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General Accounting

General Accounting includes General Ledger, Fixed Assets, Intercompany Accounting, and Financial
Reporting and related Record-to-Report (R2R) work processes. The research area is for professionals and
their managers, covering a range of issues related to the design and delivery of associated work
processes.

Introduction to Accounting Basics. ... Some of the basic accounting terms that you will learn include
revenues, expenses, assets, liabilities, income statement, balance sheet, and statement of cash flows.
You will become familiar with accounting debits and credits as we show you how to record transactions.

Generally accepted accounting principles (GAAP) are a common set of accounting principles, standards
and procedures that companies must follow when they compile their financial statements.

The general ledger is the central place, usually electronic, that stores every accounting entry a company
makes. The entries, called journal entries, are debits and credits. The entries are made to various
accounts (for example, payroll, inventory, or advertising).

Six Steps Accounting Cyle

These steps are: (1) analyzing the transactions as they occur, (2) recording them in the journals, (3)
posting debits and credits from journal entries to the general ledger, (4) adjusting the assets with a trial
balance, (5) preparing financial statements, and (6) closing the temporary accounts.

Record to Report (R2R) is a Finance and Accounting (F&A) management process which involves
collecting, processing and delivering relevant, timely and accurate information. It provides strategic,
financial and operational feedback on how a business is performing.

A general ledger contains all the accounts for recording transactions relating to a company's
assets, liabilities, owners' equity, revenue, and expenses. ... Posting is the process of recording
amounts as credits (right side), and amounts as debits (left side), in the pages of the general
ledger.
Account Payable and Payables. Definition, Meaning Explained, Example Transactions. An account
payable is a bill to be paid, or money otherwise owed to a creditor. Accounts payable is a liabilities
account, representing all such payables due for payment in the near term.

The accounting cycle, also commonly referred to as accounting process, is a series of procedures in the
collection, processing, and communication of financial information.

As defined in earlier lessons, accounting involves recording, classifying, summarizing, and interpreting
financial information.
Financial information is presented in reports called financial statements. But before they can be
prepared, accountants need to gather information about business transactions, record and collate them
to come up with the values to be presented in the reports.

The cycle does not end with the presentation of financial statements. Several steps are needed to be
done to prepare the accounting system for the next cycle.

Accounting Cycle Steps

1. Identifying and Analyzing Business Transactions

The accounting process starts with identifying and analyzing business transactions and events. Not all
transactions and events are entered into the accounting system. Only those that pertain to the business
entity are included in the process.

For example, a personal loan made by the owner that does not have anything to do with the business
entity is not accounted for.

The transactions identified are then analyzed to determine the accounts affected and the amounts to be
recorded.

The first step includes the preparation of business documents, or source documents. A business
document serves as basis for recording a transaction.

Accounting Cycle Diagram

2. Recording in the Journals

A journal is a book – paper or electronic – in which transactions are recorded. Business transactions are
recorded using the double-entry bookkeeping system. They are recorded in journal entries containing at
least two accounts (one debited and one credited).

To simplify the recording process, special journals are often used for transactions that recur frequently
such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record
those that cannot be entered in the special books.

Transactions are recorded in chronological order and as they occur.
Journals are also known as Books of Original Entry.

3. Posting to the Ledger

Also known as Books of Final Entry, the ledger is a collection of accounts that shows the changes made
to each account as a result of past transactions, and their current balances.

After the posting all transactions to the ledger, the balances of each account can now be determined.

For example, all journal entry debits and credits made to Cash would be transferred into the Cash
account in the ledger. We will be able to calculate the increases and decreases in cash; thus, the ending
balance of Cash can be determined.

4. Unadjusted Trial Balance

A trial balance is prepared to test the equality of the debits and credits. All account balances are
extracted from the ledger and arranged in one report. Afterwards, all debit balances are added. All
credit balances are also added. Total debits should be equal to total credits.

When errors are discovered, correcting entries are made to rectify them or reverse their effect. Take
note however that the purpose of a trial balance is only test the equality of total debits and total credits
and not to determine the correctness of accounting records.

Some errors could exist even if debits are equal to credits, such as double posting or failure to record a
transaction.

5. Adjusting Entries

Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the
accounting period, some expenses may have been incurred but not yet recorded in the journals. Some
income may have been earned but not entered in the books.

Adjusting entries are prepared to update the accounts before they are summarized in the financial
statements.
Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or
liability method), prepayments (asset method or expense method), depreciation, and allowances.

6. Adjusted Trial Balance

An adjusted trial balance may be prepared after adjusting entries are made and before the financial
statements are prepared. This is to test if the debits are equal to credits after adjusting entries are
made.

7. Financial Statements

When the accounts are already up-to-date and equality between the debits and credits have been
tested, the financial statements can now be prepared. The financial statements are the end-products of
an accounting system.

A complete set of financial statements is made up of: (1) Statement of Comprehensive Income (Income
Statement and Other Comprehensive Income), (2) Statement of Changes in Equity, (3) Statement of
Financial Position or Balance Sheet, (4) Statement of Cash Flows, and (5) Notes to Financial Statements.

8. Closing Entries

Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare the system for
the next accounting period. Temporary accounts include income, expense, and withdrawal accounts.
These items are measured periodically.

The accounts are closed to a summary account (usually, Income Summary) and then closed further to
the appropriate capital account. Take note that closing entries are made only for temporary accounts.
Real or permanent accounts, i.e. balance sheet accounts, are not closed.

9. Post-Closing Trial Balance

In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to test the
equality of debits and credits after closing entries are made. Since temporary accounts are already
closed at this point, the post-closing trial balance contains real accounts only.

*10. Reversing Entries: Optional step at the beginning of the new accounting period

Reversing entries are optional. They are prepared at the beginning of the new accounting period to
facilitate a smoother and more consistent recording process.
In this step, the adjusting entries made for accrual of income, accrual of expenses, deferrals under the
income method, and prepayments under the expense method are simply reversed.

General Ledger Accounting Software

The general ledger account refers to the posting of transactions in double-entry format wherein debit
items are on the left and credits are on the right. You can add another column to the utmost right corner
which will keep tab of total account activity. This pattern can be compared to what you can find in a
check book. This ledger supplies data for the balance sheet over and above the single or multi-step
income statements which companies choose from. The ledger can be manual or in the form of computer
software which most companies use. The chart of accounts is grouped according to the following
categories – Assets, Liabilities, Revenue, Expenses, and Owner’s Equity. A general ledger is sorted out
according to this cart with a distinct file, page, register and card for every account.

Functions of General Ledger Accountant

The general ledger accountant is responsible for making sure that the transactions of a certain corporate
entity is properly accounted for and replicates exactly the accounting process adopted by the firm.
These accountants can also perform the functions of corporate, property and financial reporting. Aside
from these tasks, this provider can do daily bookkeeping process such as recording purchases, sales,
disbursements, payroll entries, and cash receipts. The accountant evaluates accounts and makes
necessary adjustments regarding entries. These consist of prepaid charges (insurance premiums),
employee benefits, accumulated expenses that have not yet been billed and used utilities.

Ledger Software

Software has been designed to make the job of the general ledger accountant easier. If you are able to
procure the appropriate software, you can make substantial progress in financial management
capabilities. The application covers the continuum from uncomplicated to one that is rich in features
and fully capable. You need to choose one that will help you achieve your goals in this field of finance.

The major function of this program is to automate account balances while in the process of carrying out
the transaction. It includes the account head and entry columns of the transactions. These are the credit
and debit entries of that specific account. The sum of said transactions will provide the balance of that
account. The same principle applies to the sub-account. You only need to change the account name with
that of the child account with regards to the top account.
This software application for general ledger accounting gives management updated information that
helps in facilitating temporary and long-term business decisions. It takes into account controls and audit
traces that guarantees accurate information is reported. Companies require typical reports such as
balance sheets, income statements and cash flow to determine the progress of the enterprise. These
business reports are also utilized in collecting information to file tax returns while banks require these
for receiving and keeping business loans.

The benefits of the general ledger account software are the following:

 Viewing and monitoring account transactions
 Ensuring proper maintenance of accounts
 Generate income statements and balance sheets
 View transaction details for each account
 Check and balance sub-accounts

The software program combines with all transaction accounts, balance sheets, income statements,
account adjustment, and profit and loss statements.

Accounts receivable refers to short-term amounts due from buyers to a seller who have purchased
goods or services from the seller on credit. Credit is usually granted in order to gain sales or to respond
to the granting of credit by competitors. Accounts receivable is listed as a current asset on the seller's
balance sheet.

The total amount of accounts receivable allowed to an individual customer is typically limited by a credit
limit, which is set by the seller's credit department, based on the finances of the buyer and its past
payment history with the seller. Credit limits may be reduced during difficult financial conditions when
the seller cannot afford to incur excessive bad debt losses.

Accounts receivable are commonly paired with the allowance for doubtful accounts (a contra account),
in which is stored a reserve for bad debts. The combined balances in the accounts receivable and
allowance accounts represent the net carrying value of accounts receivable.

The seller may use its accounts receivable as collateral for a loan, or sell them off to a factor in exchange
for immediate cash.

Accounts receivable may be further subdivided into trade receivables and non trade receivables, where
trade receivables are from a company's normal business partners, and non trade receivables are all
other receivables, such as amounts due from employees.

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6 Best Practices for Record-to-Report Process

6 Best Practices for Record-to-Report Process
Record to Report (R2R) forms an important aspect of the Finance and Accounting
process. It provides the necessary insights on the strategic, operational and financial
facets which gives an in-depth idea of an organization’s performance. It involves complex
processes of gathering, converting and supplying information to stakeholders who want
to know if their expectations have been met. The data also helps organizations to evaluate
and bring about improvements in Master Data Maintenance, Financial Closing &
Consolidation and General Accounting.

Regulatory bodies and analysts expect organizations to review their account books in
less than a week and release their earnings statements within a month. Industry specific
regulations and the ever increasing financial reporting has put huge burden on an
organization’s reporting process.

Regulations such as Basel II, Basel III, carbon footprint reporting among many others,
mandate that organizations disclose additional and complex information in a time bound
manner. A research conducted by KPMG has established that around 43% of
organizations require at least 11 days to complete their monthly financial reporting
whereas 20% of them needed more than 15 days. With pressure on organizations from
various quarters, the only way this can be achieved is by following the best practices of
Record to Report. The key is to adapt the processes to the changing trends in the market
and stay one step ahead of your competition. Experienced, responsible and
resourceful Finance and Accounting outsourcing experts can provide you the assistance
that you need to manage your financial reporting processes.
Challenges Faced in Record-to-Report Service:
Before finalizing data, a lot of researching and correcting issues crop up which have a
huge impact on the accuracy of the report. Some of these issues include:

o Data Posting Errors:
These can occur due to problems with the feeder systems resulting from them being
wrongly setup. The errors can be rectified by changing the data at the source system
in compliance with the corporate policy.

o Errors in Allocation Setup:
These can occur when dependent data from previous transactions and all
consequent transactions are incorrectly created and posted. These must be done
accurately and further update of the allocation formulas must be restricted.

o General Ledger Reconciliation Processes:
These can turn out to be quite complex and time consuming. There can be problems
in establishing the account’s true ownership and responsibility which can lead to GL
reconciliation process getting prolonged and complex as unapproved journal entries
might be done to sensitive accounts. Using suspense accounting and having the
knowledge about the volume of transactions that are affecting these accounts can
really help the management in planning the reconciliation and resolving the
problem in an efficient manner.

o General Ledger Consolidation Processes:
These can lead to unexpected results. Once the initial financial statement is
generated, some unusual activity might be highlighted by the consolidation activity.

o Master Data Maintenance:
Organizations face complexity and master data errors due to incomplete
understanding of the impacts of master data change. Further complications arise
when daily transaction processing and master data maintenance are not
appropriately segregated.

