specific entries 2
- Bills of Exchange
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is called income received in advance or unearned income.
For example: If we recover Rs 2,50,000 on account of rent against a let out building with rent of Rs 20,000 per month, then Rs 10,000 (i.e. 2,50,000 − 2,40,000) is income received in advance. It is recorded with the help of following Journal
Objectives
After going through this lesson, you shall be able to understand the concept related to 'Entries for some specific transactions'.
Some Specific Entries
Bad Debts: If any amount that was recoverable is not realised or is partially realised, then the amount not realised is a loss to the business and is regarded as Bad Debts. It is recorded as follows.
(1) When the full amount is not recovered
(2) When part of debt is not recovered
Example : Amit who owed us Rs 10,000 has become insolvent. He pays a compensation of 70 paisa in a rupee.
Solution
Bad Debts Recovered: Sometimes, bad debts previously written off are subsequently recovered. In such cases, the amount so received is a gain to the business as it was written off as loss earlier. The entry for this is:
Exam8,000.
Solution
Interest on Capital: Interest on capital is an expense for the business, so it is charged from the profits of the firm. The balance profits are the real profits of the firm and represent the true efficiency of the business. And according to the rules of accounting, interest being an expense for the business will be debited (increase in the expenses) while it is a gain for the proprietor in the form of increased capital. As we know, decrease in capital is debited and increase is credited, so the increase in capital will be credited. It is recorded as follows.
Interest on Drawings: Business not only allows interest on capital but also charges for the drawings made by the proprietor. Such an interest is an income for the business and loss for the proprietor. It is recorded as follows.
In the above entry, interest on drawings being income for the business is credited as increase in income and gains is credited while Drawings Account being representative account of capital account is debited as capital is decreasing by the amount of interest being charged. Here, drawings account has been used instead capital account just to make accounts more comprehensible and specific even though use of capital account is not wrong.
Loss by Theft or Fire: The business may incur losses due to theft or fire at its place of business. In both the cases, the real outcome will be loss to the business.
In the above entry, Loss by Theft or Fire Account is debited as loss is an expense which is increasing and accordingly it is debited. And Purchases Account will be credited because stock decreases with the value of loss of goods.
The actual amount of loss and its treatment varies with the situation and is as follows.
1) When goods are fully insured, loss is borne by the insurance company
In case the goods are insured, then loss by theft or fire is made good by the insurance company. In such cases, insurance company or insurance claim becomes the asset for the firm and will make payment in future. Now, till the time amount is received it is shown as an asset in the Balance Sheet. Due to such loss, stock of goods gets reduced so it is credited and Insurance Claim Account or Insurance Company Account, being increase in asset, is debited. The entry for this is as follows.
2) When goods are not insured
In case the goods are not insured, then whole of the loss is transferred to Profit & Loss Account as it is borne by the firm itself. It is recorded with help of following Journal Entry.
3) When goods are partly insured
In case the goods are partly insured, then the treatment would be a combination of treatments as if they are insured and if they are uninsured. This will be recorded as follows.
In the above entry, the share of loss borne by the insurance company is debited to Insurance Company Account with the amount due to be received from insurance company and the remaining loss borne by the firm is debited to the Profit and Loss Account.
Note: In the above cases, when the amount due from the insurance company, in respect of insurance claim, is received, it is journalised as follows
Objectives
After going through this lesson, you shall be able to understand the concept related to 'Entries for some specific transactions'.
Some Specific Entries
Bad Debts: If any amount that was recoverable is not realised or is partially realised, then the amount not realised is a loss to the business and is regarded as Bad Debts. It is recorded as follows.
(1) When the full amount is not recovered
(2) When part of debt is not recovered
Example : Amit who owed us Rs 10,000 has become insolvent. He pays a compensation of 70 paisa in a rupee.
Solution
Bad Debts Recovered: Sometimes, bad debts previously written off are subsequently recovered. In such cases, the amount so received is a gain to the business as it was written off as loss earlier. The entry for this is:
Example : Received cash against bad debts written off last year Rs 8,000.
Solution
Outstanding expenses: The expenses which should have been paid during the current year but have not been paid due to some reasons are termed as outstanding expenses.
For example, if an employee is paid salary at the rate of Rs 1,000 per month and during the year payment for only 11 months has been done then the salary for remaining one month will be termed as outstanding salary and it will be recorded as follows.
In the above entry, Outstanding Salaries Account is a liability. And since they are increasing, they have been credited. Salaries Account is an expense for the current period. It is immaterial whether it has been paid or not and as it is increasing, it will be debited.
Prepaid expenses: These expenses are related to the next year but have been paid during the current year in advance. The benefit of these expenses will be received during the next accounting period.
For example, insurance premium amounting to Rs 6,000 has been paid on July 01, 2013 for one year and the books are closed on Dec. 31 every year. This means premium for six months relates to next accounting period or insurance premium for 6 months is prepaid i.e. Rs 3,000. The entry for recording such expense is:
In the above entry, insurance premium relating to next year has been paid in advance in the current year the benefits of which will be received in the next year. So, it is an asset for the firm. As increase in the assets is debited, Prepaid Insurance Account has been debited with the respective amount. On the other hand, insurance being an expense for the firm if separated from prepaid insurance will decrease and as decrease in expenses is credited, Insurance Account will be credited.
Accrued Income or Income Earned but not Received: Income which is earned but not received is called accrued income. It is different from outstanding income.
For example, Mr. A receives his salary after every two months. This means if he works for two months say, November and December, then he will receive salary of these two months on 1st January. So, in this case salary for the month of November is regarded as accrued income on December 01. It is because although it has been earned but it is still not due for payment. It is recorded with the help of following Journal Entry.
Income Received in Advance or Unearned Income: Income received but not earned during the accounting period is called income received in advance or unearned income.
For example: If we recover Rs 2,50,000 on account of rent against a let out building with rent of Rs 20,000 per month, then Rs 10,000 (i.e. 2,50,000 − 2,40,000) is income received in advance. It is recorded with the help of following Journal Entry.
Following transactions are based on compound entry, opening entry, trade discount and cash discount, as discussed in the previous class.
1.Received ₹1250 from Raman in full settlement of his account for ₹ 1300.
2. Paid ₹ 370 to Ram in full settlement of his account for ₹ 400.
3..Cheque received from Shyam ₹1120 in full settlement of ₹1200. Cheque is deposited on the same date.
5. Sold goods to Pankaj at a list price of ₹ 50000 less 20% trade discount.
6. Pankaj returned goods of the list price of ₹ 4,000.
7. Received from Pankaj the amount due from him under a cash discount of 5%.
8. Bought goods for cash of the list price ₹100000 at 20% trade discount and 5% cash discount.
9. Sold goods for cash of the list price ₹ 20000 at 10% trade discount and 3% cash discount.
10. Bought goods from Nupur for ₹ 200000 at 5% cash discount and 10% trade discount. Half the amount paid by cheque at the time of purchase.
11. Sold goods to Anuradha for ₹ 100000 on terms 10% trade discount and 5% cash discount if the payment is received within 15 days. 80% payment is received within the time frame by cheque.
