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Key Emerging Digital Payment Trends

Ahuja Sahil
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Key Emerging Digital Payment Trends

In recent years, there has been a shift when it comes to the use of digital payments. Reuters highlights how the use of digital wallets and payments has been steadily rising since 2017. Today, these alternative payment options are now being used by billions of consumers from all over the globe. Because of its success, more and more companies have developed a number of alternative options for consumers within these channels.

Increasing adoption of cryptocurrency and digital currency

Cryptocurrency has slowly become part of everyday life. So much so that we even listed cryptocurrency as one of our ‘Hot Stocks to Watch in 2019’. This is promising as there are several reasons why cryptocurrency, particularly Bitcoin, can be a game-changer. Firstly, cryptocurrency appeals to the younger generation while providing greater security. Cryptocurrency can also largely reduce and potentially eliminate any additional transfer costs, leading to savings for consumers. In addition to all of this, they also benefit those in third-world countries who don’t have access to traditional bank accounts. These factors have to a more mainstream acceptance of cryptocurrency. In fact, the Supreme Court has even lifted The Reserve Bank of India’s ban on dealing with cryptocurrency.

 

The growing popularity of branded credit cards

With the rise of online shopping, customers are turning to credit cards as a popular payment option. A feature on how to build a good credit score by Petal explains how most major retailers often have their own store credit cards, which offer store-wide discounts at the cost of higher interest rates and lower credit limits. While they can promote greater brand loyalty, they offer limited benefits for consumers compared to regular credit cards due to their lack of flexibility. This is because they can only be used in certain locations and with certain brands. On the other hand, being co-branded does away with this problem. If the card is co-branded with Mastercard, Visa, or American Express, it can be more widely used. This is why co-branded credit cards are steadily growing in popularity, drawing in consumers with desirable reward options.

 

The rise of e-wallets and mobile payment apps

Unlike bulky physical wallets, e-wallets and apps can be electronically stored on your mobile phone making them much more convenient for travel. Entrepreneur summarizes the various benefits of digital wallets, noting how they are rapidly evolving to adapt to the needs and lifestyles of their consumers. Unlike card payments, they allow instantaneous payments online and make it easier to keep track of your spending. They also come with promotions, and cashback rewards, and enable you to avoid expensive transaction fees. One innovative feature of e-wallets is their seamless integration with fitness wearables, such as the Apple Watch and Garmin models that enable you to make payments with these devices as well. Something that users should be aware of is the possibility of cybersecurity threats when it comes to inadequate password protection or poorly encrypted payment channels.

When it comes to keeping yourself updated with the latest digital payment trends, it’s all about being careful with regard to any security threats and hidden fees that accompany these platforms. Being mindful of your spending habits and maintaining your safety and privacy are paramount to the convenience that these cashless methods provide.

 

 

Accounting and Journal Entry for Rent Paid

Ahuja Sahil
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0

Paid Rent Journal Entry

If a business does not own an office premise it may decide to hire a property and make periodical payments as rent. Such a cost is treated as an indirect expense and recorded in the books with a journal entry for rent paid. The party receiving the rent may book a journal entry for the rent received.

Payment for rent to the landlord is often;

    • Recurring in nature
    • Pre-decided amount
    • Paid every month
    • Likely shown as “office rent” in the financial statements.

The landlord may be an individual or another business providing their services. A rent agreement is prepared and agreed upon between the landlord and the tenant.

 

Journal entry for rent paid (in cash)

Journal Entry for Rent Paid

Accounting rules applied – Modern Rules

Rent Account Debit Debit the increase in expense
Cash Account Credit  Credit the decrease in asset

Accounting rules applied – Three Golden Rules

Rent Account Debit Dr. all expenses – Nominal A/C
Cash Account Credit  Credit what goes out – Real A/C

 

Accounting Treatment for Rent Payment

The life cycle to account for payment of rent expenses (in cash) goes through a couple of steps as shown below;

Step 1 – Journal entry for rent paid (in cash)

Rent A/C Debit
 To Cash A/C Credit

 

Step 2 – Transferring office rent expense into income statement (profit and loss account).

Income and Expense A/C Debit
 To Rent A/C Credit

 

Presentation in the Financial Statements

It is shown on the debit side of an income statement (profit and loss account)

office rent paid shown in income statement (profit and loss account)

 

Example

On the 15th of March, Unreal Corporation paid a rent of 10,000 (in cash). The payment belongs to rent due for the same month. Show related journal entries for office rent paid in the books of Unreal Corporation.

March 15 – Journal entry at the time of payment

Rent A/C 10,000
 To Cash A/C  10,000

 

March 31 – When the business books Closing entries

Income Statement 10,000
 To Rent A/C 10,000

Related Topic – Accounting and Journal Entry for Outstanding Expenses

 

Journal Entry for Rent paid by Cheque

Small businesses pay office rent either in cash or by cheque. But larger organizations usually prefer paying it only by cheque. This is done to keep legal evidence of the accounting transaction and maintain an audit trail.

Following are the steps for recording the journal entry for rent paid by cheque. In this case, the cash account is replaced with a bank account.

Step 1 – At the time of the cheque issue,

Rent A/C Debit
 To Bank A/C Credit

 

Step 2 – When rent expense is transferred to the income statement (profit and loss account)

Income and Expense A/C Debit
 To Rent A/C Credit

 

Example – On 10th March, XYZ Ltd paid office rent to its landlord by cheque for the same month amounting to 20,000. Show journal entries for office rent paid by cheque in the books of XYZ Ltd.

March 10 – Journal entry for office rent paid by cheque

Rent A/C 20,000
 To Bank A/C 20,000

 

March 31 – Journal entry for transfer of rent expense to the income statement (profit and loss account)

Income Statement 20,000
 To Rent A/C 20,000

Related Topic – Journal Entry for Advance Received from Customer

 

Journal Entry for Rent Paid in Advance

Rent paid in advance i.e. Prepaid Rent is the amount of rent paid by a firm in advance but the related benefits equivalent to the amount of advance payment are yet to be received. The benefits are due to be received in the future accounting period.

It is displayed as a current asset in the balance sheet as it is an advance payment.

 

Journal Entry

Prepaid Rent A/C Debit Debit the increase in asset
 To Rent A/C Credit Credit the decrease in expense

(Recording rent paid in advance)

 

Example – On 1st January ABC Co. paid office rent amounting to 10,000 (5,000 x 2) for the month of January & February. Payment is made in cash. Show journal entries to be posted in the books of ABC Ltd.

 

Accounting on January 1

Prepaid Rent A/C 5,000
Rent A/C 5,000
 To Cash A/C 10,000

(5000 rent paid for January, 5000 rent paid in advance for February, all by cash)

 

Accounting on February 1

Rent Account 5,000
To Prepaid Rent Account 5,000

(5000 rent obligation for February charged against the rent paid in advance last month)

 

Short Quiz for Self-Evaluation

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>Read Petty Cash Book

 

Accounting and Journal Entry for Advance Received from a Customer

Ahuja Sahil
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Journal Entry for Advance Received from a Customer

In certain types of business transactions, it is a requirement for the customer to pay a part of the total amount or the entire sum in advance, for example – security deposit to rent a property, customized items, bulk orders, insurance premium, etc. As a result, journal entry for advance received from a customer is entered in the books.

Not to be confused with accrued income advance received from a customer is an ideal example of unearned income or deferred revenue. Funds collected as advance received from a customer are treated as a liability because the related revenue has not been earned by the business yet.

Customer Advances Summary

 

Journal Entry for Advance Received from a Customer

Journal entry for advance received from customer

Bookkeeping rules applied – Three golden rules

Cash A/C Debit what comes in – Real A/C
Customer Advance Account A/C Credit the giver – Personal A/C

Bookkeeping rules applied – Modern rules

Cash A/C Debit the increase – Assets
Customer Advance Account A/C Credit the increase – Liability

If the related goods or services are to be delivered within 1 year then it is treated as a current liability otherwise a long-term liability.

Related Topic – Journal Entry for Manager’s Commission

 

Accounting Treatment for Customer Advance

Following are the steps and the associated timeline to book the journal entry for advance received from a customer.

Step 1 – When customer advance is received.

Cash Account Debit Debit the increase in asset
 To Customer Advance Account Credit Credit the increase in liability

Customer advance account is shown on the liability side of the balance sheet as the related revenue is still unearned.

 

Step 2 – When an invoice is sent to the customer.

Accounts Receivable Account Debit Debit the increase in asset
 To Revenue Account Credit Credit the increase in revenue

As per accrual based accounting the revenue is earned at this step i.e. when the final product is ready for delivery. An invoice is sent to the customer, consequently, the customer advance shown as a liability on the balance sheet is removed.

 

Step 3 – Journal entry to clear the customer advance account.

Customer Advance Account Debit
 To Accounts Receivable Account Credit

Finally, the journal entry to clear the customer advance account.

 

Example – Journal Entry for Customer Advances

Unreal Corporation received 10,000 as advance from ABC on 1st January for a custom paint job for ABC’s car. The work completed, and the customer was invoiced on 1st February of the same year. Show journal entry for advance received from the customer in the books of Unreal Corp.