6 Best Practices for a Successful and Robust Record-to-
Report Process:
A survey by KPMG found that more than 50% of the organizations are working hard
towards releasing their financial statements within 7 days. To achieve this goal,
organizations can implement the best practices within the following Finance and
Accounting processes:
1. General Accounting:
General Accounting is the mainstay of any Finance and Accounting process. For
financial information to be reliable and accurate, the following best practices can be
implemented.

o Cultivate the usage of standard naming conventions.
o Standard and non-standard journal entries must be clearly defined.
o A concrete decision and approval rights must be established.
o For every account reconciliation and analysis, clear-cut roles and responsibilities must be
defined.
2. Account Reconciliation:
A reconciliation process which is efficient and effective can save a lot of time and
decrease errors. The best practices which can be followed here include:

o The process must be automated
o Unique controls must be implemented that helps in reducing issues and proactively
identifies unfamiliar items.
o Various activities such as reporting, decision support, risk identification and high value
analytics must be implemented.
o Real time monitoring of activities
o To achieve improvement, an effective plan must be developed and followed dutifully.
3. Fixed Asset Management:
Organizations can save a huge sum on taxes through depreciation deductions by
having a comprehensive fixed asset management.

o For the asset activity and depreciation charges to appear in real-time on the ledger, the
process must be automated.
o The tax requirements of every tax authority must be met by the system.
o The corporate tax system must be connected through an automatic link.
o Bar-code scanners must be used to conduct physical inventories at regular interval of time.
4. End of Month Process Reporting:
The following best practices can be implemented for end of month process
reporting:

o A single instance ERP must be used.
o Process activities must be closed by employing workflow solutions.
o The contact details of stakeholders, service providers and other relevant parties must be
carefully maintained.
o Accurate reports, both internal and external, along with financial close calendar must be
delivered.
5. Inter company Accounting:
For organizations which own subsidiaries in various locations, intercompany
accounting becomes extremely crucial as it helps in eliminating errors.

o The end-to-end process documentation must be maintained in a standardized and simple
manner.
o The reconciliation tool must be automated.
o The Key Performance Indicators must be established in such a manner that it covers all the
involved parties.
o An escalation process must be developed and adhered to.
o KPIs and other issues must reviewed regularly by conducting meetings.
6. Taxation:
Filing tax returns on time increases an organization’s credibility in the eyes of the
regulating bodies and authorities.

o Tax planning must be carried out in a strategic manner
o Latest technology must be utilized.
o The organization must be aware of every latest tax rules and regulations.
Knowledge and awareness of these best practices for Record-to-Report process would
help in more accurate and timely financial reporting for organizations. Taking the help of
a Record to Report outsourcing expert would ensure that this process could be managed
efficiently, without being diverted away from core business goals.

Accounts Receivable - AR
What are 'Accounts Receivable - AR'
Accounts receivable refers to the outstanding invoices a company has or the money the
company is owed from its clients. The phrase refers to accounts a business has a right
to receive because it has delivered a product or service. Receivables essentially
represent a line of credit extended by a company and due within a relatively short time
period, ranging from a few days to a year.

BREAKING DOWN 'Accounts Receivable - AR'
On a public company's balance sheet, accounts receivable is often recorded as an asset,
because there is a legal obligation for the customer to remit cash for the debt. If a company has
receivables, this means it has made a sale but has yet to collect the money from the purchaser.
Essentially, the company has accepted an IOU from its client.

Why Do Businesses Have Accounts Receivable?
Most companies operate by allowing some portion of their sales to be on credit. In some
cases, business offer this type of credit to frequent or special customers who are
invoiced periodically. The practice allows customers to avoid the hassle of physically
making payments as each transaction occurs. In other cases, businesses routinely offer
all of their clients the ability to pay after receiving the service. For example, electric
companies typically bill their clients after the clients have received the electricity. While
the electricity company waits for its customers to pay their bills, the unpaid invoices are
considered accounts receivable.

What Happens When a Company Cannot Collect Its Accounts
Receivable?
If a company cannot collect its accounts receivable, it may decide to take the debtor to
court over the unpaid debt, or it may outsource the debt collection activity to a third-
party bill collector. These companies typically charge a set fee or a percentage of the
amount they collect. In other cases, businesses sell their accounts receivable for
pennies on the dollar to a factoring company that then collects the debt. Factoring
companies often offer some cash up front, making them an attractive option for
companies that need a boost to their working capital.

If a business has reported an account receivable as income and it does not receive
payment, it has a bad debt. The Internal Revenue Service (IRS) allows businesses to
subtract bad debts from their gross income on their income tax returns, as long as they
reported the debt as income on a previous return.

Difference Between Accounts Receivables and Accounts
Payable
When a company owes debts to its suppliers or other parties, these are known
as accounts payable. Accounts payable are the opposite of accounts receivable. To
illustrate, imagine company A cleans company B's carpets and sends a bill for the
services. Company B owes the money, so it records the invoice in its accounts payable
column. Company A is waiting to receive the money, so it records the bill in its accounts
receivable column.

Accounts Receivable
Financing
Accounts receivable financing is a type of asset-financing arrangement in which a
company uses its receivables — outstanding invoices or money owed by customers —
as collateral in a financing agreement. In this agreement, an accounts receivables
financing company, also called a factoring company, gives the original company an
amount equal to a reduced value of the unpaid invoices or receivables.

This type of financing helps companies free up capital that is stuck in unpaid debts.
Accounts receivable financing also transfers the default risk associated with the
accounts receivables to the financing company.

BREAKING DOWN 'Accounts Receivable Financing'
Accounts receivables financing companies typically advance companies 70 to 90% of the value
of their outstanding invoices. Then, the factoring company collects the debts and pays the
original company the remainder of the amount collected minus a factoring fee.

How Factoring Companies Price Accounts Receivables
Factoring companies take several elements into account when determining how much
to offer a company in exchange for its accounts receivables. In most cases, accounts
receivables owed by large companies or corporations are more valuable than invoices
owed by small companies or individuals. Similarly, new invoices are more valuable than
old invoices. Generally, the easier the factoring company feels a bill is to collect, the
more valuable it is, and the harder a bill is to collect, the less it is worth.

How Accounts Receivable Financing Helps Companies
This type of asset-based financing allows companies to get instant access to working
capital without jumping through the hoops or dealing with the lengthy waits associated
with getting a business loan. When a business leverages its accounts receivables to
boost its cash flow, it also doesn't have to worry about repayment schedules, and
instead of focusing on trying to collect bills, it can focus attention on other core aspects
of its business.

In addition to providing a unique financing option for businesses, factoring companies
also offer other services. These accounting-centered services include running credit
checks on new clients and generating financial reports.

Negative Perceptions Associated With Factoring
Although factoring offers a number of diverse advantages, it sometimes carries negative
connotations. In particular, financing through factoring companies typically costs more
than financing through traditional lenders such as banks. As a result, businesses who
turn to factoring companies are sometimes perceived to have poor credit or to being
failing financially in other ways. However, analysts in the industry claim these misgivings
are not founded on reality, and they state all manner of upwardly mobile, successful
companies use accounts receivables financing as needed.
Net Receivables
Net receivables is the total money owed to a company by its customers minus the
money owed that will likely never be paid. Net receivables is often expressed as a
percentage, and a higher percentage indicates a business has a greater ability to collect
from its customers. For example, If a company estimates that 2% of its sales are never
going to be paid, net receivables equal 98% (100% - 2%) of the accounts receivable.

BREAKING DOWN 'Net Receivables'
Net receivables is used to measure the effectiveness of a company's collection process and is
utilized in cash forecasts to project anticipated cash inflows. Net receivables arise due to the
granting of credit. This carried inherent credit and default risk as the business does not receive
payment upfront. Cash collections can be improved by tightening control over credit issued to
customers, maintaining efficient collection procedures and performing collection procedures in a
timely manner.

Allowance for Doubtful Accounts
The allowance for doubtful accounts is subtracted from the gross amount of outstanding
accounts receivables. The two main methods of estimating the allowance for doubtful
accounts is the net receivable method or net sales method. In addition, a specific
identification method may be used in which each debt is individually evaluated
regarding the likelihood of being collected.

Balance Sheet
Net receivables are shown as an aggregated total on the balance sheet. Typically, net
receivables relate to account receivables from customers in the course of business. In
this case, net receivables is classified as a current asset. The gross receivables are
listed first and are followed by the allowance for doubtful accounts. The allowance for
doubtful accounts is a contra asset account as it reduces the balance of an asset.

Subject to Estimation and External Factors
Because all future receipts of cash as well as defaults are not known, net receivables
represents an estimated amount. This is largely contingent on the estimated amount of
uncollectable accounts. Therefore, management has potential to manipulate the value
of net receivables by adjusting the allowance for doubtful accounts. In addition, a
company's net receivables is highly subject to general economic conditions. Regardless
of the entity's procedures, the figure tends to worsen as financial conditions worsen in
the general economy.

Net Receivables Aging Schedule
Net receivables may be calculated using an aging schedule. This table groups
receivables by outstanding payment date ranges. The aging schedule may calculate the
uncollectable receivables by applying various default rates to each outstanding date
range. Alternatively, it can simply calculate the net receivables by applying the
estimated collection rate for each range. The concept behind an aging schedule is to
apply different collectability rates to different receivables based on age. As a receivable
gets older, it generally becomes harder to collect.

Accounts Payable – AP
Accounts payable (AP) is an accounting entry that represents an entity's obligation to
pay off a short-term debt to its creditors. On many balance sheets, the accounts
payable entry appears under the heading current liabilities. Another common usage of
AP refers to a business department or division that is responsible for making payments
owed by the company to suppliers and other creditors.

BREAKING DOWN 'Accounts Payable - AP'
Accounts payable are debits that must be paid off within a given period to avoid default.
For example, at the corporate level, AP refers to short-term debt payments to suppliers.
The payable is essentially a short-term IOU from the business to the other business,
who acts as a creditor.

How to Record Accounts Payable
To record accounts payable, accountants or bookkeepers credit accounts payable when
they owe a bill, and they debit accounts payable when they pay the bill. For example,
imagine a business incurs a $500 invoice for office supplies. When the AP department
receives the invoice or incurs the bill, it records it as a debit in an accounts payable
field. As a result, if anyone looks at the total debit in the accounts payable category, he
can instantly see what the business owes all of its vendors and short-term lenders.
When the bill is paid, the department enters a credit in its accounts payable column.

To balance these entries, the accountant must enter a debit in the relevant category,
office supplies in this case, when the debt is incurred, and he must enter a credit in the
cash column when he pays the invoice.

Accounts Payable and Long-Term Debts
Accounts payable are a type of short-term debt. Other short-term business debts
include expenses such as payroll costs, business income taxes and short-term loans. In
contrast, long-term debts include lease payments, retirement benefits, individual notes
payable and a range of other debts repaid over a long term.