12. Purchased goods costing ₹ 100000 from Sahil & Co. Paid 60% immediately by cheque to avail 5% discount.
Interest on Capital: Interest on capital is an expense for the business, so it is charged from the profits of the firm. The balance profits are the real profits of the firm and represent the true efficiency of the business. And according to the rules of accounting, interest being an expense for the business will be debited (increase in the expenses) while it is a gain for the proprietor in the form of increased capital. As we know, decrease in capital is debited and increase is credited, so the increase in capital will be credited. It is recorded as follows.
Interest on Drawings: Business not only allows interest on capital but also charges for the drawings made by the proprietor. Such an interest is an income for the business and loss for the proprietor. It is recorded as follows.
In the above entry, interest on drawings being income for the business is credited as increase in income and gains is credited while Drawings Account being representative account of capital account is debited as capital is decreasing by the amount of interest being charged. Here, drawings account has been used instead capital account just to make accounts more comprehensible and specific even though use of capital account is not wrong.
Loss by Theft or Fire: The business may incur losses due to theft or fire at its place of business. In both the cases, the real outcome will be loss to the business.
In the above entry, Loss by Theft or Fire Account is debited as loss is an expense which is increasing and accordingly it is debited. And Purchases Account will be credited because stock decreases with the value of loss of goods.
The actual amount of loss and its treatment varies with the situation and is as follows.
1) When goods are fully insured, loss is borne by the insurance company
In case the goods are insured, then loss by theft or fire is made good by the insurance company. In such cases, insurance company or insurance claim becomes the asset for the firm and will make payment in future. Now, till the time amount is received it is shown as an asset in the Balance Sheet. Due to such loss, stock of goods gets reduced so it is credited and Insurance Claim Account or Insurance Company Account, being increase in asset, is debited. The entry for this is as follows.
2) When goods are not insured
In case the goods are not insured, then whole of the loss is transferred to Profit & Loss Account as it is borne by the firm itself. It is recorded with help of following Journal Entry.
3) When goods are partly insured
In case the goods are partly insured, then the treatment would be a combination of treatments as if they are insured and if they are uninsured. This will be recorded as follows.
In the above entry, the share of loss borne by the insurance company is debited to Insurance Company Account with the amount due to be received from insurance company and the remaining loss borne by the firm is debited to the Profit and Loss Account.
Note: In the above cases, when the amount due from the insurance company, in respect of insurance claim, is received, it is journalised as follows.
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Goods and Services Tax (GST): It is an indirect tax which has integrated various taxes like Sales tax, excise tax, VAT, etc., into one single tax for the entire nation. By replacing the various archaic tax structures, GST is levied at every stage of the supply chain of the goods or services from production to the last retail level. GST has been discussed in detail in previous chapter. The accounting treatment of GST in the books of accounts is as follows:
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Income Tax: The profits of business in case of sole proprietorship and partnership firm are subject to income tax which is to be paid by the proprietor. So, the payment of income tax is recorded by debiting the Capital Account. The Journal Entry for the same is:
And in case refund is received due to excess tax paid to income tax department, this increases the cash balance and the capital balance simultaneously. So, this will be recorded as follows:
Note: The same will be the treatment in case any interest is received on advance payment of income tax as it will increase the cash as well as capital balance.
Treatment of Value Paid Parcel (VPP): VPP is same as purchase of goods, difference lies in the method of sale. Seller sends the goods through Post Office. Buyer pays the value of goods to the Post Office and gets the delivery of goods. In this case too, Purchases Account will be debited as we do in case of purchase of goods. Suppose, MN Ltd. received a VPP for goods worth Rs 570 and sent an employee with Rs 600 for the collection of goods. The employee paid Rs 15 for the conveyance and returned the balance.
Solution:
Receiving VPP means purchasing goods, so Purchases A/c will be debited for the purchases. Conveyance charges, being a part of cartage, are expenses so it will be debited.
Some Miscellaneous Transactions
Depreciation: It is permanent and continuing decrease in the value of an asset on account of wear and tear and passage of time. It is a loss for the business and we know that increase in expenses and losses are debited, so Depreciation Account will be debited while the asset being depreciated gets reduced, so it will be credited (decrease in assets is credited).
For Example, Provide 10% depreciation on furniture costing Rs 30,000. It will be recorded as follows.
Here, depreciation being loss for business is increasing, so is debited while furniture being asset for the business is decreasing and accordingly it is credited (decrease in assets is credited)
Distribution of goods as free samples: Goods may be distributed as free samples as a tool for advertising just to increase the sales. Samples Account is of the same nature as that of Advertisement Account. And it is recorded by passing the following Journal Entry.
Here, distribution of goods for free is an expense for the business and as the expenses are increasing, this account will be debited and on the other side distribution of goods reduces our stock. So, it will be proper to credit Purchases Account.
Goods used to make an Asset: When goods are used to make/construct an asset, value of the asset increases. Therefore, Asset Account is debited. The entry for this is:
Treatment of Goods withdrawn for personal use: We already know that the entity of a business is separate from its owners so any goods withdrawn by the owner for his/her personal use is debited to an account by the name of drawings. If need be, the businesses providing interest on capital may as well charge interest on drawings which constitutes an income for the business. For e.g.: Ramesh owns Elegant enterprises which purchases clothes for sale so if he withdraws clothes for his family then it will be considered as drawings by him. The accounting treatment for drawings is as follows.
Expenditure on the Installation of Machinery and on the Construction of Building: Machinery and Building are the fixed assets of a business. Any expenditure incurred on the carriage and installation of machinery like freight, wages etc. is treated as ‘Capital Expenditure’ and therefore, increases the cost of the asset and is debited to the Particular Asset Account and not to the Particular Expense Account. Like, expenditure incurred for the construction of building such as purchase of building material and payment of wages are also capital expenditures and debited to Building Account. The entry for recording these expenses is:
Objectives
After going through this lesson, you shall be able to understand the concept related to 'Entries for some specific transactions'.
Some Specific Entries
Bad Debts: If any amount that was recoverable is not realised or is partially realised, then the amount not realised is a loss to the business and is regarded as Bad Debts. It is recorded as follows.
(1) When the full amount is not recovered
(2) When part of debt is not recovered
Example : Amit who owed us Rs 10,000 has become insolvent. He pays a compensation of 70 paisa in a rupee.
Solution
Bad Debts Recovered: Sometimes, bad debts previously written off are subsequently recovered. In such cases, the amount so received is a gain to the business as it was written off as loss earlier. The entry for this is:
Example : Received cash against bad debts written off last year Rs 8,000.
Solution
Outstanding expenses: The expenses which should have been paid during the current year but have not been paid due to some reasons are termed as outstanding expenses.
For example, if an employee is paid salary at the rate of Rs 1,000 per month and during the year payment for only 11 months has been done then the salary for remaining one month will be termed as outstanding salary and it will be recorded as follows.
In the above entry, Outstanding Salaries Account is a liability. And since they are increasing, they have been credited. Salaries Account is an expense for the current period. It is immaterial whether it has been paid or not and as it is increasing, it will be debited.
Prepaid expenses: These expenses are related to the next year but have been paid during the current year in advance. The benefit of these expenses will be received during the next accounting period.
For example, insurance premium amounting to Rs 6,000 has been paid on July 01, 2013 for one year and the books are closed on Dec. 31 every year. This means premium for six months relates to next accounting period or insurance premium for 6 months is prepaid i.e. Rs 3,000. The entry for recording such expense is:
In the above entry, insurance premium relating to next year has been paid in advance in the current year the benefits of which will be received in the next year. So, it is an asset for the firm. As increase in the assets is debited, Prepaid Insurance Account has been debited with the respective amount. On the other hand, insurance being an expense for the firm if separated from prepaid insurance will decrease and as decrease in expenses is credited, Insurance Account will be credited.