January 1 – When 10,000 is received from ABC as advance

Cash Account 10,000
 To ABC Advance Account 10,000

 

February 1 – When ABC is billed or invoiced for 10,000 

Accounts Receivable Account 10,000
 To Revenue Account 10,000

 

February 1 – Journal entry to clear ABC’s customer advance

ABC Advance Account 10,000
 To Accounts Receivable Account 10,000

 

Short Quiz for Self-Evaluation

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>Read What is a Service Center?

 

How to save money on transferring your funds between countries?

Ahuja Sahil
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0
How to save money on transferring your funds between countries?

 

We store our funds in different places, whether it be banks, financial platforms, currency exchanges or stock markets. In today’s age of globalization, we can easily use platforms from other countries. Therefore, we start moving our money between different countries and make frequent international transactions. It generates high transaction fees, which can quickly affect our total gains.

Try online remittance platforms

Bank fees for international payments

First of all, it may be worth to research some remittance platforms. Regular international bank transfers are very expensive compared to other online alternatives. The same applies to receiving the funds, as for example some banks charge you just to get money from an overseas account. It may come in handy if you have bank accounts in few countries and want to move your money between them in a convenient and cheap way.

On average the banks charge their users $10-$25 for international SWIFT transfers. Now, sending let’s say 100 USD and exchanging it into EUR through one of the most popular online payment platforms – PayPal, costs around $4.99. The same transfer through other platform called TransferWise would cost only $1.71. At the same time, Lloyds Bank, which is one of the top British banks, charges around $12 for an international money transfer and an international wire from Australia’s ANZ bank costs around $16. You see that the difference is quite significant.

Which money transfer platform is the best?

But as you can see from our quick example, the prices can vary even between two randomly picked platforms. So, which company is the best to handle your money transfer? Well, there is no direct answer to this question. The final transaction cost depends on many factors, such as the currency, your and your recipient’s location, exchange rates, transfer method.

A good way to find out the final costs and choose platform with the best rates at given moment is to use a compare tool. For example Wirly.com, which specialize in gathering information about various remittance companies, created a neat calculator. All you have to do is type in how much money you need to transfer, in which currency and to what country and the platform will show you how much your transfer costs in all of the available money transfer companies. That way, you can either simply choose the top position, or research the lower entries if you are interested in other features.

Some companies may offer cheap transfers, but they might be very slow. In that case, you can simply sort the list depending on the estimated transaction times. If you are looking for the most trusted service for important payments, click on the safety and customer satisfaction categories.

It’s important to research some reviews and real user experience before giving your money to some company. Google Reviews or TrustPilot seem like the places to go. Learn about the advantages and disadvantages of particular platform.

 

Watch out for exchange rates

Be careful with “free” transfers

Some transfer companies, as well as banks trick their customers by providing “cheap” transaction fees. In the meantime, they provide unfavorable currency exchange rates. For example, if 1USD is equal to 0.9EUR, they may exchange your dollar for only 0.6EUR, eating that 0.3 as a hidden fee. Try to use currency conversion services, which offer rates the closets to mid-market rates (which are the rates that financial institutions use to trade currencies among themselves).

Try different currency pairs

When talking about transferring funds internationally and exchanging currencies, it’s worth noting that some currencies are cheaper to transfer than others. For example, transferring GBP to EUR might be simply cheaper than sending the same amount in USD. If you own a few currencies you can research some combinations to find the perfect configuration. When talking about these pairs, the next point is also important to have in mind…

Find local services

Some companies specialize in handling money in particular regions or countries. If you look for offers to transfer your funds between specific countries, you may find a great bargain. For example, TransferGo offers transfers between UK and Poland. Their rates in that case are significantly better than any other general remittance platform. There are many other similar examples. Remit2India, as the name indicates has a good connection with India.

To sum up, if you are handling all of your international transfers through your regular bank account, it may be worth checking some online alternatives. The remittance market has grown in recent years and these companies already process millions of transactions each day. If you have at least a few dollars on each transfer, it can add up to bigger amounts in the long term.
 

 

Types of Business Investors You Need to Know

Ahuja Sahil
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Types of Business Investors You Need to Know

Different Types of Business Investors

The idea of being your own boss is so exciting, but the point where this idea seems like crashing is when you think about money to kick-start your startup.

Unless you are born into a millionaire family, or you have served on a higher post for a multinational company, it is difficult to imagine that you would have enough money to see the dawn of your entrepreneurship. That’s why most startups lookout for investors to fulfil their funding requirements.

But finding an investor is also not as easy as you imagine. You will not get an investor just by pitching your idea. Moreover, considering that there are so many types of investors, picking the right one for you is also so confusing.

But you can’t select an investor randomly because your selection of an investor determines whether your venture will be a hit or flop.

 

Here are some types of investment you need to consider for receiving your funding:

Personal Investors

Personal investors are people close to you, your friends, family members, or anyone in close acquaintances can turn into your personal investor. What can be better than getting a helping hand financially from your acquaintance? Most probably, all the policies and paperwork will be flexible here, but you need to consider a few things.

Personal investors might not be able to lend you a huge amount of money, and involving a personal relationship in the business can be risky. Consult a lawyer and go for detailed documentation of all matters to avoid the creation of any bad blood between you two.

 

Venture Capitalist

Venture capitalists are people who look out for startups for investment that seem to be promising and have the potential for tremendous growth. Usually, people with a lot of money, banks and other established financial institutes are venture capitalists.

They know their investment can be a risky affair which is why they only invest in startups that have different business pitches and look different from their competitors. So, to approach a venture capitalist, you really need to have a firm idea.

A VC invests in the early stage and remains in the loop throughout the process, unlike private equity – that’s the main difference between venture capital and private equity. The venture capitalist asks for equity in return for the investment and holds a say in the company.

 

Angel Investors

Angel investors are the most sought-after type of investors in the world of startups because they invest in startups and small businesses for the sake of giving them a boost. Due to their intention of wellness, they usually offer to fund on favourable terms and conditions. They are the best option for those who don’t want to see someone else dominating in their company, like in the case of the venture capitalist.

As you can see that there are diverse types of investors, you will encounter while looking out funding for your business. All these types have their own pros and cons. Make sure you consider all the dimensions before choosing your fighter because – the right selection of investor matters!

 

 

How to Put Your Business on Facebook

Ahuja Sahil
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How to Put Your Business on Facebook

Procedure to Put Your Business on Facebook

You know by now that Facebook is one of the most active social media platforms. With almost two billion active monthly users, it has great potential to turn into a jackpot platform for your business if you hit it right on point. Now, Facebook is no more an option for your business; it has become a necessity.

Despite the huge buzz surrounding the significance of Facebook, many businesses still consider it merely a fancy marketing tactic. But it is a lot more than that! If you are missing it from your marketing strategies, you are missing out on a big-time potential to capture a wide customer base.

Feeling motivated to land your business in the world of Facebook? Good, we are here to help you! The best thing is that putting your business on Facebook is also not rocket science. Here are given simple steps on how to create a business Facebook page without a personal account. It is just a matter of a few steps, and you will be closer to your customers – much closer.

 

Create a Page

The first step is to create your business page. Type facebook.com/business on the search bar and click on Create a Page written in the top right-hand corner of the page. Once you click it, several options will unfold, including the type of business options, services you are offering and cause, etc.

Select the required option for each category, and in case you think that your business type can be categorized in more than one mentioned option, then select the one through which you want to register your business among customers.

 

Fill in the Required Information

Once you select your business type, a box opens that requires you to mention the name of your business, your business address, and the category of your business page. These categories are sub-types of your main business category.

After mentioning all the further details, click on ‘Get Started’. You can also check out Facebook’s terms and conditions for running a business page before clicking Get Started because once you click on it, it means that you agree to them no matter what.

Nevertheless, after clicking on ‘Get Started’, you officially get your Business Facebook Page. After that, only a few steps are left.

 

Set Up a Profile Picture

Next, choose a profile and cover image for your page. Don’t forget that these pictures will be a visual representation of your brand, so you can’t go with random images. Choose the picture wisely, your brand’s logo can become a great profile picture and your products an amazing cover picture.

They will not only be relevant but also give details about your brand personality the moment your customer will land on your page.

 

Add Details for Users

Now, you already have the basic skeleton of your brand’s Facebook page. But what if your customers need to know more about you and your services? Obviously, merely your profile and cover picture can’t help them. For this, click on Add a Short Description and pitch your brand’s essential features to your customers in max. 155 characters.

Whereas, in the About section, at the top left corner, you can edit the starting date of the business, contact information, and details of other social media accounts if any. If you are running a restaurant business, you might also be able to add specific details like menu and prices.

After doing all this, you are all set to update your first post. And starting from here, you need to have a robust Facebook marketing strategy to ensure that your social media venture writes a success story for your business.

 

 

How to turn Money into Gold

Ahuja Sahil
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0
How to turn Money into Gold

Turning money into Gold is pretty simple in this day and age. There are countless ways to buy gold coins and bullion online. However, when doing so, be sure you are buying from a highly rated website. Do your research on where are the best places and what are the best practices. Gold is not all the same, there are gold items that are made of different %’s. Gold comes in coins too and you need to understand what they are and their actual worth.

