Accounts

  What Is an Asset? An asset is a resource with  economic value  that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it's manufacturing equipment or a patent. Types of Assets Current Assets Current assets are short-term economic resources that are expected to be converted into cash within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses. Fixed Assets Fixed assets are long-term resources, such as plants, equipment, and buildings. An adjustment for the aging of fixed assets is made based on periodic charges called depreciation, which may or may not reflect the ...

  What Is Forfeiture? Forfeiture is the loss of any property without compensation as a result of defaulting on contractual obligations, or as a penalty for illegal conduct. Forfeiture, under the terms of a contract, refers to the requirement by the defaulting party to give up ownership of an  Assets , or Cash flow from an asset, as compensation for the resulting losses to the other party. When mandated by law, as a punishment for illegal activity or prohibited activities, forfeiture proceedings may be either criminal or civil. The process of forfeiture often involves proceedings in a court of law.

  Important Principle used in the Preparation of Trial Balance 1.  All the nominal, personal, and real accounts are to be considered in preparing the Trial balance. 2.  If a ledger shows a NIL balance, it is not considered in the preparation of the trial balance. 3.  The purchase or consumption ledger always carries a debit balance and appears on the debit side of the trial balance. 4.  The revenue account always carries a credit balance and appears on the credit side of the balance sheet. 5.  Sales return and purchase return can appear as separate line items in the trial balance or be shown as reduced from the main purchase and sales ledger, respectively. 6.  Opening stock figure comes from the Profit and loss account since it is not available as a closing balance of stock in the previous year's trial balance. 7.  All the expenses generally carry a debit balance. Accordingly, they will appear with a debit balance in the trial balance. 8....

  Errors Not Reflected by Trial Balance 1. Omission:  In this case, if a transaction gets missed in its entirety; the same will not get detected by the trial balance. 2. Error of Principle:  The trial balance will still match if a transaction gets recorded against the generally accepted accounting principle. The error of principle includes recording the Capital transaction as a revenue transaction in the books of accounts. 3. Error of Commission:  Suppose Rs 5000 gets recorded as Rs 500 in both the debit and credit sides of the trial balance. The trial balance will fail to point out this error. 4. Compensating Error:  In compensating error, one error compensates for another. For example, you did not debit the purchase account of Rs 1000 in one account but by mistake debited Rs 1000 in another account.

  Errors that cause a mismatch in Trial Balance Both the sides of a trial balance must tally. But if that does not happen, it may be on account of the following reasons. 1.  When only one leg of the transaction is posted:  Suppose goods are purchased on credit. The Purchase account gets debited, but the Creditor's account was not credited. 2.  Lack of accurate balancing:  The Closing balances of the previous year have not been accurately balanced in the current year. 3.  Amounts mismatched:  Suppose the sales ledger has a credit balance of Rs 10000, but while posting it in the trial balance, Rs 1000 gets posted. As a result, there will be a mismatch of Rs 9000 in the trial balance. 4.  Mismatch issue:  Suppose that the prepaid rent is paid. Instead of debiting the prepaid rent account, the Vendor's account gets debited. This will cause a mismatch in the trial balance.

  Steps to prepare Trial Balance Step 1: Understanding the Golden Rule of accounting:  Understanding the Golden rules of accounting is vital. It helps in understanding which account needs to be debited and which needs to be credited. As per the golden rule, debit comes under Expenses and assets and credit under incomes, gains, and liabilities. Therefore, credit is payables, whereas debit is receivables.   Step 2: Pass the journal entries:  After making sure which account is debited or credited, a necessary journal entry is passed. If you are using Tally ERP 9, the entries get passed automatically when the amount is input. Step 3:  Once the journal entries get passed, post the entries into their respective ledgers. In the case of Tally ERP 9, this posting takes place automatically at the back end. If you are maintaining manual accounts, then post them manually into the respective accounts. Step 4:  In this step, ...

  Methods of Preparation of Trial Balance Two methods used in the preparation of the trial balance are: 1.  Balance Method:  In this method, it is the net amount of a ledger that gets displayed in a trial balance. It can either be debit or credit balance. Under this method, the  trial balance can be prepared only after all the accounts get balanced. This is one of the accurate methods for the preparation of final accounts. 2.  Totals Method:  In this method, the total of each side of the account (debit and credit) gets posted in the trial balance. This method provides higher mathematical accuracy. However, the preparation of final accounts is not usually conducted using this method because of the scope of duplication, resulting in errors. 

