Important Notes:

Journalizing Theory:-

Assets and Expenses Increase-Debit

Liability/Income/Capital/Equity Increase-Credit

Assets and Expenses Decrease-Credit

Liability/Income/Capital/Equity Decrease-Debit

Customer and Vendors balances:

If Our Company Owes the Vendor it will show a CREDIT balance in our Vendor Ledger.
(Credit side will be higher and debit side will be lower)
If our customers owe us money it will show a CREDIT Balance in our Customer ledger.
(Credit side will be higher and debit side will be lower)
If there is a withdrawal by the owner, his drawings account will be debited. The
amount withdrawn will be shown on the debit side of the Drawings account General
Ledger.
If there is deposit by the owner, his drawings account will be credited. The amount
deposited will be shown on the credit side of the Drawings account general ledger.
Asset Accounts usually have a DEBIT Balance.
Liability Accounts usually have a CREDIT Balance.
Revenue Accounts usually have a CREDIT Balance.

Depreciation
Journal: Depreciation Expense Debit and Accumulated Depreciation credit.
Profit is an Liability because it is the amount to be given to the shareholders/Owners
(Separate Entity Concept)
Loss is an Asset because it is the amount to be claimed from the shareholders/Owners
(Separate entity concept).

Notes
Trade Discount
Trade discount is given on the basis of a purchase.
Trade discount is allowed on both credit and cash transactions.
Trade discount is not separately shown in the books of accounts, and all amounts
recorded in a purchases or sales book are done in the net amount only.
On the invoice itself the discount is given due to lump purchase.
Eg:
10 vehicles were purchased by Unreal Pvt Ltd with a 5% trade discount on the list price of
1, 00,000 each.
Total List Price = 10 x 1, 00,000 = 10,00,000
Total Discount = 5% of 10, 00,000 = 50,000
Final Invoice Price after TD = 10, 00,000 50,000 = 9, 50,000.

Cash Discount-(Provided only for Cash Transactions)

1. A cash discount is a deduction allowed by a supplier of goods or by a provider of services
to the buyer from the invoice price.
2. It is provided as an incentive or a motivation in return for paying a bill within a
specified time.
3. Cash discount is shown separately in the books .It is shown as an expense in the Profit and
Loss A/C.
4. Cash discount is only allowed on cash payments.
5. Cash discount is given on the basis of payment.

Accrued Income

Accrued income is income which has been earned but not yet received.
Income must be recorded in the accounting period in which it is earned. Therefore, accrued
income must be recognized in the accounting period in which it arises rather than in the
subsequent period in which it will be received.
As income will be credited to record the accrued income, a corresponding receivable must be
created to account for the debit side of the transaction. The accounting entry to record
accrued income will therefore be as follows:
Debit

Income Receivable (Balance Sheet)

Credit

Income (Income Statement)

Example
ABC LTD receives interest of $10,000 on bank deposit for the month of December 2010 on
3rd January 2011. ABC LTD has an accounting year end of 31st December 2010.
ABC LTD will recognize interest income of $10,000 in the financial statements of year 2010
even though it was received in the next accounting period as it relates to the current period.
Following accounting entry will need to be recorded to account for the interest income
accrued:

$
Debit
Credit

Interest Income Receivable

$
10,000

Interest on Bank Deposit (Income)

10,000

On the date of receipt of interest (i.e. 3rd January of the next year) following accounting entry
will need to be recorded in the subsequent year:
$
Debit
Credit

Bank
Interest Income Receivable

$
10,000
10,000

Accrued Expense
Accrued expense is expense which has been incurred but not yet paid.
Expense must be recorded in the accounting period in which it is incurred. Therefore, accrued
expense must be recognized in the accounting period in which it occurs rather than in the
following period in which it will be paid.