The most important thing you can take away from this is, do your research! Gold coins are all over. There are old coins that were found from the ruins of sea ships and coins that are produced in modern-day mints. The rarity of a coin, as well as other things, determine the worth of a coin. How much gold is in the coin is another factor, for example. So, coins are not just an investment, but they are more of a collectable as well. This is a fun hobby for some and also a great investment at the same time.

There are some gold coins that are much easier to buy and sell. This is an important aspect that should be understood if you plan to trade a lot of coins. Do your homework and find reputable dealers. Understand what the dealers charge to sell gold coins as well.

 

The Various Ways

There are many ways to turn your money into gold. We have been speaking about turning your money into physical gold, however, there are other ways as well. You can purchase gold certificates or ETFs (Exchange Traded Funds) for example. These are not the same as the physical gold option but they are essentially trading in your cash for gold.

It really depends on what you are trying to do when turning your money into gold. Are you looking to diversify your portfolio then paper gold such as the certificates and EFT may be what you need? If you are looking to protect yourself and your assets from a falling government or falling money value then you will want the actual gold coins and bullion.

These will need to be stored properly in your safe or bank to ensure you have access to it at all times. Most like to store it in their own safety so that they feel safer and can access it should there be any sort of a crash in the market.

Today you have a couple of options for money. You can use the typical currency issued by banks or you have hard assets like gold. Having all your wealth in currency leaves you vulnerable to attacks. As the governments become unstable or they borrow and make even more debt it makes the value of money very unstable. To help with the stability of wealth, it is important to diversify your funds into assets such as gold.

As with any investment, be sure that you do your homework and research. Ensure you know and understand what it is you want to achieve and how to possibly achieve it. As with any investment, there is some risk. However, without risk, there is no reward.

 

What to do when another business is interfering with yours?

Ahuja Sahil
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0
What to do when another business is interfering with yours?

Steps You Can Take When Another Business Interferes With Your Business

In today’s competitive business market, businesses are vying for lucrative contracts. What happens when another business interferes with your lucrative contract? You may hire a business lawyer and sue them for interfering with economic prospective.

You can sue them for intentional interference with your prospective business advantage if the other business – let’s call it BAD CORP –  disrupts or diverts the business relationship by improper methods which fall outside the boundaries of fair competition.

 

What are the elements of Intentional Interference With Prospective Economic Advantage?

A cause of action exists for intentional interference with another’s prospective business advantage if the defendant disrupts or diverts the business relationship of another by improper methods which fall outside the boundaries of fair competition.

 

Existing Prospective Business Relationship

You must show an existing business relationship or the existence of a “prospective business relationship.”

Examples:

In attempting to prove a prospective business relationship, the “interference with the market” theory is speculative and insufficient as a matter of law.

A podiatrist failed to allege an existing business relationship and, thus, stated no cause of action against the operator of a medical building who induced others not to lease space to the podiatrist.

An expectancy in obtaining a government license to do business was not sufficient because it was not a commercial dealing.

 

Prospective Business Advantage

You must show a “reasonable expectation of economic advantage which would otherwise have accrued to you. There must have been a “probability of future economic benefit” from a business relationship, which means more than a mere “hope” or “desire.”

It must have been “reasonably probable” that the economic advantage would have been realized but for the interference. If a compelling public policy is at stake, the court may permit a greater degree of speculative advantage.

 

Injurious Interference

Injurious interference occurs through an intentional disruption or diversion of the business relationship of another. The loss of potential future referrals and contacts was not sufficient to constitute injurious interference.

 

Wrongful Conduct

You must show that injurious interference did, in fact, occur. As a safeguard against intruding on lawful competition, the act or conduct must be wrongful by some measure beyond the fact of the interference itself. BAD CORP must have engaged in wrongful conduct, separate from the interference itself, that falls outside the boundaries of fair competition.

The conduct must violate a statute or other regulation or a recognized rule of common law or an established standard of a trade or profession. The plaintiff has the burden of pleading and proving that the defendant’s conduct was independently wrongful and not privileged; the defendant no longer has the burden of proving in an affirmative defense that his conduct was privileged.

Wrongful conduct may be the use of unlawful means or means otherwise lawful but without justification. Transactions creating security interests in tort claims are not unlawful per se and not “wrongful” for purposes of the tort of interference with prospective economic advantage.

 

Knowledge and Intent

Bad CORP must have known of and intended to interfere with another’s prospective business advantage. You must show that the interfering business conduct was designed to disrupt the business relationship. The court may infer the intent to interfere from a defendant’s intentional performance of an act substantially certain to result in interference.

 

Money Damages

You must show that BAD CORP caused your business to sustain money damages. Damages must not be speculative; there must be a foreseeable harm to the plaintiff caused or to be caused by the interference.

 

 

What is the Difference Between Discount and Rebate?

Ahuja Sahil
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0

Discount vs Rebate

Discount and rebate are commonly used terms in today’s dynamic markets, especially in the e-commerce world. Rebates and discounts are distinct forms of price cuts that directly or indirectly promote the overall sales of a business. Both the terms may sound similar, however, there is some difference between discount and rebate. applied.

Rebate – It is provided by a seller to the buyer for reasons such as; inferior quality of goods, inaccurate quantity, missing buyer-specific features in the final product, delayed supply, etc. Unlike, a trade discount that is provided mainly for high quantity buying, a rebate is for reasons which help a supplier to provide healing touch in a situation that is unfavourable during the process of selling.

Example of Rebate – Goods worth 10,000 were sold by Unreal Corp. to ABC Corp. but some of the goods were of poor quality, therefore, after a mutual agreement Unreal Corp. allowed a rebate of 1,000 i.e. 10%.

Rebate vs Discount

Discount – A seller grants it to the buyer in two distinct forms; trade discount and cash discount. It may be allowed out of the selling price (also known as maximum retail price or catalogue price) or as a reduction from the net amount payable.

Trade Discount – It encourages large quantity buying and is mostly provided to resellers.

Cash Discount – it is provided to encourage early payment. This helps the seller to maintain cash flow and healthy working capital.

Example of Discount – Goods worth 10,000 were sold by Unreal Corp. to ABC Corp. @10% discount each. Cash discount allowed @5% if payment is made within 15 days. This means a trade discount of 10% and an additional 5% discount if the payment is made within 15 days of the sale.   

Main difference between discount and rebate for reasons each of them is offered

 

Difference Between Discount and Rebate (Table Format)

DiscountRebate
DefinitionDiscount is the reduction offered by a seller to the buyer from the purchase price of goods or services.Rebate is refund or return of currency value that a seller of goods provides to the buyer for various different reasons.
ReasonsTo promote high quantity purchases, receive timely payments, and increased sales.For various reasons which are unfavourable during the purchase cycle, such as; poor quality, delay in delivery, etc.
Type of TransactionTrade discount is offered both on cash and credit sale, however, cash discount is only offered on a prompt payment. Rebate is allowed on both cash and credit sales.
Impact on InvoiceTrade discount is reduced from the original value even before the invoice is generated. Cash discount, on the other hand, is reduced from the final invoice value.The amount of rebate does not affect the original invoice as the adjustment is made post-sale. The effect is shown in trading account & the income statement.
Recording in book of accountsIn case of a trade discount, it is not shown in the books of accounts whereas a cash discount is recorded in the income statement as an expense.It is shown separately in the financial statements as it is provided after the sale has already been recorded.
TimingIt is applied at the time of occurrence of an event i.e. before the sale or purchase has been completed.It is used after an event has been recorded i.e. post the sale or purchase has been completed.
ConsiderationTrade discount is provided considering the quantity bought. Cash discount is provided considering the time of payment.Rebate is provided considering all the reasons for which a trade discount or cash discount is not offered.

 

Refund Vs Rebate: The terms ‘refund’ and ‘rebate’ are sometimes used synonymously. However, one important thing to keep in mind is the fact that where a refund is usually provided in full, a rebate is generally provided in part.

 

Examples of Rebate and Discount

Rebate

ABC brand has been in the mobile business for a few years. The company has come up with a new marketing strategy for a particular model X that is already popular in the market.

Reason for Rebate Delayed deliveries of mobile sets of the X model
Price of 1 set 10,000
Refund offered 10% of the phone price
Eligible Customers Each customer that has received the phone later than 1 month after ordering it
Required Steps Register themselves on the company website, fill out a survey, and verify their purchase of the X model.
Additional offer These customers can also qualify for 10% off on ABC earphones which are not that successful in the market.
Actual Cost to customers 9,000

The above strategy will be termed a rebate. This is a well-known sales promotion strategy and hits the demand side of any product. It is identifiable with characteristics like a refund of some amount, the transaction taking place after some time of the actual sale, and the customers required to do something extra in order to claim the rebate.

 

Discount

XYZ is a supermarket. It is facing low demand for breakfast items due to the pandemic situation. It comes up with a simple marketing strategy.

