Monday, April 21, 2025
Home Blog Page 19

Who are the Users of Accounting Information?

Ahuja Sahil
-
0

Users of Accounting Information

Accounting is the language of business, it brings life to the otherwise lifeless business activities. It acts as a bridge between users of the information and the day to day transactions that occur inside a business. Users of accounting information may be inside or outside a business.

Qualitative characteristics of accounting information such as identifying, measuring, recording and classifying financial transactions help businesses with decision making, analysis, target setting, budgeting, pricing, forecasts, etc.

 

There are primarily two types of users of accounting information;

Internal users (primary users) – If a user of the information is part of the business itself then he/she is considered as one of the internal or primary users of accounting information. 

For example, management, owners, employees, etc. The branch of accounting which deals with internal users is called management accounting.

 

External users (secondary users) – If a user of the information is an external party and is not related to the business then he/she is considered as one of the external or secondary users of accounting information.

For example, potential investors, lenders, vendors, customers, legal and tax authorities, etc.

Users of Accounting Information
List of Internal and External Users of Accounting Information

 

Internal Users of Accounting Information – (Primary)

Following are the primary users of accounting information:

1. Management – Organization’s internal management includes all junior and senior business managers.

They use it for
1. Budgeting, forecasting, analysis & take important financial decisions.
2. Investment decisions, identification of warning and opportunity signals.
3. Taking informed & evaluated decisions.
4. Compliance with all statutory, regulatory, and any other external body.

 

2. Owners/Partners – Owners are the legal stakeholders of the business and the ultimate signing authority.

They use it for
1. Tracking their investment and monitoring their return on investment.
2. Observing their capital invested and evaluating its upward or downward move.
3. Keeping an eye on the overall well-being of the business.

 

3. Employees – Full-time & part-time workers. They are essentially on the company’s payroll.

They use it for
1. Checking the overall financial health of the company as it affects their remuneration and job security.
2. Decision making in case of shares based payment such as ESOPs offered by the employers.
3. Examining if the employer is depositing all required funds to the appropriate authorities such as the provident fund, 401(k), etc. 

Related Topic – What is the Accounting Equation?

 

External Users of Accounting Information – (Secondary)

Following are the secondary users of accounting information:

1. Investors – They may be current investors, minority stakeholder, potential future investors, etc.

They use it for
1. Checking how the management is utilizing the equity invested in the business.
2. Decisions related to an increase in investment or to divest from the business.
3. Analyzing their present investment in the business or the overall financial health in case of a potential investor.

 

2. Lenders – Banks and Non-banking financial companies which provide loans in the form of cash or credit are termed as lenders.

They use it for
1. Evaluation of short-term and long-term financial stability of a business.
2. An insight into the liquidity, profitability, etc. with the help of ratio analysis 
3. Assessment of the creditworthiness with the help of financial ratios and scrutiny of the three main financial statements in accounting.

 

3. Regulatory and Tax Authorities – Regulatory bodies such as the stock exchange & authorities include the govt. along with various statutory and tax departments.

They use it for
1. To keep a check and ensure that the firm is following all required accounting principles, standards, rules & regulations.
2. The ultimate intent is to protect business integrity & safeguard investors. 
3. Tax department as one of the users of accounting information assures accurate tax calculation by the companies.

 

4. Customers – Are buyers of goods or services and may exist at any stage of a business cycle. They may be producers, manufacturers, retailers, etc.

They use it for
1. Checking the continuous inflow of stock and the pace of overall production.
2. Assessing the financial position of its suppliers which is essential to maintain a stable source of supply.

 

5. Suppliers – Are the sellers of goods and services.

They use it for
1. Inspecting the credibility of their customers by evaluating their repayment ability.
2. Setting up a credit limit & payment terms with their customers.

 

6. Public – The general public is also among users of accounting information. They are keen to know the financial health of a business to get a fair idea of the firm’s niche market, business environment, and economic atmosphere of the country.

 

Short Quiz for Self-Evaluation

Loading

 

>Read What is Working Capital (with Formula)?

 

What is Bookkeeping?

Ahuja Sahil
-
0

Bookkeeping

Bookkeeping is the process of recording all financial transactions of a business unit in a systematic way on a day-to-day basis. Most common examples of records are:

  • Receipts from customers
  • Payments to suppliers
  • Billing for products supplied
  • Recording invoices from suppliers
  • Recording depreciation and other adjustments etc.

Bookkeeping acts as a basis for the accounting process. A bookkeepers’ duty is to record each transaction in the corresponding day-book or journals. A competent bookkeeper records the financial transactions such a way that it gives a clear picture of activities performed inside a business unit.

The last stage of bookkeeping is to prepare the trial balance, find and correct errors. Based on this, an accountant prepares the financial statement of the company.

 

Example of Bookkeeping

Part of bookkeeping involves entering a transaction into a journal and then getting it posted to a ledger account. This first step shows a transaction of depreciation being recorded in a journal book in the form of a journal entry.

Journal entry example bookkeeping

Once the above journal entry is posted in their respective ledger accounts it will show up as below.

Ledger Posting Example Bookkeeping

 

Purpose of Bookkeeping

A business unit is involved in various financial transaction every day and over time it becomes difficult to keep track with these millions of transactions and use them for future reference.

Bookkeeping helps in organizing the data logically and chronologically for its further usability. Besides, bookkeeping is done also to:

  • Understand the financial effect of each transaction
  • Determine the factors responsible for profit or loss in a certain period
  • Avoid errors in the process of accounting
  • Determine tax-liability

 

Types of Bookkeeping 

There are mainly two methods of bookkeeping – single entry method and the double-entry method. Sometimes a combination of both methods is also used.

The single entry system is most suitable for small businesses. Here only payments, receipts, sales and purchases are recorded. Inventory, capital and others such entries are recorded as notes. However, the system is not free from error and to some extent incomplete. Double-entry bookkeeping system, contrast, is detailed and complex.

Here using the idea of debit and credit, every transaction is recorded twice: what is received (debit) and what is given up (credit). This is the standard method of bookkeeping used by bookkeepers and accountants.

Consider the example of Unreal Pvt. Ltd purchasing a car for business purposes and paying 2,00,000 for this. In a single entry system, only the purchase activity and amount will be recorded whereas in double entry system the amount will be recorded twice, debited as car purchase and credited on account of cash.

 

Short Quiz for Self-Evaluation

Loading

 

>Read Difference between Bookkeeping and Accounting

 

What are Fixed Assets?

Ahuja Sahil
-
0

Fixed Assets – Definition and Meaning

In accounting, fixed assets are assets which cannot be converted into cash immediately. They are primarily tangible assets used in production having a useful life of more than one accounting period. Unlike current assets or liquid assets, fixed assets are for the purpose of deriving long-term benefits.

Generally, it refers to tangible assets that an organization owns and uses to generate revenue. To account for natural wear and tear on these assets, companies are able to depreciate their value.

Intangible assets and investments are considered non-current assets in conjunction with fixed assets. Unlike other assets, fixed assets are written off differently as they provide long-term income. They are also called “long-lived assets” or “Property Plant & Equipment”.

Fixed Assets

 

Example and List of Fixed Assets

  • Land
  • Land improvement (e.g. irrigation)
  • Building
  • Building (work in progress)
  • Machinery
  • Vehicles
  • Furniture
  • Computer hardware
  • Computer software
  • Office equipment
  • Leasehold improvements (e.g. air conditioning)
  • Intangible assets like trademarks, patents, goodwill etc. (non-current assets)

Fixed assets are “fixed” not because of their geographical fixity. They are “fixed” because they are not entirely consumed during production activities in a single accounting period.

