Accounts making

THE SYSTEM OF ACCOUNTING

Volume – I

YEAR 2015

WRITTEN BY: SYED AQEEL RAZA

It is my pre-words to accounts making that accounts making in the system of accounting is like to build home, set characters to any story, apply labor to job, to make map of any plan or any work for completion needs hands. I think anything has many hands to make something. Whence the word makes to joint alphabet thence the accounts makes the building of accounting under umbrella of ALPRE and provides cycling power to it afterwards.

Your comments and encourages is better than fruit.

THE SYSTEM OF ACCOUNTING

ACCOUNTS MAKING

TABLE OF CONTENTS

Accounts making note 157-160

1-ASSSETS 160-163

1.1 Fixed Assets 163

1.1.1 Land 163-165

1.1.2 Building 166+168

1.1.3 Plant & Machinery 169-170

1.1.4 Furniture & Fixtures 171-173

1.1.5 Office Equipment 174-175

1.1.6 Other Assets 176-178

1.2 Current Assets 178

1.2.1 Cash in Hand 179-180

1.2.2 Cash at Bank A/c 181-182

1.2.3 Account Receivable A/c 183-185

1.2.4 Purchase Merchandise A/c 186-187

1.2.5 Prepaid Rent A/c 187-188

1.2.6 Prepaid Insurance A/c 189-193

1.2.7 Unexpired Insurance A/c 194-196

1.2.8 Prepaid Insurance A/c 197-198

1.2.9 Security Deposit A/c 199-200

1.2.10 Deferred Assets A/c 201-202

1.3 Intangible Assets 202-204

1.4 Contra Assets 204-205

1.4.1 Accumulated Depreciation A/c 205-206

1.4.2 Purchase Return A/c 207

1.4.3 Purchase Discount A/c 208

1.4.4 Uncollectable Bad Debts 209

2- LIABILITIES 210

2.1 Short Term Liabilities 211

2.1.1 Account Payable A/c 211-212

2.1.2 Salaries Payable A/c 212-213

2.1.3 Accrued Expense A/c 214-215

2.1.4 Sales Tax Payable 216-217

2.1.5 Income Tax Payable 218-220

2.1.6 Notes Payable A/c 220-221

2.1.7 Interest Payable A/c 221-222

2.2 Long Term Liabilities 223-224

3- PROPRIETORSHIP/OWNERS’EQUITY 224

3.1 Capital 224-225

3.2 Drawing 226

4 – REVENUES 227-228

4.1 Sales 229-230

4.2 Commission Income 230-231

4.3 Other Income 231-232

4.4 Unearned Revenue 232-233

4.5 Accrued Revenue Receivable 233-234

4.1 CONTRA REVENUE ACCOUNTS 234

4.1.1 Sales Return 234-235

4.1.2 Sales Discount 236-237

5- EXPENSES 237-238

5.1 Direct Expenses 239

5.2 Indirect Expenses 240

5.3 Operating Expenses 241

5.4 Non-Operating Expenses 242

5.4.1 Administrative Expenses 243

5.4.1.1 Advertising Expense A/c 243-244

5.4.1.2 Insurance Expense A/c 244-245

5.4.1.3 Repair & Maintenance Expense 245-246

5.4.1.4 Salaries & Allowances 246-247

5.4.1.5 Depreciation Expense A/c 248

5.4.1.6 Office Supplies 249-250

5.4.1.7 Other Accounts Admin 250-251

5.4.2 Selling Expenses 252

5.4.2.1 Advertising Expense A/c 252-253

5.4.2.2 Sales Promotion A/c 254-255

5.4.2.3 Sales Distribution A/c 255-257

5.4.2.4 Other Accounts Sales 257-258

5.4.3 General Expenses 259

5.4.3.1 Rent Expense A/c 259-260

5.4.3.2 Utility Expense A/c 260-261

5.5 Finance Expenses 262-263

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ACCOUNTS MAKING

In the System of Accounting there are five principle of recording transactions wherein Assets, Liabilities, Equities, Revenues and Expenses increasing or decreasing under rules of debit and credit as Assets and Expenses increases debit and decreases credit and Liabilities, Equities and Revenues increases credit and decreases debit. Assets, Liabilities and Equities are the permanent member of double entry accounting Equation “Assets=Liabilities + Equities” revolving accounting cycle round the years and Expense and Revenue related accounts are the temporary members of accounting equation perform to calculate Profit and Loss Account, the profit and loss relate to owners’ equity and the owners’ equity is the part of accounting equation. The Expenses and Revenues and related accounts are for making profit & loss account do not move accounting cycle or transfer their balances to next accounting year. The expense and revenue accounts are related with single entry, the old accounting system used or using in small businesses where to earn and expense daily or to avoid record accounting applied procedures.

<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<[email protected]>

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The Accounts making in the system of accounting is too essential to reach the goal of accounting equation or to close up them for accounting cycle. The thousands of account are made under matching of five accounting principles; the accounting principle plays the rules of head and controls huge accounts created under them.

On creating accounts Land, Building, Furniture, Plant, Machinery, Equipment, we find out that they relate to Principle head “Asset” means the value to business or things which we have in our possession, if we make accounts of account payable, loan, advance, mark up etc. indicate the debt and debt comes under Principle account “Liabilities”, and so on, on making capital, profit & loss account etc we reach on the decision that these accounts relate to Owners’ Equity, the principle account head.


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On making accounts sales, revenues, other incomes etc., we find out they indicate income from business operation and come under accounting principle head “Revenues” and like this, if we make account, salaries expenses, cartage, conveyance, wages expense, advertising expense, insurance

Expense so on, we ascertain that they relate to expenses of five principle head of account. Expenses reduce income that earned from doing business.

