will help you determine the principal amount outstanding at a given date.

Also, balancing the supplier’s accounts will help you ascertain whether the amount is payable to the supplier (credit balance) or whether you have already made advance payments but the corresponding goods or services are yet to be received (debit balance).

7. To determine the amount receivable from debtors

Balancing the debtor’s accounts will help you ascertain the amount due from your debtor (debit balance) at a particular date. In case, the debtors have already made advance payments but you haven’t rendered the corresponding goods or services, then the account will present a credit balance.

Conclusion

A ledger must be balanced because of the following reasons:

• It is necessary for preparation of trial balance.
• It is necessary for the preparation of financial statements.
• Helps to determine the cash available.
• To determine the value of assets.
• To ascertain the total expense and income.
• To ascertain the debt outstanding & the amount outstanding to creditors.
• To determine the amount receivable from debtors.

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The bank reconciliation statement (BRS) is prepared by the accountant of the business. It is prepared periodically to match all the bank transactions in the cashbook with the bank statement and ensure the accuracy of the same.

The questions of who, why, and when usually go hand in hand, therefore, I would like to familiarize you with all the three, in brief, to make the concept simpler.

Why and when is a bank reconciliation statement prepared?

After a brief introduction, you might be wondering why and when is a bank reconciliation statement prepared by the accountant. As the closing balance of the cash book and that of the bank statement do not match in the books of accounts the accountants maintain a bank reconciliation statement. There are plenty of reasons why the balances do not match and some of them are as follows:

• The rate of interest or charges was not known at the time of recording transactions therefore no account is found.
• Cheques were issued by the company but not cleared by the bank.
• There is a mismatch in the date of entry and date of credit.

Due to some of the reasons as mentioned above, the closing balance in the books of accounts of the organization and that of the bank will not match, therefore, the accountants maintain a bank reconciliation statement depending on the value of the transactions.

In case the value of the transactions is high, the statement is reconciled on a daily or weekly basis whereas in the case of small transactions it is usually done monthly or as per the will of the organization.

Steps in preparation of a bank reconciliation statement

The following steps are usually followed by the accountants to prepare a BRS:

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What is Amortization?

Amortization can be referred to as the depreciation of intangible assets such as goodwill, patent, trademarks, copyrights, computer software, etc. It is the reduction in the value of intangible assets over a period of time.

Intangible assets having definite useful life lose their value over time due to technological changes, contract expirations, etc. So, finite-life intangible assets are amortized on a straight-line basis over the period of their estimated useful lives.

Journal Entry

The journal entry for charging amortization expenses in the books of accounts is as follows-

Rules as per the Modern Approach

Rules as per the Traditional  Approach

Treatment in the Financial Statements

Amortization expenses are shown in the Balance Sheet and the Profit and Loss account.

Let us also understand the same with the help of an example.

Example

Suppose Infosys Inc. acquired a new computer software for 1,000,000 in the month of January 20×1. The estimated useful life of the software is 5 years.

In this case, computer software worth 1,000,000 will be recorded as an intangible asset at the time of acquiring the software.

However, it will be amortized at the end of each year for 5 years on a straight-line basis ie. 200,000 will be recorded as an expense and will be written off from the amount of software each year for 5 consecutive years.

An extract of Profit & Loss A/c and Balance Sheet has been attached below for a better understanding of the presentation of amortization expenses.

The above profit & loss extract shows that 200,000 has been recorded as amortization expenses for the period Jan-Dec 20×1.

The above balance sheet extract shows 200,000 amortization expenses written-off from the amount of computer software for the period Jan-Dec 20×1. The balance of 800,000 will be proportionately written off in the next 4 years.

Conclusion

The above discussion may be summarised as follows:

• Amortization is the reduction in the value of intangible assets over a period of time.
• Intangible assets such as Goodwill, Patents, Trademarks, Copyrights, etc. are amortized.
• In the Profit and Loss Account, amortization is presented as “Depreciation and Amortization Expenses” under the head Expenses.
• In the Balance Sheet, it is reduced from the respective Intangible Assets under the head “Non-Current assets”

>Related Long Quiz for Practice Quiz 15 – Amortization

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An entity should not recognize a contingent asset in the financial statements. It can only be disclosed considering the probability of the inflow of economic benefits associated with the contingent asset.

A tabular representation of the question asked – When, Where & How to disclose Contingent Assets has been presented below.

When, Where & How to disclose Contingent Assets

Moving forward, let me also make you understand the disclosure with the help of an example.

Example of Disclosure of Contingent Assets

A fire broke out in the factory of ABC Jute Ltd destroying the entire jute worth 44,000,000. The jute destroyed was covered under an insurance policy. The policy prescribed acceptance of the amount of claim, amounting to 80% of the jute destroyed ie. 35,200,000 (80% * 44,000,000).

Before the end of the financial year, ABC Jute Ltd received informal information from the insurance company that their claim has been processed and the payment has been dispatched for the claim amount.

Suggest when, where & how to disclose this transaction in the financial statement.

Solution

There is a possible asset (claim amount) & the inflow of economic benefits is also probable ( > 50% – 95% probability). Therefore, ABC Jute Ltd can treat and disclose this as a Contingent Asset. Disclosure shall be made in the Notes to Accounts or Report of Board of Directors, considering the requirements of the accounting standards.

