Bad debts

What Are Bad Debts?

Bad debts are the debts that cannot be recovered. The company sells goods to the customers on credit and if one of the customers does not pay the company, such unpaid amount by the customer is considered as bad debt. The amount is considered as bad debt after all the attempts or reasonable efforts are made by company to recover it from the customer. If the customer pays some part of the amount due then only the amount that is unpaid by the customer is considered as bad debt.
The amount of bad debts is written off and treated as a loss/expense by the company to avoid overstating its profit.

What Are Doubtful Debts?

Doubtful debts are the debts which may or may not be recovered. There is doubt as to whether they would be recovered or not. There is still hope of receiving the payment from the customer so they are not considered as bad and written off. Bad debts are a certain loss/expense and there is no possibility of their recovery whereas the doubtful debts are uncertain loss/expense and there is still a possibility of their recovery.
For doubtful debts, the company creates a provision which is called as provision for doubtful debts or provision for bad and doubtful debts or allowance for doubtful accounts. The provision is created so as to match the uncertain loss of the current period with the sales of the current period to which the debts are related.

Bad Debts Recovered:-

Sometimes it happens that the debts which were previously considered as bad and written off are recovered in the subsequent period. Some amount of bad debts may be recovered or the full amount may be recovered. The amount that is recovered is called as bad debts recovered and is treated as a gain/income now as it was treated as loss/expense before.

 

Source documents

What Are Source Documents?

The first step in the accounting process is recording of business transactions in the books of accounts as journal entries. Source documents are the basis on which the transactions are recorded in books of accounts. They are the origin or source of transactions. The origin of a transaction is in its source document. Source document provides the details of a transaction and acts as an evidence or proof that the transaction has taken place. Each transaction recorded in the books of accounts should have adequate documentary evidence to support it. Source documents are the documentary evidence providing detailed information about the transactions such as nature/description of transaction, date of transaction, amount of transaction, parties to the transaction, etc. Source documents are required in the audit of accounts and they also serve as a legal evidence in case of a dispute.

Types Of Source Documents:-

There are many types of source documents. Following are the commonly used ones:-

Cash memo:-
Cash memo serves as a source document for recording cash purchases and cash sales transactions.  When a company sells goods for cash, it issues cash memo to the customer. It issues original copy of cash memo to customer and keeps the duplicate copy with it. when the company purchases goods for cash, it receives cash memo from the supplier. Cash memo contains all the details of the transaction such as names of parties, quantity of goods, selling price, amount, date ,etc.

Invoice:-
Invoice serves as a source document for recording credit purchases and credit sales transactions. When a company sells goods on credit, it prepares and sends invoice to the customer which is called as sales invoice. (it is purchase invoice for the customer). It sends original copy of sales invoice to customer and keeps the duplicate copy with it. when the company purchases goods on credit, it receives invoice from the supplier which is called as purchase invoice. (it is sales invoice for the supplier). The invoice contains all the details of the transaction such as names of parties, quantity of goods, selling price, amount, date, terms of payment, etc.

Receipt:-
Receipt is an acknowledgement of payment received. Receipt serves as a source document for recording payment and receipt of money. When a company selling goods on credit receives money for the sold goods, it gives receipt to the customer. It gives the original copy of receipt to customer and keeps the duplicate copy with it. When the company purchasing goods on credit pays money for the purchased goods, it receives receipt from the supplier. The receipt contains details such as names of the supplier and customer, amount, date ,etc.

Debit note and credit note:-
When a customer returns some purchased goods to the supplier for being defective or for some other reason or if the supplier has overcharged for the goods, it prepares and sends a document called debit note to the supplier asking for a refund. Customer sends the original copy of debit note to supplier and keeps the duplicate copy. Debit note serves as a source document for recording purchase returns. Debit note contains details such as names of parties, particulars of goods returned, refund amount, date, reasons for return, etc.
After receiving the debit note from the customer, the supplier prepares and sends a document called credit note to the customer acknowledging the return of goods by customer and the refund. Supplier sends the original copy of credit note to customer and keeps the duplicate copy. Credit note serves as a source document for recording sales returns. Credit note contains details such as names of parties, particulars of goods received back, amount of credit, date, etc.