Discount Offers 10% off on all ready-to-eat breakfast items

5% off on all breakfast cereals
Eligible Customers All customers who buy the qualifying items and the required quantity
Actual Cost to customers The discount will be a reduction in the total bill amount and the buyer will have to pay less at the check-out
Example A customer will pay 900 for an item worth 1,000 and 950 for a breakfast cereal priced at 1,000

The above strategy is a simple trade discount strategy. It is still better to clear the inventory at lower prices than to risk the quality of perishable goods. The identifiable features of a discount can be easily seen such as all customers equally qualify for it, benefits are received at the time of purchase, and the discount is reducing the bill amount.

 

Journal Entries & Accounting

Discount

A cash discount is recorded in the books of accounts while a trade discount is not. Since the discount allowed is a clear expense for a business in order to earn revenue, the journal entry for a discount is:

Cash A/c Debit
Discount A/c Debit
  To Sales A/c Credit

 

Journal entry for recording a discount of 10% on products worth 50,000:

Cash A/c 45,000
Discount A/c 5,000
  To Sales A/c 50,000

 

Rebate

Rebate is also an expense for the business. But it is recorded in two stages.

At the initial stage:

Customer A/c Debit
  To Sales A/c Credit

 

At the time of rebate allowed:

Rebate Allowed A/c Debit
To Customer A/c Credit

 

Journal entry for recording a rebate of 10% on the phone set worth 10,000 that was sold to X:

X A/c 10,000
  To Sales A/c 10,000

 

Rebate Allowed A/c 100
  To X A/c 100

 

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Accounting and Journal Entry for Sales Returns

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Journal Entry for Sales Returns or Return Inwards

Sometimes due to various reasons goods sold by a company may be returned by the respective buyer(s). This may happen due to several different reasons, in business terminology, this action is termed a sales return or return inwards. Journal entry for sales returns or return inwards is explained further in this article.

Accounting events related to goods being returned are documented in the final accounts as they have a monetary impact on the financial statements of a company. Depending on the terms and conditions of the transaction goods sold in credit may be returned. 

 

Journal Entry for Sales Returns or Return inwards (in Credit)

Sales Returns Account Debit Debit the decrease in revenue
 To Debtor’s Account Credit Credit the decrease in asset

 

Journal entry for sales returns or return inwards
Treatment of sales returns or return inwards in books of accounts

 

Treatment of Sales Returns in the Financial Statements

Return inwards or sales returns are shown in the trading account as an adjustment (reduction) from the total sales for an accounting period.

It is not shown in the income statement or the balance sheet.

Sales returns or return inwards shown in trading account

Related Topic – What is the Accounting Cycle?

 

Example – Journal Entry for Sales Returns

Unreal Corporation sold raw materials worth 10,000 on credit to ABC Corporation. However, at the time of delivery, ABC Corporation found goods worth 2,000 as unfit because they were damaged in transit.

These goods were returned by ABC Corporation. Post an accounting entry for sales returns in the books of Unreal Corporation.

Journal entry for sales returns in the books of Unreal Corporation

Sales Returns Account 2,000
 To ABC Corporation 2,000

 

The two accounts involved in this entry are the “Sales Return account” and the “ABC Corporation” (Debtor’s) account.

As per the three types of accounts in bookkeeping;

Sales Returns Account Nominal Debit Debit all expenses and losses
ABC Corporation Personal Credit Credit the giver

Sales return isn’t exactly an expense or a loss to the company, however, it reduces current assets (in the case of credit sales), and therefore, it indirectly acts as a loss.

 

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Accounting and Journal Entry for Purchase Returns

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Journal Entry for Purchase Returns or Return Outwards

Sometimes goods purchased by a business are unfit for use and may need to be returned to the respective supplier(s). This may happen due to several different reasons, in business terminology, this action is termed purchase returns or return outwards. Journal entry for purchase returns or returns outwards is explained further in this article.

All such events related to returned goods are documented in the final accounts as they have a monetary impact. Depending on a transaction’s terms and conditions, goods purchased both in cash and credit may be returned.

 

Journal Entry for Purchase Returns or Return Outwards (in Credit)

Creditor’s Account Debit Debit the decrease in liability
 To Purchase Returns Credit Credit the decrease in expense

 

Journal entry for purchase returns or return outwards
Treatment of purchase returns or return outwards in books of accounts

 

Treatment of Purchase Returns in the Financial Statements

Return outwards or purchase returns are shown in the trading account as an adjustment (reduction) from the total purchases for an accounting period.

It is not shown in the income statement or the balance sheet.

Purchase returns shown in the trading account

Related Topic – What is COGS or Cost of Goods Sold?

 

Example – Journal Entry for Purchase Returns

Unreal Corporation purchased raw materials worth 90,000 on credit from ABC Corporation. However, at the time of delivery of the goods 5,000 worth of goods were found unfit because of inferior quality.

These goods were returned back to ABC Corporation. Post an accounting entry for purchase returns in the books of Unreal Corporation.

Journal entry for purchase returns in the books of Unreal Corporation

ABC Corp. A/C 5,000
 To Purchase Returns 5,000

 

As per the three golden rules of accounting,

ABC Corp. Account Personal Debit Debit the Receiver
Purchase Returns Account Nominal Credit Credit all incomes/gains

Purchase return isn’t exactly a gain or an income for the company, however, it reduces liability (in case of credit purchase), therefore, it indirectly acts as a gain.

 

Top Reasons for Purchase Returns

  • The customer ordered an incorrect product or size.
  • The seller delivered an incorrect product or size.
  • Products delivered in damaged or defective condition.
  • Bad quality products.
  • More products are purchased than required.

 

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Accounting and Journal Entry for Director’s Remuneration

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Journal Entry for Director’s Remuneration

The word “Remuneration” means any money or its equivalent paid to someone in exchange for using their services. Any such payment made to directors of a company is to be recorded in the books of accounts with the help of a journal entry for director’s remuneration.

Director’s remuneration is the amount paid to the directors of a company either in cash or by using the company’s property with approval from the shareholders and board of directors.

It includes salary, bonus, other rewards, etc. The board of directors control the compensation structure of the directors and the shareholders have the authority to sue the directors in case of an overpayment.

Journal entry for director’s remuneration is as follows;

Director’s Remuneration A/C Debit Personal Debit the receiver
 To Cash A/C Credit Real Credit what goes out

(Assuming the payment is made in cash)

 

Accounting rules as per modern accounting 

Director’s Remuneration A/C Debit the increase in expense
Cash A/C Credit the decrease in asset

Here, the Director’s remuneration is an expense to the company. The company is paying money to the director so the director’s remuneration account has been debited. Also, cash is going out of the organization upon such payment, therefore it has been credited.

Related Topic – How to Post from Journal to ledger?

 

Accounting for director's remuneration
Treatment of director’s remuneration in books of accounts

 

Director’s Remuneration Shown in the Income Statement

If the director is not an employee of the company then a separate account may be created to book all director remuneration related payments.

In case if the director is an employee then all expenses related to him/her may be included under the head “Employee Benefits A/C”.

Income statement showing director's remuneration
Assuming the director is not included in the company’s list of employees

Related Topic – What is Bookkeeping?

 

Example – Journal Entry for Director’s Remuneration

The board of directors for Unreal corp. approved a payment package of 1,00,000 per month including the bonus for one of its directors. Show accounting and journal entry for director’s remuneration at the end of the year if the payment is done via cheque.

In the books of Unreal Corp.

Director’s Remuneration A/C 12,00,000
 To Bank A/C 12,00,000

(Payment of 1,00,000 over 12 months paid from the bank)

 

Profit and Loss A/C 12,00,000
 To Director’s Remuneration A/C 12,00,000

(Transferring 12,00,000 as an indirect expense to the current income statement)

 

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Outsourcing Your Businesses Bookkeeping: More Profitable Than You Think

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Outsourcing Your Businesses Bookkeeping: More Profitable Than You Think

Outsourcing Your Businesses Bookkeeping

I think we can all agree that accurate accounting is a vital ingredient in a company’s success. The daily requirement of recording this information is often a low priority for those involved in running a business.

Bookkeeping is a skill that many entrepreneurs do not have or realize they need until the burden of keeping accurate financial records starts to take its toll. It’s a large expense to have a bookkeeper in your company so here’s why it’s a great idea to outsource that task.

Priority

Small businesses have small needs but with the potential rapid expansion, the owner will need to access full bookkeeping services. With an outsourced bookkeeping service, there is no need to train or hire a bookkeeper before one is needed. The outsourced service will have full-service tailor-made to the needs of the business.

Business Sense

All businesses need to conserve costs. It is a false economy to try and do it yourself or delegate it to another untrained co-worker. They will be wasting valuable time learning new skills instead of using their critical role in the efficient running of the business. If you outsource the bookkeeping then they are free to do what they are trained for.

Training

When you outsource your booking you are sending it to a trained individual. Like so many aspects of business, the laws and rules are being updated constantly, A professional bookkeeper will keep abreast of all the changes ensuring your business is being looked after.

It would be very difficult to learn about all the latest software solutions and packages used in accounting today. It is simply more effective to outsource this to a trained bookkeeper who knows which solution is best for your business.

Ready to Pay your Taxes

It is so much better to be prepared when you have to file your statements with the IRS. Similarly, your bank and your accountant will be much happier to read professionally recorded financial data.