The following disclosure shall be made by ABC Jute Ltd as of the end of the reporting period:

Notes to Accounts(Financial Statements)/Report of Board of Directors

Contingent Asset

ABC Jute Ltd has filed for the receipt of the insurance claim amount of 35,200,000 (44,000,000* 80%) to the insurance company, in respect of the jute destroyed.
The inflow of economic benefits has been considered as probable because it has received informal information from the insurance company that their claim has been processed and the payment has been dispatched.

Hope you got an insight into the disclosure requirements of Contingent Assets.

>Related Long Quiz for Practice Quiz 18 – Contingent Assets

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Accumulated Depreciation

Depreciation is a wear and tear of an asset due to the efflux of time and various other factors. It’s basically an allocation of the cost of a tangible asset over its useful life.

Accumulated depreciation is the total depreciation charged on an asset until a specified date. It’s a contra asset account. And since it’s a contra asset account it reduces the balance of an asset i.e reduces debit balance and therefore has a credit balance.

Accumulated Depreciation is an Asset or a Liability?

Well if you ask me I would say that it’s neither an asset nor a liability.

Reasons to justify the above statement:

Why is it not an asset?

Assets are the resources held by an entity so that they could provide some economic value for the entity. But, in the case of accumulated depreciation, it does not generate any economic benefit for an entity rather it indicated that a certain sum of economic benefit has already been availed.

Why is it not a liability?

A liability is an obligation of an entity for making payment at a specified future date to a third party. Here, accumulated depreciation does not represent an obligation of an entity rather it is maintained just for the purpose of record-keeping.

Conclusion

According to the reasons mentioned above, it can neither be called an asset nor a liability. This would be the correct answer to this question.

But still, if you have to compulsorily classify the same as an asset or a liability I would definitely not classify it as a liability as it would not ensure fair representation of the financial statements since then it would be considered an obligation made to a third party which is not the case here.

>Related Long Quiz for Practice Quiz 39 – Depreciation

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A question often asked is, “Is bad debt an asset or liability?”. Let us try to understand this concept in detail.

What are Bad Debts?

In layman’s language, a Bad Debt is a non-cash expense incurred by a business when the debtor does not repay the amount owed by him in due course of time for reasons such as fraud, insolvency of the debtor, etc.

We can also refer to them as Uncollectible Accounts Expenses and Irrecoverable Debt.

What is a Liability?

Liabilities refer to the financial obligations of a business. In simple words, it is a sum of money owed by a debtor to a creditor under an agreement and is repayable on a specified period. For example, Bank Loans, Accounts Payable, Bank Overdrafts, etc.

Are Bad Debts an Expense or a Liability?

Bad Debts are an expense to the business and not a liability as the amount that was expected to be received from the debtor is irrecoverable and has a negative effect on the books of accounts by way of reduction from the accounts receivable.

It is recorded on the asset side of the balance sheet. However, it is entered in the balance sheet as a contra asset account, i.e. as a reduction from the accounts receivable. It is also recorded under operating expenses in the Income Statement as well as in the profit and loss a/c on the debit side.

Therefore, we can easily conclude now that bad debts are an expense and not a liability.

This concept is further explained with an example stated below.

Example

XYZ Ltd sells machinery to ABC Ltd. for 5,000 at 60 days credit. However, ABC Ltd has been declared bankrupt and can no longer pay the specified amount. This amount of 5,000 is a non-cash expense for XYZ Ltd and leads to a fall in the accounts receivables. Hence, it is a bad debt. It is not a liability for the company but an expense.

Bad Debts Shown in the Income Statement

An extract of an Income Statement showing Bad debts is given below:

What is Provision for Bad Debts?

When a business anticipates that a debtor may not repay the money owed by him, it prepares a Provision for Bad debts. This helps the business in preparing for any loss that may occur in the future.

Conclusion

The key takeaways from the above discussion are as follows:

• A Bad Debt is a debtor who fails to repay the amount he owes to the business.
• Liabilities refer to the financial obligations of a business.
• Bad Debts are an expense to the business and not a liability.
• It is entered in the balance sheet as a contra asset account, i.e. as a reduction from the accounts receivable.

>Read

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The term negative working capital is derived from the concept of working capital. To begin with, I would like to briefly explain the meaning of working capital.

In simple terms, Working Capital refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can have a positive or a negative value, wherein the two are an indicator of the well-being of a business. The formula to calculate working capital is as follows:

Negative Working Capital

In simple words, Negative working capital refers to the excess of net current liabilities over the net current assets. As the word itself suggests, a ‘negative’ working portrays a downfall in the financial position of a business and its inefficient functioning.

A company is said to be facing financial difficulty and is not in a position to pay off its debts when the value of working capital is negative.

Example

Calculate the working capital of XYZ Ltd.

(Extract of Balance Sheet)

Note: As we can see the total current liabilities of XYZ Ltd. are exceeding the total current assets therefore, the working capital is negative.

Working capital = Total current assets – Total current liabilities

= 1,13,000 – 1,26,000

= (13,000)

>Related Long Quiz for Practice Quiz 33 – Working Capital

Overview of Purchase Return

When the buyer of goods returns the goods purchased back to the seller, the transaction is referred to as purchases return. The buyer may return the goods to the seller (the creditor) due to excessive purchases, defective goods, or any such reason. For recording this transaction, adjustments can be made to the Purchase A/c or a separate Purchase Return A/c can be created in the books of the buyer.

The purchase return account is credited for recording the transaction and the respective accounts payable are debited.

When the goods purchased by the business on credit are returned to the seller, it reduces the Accounts Payable and is a ‘gain’ or ‘income‘ for the organization, hence purchase return is a nominal account.