Cheque:-
Cheque is a written order drawn on a bank authorizing the bank to pay specified amount of money to the person named on the cheque. Every cheque book has a counterfoil in it.  Before issuing the cheque, the counterfoil is filled with the details of the cheque such as payee’s name, cheque number, amount of cheque, date of issue, etc. The counterfoil is for the future reference of the cheque issuer. It acts as a source document for recording the cheque issue transaction.

Deposit slip:-
Deposit slip is a form which is used to deposit money in the bank account either in the form of cheque or cash. Each deposit slip has a counterfoil which is returned to the depositor duly stamped and signed by the bank official. Bank retains the deposit slip. The deposit slip counterfoil contains details such as account number of depositor, name of depositor, amount of deposit, bank branch, date of deposit, etc. The counterfoil is for the future reference of the depositor. It acts as a source document for recording the cheque/cash deposit transaction.

 

 

 

Prepaid expenses, outstanding expenses, advance income, accrued income

What Are Prepaid Expenses?

Prepaid expenses are expenses paid in advance before they are incurred. They are paid in the current accounting period but their benefit accrues in the subsequent accounting period or periods.
Prepaid expenses are shown on the balance sheet as a current asset and then recognized as expenses when they are actually incurred in the next accounting period or periods.
Common examples of prepaid expenses include insurance premium paid in advance, rent paid in advance, etc.
Prepaid expenses are also called as unexpired expenses.

Why Are Prepaid Expenses Considered An
Asset?

Asset is an item of economic value that is expected to provide benefit to the company in future. Prepaid expenses are considered as an asset because the goods or services i.e. the benefit related to them are yet to be received which the company expects to receive in future without paying any money as the money has already been paid.

What Are Outstanding Expenses?

Outstanding expenses are expenses which are incurred but not yet paid. They are paid in the subsequent accounting period or periods but their benefit accrues in the current accounting period.
Outstanding expenses are shown in the balance sheet as a current liability and then recognized as expenses when they are paid in the next accounting period or periods.
Common examples of outstanding expenses include outstanding salary, outstanding rent, etc.

What Is Advance Income?

Advance income is the income which is received in advance before it is earned. It is received in the current accounting period but it’s benefit is provided in the subsequent accounting period or periods.
Advance income is shown on the balance sheet as a current liability and then recognized as income when it is actually earned in the next accounting period or periods.
Advance income is also called as prepaid income or unearned income or income received in advance.

Why Is Income Received In advance Considered A liability?

Income received in advance is considered as a liability because the goods or services i.e. benefit related to it is yet to be provided which the company is obligated to provide in future without receiving any money as the money has already been received.

What Is Accrued Income?

Accrued income is the income which has been earned but not yet received. It is received in the subsequent accounting period or periods but it’s benefit is provided in the current accounting period.
Accrued income is shown on the balance sheet as a current asset and then recognized as income when it is actually received in the next accounting period or periods.
Accrued income is also called as outstanding income.

Computerized accounting

computerized accounting

What Is Computerized Accounting?

Computerized accounting is a system of accounting in which the accounts of the company are maintained on a computer using an accounting software as opposed to the manual system of accounting in which the accounts are maintained on books of paper. In the computerized accounting system, entire accounting process is done on the computer using accounting software and nothing is done on paper. Now-a-days most of the companies in the world,whether big or small, use computerized accounting system instead of manual accounting system.

Advantages Of Computerized Accounting:-

Less Time:-

Accounting under Computerized accounting system takes much less time than accounting under manual accounting system. In most of the accounting software, only ledger accounts need to be created and transaction entries are required to be passed. Trial balance and financial statements such as profit and loss account and balance sheet are automatically generated by the accounting software.