Related Topic – Can Assets have a Credit Balance?

 

Fixed Assets Shown in the Balance Sheet

Fixed assets are shown on the “Assets” side i.e. right-hand side of the vertical balance sheet. They are shown in financial statements at their net book value, the calculation for net book value has been demonstrated in the next section.

Fixed assets shown in balance sheet

Related Topic – Why is depreciation not charged on land?

 

Net Book Value

In the balance sheet, fixed assets are recorded under the “Property, Plant and Equipment” section. Although these assets are available in the production process for several accounting years, with time and usage, they depreciate, i.e. they lose value.

Furthermore, fixed assets are recorded at their net book value, which is the difference between the “historical cost of the asset” and “accumulated depreciation.

Net book value = Historical cost of the asset – Accumulated depreciation

Let us assume Unreal Pvt Ltd. purchases a computer for their company at a price of 30,000. The computer has a constant depreciation of 2,000 per year. So, after 3 years, the net book value of the computer will be recorded as

30,000 – (3 x 2,000) = 24,000.

 

Difference Between Fixed Assets and Current Assets

Basis Fixed Assets Current Assets
Definition An entity’s fixed assets are long-term assets acquired for continuous use. A company’s current assets are resources that are held for a short term and mainly used for trading.
Time Assets of this type are held for more than a year. A year or less is the typical holding period for these assets.
Intent A company invests funds in fixed assets for the long term to generate income. Current assets are mainly used by a business for day-to-day business transactions.
Valuation A fixed asset is valued by subtracting its depreciation from its cost. A current asset is valued at its cost or market value, whichever is lower.
Funding Source Long-term funds are used to acquire fixed assets. Current assets are acquired from short-term funds.
Sale A capital gain or loss occurs at the time of sale. A revenue gain or loss occurs at the time of sale.
Funding Source Long-term funds are used to acquire fixed assets. Current assets are acquired from short-term funds.
Collateral Assets such as these can be used as collateral for loans. Current assets can not be used as collateral for loans.

 

Short Quiz for Self-Evaluation

Loading

 

Revision & Highlights Short Video

Highly Recommended!!

Do not miss our 1-minute revision video. This will help you quickly revise and memorize the topic forever. Try it :)

 

>Related Long Quiz for Practice Quiz 34 – Outstanding Expenses

>Read Types of Depreciation

 

What is Revenue From Operations?

Ahuja Sahil
-
0

Revenue From Operations

Revenue from operations or operating revenue can be defined as the income generated by an entity from its daily core business operations. If the entity is able to generate a steady flow of income from its operations, it is said to have been running successfully. It is also called operating revenue.

Example – ABC Automobile Co. makes and sells automobiles as their daily core business, so their revenue from operations is said to be generated by the selling of automobiles only.

Point to be noted – let’s say in a financial year ABC Automobile Co. earns a significant amount of money by selling one of its manufacturing plant (building), this will NOT be considered as revenue from operations instead this will be termed as a capital receipt.

 

Calculation of Operating Revenue

Revenue from operations is calculated by taking into account the figure of “sales” after factoring in any sales return or discounts allowed.

After calculating the net operating revenue from the above step deduct the “cost of operations” to derive the operating profits of a company. The same can be explained with the help of a simple illustration.

The operating profit of ABC Ltd for the period ending 31st March XXXX is calculated as follows:

Revenue from Operations

Revenue from Operations is the starting point for Profit and Loss or Income and Expenditure Account. Following are some of the incomes/expenditures which are not considered while calculating revenue from operations.

  • Income from Non-operating activities like profit on the sale of an asset, Income from investments, etc.
  • Administrative expenses like salaries, lighting and electricity, etc.
  • Selling expenses like advertising and promotions, etc.

 

Short Quiz for Self-Evaluation

Loading

 

>Read Revenue Receipts

 

How to Dispose an Asset Without Using Asset Disposal Account?

Ahuja Sahil
-
0

Disposal of Fixed Asset Without Asset Disposal Account

When an asset is being sold a new account called “Asset Disposal Account” is created in the ledger. This account is created to ascertain profit earned or loss incurred on sale of fixed asset, alternatively, all adjustments can be done inside the asset account without opening an assets disposal account. Hence it is possible to dispose of an asset without using Asset Disposal Account.

 

Journal Entries

  • To charge the current period’s depreciation on the asset being disposed,
 Depreciation Account  Debit
 To Asset Account  Credit

 

  • To book the proceeds received from the sale of asset,
 Bank Account  Debit
 To Asset Account  Credit

 

 Asset Account Debit
 To Profit and Loss Account Credit

 

  • In case loss is incurred on the sale of asset then the journal entry will be,
 Profit and Loss Account Debit
 To Asset Account Credit

 

On the date of asset disposal if proceeds from the sale of assets > written down value of the asset then it is said to have created profit.

On the date of asset disposal if proceeds from the sale of assets < written down value of the asset then it is said to have incurred a loss.

 

Short Quiz for Self-Evaluation

Loading

 

>Read Accumulated Depreciation

 

What is Asset Disposal Account?

Ahuja Sahil
-
0

Asset Disposal Account

When an asset is being sold, a new account in the name of “Asset Disposal Account” is created in the ledger. This account is primarily created to ascertain profit on sale of fixed assets or loss on the sale of fixed assets. The difference between the amount received from sale proceeds and the net current value of the fixed asset being disposed of determines profit or loss. This amount is shown on the income statement.

The account is termed as “Profit (or) Loss on Sale of Asset”. If an asset is sold at a price higher than its written down value it is said to have produced a profit. Similarly, if an asset is sold at a price lower than its written down value it is said to have incurred a loss.

 

Journal Entries for Disposal of Fixed Assets – With Provision for Depreciation

  • Gross amount of asset being sold is transferred to Asset Disposal Account (at original cost)

Debit asset disposal account and credit asset account

Debit Provision for Depreciation Account and Credit Asset Disposal

  • To record the value of proceeds received from the sale of asset.

Debit bank and credit asset disposal account

  • In the case of Profit.

Debit asset disposal account and credit profit and loss

  • In the case of Loss.

Debit profit and loss and credit asset disposal account

If an “Asset Disposal” account shows debit balance it means loss has been incurred on the disposal of the fixed asset whereas credit balance in the account shows profit earned on disposal.

Related Article – Journal entry of loss on sale of fixed assets

 

Journal Entries for Disposal of Fixed Assets – Without Provision for Depreciation

  • Gross amount of asset being sold is transferred to Asset Disposal Account (at written down value calculated at the beginning of the year of sale)

Debit asset disposal account and credit asset account

  • Depreciation is charged from the beginning of the year till the date of sale (shown in below journal entry

Debit depreciation account and credit asset disposal

  • To record the value of proceeds received from the sale of the asset.

Debit bank and credit asset disposal account

  • In the case of Profit.

Debit asset disposal account and credit profit and loss

  • In the case of Loss.

Debit profit and loss and credit asset disposal account

Short Quiz for Self-Evaluation

Loading

 

>Read Fictitious Assets

 

What is Posting?

