DEPRECIATION

DEPRECIATION

Depreciation is assessed to represent the true worth of assets on the balance sheet and to appropriately determine profit or loss.

Depreciation, then, is the continuous, ongoing, and irreversible loss of value resulting from normal wear and tear or any other comparable cause in a fixed asset. Assets can be depreciated in six different ways. As only a few instances, consider the following techniques: fixed installment, straight line, beginning cost, decreasing or reducing balance, written-down value, annuity, revaluation, depreciation, sinking fund, and insurance policy processes. However, this year we will be studying the first two methods.

(i) Fixed Instalment / Straight Line / Original Cost Method: Under this method, depreciation is charged at a fixed rate at the end of every year during the lifetime of an asset. The formula for depreciation :

Depreciation =  Original Cost of asset + Installation Charges – Break-up Value / Scrap Value

Estimated Life Of An Asset

(ii) Diminishing Balance / Reducing Balance/ Written Down Value Method : Under this method, depreciation is charged on the opening balance of the asset each year at a given rate.

An amount received when an asset is sold after its useful life is called Scrap Value / Residual Value / Break up Value.

Charges incurred for the erection of the machinery are called Installation Charges / Erection Charges.

ACCOUNTING TREATMENT
1. When any asset is purchased
                    Asset A/c. Dr.
                        To Cash / Bank A/c.

2. When depreciation is charged
                    Depreciation A/c. Dr.
                        To Asset A/c.

3. When depreciation is transferred to Profit & Loss A/c.
                    Profit & Loss A/c. Dr.
                        To Depreciation A/c.

4. When any is sold
                    Cash / Bank A/c. Dr.
                        To Asset A/c.

5. When there is loss on sale of any asset
                    Profit & Loss A/c. Dr.
                        To Asset A/c.

When there is profit on sale of asset vice-versa

ISSUE OF SHARES

Issue of shares

Every company needs funds to start the business as well as to run the business. This funds a race from various modes. The funds can be raised in the form of loan from banks, money lenders or from investors. But there is an another way to raise funds from the public in the form of shares of the company.

The capital required for the company is divided in the form of shares of the company. Such capital is called as share capital of the company. Interested people invest their amount for purchasing these shares. The investors of such capital are called as shareholders of the company.

These shareholders are the owners of the company. They get a part of profit of the company at the end of the year in the form of dividend. If the company earns huge profits then these shareholders get a good amount of dividend. In case the company goes in heavy losses then these shareholders may not even get their invested amount of capital.

The shareholders being the owner of the company have the right to vote in the Annual General Meeting.

 BILL OF EXCHANGE

Under section 5 of Negotiable Instrument Act, 1981,”A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain sum of money only to, or to the order of a certain person or the bearer of the instrument .”

Parties of the Bill : There are three original parties of a bill of exchange – the drawer, the drawee and the payee .

Drawer : A person who draws the bill is called drawer.

Drawee : A person to whom the bill is Drawn or the acceptor of the bill called a Drawee.

Payee : A person to whom the money is ordered to be paid is called the payee. He may be drawer also

Endorser : A person who endorse the bill (or transfer the bill) to the other party is called the endorser.

Endorsee : A person to whom the bill is endorsed or transferred is called the endorsee.

·        Write the word / term / phrase which can substitute each of the following statement.

1.      A person to whom bill is endorsed.

Ans : Endorsee

2.      A person who draws a bill.

Ans : Drawer

3.      A person to whom the bill is payable.

Ans : Payee.

4.      Encashment of bill with the bank at some rebate.

Ans : Discounting of the bill.

5.      A bill drawn in one country and payable in other country.

Ans : Foreign bill

6.      The date on which bill is payable.

Ans : Due Date

7.      Payment of bill before due date.

Ans : Retirement of bill.

8.      Non payment of bill on the due date.

Ans : Dishonour of bill.

9.      A person who notes the dishonour of the bill.

Ans : Notary Public

10.   Payment of bill on due date.

Ans : Honour of bill.

11.   A person who accepts the bill.

Ans : Acceptor / Drawee.

12.   A person who endorses the bill.

Ans : Endorser.