Accuracy:-

Computerized accounting is more accurate than manual accounting. In manual accounting there are more chances of making errors and mistakes as everything is done by hand.

Instant Reports:-

Various kinds of reports and accounting information can be instantly generated with the click of few buttons using the accounting software which helps the management in taking quick decisions.

Secure:-

The accounting information can be kept secure and safe under computerized accounting system by using a password which prevents unauthorized people from accessing the accounting information. In manual accounting system there are chances of accounting books being stolen, lost, damaged or accessed by unauthorized people.

Less Paperwork:-

As everything is done on computers, there is very less paperwork involved in computerized accounting as opposed to manual accounting where everything is done on paper books.

Less Employee Cost:-

In computerized accounting system less amount of employees are required to do the same amount of accounting work as manual accounting which reduces the salary and other employee costs of the company.

Less Space:-

Under Computerized accounting system lesser office space is required because of reduction in paper work and accounting staff.

Disadvantages Of Computerized Accounting:-

Cost Of Software:-

There is the initial cost of purchasing and installing the accounting software. Then there are annual maintenance charges for using the software and also cost of upgrading the software to latest version which many small companies cannot afford.

Training:-

The accounting staff needs to be given training to use the accounting software which takes time and involves some costs. This is especially true in case of custom accounting software. The training time and cost can be reduced to great extent by using widely used standard software available in the market and hiring people who know how to use that particular software.

Computer Or Software Crash:-

Sometimes the computer or the accounting software may crash which wastes time as no accounting work can be performed till the computer or accounting software is restored.

Accounting Software:-

Following are some of the popular accounting software which are used by the companies:-

SAP:-

SAP stands for systems,Applications, products in data processing. SAP is a German software company. Large companies use the FICO module of SAP ERP software or the newer SAP S/4HANA software and small companies use SAP Business One software for accounting.

Tally:-

Tally ERP accounting software is created by Tally Solutions Pvt Ltd which is an Indian company. Tally ERP software is mostly used by small and medium-sized companies.

QuickBooks:-

QuickBooks accounting software is created by Intuit which is an American company. QuickBooks is mostly used by small and medium-sized sized companies.

In addition to above there are many other accounting software packages that are available in the market and used by the companies. Some companies also get custom accounting software developed according to their needs instead of using the standard ready-made accounting software which is available in the market.

 

 

 

 

 

 

 

 

 

 

Provisions and reserves

provisions and reserves

What Is A Provision?

Provision is an amount that is set aside to cover future uncertain, but probable expenses/losses or obligations that belong to the current accounting period. Provision is a charge against the income of current accounting period and ensures proper matching of income and expenses which helps in ascertaining the true profit or loss of the company for the period. There are specific expenses/losses or obligations that may arise in future but whose amount cannot be determined exactly. So a certain estimated amount is kept aside for them which is called as provision. Some of the examples of provisions are:-
– Provision for doubtful debts
– Provision for discount on debtors
– Provision for depreciation
– Provision for preference dividend
– Provision for taxation

What Is A Reserve?

Reserve is a part of profits of the company which is set aside and retained in the business for purposes such as expansion, working capital, issuing bonus shares,etc or some other specific purpose. Reserve is an appropriation of profits. There are two types of reserves:-
(1) Revenue reserve:-
Revenue reserve is created out of the profit earned by the company from its normal trading/operating activities. Revenue reserve can be used for general purposes such as expansion of business, increasing working capital,etc or for some specific purposes such as redemption of debentures, dividend equalization, etc.
(2) Capital reserve:-
Capital reserve is created out of the profit earned from activities such as sale of assets, revaluation of assets, issue of shares at premium,etc which are not the normal trading/operating activities of the company. Capital reserve can be used for purposes such as issue of bonus shares, writing off preliminary expenses, etc.