Ahuja Sahil
-
0

Posting From Journal to Ledger

The procedure of transferring an entry from a journal to a ledger account is known as posting. It involves transferring of debits and credits from the journal book to the ledger accounts, if an account in a journal entry has been debited it will be posted in the ledger account by entering the same amount on the debit side/column of the respective ledger account.

Similarly, if an account in a journal entry has been credited it will be posted to the ledger account by entering the same amount on the credit side/column of the respective ledger account.

In the world of ERPs, posting has been automated and reduced to just a click of a button. Posting is an important part of accounting since it helps to keep an updated record of all ledger balances & at the same time it can help a user to track how the ledger balances have changed over a period of time.

 

Example

Journal Entry for Furniture worth 1,000 Bought in Cash

Example Journal Entry for Posting

Steps of Posting the Above Journal Entry in Ledger Account

  • To post a journal entry, the first step is to identify the ledger account where the debited account will appear, in this case, it will be the “Furniture A/C”.
  • Mention the date of the transaction under the head “Date”.
  • On the debit side of the ledger account under the head “Particulars” with the prefix “To” write the name of the account which has been credited in the journal entry, in this case, it will be “Cash A/C” (Refer to the image below).
  • Under the head, “Amount” enter the currency value of debit as mentioned in the journal entry.
  • Identify the ledger account where the credited account will appear, in this case, it will be the “Cash A/C”.
  • Mention the date of the transaction under the head “Date”.
  • On the credit side of the ledger account under the head “Particulars” with the prefix “By” write the name of the account which has been debited in the journal entry, in this case, it will be “Furniture A/C” (Refer to the image below).
  • Under the head, “Amount” enter the currency value of credit as mentioned in the journal entry.

 

Illustration of Journal being posted in Ledger

 

Short Quiz for Self-Evaluation

Loading

 

>Read Preparing Trial Balance From Ledger

 

What is a Promissory Note?

Ahuja Sahil
-
0

Promissory Note

A promissory note is a financial instrument, in which one party promises in writing to pay a pre-determined sum of money to the other party subject to agreed terms. It can either be payable on demand or at a specific time. It may be paid to or to the order of the authorized party or to the bearer of the instrument.

Terms of a promissory note include the amount of principal, the rate of interest (if any), name of both the parties (he who makes the promise is called the maker, and he to whom it is made is the payee), date of issuance, terms of repayment and the date of maturity.

Promissory notes are often unrecorded. There are two principal qualities essential to the validity of a promissory note. Firstly, it is payable at all events and is not dependent on any contingency. And secondly, it is to be for payment of money only.

 

Template for Promissory Note

Promissory Note Template

Maker – is the individual or business which promises to pay i.e. the one who has availed the credit.

Payee – is the individual or business which is supposed to receive the payment i.e. the one who has allowed the credit.

 

Important Requisites

  • The document must contain an unconditional undertaking to pay
  • Amount to be paid must be fixed and certain
  • It must be payable to or to the order of a certain person or to the bearer
  • The document must be signed by the maker

A promissory note is signed by the person who borrows the money from the other party i.e. the lender. The note is kept by the lender as evidence of loan and the repayment agreement. Once the debt has been discharged, it must be cancelled by the payee and returned to the issuer.

 

A promissory note can be divided into two type viz., secured and unsecured promissory note.

Secured Promissory Note – It is based on the maker’s ability to repay, but it is secured with a collateral such as an automobile, land or a house.

Unsecured Promissory Note – It is not attached to anything; the loan is made based only on the ability of the maker to pay back the amount, generally its reputation & credit history plays a big role.

 

Short Quiz for Self-Evaluation

Loading

 

>Read Bill of Exchange

 

What is Authorized Capital?

Ahuja Sahil
-
0

Authorized Capital

Maximum value and amount of total shares that a company is authorized to issue legally is termed as authorized capital or authorized share capital. It is the maximum amount a company can raise as capital in the form of both equity shares and preference shares during its lifetime.

This amount is decided during the formation of business & is mentioned inside its constitutional documents such as Memorandum of Association, Article of Incorporation or a related document as per the country of establishment.

Value per share is required to be decided by the promoters at the time of fixing the authorized capital, Authorized capital can be changed with the approval of majority Shareholders’ and often it requires a nod from the local regulatory authorities.

Related Topic – Working Capital

 

Example and Journal Entry

For example, Unreal Ltd. a newly formed company foresees its long-term capital requirements to be 10,000,000 & it is hence decided as the total authorized capital of the company. This amount of 10,000,000 is called Authorized Share Capital of the business.Image with example of Authorized Capital

Authorized shares have not been issued to shareholders they simply define the maximum number of shares the company is allowed to issue. Hence, there shall not be any journal entry in the books of accounts.

 

Short Quiz for Self-Evaluation

Loading

 

>Read What is Working Capital?

 

What are Reserves?

Ahuja Sahil
-
0

Reserves in Accounting

At the end of a financial year when a company earns a profit certain portion of it is retained in the business to meet future contingencies, growth prospects, etc. This amount of money kept aside is termed as reserves. Reserves are a component of retained earnings.

They help in fortifying the financial position of a company and can be used for various purposes such as expansion, stable dividend repayments, legal requirements, meeting contingencies, improving the financial situation, investments, etc.

Examples – General reserve, Reserve for Dividends Equalization, Reserve for Expansion, Reserve for Increased Cost of Replacement etc.

There are mainly 2 different types of reserves; Capital and Revenue.

 

Inside Financial Statements

Reserves are shown on the liability side of a balance sheet under the head “Reserves and Surplus” along with capital. If a company faces losses then it may not be created, at all.

Provisions are different, they are mandatory and created as guided by the accounting principles whereas reserves are a choice.

Reserves highlighted inside balance sheetRelated Topic – What is a Contra Liability?

 

Types of Reserves – Capital Reserve

They are created out of capital profits & are usually not distributed as dividends to shareholders. It cannot be created out of profits earned from the core operations of a company.

Examples

  • Profit earned before a company’s incorporation
  • Premium earned on the issue of shares & debentures
  • Profit on re-issuance of forfeited shares
  • Profit set aside for redemption of preference shares or debentures
  • Profit on sale of fixed assets
  • The surplus on revaluation of assets and liabilities
  • Capital redemption reserve

 

Types of Reserves – Revenue Reserve

They are created out of profits earned from the operations of a company. It is reflected in profit and loss appropriation account. It can be used for the following:

  • Dividend to shareholders
  • Expansion of business
  • Stabilize the dividend rate

They are divided into two types & both of them are kept aside as appropriation for profits.

  • General Reserves – As the name suggests, they are created out of profits & kept aside for the general purpose and financial strengthening of the company, it doesn’t have any special purpose to fulfil and can be used for any viable reason in future. Top reasons include meeting contingencies and expansions that can’t be foreseen.
  • Specific Reserves – This reserve, however, is created keeping a specific reason in mind and can only be used for its designated purpose. Examples include Dividend Equalization Reserve, Debenture Redemption Reserve, Contingency Reserve, Capital Redemption Reserve etc.

 

Short Quiz for Self-Evaluation

Loading

 

>Read Difference Between Reserves and Provisions

 

What are Balance Sheet Accounts?

Ahuja Sahil
-
0

Balance Sheet Accounts

While looking at a company’s financials there are 2 types of general ledger accounts which are found, Income statement (a.k.a Profit and Loss accounts) and Balance sheet accounts.