PARTNERSHIP FINAL ACCOUNTS

PARTNERSHIP FINAL ACCOUNTS

In final A/c’s we have to open Trading account, Profit and Loss Account, Partners’ Capital/Current account (not compulsory) and Balance Sheet.

Trading Account : We have to record all direct expenses to the debit side of this account and all direct incomes to the credit side of this account. The credit balance of this account shows gross profit which is to be transferred to the credit side of the profit and loss account. The debit balance shows gross loss which is to be transferred to the debit side of profit and loss account.

Profit and Loss Account : All indirect expenses are to be recorded to the debit side whereas all indirect incomes are to be recorded to the credit side of this account. The credit balance of this account shows net profit which is transferred to profit and loss appropriation credit side. The debit balance of this account shows net loss which is transferred to profit and loss appropriation debit side.

Partners Capital Account : Partners Capital account is credited with the opening balance. All incomes of the partners are credited to this account For eg. Salary, Remuneration to partners, Interest on Capitals. All expenses of the partners such as Drawings, Interest on drawings are debited to this account.

Partners Current Account : If Partners current account is given, then all the above adjustments are passed through Partners Current account instead of the partners capital account. In this case partners capital account is not opened and it directly appears to the Balance Sheet.

Balance Sheet : Balance Sheet is a statement showing financial position of the firm on a particular day. All liabilities are recorded to its left hand side while all assets on its right hand side.

Write the word/term/phrase which can be substitute the following statement :

1. An account to which all adjustments relating to the partners are made, when the capital is fixed.
Ans : Current Account.

2. Two or more persons coming together to do the lawful business to earn profit.
Ans : Partnersship.

3. The partner who takes active part in the management of the firm.
Ans : Active Partner.

4. An agreement among the partners.
Ans : Partnership Deed.

5. An account in which all items of expenses and income relating to the partners are recorded.
Ans : Profit and Loss Appropriation Account.

6. The proportion in which the partners distribute the firm’s profits.
Ans : Profit sharing ratio.

7. A partner who contributes the capital but does not take active part in the conduct of the business.
Ans : Sleeping Partner.

8. The statement of affairs of the firm on a particular date.
Ans : Balance Sheet.

9. Debit balance in trading account.
Ans : Gross Loss.

10. Credit balance in Profit & Loss A/c.
Ans : Net Profit.

11. Such method in which both the Capital account and the Current Account are maintained for each partner.
Ans : Fixed Capital Method.

12. List of Debit and Credit Balance on the ledger accounts.
Ans : Trial Balance.

13. The part of debtors which are definitely not recoverable.
Ans : Bad Debts.

14. Expenses due but not paid.
Ans : Outstanding Expenses.

15. Expenses paid in advance of the period which has not expired.
Ans : Prepaid Expenses.

SPECIMEN FORMAT OF FINAL ACCOUNTS

In a trial balance there are two sides, one is debit and other is credit.

On the debit side of the trial balance we record the direct expenses indirect expenses losses and assets.

On the credit side of the trial balance we record the direct incomes indirect incomes gains and liabilities.

While recording in the final accounts from the trial balance

1. All the direct expenses will appear to the debit side of trading account.

2. All the indirect expenses and losses will appear to the debit side of profit and loss account.

3. All the assets will appear on the right hand side of the balance sheet.

4. All the direct incomes will appear to the credit side of trading account.

5. All the indirect incomes and gains will appear on the credit side of profit and loss account.

6. All the liabilities will appear on the left hand side off the balance sheet.

Adjustments

1. When there is any outstanding expense.

Add in the respective expense.

Record in the liability side.

2. When there is any outstanding income.

 Add in the respective income.

 Record in the asset side.

3. When there is any decrease in asset.

Less from respective asset.

Record in the profit and loss account debit side.

4. When there is any increase in asset.

Add in the respective asset.

Record in the profit and loss account credit side.

5. When there is any decrease in liability.

Less from respective liability.

Record in the profit and loss account credit side.

6. When there is any increase in liability.

Add in the respective liability.

Record in the profit and loss account debit side.

7. When there is any prepaid expense.

Less from the respective expense.