Difference Between Provision And Reserve:-

ProvisionReserve
It is a probable loss or obligation.It is a portion of profit.
It is a charge against profit as it is deducted from the income.It is an appropriation of profit as it is allocated to various heads.
It must be created irrespective of profit or loss.It can be created only if profits are earned.
True profit or loss cannot be ascertained without creating provision.True profit or loss can be ascertained even without creating reserve.
Profit or loss is affected by provision. Profit decreases after creating provision.Profit or loss is not affected by reserve. It is created after ascertaining profit.
The amount of provision does not belong to the owners i.e. shareholders.The amount of reserve belongs to the owners i.e. shareholders.
Provision is either shown on the assets side of balance sheet by way of deduction from the items for which it is created for e.g. provision for doubtful debts from debtors or on the liabilities side of balance sheet for e.g. provision for taxation.Reserve is shown on the liabilities side of balance sheet as Reserves and Surplus after share capital.

 

Contingent assets and liabilities

contingent assets and liabilities

What Is A Contingent Asset?

Contingent asset is a possible asset which arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events which are not wholly within the control of the company. It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the company. Contingent asset is not recognized and disclosed in financial statements as it may result in the recognition of gain that may never be realized. It is usually disclosed in the director’s report. When the realization of gain is certain then it does not remain a contingent asset but becomes an actual asset and is recognized and disclosed in the financial statements. An example of contingent asset would be the possibility to receive compensation from a lawsuit where the outcome of case and amount of compensation is not yet known.

What Is A Contingent Liability?

Contingent liability is a possible obligation which arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the company. It usually arises from unplanned or unexpected events that give rise to the possibility of an outflow of economic benefits from the company. Contingent liability is not recognized and disclosed in financial statements. It is disclosed by way of a note to the financial statements. When the incurring of loss is probable and the amount of loss can be estimated then it does not remain a contingent liability but becomes an actual liability and is recognized and disclosed in the financial statements as provision. Some of the examples of contingent liabilities are:-
– Lawsuit against the company in which the company may have to pay compensation where the outcome of case and amount of compensation is not yet known.     
– Possible penalty for copyright or patent infringement where the outcome of  case and amount of penalty is uncertain.
– Possible fine for not following a government law.
– Arrears of dividend on cumulative preference shares.
– Bills discounted but not yet matured.

There are some differences in disclosure and recognition of contingent assets and liabilities:-
Contingent assets are not required to be disclosed but contingent liabilities are required to be disclosed.
If contingent assets are disclosed, they are generally disclosed in the report of Board of Directors whereas contingent liabilities are disclosed by way of note to balance sheet.
Contingent assets are recognized as actual assets in the financial statements only if the realization of gain is certain whereas contingent liabilities are recognized as actual liabilities in the financial statements even if the incurring of loss is not certain but is probable and the amount of loss can be estimated.

Difference Between Contingent Asset And Other Asset And Contingent Liability And Other
Liability:-

Contingent
Asset
Other AssetContingent
Liability
Other Liability
It is a possible asset whose occurrence depends on an event which may or may not happen in future.It is a present asset which has already occurred because of the happening of a past event.It is a possible obligation whose occurrence depends on an event which may or may not happen in future.It is a present obligation which has already occurred because of the happening of a past event.
The inflow of economic benefits is not certain.The inflow of economic benefits is certain.The outflow of economic benefits is not certain.The outflow of economic benefits is certain.
It is not recognized and disclosed in financial statements.It is recognized and disclosed in financial statements.It is not recognized and disclosed in financial statements.It is recognized and disclosed in financial statements.
It is usually disclosed in the director’s report.It is disclosed on the assets side of balance sheet.It is disclosed by way of note to the balance sheet.It is disclosed on the liabilities side of balance sheet.

 

Accounting terms

Accounting terms

Following are some of the basic
accounting terms and their
explanation:-

Transaction:-

Transaction is a financial event that takes place in the course of business or for furtherance of business. It involves transfer of money or goods and services and is recorded in the books of accounts. For e.g. purchase of goods, sale of goods, cash deposit in bank, salary payment, etc.