Balance sheet accounts are those which are related to assets, liabilities and capital. In other words all accounts which are related to balance sheet are balance sheet accounts, whereas other type of accounts i.e. income statement or otherwise called P&L (profit and loss) accounts are accounts related to expense and revenue items. Examples of balance sheet accounts include Fixed Assets, Accumulated Depreciation, Investments, Cash, Accounts Receivable, Paid-in Capital, Retained Earnings, Drawings, Accounts Payable etc.

 

Balance sheet accounts

 

At the end of an accounting period Revenue and Expense accounts are not balanced instead they are closed with the help of closing entries and transferred to profit and loss account, hence they begin the following period with zero balance. Balance sheet accounts however are termed as permanent accounts because at the end of the accounting year the balances in these accounts are not closed and the year-end balances are carried forward to become the starting balances in the next accounting year.

In modern ERPs such as SAP, PeopleSoft etc. all such accounts have a unique number assigned to them & usually have a unique attribute for easy classification. E.g. a balance sheet account will start with 1, 2 & 3 only

 

Balance Sheet Accounts in Financial Statements

While most balance sheet accounts that need to be set up are common to all businesses, some depend on the type of business. For example, Inventory accounts are needed for those businesses which are into production and selling of goods however they may not be required for firms which provide services. This can be deduced from the account heads used in the financial statements like Closing stock, WIP (Work-in Progress), Finished goods etc.

Apart from this, balance sheet also differs due to the nature of entity viz. Individual, Limited Liability Partnership, Company, etc. For example, for a company, the liability side of balance sheet would reflect Shareholder’s Capital whereas for a partnership, it would show Partner’s Capital.

 

Example of a Horizontal Balance Sheet showing balance sheet accounts

Liabilities Amt Assets Amt
Capital Land & Building
Reserves & Surplus Plant & Machinery
Outstanding Expenses Furniture
Loans Stock
Trade Creditors Sundry Debtors
Bills Payable B/R
    Misc. Investments
    Cash at Bank
    Cash in Hand
Total Total 

 

 

Frequently Asked Questions on Retirement

Ahuja Sahil
-
3
Frequently Asked Questions on Retirement

The Answers To Your Retirement Questions

As a pre-retiree in your 50s, you may be facing some challenging financial choices and some of them may be the most important ones you make in your lifetime. Here we’re diving into some of the most common situations you may be looking at and providing retirement planning solutions.

If you’re late to the game in terms of saving, you can still make a huge difference in your overall portfolio thanks to the catch-up provision. This IRS rule lets anyone who is 50 and above to contribute an extra $6K to their 401(k) plan, where everyone else is capped at $18K for 2015. This higher limit can really help you grow your money.

 

Retirement

Many people are dipping into their retirement accounts; 1 in 5 are taking loans from their 401(k)s. If you leave your job before you finish paying it back, you have to finish within a certain period of time or you are forced to take a distribution that not only raises your taxable income but is taxed more as well.

3 out of 4 people are claiming Social Security at 62, but this leaves a lot of money on the table, especially as people are living longer. Every year you delay filing, your benefit grows by 6.5-8%, depending on your age. 

If you claim Social Security at 62 for a $750 monthly payout, over your lifetime your benefit will be worth $297K. Waiting until 70 and living to be 95, your benefit jumps up to $1,320 per month or $396,100 over the course of your lifetime. 

There are other misconceptions about Social Security too when it comes to eligibility.

For example, it can serve as a resource for people younger than 62. If a 51-year-old couple has a 14-year-old son still living with them and his father were to pass away suddenly, his mother would be entitled to SS. Unfortunately, many people fail to claim their benefits because they’re unaware they’re eligible.

Long-term care insurance is worth the price. The average cost is $2,500 per year, but most of us will need LTC late in life and the optimal time to buy is in good health between 50 and 64.

Perhaps the most challenging financial situation pre-retirees in their 50s face is underestimating how expensive retirement really is. Figuring out how much you need to save and how to invest those savings to build financial security for the rest of your life is vitally important, and those who sit down and do the math end up saving a third more than those that don’t plan ahead.

———————————–

Planning for retirement is not an easy thing to do. There are a lot of unknown variables and a lot of decisions to be made. If you are interested in learning more about your options for retirement planning and you live in the Everett, WA area, then contact a local Everett retirement planner or local financial planner.`

 

 

What are Rectification Entries?

Ahuja Sahil
-
0

Rectification Entries, With Examples

When an error is committed in the books of accounts the same should be corrected to show true numbers in financial statements. If the error is immediately identified it may be fixed by striking out the wrong entry and replacing it with a correct one. However, if the error is identified at a later stage, the correction should be made by passing a suitable journal entry, such entries used to fix an accounting error are called rectification entries.

Nowadays with software packages if a journal entry has been posted to the ledger it usually requires rectification entry, however, if it is still at a preliminary stage of validation then it may be corrected without the need of an additional entry. Errors are required to be rectified before finalization of books of account.

Stated below are types of errors and their respective rectification entries illustrated with examples;

 

Rectification Entry for Errors of Omission

Omission made for the purchase of Machinery worth 50,000, the same can be rectified by passing a simple double-entry that can record debit and credit aspects of this transaction. The following entry shall be passed:

Rectification Entry for errors of omission

(Rectification of missing entry for purchase of machinery)

After the above rectification cash can be posted in the cash book and cash account. Office equipment can be entered into office equipment ledger account which means the error has now been corrected.

Related Article – What are closing entries?

 

Rectification Entry for Errors of Commission

Purchase of goods from Mr Z aggregating to 10,000 erroneously entered in the ledger of Mr.B. To rectify this error, we will have to reverse Mr B’s account and have to credit Mr Z’s account with the amount of goods purchased.

Correct Entry which should have been passed

Errors of Commission 1

Wrong Entry

Errors of Commission 2

Rectification Entry

3

(Rectification of wrongly posted purchases to Mr B’s A/C)

This is a classic case of a reclass entry.

Related Article – Why is closing stock not shown in trial balance?

 

Rectification Entry for Errors of Principle

Sale of Building for 10,00,000 entered into Sales Account.

A building is a fixed asset hence it should be entered in the building account. Therefore, we will have to rectify the sales account by debiting it and crediting the same amount to the building account.

Correct Entry which should have been passed

Principle1

Wrong Entry

Principle2

Rectification Entry

Principle3

(Rectification of entry passed in Sales account by mistake for Sale of Building)

Related Article – What is a bank reconciliation statement?

 

Rectification Entry for Errors of Compensation

Rent income is overstated by 10,000 and salary expense is overstated by 10,000.

Since rent income has a credit balance and salary expense has a debit balance, the overstatement of rent income balance will offset the overstatement of the salary account balance. There will not be any effect on the trial balance. Rectification of the same shall be done by reducing Rent Income and Salary Expense.

Error of Principle

(Being rectification of entry passed for reversal of Income over expense)

 

Short Quiz for Self-Evaluation

Loading

 

> Read What is Suspense Account?

 

What are Closing Entries?

Ahuja Sahil
-
0

Closing Entries, With Examples

At the end of an accounting period when the books of accounts are at finalization stage, some special journal entries are required to be passed. In accounting terms, these journal entries are termed as closing entries. The main purpose of these closing entries is to bring the temporary journal account balances to zero for the next accounting period, which keeps the accounts reconciled.

As similar to all other journal entries, closing entries are posted in the general ledger. Once all closing entries have been passed, only the permanent balance sheet and income statement accounts will have balances that are not zeroed. Most common examples of these closing entries can be seen in temporary accounts like:

  • Revenue account
  • Dividend account
  • Expense accounts viz., Wages, Office Expenses, Electricity, etc.