  Objectives of Trial Balance 1. Bird Eye View: The  Trial balance  gives the summary of all the ledgers. Since the net amount gets displayed, you can save time by not viewing the concerned ledger again.   2. Pointing out Error:  The trial balance aids in pointing out errors. It is also used to check the arithmetical accuracy of books of accounts.

  Limitations of Trial Balance 1. The error of principle and compensating error may still exist even after the trial balance matches. 2. The  Trial balance  matches even when the transactions are completely omitted from recording in the books if they are not accounted for.

  Features of Trial Balance 1.  Trial balance in accounting  lists down all the ledgers, including the cash book. 2. It does not form a part of the Double-entry System of Accounting. It serves only as a reference. 3. A  trial balance  can be prepared any time- weekly, monthly, quarterly, and year-end. 4. It serves as a vital tool to verify the arithmetical accuracy of the books. 5. It forms a connecting point between the Profit and Loss Account and Balance sheet. 6. It does not provide conclusive proof of the absence of error. Errors such as errors of principal may still exist.

  Purpose of Trial Balance The preparation of the Trial balance   helps in  developing financial statements. The assets and liabilities find their place in the balance sheet. The Income and expenses appear in the profit and loss account. Based on all these accounts, the preparation of Final accounts takes Place.

  What is Trial Balance  In the words of J.R Batliboi, "A trial balance is a statement, prepared with the debit and credit balances of the ledger accounts to test the arithmetical accuracy of the books." A  trial balance  gets prepared just before preparing final accounts, which includes a balance sheet, Profit and loss statement, Cash flow, and notes to Accounts. In layman's terms, we can assume that it is the basic structure behind preparing the final accounts. It is the third step in the road map to prepare final accounts after the entries are passed in journal-register followed by classification and grouping of transactions to their respective ledgers. These ledgers, i.e. the principal book containing all sets of accounts, are then accumulated in a single place to constitute a  Trial balance .

  Differences between the GAAP and IFRS: There are certain differences between GAAP and the IFRS, which are tabulated below: IFRS GAAP IFRS is the global accounting system used by 110 countries like the EU, South American and Asian countries. GAAP is the standard accounting system adopted by the USA or United States of America solely. The system is accounting principles-based. The system is accounting rules-based. This accounting system allows the below assets to be revalued according to their fair value, which can be more reliably measured. The assets are property, inventories, investments in securities, intangible assets and plant & equipment. The revaluation of an asset is not allowed, except for marketable securities. It allows the reversal of impairment losses for all asset types except goodwill. It prohibits impairment losses reversal for all asset types. Long-term assets are cost valued initially and can then be revalued to the prevailing market price. Assets such as fur...

  International Financial Reporting Standards (IFRS): The primary aim of a principle of accounting is to maintain, track, record and keep systematic accounting records. From the financial status, the value and performance of a business entity can be accurately and quickly drawn up and communicated to the required person. The ­financial statements in accounting form the basis of information relied upon in the management of a firm that makes a public communication of its ­financial information with quantitative details. Accounting software like the Biz analysts  app  make such quantitative details easily available and maintained while following all Accounting Principles as required by statutory bodies. The International Financial Reporting Standards (IFRS) are accounting principles,  and common rules set globally to ensure transparency, consistency, comparability in financial reports and statements. The primary objective of the IFRS is to clearly state how or...

  What are the accounting principles conventions used? Having understood the concepts in accounting, it is necessary to understand the accounting conventions used in accounting principles. An accounting convention means a set of traditions, practices and customs that guide the firm in its preparations when readying its accounting statements. The accounting conventions are a result of derived practice and usage. There are four critical conventions to follow in accounting principles and reporting: Convention on Consistency:  Accounting   consistency is a basic assumption made when accounting states that all policies and practices are followed. In contrast, accounting is consistent over any period and from one period to another. Convention of full disclosure:  This is an important part of accounting practice and states that accounting should be conducted and prepared openly and transparently. All material information on transactions is clearly and fully disclo...