As expense will be debited to record the accrued expense, a corresponding payable must be
created to account for the credit side of the transaction. The accounting entry to record
accrued expense will therefore be as follows:
Debit
Credit

Expense (Income Statement)

Expense Payable (Balance Sheet)

Example
ABC LTD pays loan interest for the month of December 2010 of $10,000 on 3rd January
2011. ABC LTD has an accounting year end of 31st December 2010.
ABC LTD will recognize interest expense of $10,000 in the financial statements of year 2010
even though it was paid in the next accounting period as it relates to the current period.
Following accounting entry will need to be recorded to account for the interest expense
accrued:
$
Debit
Credit

Interest Expense

10,000

Interest Payable

10,000

On the date of payment of interest (i.e. 3rd January of the next year) following accounting
entry will need to be recorded in the subsequent year:
$

Debit

Interest Payable

Credit

10,000

Cash

10,000

Prepaid Income
Prepaid income is revenue received in advance but which is not yet earned.
Income must be recorded in the accounting period in which it is earned. Therefore, prepaid
income must be not be shown as income in the accounting period in which it is received but
instead it must be presented as such in the subsequent accounting periods in which the
services or obligations in respect of the prepaid income have been performed.
Entity should therefore recognize a liability in respect of income it has received in advance
until such time as the obligations or services that are due on its part in relation to the prepaid
income have been performed. Following accounting entry is required to account for the
prepaid income:
Debit

Cash/Bank

Credit

Prepaid Income (Liability)

Example
ABC LTD receives advance rent from its tenant of $10,000 on 31st December 2010 in respect
of office rent for the following year. ABC LTD has an accounting year end of 31st December
2010.
ABC LTD will recognize a liability of $10,000 in the financial statements of year 2010 in
respect of the prepaid income to acknowledge its obligation to make the office space
available to the tenant in the following year. Following accounting entry will be recorded in
the books of ABC LTD in the year 2010:
$
Debit

Cash

$
10,000

Credit

Prepaid Rent Income (Liability)

10,000

The prepaid income will be recognized as income in the next accounting period to which the
rental income relates. Following accounting entry will be recorded in the year 2011:
$
Debit
Credit

Prepaid Rent Income (Liability)

$
10,000

Rent Income (Income Statement)

10,000

Prepaid Expense
Prepaid expense is expense paid in advance but which has not yet been incurred.
Expense must be recorded in the accounting period in which it is incurred. Therefore, prepaid
expense must be not be shown as expense in the accounting period in which it is paid but
instead it must be presented as such in the subsequent accounting periods in which the
services in respect of the prepaid expense have been performed.
Entity should therefore recognize an asset in respect of expense it has paid in advance until
such time as the services that are due in relation to the prepaid expense have been performed
by the suppliers/contractors. Following accounting entry is required to account for the
prepaid expense:
Debit

Prepaid Expense (Asset)

Credit

Cash

Example
ABC LTD pays advance rent to its landowner of $10,000 on 31st December 2010 in respect
of office rent for the following year. ABC LTD has an accounting year end of 31st December
2010.
ABC LTD will recognize an asset of $10,000 in the financial statements of year 2010 in
respect of the prepaid expense to recognize its right to use office space in the following year.
Following accounting entry will be recorded in the books of ABC LTD in the year 2010:
$
Debit

Prepaid Rent

$
10,000

Credit

Cash

10,000

The prepaid expense will be recognized as expense in the next accounting period to which the
rental expense relates. Following accounting entry will be recorded in the year 2011:
$
Debit
Credit

Rent Expense (Income Statement)

Prepaid Rent

$
10,000
10,000

Introduction to Cash Flow Statement

The official name for the cash flow statement is the statement of cash flows. We will use both
names throughout AccountingCoach.com.
The statement of cash flows is one of the main financial statements. (The other financial
statements are the balance sheet, income statement, and statement of stockholders' equity.)
The cash flow statement reports the cash generated and used during the time interval
specified in its heading. The period of time that the statement covers is chosen by the
company. For example, the heading may state "For the Three Months Ended December 31,
2014" or "The Fiscal Year Ended September 30, 2014".
The cash flow statement organizes and reports the cash generated and used in the following
categories:

What Can The Statement of Cash Flows Tell Us?