These accounts are be zeroed and their balance should be transferred to permanent accounts.

The permanent accounts in which balances are transferred depend upon the nature of business of the entity. For example, in the case of a company permanent accounts are retained earnings account, and in case of a firm or a sole proprietorship, owner’s capital account absorbs the balances of temporary accounts.

 

Closing Entry for Revenue Account

Total revenue of a firm at the end of an accounting period is transferred to the income summary account to ensure that the revenue account begins with zero balance in the following accounting period. The objective is to get the account balance to nil.

J1

 

Closing Entry for Expense Account

Just like revenue, expense account is also closed at the end of an accounting period so that it can once again begin with nil balance. Below is the journal entry that will assist in this process:

J2

 

Closing Entry for Income Summary

After closing both income and revenue accounts, the income summary account is also closed. All generated revenue of a period is transferred to retained earnings so that it is stored there for business use whenever needed.

Let’s say if a business generates revenue of 1,000 in a particular accounting period and incurs expenses worth 950 the amount transferred in retained earnings would be 1,000 – 950 = 50.

J3

*In case if expenses are more than revenue and business confront losses then the above-mentioned journal entry would be reversed.

 

Closing Entry for Dividends (Capital Reduction)

This entry is required in case if a company pays dividends during an accounting period which results in a reduction of capital. Dividend (paid) account is then closed with the help of the below journal entry:

J4

Closing entries help in the reconciliation of accounts which facilitates in controlling the overall financials of a firm.

 

Short Quiz for Self-Evaluation

Loading

 

>Read Difference between Reserves and Provisions

 

What is SIDBI?

Ahuja Sahil
-
2
What is SIDBI?

SIDBI – Small Industries Development Bank of India

Small Industries Development Bank of India (SIDBI) is a financial institution which is headquartered in Lucknow, India. It was established in 1990 on April the 2nd and is mainly responsible for promotion and development of micro, small and medium-scale enterprises (MSMEs). These small enterprises contribute about 45% to manufacturing output and about 40% to total exports, directly and indirectly. SIDBI started as a wholly owned subsidiary of Industrial Development Bank of India (IDBI) & is currently owned by 33 different institutions which are either controlled or owned by government of India. Its official website is www.sidbi.in

Since its inception SIDBI has grown from being just a refinancing agency which assisted banks and other local NBFCs indirectly to a lender which now provides loans and other forms of credit directly to MSMEs. It plays a vital role by helping these budding businesses to expand their operations.

 

SIDBI has created several different legal entities to actively perform associated activities:

  • CGTMSE – Credit Guarantee Fund Trust for Micro and Small Enterprises (www.cgtmse.in)
  • SIDBI Venture Capital Limited (www.sidbiventure.co.in)
  • SMERA – SME Rating Agency of India Ltd. (www.smera.in)
  • ISARC – India SME Asset Reconstruction Company Ltd. (www.isarc.in)
  • MUDRA – Micro Units Development & Refinance Agency Ltd. (www.mudra.org.in)

 

SIDBI

 

Products and Services of SIDBI

Few of the products and services that Small Industries Development Bank of India offers are:

  • Service Sector Assistance – The micro small and medium-scale enterprises which require Loan/Capital for growth can consider SIDBI, this includes service sector enterprises such as IT houses, health care, logistics, retail outlets, clinics etc. It also offers loan facilitation and syndication services to the service sector.
  • Supporting Clean Energy – It has different programs to extend credit to support waste management, cleaner production and similar firms who are helping the planet to reduce the carbon footprint. 
  • Receivable Finance Scheme – It is a scheme devised to mitigate the receivables issue that occurs from the suppliers who are supplying goods to MSMEs and it helps to improve liquidity.
  • Flexible assistance for Capital Expenditure -It provides assistance in scheduling the tenure of your repayment schedule if the investor is investing in fixed assets for example land or building.
  • Government Subsidy schemes – It assists in variety of schemes which are offered by the government to help MSMEs in adoption of modern technological processes & expansion of operations.

 

Top Benefits of SIDBI

  • Uniquely Designed Products to meet MSMEs needs.
  • Focused attention on Industrial and Service sector.
  • Attractive rates on financial products.
  • Focused managers to assist in entrepreneurial development.
  • Its wide presence across the country.
  • Provision of risk/growth capital.
  • Access to equity and venture financing.
  • Access to collateral free finance.
  • Focused attention on Industrial & Service Sector Funding.

 

 

What are Sundry Expenses?

Ahuja Sahil
-
0

Sundry Expenses

The word “Sundry” is used for items which are irregular and insignificant to be listed individually. Sundry expenses are costs incurred during business operations that are not listed separately because they are usually small, rare, and do not relate to other general expenditures.

They are comparatively small, miscellaneous in nature & can not be classified under a specific day-to-day expense ledger.

Sundry Expenses

They may also be referred to as “Miscellaneous Expenses”. They can be related to a particular area within a business such as sundry office expenses, sundry retail expenses, etc.

 

Examples of Sundry Expenses

As mentioned above these types of expenses do not usually have a separate ledger account however they can be grouped together and clubbed together as sundry expenses. There are no hard and fast rules for categorizing expenses as sundries but they should definitely not include any regular payments or capital expenses.

Examples may include expenses related to bank service charges (not regular), gifts & flowers, festival celebrations, donations, etc.

Related Topic – What is a Journal?

 

Treatment in Financial Statements

Sundry expenses are shown on the expenses side (left) of a profit and loss account (Income statement). Size, industry practice & nature of an expense plays an important role to determine whether it should be included in sundries or be given a separate ledger account.Sundry Expenses in Income Statement

Back in the days of manual bookkeeping, there was a greater need for such classifications since having a particular ledger account made for every little expense would not feasible. Now with ERPs and modern computer systems, the need to reclass dozens of small expenses as sundry expenses has been greatly reduced.

 

Sundry Expenses Vs General Expenses

Basis Sundry Expenses General Expenses
Definition One-time or random expenses that cannot be classified under another expense category are called sundry expenses. They are general, regular, day-to-day, and necessary expenses that are grouped under a general category.
Frequency There is no fixed interval for sundry expenses. Either they are one-time or intermittent. General expenses occur regularly.
Size It is typical for such expenses to be small or to be made up of several small expenses. They are usually larger (in comparison), regular, and significant for core business operations.
Examples Once in a while bank transfer charges (WIRE), Donations, Flowers & Gifts, etc. Salaries, rent expense, purchase of raw material, electricity expense, depreciation, etc.

Related Topic – Type of account and normal balance of a petty cash book

 

Journal Entry for Sundry Expenses

Sundry Expense A/C Debit
 To Cash/Bank A/C Credit

(Being payment of sundry expenses made by cash/bank)

Sundry Expense Account – It is an expense for the business therefore debit the increase in expense.

Cash/Bank Account – Credit the decrease in assets.

Related Topic – Is an expense debit or credit?

 

Short Quiz for Self-Evaluation

Loading

 

Revision & Highlights Short Video

Highly Recommended!!

Do not miss our 1-minute revision video. This will help you quickly revise and memorize the topic forever. Try it :)

 

>Related Long Quiz for Practice Quiz 38 – Sundry Expenses

>Read Prepaid Expenses

 

What are Personal Loans?

Ahuja Sahil
-
3
What are Personal Loans?