  Accounting concepts: To understand the types of accounting principles, you must first understand the accounting conventions and the accounting concepts that form the accounting principles involved in business accounting. So, let’s begin with the concepts and conventions that overlap in accounting practices, including the popular accounting principles.  Some of the important accounting concepts and conventions underpinning the principles of accounting  are discussed below: The concept of money measurement:  Business transactions in accounting use money as a measure and unifying factor in accounting measurements. This accounting principle makes perfect sense once you accept money as the common measurement unit in recording financial transactions. The accounting principles   for money used in financial transactions are that only events and transactions involving money are recorded as accounting transactions and show the amount or value of money in the transaction...

  Accounting principles preconditions: The body of doctrines or accounting principles is associated with the theory of the accounting method. This justifies the financial reporting and its current practices. You and your accountant may choose one method of accounting while your vendors and clients may use some other form of accounting. The applied basic accounting principles should help in maintaining uniformity in reporting, recording, and tracking financial transactions. There are certain preconditions to be met by accounting principl es such as: Accounting principles must be based on realistic assumptions. An explanatory, simple and understanding principle should underlie the practice. They must be used throughout and consistently. Future predictions should be possible to derive from such accounting principles. They must be uniform and informative across all its users.

  The importance of accounting principles: The Generally Accepted Accounting Principles (GAAP) ensure that financial statements are accurate and consistent in recording and tracking financial records uniformly and globally. They set up certain protocols, accounting concepts and standards, that all businesses and companies should and are expected to follow when accounting. This helps get efficient reports and accurate financial statements when viewing an organisation’s reports or statements like the Balance Sheet or Profit and Loss Statements.

  Need for accounting principles Consider the possibility of every business having its  principles of accounting  and preparing its financial statements. Thousands of different formats in financial statements would be present for the same financial information. Businesses themselves will find it hard to evaluate their performance, compare their competitor’s financial statements or approach each other for raising funds, supplying goods, etc. Financial data and statements would be useless in evaluating businesses, as there would be no common format or principle followed when preparing the financial statements. That’s why  accounting principles  are needed to provide a form of  standardisation  and  uniform reporting  of financial statements and accounting practices.

What is accounting principle? The standard guidelines or rules  used in accounting are recording and tracking a business’s financial transactions and drawing up the financial statements from records. These are called accounting principles. They form the base guidelines used in preparing and recording a firm’s financial statements and are also called the Generally Accepted Accounting Principles (GAAP). The accounting principles and concepts  have global acceptance and bring an acceptable format and accounting uniformity when preparing financial statements. The authorities and regulators in each country, like India, USA, UK, etc., have different GAAP procedures in accounting. However, the objectives, fundamentals and core accounting principles of all GAAP procedures are identical.

  Nominal Account A nominal account is the type of account in which all accounting transactions are stored for one fiscal year, transferring balances to permanent accounts at the end of a fiscal year. This allows for resetting the balances to zero and starting afresh. Nominal accounts are usually related to Revenues, Expenses, Gains and Losses. Golden Rule 3 says, Debit all expenses and losses, credit all incomes and gains. If a business incurs a loss or expense, then the books' respective entry is represented as a debit. If the business earns a profit or gains income by way of rendering services, then the entry in the book is represented as credit. An example below demonstrates this. A business pays rent for the premises it holds and is an expense for the business. Date Account Debit Credit XXXX Rent account Rs.12000     Cash Account   Rs.12000

  Real Account In a real account, the closing balance is retained and carried forward at the end of the year. These carried forward amounts then become the opening balances for the next year. These accounts usually pertain to assets, liabilities and equity. Golden Rule 2 says,  Debit what comes in, Credit what goes out.  In a real account, if a business receives something of value (property or goods), it is represented in the books as debited. If something of value goes out from the business it is represented in the books as credited. An example is given below. The example below is of a furniture purchase worth Rs. 10000 in cash. Date Account Debit Credit XXXX Furniture Account Rs. 10000     Cash Account   Rs. 10000

  Personal Account A personal account is a general ledger account. All accounts related to persons, whether natural persons like individuals or artificial persons like companies, fall in this category.  In the case of a personal account, when a business receives something from another business or individual, the first business becomes the receiver, and the second business or individual from which it was received becomes the giver.  Golden Rule 1 says,  Debit the receiver, credit the giver.  Applying the rule to our example, the books should reflect a debit on the personal account and a credit on the business account. Let’s take the example of buying a gift from a gift shop. In your account, the transaction will reflect as such. Date Account Debit Credit XXXX Purchase Account Rs.5000     Gift Shop   Rs.5000