Your outsourced data will be readily received and the burden reduced. There will be no question of the integrity of the information you provide as it has been verified by a professional bookkeeper.

Privacy

There is always the worry for any business that data is kept private. If you outsource your bookkeeping to an approved bookkeeper with impeccable references than you can rest assured of your business’s privacy. Networking in your community to find a service is paramount to finding a reliable service with a good reputation.

Why should you outsource?

There are some expenses a business can save on but financial well being isn’t one of them. There are too many parties that need to see your accounts and it is better to have a fully accurate record of all your transactions readily available than to struggle to keep track of your money.

If you do not have an experienced in house bookkeeper you should be searching for a company to outsource this role today.

 

 

Using Your Businesses Cash Flow For Loans

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Using Your Businesses Cash Flow For Loans

Businesses Cash Flow For Loans

Are you looking for a loan to keep your business ‘s cash flowing? Sometimes you need help to keep your business fluid and it may be that you need a cash flow loan. There are many quick collateral-free loans available to help you. There is no risk to your business assets with a cash flow loan and it can only make things better.

 

Are There Different Types of Loans?

Yes, there are four main options with a cash flow loan. Whether you need an invoice loan, a short-term loan, a cash advance loan, or a business line of credit it is vital that you investigate the options available to you. They all have a variety of terms and conditions and with careful consideration, you should pick the one most suited to your needs.

1. Business Lines of Credit

Quite simply one of the most flexible options around. The lender will allocate you a set amount which you can draw from when you need it. Once you repay the debt in full it refills and you can keep using the funds as you see fit. It has the feel of a credit card loan in that as long as you repay the minimum stated amount on the time you won’t incur any penalties.

These loans can be secured or unsecured in that they do not need collateral to obtain one. This is a good option if you need to boost your cash flow. If your financial records are up to date you may receive the cash the same day you apply.

2. Short-Term Loans

Similar to a traditional business loan but with a shorter-term repayment plan these also allow you to access funds immediately. You may have to start the repayments on a daily or weekly basis but a quick repayment can give the business owner peace of mind.

This might be the perfect solution during the busiest months of the year when a sudden injection of funds is required. If your business grows suddenly then this short term loan might just help with the flow.

3. Invoice Financing

This is the perfect solution if you are waiting for invoices to be paid. With an invoice finance loan, the credit company will check your creditworthiness and offer your terms based on the quality of your invoices. It would be a shame if you missed out on buying parts for a large order because you were waiting for someone to pay you.

You should receive around 85 % of the value of the company’s invoices which you can repay as your invoices are paid. The typical fee for this service is 2-3% plus a time related “factor fee”. This loan is collateral-free.

 

4. Merchant Cash Advance

This type of loan is a good option if your business receives money from credit cards. The merchant advance company will loan you money which you will repay as part of your daily credit card sales.

This daily repayment might mean that you have to change credit card providers if you do not work with a company on their list. This option is a little more costly than the others so a thorough investigation in all options is advisable. Ultimately you will make the best decision for your own business.

 

 

The Reasons Why Buying a Smartphone on EMI Is a Good Idea

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Few Reasons For Buying a Smartphone on EMI

Smartphones have become a necessity for many people throughout the world. Today’s technically advanced smartphones are capable of doing much more than just receiving and placing phone calls. And its potential is not restricted to just connecting you on social media platforms; you can use the technology to store data, take pictures and do a lot more.

Are you finally considering upgrading your old mobile phone to a new technology-advanced smartphone, but don’t have the money to buy it? We get it.

Mobile on EMI Stock photo

Your meticulously planned monthly budget, your list of potential expenditures, and some unexpected expenses may leave you not enough money to splurge on the latest smartphone. But, if you must own the phone, you can easily buy the smartphone on EMI.

The evolution of the lending sector has made it easier for people to fulfil their dreams without causing financial unrest. If possessing a high-end, feature-rich smartphone is your dream, then you can easily buy it on EMI.

There are a lot of financial institutions and fintech lending platforms, such as MoneyTap that provide you with the option to purchase a mobile on EMI. Simply buy the phone on a loan and repay the loan in affordable EMIs spread over a certain loan tenure.

 

 

Why You Should Buy Your Next Smartphone on EMI?

1. It’s a shame not to pick up a great bargain
Retail and online stores lure buyers like you and me with amazing bargains and deals. It would be a waste not to use such massive discounts to buy the phone you want. Wouldn’t it? Don’t get discouraged by your low account balance, buy the smartphone on EMI.

2. You get closer to luxury
Since you won’t be paying from your own pocket, you can think of buying a premium segment smartphone on EMI.

3. It’s simply convenient and fast
Standing in line, gathering the documents, and applying for a loan with a traditional bank to buy a mobile phone may not be your thing. Buying a smartphone on EMI gives you the convenience of applying for a loan online with loan approval done within a few minutes.

 

 

Why Buy a Smartphone on EMI Using a Personal Loan?

Because of the benefits, it provides.
1. Hassle-free loan application process – You get to enjoy a fast, hassle-free, convenient loan application experience.

2. Get access to funds instantly to buy the smartphone you want – Unlike traditional loans, you can get instant approval and quick disbursal so that you can take advantage of bargain deals and buy the smartphone before the deal expires.

3. A better option than using Credit Cards – Using a credit card to buy a smartphone means taking on debt at a high-interest rate. You can get a personal loan at a much lower interest rate. That means you get to save money on interest.

4. Affordable EMIs –Depending on your financial capability, you can choose to either pay high EMIs over a shorter loan tenure or low EMIs spread across a longer duration.

5. Flexibility in its usage – The personal loan amount may be used for any purpose you choose. After paying for your phone, if you are still left with funds, you can use them to buy mobile accessories you’ve always wanted but couldn’t afford.

6. Flexible repayment tenure – Most personal loans have flexible loan repayment tenure ranging from 2 months to 5 years.

7. Pay interest only on the amount you use – A lending platform like MoneyTap offers its consumers a unique feature that is not available with traditional personal loans. The personal loan or mobile loan is offered to you in the form of a personal line of credit. You can withdraw as much as you want up to your approved credit limit. The best part is that you pay interest only on the amount you withdraw from your credit line and not on the entire credit limit that is approved.

 

 

What is the Difference Between Loss and Expense?

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Loss Vs Expense

Loss – is the excess of expenditure incurred over revenue earned by a business for a given accounting period. It reduces the total capital invested in the business.

Loss is Expenses Minus Revenues

Such monetary damage may arise due to;

  • Business operations – Relating to business activities.
  • Non-recurring events – Relating to unforeseen events e.g. fire, theft, loss on sale of fixed assets, etc.
  • Accounting loss – Relating to accounting policy or accounting standard changes, etc.

 

Loss Shown in Financial Statements

Net Loss incurred by a business is shown on the credit side of an income statement as a balancing figure. At the time of preparation of final accounts, the loss is transferred to the balance sheet.

Loss shown in financial statements

 

Expense – Money spent by a firm for generating revenue is termed as expenditure or expenses. The cost incurred as expense usually expires during the same accounting period, i.e. it is not carried forward to a future period.

Expenses may occur in the following forms;

  1. Cash payment of currency, for e.g. paying bills such as rent, salaries, etc.
  2. A decline in the value of assets (e.g revaluation loss or investment loss), etc.
  3. Accepting a liability, for example – accrual of rent, etc.
  4. The total cost of goods sold.
  5. Depreciation & Amortization.
  6. Bad debts, etc.

Expenses are classified in various different ways;

 

Expense Shown in Financial Statements

Expenses incurred by a business are shown on the debit side of an income statement and are further used to compute the net gain or net loss of the company.

Expenses shown in financial statements

One of the main differences between loss and expense is that total loss is computed with the help of total expenses and affects the total capital invested in the business. On the other hand, expenses do not directly affect the capital invested in a business.

 

Difference Between Loss and Expense (Table)

Basis Loss Expense
Meaning A loss is an unfavourable movement in monetary terms. Specifically, it can be excess of expenses over revenue. In a very broad sense, expense represents all consumed up costs that should be deducted from the revenue of a business.
Types In accounting terms, a loss can be operating, gross, or net. Expenses can be either direct or indirect for a business.
Origin Loss is the opposite outcome of gain. For a non-operating activity of a business, the result will be either a loss or gain. Expenses are comparable to revenues but not the exact opposite financial outcome of the same economic activity.
Gross/Net Loss is generally shown in net terms in financial statements because it usually originates from incidental transactions. Expense is usually shown in gross terms as it originates from the major revenue earning activities of a business.
Capital/Revenue There is no concept of capital and revenue in losses. These terms are defined for tax purposes. There is a clear distinction between revenue expenses and capitalized expenses, in accountancy.
Interrelation A loss results from an excess of expenses over operating revenue, in a financial year. Expenses do not get affected by losses generally.
Importance A loss can critically affect the financial performance of a company, even if it results from secondary activities. Without the correct assessment of the expenses used up in earning the revenue, true profit or loss can not be determined.
Example A loss arising from the sale of a fixed asset at a price less than its book value. Electricity expense, rent paid, utility bills, salary expense, etc.