As per Modern Rules

Purchase Return (Income) is Credited (Cr.) when increased & Debited (Dr.) when decreased.

Why is it like this?

This is a rule of accounting that is not to be broken under any circumstances.

How is it done?

For instance, you own a trading business and you purchased goods on credit from the supplier. Upon receiving the stock, you find a few defective items which you return to the supplier. In the financial books, the Purchase return account will be credited since it is an increase in income for the organization.

Given below is the timeline of how it would be recorded in the financial books.

Step 1 – The following journal entry is recorded in the books of accounts when the defective items are returned. (Rule Applied – Cr. the increase in income or revenue)

(Goods sent back to suppliers)

Step 2 – To transfer the income to “Trading A/c”.

(Goods returned are transferred to the trading account)

As per the Golden Rules of Accounting

Purchase Return (Income) is Credited (Cr.)

As per the golden rules of accounting for (nominal accounts) incomes and gains are to be credited.

The account of expenses, losses, incomes, and gains are called Nominal accounts. The balance of these accounts is always zero at the beginning of the financial year. Since the purchase return is an income for the business, it is to be credited.

Example

For instance, you manufacture bottles but a part of the raw material you purchased from the supplier is not of the required quality so you return the material to the supplier. In the financial books, the Purchase return account will be credited because it is an income for the organization since the amount payable to the supplier decreases.

Below is the timeline of how it would be recorded in the financial books.

Step 1 – For the above example, the journal entry for the raw material returned, “Purchase Returns A/c” is credited. ( Rule Applied – Cr. all incomes and gains)

(Raw material sent back to suppliers)

Step 2 – To transfer the income to the “Trading Account”

(Materials returned are transferred to the trading account)

Purchase Return Inside Trial Balance

Purchase returns show a credit balance in the trial balance. A trial balance example showing a credit balance for purchase returns is provided below.

Read

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Sales Return and Allowances

When the goods or commodities are sold by the dealer or a manufacturer to the customer and the customer returns these goods or part thereof then such return made by the customer is called a sales return for the seller or the dealer.

It’s a contra revenue account. It is reduced from the total sales amount. Generally, it is recorded in the “Sales Return and Allowance Account”.

Accounting Treatment of Sales Return in Books of Accounts;

When initially the goods are sold on credit and later on a part of them are returned the journal entry shall be,

When goods are sold initially for cash and later on a part of them are returned;

Example

You have a stationery store and a customer placed an order to buy 4 packs of blue gel pens but mistakenly you delivered 3 packs of blue and 1 pack of black pens. Each pack is sold for an amount of 100.

Initially, you must have recorded sales in your book as;

Now, the customer placed an order for 4 packs of blue gel pens and you sent 3 packs of blue gel and 1 pack of black gel pens hence, the customer returns a pack of black gel pens.

Now, you will record this return in your books as;

Sales Allowance

When the goods are sold by the seller or the dealer and a few of them are defective or damaged or not as per the specification for that matter then to maintain the relationship with the customer the seller sometimes grants allowances.

Such allowances granted are called sales allowances. It is a contra revenue account. And hence, it’s reduced from the total sales.

Accounting Treatment

When initially the goods are sold on credit and later on it was discovered that a part of them are defective the seller extends some allowance. The journal entry for this transaction shall be;

When initially the goods are sold on a cash basis and later on it was discovered that a part of them are defective the seller extends some allowance. The journal entry for this transaction shall be;

For Example,

Mr Alex has a business dealing in shirts. He sold 10 shirts to Mr Allen. The price of each shirt was 100 and so Mr Allen immediately paid 1000 cash.

At the time of initial recognition of sales, Mr Alex recorded it in his books as;

Later on, Mr Allen found that one of the shirts was defective and hence, he gave an intimation of the same to Mr Alex. Mr Alex agreed to give him an allowance and thus gave him a 50% discount on that shirt. The journal entry for the same shall be –

The sales are recorded as a net of all the returns and allowances made by the seller during the accounting period.

The following image illustrates the formula for net credit sales;

Overview of Income

Income is the money received by a business in exchange for goods or services sold. It could be both, received or yet to be received. In other words, it is a monetary inflow received either in cash or kind. It includes the revenue from various sources like dividends and interest received, selling goods or services, the commission received, etc.

There are two types of income or revenue shown in the income statement:

• Operating income: The income that is generated from the ordinary course of business such as Sales revenue.
• Non-operating income: The income that is generated from sources other than ordinary business activities such as Dividends received.

In accounting terms, economic benefits increase due to inflows. An increase in income should be credited to the books of accounts.

Related topic – Is Income Received in Advance an Asset or Liability?

As per Modern Rules of Accounting

Income is Credited (Cr.) when increased & Debited (Dr.) when decreased.

Why is it like this?

This is a rule of accounting that is not to be broken under any circumstances.

How is it done?

For instance, you receive a commission for selling goods at the end of every month. The total amount of commission (income) would be added to the income statement for the current accounting year since this increases the total income of your business.

Below is the timeline of how it would be recorded in the financial books.

Step 1 – The following journal entry for commission received is recorded in the books of accounts when money is received. (Rule Applied – Cr. the increase in income or revenue)

(Commission received in cash)

Step 2 – To transfer the income to “Profit & Loss A/c”.

(Commission received is transferred to the income statement)

Related topic – Is Fees Earned a Debit or Credit?

As per the Golden Rules of Accounting

Income is Credited (Cr.)

As per the golden rules of accounting for (nominal accounts) incomes and gains are to be credited.