Accounts Payable vs. Trade Payables
While some people use the phrases accounts payable and trade payables
interchangeably, the phrases refer to similar but slightly different things. Trade payables
constitute all the money a company owes the vendors it buys business supplies and
materials included in its inventory, while accounts payable include all other short-term
debts. For example, if a restaurant owes money to a food or beverage company, the
stock is part of its inventory and thus part of its trade payables, while money owed to the
company that launders its chef's whites falls into the accounts payable category. Some
accounting methods roll both of these categories into the accounts payable category.

Accounts Payable vs. Accounts Receivables
Accounts receivables and accounts payable are essentially opposites. Accounts
payable is the money a company owes its vendors, while accounts receivables is the
money that is owed to a company. If a company has a bill in its accounts payable
department, the company it owes the funds to categorizes the bill in its accounts
receivables department.

Allowance For Doubtful
Accounts
An allowance for doubtful accounts is a contra-asset account that reduces the
total receivables reported to reflect only the accounts receivable expected to be
collected. The allowance is established by recognizing a bad debt loss on the financial
statements in the same accounting period when the associated sale is reported.

BREAKING DOWN 'Allowance For Doubtful Accounts'
Only entities that extend credit to their customers use an allowance for doubtful
accounts. Regardless of company policies and procedures for credit collections, the risk
of the failure to receive payment is always present in a transaction utilizing credit. Thus,
a company is required to realize this risk through the establishment of the allowance.

Timing of Allowance for Doubtful Accounts
The allowance for doubtful accounts is established in the same accounting period in
which a sale is performed. This creates the issue of knowing exactly how much to
establish the allowance for. Since no significant period of time has passed since the
sale, an entity does not know which exact accounts receivable will be paid and which
will default. Therefore, generally accepted accounting principles (GAAP) rule that the
allowance must still be established in the same accounting period as the sale but is
based on an anticipated and estimated figure. The allowance can accumulate across
accounting periods and may be adjusted based on the balance in the account.

Estimation of Allowance for Doubtful Accounts
Two primary methods exist for estimating the dollar amount of accounts receivables not
expected to be collected. The sales method utilizes the total dollar amount of sales for
the period, as a flat percentage is applied to this amount. For example, based on
previous experience, a company may expect that 3% of net sales are not collected. If
the total net sales for the period is $100,000, the company cab establish an allowance
for doubtful accounts for $3,000. If the following accounting period results in net sales of
$80,000, an additional $2,400 is reported in the allowance for doubtful accounts. The
aggregate balance in the allowance for doubtful accounts after these two periods is
$5,400.

The second method of estimating the allowance for doubtful accounts is the aging
method. All outstanding accounts receivable are grouped by age, and specific periods
are applied to each group. The aggregate of all groups results is the estimated
uncollectible accounts receivable. For example, a company has $70,000 of accounts
receivable less than 30 days outstanding and $30,000 of accounts receivable at least
30 days outstanding. Based on previous experience, 1% of accounts receivable less
than 30 days old will not be collected and 4% of accounts receivable at least 30 days
old go uncollected. Therefore, the company will report an allowance of $1,900 (($70,000
* 1%) + ($30,000 * 4%)). If the next account period results in an estimated allowance of
$2,500, only $600 ($2,500 - $1,900) will be the adjusted dollar amount.

Factor
A factor is a financial intermediary that purchases receivables from a company. A factor
is essentially a funding source that agrees to pay the company the value of
the invoice less a discount for commission and fees. The factor advances most of the
invoiced amount to the company immediately and the balance upon receipt of funds
from the invoiced party.

BREAKING DOWN 'Factor'
A factor allows a business to obtain immediate capital based on the future income attributed to a
particular amount due on an account receivable or business invoice. Accounts receivable
function as a record of the credit extended to another party where payment is still due. Factoring
allows other interested parties to purchase the funds due at a discounted price in exchange for
providing cash up front.

Factoring Operations
The terms and conditions set forth by a factor may vary depending on their own internal
practices. Most commonly, factoring is performed through third party financial
institutions, referred to as factors. Factors often release funds associated with newly
purchased accounts receivable within 24 hours. Repayment terms can vary in length
depending on the amount involved. Additionally, the percentage of funds provided for
the particular account receivables, referred to as the advance rate, can also vary.

Factoring is not considered a loan, as neither party issues or acquires a debt as part of
the transaction. The funds provided to the company in exchange for the accounts
receivable is also not subject to any restrictions regarding use.

Example of Factoring
Assume a factor has agreed to purchase an invoice of $1 million from Clothing
Manufacturers Inc., representing outstanding receivables from Behemoth Co. The factor
may discount the invoice by say 4%, and will advance $720,000 to Clothing
Manufacturers Inc. The balance of $240,000 will be forwarded by the factor to Clothing
Manufacturers Inc. upon receipt of the $1 million from Behemoth Co. The factor's fees
and commissions from this factoring deal amount to $40,000.

Note that the factor is more concerned with the creditworthiness of the invoiced party -
Behemoth Co. in the example above - rather than the company from which it has
purchased the receivables, Clothing Manufacturers Inc. in this case. Although factoring
is a relatively expensive form of financing, factors provide a valuable service to
companies that operate in industries where it takes a long time to convert receivables to
cash, and to companies that are growing rapidly and need cash to take advantage of
new business opportunities.

Aging Schedule
An aging schedule is an accounting table that shows the relationship between a
company’s bills and invoices and its due dates. Often created by accounting software,
aging schedules can be produced for both accounts payable and accounts receivable to
help a company see whether it is current on its payments to others and whether its
customers are paying it on time.

BREAKING DOWN 'Aging Schedule'
An aging schedule often categorizes accounts as current (under 30 days), 1-30 days
past due, 30-60 days past due, 60-90 days past due, and more than 90 days past due.
Companies can use aging schedules to see which bills it is overdue on paying and
which customers it needs to send payment reminders to or, if they are too far behind,
send to collections. A company wants as many of its accounts to be as current as
possible. A company may be in trouble if it has a significant number of past-due
accounts.

Aging schedules can help companies predict their cash flow by classifying
pending liabilities by due date from earliest to latest and by classifying anticipated
income by the number of days since invoices were sent out. Besides their internal uses,
aging schedules may also be used by creditors in evaluating whether to lend a company
money. In addition, auditors may use aging schedules in evaluating the value of a firm’s
receivables.

If the same customers repeatedly show up as past due in an accounts receivable
aging schedule, the company may need to re-evaluate whether to continue doing
business with them. An accounts receivable aging schedule can also be used to
estimate the dollar amount or percentage of receivables that are probably uncollectible.

Invoice Financing
nvoice financing is a way for businesses to borrow money against the amounts due
from customers. Invoice financing helps businesses improve cash flow, pay employees
and suppliers, and reinvest in operations and growth earlier than they could if they had
to wait until their customers paid them. Businesses pay a percentage of the invoice
amount to the lender as a fee for borrowing the money. Invoice financing can solve
problems associated with customers taking a long time to pay and difficulties obtaining
other types of business credit.

Invoice financing is also known as accounts receivables financing, or simply,
receivables financing.

BREAKING DOWN 'Invoice Financing'
When businesses sell goods or services to customers, such as wholesalers or retailers,
they usually do so on credit. This means that the customer does not have to pay for the
goods that it purchases immediately. The purchasing company is given an invoice
which has the total amount due and the date that the bill should be settled by. However,
offering credit to clients ties up funds that a business might otherwise use to invest or
grow its operations. To finance slow-paying accounts receivables or to meet short-term
liquidity, businesses may opt to finance their invoices.
Invoice financing is a form of short term borrowing which is extended by a lender to its
business customers based on unpaid invoices. Through invoice factoring, a company
sells its accounts receivable to improve its working capital, which would provide the
business with immediate funds that can be used to pay for company expenses.

Invoice financing benefits lenders because unlike extending a line of credit, which
is unsecured and leaves little recourse if the business does not repay what it borrows,
invoices act as collateral for invoice financing. The lender also limits its risk by not
advancing 100% of the invoice amount to the borrowing business. Invoice financing
does not eliminate all risk, though, since the customer might never pay the invoice,
which could result in a difficult and expensive collections process.

Invoice financing can be structured in a number of ways, most commonly factoring or
discounting. With invoice factoring, the company sells its outstanding invoices to a
lender, who might pay the company 70% to 85% of what the invoices are worth, up
front. Assuming the lender receives full payment for the invoices, it will then remit the
remaining 15% to 30% of the invoice amounts to the business, and the business will
pay interest and/or fees for the service. Since the lender collects payments from the
customers, the customers will be aware of this arrangement, which might reflect poorly
on the business.

As an alternative, a business could use invoice discounting, which is similar to invoice
factoring except that the business, not the lender, collects payments from customers, so
customers are not aware of the arrangement. With invoice discounting, the lender will
advance the business up to 95% of the invoice amount. When clients pay their invoices,
the business repays the lender, minus a fee or interest.

Bad Debt
Bad debt is debt that is not collectible and therefore worthless to the creditor. Bad debt
is usually a product of the debtor going into bankruptcy but may also occur when
the creditor's cost of pursuing the debt collection activities is more than the amount of
the debt. Once a debt is considered bad, the business may be able to write it off as an
expense on its income tax return.

BREAKING DOWN 'Bad Debt'
Many businesses make sales on credit, as it generally allows them to increase their sales.
Inevitably, most businesses end up offering credit to clients with less than desirable credit, or
they face situations in which their clients cannot pay. As a result, companies that make credit
sales often estimate the amount of sales they expect to become bad debts, and they record this
projection in their allowance for doubtful accounts. Both individual and business debtors with
histories of bad debts are likely to have their credit ratings decline, which makes it difficult for
these debtors to access any additional forms of credit.
Can Businesses Write Off Bad Debts
The Internal Revenue Service (IRS) allows businesses to write off bad debts on Form
1040, Schedule C, but businesses may only write off debts they have previously
reported as income. Bad debts may include loans to clients and suppliers, credit sales
to customers, and business loan guarantees, but they typically do not include unpaid
rents, salaries or fees.

For example, for tax purposes, the IRS considers a landlord as a small business owner.
However, in most cases, if a landlord does not receive rent from a tenant, he cannot
write off the missing payment as a bad debt. Conversely, imagine a food distributor that
delivers a shipment of food to a restaurant on credit in December. The food distributor
uses the accrual method of accounting, so it records the invoice as income on its tax
return for that year. However, in January, the restaurant goes out of business and does
not pay the invoice. The food distributor can write off the unpaid bill as a bad debt on its
tax return for the following year.

Can Individuals Claim Bad Debts on Their Income Tax
Returns?
For tax purposes, bad debts are typically associated with businesses. However, in some
cases, the IRS allows individuals to write off bad debts as well. If an individual has
loaned money to someone else with the expectation of reclaiming it, he can write off the
debt as a bad debt. The IRS classifies nonbusiness bad debts as short-term capital
losses.

https://www.youtube.com/watch?v=_TlUityyq0U

https://www.youtube.com/watch?v=EM1qLQak1rk
5 Steps for Effective Cash Flow Budget Planning

5 Steps for Effective Cash Flow Budget Planning
Forecasting cash flows and cash flow reporting utilizing actual results are two critical
activities that go hand in hand. Cash flow forecasting, also known as cash flow budgeting,
forms the core of the financial process of any business.