Personal Loans

You need money for almost everything. To tackle emergencies, to fulfil wishes, to get a higher education, to buy any amenity for your home or to get the best treatment for a health condition, money is all you want. And in these situations, Personal Loan comes to our rescue.

 

Personal Loans

 

Definition

A personal loan is “money borrowed” from an institution or a person to fulfil the personal requirements of a person for instance, for education, vacation, medical requirements, vehicle repair, etc. They are smaller loans and are of two types:

  • Secured Personal Loan
  • Unsecured Personal Loan

A secured personal loan is protected by collateral or an asset, for instance, a car or a house. Whereas, the unsecured personal loan does not require any kind of protection by any asset or collateral.

If you hold a good credit record, you can apply for a personal loan at any official lender, bank or building agency. As the personal loan is a smaller loan, the amount is also small. It may range from $500 to $10,000, i.e., any small amount based on your requirement, but if you want to borrow a large sum of money, you would have to apply for a secured personal loan.

 

Personal Loan Application

The procedure of applying for a personal loan is very easy. You need to apply for a loan at a bank or a lending agency. Nowadays, you can also apply online for a personal loan. You first need to fill an application then you may choose to talk to a representative who will explain you in detail, the loan options available for you. You will also be required to provide some personal information to the bank and your financial history and its current status. You also need to provide the proof of employment, the amount you need to borrow and the reason behind application of personal loan. Another important thing that you need to tell the bank is whether you have a co-signer or not.

Once you manage to get the personal loan, you can pay it back by paying an equal amount every month. The rate of interest and the loan fee may differ with different banks and lending agencies.

Advantages 

  • It is the easiest type of loan available at your disposal.
  • You can directly apply for a loan in a bank without any need of an agent.
  • The processing time is very less.
  • This is the least troublesome loan. The paperwork is a minimum.

Disadvantages

  • You cannot apply for a personal loan unless you have a bank account.
  • You must qualify the criteria set by the bank to get the loan.
  • Good credit history is a must.

 

Example of some personal loan providers in the world are:

  • Citibank
  • Santander
  • HDFC Bank
  • Money Lender Singapore – Passcredit.com

 

 

What are Moneylender Loans?

Ahuja Sahil
-
1
What are Moneylender Loans?

Moneylender Loans

Moneylender loans illustration

 Moneylenders provide small personal loans for a short time period at high rates of interest. In other words, risks and repayments are high. There are many different types of moneylenders. Some give a small number of loans that are to be repaid over a number of days. Some offer a heavy sum of money with a high-interest rate. Others may offer credits on furniture or electrical goods.

Moneylenders don’t count for your good or bad credit history. They even lend money to the gamblers who often get into a debt circle. However many countries are governed by the Money Lenders Acts of particular states.

 

Repayment and Interest Rates

Moneylenders will collect money from you in cash by reaching your doorstep and you will have to bear their collection charge. If you cannot pay the collection charge, you need to repay (principal+interest) at the moneylender’s office. The moneylender should carry his identity card so that he has permission to call you for repayment, any day between Monday to Saturday from 10 am to 9 pm. If you are comfortable, they can also call you from 8 am to 10 pm, but you must give it in writing beforehand. Also, they don’t have the permission to contact you on Sundays or any of the bank holidays or Contact your family members without your agreement.

Moneylenders are more expensive when compared to a bank or credit institution. The APR is a minimum of 23% and higher in other cases. The total credit cost tells the extra amount or the interest to be paid on the amount you borrowed. Moneylenders cannot charge extra interest, except for the collection charge. So make sure that if you miss paying the repayment, the total amount to be paid should not go up.

 

Consequences of Non-Payment

If you miss repaying the loan amount, contact your moneylender as soon as possible. If you fall short of payments, the moneylender cannot charge any kind of penalty and cannot give you another loan to pay the first loan. If the matter is still not resolved between you and the moneylender, you can contact the Money Advice and Budgeting Service (MABS). They give free and independent advice to people in debt. They will give you various suggestions such as drawing of budget, finding your entitlements, try to work out new loan arrangements with your moneylender. It will help to fulfil your commitments.

 

Some examples of moneylenders are,

  • creditwaves.com
  • hardmoneyusa.com

 

 

What are Foreigner Loans?

Ahuja Sahil
-
1
What are Foreigner Loans?

Foreigner Loans

A foreigner loan is a type of loan which can easily be accessed by someone who is not the citizen of the country from which he/she is acquiring the loan. Let us say if you need money to set up your business, buy some goods etc. however, you don’t have enough cash then there are some institutions which are specialized to give you financial help. You can avail that by applying for a foreigner loan to meet your needs. You just need to meet certain requirements to get your money.

 

Foreigner Loans

 

Foreigner Loans Vs Other Loans

The key difference between a foreign loan and another type of loan is the interest rate and the duration of repayment it offers. The banks and other credit institutions generally offer short-term loans. But foreign loans can attract higher interest rates, as the foreigners don’t have to go for collateral securities. So this means that foreigner loan is a high-risk loan. The duration of this loan is shorter when compared with standard loans. The less you borrow, the shorter the duration of repayment. Before going for this loan, a proper detailed study must be done taking various lending institutes into account.

 

Documents Needed to Obtain a Foreigner Loan

To obtain the loan from a moneylender, you are required to submit the following documents:

1. Work permit
2. Personal Information
3. Identification Documents
4. Payslips

*Specific requirements vary among different lenders.

 

Miscellaneous Points & Examples

Some moneylenders will try to exploit a high-interest rates from you if they know how badly you need a loan or if you don’t have sufficient knowledge. So explore and know more and more moneylenders and find out a suitable deal.

If you don’t want to obtain a loan from any of these sources, you can go for private lenders. All they need is your credit history and creditworthiness. They have less strict policies.

So before you apply for any loan, make sure that you take a glimpse of your income. Also make sure to study different sources of obtaining loans and keeping in mind your creditworthiness and future prospects, choose the most effective and efficient option.

 

An example of a foreigner loan provider is Power credit money lender Singapore.

 

 

What is a LLP in India?

Ahuja Sahil
-
10
What is a LLP in India?

Limited Liability Partnership – India

In India, a business organization can take many forms such as an LLP (Limited Liability Partnership), Private Limited Company, Public Company etc. On 7th January 2009 with the assent of the President the Limited Liability Partnership Act, 2008 came into effect. LLP has been a successful business vehicle since then as it combines the benefits of a partnership with that of a limited liability company, making it a lucrative option for start-ups. It keeps the personal wealth of partners safe and on the other hand, it helps leverage the benefits of a partnership.

In a Limited Liability Partnership, a partner is not bound by another partner’s acts; it can be due to negligence, misconduct etc. In other words, LLP can also be defined as a corporate entity that combines professional as well as entrepreneur behaviour to operate in an effective, efficient and flexible manner by providing the benefit of limited liability and larger financial resources.

 

LLP in India

 

 

Requirements and Benefits of an LLP

  • The formation of an LLP requires a minimum of 2 partners and at least one of them shall be an Indian resident. Each partner will only be liable to the extent of its capital in the business unless found to have acted with fraudulent intentions and deceiving purposes to cheat creditors.
  • It is a separate legal entity formed under the LLP Act 2008 therefore It shall now possess the power to sue and be sued. Also, both an individual and a body corporate may become a partner.
  • Duties, rights & shares of each partner are governed by an agreement among partners or between the LLP and partners subject to the act. Law gives the freedom to formulate the agreement per choice.
  • There is no minimum capital required to form an LLP, moreover, the creation of a limited liability partnership is inexpensive as compared to other forms of business.
  • When paralleled with regular partnership an LLP is a preferred choice of lenders hence making borrowing easier. Also, it has less stringent compliance and regulatory requirements making it easier for the business owners to focus on operations.