In the system of accounting there are three businesses are described which are trading, manufacturing and servicing have same concept of accounting system and requires the five principle of accounting head but sub accounts relating to five principal of accounting head mostly are common and not common can be made according to the nature of business, business activities, events and needs, and for the manufacturing business, manufacturing process involves machineries, equipments, finished goods, advertising, promotion etc. accounts, for trading and servicing businesses common accounts and some uncommon accounts are made.


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In order to have knowledge and definition of accounts, I am discussing individually on accounts most commonly used in the system of accounting.

The System of Accounting has five principal head which are Assets, Liabilities, Proprietorship, Revenue and Expenses wherein Assets, Liabilities and Proprietorship are permanent accounts rounding accounting cycle and Revenue and Expenses are temporary accounts end on Income & loss account or provide the source of income or loss to capital account.

Here we discuss thoroughly each principal head, its sub accounts and related with accounts mostly used in accounts making;-

1-ASSETS

Assets are the resources of the business and equities are sources, sources provide finances to resources for conversion capital into assets enable business to start functioning. Assets are the main head which generate sub heads and sub heads


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further generate related accounts according to the nature of the business.

Many terms of assets are used in accounting such as fixed assets, tangible assets, non-current assets, immoveable assets, long term resources having live more than one year, and these are recorded at book value or on purchase price decreasing depreciation and placed sub head of ASSETS in financial statement .Other assets are current assets, liquid assets, value assets, moveable assets, intangible assets and short term assets having life under one year.

Some assets are contra assets which reduces the value of assets.


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Much Kind of assets according to the nature of business are in accounts or can give name or make account to any asset purchased or acquired for business.


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Here are the details and description some of assets relating to fixed assets, tangible assets, non-current assets, immoveable assets, long term assets.

1-FIXED ASSETS

1- Land2- Building3- Plant & Machinery4- Furniture & Fixtures5- Office Equipment6- Other Assets

1.1.1 LAND A/c

Land is required mostly in manufacturing concerns producing raw material or convert raw material into finished goods for home country and out countries and having huge production, labor, materials and process.


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The land is fixed, non- current, tangible, long term resources or immovable asset of the business and the permanent member of accounting cycle and shown in balance sheet as land. There is no depreciation is charged on land and the value of land is recorded as book value or purchase value instead of market value.

Banks offer loan on mark up or on demand finance against mortgage of land to assess market value of the land.

The account of land is made under head Fixed Assets and according to accounting rules as asset increases debit decreases credit it will be debited and other account which is cash or bank also an asset is credited. There is no affect on accounting equation is made as cash converted into asset “Land,” and this action is called asset for asset entry or conversion entry.

Entry;

Land

Cash/Bank

(Purchase land by cash/bank)


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1.1.2 BUILDING A/c

After purchasing of land, the building is needed to be constructed and designed according to the nature or work of business keeping in view all the aspects of health and safety of workmen.

The expense on construction of building is capital expenditure, and capital expenditure is converted into asset as Building Account. Money spending any kind on all repairs and maintenance on building is charged as expenses under head Repair & Maintenance Building.

The building is fixed, non- current, tangible asset, long term resources or immoveable asset of the business and the permanent member of accounting cycle and shown in balance sheet as Building. The value of building is recorded as book value or construction value instead of market value, and depreciation is charged on building.


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Therefore, the account of building is made under head Assets and sub head Fixed Assets and according to accounting rules asset increases debit decreases credit it will be debited and other account which is cash or bank also an asset is credited. There is no affect on accounting equation as cash converted into asset (Building) and this action is called asset for asset entry or conversion entry.

Entry;

Building Debit

Cash/Bank Credit

(Purchase building by cash/bank)


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1.1.3 PLANT AND MACHINERY A/c

There will be needed to have plant and machinery to run any manufacturing concern according to the nature and work of business after acquiring of land and building.

The Plant and Machinery is fixed, non- current, tangible asset, immoveable or long term resources of the business and the permanent member of accounting cycle and shown in balance sheet as Plant & Machinery. The value of plant and machinery is recorded as book value or purchase value, and depreciation is charged on plant and machinery.

Money spending any kind on all repairs and maintenance on plant and machinery is recorded as expenses under head Repair & Maintenance (Plant & Machinery).

The account of plant and machinery is made under head Fixed Assets, the sub head of Assets and according to accounting rules asset increases debit decreases credit it will be debited and other account which is cash or bank also an asset is credited. There is no affect on accounting equation is made as cash converted into asset “Plant & Machinery and this action is called asset for asset entry or conversion entry.


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Entry;

Plant & Machinery Debit

Cash/Bank Credit

(Purchase plant & machinery by cash/bank)


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1.1.4 FURNITURE & FIXTURES A/c

Furniture and fixtures according to the nature and work of business is also required in any concern after acquiring land, building and plant and machinery.

The Furniture and fixtures is fixed, non- current, tangible asset, immoveable or long term resources of the business and the permanent member of accounting cycle and shown in balance sheet as Furniture and Fixtures. The value of furniture and fixtures is recorded as book value or purchase value, and depreciation is charged over it.

Money spending any kind on all repairs and maintenance on Furniture and fixtures is recorded as expenses under head Repair & Maintenance (furniture and fixtures) or Repair & Maintenance (F&F).