Voucher:-

Voucher is a document which serves as an evidence or support to a transaction. For e.g. in case of credit purchase, purchase invoice or in case of cash purchase, cash memo. The vouchers act as source documents on the basis of which transactions are recorded in the books of accounts.

Entry:-

Entry is a recording made in the books of accounts in respect of a transaction that has taken place. Entries are passed in the books of accounts on the basis of vouchers.

Capital:-

Capital is the amount that is invested in the business by the owners. It also includes the assets that are brought into the business by the owners. In case of sole proprietorship, the owner is the sole proprietor himself. In case of partnership, the owners are the partners. In case of company, the owners are the shareholders. Profits (retained) are added to the capital and losses are deducted from the capital.

Drawings:-

Drawings are the total amount of cash or goods or any other assets that are withdrawn by the owner of business for his personal use. Drawings amount is deducted from the capital. Drawings are possible only in sole proprietorship and partnership form of business. There are restrictions on drawings in the company.

Asset:-

Asset is an item of economic value owned by a company with the expectation that it will provide future benefit to the company. There are two main types of assets:-
(1) Fixed asset:-
Fixed assets are the assets which are held by the company for a long period of time i.e. more than one accounting year. There are two types of fixed assets:-
(a) Tangible fixed assets:- Tangible fixed assets are the assets which can be physically verified i.e. seen and touched for e.g. land, building, machinery, furniture, etc.
(b) Intangible fixed assets:- Intangible fixed assets are the assets which cannot be physically verified i.e. seen and touched for e.g goodwill, patent, copyright, trademark, etc.
(2) Current asset:-
Current assets are the assets which are held by the company for a short period of time i.e. less than one accounting year. Some of the important examples of current assets are stock, trade debtors, sundry debtors, cash in hand, bank balance, prepaid expenses, loans and advances given by the company on short-term basis,etc.

Liability:-

Liability is the amount of money that the company owes to the outside parties. There are two main types of liabilities:-
(1) Long-term liabilities:-
Long-term liabilities are the liabilities that are due for re-payment after one accounting year. Some of the important examples of long-term liabilities are debentures, bonds, term loans from banks and financial institutions, fixed deposits issued by the company, etc.
(2) Current liabilities:-
Current liabilities are the liabilities that are due for re-payment within one accounting year. Some of the important examples of current liabilities are trade creditors, sundry creditors, outstanding expenses, loans and advances received by the company on short-term basis,etc.

Purchases:-

Purchases are the amount of goods bought by the company for resale or for use in the production of goods or rendering of services in the normal course of business. Purchases may be cash purchases or credit
purchases.
Total purchases = cash purchases + credit purchases

Sales:-

Sales are the amount of goods sold that are bought or manufactured by the company or services rendered by the company. Sales may be cash sales or credit sales.
Total sales = cash sales + credit sales

Purchase Return:-

When the goods are returned to the suppliers because of some defect or if the goods are not as per the specifications, it is called as purchase return. Purchase return is also called as return outward. Purchase returns are deducted from the amount of total purchases.

Sales Return:-

When the goods are returned by the customers because of some defect or if the goods are not as per their specifications, it is called as sales return. Sales return is also called as return inward. Sales returns are deducted from the amount of total sales.

Retained Earnings:-

Retained earnings is the portion of net profit of the company which is not paid out as dividend to the shareholders but retained by the company to reinvest in the business or to pay debt or to purchase some asset. Retained earnings is shown under the capital in the balance sheet. It is the sum of all the profits retained by the company since its inception.

 

Subsidiary books

Subsidiary books

What Are Subsidiary Books?

Subsidiary books are the subdivision of journal. The journal is sub-
divided in such a way that a separate book is used for each category of transactions which are similar in nature and are large in number. Subsidiary books are also called as special journals or day books.