Accrued Income or Income Earned but not Received: Income which is earned but not received is called accrued income. It is different from outstanding income.
For example, Mr. A receives his salary after every two months. This means if he works for two months say, November and December, then he will receive salary of these two months on 1st January. So, in this case salary for the month of November is regarded as accrued income on December 01. It is because although it has been earned but it is still not due for payment. It is recorded with the help of following Journal Entry.
Income Received in Advance or Unearned Income: Income received but not earned during the accounting period is called income received in advance or unearned income.
For example: If we recover Rs 2,50,000 on account of rent against a let out building with rent of Rs 20,000 per month, then Rs 10,000 (i.e. 2,50,000 − 2,40,000) is income received in advance. It is recorded with the help of following Journal Entry.
Interest on Capital: Interest on capital is an expense for the business, so it is charged from the profits of the firm. The balance profits are the real profits of the firm and represent the true efficiency of the business. And according to the rules of accounting, interest being an expense for the business will be debited (increase in the expenses) while it is a gain for the proprietor in the form of increased capital. As we know, decrease in capital is debited and increase is credited, so the increase in capital will be credited. It is recorded as follows.
Interest on Drawings: Business not only allows interest on capital but also charges for the drawings made by the proprietor. Such an interest is an income for the business and loss for the proprietor. It is recorded as follows.
In the above entry, interest on drawings being income for the business is credited as increase in income and gains is credited while Drawings Account being representative account of capital account is debited as capital is decreasing by the amount of interest being charged. Here, drawings account has been used instead capital account just to make accounts more comprehensible and specific even though use of capital account is not wrong.
Loss by Theft or Fire: The business may incur losses due to theft or fire at its place of business. In both the cases, the real outcome will be loss to the business.
In the above entry, Loss by Theft or Fire Account is debited as loss is an expense which is increasing and accordingly it is debited. And Purchases Account will be credited because stock decreases with the value of loss of goods.
The actual amount of loss and its treatment varies with the situation and is as follows.
1) When goods are fully insured, loss is borne by the insurance company
In case the goods are insured, then loss by theft or fire is made good by the insurance company. In such cases, insurance company or insurance claim becomes the asset for the firm and will make payment in future. Now, till the time amount is received it is shown as an asset in the Balance Sheet. Due to such loss, stock of goods gets reduced so it is credited and Insurance Claim Account or Insurance Company Account, being increase in asset, is debited. The entry for this is as follows.
2) When goods are not insured
In case the goods are not insured, then whole of the loss is transferred to Profit & Loss Account as it is borne by the firm itself. It is recorded with help of following Journal Entry.
3) When goods are partly insured
In case the goods are partly insured, then the treatment would be a combination of treatments as if they are insured and if they are uninsured. This will be recorded as follows.
In the above entry, the share of loss borne by the insurance company is debited to Insurance Company Account with the amount due to be received from insurance company and the remaining loss borne by the firm is debited to the Profit and Loss Account.
Note: In the above cases, when the amount due from the insurance company, in respect of insurance claim, is received, it is journalised as follows.
Goods and Services Tax (GST): It is an indirect tax which has integrated various taxes like Sales tax, excise tax, VAT, etc., into one single tax for the entire nation. By replacing the various archaic tax structures, GST is levied at every stage of the supply chain of the goods or services from production to the last retail level. GST has been discussed in detail in previous chapter. The accounting treatment of GST in the books of accounts is as follows:
Income Tax: The profits of business in case of sole proprietorship and partnership firm are subject to income tax which is to be paid by the proprietor. So, the payment of income tax is recorded by debiting the Capital Account. The Journal Entry for the same is:
And in case refund is received due to excess tax paid to income tax department, this increases the cash balance and the capital balance simultaneously. So, this will be recorded as follows:
Note: The same will be the treatment in case any interest is received on advance payment of income tax as it will increase the cash as well as capital balance.
Treatment of Value Paid Parcel (VPP): VPP is same as purchase of goods, difference lies in the method of sale. Seller sends the goods through Post Office. Buyer pays the value of goods to the Post Office and gets the delivery of goods. In this case too, Purchases Account will be debited as we do in case of purchase of goods. Suppose, MN Ltd. received a VPP for goods worth Rs 570 and sent an employee with Rs 600 for the collection of goods. The employee paid Rs 15 for the conveyance and returned the balance.
Solution:
Receiving VPP means purchasing goods, so Purchases A/c will be debited for the purchases. Conveyance charges, being a part of cartage, are expenses so it will be debited.
Some Miscellaneous Transactions
Depreciation: It is permanent and continuing decrease in the value of an asset on account of wear and tear and passage of time. It is a loss for the business and we know that increase in expenses and losses are debited, so Depreciation Account will be debited while the asset being depreciated gets reduced, so it will be credited (decrease in assets is credited).
For Example, Provide 10% depreciation on furniture costing Rs 30,000. It will be recorded as follows.
Here, depreciation being loss for business is increasing, so is debited while furniture being asset for the business is decreasing and accordingly it is credited (decrease in assets is credited)
Distribution of goods as free samples: Goods may be distributed as free samples as a tool for advertising just to increase the sales. Samples Account is of the same nature as that of Advertisement Account. And it is recorded by passing the following Journal Entry.
Here, distribution of goods for free is an expense for the business and as the expenses are increasing, this account will be debited and on the other side distribution of goods reduces our stock. So, it will be proper to credit Purchases Account.
Goods used to make an Asset: When goods are used to make/construct an asset, value of the asset increases. Therefore, Asset Account is debited. The entry for this is:
Treatment of Goods withdrawn for personal use: We already know that the entity of a business is separate from its owners so any goods withdrawn by the owner for his/her personal use is debited to an account by the name of drawings. If need be, the businesses providing interest on capital may as well charge interest on drawings which constitutes an income for the business. For e.g.: Ramesh owns Elegant enterprises which purchases clothes for sale so if he withdraws clothes for his family then it will be considered as drawings by him. The accounting treatment for drawings is as follows.
Expenditure on the Installation of Machinery and on the Construction of Building: Machinery and Building are the fixed assets of a business. Any expenditure incurred on the carriage and installation of machinery like freight, wages etc. is treated as ‘Capital Expenditure’ and therefore, increases the cost of the asset and is debited to the Particular Asset Account and not to the Particular Expense Account. Like, expenditure incurred for the construction of building such as purchase of building material and payment of wages are also capital expenditures and debited to Building Account. The entry for recording these expenses is:
For example: If we recover Rs 2,50,000 on account of rent against a let out building with rent of Rs 20,000 per month, then Rs 10,000 (i.e. 2,50,000 − 2,40,000) is income received in advance. It is recorded with the help of following Journal
Recording of Transactions - I
Specific Entries:
Objectives
After going through this lesson, you shall be able to understand the concept related to 'Entries for some specific transactions'.
Some Specific Entries
Bad Debts: If any amount that was recoverable is not realised or is partially realised, then the amount not realised is a loss to the business and is regarded as Bad Debts. It is recorded as follows.