Because the income statement is prepared under the accrual basis of accounting, the revenues
reported may not have been collected. Similarly, the expenses reported on the income
statement might not have been paid. You could review the balance sheet changes to determine

the facts, but the cash flow statement already has integrated all that information. As a result,
savvy business people and investors utilize this important financial statement.
Here are a few ways the statement of cash flows is used.
1. The cash from operating activities is compared to the company's net income. If the
cash from operating activities is consistently greater than the net income, the
company's net income or earnings are said to be of a "high quality". If the cash from
operating activities is less than net income, a red flag is raised as to why the reported
net income is not turning into cash.
2. Some investors believe that "cash is king". The cash flow statement identifies the cash
that is flowing in and out of the company. If a company is consistently generating
more cash than it is using, the company will be able to increase its dividend, buy back
some of its stock, reduce debt, or acquire another company. All of these are perceived
to be good for stockholder value.
3. Some financial models are based upon cash flow.

IMPORTANT THEORY RELATED TO CASH FLOW

When an asset (other than cash) increases, the Cash account decreases.
When an asset (other than cash) decreases, the Cash account increases.
When a liability increases, the Cash account increases.
When a liability decreases, the Cash account decreases.
When owner's equity increases, the Cash account increases.
When owner's equity decreases, the Cash account decreases.

Here's a Tip
For a change in assets (other than cash)the change in the Cash account is in the opposite
direction.

For a change in liabilities and owner's equitythe change in the Cash account is in the same
direction.

Important Journals Entries:

Writing off an Asset After depreciation and Losses.
Abc Ltd is buying a machinery and is given away and written off. Machine Purchased for
100000/-.Depreciation for 10 Years @ 10000/Year.

Accumulated Depreciation
To Machine Asset

10000
10000

Variation on this first situation is to write off a fixed asset that has not yet been completely
depreciated. In this situation, write off the remaining undepreciated amount of the asset to a
loss account. To use the same example, ABC Corporation gives away the machine after eight
years, when it has not yet depreciated $20,000 of the asset's original $100,000 cost. In this
case, ABC records the following entry:
Debit
Loss on asset disposal

20,000

Accumulated depreciation

80,000

Machine asset

Credit

100,000

The second scenario arises when you sell an asset, so that you receive cash (or some other
asset) in exchange for the fixed asset you are selling. Depending upon the price paid and the
remaining amount of depreciation that has not yet been charged to expense, this can result in
either a gain or a loss on sale of the asset.
For example, ABC Corporation still disposes of its $100,000 machine, but does so after seven
years, and sells it for $35,000 in cash. In this case, it has already recorded $70,000 of
depreciation expense. The entry is:
Debit
Cash

35,000

Accumulated depreciation

70,000

Credit

Gain on asset disposal

5,000

Machine asset

100,000

What if ABC Corporation had sold the machine for $25,000 instead of $35,000? Then there
would be a loss of $5,000 on the sale. The entry would be:
Debit
Cash

25,000

Accumulated depreciation

70,000

Loss on asset disposal

5,000

Machine asset

Credit

100,000

A fixed asset write off transaction should only be recorded after written authorization
concerning the targeted asset has been secured. This approval should come from the manager
responsible for the asset, and sometimes also the CFO.
Fixed asset write offs should be recorded as soon after the disposal of an asset as possible.
Otherwise, the balance sheet will be overburdened with assets and accumulated depreciation
that are no longer relevant. Also, if an asset is not written off, it is possible that depreciation
will continue to be recognized, even though there is no asset remaining. To ensure a timely
write off, include this step in the monthly closing procedure.