Types Of Subsidiary Books:-

Following are the different types of  subsidiary books which are
generally opened by most companies:-
(1) Cash book
(2) Purchases book
(3) Sales book
(4) Purchase returns book
(5) Sales returns book
(6) Bills receivable book
(7) Bills payable book
(8) Journal proper

(1) Cash Book:-

Cash book is a book in which all the cash receipts and payments are recorded. Cash receipts are recorded on the debit side and cash payments are recorded on the credit side. There are four types of cash book:-
(i) Single column cash book:- Single column cash book has only one amount column on each side. All cash receipts are recorded on the debit side and all cash payments are recorded on credit side. So only cash receipts and cash payments are recorded in this book.
(ii) Double column cash book:- Double column cash book has two amount columns on each side i.e one for cash and other for discount. All cash receipts and cash discount allowed are recorded on the debit side and all cash payments and cash discount received are recorded on the credit side. So cash receipts and payments and discount received and allowed are recorded in this book.
(iii) Three column cash book:-Three column cash book has three amount columns on each side i.e one for cash, one for discount and one for bank. All cash receipts, cash discount allowed and bank deposits are recorded on the debit side and all cash payments, cash discount received and bank withdrawals are recorded on the credit side. So cash receipts and payments, discount allowed and received and bank deposits and withdrawals are recorded in this book.
(iv) Petty cash book:- Petty cash book is used to record only small petty cash expenses by the petty cashier. Petty cashier is the person who is authorized to make payments for petty cash expenses and to record them in petty cash book. In petty cash book, only cash receipts from the main cashier are recorded and not other receipts. Some of the examples of petty cash expenses are stationary expenses, conveyance expenses, office tea expenses, cartage, etc. So only cash receipts from main cashier and small payments of cash are recorded in this book.

(2) Purchases Book:-

Purchases book is used for recording the credit purchases of goods. Cash purchases are not recorded in this book. Purchase of any asset on cash or credit is also not recorded in this book. Purchases book is used only to record goods purchased on credit. The entries in purchase book are made on the basis of purchase invoices received from the suppliers.

(3) Sales Book:-

Sales book is used for recording the credit sales of goods. Cash sales are not recorded in this book. Sale of any asset on cash or credit is also not recorded in this book. Sales book is used only to record goods sold on credit. The entries in sales book are made on the basis of sales invoices issued to the customers.

(4) Purchase Returns Book:-

Purchase returns book is also called as return outwards book. It is used for recording the goods returned to the suppliers which were purchased on credit. Return of goods purchased on cash are not recorded in this book. Return of any asset purchased on cash or credit is also not recorded in this book. The entries in purchase returns book are usually made on the basis of debit notes issued to the suppliers or credit notes received from the suppliers.

(5) Sales Returns Book:-

Sales returns book is also called as return inwards book. It is used for recording the goods returned by the customers which were sold on credit. Return of goods sold on cash are not recorded in this book. Return of any asset sold on cash or credit is also not recorded in this book. The entries in sales returns book are usually made on the basis of credit notes issued to the customers or debit notes received from the customers.

(6) Bills Receivable Book:-

When the company sells goods on credit, the customer gives a guarantee to make payment in the future in the form of a bill. When the company receives such a bill, it is recorded in the bills receivable book as it will be the bill receivable for company and the company will receive payment in future against such bill.

(7) Bills Payable Book:-

When the company purchases goods on credit, it gives a guarantee to the supplier to make payment in future in the form of a bill. When the company issues such a bill, it is recorded in the bills payable book as it will be the bill payable for company and the company will make payment in future against such bill.