The account of Furniture and Fixtures is made under head Fixed Assets, the sub head of Assets and according to

accounting rules asset increases debit decreases credit it will be debited and other account which is cash or bank also an


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asset is credited. There is no affect on accounting equation is made as cash converted into asset “Furniture & Fixtures,” and this action is called asset for asset entry or conversion entry.

Entry;

Furniture & Fixtures Debit

Cash/Bank Credit

(Purchase furniture & fixtures by cash/bank)


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1.1.5 OFFICE EQUIPMENT

Office Equipments like typewriters, computers, printers, fax machines, etc. are also required to control and run any concern according to the nature and work of business.

The Office Equipment is fixed, non- current, tangible asset, immoveable or long term resources of the business and the permanent member of accounting cycle and shown in balance sheet as Office Equipment. The value of Office Equipment is recorded as per book value or purchase value, and depreciation is charged over it.

Money spending any kind on all repairs and maintenance on office equipment is recorded as expenses under head Repair & Maintenance (Office Equipment).

The account of Office Equipment is made under head Fixed Assets, the sub head of Assets and according to accounting rules asset increases debit decreases credit it will be debited and other account which is cash or bank also an asset is credited. There is no affect on accounting equation is made as cash converted into asset (office equipment) and this action is called asset for asset entry or conversion entry.


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Entry;

Office Equipment Debit

Cash/Bank Credit

(Purchase office Equipment by cash/bank)


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1.1.6 OTHER ASSETS

Other assets are a group of accounts of minor value adding during business operation to avoid lengthiness in the system of accounting. Like land, building, plant & machinery, Furniture and fixtures and office equipment there may be other assets like Air Conditioning unit, generator, power factor, tools, vehicles etc.

The Other Assets is fixed, non- current, tangible asset, immoveable or long term resources of the business and the permanent member of accounting cycle and shown in balance sheet as Other Assets. The value of Other Assets is recorded as book value or purchase value, and depreciation is charged over it.

Money spending any kind on all repairs and maintenance on other assets is recorded as expenses under head Repair & Maintenance (Other Assets head wise).

The account of Other Assets is made under head Fixed Assets, the sub head of Assets and according to accounting rules asset increases debit decreases credit it will be debited and other account which is cash or bank also an asset is credited.


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There is no affect on accounting equation is made as cash converted into asset (Other Assets) and this action is called asset for asset entry or conversion entry.

Entry;

Other Assets Debit

Cash/Bank Credit

(Purchase generator by cash/bank)


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Like fixed assets many Kind of assets according to the nature of business are therein or can give name or make account to any asset.

Here are the details and description some of assets relating to current assets, liquid assets, moveable assets, value assets, intangible assets, short term assets;

1.2 Current Assets

1- Cash in hand2- Cash at Bank3- Accounts Receivable4- Merchandise Inventory 5- Purchases Merchandise6- Prepaid Rent7- Prepaid Insurance8- Unexpired Rent

9-Unexpired Insurance

10-Prepaid Advertising

11-Security Deposit

12-Deferred Assets


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1.2.1 CASH IN HAND A/c

Cash is used for payments relating to purchases, expenses, debts and all financial matters which are expedited during business operation. The source of cash is transferred by capital, conversion of assets, sale, any kind of revenue and all other sources where cash comes during business operation.

Cash in hand means cash balance in cash book and petty cash book or the cash remained unused during business operation at the end of accounting period and shown in balance sheet as Cash-in-hand.Cash in hand is current asset, liquid asset, moveable asset or value asset of any entity.

The account of cash is made under head Current Asset, the sub head of asset and cash comes from capital assume. It will be transfer entry of cash from the sources of the business and shown debit balance in cash book. The account cash debit and credit from cash book.


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Entry;

Cash Debit

Capital Credit

(Cash by investment)


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1.2.2 CASH AT BANK A/c

All cash comes from the sources of business during business operation is kept in bank account for all payments to save risk and according to the instruction of government issued from time to time for controlling taxes by bank. All records of cash drawn and paid are furnished by bank which is reconciled with cash book by account holder.

The balance unused in bank at the end of the accounting period is cash at bank shown in balance sheet.

Cash at bank is current asset, liquid asset, moveable asset or value asset of any entity.

The account of Cash at bank is made under head Current Asset, the sub head of Assets and shown in debit balance in cash book as;


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Entry;

Bank Debit

Cash Credit

(Cash deposited into bank)


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1.2.3 ACCOUNTS RECEIVABLE A/c

The money recoverable from customer whom goods or services sold on credit is called account receivable.

Account receivable is a current asset, liquid asset or value assets, the sub head of Assets shown in balance sheet as Accounts receivable under note, the detail of parties.

On account of sale on credit, an account “Account R/A “with party’s name individually created in the ledger to record increase or decrease the amount due on customer. As per accounting rule debt is debited to account receivable and credited by cash, cash is also an asset, therefore, cash move to other hand and this action is called asset for asset or moving entry. When cash is the amount of debt is received, it will be reversed.

Entry;

Account R/A. Debit

Cash Credit

On recovery of cash, the entry will be;

Cash Debit

Account R/A. Credit


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1.2.4 MERCHANDISE INVENTORY A/c

Merchandise inventory means the merchandise remain unsold at the end of accounting period.

Merchandise Inventory is current asset and shown in balance sheet as Stock or Merchandise Inventory.

The merchandise inventory ending is reduced by cost of


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merchandise sold statement as unsold goods already recorded

in purchases and opening inventory therefore, the entry will be;

Merchandise Inventory Debit

Income Summary Credit


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1.2.5 PURCHASES MERCHANDISE A/c

Merchandise means to things or commodities bought and sold. Purchases are made on cash basis where payment made immediately is cash purchases and on account where payment made after purchases on certain understanding called credit purchases.

