Accrued Income: Income which has been earned but not received is termed as ‘Accrued Income’. If any item of income such as Rent receivable, Interest on Securities, Interest on Loan, Commission, Discount etc. is earned and belongs to the financial period but not received then it is necessary that all such incomes relating to that financial period should be shown in the accounts.
The necessary adjustment for the purpose of bringing such accrued incomes into account should, therefore, be made by means of a journal entry debiting accrued, income account and crediting the source of income. The debit to accrued income account will appear as an asset in the Balance Sheet..
Unearned Income: Unearned Income is an income which has been received it has not been earned. Suppose, if, in any financial year, businessman receives some money and in respect of which full services have not been rendered by him. The amount for which service has not been provided is to be treated as a liability. A journal entry is passed for the amount received in respect of which the service still remains to be rendered. The nominal account concerned is debited and an account styled as Unearned Income is credited. This credit balance on the latter account is shown as a liability in the Balance Sheet. At the commencement of the coming financial year, the above entry would be reversed.
Depreciation: The term Depreciation means a permanent decline in value of the asset due to wear and tear or from any other cause. All assets have either a definite or an estimated period of utility to the business in which they are employed and as the years pass by, their measure of usefulness diminishes or declines with the result that they have to be discarded when they become useless. The loss sustained by way of depreciation should be charged to the Profit and Loss Account each year otherwise final accounts will fail to show the true facts of the business.
The depreciation arising from the use of the assets should be charged in the period to which it relates, irrespective of whether a profit or loss has been made. The journal entry for writing off depreciation on any asset is to debit Depreciation account and credit the respective Asset account. The effect of such an entity would be that it will reduce the book value of the asset and the loss is charged to the Profit and Loss Account.
Appreciation: When a country faces problems such as drought, plague or war then the Government of the country circulates extra currency to overcome the prevailing problems. The purchasing power of money is reduced by the extra circulation of money and prices of various commodities and assets begin to rise. Appreciation in value of assets is again for the business and is shown on the credit side of the Profit and Loss Account and the assets are shown by the appreciated value in the Balance Sheet.
Interest on Capital: A businessman expects his business to yield a much better return on the capital employed than it would have earned if the same amount was invested in other securities. This is because of the extra risk and efforts involved in carrying out the business. In order to find out, whether the business has really yielded any profit in excess of the current rate of interest, he charges that interest to Profit and Loss Account and credit the same to his Capital Account. The interest on capital paid is loss or can be said an expense for the business and a gain to the owner himself.
If any such interest is to be adjusted at the end of the financial year, journal entry has to be passed debiting interest account and crediting the Capital Account of the owner with the amount of interest to be paid.
Interest on Drawings: A businessman often draws some money out of his business to meet out his personal expenses. Such withdrawals reduce his capital balance in the business. In some cases, such drawings are debited to (UPBoardSolutions.com) a separate account called ‘Drawings Account’ and this account is then closed by transfer to the capital account at the end of each financial year.
Interest on drawings are calculated from the date of withdrawal till the end of the financial period, and amount thus ascertained is debited to the Capital Account and credited to the Interest Account. The owner is thus charged with interest on the sum withdrawn for meeting out his personal expenses.
Bad Debts: In modern business, most of the transactions are done on a credit basis. Whether it is a small businessman or a big business house all have a major percentage of credit transactions in the business.
It’s a common feature in the business that some of the debtors fail to pay their debts in full. The debts which are irrecoverable from the debtors are called ‘Bad Debts’. The journal entry to write off Bad Debts would be to debit Bad Debts Account and credit the Personal Account of the customer who has failed to pay. The debit balance of Bad Debts Account represents a loss and is transferred to the Profit and Loss Account.
If the amount of Bad Debts appears in Adjustment Entries then Profit and Loss Account is debited with the amount and the same is deducted from the Debtors in the Balance Sheet.
Reserve for Bad and Doubtful Debts: After writing off all known Bad Debts, the businessman tries to find out the list of those customers from whom payment may be doubtful. Such debts are called Doubtful Debts, and in order to arrive at an accurate figure of the net profit made in any particular financial year, it is necessary to provide for Doubtful Debts. This is done by estimating the further less likely to be sustained on the recovery of Book Debts and a journal entry is passed, debiting the Profit and Loss Account and crediting Reserve for Bad and Doubtful Debts Account.
The credit balance of Reserve for Bad and Doubtful Debts Account is shown in the Balance Sheet as a deduction from the net amount of Sundry Debtors i.e., the amount arrived after deducting the amount of bad debts from debtors so that the net estimated realisable amount from Sundry Debtors may be shown in outer column of the Balance Sheet.
If the amount of Bad Debts equals the amount of reserve made in that period, then correct profit or loss is ascertained. If there is any balance left in Reserve for Bad and Doubtful Debts Account then the same is shown as a profit on the credit side of the Profit and Loss Account. In the next financial year, the balance of the reserve is known as Old Reserve. If Bad Debts and Old Reserve for Bad and Doubtful Debts are given in the Trial Balance and if some reserve is to be made on Debtors for the present financial year, then the number of Bad Debts and the amount of New Reserve will be added. The amount of Old Reserve for Bad and Doubtful Debts will be deducted from the above amount arrived and the balance will be shown on the debit side of the Profit and Loss Account.
When the balance of Old Reserve for Bad and Doubtful Debts is more than the total of Bad Debts and Reserve for Bad and Doubtful debts then old balance is shown on the credit side of the Profit and Loss Account and Bad Debts plus new Reserve are shown on the debit side of the Profit and Loss Account. The amount of New Reserve is deducted from the debtors in the Balance Sheet.
Reserve for a discount on Debtors: In modern times as most of the business transactions are done on a credit basis, the trader gives some incentive in the form of discount to his customers for early realisation of payments. The loss arising due to discount to be allowed will be estimated and brought into accounts. This will help in showing the exact realisable amount from customers in the Balance Sheet.
At the end of each financial year, therefore, it becomes necessary to estimate this loss of discount that will have to be allowed to the customers, and make a provision in this respect. The provision is made by way of a certain percentage being calculated on Sundry Debtors at the close of the financial year and by debiting the Discount Account and crediting the Reserve for Discount Account. The credit balance of Reserve for Discount Account is shown by deducting the same from the number of Sundry Debtors in the Balance Sheet.
If both Reserve for Bad and Doubtful Debts and Reserve for Discount are to be made, then first Reserve for Bad and Doubtful Debts is made and after deducting the same from the amount of the Sundry Debtors, the Reserve for Discount is made on the balance amount of the Sundry Debtors remaining after deduction of the Reserve for Bad and Doubtful Debts. Both the reserves Eire shown on the debit side of the Profit and Loss Account and are deducted from the Sundry
Debtors in the Balance Sheet. Discount cannot be given to those customers from whom payment is doubtful.