(8) Journal Proper:-

Journal proper is a book in which those transactions are recorded which cannot be recorded in any other subsidiary book. Following types of entries are usually recorded in journal proper:-
(i) Opening entries:- Opening entries are passed at the beginning of the financial year for bringing the balances of assets, liabilities and capital appearing in the balance sheet of previous year into the current financial year.
(ii) Closing entries:- Closing entries are passed at the end of the financial year for closing the nominal accounts by transferring them to the trading and profit and loss account.
(iii) Adjustment entries:- At the end of the financial year, adjustment entries are passed to bring unrecorded items such as closing stock, depreciation, outstanding and prepaid expenses, accrued income and income received in advance, bad debts, etc into the books of accounts.
(iv) Transfer entries:- Transfer entries are passed to transfer amount from one account to other account for e.g. transfer of net profit/net loss to the capital account or retained earnings account, transfer of drawings from drawings account to the capital account, etc.
(v) Rectifying entries:- Rectifying entries are passed to rectify the various errors committed while recording, posting, totaling, balancing, etc.
Some other types of entries which are recorded in journal proper are :-
– Credit purchases of assets
– Credit sales of assets
– Return of assets bought on credit
– Return of assets sold on credit
– Capital brought in kind by the proprietor
– Dishonor of bills receivable
– Cancellation of bills payable
– Withdrawal of goods by proprietor for personal use
– Goods distributed as free samples
– Goods lost by fire, theft, etc

 

 

Trade and cash discount

Trade and cash discount

What Is Trade Discount?

Trade discount is the reduction granted by the supplier/vendor from the list price of products/services on business considerations such as quantity bought, trade practices, etc. List price is also called as catalog price and it is the price that is printed on the product or in the catalog of products/services.

Example of trade discount:-

10 machines are sold at the list price of Rs 50000 each
Trade discount granted is 5%

calculate the trade discount amount and amount payable to supplier.

Solution:-

10 machines @ Rs 50000 each = Rs 500000
Trade discount @ 5% = Rs 25000
Amount payable to supplier = 500000 – 25000 = Rs 475000

What Is Cash Discount?

Cash discount is the reduction granted by the supplier/vendor from the invoice price of products/services in consideration for quick payment or payment within stipulated period.

Example of cash discount:-

In the trade discount example above,  lets say that the supplier is also willing to grant cash discount in addition to trade discount if the payment is made within specific period. Let us assume that he is willing to give a cash discount of 2% if the payment is made within 15 days and 1% if the payment is made within 30 days. No cash discount would be granted if the payment is made after 30 days.

Calculate the cash discount amount and amount payable to supplier if payment is made within 15 days, 30 days and after 30 days.

Solution:-

If payment is made within 15 days:-
10 machines @ Rs 475000
Cash discount @ 2% = Rs 9500
Amount payable to supplier = Rs 465500

If payment is made within 30 days:-
10 machines @ Rs 475000
Cash discount @ 1% = Rs 4750
Amount payable to supplier = Rs 470250

If payment is made after 30 days:-
10 machines @ Rs 475000
No cash discount in this case
Amount payable to supplier = Rs 475000

Difference Between Trade Discount And Cash Discount:-

Trade DiscountCash Discount
Trade discount is the reduction granted by vendor from the list price of products/services.Cash discount is the reduction granted by vendor from the invoice price of products/services.
Trade discount is granted to promote the sales.Cash discount is granted to promote the prompt payment
Trade discount is shown by the way of deduction in invoice.Cash discount is not shown on the invoice.
Trade discount account is not opened in the ledger.Cash discount account is opened in the ledger for discount received and discount allowed separately.
Trade discount may vary with the quantity purchased.Cash discount may vary with the period within which payment is made.

Capital and revenue receipts and expenditure

Capital and revenue receipts and expenditure
What Are Capital Receipts?

Capital receipts are the receipts which occur from activities which are not part of the normal trading activities of the company. They do not arise from the operating activities of business. Capital receipts are non-recurring in nature and generally appear as liabilities in the balance sheet.

Examples Of Capital Receipts:-

Following are some of the common examples of capital receipts:-

  • Money received from shareholders
  • Money received from debenture holders
  • Loans raised
  • Sale of plant and machinery
  • Sale of investments
  • Insurance claim for machinery damaged

What Are Revenue Receipts?