(1) When the full amount is not recovered
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Bad Debts A/c |
Dr.
| xxx | |||
| To Debtor’s A/c | xxx | ||||
| (Amount not recovered written off as bad debts) | |||||
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash A/c |
Dr.
| xxx | |||
| Bad Debts A/c |
Dr.
| xxx | |||
| To Debtor’s A/c | xxx | ||||
| (Amount recovered and balance written off as bad debts) | |||||
Example : Amit who owed us Rs 10,000 has become insolvent. He pays a compensation of 70 paisa in a rupee.
Solution
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash A/c |
Dr.
| 7,000 | |||
| Bad Debts A/c | 3,000 | ||||
| To Amit’s A/c | 10,000 | ||||
| (Amount recovered and balance written off as bad debts) | |||||
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash or Bank A/c |
Dr.
| xxx | |||
| To Bad Debts Recovered A/c | xxx | ||||
| (Amount recovered previously written off as bad debts) | |||||
Solution
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
AAmoun
| |
| d | |||||
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Interest on Capital A/c |
Dr.
| xxx | |||
| To Capital A/c | xxx | ||||
| (Interest on capital provided) | |||||
Interest on Drawings: Business not only allows interest on capital but also charges for the drawings made by the proprietor. Such an interest is an income for the business and loss for the proprietor. It is recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Drawings A/c |
Dr.
| xxx | |||
| To Interest on Drawings A/c | xxx | ||||
| (Interest on drawings charged) | |||||
Loss by Theft or Fire: The business may incur losses due to theft or fire at its place of business. In both the cases, the real outcome will be loss to the business.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Loss by Theft or Fire A/c |
Dr.
| xxx | |||
| To Purchases A/c | xxx | ||||
| (Loss of goods by theft or fire) | |||||
The actual amount of loss and its treatment varies with the situation and is as follows.
1) When goods are fully insured, loss is borne by the insurance company
In case the goods are insured, then loss by theft or fire is made good by the insurance company. In such cases, insurance company or insurance claim becomes the asset for the firm and will make payment in future. Now, till the time amount is received it is shown as an asset in the Balance Sheet. Due to such loss, stock of goods gets reduced so it is credited and Insurance Claim Account or Insurance Company Account, being increase in asset, is debited. The entry for this is as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Insurance Co. or Insurance Claim A/c |
Dr.
| xxx | |||
| To Loss by Theft or Fire A/c | xxx | ||||
| (Loss of goods by theft or fire) | |||||
2) When goods are not insured
In case the goods are not insured, then whole of the loss is transferred to Profit & Loss Account as it is borne by the firm itself. It is recorded with help of following Journal Entry.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Profit & Loss A/c |
Dr.
| xxx | |||
| To Loss by Theft or Fire A/c | xxx | ||||
| (Loss transferred to P & L A/c) | |||||
3) When goods are partly insured
In case the goods are partly insured, then the treatment would be a combination of treatments as if they are insured and if they are uninsured. This will be recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Insurance Co. or Insurance Claim A/c |
Dr.
| xxx | |||
| Profit & Loss A/c |
Dr.
| xxx | |||
| To Loss by Theft or Fire A/c | xxx | ||||
| (Claim received for Loss of goods by theft or fire and remaining loss transferred to P & L A/c) | |||||
Note: In the above cases, when the amount due from the insurance company, in respect of insurance claim, is received, it is journalised as follows
- Sample Papers
- Live Test Series
- Introduction to Accounting
- Theory Base of Accounting
- Goods and Services Tax (GST)
- Recording of Transactions - I
- Recording of Transactions - II
- Bank Reconciliation Statement
- Trial Balance and Rectification of Errors
- Depreciation, Provisions and Reserves
- Bills of Exchange
Recording of Transactions - I
Specific Entries:
Objectives
After going through this lesson, you shall be able to understand the concept related to 'Entries for some specific transactions'.
Some Specific Entries
Bad Debts: If any amount that was recoverable is not realised or is partially realised, then the amount not realised is a loss to the business and is regarded as Bad Debts. It is recorded as follows.
(1) When the full amount is not recovered
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Bad Debts A/c |
Dr.
| xxx | |||
| To Debtor’s A/c | xxx | ||||
| (Amount not recovered written off as bad debts) | |||||
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash A/c |
Dr.
| xxx | |||
| Bad Debts A/c |
Dr.
| xxx | |||
| To Debtor’s A/c | xxx | ||||
| (Amount recovered and balance written off as bad debts) | |||||
Example : Amit who owed us Rs 10,000 has become insolvent. He pays a compensation of 70 paisa in a rupee.
Solution
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash A/c |
Dr.
| 7,000 | |||
| Bad Debts A/c | 3,000 | ||||
| To Amit’s A/c | 10,000 | ||||
| (Amount recovered and balance written off as bad debts) | |||||
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash or Bank A/c |
Dr.
| xxx | |||
| To Bad Debts Recovered A/c | xxx | ||||
| (Amount recovered previously written off as bad debts) | |||||
Solution
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash A/c |
Dr.
| 8,000 | |||
| To Bad Debts Recovered A/c | 8,000 | ||||
| (Amount recovered previously written off as bad debts) | |||||
Outstanding expenses: The expenses which should have been paid during the current year but have not been paid due to some reasons are termed as outstanding expenses.
For example, if an employee is paid salary at the rate of Rs 1,000 per month and during the year payment for only 11 months has been done then the salary for remaining one month will be termed as outstanding salary and it will be recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Salaries A/c |
Dr.
| 1,000 | |||
| To Outstanding Salaries A/c | 1,000 | ||||
| (Salaries remained unpaid) | |||||
Prepaid expenses: These expenses are related to the next year but have been paid during the current year in advance. The benefit of these expenses will be received during the next accounting period.
For example, insurance premium amounting to Rs 6,000 has been paid on July 01, 2013 for one year and the books are closed on Dec. 31 every year. This means premium for six months relates to next accounting period or insurance premium for 6 months is prepaid i.e. Rs 3,000. The entry for recording such expense is:
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Prepaid Insurance A/c |
Dr.
| 3,000 | |||
| To Insurance A/c | 3,000 | ||||
| (Insurance paid in advance) | |||||
Accrued Income or Income Earned but not Received: Income which is earned but not received is called accrued income. It is different from outstanding income.
For example, Mr. A receives his salary after every two months. This means if he works for two months say, November and December, then he will receive salary of these two months on 1st January. So, in this case salary for the month of November is regarded as accrued income on December 01. It is because although it has been earned but it is still not due for payment. It is recorded with the help of following Journal Entry.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Accrued Income A/c |
Dr.
| ||||
| To Income A/c | |||||
| (Income earned but not yet due) | |||||
Income Received in Advance or Unearned Income: Income received but not earned during the accounting period is called income received in advance or unearned income.
For example: If we recover Rs 2,50,000 on account of rent against a let out building with rent of Rs 20,000 per month, then Rs 10,000 (i.e. 2,50,000 − 2,40,000) is income received in advance. It is recorded with the help of following Journal Entry.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Income A/c |
Dr.
| ||||
| To Income Received in Advance A/c | |||||
| (Income earned but not yet due) | |||||
DO THE ASSIGNMENT # 11
Following transactions are based on compound entry, opening entry, trade discount and cash discount, as discussed in the previous class.