Record in the asset side of the balance sheet.

8. When there is any pre-received income.

List from the respective income.

Record in the liability side off the balance sheet.

Dissolution of partnership firm

Dissolution of a Partnership Firm

When any business goes in heavy losses for consecutive many years the partners decide to put an end to the business. Such ending of a business is called dissolution.

There may be any reason for dissolution of partnership firm.

• The deed might force the business to end the partnership.
• If the firm is of three partners and two of them retire or die then also the partnership may end.
• There may be disputes between the partners which may end the partnership. 

Thus there may be any reason for dissolution of partnership firm but the main reason is losses for consecutive two three years.

Sometimes all the partners become insolvent. In such case third party liabilities are not transferred to Realisation Account. We have to prepare separate account for each third party liability.

Next we have to distribute the balance cash to the third parties in their proportion.

for eg : If the creditors are Rs.20,000, Bills Payable are Rs.10,000 and Bank Overdraft is Rs.10,000 and the balance cash after all other payments is Rs.5,000. Then this cash will be distributed to Creditors, Bills Payable and Bank Overdraft in the ratio of 2 : 1 : 1 which measns out of Rs.5,000, Creditors will get Rs.2,500, Bills Payable will get Rs.1,250 and Bank Overdraft will get Rs.1,250.

Third Party Liability A/c........ Dr.

        To Cash /Bank Account.

After this we have to close the Third Party Liabilites Account and transfer the balance to Deficiency Account. 

Then close the Realisation Account and transfer the loss to Partners Capital Account in their profit sharing ratio.

Lastly the Partners' Capital Account will be closed and the balance will be transferred to Deficiency Account.

Ultimately Deficiency will get tallied.

ADMISSION OF A PARTNER IN A PARTNERSHIP FIRM

Admission of a Partner in a Partnership Firm

When a new partner is admitted into partnership it is called admission of a partner. The new partner has to bring capital in cash or kind. The new partner also has to bring the goodwill for the business. If the goodwill is not brought in the business by the new partner it is decided by the old partners to raise the goodwill or value the goodwill or fix the goodwill. In such case the goodwill is shown in the balance sheet at its full value.

The accounting treatment for the admission purpose are as below :

Transaction	Entry
1.     When General Reserve or accumulated profits are transferred to partners	General Reserve A/c…………. Dr. Profit & Losss A/c……………. Dr.       To Old Partners’ Capital A/c
2.     When new partner brings capital in cash	Cash A/c………………………..Dr.        To New Partners’ Capital A/c.
3.     When new partner brings his share of goodwill in cash	a)     Cash A/c……………...... Dr.         To Goodwill A/c. b)     Goodwill A/c……………Dr.          To Old Partners’s Capital A/c.                  (distribute in sacrifice ratio)
4.     When amount of goodwill is withdrawn by old partners.	Old Partners’ Capital A/c……….Dr.        To Cash A/c.
5.     When new partner is unable to bring the goodwill in cash	Goodwill A/c……………………Dr.        To Old Partners’s Capital A/c. (old ratio) here the goodwill a/c will show balance and will appear in balance sheet.
6.     When goodwill is withdrawn	All Partners’ Capital A/c………...Dr.         To Goodwill A/c (new ratio)
7.     When any asset is appreciated	Asset A/c…………………………Dr.         To Revaluation A/c.
8.     When any asset is depreciated	Revaluation A/c………………….Dr.         To Asset A/c
9.     When any liability is increased	Revaluation A/c……………….... Dr.         To Liability A/c.
10.  When any liability is decreased	Liability A/c…………………..… Dr.         To Revaluation A/c.
11.  When there is profit on revaluation	Revaluation A/c…………………. Dr.         To Old Partners’ Capital A/c.
12.  When there is loss on revaluation	Old Partners’ Capital A/c…………Dr.         To Revaluation A/c.
13. When there is excess of capital on capital adjustment	Partners’ Capital A/c………………Dr.         To Cash / Current / Loan A/c.
14. When there is shortage of capital on capital adjustment	Cash /  Current A/c………………...Dr.          To Partner’s Capital A/c.