Unused merchandise into Purchases is current asset shown in balance sheet as stock or Merchandise Inventory and permanent member of accounting cycle but used merchandise relates to income summary and temporary asset.

On purchasing of commodities, the Local purchase account or import purchase A/c is debited and cash a/c or party’s account in case of credit purchase is credited. It is asset for asset or conversion entry.

Entry’

Local Purchases Debit

Cash/bank Credit

Import Purchases Debit

Bank Credit


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1.2.6 PREPAID RENT A/c

On starting business, there will be need to have a place, shop, go-down, building etc. which is acquired by applying capital or on rent and rent is paid in advance and advance remains unutilized is owned and ownership claims to be an asset.


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Therefore prepaid rent is a current asset and debited as Prepaid rent or unexpired rent and unexpired rent is claimable or utilizable in the next accounting cycle.

Entry;

Prepaid Rent Debit

Cash Credit

(Cash paid for rent in advance)


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1.2.7 PREPAID INSURNACE A/c

Prepaid Insurance is an account which shows the amount paid for business insurance in advance at the time of taking business policy from Insurance Company for any asset’s value covering all losses covered under policy. It is an asset before expiry, affects accounting equation, and debited under rules of double entry and on completion the period covered prepaid insurance credited and Insurance Expenses debited. Like unexpired insurance, if the some portion of it remains to consume will also be an asset.

Entry;

Prepaid Insurance Debit

Cash Credit

(Insurance paid in advance)


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1.2.8 UNEXPIRED RENT A/c

Unexpired rent is meant that some part of rent which was paid in advance saved to consume and value to business owned and claimable or recycle able for the next accounting period. The rent when was paid in advance then debited as Prepaid Rent and on the end of accounting period credited the consumed rent by crediting Prepaid Rent. The balance of unexpired rent is charged as asset of the company.


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Therefore, unexpired rent is the amount which is the asset of the company is consumable or claimable in next accounting cycle.

Example

Prepaid Rent 10,000/=

Cash 10,000/=

(Rent paid in advance)

Rent Expenses 8,000/=

Prepaid Rent 8,000/=

(Rent consumed during the year)

Balance of Prepaid Rent Rs.2, 000/= is unexpired rent.


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1.2.9 UNEXPIRED INSURNCE A/c

The some part of business insurance which saved to consume is unexpired insurance and by definition unexpired insurance is an asset. It is an example that a businessman takes policy worth Rs.100000/= from Insurance Company for one year on 1st September and it was debited with prepaid insurance. On ending of the year at 30th June, consumed part of the insurance which becomes 75000/= for nine months is debited by Insurance expense and credited by Prepaid Insurance. The balance of Prepaid Insurance Rs.25000/= is consumable or claimable from Insurance Company for the next accounting period.

In other words unexpired insurance is the amount that is the asset of the company and balanced into prepaid insurance means already paid insurance in advance consumable or claimable from Insurance Company for the next accounting period.


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Example

Prepaid Insurance 10,000/=

Cash 10,000/=

(Insurance paid in advance)

Insurance Expenses 8,000/=

Prepaid Insurance 8,000/=

(Insurance consumed during the year)

Balance of Prepaid Insurance Rs.2, 000/= is unexpired insurance.


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1.2.10 PREPAID ADVERTISING A/c

The prepaid advertising is current asset/liquid asset/value asset and debited as Prepaid Advertising or unexpired Advertising and unexpired Advertising is claimable or utilizable in the next accounting cycle.

The account Prepaid Advertising comes under Assets, sub head Current Asset/Liquid Asset/Value Asset and according to accounting rules asset increases debit decreases credit then it will be debited and other account which is cash or bank also an asset is credited. There is no affect on accounting equation is made as cash converted into value asset “Pre-Paid advertising” and this action is called asset for asset or conversion entry to value asset.


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Entry;

Prepaid Advertising Debit

Cash Credit

(Cash paid for advertising in advance)


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1.2.11 SECURITY DEPOSIT A/c

Security deposit is the amount that company has to give on import stage or to acquire fixed assets from parties that take some amount from buyer to have with him for assurance of their assets in other custody.

On taking shop, go down, office or any premises for business on rent, one should have to deposit some amount with the owner that is refundable.

Security deposit is short term asset or current asset in case of returning within one year of the balance sheet date and after one year, it will be long term asset or non-current asset.

The account security deposit comes under Assets, sub head Current Asset or non-current asset conditionally and as per accounting rule it is debited to Security Deposit and credited by cash or bank, cash is also an asset, therefore, cash move to other hand and this action is called asset for asset or moving entry.


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Entry;

Security Deposit Debit

Cash/Bank Credit


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1.2.12 DEFERRED ASSETS A/c

Unconsumed prepaid expenses, which could not be expired during accounting period such as insurance, rent, interest, advertising etc., are carried forward as an asset for future benefit is called deferred assets.

Deferred Assets are long term current assets transferred by prepaid expenses shown in balance sheet.

Entry;

Deferred Assets Debit

Prepaid Expenses Credit


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1.3 Intangible Assets

1- Goodwill2- Trade Mark3- Copy Right4- Brands5- Logos


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Intangible assets such as goodwill, logos, trade mark, brands, copy write etc. are long term current assets and have no physical existence but relate to the value of reputation of business generated gradually by first day of its having. It may be purchased to increase the value of business and sold to take benefit of having it.