The account of expenses, losses, incomes, and gains are called Nominal accounts. Basically, nominal accounts are those accounts shown in profit and loss accounts or income statements. The balance of these accounts is always zero at the beginning of a financial year.

Example

Let’s say you rent out a premises and receive a monthly payment from the tenant. Consequently, this income (rent received) would be reflected on the income statement.

Below is the timeline of how it would be recorded in the financial books.

Step 1 – In the below example the journal entry for rent received is recorded and “Rent Received A/c” is credited. (Rule Applied – Cr. all incomes & gains)

(Monthly rent received in the bank account)

Step 2 – To transfer the income to “Profit & Loss A/c”

(Rent received is transferred to the income statement)

Any income received in advance is a liability for the receiver and it is shown on the liability side of the balance sheet.

Related topic – Capital is Debit or Credit?

Incomes Inside Trial Balance

Incomes show a credit balance in the trial balance. A trial balance example showing a credit balance for commission and interest received is provided below.

>Read Is Expense Debited or Credited?

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What is Income Received in Advance?

Income received in advance is the income received but not due. In other words, when a business receives an income for a service not yet rendered, it is considered as income received in advance. It may be commission, rent, or any other income which is received before it is due.

Why is Income Received in Advance treated as a current liability?

In simple words, income received in advance is treated as a current liability because the income that has been received by the company before its due date, is not yet earned and the company is obliged to deliver the purchased goods or services in the future.

Let us assume that you have received an amount from a customer, for the goods or services that you will provide in the future, therefore, in the current financial period it is a liability for your company. It can be referred to as Deferred revenue, Deferred income, or Unearned income.

Example

XYZ Ltd. has received 4,000 from a customer in March for goods that will be delivered in April.

XYZ Ltd. will debit the Cash a/c for 4,000 and credit the Deferred Revenue a/c for 4,000. On the 31st of March, the balance sheet of XYZ Ltd. shall include 4,000 in the cash of their company and record the deferred revenue of 4,000 under current liabilities.

The journal entries to be recorded are as follows:

(Being income received in advance)

The above Journal entry records the transaction of receiving the cash in advance in the month of March for the goods that are to be delivered in April.

(Being goods sold to the customer)

In the above Journal entry, the Deferred Revenue Account is debited and the sales revenue account is credited to show that the goods have been delivered and revenue has been earned.

Placement in the balance sheet

An extract of the balance sheet is given below to show the placement of income received in advance:

Conclusion

The key takeaways from the above article are as follows:

• Income received in advance is the income not yet due but received.
• Income received in advance is treated as a liability.
• This is because the business has yet to render the services for the income already received by it.
• It is shown as a current liability under the Liabilities side of the Balance Sheet.
• It is also referred to as Deferred revenue, Deferred income, or Unearned income.

>Related Long Quiz for Practice Quiz 22 – Current Liabilities

>Related Long Quiz for Practice Quiz 31 – Income received in Advance

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Firstly, Nancy, the question put up by you is a bit vague. As in it is difficult to identify whether you have an issue in understanding an accounting concept regarding a loan given or loan taken.

Moving ahead, I think I can answer the question stated below in two ways

Is Loan a Current Asset?

Case 1: If a Loan is Given

Firstly you have to be clear whether the loan is a Loan granted or a Debt. When an entity lends a certain amount to another person based on certain conditions agreed by the parties at the time of entering into such contract. Then such a lender will recognise this transaction as a case of Loan Given.

Case 2: If a Loan is Taken

When an entity or a person owes a certain amount to another person or an entity or simply put up he has borrowed a certain sum from such another person based on certain conditions agreed at the time of entering into the contract such a transaction is a case of Loan Taken for the borrower.

To classify such a loan as a Current Asset or a Current Liability, you will need to first identify the tenure of such loan given or taken i.e whether it’s a Short term Loan or a Long term Loan.

If you want to make an accurate classification pertaining to the head under which such loan would be presented it is very important to ascertain whether its a short term or a long term loan.

Short term Loan

It refers to a loan taken or given for a short duration of time roughly ranging between a month and a year these are generally repaid in monthly instalments. Such Short term Loans can be classified under the heads of Current Assets or Liabilities. If you are still unable to get the concept clear the below-mentioned table can be of great help –

Long term Loan

A loan Taken or Given shall be said to be a Long term Debt or Long term Loan Given if such a loan is not due to be repaid or received within a year. It can be classified as a Non-Current Asset or a Liability.

Similarly, refer to the table below for a better understanding of this concept

I am sure that after having a look at the image included below you will have a clear understanding of this concept;

>Related Long Quiz for Practice Quiz 20 – Current Assets

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Before I give you the examples of deferred revenue I would first like to explain what deferred revenue means.

Meaning of Deferred Revenue

Deferred revenue is the amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services.