1.Received ₹1250 from Raman in full settlement of his account for ₹ 1300.
2. Paid ₹ 370 to Ram in full settlement of his account for ₹ 400.
3..Cheque received from Shyam ₹1120 in full settlement of ₹1200. Cheque is deposited on the same date.
4. The following balances existed in the books of Shyam traders as on 1st April, 2019. Pass the opening entry.
Assets: Cash ₹100000, Debtors ₹40000 (Amit ₹ 12000, Shyam, ₹ 17000, Kapil ₹ 11000), Furniture ₹ 20,000, Plant and machinery ₹ 70000
Liabilities: Creditors ₹ 55000, Bank Loan ₹ 30000.
Assets: Cash ₹100000, Debtors ₹40000 (Amit ₹ 12000, Shyam, ₹ 17000, Kapil ₹ 11000), Furniture ₹ 20,000, Plant and machinery ₹ 70000
Liabilities: Creditors ₹ 55000, Bank Loan ₹ 30000.
5. Sold goods to Pankaj at a list price of ₹ 50000 less 20% trade discount.
6. Pankaj returned goods of the list price of ₹ 4,000.
7. Received from Pankaj the amount due from him under a cash discount of 5%.
8. Bought goods for cash of the list price ₹100000 at 20% trade discount and 5% cash discount.
9. Sold goods for cash of the list price ₹ 20000 at 10% trade discount and 3% cash discount.
10. Bought goods from Nupur for ₹ 200000 at 5% cash discount and 10% trade discount. Half the amount paid by cheque at the time of purchase.
11. Sold goods to Anuradha for ₹ 100000 on terms 10% trade discount and 5% cash discount if the payment is received within 15 days. 80% payment is received within the time frame by cheque.
12. Purchased goods costing ₹ 100000 from Sahil & Co. Paid 60% immediately by cheque to avail 5% discount.
Interest on Capital: Interest on capital is an expense for the business, so it is charged from the profits of the firm. The balance profits are the real profits of the firm and represent the true efficiency of the business. And according to the rules of accounting, interest being an expense for the business will be debited (increase in the expenses) while it is a gain for the proprietor in the form of increased capital. As we know, decrease in capital is debited and increase is credited, so the increase in capital will be credited. It is recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Interest on Capital A/c |
Dr.
| xxx | |||
| To Capital A/c | xxx | ||||
| (Interest on capital provided) | |||||
Interest on Drawings: Business not only allows interest on capital but also charges for the drawings made by the proprietor. Such an interest is an income for the business and loss for the proprietor. It is recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Drawings A/c |
Dr.
| xxx | |||
| To Interest on Drawings A/c | xxx | ||||
| (Interest on drawings charged) | |||||
Loss by Theft or Fire: The business may incur losses due to theft or fire at its place of business. In both the cases, the real outcome will be loss to the business.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Loss by Theft or Fire A/c |
Dr.
| xxx | |||
| To Purchases A/c | xxx | ||||
| (Loss of goods by theft or fire) | |||||
The actual amount of loss and its treatment varies with the situation and is as follows.
1) When goods are fully insured, loss is borne by the insurance company
In case the goods are insured, then loss by theft or fire is made good by the insurance company. In such cases, insurance company or insurance claim becomes the asset for the firm and will make payment in future. Now, till the time amount is received it is shown as an asset in the Balance Sheet. Due to such loss, stock of goods gets reduced so it is credited and Insurance Claim Account or Insurance Company Account, being increase in asset, is debited. The entry for this is as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Insurance Co. or Insurance Claim A/c |
Dr.
| xxx | |||
| To Loss by Theft or Fire A/c | xxx | ||||
| (Loss of goods by theft or fire) | |||||
2) When goods are not insured
In case the goods are not insured, then whole of the loss is transferred to Profit & Loss Account as it is borne by the firm itself. It is recorded with help of following Journal Entry.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Profit & Loss A/c |
Dr.
| xxx | |||
| To Loss by Theft or Fire A/c | xxx | ||||
| (Loss transferred to P & L A/c) | |||||
3) When goods are partly insured
In case the goods are partly insured, then the treatment would be a combination of treatments as if they are insured and if they are uninsured. This will be recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Insurance Co. or Insurance Claim A/c |
Dr.
| xxx | |||
| Profit & Loss A/c |
Dr.
| xxx | |||
| To Loss by Theft or Fire A/c | xxx | ||||
| (Claim received for Loss of goods by theft or fire and remaining loss transferred to P & L A/c) | |||||
Note: In the above cases, when the amount due from the insurance company, in respect of insurance claim, is received, it is journalised as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Bank A/c |
Dr.
| xxx | |||
| To Insurance Co. or Insurance Claim A/c | xxx | ||||
| (Insurance Claim received) | |||||
Goods and Services Tax (GST): It is an indirect tax which has integrated various taxes like Sales tax, excise tax, VAT, etc., into one single tax for the entire nation. By replacing the various archaic tax structures, GST is levied at every stage of the supply chain of the goods or services from production to the last retail level. GST has been discussed in detail in previous chapter. The accounting treatment of GST in the books of accounts is as follows:
Journal Entries for the accounting of GST Paid or Collected
| |||||
Date
|
Particulars
|
L.F.
|
Dr.
Amount
(₹)
|
Cr.
Amount
(₹)
| |
1.
|
Purchase of Fixed Assets
| ||||
Fixed Assets A/c
|
Dr.
| ||||
Input CGST A/c
|
Dr.
| ||||
Input SGST A/c
|
Dr.
| ||||
Input IGST A/c
|
Dr.
| ||||
To Vendor’s A/c
| |||||
(Being fixed asset purchased and input CGST, input SGST and input IGST claimed)
| |||||
2.
|
Purchase of Goods
| ||||
Purchases A/c
|
Dr.
| ||||
Input CGST A/c
|
Dr.
| ||||
Input SGST A/c
|
Dr.
| ||||
Input IGST A/c
|
Dr.
| ||||
To Creditor’s A/c
| |||||
(Being goods purchased plus input CGST, SGST and IGST)
| |||||
3.
|
Sale of Goods
| ||||
Debtor’s A/c
|
Dr.
| ||||
To Sales A/c
| |||||
To Output CGST A/c
| |||||
To Output SGST A/c
| |||||
To Output IGST A/c
| |||||
(Being goods sold plus output CGST, output SGST and output IGST)
| |||||
4.
|
Return of goods purchased
| ||||
Creditor’s A/c
|
Dr.
| ||||
To Purchases Return A/c
| |||||
To Input CGST A/c
| |||||
To Input SGST A/c
| |||||
To Input IGST A/c
| |||||
(Being goods purchased returned and input GST reversed.)
| |||||
5.
|
Return of goods sold
| ||||
Sales Return A/c
|
Dr.
| ||||
Output CGST A/c
|
Dr.
| ||||
Output SGST A/c
|
Dr.
| ||||
Output IGST A/c
|
Dr.
| ||||
To Debtor’s A/c
| |||||
(Being goods sold returned and output GST reversed.)
| |||||
6.
|
Journal entry for expenses
| ||||
Printing and Stationery Expenses A/c
|
Dr.
| ||||
Telephone Expenses A/c
| |||||
Input CGST A/c
|
Dr.
| ||||
Input SGST A/c
|
Dr.