A cash flow budget guides you to take the right decisions to ensure comfortable liquidity
for the business. An accurate and detailed cash flow forecast would help organizations
anticipate cash flow issues and resolve them on time.

It must be noted that constant review of this forecast with actual cash flow is crucial for
keeping the company afloat. An annual cash flow forecast should be continually adjusted
for the timing of actual receipt and disbursement of cash.

A number of steps are required to create a cash flow budget and for controlling cash flow.
There are two key factors that go into the preparation of cash flow budgeting: one is the
cash inflow (receipts) and the other is the cash outflow. In order to accurately forecast
these figures, you might have to make a number of assumptions about how your business
will be operating. Read on to find out the steps involved in preparing a cash flow budget.

Steps Involving a Cash Flow Budget
1. Determining Cash Inflows:
o The first step is to take your P&L statement and predict future cash receipts based on the
sales figures. The best place to start would be by looking at sales in previous years. This
would help identify trends and patterns in sales.
o One can then identify internal (e.g. changing product pricing) and external (e.g. industry
pricing changes) factors that might have an impact on the current period. When it comes
to price changes, look at the timing and quantum of price changes. You might also need
to factor in the impact of seasonality when predicting sales. For instance, a business
selling air conditioners cannot expect the same kind of sales in summer and winter.
o Once you predict realistic sales for the period, it needs to be broken down into cash
receipts (i.e. when would the cash from customers come in).
o Next is to identify the pattern in debtor remittances. To facilitate this, you could prepare an
‘aged’ list of your receivables. This would show the actual payment terms being taken. For
example, you might see that sale happens in one month while the total cash is received
only the next month. This is because sale might involve cash as well as credit sales and
the credit could be for 30, 60 or even 90 days. For instance, you might receive 60%on
sale, 20% within a month and the rest within another fortnight.
o Furthermore, start considering cash receipts other than those from sale of goods and
services. These could include deposits or part payments on contracts, supplier rebates,
insurance claims, new loans or cash from shareholders.
2. Determining Cash Outflows:
By forecasting your expenses, you could get an estimate of your total outflows for
the year. The selling price of your products or services has to include an amount that
would cover these expenses, if you want to make profits. Usually, there are three
types of cash outflows to consider, although they may vary from one business to
another:

3. Overhead Expenses:
These are also known as fixed costs because they do not vary much with the level or
volume of sales or they have no correlation to sales. These expenses are usually paid
on a monthly basis and include items such as salaries, electricity, stationery, rent
and phone bills. Even though expenses might change during unusual periods, they
generally remain within a range. For instance, utility bills might go up during
particular seasons.

4. Variable Expenses:
These expenses change along with the sales volume or the inventory levels. Variable
expenses might include raw materials, direct labor and other such costs. These costs
should be forecast as a percentage of sales. For example, assume your cost of goods
sold (COGS) is 60% of your selling price and you decide to keep a quarter’s supply
of goods on hand. Suppose you forecast $200,000 of sales in the first quarter, you
would need $120,000 worth of goods (at cost) as part of inventory, before the
quarter begins. However, this does not take into account the cash paid for such
inventory. Costs associated with inventory are several and might not be paid at the
same time. For instance, direct labor, if you run a manufacturing firm, would have
to be paid early, while raw materials can be obtained on credit ranging from a week
to 90 days or more.

5. Other Expenses:
Some other expenses might require you to pay cash. However, they might not be
incurred regularly or could be a one-time expense. These would include expenses
like purchase of machinery or equipment, dividends, insurance premiums or
training programs. These also need to be taken into account for accurate cash
forecasting.

 Preparing the Cash Flow Budget:
 It is best to prepare cash flow forecast for a minimum of 13 weeks into the future. This is
because most organizations do not have enough financial strength to survive even a short-
term cash flow crisis. For large or complex organizations, monthly forecast could be
prepared for a minimum of six months. Only for very large organizations, annual cash flow
statements could be looked at.
 Start with the simplest of forecasts. You could scale as you gain control. If you prepare the
budget in the right way, forecasting should not be too tough. Once you have a cash flow
forecast, you must share it with key staff members. This would help you achieve your goals
on time.
 Engage talented Finance and Accounting (F&A) professionals internally or outsource to a
specialist F&A services company for accuracy of cash flow forecasting and updating on a
periodic basis.
It is evident that an organization’s success lies in finding a successful balance between
producing profits and effectively managing its cash flows. Cash flow management is the
core of any successful business and effective cash flow management depends on
forecasting with accuracy.

16 Tips for Effective Invoicing for Businesses

16 Recommended Tips for Effective Invoicing for Businesses
It is essential for every business to ensure timely payments for the delivery of its product
or service. As a significant step in the accounts receivable (AR) management process,
streamlining invoicing goes a long way in determining the success of an organization.
Having an accurate and efficient invoicing system can speed up customer payments and
helps a business become more consistent in realization of its revenue.

The following tips will help you make the invoicing process seamless.

16 Tips for Effective Invoicing for Accounts Receivable
Management
1. Keep Accurate Records:
Before sending an invoice, a business should know what work has been done, and
how it was done. It is recommended to track the work on an ongoing basis via time-
management platforms. Use time-tracking software for hourly billings. All data
pertinent to the invoice must be entered correctly into the system.

2. Prompt Dispatch of Invoice:
A business need to send an invoice immediately after the work is completed or a
product or service is delivered, as prompt invoicing generally leads to prompt
payments. It also reflects your professionalism. When invoices arrive late, it sends
a wrong message that you are casual when it comes to collection and it may delay
the payments. Setting reminders can help you send invoices in a timely manner.

3. Clean and Consistent Format:
Always follow a clean and consistent format for invoices. An invoice should be
simple and to-the-point, and yet effective. It should be easy to understand as most
invoices are read quickly and immediately upon receipt. Key details such as
payment due date and amount should be clearly legible.

4. Relevant Information:
A good invoice should include all pertinent information, such as:

 Description of product or service
 Order number
 Total amount
 Summary of the total payment
 Due date
 Payment options
 Details of any discounts
 Outstanding payment details
 Delivery charges if any
 Late payment charges
 Details of the GST amount
 Contact number for any queries
5. Billing Schedule:
Prepare a billing schedule and stick to it. Consistent invoicing helps businesses plan
and indicates to customers when to expect an invoice, thereby enabling them to
make payments on time. If possible, try to bill recurring invoices on the same day
each month as it may reduce chances of an invoice being overlooked.

6. Communicate Policies:
It goes without saying that terms and conditions, or business policies, should be
known to both buyer and seller. Else, it may lead to unnecessary confusion and
disputes. An invoice should contain all the terms and policies and it should be
intuitive and easy to understand for the customers. An invoice should clearly
communicate businesses policies regarding late payments, discounts etc.

7. Client Knowledge:
Gaining adequate knowledge regarding clients and their business cycle always
increases chances of being paid on time. Also, freeze on details such as preferred
way of billing and mode of payment (whether online or check or lump-sum or part
payments). These details can help to avoid future disputes.

8. Employ Digital Invoices:
Insist on sending digital invoices even if the client prefers printed copy. Send invoice
by post as well as electronic mail, as this ensures delivery, and helps when customers
shift their office premises. This practice is also valuable in case of legal issues as you
will have dual records of communication with client. In case of invoicing via email,
always send invoice as an attachment.

9. Timely Reminders:
It is always appreciated when you send timely reminders about payment deadlines.
This will ensure payment on time and relief to both parties. Decide what timeline
works best for your business and clients.

10. Multiple Payment Options:
An effective invoice should always provide details regarding multiple payment
options to clients. For example, a digital invoice may include a link for making
payments online. Businesses can also offer installment payments to facilitate
smooth collection of receivables.

11. Human Touch:
Always include a ‘thank-you’ phrase in the invoice such as, “It was a pleasure serving
you.” Also, try to connect with the accounting department, introduce yourself and
inform them that you are sending an invoice for the product delivered or service
rendered. Putting a face to the business may provide it with more attention and help
in faster payments.

12. Charge Interest for Late Payments:
Late payments must be taken as a serious matter, as it is your right to claim the
outstanding dues. Send a digital and paper mail reminder about late payments,
including details such as amount due, interest on late payment, and tracking
number. This should be your first step in claiming payments before seeking legal
remedies.

13. Invoice Tracking:
Develop a system for tracking invoices as it is essential for the proper updating of
financial statements and tax payments. Have up-to-date details of client, and their
status of payment. Invoice numbering system can help businesses in this regard.

14. Good Software:
Install efficient invoicing software that helps you create professional invoices with
all the required information. The program should permit customization with
respect to themes and colors. It should allow different level of access to multiple
users and provide real-time reporting.

15. Effective Use of Blank Space:
If your invoice has a lot of blank spaces, then use it judiciously. It can be leveraged
to advertise your new product or service, or communicate any update to the existing
product or service. This cross-selling technique not only reminds the customer that
you have more to offer but also helps in building loyalty.

16. Consider Outsourcing:
Outsourcing the task of invoice data entry to a professional Finance and Accounting
(F&A) outsourcing Services Company will ensure that the task is completed with
accuracy and within the specified turnaround time. Outsourcing will enable the
improvement of the productivity of your employees, and they can concentrate their
energy and time on mission-critical objectives.

To conclude, establishing an effective and efficient invoicing process will facilitate
organizations in collecting payments on time and in a standardized, planned manner. Not
only will this boost revenue for the business, but it will also establish the enterprise’s
reputation as a professionally-run entity.
Journal Entries Examples of
Depreciation
8 Vinod Kumar September 2, 2011

Journal entries examples of depreciation will be advantageous to understand accounting aspect of
depreciation. Depreciation is the loss due to decrease in the value of any fixed asset. Simple journal
entry will be done by writing depreciation account debit and particular fixed asset account credit.

There are many situation when you may face difficulty relating to passing the journal entries of
depreciation. Today, we are trying to solve this problem by writing some journal entries examples of
depreciation.

Following are the journal entries of transactions and financial events relating to depreciation.
All these journal entries have been passed on the basis of double entry system.

1. A company bought machinery for Rs. 10000 and depreciation rate is 10%.

a) Depreciation on fixed assets is the loss of business, and every loss will be debited.

b) There is a decrease in asset and we will apply what goes from business on it. So, Machinery (Fixed

asset) account will be credited.

Depreciation Account Debit 1000

Machinery Account Credit 1000

2. Financial year is 1st Jan. to 31st Dec. Above same machinery has been sold at Rs. 5000

on 31st march 2011. This machinery was purchased on 1 Jan. 2010. Depreciation rate is

10% and it is charged with diminishing balance method.

Above entry will be same in this case from 1 Jan. 2010 to 31st DEC. 2010. After this, we are telling

you the procedure.

a) Depreciation is loss and with this up to sale date. It will be debit

b) Value of machinery will decrease, it will be credit.

Depreciation Account Debit 225

Machinery Account Credit 225

3. Rs. 10000 depreciation transfer to Profit and Loss account.
a) Profit and loss account complete the double entry record. All expenses and loss will be debit in its

account. With this, all expenses and losses account will be closed. So, profit and loss account will be

debit in this journal entry.

b) Depreciation account will be credit because with this depreciation account will be closed. Please do

not create doubt about showing depreciation loss in credit side. This entry is the part of closing of

accounts at the end of year.