 

Cost Vs Expense Vs Loss

Meaning of cost: Cost is the monetary measure of the resources that a business has used or spent in the primary process of producing its sources of revenue i.e. goods or services.

  • Cost may also represent the resources utilized in acquiring assets for the business, as that will result in future benefits.
  • Cost does not include the profit margin. It can be divided into categories like direct-indirect, implicit-explicit, etc.

Loss vs Cost – Loss can not be used interchangeably with cost, in any accounting sense. Loss necessarily means an outflow of funds, an unfavourable monetary condition that results from some incidental transaction and not the primary activities of a business. Loss does not give rise to any economic benefit. On the other hand, the cost incurred will represent resources used in order to earn revenue from it.

Expense vs Cost – Expense and cost are closely related terms but there are few points of distinction between the two.

  • The similarity between them is that both the expense and cost represent the use of resources owned by a business in relation to some revenue. Both of them relate to the primary money-earning operations of a business.
  • But, the expense necessarily inhibits resources that have already been used and the economic benefits have been realized. If not, that particular expense shall not be a part of the income statement.
  • Costs can be both utilized and deferred. Cost is more of a sacrifice to let go of one thing in order to own something else.
  • If the economic benefit deriving from the cost has been realized in the financial year, it will be expensed and shown on the income statement. Else, it will be a deferred cost and shown on the balance sheet.

 

Read Difference Between Income and Revenue

 

What is an Invoice or a Bill?

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Invoice or Bill

An invoice is a document created by the seller as evidence of a sales transaction between a buyer and the seller. It is often prepared in case of a credit sale. Nowadays invoices are prepared with the help of ERPs i.e. in a digital format yet they can also be prepared on paper.

It is a non-negotiable commercial document and normally contains details such as;

  • Date of transaction
  • Unique Identification Number
  • Details of Buyer
  • Quantity Sold
  • Price Per Item
  • Short Description of Items Sold
  • Amount
  • Taxes
  • Terms of Payment
  • Signature of the Authorized Party

The terms are synonymous with each other, nevertheless, it is commonly accepted that an invoice is created whereas a bill is received. It may look similar to a cash memo, however, a cash memo is only used for cash sales.

 

Template of Invoice or Bill

Invoice or Bill Template

The original copy is provided to the buyer whereas the duplicate is preserved by the seller as evidence of the transaction. A bill acts as a source document at the time of preparing journal entries. 

 

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What is a Cash Memo?

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Cash Memo

In accounting, all transactions are properly documented as evidence of the financial trail. Cash Memo is a source document used in case of a cash transaction between the seller and a buyer.

In case of a cash sale, the seller prepares the cash memo and hands it over to the purchaser. It acts as a proof for ‘cash sales’ made by a business. On the other hand, it acts as proof for cash purchase made by a person or business.

It can be seen as an equivalent to the invoice but for cash sales. Most often a cash memo is prepared in a pair so that a duplicate copy is present with the seller as well. This helps the seller to compile all its cash sales along with reconciliation, tax payments, analysis, inventory planning, cash management, etc.

It contains the following details;

  1. Date of transaction
  2. Details of goods
  3. Quantity
  4. Rate per item
  5. Gross total
  6. Taxes
  7. Net total
  8. Terms & conditions

 

Template of Cash Memo

Cash Memo Template

To authenticate the document it is signed or stamped with a seal by an authorized person. It is a legal document and the stamp/signature helps with the validity of the event in case of a dispute.

 

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What is Net Profit and Net Loss?

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Net Profit and Net Loss

A business may earn from various different operating and non-operating sources. Furthermore, it may pay for several different continuous and one-time events. The difference between indirect expenses and indirect incomes of business gives rise to net profit and net loss.

In its adjective form, the word “Net” means the amount remaining after all deductions. In the accounting world, net profit and net loss refer to the remaining difference between indirect expenses and indirect revenues.

After all the relevant indirect items are recorded in the income statement in their respective debit and credit columns the difference is calculated to ascertain the net profit or net loss. It is then transferred to the company’s capital account.

 

Net Profit

In a company’s income statement if the credit side i.e. the income side is in excess of the debit side i.e. the expense side it is said to have earned a net profit. The amount calculated is the balancing figure to be put on the debit side as a part of balancing the account. (Refer to the image below)

Debit Side (Indirect Expenses) < Credit Side (Indirect Incomes) 

Net Profit is transferred to the Capital Account and shown on the Liability side of a balance sheet. (Shown in the image)

Net Profit

Related Topic – What is are Liquid Assets?

 

Net Loss

In a company’s income statement if the debit side i.e. the expense side is greater than the credit side i.e. the income side it is said to have earned a net loss. The amount calculated is the balancing figure to be put on the credit side as a part of balancing the account. (Refer to the image below)

 Debit Side (Indirect Expenses) > Credit Side (Indirect Incomes)

Net loss is transferred to the Capital Account and shown on the Liability side of a balance sheet. (Shown in the image)

net loss

 

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What is Gross Profit and Gross Loss?

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Gross Profit and Gross Loss

A business may earn money from various different operating and non-operating sources. Similarly, it may spend on several different ongoing and one-time items. The difference between direct expenses and direct revenues of business gives rise to gross profit and gross loss.

In its noun form, the word “Gross” means an amount before deduction of expenses. In the accounting world, gross profit and gross loss refer to the net of direct expenses and revenue from operations before adjusting indirect items.

 

Gross Profit

In a company’s trading account if the credit side i.e. the income side is in excess of the debit side i.e. the expense side it is said to have earned a gross profit. The amount calculated is the balancing figure to be put on the debit side as a part of balancing the account.

Credit Side (Direct Incomes) > Debit Side (Direct Expenses)

Gross Profit is transferred to the Profit & Loss Account on the credit side and further added to the income earned in the current period.

Gross Profit

Related Topic – What is a Profit and Loss Appropriation Account?

 

Gross Loss

In a company’s trading account if the debit side i.e. the expense side is in excess of the credit side i.e. the income side it is said to have earned a gross loss. The amount calculated is the balancing figure to be put on the credit side as a part of balancing the account.

 Debit Side (Direct Expenses) > Credit Side (Direct Incomes)

Gross Loss is transferred to the Profit & Loss Account on the debit side and further added to the expenses incurred in the current period.

Gross Loss

 

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What is the Difference Between Sales Book and Sales Account?

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Sales Book Vs Sales Account

Sales Book – It is a subsidiary book of accounting used to record all goods sold on credit. One of the major differences between sales book and sales account is that only the items sold on credit are recorded in the sales book, whereas the same is not applicable to a sales account as it takes into account both cash and credit sales.

Sales Account – It is a ledger account just like any other account in a business. It is a part of the chart of accounts and it is used to record the journal entry for cash and credit Sales. It includes all sales and returns-related transactions which help a business determine the net sales for a given accounting period.

 

Difference between Sales book and Sales account – Table Format

Sales Book Sales Account
1. It is a part of the journal. 1. It is a part of the ledger.
2. As it is a special-purpose book it doesn’t have debit and credit columns. 2. Since the sales account is a ledger account it has both debit and credit columns.
3. The balance in the sales book is posted to the sales account in every accounting period. 3. The balance in the sales account is further moved to the trading account.
4. Only credit sales related to the core business are recorded in the sales book. 4. All cash and credit sales related to the core business are journalized and entered into this account.

Related Topic – Difference Between Purchase Book and Purchase Account

 

Sample Format of Sales Book and Sales Account

Sales Book

Sample format of a sales book

Sales Account

Sample Format of a Ledger

 

>Read Difference Between Financial Accounting and Management Accounting

 

Trading Account with Format and Example in Accounting

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Trading Account with Format and Example in Accounting
  1. Meaning and Overview
    1. Type of Account
  2. Trading Account Format (download PDF/Excel)
  3. How to Prepare a Trading Account?
    1. Items in a Trading A/c
    2. Purpose of preparation
  4. Trading Account vs Profit & Loss Account
  5. Quiz

 

Meaning & Overview

A trading account is used to record the sale and purchase of goods/services. This temporary account closes at the end of each accounting period. The purpose of the trading account is to show the gross profit or gross loss made in a particular time period.

The following are some key points to understand about a trading account:

  1. It is a temporary account that records sales and purchases of goods/services.
  2. It is used to calculate the gross profit or gross loss on the sale of goods.
  3. It is closed at the end of every accounting period.
  4. It is usually combined with the income statement.
  5. When combined with the profit & loss account, it also helps to determine the net profit/net loss for a period.

In Simple Terms – A trading account keeps track of what a company buys and sells. Every month, the company adds up all the things it bought and sold to determine if it made or lost money. This helps the company know how much money it has from trading activities.

Trading Account Summary

During the period-end closing process of a company, all the financial statements are prepared and finalized. Trading account is the first step in the process of preparing the final accounts of a company.

Related Topic – What is the Journal Entry for Closing Stock?

 

Type of Account

A trading account is a nominal account in nature.

As per the 3 golden rules of accounting, a trading account is a nominal account. The golden rules of accounting ensure that a business’s financial position and performance are accurately reflected in its financial statements.

