Objectives of Providing Depreciation

OBJECTIVES OF PROVIDING DEPRECIATION

The following are objectives of providing depreciation:

1. Ascertainment of true profits. When an asset is purchased, it is nothing more than a payment in advance for an expense. For example, if a building is purchased for Rs 10,000 for business, the effect of such a purchase will be saving in the cost of rent in the future. But, after a certain number of years, the building will become useless. The cost of the building is, therefore, nothing except paying rent in advance for a period of years. If the rent had been paid, it would have been charged as an expense for determination of the true profits, made by the business during a particular period. The amount paid for the purchase of building should, therefore, be charged over a period of time for which the asset would be serviceable.

2. Presentation of true financial position. The assets get depreciated in their value over a period of time on account of various factors, as explained before. In order to present a true slate of affairs of the business, the assets should be shown in the Balance Sheet, at their proper values.

3. Replacement of assets. Assets used in the business need replacement after the expiry of their service life. By pmviding depreciation a part of the profits of the business is kept in the business which can be used for purchase of new assets on the old fixed assets becoming useless.

 

Consignment Accounting – Abnormal loss

Abnormal loss. This loss should be debited to Abnormal Loss Account and credited to Consignment Account. Abnormal Loss Account may be closed by transferring to P & L Account.

The credit to the consignment account with the value of Abnormal Loss is given because it will make possible for the management to judge properly the profitability or otherwise of the consignnicnt.

The valuation of stock destroyed on account of abnormal reasons will be done on the same basis as valuation of Stock on Consignment i.e., proportionate cost price plus proportionate direct expenses incurred up to the date of loss.

While valuing abnormal loss, care should be taken of the stage where abnormal loss took place since only such expenses have to be included in the valuation oEsuch abnormal loss which have been incurred upto that stage. This will be clear with the help of the following illustration.

Significance Of Bank Reconciliation Statement

The purpose of a bank reconciliation statement is to check the accuracy of an organisation’s bank account record by comparing it with the record of the account held by the bank. In Chapter 8 we saw that there is often a timing delay between the transaction occurring (and therefore being recorded in the cash book) and it being processed by the bank. It is this timing difference that is usually the cause of any difference between the balances. However, there are some transactions of which the organisation will not be aware until they receive their bank statement. These include bank charges, commissions and dishonoured cheques (where the drawer’s bank has refused to honour the cheque drawn upon it), and may also include direct debits and standing orders if the account holder has not been separately notified of their being paid.

In order to ensure that both the bank’s and the organisation’s records are correct a comparison is made of the two sets of records and a reconciliation statement produced.

SIGNIFICANCE OF BANK RECONCILIATION STATEMENT

(i) It highlights the causes of difference between the bank balance as per cash book and the balance as per pass book. Necessary adjustments can, therefore, be carried out at an early date.

(ii) It reduces the chance of fraud by the staff dealing in cash.

(iii) It acts as a moral check on the staff of the organization to keep the cash records always up to date.

(iv) Bank balance as per cash book cannot be accepted as final unless it is supported by statement of passbook. When these two balances do not tally, reconciliation becomes essential to determine the correct bank balance that can be used while finalizing the accounts.

(v) It helps in finding out actual position of the bank balance.

Average Due Date Introduction

AVERAGE DUE DATE

Avenge Due Date may be defined as the mean or equated date on which one payment may be made in lieu of several payments due on different dates without loss of interest to either party. For example, A, a businessman may have a series of transactions involving receipts and payments of money due on different dates with B, another businessman. They may decide to settle their accounts on a particular date, after taking into account the amount of interest which may have become due by one party to another. There are two alternatives available in such a case:

(a) Interest may be calculated separately for each transaction; or

(b) A mean date may be determined and the interest may be calculated from such mean date to the date of actual scttlement on the total amount due by one party to another.

Alternative (a) is preferable since it will reduce a lot of clerical work. The mean date so calculated is termed as the Average Due Date. 

Salient Features of the Single Entry System

The salient features of the Single Entry System can be put as follows:

(i) Maintenance of personal accounts. Usually under this system personal accounts are maintained while real and nominal accounts are avoided. On account of his reason some accountants define it as a system where only personal accounts are maintained.