Profit and Loss Account Debit 10000

Depreciation Account Credit 10000

4. A company bought machinery for Rs. 10000 and depreciation rate is 10%. Provision for

depreciation account is maintained.

a) Depreciation on machinery is the loss of business, and every loss will be debited.

b) Provision for depreciation account will be credit because we are maintaining it. It means, we will
not decrease the original cost of machinery at any time except time of sale. So, provision for

depreciation will be just like liability of business. Like other liabilities, this liability account will also

credit.

Depreciation Account Debit 1000

Provision for Depreciation Account Credit 1000

5. A company bought machinery for Rs. 10000 and depreciation rate is 10%. All depreciation
will be transferred to accumulated depreciation account.
a) Depreciation on machinery is the loss of business, and every loss will be debited.

b) Accumulated depreciation account is just like provision for depreciation account and it will be credit

because we are collected all depreciation in the form of accumulated depreciation. It means, we want

to maintain our historical cost of machinery at any time except time of sale. So, accumulated

depreciation will be contra account. So, it will be credited.

Depreciation Account Debit 1000
Accumulated Depreciation Account Credit 1000

6. You sell the Car at Rs. 5,00,000. Its accumulated depreciation is Rs. 50,000.

Its original cost is Rs. 600000.

a) cash account will be debited because cash comes in the business. Everything which comes in the

business will be debit under second rule of double entry system.

b) Accumulated depreciation account will be debit because with this, liability will decrease.
Accumulated depreciation was our liability.

c) Profit and loss account will be debit because this is the loss on sale car.

d) Original Cost of car will be credit because car goes from business.

Cash Account Debit 500000
Accumulated Depreciation Account Debit 50000

Profit and Loss Account Debit 50000
Car Account Credit 600000

7. 1st April 1997, Vishal acquires a 5 year's lease for Rs. 40000. It is decided for renewal of

lease immediately after 5 years by setting up a depreciation fund. It is expected that

investment will fetch interest at 5% p.a. sinking fund table shows that RS. 0.180975

invested each year will produce Rs. 1 at end of 5 years at 5% p.a.

Annual depreciation = 40000 X 0.180975 = Rs. 7239

a) Depreciation on lease is the loss of business, and every loss will be debited.

b) All depreciation will transfer to depreciation fund account. You know that depreciation cuts

fromprofit. It decrease the profit but there is no outflow. Same amount, we will transfer in

depreciation fund.

Depreciation Account Debit 7239

Depreciation Fund Account Credit 7239

(this entry will be passed five years)

When We also invest same depreciation fund money in depreciation fund investment.

a) We got investment, so depreciation fund investment account will be debit

b) Money goes from business. It means we will credit to cash account
Depreciation Fund Investment Account Debit 7239

Cash Account Credit 7239

(this entry will be passed five years)

When we receive interest on depreciation fund investment

a) We receive money of interest. So, bank or cash account will be debit.

b) Interest on depreciation fund investment account is our income. So, it will be credit

Bank Account Debit 7239 X 5% = 362

Interest on Depreciation Fund Investment Account Credit 362

(this entry will be passed five years)

8. At the expiry of the lease i.e. on 31st march, 2002, the depreciation fund investment are
sold Rs. 31205 and immediately renewed for a further period of 5 years by a payment of Rs.

44000. Pass journal entries.

When we get cash on sale of depreciation fund investment

a) Cash will come on the sale, so cash account will be debit

b) Depreciation fund investment will go from our business, so depreciation fund investment account

will credit
Cash Account Debit 31205

Depreciation Fund Investment Credit 31205

When Profit on sale of investment will be transfer to depreciation fund account

Depreciation Fund Investment Account Debit 4

Depreciation Fund Account Credit or Profit and loss Account 4

( Entry just on the basis of balance adjustment)

9. You have one piece of property for which you originally paid Rs. 10,000. Let's also

assume after six years the property is fully depreciated and you sell it for Rs. 1,000.

We will not pass the depreciation entry because this property is fully depreciated. It means total

depreciation of its working life has been transferred to profit and loss accounts. We just show as profit

because total cost will already become nil.

Cash Account Debit Rs. 1000

Profit and Loss Account Rs. 1000

10. Provide depreciation of Rs. 20000 on Factory Machine. Pass the adjusting entry in final

accounts

a) Manufacturing account will be debit because all the expenses relating to production will be debit in
this account.
b) Depreciation account is already debited in day book. Now, this account is closed by transferring to

the debit side of manufacturing account because this is the part of production expenses.

Manufacturing Account Debit 20000
Depreciation on Factory Machine 20000

Journal Entries of TDS
11 Vinod Kumar August 10, 2012

TDS means tax deducted at source. If tax is deducted from assessee's income and deposited in the
Govt. account, its journal entries will be in the books of company. For example ABC company used
the service of MR. N person. Now, ABC company will pay the amount of MR. N person. If TDS will
apply as per income
tax law, ABC will deduct TDS and net amount will pay to Mr. N person. At that time following journal
entries will be passed in books of ABC company and Mr. N Person.

In the Books of ABC Company

1. When company pays the money and deduct the TDS.
Indirect Expense Account Debit

Mr. N Person Account Credit

TDS of Mr. N Person Account Credit

Explanation of Above Entry with Example : Suppose, ABC have to pay Rs. 1,00,000 pay rent to
Mr. A person. Suppose, it TDS is Rs. 5000. Now, the net liability of Mr. N person will be of Rs.
95000. and TDS liability will be Rs. 5000 because both amount is payable to different persons. So,
Mr. N person account will be credited with Rs. 95000 and TDS account will be credited with Rs.
5000. Because total Rent is the indirect expense, so Rs. 1,00,000 will be debited. Company will
follow the law and total amount will be divided between assessee and govt.

Rent Account Debit 1,00,000

Mr. N Person Account Credit 95000

TDS Credit 5000

Before Actual Payment to Creditor for expense and TDS, both will be shown in the liability side.

Liability Side of Balance Sheet

Mr. N Person Account (Creditor for Rent ) = Rs. 95000

TDS = Rs. 5000
2. When Payment is done to Creditor for our expense and TDS, then following entry will be
passed.

Mr. N Person Account Debit 95,000

TDS Account Debit 5000

Bank Account Credit 1,00,000

In the Books of Mr. N Person (Assessee)

1. When his earning from Rent is due.

ABC Company Account Dr. 95000

TDS Dr. 5000

Rent Account Cr. 100000

2. When Assessee Gets net amount of his rent

Bank Account Dr. 950000

ABC Company Account Cr. 95000

3. When Govt. Refunds the TDS to Assessee
When Mr. N Person fills his regular income tax return and he refunds some of his TDS. Suppose, it
is the Rs. 1500

Bank Account Dr. 1500

Refund of TDS Cr. 1500

{ Important Note : Payment of income tax is the personal liability of any person. So, we do not record
the income tax of an individual assessee. But when TDS is deducted it just like drawing of person.
So, it will be debited. When we get the refund of TDS, it is just like increase of capital because rent
was our earning. If we deduct TDS, it means, it is decrease of our earning and capital. Refund is just
like increase of our earning and capital. }

Journal Entries of Prepaid
Expenses
5 Vinod Kumar August 11, 2012
Prepaid expenses are those which are paid but whose service has not obtained from service
provider. For example, you have paid one month advance rent of your business shop before using
30 days for your business. This one month advance rent will be prepaid expense. To record all
the prepaidexpenses are is very important. If you have added it in normal expense in the end, you
have to pass adjustment entry for deducting this from normal expense because this expense will be
of next year not this year. Now, we are telling you the main journal entries of prepaid expenses.

1. When you paid the expense in advance

Service Provider or Prepaid Account Debit

Bank Account Account Credit

Before getting service if we pay any expense to service provider, it will just loan to service
provider. Service provider will be receiver. So, we will debit service provider account. We will credit
the bank account because when we pay the expense, our money will go outside the business.

In the Balance Sheet, we will show service provider for expense as our current asset.

2. When Service Provider provides us the service before end of financial year.

Expense Account Debit

Service Provider or Prepaid Expense Account Credit

2. When we have added it in normal expense. At the end of year, we will pass the adjustment
entry.
Prepaid Expense or Service Provider for Expense Account Debit

Expense Account Credit

For example, we have entered Rs. 5000 in normal rent account but it was the prepaid rent for next
financial month. So, following entry will be passed.

Prepaid Rent Account Debit 5000

Rent Account Credit 5000

In the profit and loss account,we will deduct Rs. 5000 from total rent. We also
show Prepaidrent account in the asset side of balance sheet.

Journal Entries of Accrued
Expenses
5 Vinod Kumar August 20, 2012
Accrued expenses are those whose service we have taken but payment has not been done by us. In
other words, these expenses are recognized before actual payment. So, it is necessary to record to
record it in the books because we have to show our total expenses in the profit and loss account
whether it is paid or not as
per the accrual concept of accounting. Following journal entry will be passed.

Expense Account Debit

Accrued Expense or outstanding expense or expense payable Account Credit

Explanation of Above journal entry: We have debited expense account because whether expense
is paid or not, it reduce our total incomes. So, it will be debited. Accrued expense increases the
current liability. So, we have credited accrued expense.

Accrued expense or outstanding expense will be added into the expense when we show the total
expense in the debit side of profit and loss account. Accrued expense will also show in the liability
side of balance sheet.

Example of the Journal Entries of Accrued Expenses
1. Accrued Commission on Sales

ABC Co. pays salesman a 10% commission on sales. Salesman sold Rs. 10,00,000 goods up to
the end of 31st DEC. 2011. ABC company has paid Rs. 70,000 commission to salesman. How
muchdoes ABC Co. accrue in commissions on December 31 and what journal entry of accrued
commission will be passed.

Total commission = 10,00,000 X 10% = Rs. 1,00,000
Total paid commission = 70,000

Accrued Commission = 1,00,000 - 70,000 = 30,000

31st Dec. 2011

Commission Account Debit 30,000

Accrued Commission Account Credit 30,000

When ABC company will pay the Accrued commission to salesman on 15 Jan. 2012, then following
entry will be passed

On 15th Jan 2012

Accrued Commission Account Debit 30,000

Bank Account Credit 30000

2. Accrued Salary
Suppose, ABC company gets the salary at the end of the month. Because 31st DEC. 2011 is the
closing of financial of company. Company pays the salary of Rs. 5,00,000 on 10 the Jan. 2012. This
salary of Rs. 5,00,000 will show as the 2011's expense and current liability by following entry.

On 31st Dec. 2012

Salary Account Debit 5,00,000

Accrued Salary Account Credit 5,00,000

On 10th Jan. 2012
Accrued Salary Account Debit 5,00,000

Bank Account Credit 5,00,000

Journal Entries of Outstanding
Expenses
6 Supporter August 23, 2012

Outstanding expenses' journal entries are same as I have explained in the journal entries of accrued
expenses. Difference is only that Indian accountants use the term outstanding expenses and same
term is used as accrued expenses in USA. So, we again explain this term for Indian students.
Outstanding expenses are those
expenses which are due but not yet paid. At the time of making financial statement, we pass its
adjustment journal entry.

