Competitive Exams: Financial Accounting (Part 1 of 4)

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Outstanding expenses and its accounting treatment

Some people are coming from non medical and medical in field of accounting. There can easily learn tally and some basic rules of accounting From any coaching institute but they do not know the accounting treatment of outstanding expenses in book of accounts. Then I am training of this point at this time. First of all I am telling you that outstanding expenses are those expenses which are payable but not paid, so it is our duty to record it at the closing of financial year. Dear friends according to the accounting principals any expenses paid or payble is the expenses of business, so when we makes profit and loss account of business, it must be added in paid expense and you can make journal entry in tally

Expenses account dr. Xxxxx

To outstanding expense account xxxxx

This entry automatically adjust your final account, you need not change your final accounts in tally. This is facility to you in using tally.

Adjustments of Final accounts

  • Name of items
  • Adjustment entry
  • Effect on trading and profit and loss account
  • Effect on balance sheet
  • Closing stock
  • Closing stock account dr. Xxx
  • To trading account xxx
  • Closing stock will write in the credit side of trading account
  • It will show as asset in the final account
  • outstanding expenses or expenses payable or expenses due but not paid
  • Expenses account dr. Xxx
  • To outstanding exp. Xxx
  • Outstanding expenses will add in expenses. If it is direct it will go to trading account's debit side, if it is indirect nature then it will go to the debit side of profit and loss account
  • It will be the current liability so it will go to the liability side of balance sheet.
  • advance expenses
  • Advance expenses a/c dr. Xxx
  • To expenses account xxx
  • It will deduct from respective expenses paid.
  • It will be the current asset so it will go to assets side of balance sheet
  • income receivable
  • Outstanding income account dr. Xxx
  • To income account xxx
  • It will add in the income and go to credit side of profit and loss account
  • It will show as asset in the assets side of balance sheet
  • income received in advance
  • Income account dr. Xxx
  • To advance income account xxx
  • It will deduct from the income received
  • It will shown as liability in the liabilities side of balance sheet
  • Goods use for personal use
  • Drawing account dr. Xxx
  • To purchase account
  • It will deduct from purchase in the debit side of trading account
  • = purchase drawing in goods
  • It will deduct from capital in the liabilities side of balance sheet
  • = capital-drawing in goods
  • Destroyed of goods
  • loss by fire or accident account Dr. Xxx
  • To trading
  • If there is no insurance
  • It will also go to profit and loss account
  • Profit and loss account dr. Xxx
  • To loss by fire/accident
  • It will shown in credit side of trading account
  • And also in profit and loss account's debit side
  • It will not go to balance sheet
  • Depreciation
  • Depreciation account dr. Xxx
  • To respective asset account xxxx
  • It will go to the debit side of profit and loss account
  • It will deduct from fixed asset. Because it decrease the value of asset
  • = fixed asset-depreciation
  • provisional for doubtful debts
  • If you have make any provision for doubt ful debts the its journal entry will passed
  • Provision for doubtful debt account dr. Xxx
  • To Bad debts account xxx
  • New bad debts which is not shown in trial balance will transfer to provision for doubtful debt account
  • Net value of provision for doubtful debt account transfer to profit and loss account's debit side
  • = total bad debt + closing balance or provision of doubtful debt or this year provision-opening balance of provision for doubtful debts
  • Deduct from debtor
  • = debtor new bad debts this year provision or closing balance of provision for bad debts
  • Commission to manager
  • Commission account dr. Xxx
  • To outstanding commission
  • It will shown in the debit side of profit and loss account as o/s commission to manager
  • If it charge on the amount after charging such commission then we will calculate
  • = profit before commission X Rate/100 + rate
  • It will shown as liability

Accounting Treatment of Provision for doubtful debts

Before doing accounting treatment of provision for doubtful debts, you must know the complete definition of provision. In accounting, it is a reserve that is against loss due to non payment of debtors. In case debtor does not give us our amount. Then if we have make provision or reserve for this, we can easily purchase new goods but if we have no money due to every year bad debts then we can become insolvent. So with our work experience we should make our provision on our debtors with some % on debtor.

Now you are ready for doing the accounting treatment of provision for doubtful debts.

First of pass the journal entry of actual bad debts.

Entry for recording actual bad debt which did not record in books of business

  1. Bad debts account Dr. Xxxxx To Sundry Debtors Account xxxxxx Entry for transferring bad debts to provision for bad debts Account

  2. Provision for bad debts account Dr. Xxxxxx To Bad Debts account xxxxx Transfer of provision for bad debts account to profit and loss account

  3. Profit and loss account Dr. Xxxxxx

To Provision for bad debts account xxxxx

It is not necessary that provision for doubtful debt account will go only to the debit side of this account but it may go to the credit side. It will decide after making provision for doubtful debt account. Which is very easy to make. I am showing you this account. After study of this account you can easily make this account and take the benefits of this provision.