Examples of Deferred Revenue

• Yearly Subscription to a Magazine: An entity engaged in publishing magazines generally charges a yearly subscription for sending the magazines at predetermined time intervals to the subscribers. Such an entity charges a yearly subscription the amount received is a perfect example of deferred revenue. The Accounting Treatment for the Same is –
  The entity will first record deferred revenue as

At the time of actual accrual of revenue i.e at the time of recording earned revenue-

• Other Subscriptions: another example is the subscription charged by Amazon, Netflix, Hotstar etc. for getting access rights to download or watch the content on the website or such app. The charges are generally on a yearly or quarterly or monthly basis and thus in case if the customer buys a quarterly or a yearly plan such revenue is a deferred revenue since the services are not yet availed by the users. The company shall account for such receipts and revenue as:
  when it receives such subscription amount-

and when such revenue is accrued i.e customer has availed such service-

• Software license Fees: A software company generally charges the software license fees for using the entity’s software on a yearly or semi-annually or quarterly basis. Such fees are charged even before giving access rights. Hence, the company defers revenue. Accounting Treatment in the books of software companies shall be:
  At the time of receipt of the license fee

At the time of recognising revenue which may be monthly or quarterly or such other basis as per the entity’s policy;

• Educational Institute: Coaching centres or the universities for higher education generally charge the course fee before the commencement of each term. Thus the amount is received by such institute even before the services of imparting education has been rendered, This is a perfect example of deferred revenue. Such Educational Institute shall account this transaction as:
  At the time of receipt of such fee;

and at the time of revenue recognition;

What is Suspense account?

A suspense account is a general ledger account prepared in the following situations;
1. Transactions are unidentified or unclassified at the time of occurrence, or
2. Differences arises between the total debit side & the credit side of the trial balance.

When the right account is determined or the error is rectified, the amount shall be moved from the suspense account to its proper account.

Features Suspense account?

Here are some key features of a suspense account:

1. Temporary Holding: A suspense account serves as a temporary holding place for transactions that cannot be immediately classified into the appropriate permanent accounts.
2. Resolution: The purpose of a suspense account is to provide a means to temporarily record transactions until their proper classification or resolution can be determined.
3. Corrective Action: Transactions in a suspense account often require further investigation or correction to resolve discrepancies or uncertainties in the accounting records.
4. Balance Sheet Impact: Transactions recorded in a suspense account may impact the balance sheet temporarily until they are properly classified or adjusted.
5. Income Statement Impact: Depending on the nature of the transactions, entries in a suspense account may also affect the income statement temporarily until they are resolved.
6. Clearing Account: Once the discrepancies or uncertainties are resolved, the entries in the suspense account are typically cleared by transferring them to their appropriate permanent accounts.
7. Audit Trail: A suspense account provides an audit trail, allowing auditors and accountants to track transactions that required further investigation or correction.
8. Disclosure: In financial statements, any transactions recorded in a suspense account are typically disclosed in the notes to the financial statements to provide transparency to stakeholders.
9. Common Use: Suspense accounts are commonly used in situations where there are timing differences, errors, or missing information in accounting records.
10. Control Mechanism: Maintaining a suspense account helps in maintaining control over the accounting process by ensuring that all transactions are eventually properly classified and recorded.

Presentation of Suspense account in Financial Statements

In case Suspense A/c is not closed at the end of the accounting period, the balance in the Suspense A/c is presented in the Balance Sheet.

Extracts of the balance sheet have been attached for better understanding.

Example of Suspense A/c

A customer of ABC Ltd makes an online payment of 50,000 but he did not specify against which open invoice (out of the 20 open invoices) the amount needs to be settled. In this case, the accountant will pass the initial entry in the suspense account till he identifies the correct open invoice.

Journal entry to park the unidentified amount in the suspense account

The accountant identifies the open invoice against which the amount of 50,000 is to be settled.

Journal entry to close the suspense account and post the amount received against the appropriate invoice and proper account-

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Fixed Assets

Fixed assets are those assets that can be in the firm for a long period and it is tangible. These assets provide benefits for more than one accounting period for the firm. These provide support for the production or delivery of goods or services.

Current Assets

Current assets are those assets that are used within the operating year. These assets are used for the company’s day-to-day operations. This shows the firm’s liquidity and its ability to meet short-term obligations.

List of Fixed Assets and Current Assets

Presentation in the balance sheet

The balance sheet of ABC Ltd. is as follows;

This is an example of a balance sheet. The liabilities are recorded first and later assets are recorded. Assets and liabilities must balance out each other.

It is important to record all the liabilities as the company needs to pay them back responsibility on time. The assets also need to be recorded to know what kind of assets the company owns.

The fixed assets are recorded first since they stay for more than one accounting period. Later, the current assets are recorded since they will be used up within an operating year. All of the assets need to be mentioned in the company and should be organized based on the category it belongs to like fixed assets and current assets.

Conclusion

It is important and necessary for the company to be transparent about its assets and liabilities to the public.

>Related Long Quiz for Practice Quiz 20 – Current Assets

>Related Long Quiz for Practice Quiz 35 – Fixed Assets

Overview of Liabilities

From a business perspective, a liability is defined as money owed to third parties. It may be external (3rd parties) or internal (promoters). It is a debt or financial obligation that is settled by an exchange of economic benefits at a future date. For example, long-term loans, bonds payable, trade payables, bills payable, short-term loans, bank overdraft, etc.

Classification of Liabilities

• Internal & External Liabilities – Internal liabilities include all obligations that a business has to pay back to internal parties. For e.g. promoters (owners), employees, etc.
• Current liabilities: The liabilities that are payable within one year. For Example- Creditors, bank overdraft
• Non-current liabilities: The liabilities that are payable after a period of more than one year. For Example- long-term loans, debentures
• Contingent liabilities: The liabilities that are payable depending on the occurrence of a particular event. For Example- lawsuit proceedings, guarantee for loans

In accounting terms, liabilities are the funds payable to outsiders. Thus, an increase in liability should be credited to the books of accounts.

Related topic – Where is Amortization Shown in Financial Statements?

As per the Modern Rules of Accounting

Liability is Credited (Cr.) when increased & Debited (Dr.) when decreased.

Why is it like this?