Entry;

For purchase of intangible asset

Intangible Asset Debit

Cash Credit

For sale of intangible asset

Cash Debit

Intangible Asset Credit


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Intangible assets of having limited life can be amortize under formula annual amortization expense=cost/useful life debiting Amortization Expense and crediting Accumulated Amortization and of an indefinite life, there is not amortization but is test of impairment and written down to its recoverable amount under formula impairment loss = carrying value-recoverable amount debiting Loss on Impairment and crediting Accumulated Impairment Loss.

1.4 Contra Assets

1. Accumulated Depreciation(O.E.)2. Accumulated Depreciation (P&M)3. Accumulated Depreciation (F)4. Purchase Return5. Purchase Discount6. Allowance for Uncollectable Bad Debts

CONTRA ACCOUNTS

Contra accounts reduce the value of a related account and to correct previous mistakes.


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1.4.1 ACCUMULATED DEPRESCIATION A/c

Contra assets accounts are reduced by accumulated depreciation, a collection of depreciation, on fixed assets like building, plant and machinery, furniture and fixtures, office equipment and other fixed assets. Contra assets relating to depreciation credited by accumulated depreciation, a new account is generated instead of asset account and shown in balance sheet reducing the amount of fixed assets accounts.


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Adjusting Entry;

Depreciation Expenses Asset Debit

Accumulated Depreciation - Asset Credit

Closing Entry;

Expense and Revenue Summary asset Debit

Depreciation Expenses Asset Credit


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1.4.2 PURCHASE RETURN A/c

Purchase return which relates to purchase account, a temporary asset account, reduces the value of cost of goods sold in cost of goods sold statement or in income statement.

Entry;

Account Payable Debit

Purchase Return & Allows Credit


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1.4.3 PURCHASE DISCOUNT A/c

Purchase discount which relates to purchase account, a temporary asset account, reduce the value of cost of goods sold in cost of goods sold statement or in income statement.

Account Payable Debit

Purchase discount Credit


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1.4.4 UNCOLLECTABLE BAD DEBTS

The new account “Allowance for uncollectable bad debt” is created against accounts receivable accounts. Allowance for uncollectable bad debit consists on estimated value by percentage of receivables from suppliers.

Uncollectable/Bad Debits Expenses Debit

Allowance for uncollectible/Bad debts Credit


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2-LIABILITIES

Liabilities mean the claim of suppliers on account of purchases or the debts taken or have to pay on various causes during business operation.

Liabilities are the second main principle of accounting consists on short term and long term liabilities and shown in balance sheet.


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2.1 SHORT TERM LIABILITIES

1. Accounts Payable

2. Salaries & Wages Payable

3. Accrued Expenses

4. Sales Tax Payable

5. Income Tax Payable

6. Notes payable

7. Interest payable on banks’ loan

2.1.1 Accounts Payable

Short term liabilities is meant by debts payable shorter than one year such as accounts payable, shown in balance sheet under the heading current liabilities covering note, the detail of parties to whom the debt is payable. Short term liabilities are credited as A/c payable with party name from whom the goods purchased and purchases are debited under rules.


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Merchandise/Assets = DebitA/c P/A ABC & Co. /Liabilities = Credit

2.1.2 Salaries Payable A/c

At the end of the year, the balance of salaries, the salaries to staff permanently working in an organization, and wages, the wages to workmen working on daily basis, remain to pay because of the reason that the some companies pay salaries and wages to their staff after last day of the month. The remaining part of the salaries & wages, already charged in expenses, comes under head Salaries & Wages payable, showing the salaries & wages are remaining to pay.


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Salaries are wages payable come under short term liabilities journalized as;

Salaries & Wages Expenses Debit

Salaries & Wages Payable Credit


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2.1.3 ACCRUED EXPENSES

Accrued Expenses, the amount of expenses relating to current accounting year, are the liabilities of short term and payable under head Accrued Expenses in the next accounting period.

The account of Accrued Expenses is temporary account from which all expenses relating to previous accounting year are paid and charged in balance sheet under Current Liabilities. The accrued expenses on one side make profit & loss actual and on other side wipes out the matter of expenses relating to previous accounting year.

The Expenses relating to previous year are debited in new accounting year under head Accrued Expenses and credited in previous accounting year in lump sum as Accrued Expenses.


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Ledger Entry in current year

Accrued Expenses Debit

Cash/Bank Credit

Ledger Entry in previous year

Expenses (Head wise) Debit

Accrued Expenses Credit


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2.1.4 SALES TAX PAYABLE

Sales tax payable, the amount of sales tax balance of sales and purchases in ledger account at the end of the accounting year, comes under liabilities shown in balance sheet.

Sales tax on supplies or services is charged by Estate on prescribed rate which is deducted by Sales Tax Invoice and journalized as;

Goods or Services a/c Debit

Sales Tax payable a/c Credit

Sales tax payable a/c credit Credit

Sales tax allows the adjustment of purchases and other related expenses as;

Sales Tax Payable A/c Debit

Purchases/related expenses A/c Credit


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The balance of ledger in sales tax payable account is meant to pay the tax into bank as;

Sales Tax Payable A/c Debit

Cash/Bank A/c Credit


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2.1.5 INCOME TAX PAYABLE A/c

Income tax payable, the amount of Income tax balance in ledger account at the end of the accounting year, comes under liabilities shown in balance sheet.

Income tax on supplies and services is charged by Estate on prescribed rate which is deducted by withholding agent; withholding agent is that who makes payment to suppliers and service providers. The tax, which is deducted by withholding agent, is credited to withholding agent under credit note by suppliers or service provider.