With certain accounts such as Trading A/cs, Profit & Loss A/cs, Suspense A/c, etc., it is almost impossible to apply the rules of debit and credit.

As per the modern rules of accounting, the trading account is a type of income statement account that records and reports a business’s trading income & expenses.

Related Topic – Process to Prepare Income Statement from Trial Balance

 

Trading Account – Format with Example

Activities which generate revenue for the business, such as Sales of Services or Goods, Closing Stock, are shown on the credit side (Right).

In contrast, activities that are part of the cost of goods sold, such as purchasing raw materials, opening stock, direct expenses, etc., are shown on the debit side (Left).

Trading Account Format

Download Excel Version – Trading Account Sample Format Download Excel Version

Download PDF Version – Trading Account Sample Format Download PDF Version

Related Topic – Difference Between Direct and Indirect Expenses

 

List of items in a Trading Account

Opening Stock – The unsold stock remaining from the previous accounting period is the opening stock of the current accounting period. Depending on the type of industry, it can include raw materials, unfinished products, and finished goods.

It is typically listed on a company’s trial balance and appears on the debit side of a trading account. A new business’s first year of operation does not include opening inventory.

Purchase and Purchase Returns – Goods and services bought for resale are collectively termed “purchases” for the business. It is a ledger account that records the cost of goods and services that a business purchases on credit. It has a debit balance and includes both cash & credit purchases.

It is important to note that the purchase account does not include the cost of assets purchased for use in the business, such as machinery or furniture.

In the event that the goods are returned for any reason, it is considered a purchase return or a return outwards. Such accounts have a credit balance.

Sales and Sales Return – Goods sold in cash and credit by the business to earn profits are included under the head “Sales”. It has a credit balance and includes both cash and credit sales.

In the event that a customer returns goods for any reason, it is considered a sales return or a return inwards. Such accounts have a debit balance.

Direct Expenses – Expenses incurred while purchasing goods till the time they are brought to a saleable condition are called direct expenses. These are expenses related to the core business operations of a company. For example – Wages, Carriage Inwards, Power, Freight, etc.

Closing Stock – The unsold stock in hand at the end of the current accounting period is placed under the head “closing stock”. It is also known as “inventory” and is shown on the credit side of a trading account.

It is valued at the end of an accounting period at cost or net realisable value, whichever is lower.

Example: If a company records its closing stock at 10,000 but has a market value of 5,000, its financial records will record the lower market value of 5,000. This is because the value of the closing stock must be recorded at its market value, which is the price it could be sold for on the current market.

In this case, the market value is lower than the recorded value, so the lower value must be used in the company’s financial statements.

Gross Profit or Gross Loss – After all items of trading are arranged in the prescribed trading account format. The account must be balanced to determine loss or profit arising from selling activities.

If sales are higher than purchases, i.e. Credit side is bigger than the Debit side, then the difference is termed “Gross Profit“. This is then transferred to the Profit & Loss account.

If purchases are higher than sales, i.e. Debit side is bigger than the Credit side, then the difference is termed “Gross Loss“. This is then transferred to the Profit & Loss account.

Related Topic – Treatment of Closing Stock in Trading A/c

 

How to Prepare a Trading A/c?

When preparing a trading account, closing entries are typically recorded in a journal proper.

These entries transfer the balances of various temporary accounts, such as revenue and expense accounts, to the appropriate permanent account, such as the owner’s equity account.

By doing this, the temporary accounts are reset to zero and can be used to record transactions in the next period.

To create a trading account in accounting, the following steps can be followed:

Debit Side

  • Start with the opening balance of stock and place it as the first item on the debit side.
  • Calculate the net purchases of the period (purchases – returns) and record them on the debit side as the next item.
  • Next, record all direct expenses, such as wages, carriage, freight, fuel, etc.

 

Credit Side

  • Enter the net sales figures on the credit side (Sales – Returns).
  • Record any other direct inflows such as “scrap sales”, etc.
  • Closing stock valued at the end of the period is recorded and shown on the credit side of the trading account.

Record the trading account in the company’s financial records and include it with the income statement for the accounting period.

 

Balancing

The balance of the trading account is calculated by recording the above items on their respective sides, which allows for the determination of gross profit or gross loss.

If the Credit side > the Debit side, it is Gross Profit. It is then transferred to the credit side of a profit & loss account.

If the Debit side > the Credit side, it is Gross Loss. It is then transferred to the debit side of a profit & loss account.

Related Topic – Debit Balance in Trading Account

 

Purpose of a Trading A/c

The purpose of creating a trading account in accounting is to:

  • Maintain a record of goods sold and purchased.
  • Establish whether the sale of goods resulted in a gross profit or gross loss.
  • Provide a basis for the calculation of net profit or loss.
  • Provide information that is useful for management accounting.
  • Comply with accounting standards and regulations.
  • Prepare the basis of the income statement for the accounting period.

Overall, the main purpose of a trading account is to provide a clear and accurate record of the sales and purchases of goods and to calculate the gross profit or loss on these transactions.

This information is used in the preparation of the income statement and is also used by management to make decisions about the business.

Creating a trading account is an important part of the accounting process and helps to ensure the accuracy and completeness of the company’s financial records.

Related Topic – Credit Balance in Trading Account

 

Trading Account Vs Profit and Loss A/c

Basis Trading A/c Profit & Loss A/c
Definition It is a statement that records buying & selling (trading) activities of a business. It is a statement that records all gains and losses incurred by a business.
Purpose A trading account is prepared to calculate gross profit or gross loss. A profit & loss account is prepared to calculate net profit or net loss.
Relation It is part of the profit & loss account itself. It is the main account.
Items It consists of direct expenses and gains. It consists of indirect expenses and gains.
Balance Balance of this account is transferred to the Profit & Loss  account. Balance of this account is transferred to the balance sheet.
Example of items Some examples include – Purchases, Sales, Opening and Closing Stock, Direct Expenses, etc. Some examples include – Salaries, Rent, Depreciation, Bank Charges, etc.

Related Topic – How to Prepare Balace Sheet from Trial Balance?

 

Points to Remember

  • Carriage inwards is debited to the trading account, whereas Carriage outwards is debited to the profit & loss account.
  • Gross profit can be shown with the help of an equation as well,
    • GP = Net Sales – COGS
    • COGS = Opening Stock + Net Purchases + Direct Expenses – Closing Stock
    • Net Purchases = Total Purchases – Purchase Returns
  • Return inwards are deducted from “Sales” whereas Return outwards is deducted from “Purchases”.
  • Trading is a part of the overall profit & loss account (income statement).

Related Topic – Where are Trading Expenses in Final Accounts?

 

Short Quiz for Self-Evaluation

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What is the Difference Between Purchase Book and Purchase Account?

Ahuja Sahil
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Purchase Book vs Purchase Account

Purchase Book – It is a subsidiary book of accounting used to record all goods purchased on credit. One of the major difference between purchase book and purchase account is that only the items purchased related to the core business operations are recorded in the purchase book, whereas the same is not applicable to a purchase account. All capital expenditure is excluded from the purchase book.

Purchase Account – It is a ledger account just like any other account in business. It is a part of the chart of accounts and it is used to record the journal entry for cash and credit purchases. It includes all stock related transactions which help a business to ascertain the amount of inventory available at any time.

 

Difference between purchase book and purchase account – Table Format

Purchase Book Purchase Account
1. It is a part of the journal. 1. It is a part of the ledger.
2. As it is a special-purpose book it doesn’t have a debit and credit column. 2. Since purchase account is a ledger account it has both debit and credit columns.
3. The balance in purchase book is posted to the purchase account regularly. 3. The balance in the purchase account is further moved to the trading account.
4. Only credit purchases related to the core business are recorded in the purchase book. 4. All cash and credit purchases related to the core business are journalized and entered in this account.

Related Topic – Difference between Sales Book and Sales Account

 

Sample Format of Purchase Book and Purchase Account

Purchase Book

Purchase Book

 

Purchase Account

Sample Format of a Ledger

 

>Read Difference Between Debtors and Creditors

 

What is the Journal Entry for Bad Debts?

Ahuja Sahil
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What is the Journal Entry for Bad Debts?

Insolvency may cause some debtors to fail to pay their dues on time. Such partially or fully irrecoverable debts are called bad debts. Accounting and journal entry for bad debt expense involves two accounts, “Bad Debts Account” & “Debtor’s Account (Name)”.

When you write off bad debt, you simply acknowledge that you have suffered a loss. It differs from a bad debt expense, which anticipates future losses.

Bad debt is a loss for the business, and it is transferred to the income statement to adjust against the current period’s income.