This is a rule of accounting that cannot be broken under any circumstances.

How is it done?

For instance, a local business borrowed a sum from the bank for expanding its operations. As a result, this loan would be a liability and would be shown on the balance sheet for the current accounting year since the borrowed money increases the liability of the business.

Given below is the journal entry to be recorded at the time of borrowing the loan: (Rule Applied – Cr. the increase in liability)

(Sum borrowed from the bank for expansion)

The balance in the loan account decreases when payment is made towards amortization.

Related topic – Are Bad Debts Recorded in the Income Statement?

As per the Golden Rules of Accounting

Liability is credited as per the Golden Rules

The individuals and other organizations that have direct transactions with the business are called personal accounts. Liabilities such as creditors, outstanding expenses, income received in advance, loans taken, etc. are classified as personal accounts. Personal accounts are recorded on the balance sheet of the organization.

As per the golden rules of accounting (for personal accounts), liabilities are credited. In other words, the giver of the benefit is a liability to the one who receives it.

Example

For instance, you own a stationery shop and you purchased pens from the manufacturer on credit. You agreed to make the payment for pens after 30 days. Thus, the amount payable to the supplier is a liability to you and is credited to your books of accounts.

Given below is the example of a journal entry to be recorded at the time of credit purchase: (Rule Applied – Credit the giver )

(Pens purchased on credit)

Related topic – List of Liabilities in Accounting

Liabilities Inside Trial Balance

Liabilities show a credit balance in the trial balance. A trial balance example showing a credit balance for reserves, trade payables, and loans is provided below.

>Read What is the Meaning of Assets have Debit Balance and Liabilities have Credit Balance?

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Meaning of Income received in advance

It refers to an income received in advance by the entity for goods or services which have not been rendered in the current accounting period. The advance income received relates to the future accounting period. It is a personal account and presented on the liability side of the balance sheet.

Income received in advance includes;

1. Commission received in advance
2. Rent received in advance
3. Professional fees received in advance
4. Premium received in advance

Taxable or not?

Taxability of Income received in advance depends on the method of accounting (Accrual method or Cash method) followed by an entity.

So, let me help you understand the taxability considering both approaches with an example each.

1. Entity follows the accrual method

If the accrual system of accounting is followed then income received in advance will be not be taxed in the period of receipt. It will be taxed in the accounting period to which it relates.

For Example,

In the month of December 20×1, Mr Michael received professional fees in advance 50,000 which relates to the month of January 20×2.

So, in this case, professional fees received in advance 50000 will not be taxed in the accounting period Jan-Dec 20×1. It will be taxed in the period Jan-Dec 20×2, as it belongs to January 20×2.

2. Entity follows cash method

If the cash system of accounting is followed then income received in advance will be taxed in the period of receipt itself.

For Example,

Ms Alexa received the commission in advance 25,000 in the month of December 20×5, but the same relates to the month of January 20×6.

So, in this case, the commission received 25,000 will be taxed in the accounting period Jan-Dec 20×5 itself. Even though it relates to a future accounting period ie. Jan-Dec 20×6, it is of no concern here, as the cash system of accounting is followed.

Conclusion

We can conclude,

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Objectives of Bank Reconciliation Statement

Bank Reconciliation statement refers to the statement that reconciles the difference between the balances as per the bank column of cash-book and pass-book.  The following are the objectives of the bank reconciliation statement. BRS Stands for Bank Reconciliation Statement.

1. The primary objective for preparing BRS is to check the accuracy in the bank column of both cash book and passbook. Accountants generally prepare BRS based on transactions recorded in the cash book and bank book (passbook) at a particular time.

2. BRS is prepared to check the cash inflows and outflows in the business and they must tally with the bank statements (or) passbook. This helps the users to easily detect the non-uniformity in cash book balance and passbook balance.

3. BRS provides us information on the various aspects of banking transactions such as it gives information on the position of cheques, payment made by the bank on standing instructions, direct payment by debtors, bank charges, bank interest, dividends received etc.,

4. BRS helps the accountant to keep track of the funds available in the bank account. Hence it becomes comfortable for the company to issue a cheque for making payments to its various creditors in some future agreed date.

5. Another main objective of preparing BRS is to control the internal management of the organization on cash inflow and outflow. BRS acts as a mechanism to keep track of cash embezzlement, bank drafts and misuse of the company’s funds by dishonest employees.

Impact of Bank Reconciliation Statements

The following impact may occur if companies do not prepare bank reconciliation statements.

1. If the bank reconciliation statements are not prepared by the companies then there will be a difference in the bank column of cashbook and passbook. Hence, there will not be any accuracy in amounts of cashbook and passbook.

2. If the bank reconciliation statement is not prepared then the company will not have adequate information relating to the various banking transactions such as payment made to various creditors, bank interest, bank charges, dividends received etc.,

3. If the bank reconciliation statement is not prepared then it will be very difficult for an accountant to keep track of available funds in the bank account as per the passbook. This may result in the delay of future payment to suppliers, creditors and other agents.

4. If the bank reconciliation statement is not prepared by the companies then cash embezzlement, fraudulent transactions, misuse of company funds by dishonest employees will increase and it cannot be easily traced by the company.

I would like to add an example for a clear understanding of the above explanation

Example for Bank Reconciliation Statement

ABC Ltd furnishes you the following information prepare a Bank Reconciliation Statement to find out the Debit Balance of Pass Book.

Bank Reconciliation Statement of ABC Ltd.