Entry will be
Expenses account Debit

Outstanding expenses account Credit

For example

Ram takes the loan of Rs. 10000. He has to pay the interest of 10% per year. Suppose, he has
taken loan on 1st April 2011. He has paid 1000 interest on the 15th May 2012. On 31st March. 2012,
he closed his account, that time his outstanding interest will be 1000 which is payable but not paid.
At 31st 2011 following journal entry will be passed.

On 3st March 2012

Interest account debit 1000

Outstanding Interest Expense account credit 1000

In the profit and loss account

Debit | Credit
----------------
Interest Nil |
+ Outstanding Interest 1000 |
|

In the balance sheet

Liabilities | Assets
----------------
Current liabilities |
Outstanding Interest 1000 |
|

We will show this outstanding expense account in the debit side of profit and loss account. We also
show it in the current liability side.

On the date of payment 15th May 2012

Outstanding Interest Expense Account Debit 1000

Bank Account Credit 1000

Outstanding Interest Expense Account Debit 1000

Bank Account Credit 1000

Advantage of Passing Journal Entry of Outstanding Expenses

1. Because we have taken the service of these expenses, so, it is very necessary to pass the journal
entry of outstanding expense and to show it in the debit side of profit and loss account. By showing it
in the debit side of profit and loss account, we are including it to compare with the revenues. So, it
will be helpful for showing exact net profit or net loss.

2. Journal entry of outstanding expenses will also helpful for us to show the exact liabilities. After
passing this journal entry, we can show our true financial position at the end of the financial period.
Journal Entries of Unrealized
Earning
1 Supporter August 28, 2012

Unrealized earning means that earning which we can find by knowing the increase in the market
value of our asset. It is also called unrealized gain or revenue. If we see that today our share rate is
Rs. 500 but we have bought it one day ago at the rate of Rs. 400. So, today our unrealized earning
will be Rs. 100. Like this, we
see our other assets value increase. So, showing our balance sheet under marked to market, we
have to pass the journal entry of unrealized earning. Unrealized earning is different from outstanding
earning. In unrealized earning or gain, we just get paper information that our asset's value has
increased. So, we have this gain but in the outstanding earning, we sell our asset but we did not
received money in cash. Following journal entry will be pass in the case of unrealized earning.

Asset account Debit

Unrealized Earning account Credit

Now , discuss why did we debit the asset account and why did, we credit the unrealized earning.

We have debited asset account because value of asset has increased. Every increase in the value
of asset is debited. If value of share has increased with Rs. 100. We will debit our share investment
account with Rs. 100. We credited the unrealized earning account because we have to credited all
the earning.

Important :

As per historical cost concept, we will not write above entry because we keep all the assets on their
historical cost rather than their market value but now latest GAAP requirement, financial instruments
like shares and stock will be kept in the financial statement at their market value rather than their
historical cost. So, above entry is important for showing the correct net income in the income
statement and financial position in the balance sheet.

ournal Entries For Unbilled
Revenue
0 Vinod Kumar August 29, 2012
When we sell the goods to the buyer of goods, we are able to show our revenue in our books as per
the accrual concept of accounting. Whether we have obtained the cash from sale or not, we show
total sale revenue in our income statement. Unbilled revenue case is different from outstanding
revenue. It is that
revenue which we have earned but we still did not write the bill or invoice for getting the revenue. For
example, we are service company. We have completed the project. When we have completed
the project, we issue the bill end of the 3rd day after providing the service. But we did not issue the
bill at end of third day but we have issued the bill at the end of 10th day after providing the service.
So, revenue between the end of 3rd day and end of 10th day will be our unbilled revenue.

We have to pass the following entry of its record.

1. For Recording of Revenue

Unbilled Account Receivable Account Debit

Revenue Account Credit

We have debited the unbilled account receivable account because these are the part of our asset
but still unbilled. By showing it as Unbilled in FS, it will be helpful for auditor to know their detail.
We have credited the revenue account because whether we have obtained cash or not from sale, it
is our earning and every earning will be credited in the journal entry.

2. When bill has been issued to the party.

Account Receivable Account Debit

Unbilled Account Receivable Account Credit

Benefit of Passing Unbilled Revenue Journal Entry

You may think, what is the benefit of passing Unbilled revenue when we correct this transaction by
transferring it to account receivable account. On this, I want to say that big company appoints billing
auditor (Internal auditor) for checking the procedure of billing department. If they find above first
entries of different debtors, they can get help for further investigation. Any mistake or error in the
billing time may be correct fastly before affecting any budget or our financial plan.

Journal Entries of Account
Receivables
4 Vinod Kumar August 12, 2012
Account receivables are the major current asset if you sell you goods on credit. When we sell our
goods on credit, we make the party account of buyer. When we calculate the receivable total
from all these parties, it will be account receivables. In simple words, "Account used to record sales
made "on account", meaning that
the company has made a sale but has not collected payment." For example, Reliance Steel
and Aluminium project's financial statement shows 1.016 Billion account receivables. See its chart.

This chart is of 5 years. But we can see this data with different period view. Do, you know, how do
we get this important information. Answer is, we get all these information by passing correct journal
entries of account receivables. Following are main journal entries of account receivables.

1. When we sell goods on credit

Account Receivables or Debtor Account Debit

Sales Account Credit
2. When we receive money from Account Receivables

Bank Account Debit

Account Receivables or Debtor Account Credit

3. When account receivables are converted into bill receivables

Bill receivable account Debit

Account Receivables or Debtor account Credit

4. When some of customers become bad and these account will be written off with following
journal entry.

Bad Debt Account Debit

Account Receivable Account Credit

5. When a customer becomes good and gives his previous debt which was written off
through bad, it means it is just recovery of bad debt.

Bank Account Debit

Bad Debts Recovered from Particular Debtor Account (Specific name of client) Credit
6. When you sell goods on the basis of credit card

It means, you accept money through customer's credit card.

Let me explain with a simple example.

Reliance mobile company's online site accepts credit cards. Through credit card,
company recharged Rs. 1,00,000. The credit card company charges 5%. Following will be it journal
entry

a) When reliance company get cash immediately from bank after submitting sales invoice

Cash Account Debit 100,000

Credit Card Charges Debit 5,000

Sales Account Credit 105,000

b) When reliance company has to wait after submitting sales invoice to bank

1. The entry on the date of sale.

Account Receivable Account Debit 105,000

Sales Account Credit 105,000

2. The entry on the date that reliance company receives the cash.

Cash Account Debit 1,00,000

Credit Card Charges Account Debit 5,000

Account Receivables Account Credit 1,05,000
Journal Entries for Bad Debts
17 Vinod Kumar August 18, 2012

Bad debts means that money which we could not acquire from our debtors. We may give the goods
or money on credit to our debtors. Same debtor or debtors has to give us the money of his taken
debt. But when will not give the debt, it will be the loss of our business, so, we have to pass the entry
for bad debts like
the entry of any other business loss. All losses account will be debited and any asset which will
decrease, will be credited. In case of bad debt following journal entry will be passed.
1. Journal Entry for Bad Debts Loss

For showing this journal entry, it is very necessary that a debt must be uncollectible. We
have done all the efforts but we did not collect the debt. After failure of final notice to the
debtor, we will convert our debt in bad debt.

Bad Debt Account Debit

Particular Debtor Account Credit

Example : Sham did not pay us our Rs. 5000 debt and Ram did not pay us our Rs. 10000 debt up to
end of the financial year. This receivable amount has converted in to bad debt loss by following
entry.

Bad Debts Account Debit 15000

Sham Account Credit 5000

Ram Account Credit 10000

2. Journal Entry for Bad Debts Written Off

Written off means, we are closing bad debt account by transferring bad debt amount to the debit side
of our profit and loss account . When we will show bad debts in the debit side of profit and loss
account, bad debts account will show same amount in its credit side. So, both side of bad debt
account will be equal. No balance will carry forward.

Profit and Loss Account Debit

Bad Debts Account Credit
Example : Sham did not pay us our Rs. 5000 debt and Ram did not pay us our Rs. 10000 debt up to
end of the financial year. This receivable amount has converted in to bad debt loss and then written
off by transferring it in profit and loss account

Profit and Loss Account Debit 15000

Bad Debts Account Credit 15000

3. Journal Entry for Bad Debts Recovered

When bad debts are recovered from debtor after the closing of our financial year. We will show it as
our income. Like other incomes, bad debts recovered will also be our income. So, this account will
be credited. We will debit that asset account which will increase. By earning this income, our bank
account will increase because we received same money from our debtor. At that time, following
entry will be passed.

Bank Account Debit

Bad Debts Recovered Account Credit

Example : Sham did not pay us our Rs. 5000 debt and Ram did not pay us our Rs. 10000 debt up to
end of the financial year 2011. In the financial year 2012, we received Rs. 6000 from Ram and 2000
from Sham on 7th June 2012
7 June 2012

Bank Account Debit 8000

Bad Debt Recovered Account Credit 8000

4. Journal Entry for Bad Debts Recovered which has been transferred to profit and loss
account

Bad Debts Recovered Debit

Profit and Loss Account Credit

Example : Sham did not pay us our Rs. 5000 debt and Ram did not pay us our Rs. 10000 debt up to
end of the financial year 2011. In the financial year 2012, we received Rs. 6000 from Ram and 2000
from Sham on 7th June 2012. At the end of 2012, we transferred it to profit and loss account.

31st Dec. 2012

Bad Debts Recovered Account Debit 8000

Profit and Loss Account Credit 8000

Journal Entries of Credit Note
1 Vinod Kumar August 20, 2012
Before passing the journal entries of credit note, you should know the meaning of credit note. Credit
note is that note which is given to the customer when we get his returned goods. By giving this paper
or enote to customer, we tries to tell that we are crediting his account with his returned goods
amount. Our customer can
also give the note with his returned goods but it will be the debit note. Because we are
the creditor for him. When he will return the goods to us, it means he will debit our account in his
books. With this, he will not pay of the amount of his returned goods.

Now, we teach you the journal entry of credit note. We simple pass the sale return entry. When we
receive the goods, it means goods comes into the business. Our stock asset will be increased. We
will debit the sales returned account. With same amount, our debtor asset will be decreased. So, we
will credit the debtor or customer account.

In our books

Sales Return Account Debit

Debtor or Customer Account Credit
In Our Customer's books

When our customer will receive the credit note, he will pass following journal entry. note received

Creditor Account Debit

Purchase Return Account Credit

Example : Suppose, Sham has received goods of Rs. 5000 from Ram. Ram has returned this good
because this is not good. Sham is the supplier of Ram. So, Sham issued the credit note to Ram and
pass the following journal entry in his books.

Sales Return Account Debit 5000

Ram Account Credit 5000

Journal Entries of Debit Note
3 Vinod Kumar July 2, 2013
Before passing the journal entries of debit note, you should know the meaning of debit note. Debit
note is that note which is given to the supplier or accepted the credit note which is given by our
supplier to us when we returned goods to our supplier or creditor. By giving this paper or enote to
creditor, we tries to tell that we are debiting his account with returned goods to him. Our creditor can
also give the note after accepting our returned goods, it will be also the debit note for us. Because we
are his customer. When we will return the goods to him, it means we will debit his account in our
books. With this, we will not pay the amount of our returned goods.