| ||||
To Cash/ Bank A/c
| |||||
(Being stationery purchased and telephone bill for the __ month paid and input CGST and SGST claimed)
| |||||
7.
|
Journal entry for Drawings of goods by proprietor, goods distributed as free samples, goods destroyed by fire, goods stolen etc.
| ||||
Drawings A/c
|
Dr.
| ||||
Advertisement A/c
|
Dr.
| ||||
Loss by fire A/c
|
Dr.
| ||||
Loss by Theft A/c
|
Dr.
| ||||
To Purchases A/c
| |||||
To Input CGST A/c
| |||||
To Input SGST A/c
| |||||
To Input IGST A/c
| |||||
(Being goods withdrawn for personal use, destroyed, lost by fire and Input GST reversed)
| |||||
8.
|
Setting off input CGST against Output CGST
| ||||
Output CGST A/c
|
Dr.
| ||||
To Input CGST A/c
| |||||
(Being the Input CGST set off against Output CGST)
| |||||
9.
|
Setting off input CGST against Output IGST
| ||||
Output IGST A/c
|
Dr.
| ||||
To Input CGST A/c
| |||||
(Being the Input CGST set off against Output IGST)
| |||||
10.
|
Setting off input SGST against Output SGST
| ||||
Output SGST A/c
|
Dr.
| ||||
To Input SGST A/c
| |||||
(Being the Input SGST set off against Output SGST)
| |||||
11.
|
Setting off input SGST against Output IGST
| ||||
Output IGST A/c
|
Dr.
| ||||
To Input SGST A/c
| |||||
(Being the Input SGST set off against Output IGST)
| |||||
12.
|
Setting off input IGST against Output IGST
| ||||
Output IGST A/c
|
Dr.
| ||||
To Input IGST A/c
| |||||
(Being the Input IGST set off against Output IGST)
| |||||
13.
|
Setting off Debit balance in input CGST, input SGST against credit balance in Output IGST
| ||||
Output IGST A/c
|
Dr.
| ||||
To Input CGST A/c
| |||||
To Input SGST A/c
| |||||
(Being the Input CGST and input SGST set off against Output IGST)
| |||||
14.
|
Payment of GST into Government Account
| ||||
Output CGST A/c
|
Dr.
| ||||
Output SGST A/c
|
Dr.
| ||||
Output IGST A/c
| |||||
To Bank A/c or Electronic Cash Ledger A/c
| |||||
(Being GST payable deposited into Government Account)
| |||||
Income Tax: The profits of business in case of sole proprietorship and partnership firm are subject to income tax which is to be paid by the proprietor. So, the payment of income tax is recorded by debiting the Capital Account. The Journal Entry for the same is:
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Capital A/c |
Dr.
| ||||
| To Cash/Bank A/c | |||||
| (Income tax paid) | |||||
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash A/c |
Dr.
| ||||
| To Capital A/c | |||||
| (Refund of Income tax) | |||||
Treatment of Value Paid Parcel (VPP): VPP is same as purchase of goods, difference lies in the method of sale. Seller sends the goods through Post Office. Buyer pays the value of goods to the Post Office and gets the delivery of goods. In this case too, Purchases Account will be debited as we do in case of purchase of goods. Suppose, MN Ltd. received a VPP for goods worth Rs 570 and sent an employee with Rs 600 for the collection of goods. The employee paid Rs 15 for the conveyance and returned the balance.
Solution:
Receiving VPP means purchasing goods, so Purchases A/c will be debited for the purchases. Conveyance charges, being a part of cartage, are expenses so it will be debited.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Purchases A/c |
Dr.
| 570 | |||
| Cartage A/c |
Dr.
| 15 | |||
| To Cash/Bank A/c | 585 | ||||
| (VPP collected) | |||||
Some Miscellaneous Transactions
Depreciation: It is permanent and continuing decrease in the value of an asset on account of wear and tear and passage of time. It is a loss for the business and we know that increase in expenses and losses are debited, so Depreciation Account will be debited while the asset being depreciated gets reduced, so it will be credited (decrease in assets is credited).
For Example, Provide 10% depreciation on furniture costing Rs 30,000. It will be recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Depreciation A/c |
Dr.
| 3,000 | |||
| To Furniture A/c | 3,000 | ||||
| (Depreciation provided on furniture) | |||||
Distribution of goods as free samples: Goods may be distributed as free samples as a tool for advertising just to increase the sales. Samples Account is of the same nature as that of Advertisement Account. And it is recorded by passing the following Journal Entry.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Advertisement A/c or Samples A/c |
Dr.
| xxx | |||
| To Purchases A/c | xxx | ||||
| (Goods distributed as free samples) | |||||
Goods used to make an Asset: When goods are used to make/construct an asset, value of the asset increases. Therefore, Asset Account is debited. The entry for this is:
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Asset A/c |
Dr.
| xxx | |||
| To Purchases A/c | xxx | ||||
| (Goods used to make an asset) | |||||
Treatment of Goods withdrawn for personal use: We already know that the entity of a business is separate from its owners so any goods withdrawn by the owner for his/her personal use is debited to an account by the name of drawings. If need be, the businesses providing interest on capital may as well charge interest on drawings which constitutes an income for the business. For e.g.: Ramesh owns Elegant enterprises which purchases clothes for sale so if he withdraws clothes for his family then it will be considered as drawings by him. The accounting treatment for drawings is as follows.
| Date | Particulars | L.F. | Debit Amount (Rs.) | Credit Amount (Rs.) | |
Drawings A/c To Purchases A/c (Being goods withdrawn for personal use) | Dr. |
Expenditure on the Installation of Machinery and on the Construction of Building: Machinery and Building are the fixed assets of a business. Any expenditure incurred on the carriage and installation of machinery like freight, wages etc. is treated as ‘Capital Expenditure’ and therefore, increases the cost of the asset and is debited to the Particular Asset Account and not to the Particular Expense Account. Like, expenditure incurred for the construction of building such as purchase of building material and payment of wages are also capital expenditures and debited to Building Account. The entry for recording these expenses is:
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Related Asset A/c |
Dr.
| xxx | |||
| To Cash / Bank A/c | xxx | ||||
| (Expenses incurred on related asset) | |||||
- Sample Papers
- Live Test Series
- Introduction to Accounting
- Theory Base of Accounting
- Goods and Services Tax (GST)
- Recording of Transactions - I
- Recording of Transactions - II
- Bank Reconciliation Statement
- Trial Balance and Rectification of Errors
- Depreciation, Provisions and Reserves
- Bills of Exchange
Recording of Transactions - I
Specific Entries:
Objectives
After going through this lesson, you shall be able to understand the concept related to 'Entries for some specific transactions'.
Some Specific Entries
Bad Debts: If any amount that was recoverable is not realised or is partially realised, then the amount not realised is a loss to the business and is regarded as Bad Debts. It is recorded as follows.
(1) When the full amount is not recovered
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Bad Debts A/c |
Dr.
| xxx | |||
| To Debtor’s A/c | xxx | ||||
| (Amount not recovered written off as bad debts) | |||||
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash A/c |
Dr.
| xxx | |||
| Bad Debts A/c |
Dr.
| xxx | |||
| To Debtor’s A/c | xxx | ||||
| (Amount recovered and balance written off as bad debts) | |||||
Example : Amit who owed us Rs 10,000 has become insolvent. He pays a compensation of 70 paisa in a rupee.