Impact of Transaction if bank reconciliation statement not prepared

If the cheque is deposited but not collected,

CashBook– The accountant will record the transaction and it will show an increase in the bank balance of the cashbook (15,000+4,000 = 19,000).

PassBook– If the same is not recorded by the bank at the same time. Then the bank passbook will show the same balance (say- no increase and no decrease).

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In layman’s language, a trade discount refers to a reduction/fall in the original price of a commodity being sold. This type of discount is usually granted on the list price of the products by the supplier or wholesaler to the retailer for considerations such as buying goods in bulk, trade relations, etc.

No journal entry is recorded separately in the books of accounts for trade discounts. The entries that are shown in the sales or purchase books are recorded as the net amount.

This type of discount is simply utilized to determine the net amount for a customer. Since the trade discount is deducted before any exchange takes place, it does not have any accounting entry.

Example

Mr.A sells goods to Mr U amounting to the list price of 8,000 and offers a trade discount of 10% as the customer purchased goods in bulk. Pass the necessary journal entries for this transaction.

Solution:

The net price will be calculated as follows:

List price = 8,000
Trade discount = 10%

Net amount = 8,000 – (8,000 x 10%)
= 8,000 – 800
= 7,200

The journal entry in the books of the seller (Mr. A) is as follows;

(Being goods sold)

While recording in the journal entry, the discount amount will be deducted from the total amount, hence the net amount will be recorded.

Rules as per the Modern Approach

As cash is coming into the company due to sales, it leads to an increase in assets hence it is debited. This is leading to an increase in revenue hence it is credited.

Rules as per the Traditional Approach

As the cash is coming into the company due to sales, it is debited. The sales are credited since it is the reason leading to an increase in income hence they are credited as per the nominal account rule.

The journal entry in the books of Mr. U is as follows:

As the goods are being purchased with a discount of 10%, it is debited and as the cash is going out it is credited. The discount amount of 800 is subtracted from the total 8,000 the net amount of 7,200 is recorded as it is being bought in bulk and a trade discount is being provided. (Being goods purchased)

Rules as per the Modern Approach

The purchases account is debited since there is an increase in expenses. The cash account is credited since there is a decrease in assets as payment is made for the purchases.

Rules as per the Traditional Approach

The purchases account is debited since its an expense for the company. As the cash is going out from the company for the payment it is credited as per real account rule.

Note:

• The seller and the buyer will record the transactions in the books of accounts after subtracting the trade discount allowed from the original amount.
• As shown in the example above, the distributor and Mr. U shall record the transaction at 7,200.
• No separate entry shall be shown for a trade discount.

Conclusion

The key takeaways from the above article are as follows:

• A trade discount is a reduction/fall in the original price of a commodity being sold.
• It is usually granted on the list price of the products by the supplier to the buyer for reasons such as buying goods in bulk, trade relations, etc.
• No journal entry is recorded separately in the books of accounts for trade discounts.

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Posting Reference

A posting reference column is used to indicate that the entry is posted in the respective ledger accounts and it links the journal with the respective ledger account. The abbreviation used for posting reference is “PR”. It is also called a folio.

Purpose of PR Column

When an entity transacts in a large number on daily basis it becomes a troublesome task then for the bookkeeper to ascertain whether the entries are posted in appropriate ledgers. And it may so happen that the entry is posted twice. Later on, tracking that transaction and correcting the same becomes a tedious and time-consuming job.

Hence, to avoid these issues it’s recommended to maintain a posting reference column. Thereby simplifying the job of a bookkeeper.

It can be seen in the third column of the journal book generally. You can also see the same in the image inserted below;

Example

When an entity purchases an immovable property for an amount of 100,000 it shall be recorded in the books of accounts as;

The reference of the page number of the journal book shall be given in the respective ledger accounts to interlink the same. The ledger given below indicates the same;

Similarly, Cash Account shall also have a PR column wherein the reference of the page consisting of the primary journal entry shall be given. The below-given image presents the same

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In the business world, the terms “Debt” and “Liability” are used interchangeably and are understood to be the same. But in reality, they differ.

Debt

Debt refers to the money that a company borrows from external sources, typically in the form of loans, bonds, or lines of credit and it represents funds that the company owes to creditors or lenders with a promise to repay the borrowed amount along with interest over a specified period.

In other words, debt is the money borrowed by a business entity that is to be repaid to the moneylenders at a future specified date.

Examples of debt include bank loans, corporate bonds, mortgages, and other forms of borrowing used by businesses to finance operations, investments, or expansion.

Liability

Liabilities are a broader category of financial obligations that a company owes to external parties or stakeholders that include debt and other obligations such as accounts payable, accrued expenses, deferred revenue, and other liabilities that arise from past transactions or events.

Liabilities can be both short-term and long-term.

In other words, liability is an obligation to render goods or services or an economic obligation to be discharged at a future date.

For Example,

• Outstanding payment to suppliers of raw materials
• Outstanding Expenses – accrued rent, outstanding professional fees, outstanding electricity expenses, unpaid salary, etc
• Income received in advance – rent received in advance, the commission received in advance, etc
• Bills payable
• Debts accepted by an entity

Key differences between Debt and Liability

Now, let me help you understand the differences between the two terms discussed above, debt and liability.

Conclusion

All debts are liabilities, but not all liabilities are debts.

Debt is under liabilities, it refers to the portion of liabilities that represents borrowed funds. Liabilities are a broader range of financial obligations, including both debt and other types of liabilities arising from various business activities.

Debt and liabilities are essential components of a company’s balance sheet and are crucial for assessing its financial health and stability.