Now, we teach you the journal entry of debit note. We simple pass the purchase return entry. When
we return the goods, it means goods go out from our the business. Our stock asset will be decreased.
We will credit the purchase returned account. With same amount, our creditor's liability will be
decreased. So, we will debit the creditor or supplier account.

In our books

Creditor or Supplier Account Debit

Purchase Return Account Credit

In Our Supplier's books

When our supplier will receive the debit note, he will pass following journal entry.

Sale Return Account Debit

Customer Account Debit
Example : Suppose, Sham has received goods of Rs. 5000 from Ram. Ram has returned this good
because this is not good. Sham is the supplier of Ram. So, Ram returned goods with debit
note. Pass journal entry in Ram's books.

Sham Account Debit 5000

Purchase Return Account Credit 5000

Journal Entries of Lease
1 Vinod Kumar August 19, 2012

Lease is the agreement between lessee and lessor. Lessor gives his asset to lessee for use. Lessee
gives the money for using the asset of lessor. So, there are transactions which happen between the
lessee and lessor. We can record all these transactions by writing journal entries. Both parties will
record the journal entries.
Before learning all these journal entries, we have to understand the the kinds of lease because it
affects the journal entries.

1. Capital or Finance Lease
When there is the agreement which fulfills the following condition, will be the capital or finance lease.

a) Lessor will transfer the ownership at the end of the term of lease.

b) Purchasing bargaining.

c) 75% or more of total life will be the lease life. If total life of asset will be 6 and lease agreement is
of 5 years, then it is more than 75% life of total lease and acceptable as capital lease.

d) 90% or more of fair value of asset will be the present value of asset for lease.

2. Operating Lease

Operating lease means the lease in which asset is not transferred. Just asset is used for
the rentpayment. After the end of lease, ownership will be in the hand of lessor. During the time, all
the risk relating to the asset will be of lessor.

We also should understand the the following meaning clearly.

1. Payment or Rent Payment

Payment is the amount which is given by lessee to lessor. In this, interest and principal amount.

2. Lease obligation or payable

It is the principal amount which a lessee will pay to lessor during the period of lease.

3. Interest
Interest is the income for lessor. It is the gain on the lease.

Journal Entries in the Books of Lessee

{A} When there is Capital Lease

1. For total amount of lease payable.

In the beginning of lease

Fixed Asset Account Debit

Lease Payable Account Credit

In the end of first year and subsequent years.

2. For transfer of Depreciation to Depreciation accumulated account

Depreciation account Debit

Accumulated Depreciation account Credit

In the end of first year and subsequent years.

3. For payment of lease obligation and interest.

( For example, rent payment is of $ 5000 ( lease obligation $ 4000 + $ 1000 )

Lease Payable Account Debit 4000

Interest Account Credit 1000

Bank Account Credit 5000
{B} When there is Operating Lease

In the end of the year and subsequent years.

Rent of Lease Account Debit 5000

Cash Account Credit 5000

Journal Entries in the Books of Lessor

{A} When there is Capital Lease

1. For total amount of lease receivables. It is just like credit sale of fixed asset.

In the beginning of lease

Lease Receivables Account Debit

Fixed Asset Account Credit

In the end of first year and subsequent years.

2. For Receiving the amount of lease.

( For example, rent received is of $ 5000 )

Lease Receivable Account Debit 5000

Bank Account Credit 5000

{B} When there is Operating Lease

In the end of the year and subsequent years.
Bank A Debit 5000

Lease Receivable Account Credit 5000

Example :

Journal Entry for Fixed Deposit
2 Vinod Kumar January 21, 2011
Question

What will be the entry for fixed deposit with bank by co. for 2 yrs and if loan has been taken on it and
what will be the entry of interest given by the bank on F.D

Answer

There will be three journal entries of above transaction :

1. Journal Entry for Fixed Deposit for 2 years

Fixed deposit is that investment which has been done by you for getting interest earning. Bank gets
your FD money and send it for giving loan to others and earn margin between interest received on
this money and interest which is given to you by bank. So, this is your asset. Real account rule will
apply on this asset. We also see that bank is personal account which is affected from this
transaction.

Debit : Who is receiver of this money ( In personal account ) = Bank = Bank receives money in the
form of FD

It means Fixed Deposit in Bank Account Dr.

Credit : What goes from your business ( In real account or asset account ) = Cash
for investing money in secured area.
It means Cash Account Debit Cr.

FD in Bank Account Dr. XXXX

Cash Account Cr. XXXX

2. Journal Entry for loan which has been taken on your own Fixed Deposit

Loan is loan. It is your liability. But, it is secured loan. If you will not pay, your FD will not repaid to
you until, you pay your loan to bank with its interest. Now, think which two account affects from it.

One is real account because you receive cash.

Other is personal account because bank gives you money in the form of loan.

So, remember the rules of double entry form.

Cash Account Dr. XXXX
Loan from Bank Account Cr. XXXX

3. Journal Entry of interest which is given by the bank on F.D.

This interest is source of your earning. So, it is gain of your business. I think it is in cash form

Debit = So, what comes in your business = Cash
Credit = which income increase in your business = Interest on FD in Bank

Now pass the journal entry

Cash account Dr. XXXX
Interest on FD in Bank Cr. XXXX
Journal Entries of Dividends
3 Vinod Kumar August 30, 2012

Dividend is the source of income of shareholders when they invest money in shares for gaining
the dividend. On the other hand, when company declares the dividend for shareholder, it will be the
deduction of its net profit. For transferring dividend out of net profit, we make the profit and loss
appropriation account.

Following are the journal entries of dividends

1. When dividend is proposed by company out of net profit.

Profit and Loss Appropriation Account Debit

Proposed Dividend Account Credit

2. When Proposed dividend is paid by Company

Proposed Dividend Account Debit

Bank Account Credit
3. When Dividend is Declared Out of Retained Earning

Retained Earning Account Debit

Dividend Account Credit

4. When Such Dividend is Paid

Dividend Account Debit

Bank Account Credit

Examples :

Let’s assume that the Reliance Corporation, on Dec. 20, 2011, declared a cash dividend of Rs. 2 per
share on 4,00,000 shares payable April 1, 2012, to all stockholders of record March 15. The
following journal entries are required:

1. Date of declaration, Dec. 20, 2011

Retained Earning Account Debit 8,00,000

Dividend Payable Account Credit 8,00,000

2. When dividend is paid on Date of payment, April 1, 2012

Dividend Payable Account Debit 8,00,000

Bank Account Credit 8,00,0000

Important : Sometime company may not have sufficient cash, at that time, company may give his
fully paid up new equity shares or other investments. So, we will not credit the bank account but we
will credit the equity share capital or investment.
Journal Entries of Revaluation
of Assets
1 Vinod Kumar August 30, 2012

In the journal entries of revaluation of assets, we record all changes in the value of fixed assets. As
per the cost concept, we have no right to record increase or decrease in the value of fixed asset. It
should be kept on its historical book cost value. Now, time is going fast. All old concepts of
accounting are being modified on
the basis of revaluation concept. As per new concept, our all assets should be upto dated. An
investor who check our financial statement should not mislead by providing old information in the
statements. Upto dated information means, if any asset's value is decreased due to impairment,
our balance sheetshould cut the same loss from that specific loss. If our investments like shares and
stock have increment, it should be recorded in our financial statements.
Now, all these things can be possible with journal entries of revaluation of assets.

(1) If there is an decrease in the vale of assets:

Revaluation Account Debit

Fixed Assets Account Credit

(2) If there is an increase in the value of assets:

Fixed Assets Account Debit

To Revaluation Account Credit

Example:

Assume on December 31, 2011 the company intends to switch to revaluation concept and carries
out a revaluation exercise which estimates the fair value of the building to be $200,000 as at
December 31, 2011. The book value at the date is $150,000 and revalued amount is $200,000 so an
upward adjustment of $50,000 is required to building account. It is recorded through the following
journal entry:
1 .For recording the revaluation surplus on the building.

Building Account Debit 50,000
Revaluation Account Credit 50,000

2. For transferring the revaluation surplus to the equity share capital.

Revaluation Account Debit 50,000

Equity Share Capital Account Credit 50,000

If we do not open the revaluation account, we can directly debit the asset account and credit
the equity share capital account in case of any surplus. For example, if we there is surplus of $
1,00,000 in the value of shares in which we have invested. We can easily pass the journal entry of
share investment account Dr. to Equity share capital account Cr.

If there is any decrease in fixed asset, we can also debit the equity share capital account and
credit the asset account.

Journal Entry Examples of
Discount Allowed
4 Vinod Kumar December 1, 2014
Discount allowed is the loss of business but there is big strategy of long term gain. If any customer
will pay us in cash at this time or before the time when he will actually pay for his goods bought
goods on credit, then, we will allow discount. With this, we can get our cash from debtors fastly.
Secondly, it will help to increase working capital for day to day expenses. So, many organisations
have clear policy to allow discount.

Discount allowed is deduction from purchase price of customer, if he pay within time or before time.
In other words, it is encourage to buyer for buying with cash rather than buying on credit.

Journal Entry Examples of Discount Allowed

Discount allowed must be recorded both vendor and buyer’s journal. In Vendor book, it is
treated as discount allowed and this cash discount will become loss of business and in the day
book of buyer, it will become discount received account which income account.

1st Example :
Suppose Ram has sold goods to Sham on Credit of Rs. 50000 and it is the term of agreement
that if Sham pays within 20 day of this purchase, he can receive 10% discount. If Sham pays
within 20 days then Treat cash discount in day book of both parties.

Day book of Seller ( Ram )

Bank Account Dr. 45000
Discount Allowed Account Dr. 5000
Sham Account Cr. 50000

Day book of Buyer ( Sham )

Ram Account Dr. 50000
Bank Account Cr. 45000
Discount Received Account Cr. 5000

2nd Example :

Jan.2 Paid cash to Mohan Rs. 9700

and discount allowed Rs. 400

Jan. 5 Received Cash from Arjun Rs. 5000

and Discount allowed to him Rs. 100
Jan. 11 Goods Sold to Hari Rs. 31000

Jan. 13 Hari Returned Goods Rs. 1000

Jan. 15 Received cash from Hari Rs. 28000 in full settlement of his account

Jan. 21 Sold Goods to Ganesh of List Price of Rs. 70000 at 10% trade discount

Jan. 24 Purchased goods from Raj of the list price of Rs. 20000 at 20% Trade Discount

Pass the Journal Entries

Jan 2

Mohan Account Dr. 10100
Cash Account Cr. 9700

Discount Received Account Cr.400

Jan. 5

Cash account Dr. 5000

Discount Allowed Account Dr. 100

Arjun Account Cr. 5100

Jan. 11

Hari Account Dr. 31000

Sales Account Cr. 31000

Jan. 13

Sales Return Account Dr. 1000

Hari Account Cr. 1000
Jan. 15

Cash Account Dr. 28000

Discount Allowed account Dr. 2000

Hari Account Cr. 30000

Jan. 21

Ganesh Account Dr. 63000

Sales Account Cr. 63000

Jan. 24

Purchase Account Dr. 16000

Raj Account Cr. 16000

Remember : We do not make the trade discount account because we show net amount in purchase
or sale account after deducting from trade discount. Only discount allowed account will make.
Journal Entry of Discount
Received
1 Vinod Kumar December 4, 2014

Discount received is the gain of business. If we will pay our creditor before the time, we will
earndiscount. One side it is the part of our earning, second, we can fastly pay our creditor due to this
motive. So, we received the discount, we pass following journal entry.