Solution
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash A/c |
Dr.
| 7,000 | |||
| Bad Debts A/c | 3,000 | ||||
| To Amit’s A/c | 10,000 | ||||
| (Amount recovered and balance written off as bad debts) | |||||
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash or Bank A/c |
Dr.
| xxx | |||
| To Bad Debts Recovered A/c | xxx | ||||
| (Amount recovered previously written off as bad debts) | |||||
Solution
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash A/c |
Dr.
| 8,000 | |||
| To Bad Debts Recovered A/c | 8,000 | ||||
| (Amount recovered previously written off as bad debts) | |||||
Outstanding expenses: The expenses which should have been paid during the current year but have not been paid due to some reasons are termed as outstanding expenses.
For example, if an employee is paid salary at the rate of Rs 1,000 per month and during the year payment for only 11 months has been done then the salary for remaining one month will be termed as outstanding salary and it will be recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Salaries A/c |
Dr.
| 1,000 | |||
| To Outstanding Salaries A/c | 1,000 | ||||
| (Salaries remained unpaid) | |||||
Prepaid expenses: These expenses are related to the next year but have been paid during the current year in advance. The benefit of these expenses will be received during the next accounting period.
For example, insurance premium amounting to Rs 6,000 has been paid on July 01, 2013 for one year and the books are closed on Dec. 31 every year. This means premium for six months relates to next accounting period or insurance premium for 6 months is prepaid i.e. Rs 3,000. The entry for recording such expense is:
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Prepaid Insurance A/c |
Dr.
| 3,000 | |||
| To Insurance A/c | 3,000 | ||||
| (Insurance paid in advance) | |||||
Accrued Income or Income Earned but not Received: Income which is earned but not received is called accrued income. It is different from outstanding income.
For example, Mr. A receives his salary after every two months. This means if he works for two months say, November and December, then he will receive salary of these two months on 1st January. So, in this case salary for the month of November is regarded as accrued income on December 01. It is because although it has been earned but it is still not due for payment. It is recorded with the help of following Journal Entry.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Accrued Income A/c |
Dr.
| ||||
| To Income A/c | |||||
| (Income earned but not yet due) | |||||
Income Received in Advance or Unearned Income: Income received but not earned during the accounting period is called income received in advance or unearned income.
For example: If we recover Rs 2,50,000 on account of rent against a let out building with rent of Rs 20,000 per month, then Rs 10,000 (i.e. 2,50,000 − 2,40,000) is income received in advance. It is recorded with the help of following Journal Entry.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Income A/c |
Dr.
| ||||
| To Income Received in Advance A/c | |||||
| (Income earned but not yet due) | |||||
Interest on Capital: Interest on capital is an expense for the business, so it is charged from the profits of the firm. The balance profits are the real profits of the firm and represent the true efficiency of the business. And according to the rules of accounting, interest being an expense for the business will be debited (increase in the expenses) while it is a gain for the proprietor in the form of increased capital. As we know, decrease in capital is debited and increase is credited, so the increase in capital will be credited. It is recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Interest on Capital A/c |
Dr.
| xxx | |||
| To Capital A/c | xxx | ||||
| (Interest on capital provided) | |||||
Interest on Drawings: Business not only allows interest on capital but also charges for the drawings made by the proprietor. Such an interest is an income for the business and loss for the proprietor. It is recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Drawings A/c |
Dr.
| xxx | |||
| To Interest on Drawings A/c | xxx | ||||
| (Interest on drawings charged) | |||||
Loss by Theft or Fire: The business may incur losses due to theft or fire at its place of business. In both the cases, the real outcome will be loss to the business.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Loss by Theft or Fire A/c |
Dr.
| xxx | |||
| To Purchases A/c | xxx | ||||
| (Loss of goods by theft or fire) | |||||
The actual amount of loss and its treatment varies with the situation and is as follows.
1) When goods are fully insured, loss is borne by the insurance company
In case the goods are insured, then loss by theft or fire is made good by the insurance company. In such cases, insurance company or insurance claim becomes the asset for the firm and will make payment in future. Now, till the time amount is received it is shown as an asset in the Balance Sheet. Due to such loss, stock of goods gets reduced so it is credited and Insurance Claim Account or Insurance Company Account, being increase in asset, is debited. The entry for this is as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Insurance Co. or Insurance Claim A/c |
Dr.
| xxx | |||
| To Loss by Theft or Fire A/c | xxx | ||||
| (Loss of goods by theft or fire) | |||||
2) When goods are not insured
In case the goods are not insured, then whole of the loss is transferred to Profit & Loss Account as it is borne by the firm itself. It is recorded with help of following Journal Entry.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Profit & Loss A/c |
Dr.
| xxx | |||
| To Loss by Theft or Fire A/c | xxx | ||||
| (Loss transferred to P & L A/c) | |||||
3) When goods are partly insured
In case the goods are partly insured, then the treatment would be a combination of treatments as if they are insured and if they are uninsured. This will be recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Insurance Co. or Insurance Claim A/c |
Dr.
| xxx | |||
| Profit & Loss A/c |
Dr.
| xxx | |||
| To Loss by Theft or Fire A/c | xxx | ||||
| (Claim received for Loss of goods by theft or fire and remaining loss transferred to P & L A/c) | |||||
Note: In the above cases, when the amount due from the insurance company, in respect of insurance claim, is received, it is journalised as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Bank A/c |
Dr.
| xxx | |||
| To Insurance Co. or Insurance Claim A/c | xxx | ||||
| (Insurance Claim received) | |||||
Goods and Services Tax (GST): It is an indirect tax which has integrated various taxes like Sales tax, excise tax, VAT, etc., into one single tax for the entire nation. By replacing the various archaic tax structures, GST is levied at every stage of the supply chain of the goods or services from production to the last retail level. GST has been discussed in detail in previous chapter. The accounting treatment of GST in the books of accounts is as follows:
Journal Entries for the accounting of GST Paid or Collected
| |||||
Date
|
Particulars
|
L.F.
|
Dr.
Amount
(₹)
|
Cr.
Amount
(₹)
| |
1.
|
Purchase of Fixed Assets
| ||||
Fixed Assets A/c
|
Dr.
| ||||
Input CGST A/c
|
Dr.
| ||||
Input SGST A/c
|
Dr.
| ||||
Input IGST A/c
|
Dr.
| ||||
To Vendor’s A/c
| |||||
(Being fixed asset purchased and input CGST, input SGST and input IGST claimed)
| |||||
2.
|
Purchase of Goods
| ||||
Purchases A/c
|
Dr.
| ||||
Input CGST A/c
|
Dr.
| ||||
Input SGST A/c
|
Dr.
| ||||
Input IGST A/c
|
Dr.
| ||||
To Creditor’s A/c
| |||||
(Being goods purchased plus input CGST, SGST and IGST)
| |||||
3.
|
Sale of Goods
| ||||
Debtor’s A/c
|
Dr.
| ||||
To Sales A/c
| |||||
To Output CGST A/c
| |||||
To Output SGST A/c
| |||||
To Output IGST A/c
| |||||
(Being goods sold plus output CGST, output SGST and output IGST)
| |||||
4.
|
Return of goods purchased
| ||||
Creditor’s A/c
|
Dr.