 

Bad Debts Journal Entry

Journal entry for bad debts expense is as follows;

Bad Debts A/c Debit Nominal Debit all Losses
 To Debtor’s A/c Credit Personal Credit the giver

(Amount written off from the respective debtor’s account)

Rules applied as per modern or US style of accounting 

Bad Debts A/C Debit the increase in expense
Debtor’s A/C Credit the decrease in asset

 

The closing journal entry for bad debts would be as follows;

Profit and Loss A/c Debit
 To Bad Debts A/c Credit

(Transferring bad debts to the profit and loss account)

Related Topic – Difference Between Debtors and Creditors

 

Journal Entry for Bad Debts
Treatment of Bad Debts in the Books of Accounts

 

When only a part of the debt is not recovered

Bank A/c Debit
Bad Debts A/c Debit
 To Debtor’s A/c Credit

(Amount received against a bad debt loss which was previously written off)

 

Bad Debts Shown Inside a Financial Statement

Income statement showing bad debts

Related Topic – Provision for Doubtful Debts

 

Example

Unreal corp was declared insolvent this year, and an amount of 70,000 is to be shown as bad debts in the books of ABC Corp. Show accounting for bad debts in this case. 

In the books of ABC Corp.

Bad Debts A/c 70,000
 To Unreal Corp’s A/c 70,000

(70,000 written-off as a bad debt being transferred to bad debts account)

 

Profit and Loss A/c 70,000
 To Bad Debts A/c 70,000

(Transferring 70,000 bad debts to the current income statement)

Related Topic – Provision for Doubtful Debts in Trial Balance

 

Bad Debts Adjustment in Final Accounts

Any information about bad debts that is present outside the trial balance is incorporated before the adjustments in final accounts are concluded.

Without such adjustments being made during the preparation of financial statements, the numbers shown in the firm’s final accounts will not be accurate.

Incorporating bad debts into financial statements

Situation 1 – No adjustment is made when bad debts are included in the trial balance. Only the P&L is affected.

Situation 2 – The final accounts are adjusted when bad debts are given outside the trial balance as supplement information. They are called further bad debts.

Account Impact
Profit & Loss A/c Show on the debit side (add to bad debts already written off)
Balance Sheet Show on the “Asset” side (subtract from sundry debtors)

Related Topic – Are Non-current Liabilities Debt?

 

Bad Debt Recovery Journal Entry

Accepting payment from sundry debtors who have already had their accounts written off as bad debt is called “recovery of bad debts”.

Journal entry for bad debts recovered should reflect that it is treated as a gain for the business as opposed to bad debts written off, which are losses. While recording the money received, the debtor should not be credited as in the case of sales.

Journal entry for bad debts recovered is as follows;

Bank A/c Debit Asset Dr. the increase
 To Bad Debts Recovered A/c Credit Income Cr. the increase

Debit (Bank A/c) assuming the recovery was done as a deposit in the firm’s bank account.

Rules applied in the journal entry as per the three golden rules of accounting,

Account Type Rule
Bank A/c Personal Account Debit the receiver
Bad Debts Recovered A/c Nominal Account Credit incomes & gains

Related Topic – Treatment of Discount on Debtors in Final Accounts

 

Provision for Bad Debts Journal Entry

Out of the total debtors of a business, there is always a small percentage that is unable to make a payment. To allow for such doubtful and bad debts, it is important to create a reserve (as an estimate). Such a provision is called a provision for bad debts.

The journal entry of provision for bad debts would be as follows;

Profit and Loss A/c Debit
 To Provision for Bad Debts A/c Credit

(Creating a provision for b/debts by debiting the profit & loss a/c)

Related Topic – Difference Between Bad Debts and Doubtful Debts

 

Practice

Record the journal entries for the following transactions in the books of Unreal Co.

  1. It is determined that the 50,000 due from ABC Co. is irrecoverable after they declared bankruptcy.
  2. John, declared insolvent last year, has paid 9,000 this year with a cheque.
  3. Kumar was also declared insolvent last year. The balance of his accounts payable is 30,000, but it is fully closed after he repaid 50% in cash.

 

Journal – 1

There has been a loss for Unreal Co. due to the bad debt incurred. ABC co. has declared bankruptcy and is therefore unable to make any payments.

Bad Debts A/c 50,000
 To ABC Co. A/c 50,000

(Amount is written off as bad debts)

 

Journal – 2

Bad debt recovery occurs when you receive payment for a debt previously written off as uncollectible. The recovery of bad debt usually results in income, whereas a bad debt typically means a loss.

In this case, the money received is treated as income. Since the recovery is a gain for the business, it is credited to the “Bad Debts Recovered A/c”.

Bank A/c 9,000
 To Bad Debts Recovered A/c 9,000

(Recovering a previously written-off bad debt via a cheque from John)

 

Journal – 3

A partial recovery may require tweaking the journal entry for bad debts. This is because a certain portion of the money received is considered actual payment by the debtor, whereas the remaining is written off as a loss.

The journal entry below shows this as a compound entry.

Cash A/c 15,000
Bad Debts A/c 15,000
 To Kumar’s A/c  30,000

(Out of 30,000 in debt, 50% was received from Kumar as a final settlement)

Related Topic – How to Calculate Provision for Doubtful Debts?

 

Short Quiz for Self-Evaluation

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What is the Difference Between Debtors and Creditors?

Ahuja Sahil
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Debtors vs Creditors

While purchasing goods on credit a buyer may not make the payment immediately instead both the seller and buyer may enter into a lending & borrowing arrangement. This allows delayed payments for current invoices. Even though payment terms are mutually agreed upon there is still a difference between debtors and creditors.

Typically such agreements involve a short interest-free credit period during which the buyer can make its payment. Debtors and creditors may be defined as follows;

difference between debtors and creditors infographic

Debtors – A person or a legal body that owes money to a business is generally referred to as a debtor in the eyes of that business, as he or she owes the money. For a business, the amount to be received is usually a result of a loan provided, goods sold on credit, etc.

Example – Unreal corp. purchased 1000 kg of cotton for 100/kg from X to use as raw material for their clothes manufacturing business. The total invoice amount of 100,000 was not paid by Unreal corp. In this example, Unreal corp. is a debtor for X.

 

Creditors – In day-to-day business, a person or a legal body to whom money is owed is known as a creditor. For a business, the amount to be paid may arise due to repayment of a loan, goods purchased on credit, etc.

Example – Unreal corp. purchased 1000 kg of cotton for 100/kg from vendor X. The total invoice amount of 100,000 was not received immediately by X. In this example, X is a creditor for Unreal corp.

 

Difference Between Debtors and Creditors (Table Format)

Debtors Creditors
1. Debtors avail credit facilities as they borrow. 1. Creditors extend credit as they act as lenders.
2. It is a current asset for the business. 2. It is a current liability for the business.
3. Debtors are a result of credit sales by the business. 3. Creditors are a result of credit purchases by the business.
4. Discount is allowed on debtors. 4. Discount is received from creditors.
5. Total amount to be received (total debtors) is also known as Sales Ledger Control. 5. Total amount to be paid (total creditors) is also known as Purchase Ledger Control.
6. Collectively they form the company’s accounts receivables. 6. Collectively they form the company’s accounts payables.
7. Also known as Trade Debtors or Trade Receivables. 7. Also known as Trade Creditors or Trade Payables.
8. A provision for doubtful debts is created for debtors. 8. No such provision or reserve is created.

 

Shown in Financial Statements

Debtors and Creditors are both critical financial indicators and important parts of the financial statements of a company. Debtors form part of the current assets while creditors are shown under the current liabilities.

In the balance sheet

balance sheet showing creditors and debtors

 

Vendor and Supplier

Is the supplier a creditor or debtor?

A supplier is usually the first link in a supply chain. It does not indulge in the inventorying processes and provides goods that are further processed in the supply chain. The concept of supplier is more commonly found in B2B chains.

Going by common practice, a supplier will be a creditor of the company. Assuming that the business is buying its raw material from a supplier on a regular basis, and then adding some value to them and manufacturing a finished product for the market.

Example: A restaurant owner X is buying vegetables from a farm owner and making dishes for customers. There is a value addition to the vegetables in this case. Also, the farm owner is most likely not selling these vegetables to retail consumers and just supplying them to various restaurants.

 

Is a vendor a creditor or a debtor?

A vendor is usually the last link in a supply chain. A vendor involves in the process of buying from one company and selling to the other. It can be both B2B and B2C kind of the supply chain. It generally does not involve manufacturing or value-adding processes

Usually, a vendor can be both a debtor and a creditor of the business. Since a vendor may be providing the company with some kind of finished products and also can be buying the same products from another company.

Example: The same restaurant owner X may not want to indulge in ice cream making and is just buying desserts from a vendor on a regular basis, making him a creditor for X. On the other hand, the same vendor may be buying these desserts from a dairy business B, making him a debtor for B. There is no value being added other than packing and shipping in this case and there is inventorying involved.

 

Is Debtor and Creditor Asset or Liability?

An asset is something that inhibits future benefits. These are economic resources that are owned by the business and can be measured in monetary terms. Going by this definition, a debtor is an asset to the business.

  • Since a debtor represents a financial obligation for the entity to repay in the future, putting the business on the receiving end.
  • Debtors owe cash benefits to the business and hence are classified as current assets in the balance sheet.

On the other hand, liabilities are the amounts that a business entity has to pay. Liabilities can be both internal and external. By this definition, creditors are an external liability for the business.

  • Creditors inhibit future cash outflow for any business. This amount reduces with payments to the entities that the business owes money.
  • Creditors are classified as current liabilities on the balance sheet.

 

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