Accounting for Insurance Proceeds Journal Entries

Account

Debit

Impairment of inventory (expense)

XXX

Inventory

Credit

XXX

The damaged inventory is written off

Account

Debit

Accounts receivable

XXX

Insurance compensation (income)

Credit

XXX

The claim is agreed with the insurance company.

Account

Debit

Cash

XXX

Accounts receivable
The cash is received from the insurance company

Credit

XXX

If the insurance company does not fully compensate for the damaged inventory, there will be
a difference between the debit on the impairment of inventory account in journal one, and the
credit on the insurance compensation account in journal two. This net debit represents a loss
to the business for inventory damaged but not covered by the insurance claim.
Q: What is the entry for the claim recovered from fire insurance?
A: This depends on the exact asset/s that was destroyed in the fire and to what extent they
were covered.
1) Let's say a storeroom and its contents, valued at $60,000, were destroyed by fire. The
insurer pays your business $60,000.
In this case the entry would be:
Dr Insurer (debtor) $60,000
Cr Storeroom (asset) $60,000
Later:
Dr Bank $60,000
Cr Insurer (debtor) $60,000
2) Now let's say the agreed amount of the claim was $50,000 instead of $60,000.
The journal entry would be:
Dr Insurer (debtor) $50,000
Dr Loss $10,000
Cr Storeroom (asset) $60,000
Later:
Dr Bank $50,000
Cr Insurer (debtor) $50,000
In this second scenario we record the loss (the difference between the value of the asset lost
and the amount of the claim) of $10,000.
For asset/s that were destroyed that were subject to depreciation, one would take out the
accumulated depreciation account too.
3) A delivery vehicle, which had a cost of $10,000 and accumulated depreciation of $3,000,
was destroyed by fire. The insurance claim amounted to $5,000.
The entries would be:
Dr Insurer (debtor) $5,000
Dr Accumulated depreciation $3,000
Dr Loss $2,000

Cr Delivery vehicle (asset) $10,000

Later:
Dr Bank $5,000
Cr Insurer (debtor) $5,000

ACCOUNTING TREATMENT OF IMPORT PURCHASE

http://www.letslearnaccounting.com/accounting-treatment-of-import-purchase
Posted By G.S. Bansal, On January 20, 2013
What is Purchase Import? When we purchase goods from out of our country that is called
Purchase Import. For example we are living in India and we are importing goods from China
then this purchase shall be treated as Purchase Import.
Following payments are included in Purchase Import Account:

Cost of material.

Custom Duty on material purchased.

Freight and cartage expenses.

Bank charges in respect of payment made to supplier.

Insurance expenses.

Shipping agents service charges or clearing agents service charges.

Other incidental expenses in respect of purchase from out of country.

Procedure for Import of goods:- An importer has to follow the following procedure for import
of goods:

First of all, the importer must have valid license to import that particular goods.

Then the importer places the purchase order to exporter.

After receiving the purchase order from the importer, the exporter dispatches the
goods through road, sea or by air as per the situation demands.

The exporter then sends the Invoice for the material, to the importer either directly or
through his banker.

After receiving the bill the importer pays the same either directly or through Letter of
Credit (L/C).

After arrival of the goods the importer pays the custom duty to custom department.

Payment of cartage and other clearance work is done by clearing agent. For that the
importer has to pay some service charges to them.

After all above is done, the imported goods is in the hand of importer to sale it.