 

Journal & Ledger

JOURNAL and LEDGER

WHAT IS A JOURNAL ?

When any transaction occurs. It has to be recorded in a book first. This book is called as a journal. Thus we can say that journal is a book in which the entry is done first. In other words we can say that the initial entry passed in a book is called as a journal.

A journal has five columns. The first column is the ‘Date’, Second column is Particulars, Third column is Ledger Folio, Fourth and fifth column are the Amount column, one is Debit and the last one is Credit.

HOW TO PASS JOURNAL ENTRIES  ?

Journal is a book in which the entry of the books is made first. When any transaction occurs it has to be recorded in the Journal first.

Steps to pass any journal entry

Decide the accounts effected in the transaction.

See the types of accounts whether they are Personal, Real or Nominal.

Once the type is decide apply the rules and decide the Debit or Credit to the respective accounts.

In the traditional method of passing journal entries, handwritten ledgers and journals are typically used. Here's how you would do it:

1. Date the Entry: Write down the date of the transaction in the first column of the journal.

2. Write the Account Titles: In the next column, write the titles of the accounts to be debited and credited. Start with the account to be debited, followed by the account to be credited.

3. Enter Debit and Credit Amounts: In the respective debit and credit columns, enter the amounts for each account. Debit amounts are typically listed in the left column, and credit amounts in the right column.

4. Write a Brief Description: In the last column, provide a brief description or explanation of the transaction.

5. Balance the Entry: Ensure that the total debits equal the total credits. If they do not balance, review the entries for errors.

6. Post to Ledger Accounts: Transfer the amounts from the journal entry to the respective ledger accounts. Debit amounts are recorded on the debit side of the ledger account, and credit amounts are rcorded on the credit side.

7. Prepare Trial Balance: Periodically, prepare a trial balance to ensure that the total debits equal the total credits in the ledger accounts.

 Using the same example of a company selling goods for Rs. 1,000 in cash:

Journal

Date	Particulars	L.F.	Debit (Rs.)	Credit(Rs.)
	Cash A/c…….Dr.             To Sales A/c.		1,000 ----	1,000 ----

This journal entry would be recorded in the general journal. Then, the amounts would be posted to the Cash account and Sales account in the ledger. The process ensures that each transaction is accurately recorded and summarized in the company's financial records.

After recording journal entries, the next step in the accounting process is to post these entries to the ledger accounts. Here's how you can do it:

1. Identify Ledger Accounts: Each journal entry affects at least two accounts. Identify the accounts involved in the entry. For example, if a transaction involves cash and sales, you'll need to post to the Cash account and the Sales account.

2. Open Ledger Accounts: If ledger accounts for the identified accounts don't exist already, you need to open them. Write the account title (e.g., Cash, Sales) at the top of a new page in the ledger book.

3. Locate Journal Entry: Find the journal entry you want to post in the general journal.

4. Determine Debit and Credit Amounts: Identify the debit and credit amounts for each account mentioned in the journal entry.

5. Post Debit Amounts: Locate the ledger account that needs to be debited. Enter the date of the transaction in the date column of the ledger account. Write down the debit amount in the debit column. If the ledger account is already debited, write the new amount below the previous entry and calculate the updated balance.

6. Post Credit Amounts: Similarly, locate the ledger account that needs to be credited. Enter the date of the transaction in the date column of the ledger account. Write down the credit amount in the credit column. Again, if the ledger account is already credited, write the new amount below the previous entry and calculate the updated balance.

7. Balancing the Ledger Account: After posting all entries related to a particular account, calculate the total debits and credits. The total debit balance should equal the total credit balance. If they don't match, review the entries for errors.

8. Repeat for Other Entries: Repeat this process for all journal entries that need to be posted to ledger accounts.

9. Cross-Referencing: Optionally, you can cross-reference ledger entries with their corresponding journal entries by writing the journal entry number in the ledger account and vice versa. This helps in easy reference and tracing of transactions.

10. Trial Balance: Once all entries are posted, prepare a trial balance to ensure that the total debits equal the total credits in the ledger accounts.

In this way one can post journal entries to the ledger accounts.