In case of salaried persons, the Income tax on payment of salaries to employees is deducted and deposited by company and received the amount of income tax from employees.

The income tax deducted by withholding agent on sales is claimable or adjustable by government.


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The following accounts are generated in connection with income tax;

As withholding agent

Party’s account A/c Debit

Income tax payable A/c Credit

As other than withholding agent

Income Tax payable A/c Debit

Party’s Accounts A/c Credit

As an Employer

Salaries Expenses A/c Debit

Income Tax payable A/c Credit

As a Depositor

Income Tax Payable Debit

Cash/Bank Credit


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2.1.6 NOTES PAYABLE A/c

A promissory note is an instrument of formal written promise by one person or maker, who makes note and promises to pay, to another person or payee, the person whom the amount is payable, for payment of liabilities. For example, if company or person received cash against promissory note from person or financial institution on promise to repay a note recorded as;


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Cash/Bank Debit

Notes payable Credit

2.1.7 Interest on Notes Payable

In case of interest on notes, mentioned in promissory note with the specific rate of interest and terms therein, the borrower will accrue the transaction debiting Interest Expenses and crediting Interest payable and on payment of interest debiting interest payable and crediting cash as;


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Accrual of Interest on notes payable

Interest Expenses

Interest payable

Payment of Interest on Notes payable

Interest payable

Cash


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2.2 LONG TERM LIABILITIES

1. Loans

2. Debentures

3. Mortgage

4. Bank Loans

2.2.1234 Long Term Liabilities

Long term liabilities is meant by debts payable longer than one year such as loans, debentures, mortgage, bank loans etc. as shown in balance sheet under main head liabilities.

In order to operate business or to solve funds problems, organizations take loans from some sources such as persons, banks, financial institution or on leasing on fixed assets. The assets against loans, debentures, mortgages, banks loans are debited and persons/organization/financial institution are credited in the book of company having liabilities.

Assets/Cash/Bank Debit

A/c Payable (Financial Institution) Credit


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3 - PROPRIETORSHIP/OWNERS’ EQUITY

1. CAPITAL

2. DRAWING

3.1 CAPITAL A/c

Capital, a permanent member of accounting cycle, in shape of cash or goods invested in business is a part of owner’s equity means owner’s interest on values of assets or the recourses of business.


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Capital account is generated in connection with investment in business as to credit capital account and debit asset account;

Cash Invested in business

Cash Debit

Capital Credit


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3.2 DRAWING A/c

Drawing is a contra equity account which reduces the capital of owner because of the owner withdraws cash or goods for his personal use as;

Cash drawn for personal use

Drawing Debit

Cash Credit


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4 – REVENUE/INCOME

Revenue is the fourth main principle head of the system of accounting and many accounts relating to income linked with like income from sales, commission income, other incomes etc.

Under rules of debit and credit revenue increases credit decreases debit then on selling, cash or account receivable/asset increases and merchandise/asset sold decreases. it is asset for asset entry but the profit or commodity purchased for doing business is involved in selling this asset therefore, it belongs to revenue, ascertain in profit and loss account, profit and loss transferred to equity and equity is the source. It is concluded that the profit is the source generated by sales and sales contra to commodities.

Revenue is the part of income summary and temporary member of accounting cycle. It ends on profit and loss account which transferred to Balance sheet under owners’ equity or capital account.


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4.1 SALES

4.2 COMMISSION INCOME

4.3 OTHER INCOMES

4.4 UNEARNED REVENUE

4.5 ACCRUED REVENUE RECEIVABLE


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4.1 SALES A/c

The merchandise or commodities that was purchased or manufactured for doing business or to make profit by selling them to customer is sale. In sale, the process involves that manufacturer manufactures goods, sells to distributor; distributor to whole seller and whole seller to retailer and retailer to end user.

Sales come under the fourth main head “Revenue”, the temporary member of accounting cycle, ends on profit and loss account. Under rules, it is credited either on cash or on credit and debited cash and on account receivable in case of sale on account like;

Sale on cash

Cash Debit

Sales Credit

Sales on account

A/c Receivable (ABC Co.) Debit

Sales Credit


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4.2 COMMISSION INCOME A/c

Commission income relates to the business of services wherein no merchandise or commodity is involved but consultancy or making help in executing commercial transactions like commission on sale, commission on property selling etc.

Commission income comes under main head revenue crediting commission income debiting cash/bank.

Cash/Bank Debit

Commission income Credit


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4.3 OTHER INCOMES

Other incomes is the summary of incomes from other sources besides business specific incomes but relates to business like scrap sale, shop sale, income from bank interest, etc.

Other income generates sub accounts according to the nature of incomes and recorded as;

Cash/Bank Debit

Other Income Credit


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4.4 UNEARNED REVENUE

Unearned revenues mean company receives the money in advance for services or sale of goods that not performed or delivered or pre-receipt for undelivered goods or unperformed services. In other words, the unearned revenue is the liability until it earns so recorded as;

Cash/Bank

Unearned revenues

On delivery of goods or performing services, unearned revenue will be debited and credit sales/service as;

Unearned revenues

Sales


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4.5 ACCRUED REVENUE RECEIVABLE

Accrued revenue means to build up revenues that have been earned and sales performed but not received or recorded at the end of accounting period which could be recognized by adjusting entry.

Accrued revenue is treated as an asset instead of liability.