Meaning of Contra Assets

The word contra means “opposite”. So, contra assets have a credit balance, whereas assets normally have a debit balance. A contra-asset account stores a reserve which reduces the balance of the paired account. The reason to show this information separately in a contra-asset account is to see the extent to which the corresponding asset should be reduced.

A contra asset is used to offset or reduce the balance of the corresponding asset account in the balance sheet. Reducing or offsetting the gross value of the asset with the corresponding contra asset will give us the net value of the asset. A contra asset can also be referred to as a negative asset account.

Examples of Contra Assets

1. Accumulated Depreciation
2. Accumulated Amortization
3. Obsolete Inventory Reserve
4. Reserve/Provision for Doubtful Debts

Importance of Preparing the Contra Assets

• This helps in the accurate valuation of assets on the balance sheet. It helps in showing the present value of the assets after using them.
• It enhances financial transparency. The accuracy of financial documents is important for investors, creditors, and other stakeholders in making informed decisions.
• Contra assets help in eliminating risks relating to assets. For example, accumulated depreciation is a common contra asset that is used to indicate the depreciating nature of fixed assets, which may require maintenance or replacement and reduce the value.
• Contra assets help in making management decisions related to asset management and its maintenance.

Presentation in the Balance Sheet

Contra assets are to be stated in separate line items on the balance sheet of the company. The following contra assets can be presented on the balance sheet as given below:

Given below are the examples of Accumulated Depreciation & Reserve/Provision for Doubtful Debts. The calculation and posting in the extract of the balance sheet are also provided.

Example 1.

Suppose ABC Ltd. acquires new computer software for 600,000 in the month of January 20×1. The expected useful life of the software is 3 years with no scrap value.

As per the straight-line method, 200,000 will be written off or reduced from the amount of computer software each year for 3 consecutive years.

Example 2.

The outstanding balance of debtors was 50,000 as of 31/12/20×2. Entity ABC Ltd anticipates doubtful recovery from some debtors based on the previous year’s experiences. Therefore, it decides to provide a reserve for doubtful debts at 5% on its debtors.

So, 2,500 (50,000*5%) will be reduced from the number of debtors as a reserve or provision for doubtful debts as of 31/12/20×2. Hence, the net amount of debtors will be 47,500 at the end of the year.

Presentation of Accumulated Depreciation & Reserve/Provision for Doubtful Debts in the extract of the balance sheet as of 31/12/20×2

Conclusion

Adjusting asset values will help reflect their true worth and accounting like depreciation, and contra assets contribute to the reliability and integrity of financial reporting. These are asset quality indicators, that help assess financial health, and influence strategic decisions regarding asset management.

Overview of Prepaid Insurance

Prepaid Insurance is the amount of insurance premium which has been paid in advance in the current accounting period. However, the related benefits corresponding to the insurance amount prepaid will be received in the next accounting period. In other words, the insurance premium is paid before it is actually incurred.

Prepaid Insurance is an example of Prepaid Expenses. It is a current asset since its benefit will be received within a year. The actual amount pertaining to the next accounting period is recorded on the asset side of the balance sheet of the current year. Thus, prepaid insurance has a debit balance just like any other asset and it is debited in the books of accounts.

As the benefits of prepaid insurance are realized over time, the asset value decreases, and the amount is shown as an expense in the income statement of the organization. The adjustment related to prepaid insurance in the financial statements is carried out at the appropriate time i.e. both in the current period and in the future period (when it becomes due).

As per the Modern Rules of Accounting

Prepaid Insurance (Asset) is Debited (Dr.) when increased & Credited (Cr.) when decreased.

Why is it like this?

This is a rule of accounting that cannot be broken under any circumstances. Prepaid insurance is an asset to the entity. Therefore, as per the modern rules of accounting for assets an increase in assets will be debited.

How is it done?

For instance, HP Inc. paid the insurance premium for its equipment’s amounting to 50,000 on 10/12/20×1. This insurance policy covers the next 12 months. The amount paid towards insurance increases the assets of the business hence it is debited in the books of accounts.

Given below is the journal entry for recording prepaid insurance in the financial books. (Rule Applied – Dr. the increase in Asset)

(Insurance premium for next year paid in cash.)

The balance at the end of the year is shown on the asset side of the balance sheet and the amount is carried forward to the next year.

As per the Golden Rules of Accounting

Prepaid Insurance is debited as per the golden rules.

Prepaid Expenses are referred to as representative personal accounts (accounts that represent a certain person or group of people). According to the rule for personal accounts, we have to debit the receiver of the benefit and credit the giver of the same.

As per the golden rules of accounting (for personal accounts), prepaid insurance is debited.

Example

J P Morgan Inc. paid the insurance premium for all its furniture amounting to 100,000 on 31/12/20×2. However, the entire amount of premium paid relates to the year 20×3 (Accounting period-Jan 20×2 to Dec 20×2).

Given below is the example of the journal entry for prepaid insurance, for which the Prepaid Insurance Account is debited. (Rule Applied – Dr. the receiver.)

(Insurance premium for next year paid through the bank.)

The debit balance at the end of the year is shown on the asset side of the balance sheet and the amount is carried forward to the next year.

Prepaid Insurance Inside Trial Balance

Prepaid insurance shows a debit balance in the trial balance. A trial balance example showing a debit balance for prepaid insurance is provided below.

Here, only the amount for 3 months is prepaid and it is recorded on the asset side of the balance sheet.

Read

>Related Long Quiz for Practice Quiz 36 – Prepaid Expenses