Revenue receipts are the receipts which occur from activities which are part of the normal trading activities of the company. They arise from the operating activities of business. Revenue receipts are recurring in nature and generally appear as income on the credit side of trading and profit and loss account.

Examples Of Revenue Receipts:-

Following are some of the common examples of revenue receipts:-

  • Sale of goods and services
  • Interest on investments
  • Rent received
  • Commission received
  • Insurance claim for stock damaged

Difference Between Capital Receipts And Revenue Receipts:-

Capital ReceiptsRevenue Receipts
Capital receipts arise from the non-operating activities of the company.Revenue receipts occur from the operating activities of the company.
Capital receipts are non-recurring and non-continuing in nature.Revenue receipts are recurring and continuing in nature.
Capital receipts usually appear on the liabilities side of balance sheet.Revenue receipts usually appear on the credit side of trading and profit and loss account.

What Is Capital Expenditure?

Capital expenditure is the expenditure which in incurred to acquire a fixed asset which increases the productivity or earning capacity of the company. Such expenditure normally yields benefit beyond the current accounting period. Capital expenditure is generally of a one-off kind but its benefit is derived over several accounting periods. Capital expenditure appears generally as assets in the balance sheet. Capital expenditure is non-recurring in nature.

Examples Of Capital Expenditure:-

Following are some of the common examples of capital expenditure:-

  • Cost of machinery purchased
  • Installation charges of machinery purchased
  • Customs duty on imported machinery
  • Expenses on a foreign tour to purchase machinery
  • Legal expenses to acquire a building
  • Expenses to obtain a license for starting a factory
  • Cost of improvement in electric wiring system
  • Purchase of a patent right
  • Purchase of technical know-how
  • Repair of a second-hand machine before put to use.

What Is Revenue Expenditure?

Revenue expenditure is the expenditure which is incurred to carry out the normal day-to-day activities of the company. They are incurred to maintain existing productivity or earning capacity of the company. Revenue expenditure does not yield benefit beyond the current accounting period. Revenue expenditure appears generally as expenses on the debit side of trading and profit and loss account. Revenue expenditure is recurring in nature.

Examples Of Revenue Expenditure:-

Following are some of the common examples of revenue expenditure:-

  • Depreciation on assets
  • Repairs of machine after it is put to use
  • Annual maintenance charges of the machine
  • Rent paid
  • Interest paid
  • Commission paid
  • Salary paid
  • Insurance premium

Difference Between Capital Expenditure and Revenue Expenditure:-

Capital ExpenditureRevenue Expenditure
Capital expenditure is incurred in acquiring fixed assets. Revenue expenditure is incurred in carrying out normal day-to-day activities of business.
Capital expenditure is non-recurring and non-continuing in nature.Revenue expenditure is recurring and continuing in nature.
Capital expenditure helps in increasing the productivity or earning capacity of the company.Revenue expenditure helps in maintaining the existing productivity or earning capacity of the company.
Benefit of capital expenditure extends to many accounting periods.Benefit of revenue expenditure does not extend beyond the current accounting period.
Capital expenditure usually appears on the assets side of balance sheet.Revenue expenditure usually appears on the debit side of profit and loss account.

What Is Deferred Revenue Expenditure?

Deferred revenue expenditure is the expenditure for which payment has been made or a liability has been incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods. It is an expenditure which is, for the time being, deferred from being charged to income. Deferred revenue expenditure appears in both the trading and profit and loss account and the balance sheet. The written off portion of deferred revenue expenditure appears on the debit side of trading and profit and loss account while the un-written portion of deferred revenue expenditure appears on the assets side of balance sheet.

Examples Of Deferred Revenue Expenditure:-

Following are some of the common examples of deferred revenue expenditure:-

  • Preliminary expenses which are incurred at the time of starting the company
  • Heavy advertising expenses to launch a new product the benefit of which will come in the future years
  • Discount on issue of shares
  • Research and development expenses