 

Disadvantages of an LLP in India

  • A Limited Liability Partnership is not allowed to go public this means that it can not be listed on the stock exchange and is not allowed to raise money from the general public.
  • Actions of any partner related to the LLP will have an impact on it and the entity will be legally held responsible for any liabilities thus created.
  • Winding up an LLP can be a tedious and expensive task.

 

You may Download/View a PDF of the complete LLP Act – 2008 here LLP_Act_2008_India

To get details on the steps to register an LLP go to the official MCA India Website.

 

 

What is REIT (Real Estate Investment Trust)?

Ahuja Sahil
-
1
What is REIT (Real Estate Investment Trust)?

REIT (Real Estate Investment Trust)

REIT stands for Real Estate Investment Trust, it can be seen as a mutual fund that instead of investing in stocks invests in real estate. It is an organisation that deals in securities which may be sold like shares on major exchanges. REIT invests in real estate either directly or through mortgages by making a combined pool of money from investors which can range from small retail type to large accredited ones.

REIT own income-producing real estate which are in form of offices, apartment buildings, warehouses, hospitals, hotels, shopping malls etc. It benefits investors in several ways such as helping them attain regular income streams, long-term capital appreciation, diversify their investment portfolio, invest in real estate with relatively small capital etc. REIT’s prove to be strong income vehicles because they pay out almost 90% of their taxable income to the shareholders in form of dividends and shareholders pay taxes on those dividend. As Real Estate Investment Trust receive special considerations regarding tax, so high yields and liquid methods are offered to investors.

 

REIT - Real Estate Investment Trust

 

Types of Real Estate Investment Trusts

1. Equity REIT – In this type, investment is made in owning properties or a part of it thus generating their core income either by property rents or  by selling their long-term properties. Equity REITs are tilted towards specializing in owning certain building types such as apartments, shopping malls, corporate offices, hotels etc. Few concentrate on owning & generating revenues from a single type of building while others diversify.

2. Mortgage REIT – In this type, revenue is generated from investing not directly in the property instead investing it in mortgage related to a real estate. Money is either lent directly to the owners of real estate in form of a mortgage or existing mortgage is acquired or a mortgage-backed security is purchased. This may be done for both residential & commercial properties. Prime source of money is earned in form of interest generated on mortgages.

3. Hybrid REIT – It is a combined outcome of equity REIT’s and mortgaged REIT’s. This investment is done carefully in both properties and mortgages thus getting benefits of both the dimensions.

 

REIT – Common Qualifications

Different countries have different internal criteria(s) to qualify a company as a Real Estate Investment Trust, below mentioned are few common points across various nations:

1. Invest about 75% of assets in the field of real estate.

2. About 75% of gross income should be generated from real property or interests from mortgages.

3. Pay approx 90% of its taxable income to shareholders as dividends every year.

4. Should be controlled and managed by Board of Directors or Trustees.

5. At least have 100 shareholders.

 

Benefits of a REIT

1. High Yields – For most people, main attraction of this scheme is the income earned which usually outperforms the broader market making this a lucrative option. 

2. Easy Tax Procedure – Tax issues with REIT’s are more straight forward when compared to other schemes or partnerships. A form 1099-DIV is sent to shareholders which contain the breakdown of dividends. Each year dividends are allocated from capital gains and ordinary incomes. So it becomes easy to invest here.

3. Liquid Asset – Since REITs can be listed as stocks on major exchanges hence they are easy to buy and sell. This makes them liquid & hassle free.

4. Diversification – Research has shown adding REIT’s to any investment increases returns and diminishes risk as they have very little correlation with the stock exchange(s).

5. Leverage – Usually a small investor with less to moderate initial capital can not buy real estate easily, they may never be able to get the benefits of investing in high potential commercial real estate such as shopping malls, office spaces etc. Such investors can leverage their investment and get the benefits they otherwise may never be able to get.

 

 

What is Adjusted Trial Balance?

Ahuja Sahil
-
0

Meaning and Definition

As we know, final accounts are prepared at the end of an accounting period, by that time ledger balances also change due to day-to-day business transactions. Therefore, ledger balances are also required to be updated with relevant adjustments.

Examples of such transactions are depreciation, closing stock, accruals, deposits, etc. Adjustment entries relating to these transactions are passed and posted to respective ledger accounts to bring the ledger accounts to their appropriate balances. 

Once all the necessary adjustments are absorbed a new second trial balance is prepared to ensure that it is still balanced. This new trial balance is called an adjusted trial balance. All ledger balances and their respective debit and credit balances are listed within this and are further used to prepare the financial statements of a company.

 

Example

Suppose Unreal Pvt. Ltd. runs a small business and its trial balance as on March 31, 2014, is as follows:

Trial balance before adjustments

The following additional information is also to be incorporated into the above trial balance thereafter an adjusted trial balance is to be furnished.

  • The salary due to employees as on 31 March 2014 is 4,000
  • Rent includes a refundable deposit of 15,000

 

The following entries will be recorded in their respective ledger accounts

Salary and rent account adjustment

 

Adjusted Trial Balance

Adjusted Trial Balance

Hence the trial balance thus made is the one which includes all considerable adjustments and can be termed an adjusted trial balance.

Purpose of Adjusted TB

An adjusted trial balance is usually the last step in the accounting cycle because the financial statements are prepared after this. This adjusted trial balance is a report in which all the debit and credit balances are provided.

Preparing an adjusted trial balance can serve a variety of purposes, some of which are stated below,

  1. The very first and main purpose is to show that the debit balances match the credit balances
  2. Trial balance is used to prepare financial statements every year such as balance sheets, income statements, and cash flow statements.
  3. An adjusted trial balance ensures that the financial statements for the year are accurate.
  4. This trial balance is also useful in determining whether the adjusting entries at year-end are made correctly or not
  5. This adjusted trial balance helps in supervising the company’s performance because it acts as a final version of the accounts and gives a better and clearer picture altogether.

 

Adjusted Trial Balance to Income Statement

Once the adjusted trial balance is prepared after adjusting all the required entries in it, the next step is to prepare the financial statements from this adjusted trial balance such as the balance sheet, income statement, and cash flow statement.

The very first financial statement prepared is the income statement. The company will start by looking into the adjusted trial balance and taking out all the revenue and expense accounts and putting the information in the income statement.

Let us see the following example,

After looking at the above trial balance we can easily recognize the items that will go into the income statement of an enterprise. After recognizing the revenues and expenses we will post them in the income statement.

The income statement will be made as follows,

This way the income statement will be prepared showing all the revenue and expenses of that particular accounting period taking from the adjusted trial balance and at last, showing the net profit which is the difference between all the revenues and expenses.

Unadjusted Trial Balance

An unadjusted trial balance is a raw form of trial balance where all the general balances of the ledger accounts are directly posted and no adjusting entries are made. When such type of trial balance is made, all the balances of ledger accounts without any adjustments are used in the preparation of financial statements.