Suppose Sham has bought goods from Ram on Credit of Rs. 50000 on 1st jan. 2014 and it
is the term of agreement that if Sham pays within 20 day of this purchase, he can receive
10% discount. Sham paid on 17th Jan. 2014 then Treat discount received in day book
of Sham.

Day book of Sham

1st Jan. 2014
Purchase Account Dr. 50000

Ram Account Cr. 50000

17th Jan. 2014

Ram Account Dr. 50000

Bank Account Cr. 45000

Discount Received Account Cr. 5000

How to Pass Journal Entries for
Purchases
0 Vinod Kumar August 11, 2015

In any type of business, record of purchase is so important. Because on the basis of purchase
record basis, we take the decisions of manufacturing and sales. So, for records of purchase, we
need to pass the journal entries of purchases. For these journal entries, we deem purchase as the
inventory which is needed for manufacturing or sale. It is current asset and it is not purchase of fixed
asset.

Following are the Main Journal Entries for Record of Purchases

1. Journal Entry for Cash Purchases

When we purchase the goods on the basis of cash, we need not record our supplier. We already
know where we want to buy with cash. Just pass following journal entries when you pay the money
for buying.

Purchase Account Debit

Bank/Cash Account Credit

2. Journal Entry for Credit Purchases

When we purchase on credit basis instead of cash, we need to record the detail of creditor. Because
with this, we can pay the creditor in future. We know what balance of creditors, we have in our
accounts as liability.

Purchase Account Debit

Creditor Account Credit

3. Journal Entry for Purchases with excise duty

If any manufacturer buys the purchase from other dealer or manufacturer, there will apply the rule of
excise duty. For changing the rates of excise duty, you should get updates of your current year
budget. As per businessman, excise duty is indirect expense. First of all Excise duty will be payable
to creditor. After this, he will sell same goods, he will get excise duty on sale. Difference of excise
duty paid on purchase and excise duty received on sale will be deposited in Govt. Department. More
journal entries of excise duties, you can learn at Journal Entries of Excise Duties.

Purchase Account Debit

Excise Duty on Purchase Account Debit

Creditor Account Credit

4. Journal Entry of Purchase Return

If you have return goods due to scrap or any default, it will be purchase return, following entry will
pass

Creditor / Cash / Bank Account Debit

Purchase Return Account Credit

5. Journal Entry of Purchase return with Excise Duty

If there is purchase return and sale return, then net payable amount to Govt. account will adjust from
these two major factor.

Creditor Account Debit

Excise duty Account Credit

Purchase Return Account Credit

6. Journal Entry of Purchase with VAT
When Goods are bought and you have to pay both purchase value and VAT input or paid both, at
that time, following journal entry will be passed.

Purchase Account Dr. (Value of Purchase)
VAT Input Account Dr. ( VAT on Purchase)
Cash or Bank or Name of Creditor Account Cr. (Value of Purchase + VAT input)

Reason of this Journal Entry :

We have bought the goods, it increases our current asset. Increase of asset will always debit. VAT
input is also our current Asset or Negative Current Liability because We paid this to our creditor or
supplier (for paying govt.) but still our net liability has not been fixed. If we received VAT output same
to VAT input, then VAT Input account will automatically written off. If VAT input will be more than
VAT Output, we have to Get money from Govt. So, VAT input account will be Debit. If we are final
consumer, we need not show the VAT Input account, its cost will be included in purchase account.
So, purchase expense will increase and debit in our journal entry. More learn about VAT journal
entries.

7. Purchase return with VAT

If there is purchase return, VAT input account will cancel on the basis of purchase return amount.

Cash/Bank / Creditor Account Debit (Value of Purchase return + VAT input on purchase return)

Purchase Return Account Credit (Value of Purchase return)

VAT Input Account Credit ( VAT on Purchase return)

Example
Journal Entries of Sales
1 Vinod Kumar August 17, 2015
In any type of business, record of sale is so important. Because on the basis of sales record, we
take the decisions of new purchase and production. So, for records of sales, we need to pass the
journal entries of sales. For these journal entries, we deem sales as the inventory sales. It is our
revenue item and it is not capital revenue.

Following are the Main Journal Entries for Record of Sales

1. Journal Entry for Cash Sales

When we sell the goods on the basis of cash, we need not record our customers. We already know
to whom we sold the goods. Just pass following journal entries when you pay the money for buying.

Bank / Cash Account Debit

Sales Account Credit

2. Journal Entry for Credit Sales

When we sell on credit basis instead of cash, we need to record the detail of debtor. Because with
this, we can receive money from our debtors in future. We want to know what balance of our
debtors in our books, This is our current asset.
Debtor Account Debit

Sale Account Credit

3. Journal Entry for Sales with excise duty

If any manufacturer sells to other dealer or manufacturer, there will apply the rule of excise duty. For
changing the rates of excise duty, you should get updates of your current year budget. As per
businessman, received or receivable excise duty with sales which will be our current liability. First
of all Excise duty will be receivable from debtors. Then, Difference of excise duty paid on purchase
and excise duty received on sale will be deposited in Govt. Department. More journal entries of
excise duties, you can learn at Journal Entries of Excise Duties.

Debtor Account Debit

Excise Duty on Sales Account Credit

Sales Account Credit

4. Journal Entry of Sales Return

If you have received returned goods due to scrap or any default, it will be your sales return, following
entry will pass

Sales Return Account Debit

Bank/Cash / Debtor Account Credit

5. Journal Entry of Sales return with Excise Duty

If there is purchase return and sale return, then net payable amount to Govt. account will adjust from
these two major factor. First you should understand the sales return entry with excise duty.

Sales Return Account Debit

Excise duty on Sales Return Account Debit

Debtor Account Credit

6. Journal Entry of Sales with VAT

When Goods are sold and you have to receive both sale value and VAT output or VAT on sales
both, at that time, following journal entry will be passed.

Bank / Cash / Debtor Account Dr. (Value of Sales + VAT Output)
VAT Output Account Cr. ( VAT on Sales)
Sales Account Cr. (Value of Sales )

Reason of this Journal Entry :

We have sold goods the goods, it will decrease our current asset. Decrease of asset will always
credit. VAT output is also our current liability because We have to receive VAT output for paying
govt. More learn about VAT journal entries.

7. Sales return with VAT

If there is sales return, VAT output account will cancel on the basis of sales return amount.

Sales Return Debit (Value of sales return)

VAT Output on sales return Account Debit (Value of Vat output on sales return)

Bank/ Cash/ Debtor Account Credit ( Value of sales return + VAT on sales return)
In brief

Journal Entries of Loan
2 Vinod Kumar August 10, 2015

Whether loan is given or loan is taken, it is must to record it in books because given loan is our asset
and taken loan is our liability. Moreover on the basis of outstanding balance, interest is calculated
and it is paid by borrower to lender. So, for knowing actual balance of loan outstanding, we need to
pass journal entries.

In the Books of Borrower
1. When loan is received by borrower

Bank Account Debit

Lender's Loan Account Credit

2. When Borrower is responsible for paying Interest on
Loan

Interest Account Debit

Interest on Loan Payable Account Credit

3. When Borrower pays the interest to Lender

Interest on Loan Payable Account Debit

Bank Account Credit

4. When Borrower repays his loan.

(a) If there is no interest liability on loan.

Lender's Loan Account Debit

Bank Account Credit

(b) If there is any interest liability on loan
(i)

Interest on Loan Payable Account Debit

Lender's Loan Account Credit

(ii)

Lender's Loan Account Debit ( Principle + Payable Interest)

Bank Account Credit

In the Books of Lender

1. When loan is given by Lender

Borrower's Loan Account Debit

Bank Account Credit

( Logic : Cash though banks will come in the business which is our asset. It is increase of asset in
the business. So, Bank account Debit . Lender's Loan is our liability. It is increase in existed liability,
so this account will credit. )

2. When Lender has right to get interest on given loan

Interest on Loan Receivable Account Debit

Interest Account Credit

3. When Lender receives interest from borrower
Bank Account Debit

Interest on Loan Receivable Account Credit

4. When Borrower repays his loan.

(a) If there is no interest receivable on loan.

Bank Account Debit

Borrower's Loan Account Credit

(b) If there is any interest receivable on given loan

(i)

Borrower's Loan Account Debit

Interest on Loan Receivable Account Credit

(ii)

Bank Account Debit ( Principle + Receivable Interest)

Borrower's Loan Account Credit

Example
How to Pass Closing Journal
Entries
0 Vinod Kumar August 8, 2015
Closing journal entries are helpful for closing the accounts in any financial year of any organisation.
These entries are relating to revenue, expenses and drawing because next financial year, we have
to open these account with zero balance.

1. To Pass the Journal Entries to Close the Revenue
Accounts

To close the revenue accounts are necessary because we have earned the amount, so, we can use
it for our business. No one can ask for same money. It can be used for business promotion. Now,
you should pass the following journal entries.

Respected Revenue account Debit

Profit and Loss account Credit

There may be lots of revenues. Each revenue account will Debit because we are closing it. When we
have started revenue account, we have credited it because it was our gain. Gain will always credit.
Now, its account's closing balance will show. But we have to close it. So, we credited profit and loss
account. It means, simply total earning are still credit with a new name which will club small and
small revenues and credit in profit and loss account with single name. Now, there will no identity of
any revenue account in next financial year.
2. To Pass the Journal Entries to Close the Expenses
Accounts

To close the revenue accounts are necessary because we have paid same amount and we have
gained its service benefit in this year, so, for calculating our net incomes, we need to close all
expenses account. No one can demand money in next year because we have proof of
payment. Now, you should pass the following journal entries.

Profit and Loss Account Debit

Respected Expenses Account Credit

There may be lots of expenses. Each expense account will credit in this journal entry because we
are closing it. When we have started expense account, we have debited for showing expenses in
book. Now, we need to close, so all expenses will debited in profit and loss account. That is the
reason, we are debiting profit and loss account.

3. To Pass the Journal Entry for Close the Profit and Loss
Account

After find the balance by deducting expenses side from income side in profit and loss account, we
will transfer same net profit to capital account. If there is net loss, still, it will transfer to capital
account. On this basis, capital account will show correct amount.

If Net profit

Profit and loss account Debit

Capital Account Credit

If Net Loss

Capital Account Debit
Profit and Loss Account Credit

4. To Pass the Journal Entries to Close the Drawing
Account

Our drawing account's balance will be the loss of our business's capital. So, it will be closed by
transferring capital account. With this, our capital will decrease. So, capital account must be debited
and drawing account will credited with its closing balance amount.

Capital Account Debit

Drawing Account Credit

Example
Following is the example of Closing Entries

Note Date Account Debit Credit

1
March 31 Sale Revenue 100,000

Profit and Loss
100,000
Account
Profit and Loss
2 March 31 50,000
Account
Note Date Account Debit Credit

Salaries
30000
Expense
Internet
10000
Expense
Domain Hosting
5000
Expense
Electricity
5000
Expense

Profit and Loss
3 March 31 50000
Account
Capital
50000
Account
4 March 31 Capital Account 10000

Drawing
10000
Account