| ||||
To Purchases Return A/c
| |||||
To Input CGST A/c
| |||||
To Input SGST A/c
| |||||
To Input IGST A/c
| |||||
(Being goods purchased returned and input GST reversed.)
| |||||
5.
|
Return of goods sold
| ||||
Sales Return A/c
|
Dr.
| ||||
Output CGST A/c
|
Dr.
| ||||
Output SGST A/c
|
Dr.
| ||||
Output IGST A/c
|
Dr.
| ||||
To Debtor’s A/c
| |||||
(Being goods sold returned and output GST reversed.)
| |||||
6.
|
Journal entry for expenses
| ||||
Printing and Stationery Expenses A/c
|
Dr.
| ||||
Telephone Expenses A/c
| |||||
Input CGST A/c
|
Dr.
| ||||
Input SGST A/c
|
Dr.
| ||||
To Cash/ Bank A/c
| |||||
(Being stationery purchased and telephone bill for the __ month paid and input CGST and SGST claimed)
| |||||
7.
|
Journal entry for Drawings of goods by proprietor, goods distributed as free samples, goods destroyed by fire, goods stolen etc.
| ||||
Drawings A/c
|
Dr.
| ||||
Advertisement A/c
|
Dr.
| ||||
Loss by fire A/c
|
Dr.
| ||||
Loss by Theft A/c
|
Dr.
| ||||
To Purchases A/c
| |||||
To Input CGST A/c
| |||||
To Input SGST A/c
| |||||
To Input IGST A/c
| |||||
(Being goods withdrawn for personal use, destroyed, lost by fire and Input GST reversed)
| |||||
8.
|
Setting off input CGST against Output CGST
| ||||
Output CGST A/c
|
Dr.
| ||||
To Input CGST A/c
| |||||
(Being the Input CGST set off against Output CGST)
| |||||
9.
|
Setting off input CGST against Output IGST
| ||||
Output IGST A/c
|
Dr.
| ||||
To Input CGST A/c
| |||||
(Being the Input CGST set off against Output IGST)
| |||||
10.
|
Setting off input SGST against Output SGST
| ||||
Output SGST A/c
|
Dr.
| ||||
To Input SGST A/c
| |||||
(Being the Input SGST set off against Output SGST)
| |||||
11.
|
Setting off input SGST against Output IGST
| ||||
Output IGST A/c
|
Dr.
| ||||
To Input SGST A/c
| |||||
(Being the Input SGST set off against Output IGST)
| |||||
12.
|
Setting off input IGST against Output IGST
| ||||
Output IGST A/c
|
Dr.
| ||||
To Input IGST A/c
| |||||
(Being the Input IGST set off against Output IGST)
| |||||
13.
|
Setting off Debit balance in input CGST, input SGST against credit balance in Output IGST
| ||||
Output IGST A/c
|
Dr.
| ||||
To Input CGST A/c
| |||||
To Input SGST A/c
| |||||
(Being the Input CGST and input SGST set off against Output IGST)
| |||||
14.
|
Payment of GST into Government Account
| ||||
Output CGST A/c
|
Dr.
| ||||
Output SGST A/c
|
Dr.
| ||||
Output IGST A/c
| |||||
To Bank A/c or Electronic Cash Ledger A/c
| |||||
(Being GST payable deposited into Government Account)
| |||||
Income Tax: The profits of business in case of sole proprietorship and partnership firm are subject to income tax which is to be paid by the proprietor. So, the payment of income tax is recorded by debiting the Capital Account. The Journal Entry for the same is:
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Capital A/c |
Dr.
| ||||
| To Cash/Bank A/c | |||||
| (Income tax paid) | |||||
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Cash A/c |
Dr.
| ||||
| To Capital A/c | |||||
| (Refund of Income tax) | |||||
Treatment of Value Paid Parcel (VPP): VPP is same as purchase of goods, difference lies in the method of sale. Seller sends the goods through Post Office. Buyer pays the value of goods to the Post Office and gets the delivery of goods. In this case too, Purchases Account will be debited as we do in case of purchase of goods. Suppose, MN Ltd. received a VPP for goods worth Rs 570 and sent an employee with Rs 600 for the collection of goods. The employee paid Rs 15 for the conveyance and returned the balance.
Solution:
Receiving VPP means purchasing goods, so Purchases A/c will be debited for the purchases. Conveyance charges, being a part of cartage, are expenses so it will be debited.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Purchases A/c |
Dr.
| 570 | |||
| Cartage A/c |
Dr.
| 15 | |||
| To Cash/Bank A/c | 585 | ||||
| (VPP collected) | |||||
Some Miscellaneous Transactions
Depreciation: It is permanent and continuing decrease in the value of an asset on account of wear and tear and passage of time. It is a loss for the business and we know that increase in expenses and losses are debited, so Depreciation Account will be debited while the asset being depreciated gets reduced, so it will be credited (decrease in assets is credited).
For Example, Provide 10% depreciation on furniture costing Rs 30,000. It will be recorded as follows.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Depreciation A/c |
Dr.
| 3,000 | |||
| To Furniture A/c | 3,000 | ||||
| (Depreciation provided on furniture) | |||||
Distribution of goods as free samples: Goods may be distributed as free samples as a tool for advertising just to increase the sales. Samples Account is of the same nature as that of Advertisement Account. And it is recorded by passing the following Journal Entry.
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Advertisement A/c or Samples A/c |
Dr.
| xxx | |||
| To Purchases A/c | xxx | ||||
| (Goods distributed as free samples) | |||||
Goods used to make an Asset: When goods are used to make/construct an asset, value of the asset increases. Therefore, Asset Account is debited. The entry for this is:
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Asset A/c |
Dr.
| xxx | |||
| To Purchases A/c | xxx | ||||
| (Goods used to make an asset) | |||||
Treatment of Goods withdrawn for personal use: We already know that the entity of a business is separate from its owners so any goods withdrawn by the owner for his/her personal use is debited to an account by the name of drawings. If need be, the businesses providing interest on capital may as well charge interest on drawings which constitutes an income for the business. For e.g.: Ramesh owns Elegant enterprises which purchases clothes for sale so if he withdraws clothes for his family then it will be considered as drawings by him. The accounting treatment for drawings is as follows.
| Date | Particulars | L.F. | Debit Amount (Rs.) | Credit Amount (Rs.) | |
Drawings A/c To Purchases A/c (Being goods withdrawn for personal use) | Dr. |
Expenditure on the Installation of Machinery and on the Construction of Building: Machinery and Building are the fixed assets of a business. Any expenditure incurred on the carriage and installation of machinery like freight, wages etc. is treated as ‘Capital Expenditure’ and therefore, increases the cost of the asset and is debited to the Particular Asset Account and not to the Particular Expense Account. Like, expenditure incurred for the construction of building such as purchase of building material and payment of wages are also capital expenditures and debited to Building Account. The entry for recording these expenses is:
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Related Asset A/c |
Dr.
| xxx | |||
| To Cash / Bank A/c | xxx | ||||
| (Expenses incurred on related asset) | |||||
Date
|
Particulars
|
L.F.
|
Debit
Amount
(Rs) |
Credit
Amount
(Rs) | |
| Bank A/c |
Dr.
| xxx | |||
| To Insurance Co. or Insurance Claim A/c | xxx | ||||
| (Insurance Claim received) | |||||
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