Illustration:
1. M/s XYZ Ltd. imported goods from M/s ABC Corporation China on 10.01.13. M/s
ABC Corporation raised an Invoice no. 1512 dated 10.01.13 for US $ 10000.
2. M/s XYZ Ltd. paid the above bill on 15.01.13. They paid Rs.540000/= against US $
10000 from State Bank of India and Rs.2500/= as bank charges.
3. M/s XYZ Ltd also made the following payments in respect of above import:4. Freight and cartage Rs.30000/= to M/s Perfect Shipping Co.
5. Custom Duty Rs.162000/= paid through State Bank of India.
6. Rs.16500/= paid to M/s Prince Associates for their service charges to clear the goods
through State Bank of India.
7. How the above transactions shall be booked in the account books of M/s XYZ Ltd.?
Solution:
We shall make the following entries in the books of M/s XYZ Ltd. as under:Entry 1
Debit: Purchase Import Account Rs.540000/=
Credit: M/s ABC Corporation, China Rs.540000/=
(Being goods purchased from M/s ABC Corporation, China as per their Invoice No. 1512
enclosed)
Entry-2
Debit: M/s ABC Corporation, China Rs.540000/=
Credit: State Bank of India

Rs.540000/=

(Being payment of US $ 10000 made through State Bank of India)

Entry 3
Debit: Purchase Import Account Rs.2500/=

Credit: State Bank of India

Rs.2500/=

(Being currency exchange charges paid through State Bank of India for payment of US $
10000 to M/s ABC Corporation, China)
Entry 4
Debit: Purchase Import Account Rs.30000/=
Credit: Cash Account

Rs.30000/=

(Being cash paid to M/s Perfect Shipping Co. for Freight and cartage of goods from China)
Entry 5
Debit: Purchase Import Account Rs.162000/=
Credit: State Bank of India

Rs.162000/=

(Being custom duty paid through State Bank of India for the goods imported from M/s ABC
Corporation, China)
Entry 6
Debit: Purchase Import Account Rs.16500/=
Credit: State Bank of India

Rs.16500/=

(Being amount paid to M/s Prince Associates for their service charges to clear the goods
through State Bank of India)
From above example it is clear that all expenses related to purchase import also shall be
debited to Purchase Import Account.

Fixed Assets
Accounting treatment for lost or stolen tangible fixed assets such as motor vehicles is similar
to the accounting for disposal of such assets without any sale proceeds.
The fixed asset must be de-recognized from the statement of financial position and a loss
must be recognized for the carrying amount of the lost or stolen asset.
Insurance compensation received or receivable on the asset may either be offset against the
loss or presented separately as other income.
The accounting entries may therefore be summarized as follows:
Debit

Loss on asset theft

Debit

Accumulated Depreciation

Credit

Debit

Property, plant and equipment (cost)

Bank / Insurance compensation receivable

Credit

Other income - Insurance compensation*

*This may instead be set off against the loss on asset theft
- See more at: http://accounting-simplified.com/questions/stolen-lost-assets-accountingtreatment.html#sthash.csazFOk1.dpuf
Journal Entries of Credit Note
1 Vinod Kumar August 19, 2012
Before passing the journal entries of credit note, you should know the meaning of credit note.
Credit note is that note which is given to the customer when we get his returned goods. By
giving this paper or enote to customer, we try to tell that we are crediting his account with his
returned goods amount. Our customer can
also give the note with his returned goods but it will be the debit note, because we are the
creditor for him. When he will return the goods to us, it means he will debit our account in
his books. With this, he will not pay of the amount of his returned goods.
Now, we teach you the journal entry of credit note. We simple pass the sale return entry.
When we receive the goods, it means goods comes into the business. Our stock asset will be
increased. We will debit the sales returned account. With same amount, our debtorasset will
be decreased. So, we will credit the debtor or customer account.
In our books

Sales Return Account Debit

Debtor or Customer Account Credit

In Our Customer's books

When our customer will receive the credit note, he will pass following journal entry. note
received
Creditor Account Debit
Purchase Return Account Credit

Example: Suppose, Sham has received goods of Rs. 5000 from Ram. Ram has returned this
good because this is not good. Sham is the supplier of Ram. So, Sham issued the credit note
to Ram and pass the following journal entry in his books.

Sales Return Account Debit 5000

Ram Account Credit 5000

Source:- http://www.svtuition.org/2012/08/journal-entries-of-credit-note.html