Accrued Account receivable Debit

Income account Credit


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4.1 CONTRA REVENUE ACCOUNT

4.1.1 SALES RETURN

4.1.2 SALES DISCOUNT

4.1.1 SALES RETURN

Sales return account, a contra revenue account, is made if the goods sold returned causing defects, expiry, damage and any reason. It reduces income but balance to inventory or stock. In case of sale on credit, the amount of credit is given to purchaser on receipt of his complain or debit note recording


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journal entry for adjustment of claim as to debit sales return and allowances and credit account receivable.

One side, sales return and allowances reduce the account of account receivable or liability of purchaser and on other side sales in income statement as;

Sales Return & Allowances Debit

Account Receivable Credit.


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4.1.2 SALES DISCOUNT

Sales discount account, a contra revenue account, is made if reduction in the price of a product or service offered by seller in place of early payment or to increase sales. It reduces income but not affect on inventory or stock. The amount of credit is given to purchaser at the time of purchasing on cash sale or/on credit in later adjustment by crediting purchaser’s account as;

Sales Discount Debit

Account Receivable Credit.

Sales return reduces the account of account receivable or liability of purchaser and sales in income statement.


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5 - EXPENSES

Expenses are the fifth part of main principle head of the system of accounting and numerous accounts linked with it like direct expenses, freight charges, insurance of goods in transit, carriage, wages, custom duty, import duty, octroi, other taxes etc. and all indirect expenses, operating and non-operating, other than direct expenses like rent of building, salaries to employees, legal charges, insurance expense, depreciation expense, printing expense, office stationery expense, financial charges etc., revolving in selling expenses, administrative expenses, financial expenses, general expenses etc.


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Expenses are the member of temporary accounts ending on profit and loss account. The net profit and loss is ascertained by reducing them to income and loss account.


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5.1 DIRECT EXPENSES

Direct expenses involve in purchases from purchase point to business place like cartage, freight, goods insurance in transit, carriage inward, wages, custom duty, import duty, octroi, taxes and all other expenses included in goods or in process of making goods directly.

Direct expenses affect on the cost of goods sold by adding them in merchandise purchased. In other words they increase the value of actual purchases or to the cost of goods sold.


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5.2 INDRECT EXPENSES

Indirect expenses relate to operating and non-operating expenses containing manufacturing expenses, selling expenses, administrative expenses, financial expenses, general expenses etc. which generate numerous accounts like rent of building, salaries to employees, legal charges, insurance expense, depreciation expense, printing expense, office stationery expense etc.

The net profit and loss is ascertained by reducing indirect expenses to income and loss account.


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5.3 OPERATING EXPENESES

All expenditures involve in business operation but not directly associated with the cost of goods usually sub divided administrative expenses, sales expenses and general expenses like salaries expenses, repair & maintenance expenses, advertising expenses, insurance expenses, rent expenses, utility expenses.

The net profit or loss is ascertained by reducing them to revenues in income statement.


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5.4 NON OPERATING EXPENSES

Some expenditure in business are incurred for reasons and not involve normal business operations are non operating expenses like interest charges or other costs of borrowing and expenses relating to employee benefits, such as pension contributions, non recurring items such as accounting adjustments, obsolete of equipment or currency exchange etc.


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5.4.1 ADMINSTRATIVE EXPENSES

Advertising Expenses

Insurance Expenses

Repair & Maintenance

Salaries &Allowances

Depreciation Expenses

Office Supplies

5.4.1.1 ADVERTISING EXPENSES

Advertising may be administrative expense, in case of giving advertising for hiring staff, property transfer, sale, legal rights etc.

On payment of advertising cost, it must be debited with Advertising expenses and cash/account payable credit in cash of credit advertising.

Advertising Expense debit

Cash/account payable credit


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5.4.1.2 INSURANCE EXPENSE

Insurance expense means the amount of insurance is paid on policies for any business value in anticipation of recovering losses from any kind of fire, theft, hazardous etc. in the business. There will be no return, in case of nothing is occurred like personal insurance.

The expenditure on insurance is debited by Insurance Expenses and credited cash/bank under rules of debit and credit.

Example:

Paid for insurance on goods

Insurance Expense debit

Cash/Bank credit


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5.4.1.3 REPAIR & MAINTENANCE EXPENSES

The Assets involves in business operation need to renovate, repair and maintain or to keep in working condition, there will be accounts like repair & maintenance, building, plant & machinery office equipment, air conditioners etc.

All repair and maintenance on assets are expenses, debited under rules and reduce income;

Repair & Maintenance debit

Cash credit


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5.4.1.4 SALARIES & ALLOWANCES

A business unit has different departments, huge labors, officers and directors for business operation and their salaries and allowances, remunerations, benefits are recorded under head Salaries & Allowances A/c, Remuneration A/c, Benefits A/c generated to specific benefit.

Salaries and allowances are journalized at the end of the month to create liability of the period as;


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Salaries & Allowances Debit

Salaries & Allowances payable Credit

And when, salaries & allowances are distributed by cash or bank, the recording of entry will be as;

Salaries & Allowances payable Debit

Cash/Bank Credit.

Salaries & Allowances comes under Expense Account may be split out department wise, station wise, category wise etc.


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5.4.1.5 Depreciation Expense A/c

The Account depreciation expense is derived from accumulated depreciation which reduces the net income under Income and loss account.

Depreciation expense is the result of calculation of accumulated depreciation on fixed assets under different methods and recorded at the end of the year as;

Depreciation Expense Debit

Accumulated Depreciation Credit


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5.4.1.6 Office Supplies

Office requires stationery like pens, pencils, calculators, papers, staplers, toners, ink, etc besides printing vouchers, forms, books, etc.