This type of trial balance is issued by accounting software packages. It is often manually compiled. An unadjusted trial balance is only used in double-entry bookkeeping, where there is a credit to every debit and all the entries are balanced. If an entity is following a single-entry system, it is not possible to create a trial balance with equal debit and credit.

 

Adjusted vs Unadjusted Trial Balance

A small table showing the differences between the two.

Basis Adjusted trial balance  Unadjusted trial balance 
Meaning An adjusted trial balance is one that is made after making all the necessary adjusting entries to the general balances of the ledger accounts. An unadjusted trial balance is one that records the general balances of ledger accounts as it is without making any adjusting entries to them.
Adjusting entries All the adjusting entries are recorded and only after that this type of trial balance is made. No adjusting entries are recorded in this type of trial balance.
Additional account of net loss or net income An adjusted trial balance shows an additional account of the net loss or net income of the firm. Unadjusted trial balance on the other hand does not show any additional account for net loss or net income.
True and fair presentation An adjusted trial balance shows the true and fair presentation of all the balances of the ledger accounts as all the required adjustments are made. An unadjusted trial balance in comparison to an adjusted trial balance does not show a true and fair presentation of the accounts as no adjusting entries are made to this.
Type of bookkeeping This type of trial balance can be used by both types of bookkeeping, that is, double-entry bookkeeping as well as single-entry systems. This type of trial balance can only be used by double-entry bookkeeping systems. Firms maintaining accounts on single-entry systems cannot use this trial balance.

 

 

What is the Journal Entry for Cash Discount?

Ahuja Sahil
-
0

Journal Entry for Cash Discount

100 keyboards are sold for the invoice price of 300 each with payment terms 1/10, Net 30 days. Journal entry for a cash discount, in this case, will depend on the terms that the buyer will get 1% cash discount from total invoice price if the payment is made within the first 10 days of receipt of the invoice. (Assuming there is no trade discount)

Assuming that the buyer avails cash discount in the above example, we have provided an example of a journal entry for both discounts allowed and discount received.

The discount allowed by the supplier acts as the discount received for the buyer and vice-versa. In the above example, 300 will be the discount allowed by the supplier and the same amount will be the discount received by the buyer.

 

Example I – Journal entry for cash discount allowed

Cash A/C 29,700 Real A/C – Dr. What comes in
Discount Allowed A/C 300 Nominal A/C – Dr. All expenses and
 To Debtor’s A/C 30,000 Personal A/C – Cr. the giver

 

Example II – Journal entry for cash discount received

Creditor’s A/C 30,000 Personal A/C – Dr. the receiver
 To Cash A/C 29,700 Real A/C – Cr. what goes out
 To Discount Received A/C 300 Nominal A/C – Cr. all gains

 

Short Quiz for Self-Evaluation

Loading

 

>Read Provision for Discount on Debtors

 

What are Non-Performing Assets or NPA?

Ahuja Sahil
-
0

Non-Performing Assets or NPA

Non-performing assets or NPA are the loans provided by the banks to retail or institutional clients which are no more performing up to the mark or a preset standard. These are basically loans turned bad. It is all form of credit which is extended by a bank or NBFC and is overdue for a specified period of time. To qualify as a Non-Performing Asset it needs to be delinquent for a minimum of 90 days. It is also known as “Non-performing loans”.

Term loans, overdraft/cash credits & all other loans and advances are qualified to be tagged under NPA

Banks would generally classify an asset as Non Performing only if the interest due and charged during a quarter is not serviced fully within 90 days from the end of a quarter.

 

Example of NPA

When a loan is provided to a client by the bank it is a financial instrument through which the bank will earn income (till the tenure of the loan) in form of “interest income”. This is then seen as an asset that will generate income and is shown on the asset side of a balance sheet, however, the interest income earned in every period will be shown on the income side of a Profit and Loss Account.

Once this asset becomes overdue for a minimum of 90 days or as otherwise specified it is considered non-performing and it discontinues generating any income for the bank, hence it now potentially acts as a liability for the bank.

Related Topic – What are Fixed Assets?

 

Main Causes of NPA – Non-Performing Assets

There are several reasons for assets turning bad, a few of them are:

  • Economic Instability – A region’s economy could be hit by several reasons beginning from inflation to environmental issues. If the macroeconomy is in trouble chances are that loans all over will be affected.
  • Improper Risk Mitigation by Banks – This can also be categorized as low standard lending by banks and NBFCs where credit is extended to a client just on the base of speculation or any related reason.
  • Diversion of funds – Funds used for purposes other than stated in the loan documents are called diversion of funds, due to their ill-intent, it is difficult to recover money from these types of borrowers.
  • Bank Operating Style – Sometimes the way a bank operates also adds up to NPA such as reasons related to the credit policy, terms of credit etc.

 

Short Quiz for Self-Evaluation

Loading

 

>Read Contingent Liabilities

 

5 Reasons to Invest in Blue Chip Stocks

Ahuja Sahil
-
0
5 Reasons to Invest in Blue Chip Stocks

Reasons to Invest in Blue Chip Stocks

Blue Chip is a stock recognized for features such as stable earnings, high quality, less volatility and good returns. Thanks to Oliver Gingold of Dow Jones, In the early 1920s he termed such stocks as “blue chips” as he related them with the highest denomination in poker which was $25 back then for a blue coloured chip.

Such recognition helps a naive investor differentiate between “almost garbage” & a well-established firm. A regular investor with limited financial literacy can be awestruck by the number of options to invest while looking at all the listed stocks on an exchange. Let’s look at why blue-chip stocks are famous among investors.

 

1. Stable Earnings

If a business has stable earnings over a consistent period of time then it becomes reliable & earns the trust of investors which is considered a real good sign of a company which has its fundamentals right. If a stock has stable earnings it clearly means that the top management of the company is doing “something right” which has led them to stability. Stable earnings mean good returns for your portfolio & that remains the primary goal for all investments.

 

2. Dividend Payments

A solid trend which shows that the company pays dividends to its shareholders in a timely and consistent basis is a great morale booster for a stock owner simply because it acts as a cherry on the cake. It is income over and above your capital appreciation so, for example, a 20% dividend would mean an extra 20% income over and above your investment appreciation in a particular blue-chip company.

 

3. Strong Financials

Blue-chip companies have strong financials, for example, they are not hugely burdened by debt, their financial ratios are intact and are seen within prescribed limits, they have an efficient operating cycle etc. This leads to less volatility, minimal risk & very limited downside risk for the investor which ultimately helps them to mitigate risk keeping the entire investment profile in view.

 

4. Diversification

You might be someone who likes to take the risk; however, since blue-chip stocks are less risky they provide a great feature to help you reduce the entire risk profile so that even if you invest in more risky stocks which have a greater chance to fail blue chips can help you cover up some of your losses. These businesses usually have diversified business lines, demographics and multiple revenue channels which in turn help them reduce risk from operational failures.

 

5. Competitive Brand Advantage

Most of the blue-chip companies have a stronghold and their presence can be felt in daily lives of common people, for example, if you buy a can of sprite then you are adding up to the revenues of coca-cola if you buy ahead & shoulders shampoo you are adding up to the revenues of P&G. There are many such examples where it can be seen that blue chips get a competitive advantage due to their cost efficiency, franchise value, goodwill or distribution control.

 

Famous Blue Chip Companies 

These are the top 5 among various reasons to invest in blue-chip stocks.

 

1...181920...24Page 19 of 24

Useful Links

legal

More

[email protected]

© www.Accountingcapital.com 2014 - 2023