The expense on stationery and printing for office comes under administrative expenses debited under rules and the account of all purchases relating to printing and stationery using in office will be Office Supplies Expense A/c or Printing & Stationery A/c like;

Office Supplies Expense A/c Debit

Cash/Bank Credit


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5.4.1.7 OTHER ACCOUNTS (ADMINSTRATIVE)

Many other expenses relating to cash or petty cash commonly used under administration like EOBI Expense a/c, Social Security A/c Security Expenses A/c, conveyance a/c, cartage a/c, vehicle running expenses a/c, staff welfare a/c, ex-gratia a/c, mobile expense a/c, janitorial expenses a/c, entertainment a/c, potage a/c, incidental a/c, rent rates & tax a/c, miscellaneous a/c, consumable stores a/c and many other accounts creatable according to the need of recording transactions.


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The expenses in question may be passed through petty cash system or directly from cash book as shown below;

Petty Cash Funds a/c Debit

Petty cash expenses (accounts) Credit

OR

Conveyance Debit

Cash Credit


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5.4.2 SELLING EXPNESES

Advertising Expenses

Sales Promotion Expenses

Sales Distribution Expenses

5.4.2.1 Advertising Expense A/c

In all three business; trading, manufacturing and servicing, there is need to advertise the item that the manufacture is producing and benefiting its traders to increase its manufacturing process by selling its produces. The traders who imports items not known in the region, they should have to introduce imported items by advertising with the support of newspaper, magazines, TV. Channels, cables, wall chalking, hand bills and all other sources come under advertising. As far as servicing is concerned, the one is introduced oneself by doing advertising.


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Advertising Expense account is made to record all the transaction relating to advertising.

Advertising Expense comes under the fifth principle account ALPRE and the sub account of Selling expenses on the income statement.

On payment of advertising cost, it must be debited with Advertising expenses and cash/account payable credit in cash of credit advertising.


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5.4.2.2 Sales Promotion Expenses

Sales promotion is an essential part of business which introduces the items that are new or imported and none is known about its function or advantages. Sales promotion also makes goodwill of the items promoted by means of installing stall, door to door introduction, different activities in school, college, health institution etc. in city or out city, in country or out country.

The Expenditure on promotion comes under Sales Promotion Expenses directly head or having sub accounts like travelling expense a/c, conveyance a/c, communication a/c, field expense ac, salaries & allowances a/c, staff welfare a/c, vehicle expense a/c, conveyance a/c, cartage a/c and many other accounts relating to sales promotion.

Sales promotion expenses linked with Selling Expenses and debited under expenses rules like;

Sales Promotion Expenses a/c Debit

Cash/Bank Credit


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5.4.2.3 Sales Distribution Expenses

Another essential part of sales is distribution from which the demand of items is distributes to distributor, whole seller, retailer or end user in city or out city, in country or out country.


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The expenditure on distribution come under Sales Distribution Expenses a/c directly or having sub accounts like travelling expense a/c, communication a/c, field expense a/c, salaries & allowances a/c, staff welfare a/c, vehicle expenses a/c, conveyance a/c, freight & cartage a/c and may other accounts relating to sales distribution.

Sales distribution expenses linked with Selling Expenses and debited under expenses rules like;

Sales Distribution Expenses a/c Debit

Cash/Bank Credit


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5.4.2.4 Other Accounts (Sales & Marketing)

Many other expenses relating to cash or petty cash commonly used under sales & marketing like conveyance a/c, cartage a/c, vehicle running expenses a/c, staff welfare a/c, ex-gratia a/c, mobile expense a/c, entertainment a/c, potage a/c, incidental a/c, miscellaneous a/c, commission a/c, incentive a/c, field expenses a/c, printing & stationery a/c and many other accounts creatable according to the need of recording transaction.


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The expenses in question may be passed through petty cash system or directly from cash book as shown below;

Petty Cash Funds a/c Debit

Petty cash expenses (accounts) Credit

OR

Conveyance Debit

Cash Credit


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5.4.3 GENERAL EXPENSES

Rent Expenses

Utility Expenses

5.4.3.1 Rent Expenses A/c

0n starting of business, the business man needs some assets either to purchase or take on rent. In the form of rent, he must have to pay deposit, pre rent, monthly rent of the asset acquired for business use.

When the rent is paid for business premises, the account “Rent Expense” is made and debited as Rent Expense and credited cash under rules of debit and credit.

Rent Expense Debit

Cash Credit Credit

(Rent for Jan 2015)


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5.4.3.2 Utilities Expense A/c

Utility expenses mean electricity, Sui gas, water and other useful items for smooth operation of business. It may be itself account or divided into other accounts like Electricity charges a/c, Sui gas charges a/c, water & sewerage a/c, etc.


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The expenditure on utilities comes under general expenses or under sub accounts in question and debited under expenses rules like;

Utilities Expense a/c Debit

Cash/Bank Credit


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5.5 FINANCIAL EXPENSES

BANK CHARGES

BANK COMMISSION

MARK UP

Financial charges are the amounts that are deducted by financial institutions on making financial instruments, on line transfer, check books; accounting maintaining charges, mark up on loans, credit cards, late charges, taxes, postages, excise duty and many other charges based on the nature of transactions.

Financial charges are considered as non-operating expenses but charges relates to business operation are operating expense like mark up on loan taken for business operation.

Many accounts may be created for financial charges but mostly used as bank charges, bank commission, mark up etc. and recorded as;

Bank charges Debit

Cash/Bank Credit


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Accounts making

Education

depreciationexpense

bank ac

insurance expense ac

deferred assets ac

accrued expense ac

advertising expense

rent expense ac

sales promotion ac