(ii) Maintenance of cash book. A Cash Book is maintained, which usually mixes up both the personal transactions and the business transactions.

(iii) Dependence on original vouchers. In order to collect the necessary information one has to depend on original vouchers. For example, the figure of credit purchases may not be readily available, it may have to be found out on the basis of original invoices received from the suppliers. Similarly, the total figure of sales at the end of a particular period may have to be found out on the basis of the invoices which have been issued by the business from lime to time.

(iv) No uniformity. The system may differ from finn to finn as per their individual requirements and conveniences.

(v) Suitability. The system is suitable in case of small, proprietary or partnership concerns. Limited companies cannot adopt this system on account of legal requirements.

 

Depreciation Accounting – Dilapidations

Dilapidations. The term dilapidation refers to damage done to a building or other property during tenancy. When a property is taken on lease, is returned to the landlord he may ask the lessee as per agreement to put it in as good condition as it was at the time it was leased out. In orderlo meet cost of such dilapidation, a provision may be created by debiting the property account with the estimated amount of dilapidation and crediting the provision for dilapidations account. Depreciation may then be charged on the total cost of the asset so an-ivçd at Any payment made later on dilapidation may be debited to the provision for dilapidation account. The balance, if any, may be transferred to profit and loss account.

Average Due Date – Calculation of Interest

Calculation of Interest

The computation of the Average Due Date simplifies interest calculations. The amount of interest can be calculated from the Average Due Date to the date of settlement instead of making separate calculation for interest for each transaction.

(ii) Where the amount is lent in a single instalment

In this case where the amount is lent in one single instalment while repayment is made in a number of equal instalments, the average due date can be calculated by taking the following steps:

1. The numbers of days (months or years) from the date of lending money to the date of each repayment should be calculated.

2. The total of such days (months or years) should be found out

3. The total calculated as per step 2 above should be divided by the number of instalments payable for repayment of the amount.

4. The result as per step 3 above will be the number of days (months or years) by which the Average Due Date is away from the date on which the loan was given.

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Objectives of Inventory Valuation

OBJECTIVES OF INVENTORY VALUATION 

Inventory has to be properly valued because of the following reasons:

(i) Determination of income. The valuation of inventory is necessary for determining the ne income earned by a business during a particular period. Gross profit is the excess of sales over cost of goods sold. Cost of goods sold is ascertained by adding opening inventory to and deducting closing inventory from purchases.

(ii) Determination of financial position. The inventory at the end of a period is to be shown as a current asset in the balance sheet of the business. In ease the inventory is not properly valued, the balance sheet will not disclose the correct financial position of the business.

Account Current – Different Methods

Red Ink Interest 

Some times the due date of a transaction falls after the closing date of the account current. For example, an account current is prepared for the quarter ending 31st March, 1989. A receives a bill or exchange from B for Rs 10,000 on 15th March due one month after date. The due date of the transaction is therefore 18th April, 1989 i.e., 18 days after the closing date of the account current. A on 31st March is entitled to get interest from B for 18 days instead of allowing interest to him for this transaction. In the statement to be rendered by A to B the product of 1,80,000 will be subtracted from the total of the products of other items. In order to differentiate it from other products, the product of such an amount is entered in red ink. This is the reason why such a product is known as “red ink interest” product.

Epoque Method 

This method is the reverse of the first two methods. Interest is computed from the opening date Of the account current to the date of each transaction. Thus, no interest is charged on the opening balance while interest for the whole period will be charged on the closing balance.

Interest is calculated at the agreed rate on the balance of the products for one thy (or month) and entered on the side which has smaller product In case rates of interest are different for debits and credits, interest for each side will have to be calculated separately.

Periodical Balance Method

The method isusually followed in banks. The balance is struck after each transaction and is multiplied by the number of days up to the next transaction. Interest is charged for one day on the difference of the products. In case the rates of interest are different for debits and credits interest will be calculated for the debits of the products and the credits of the products separately. The difference of the two amounts will be the amount of interest chargeable to or receivable from the party concerned.

Consignment Accounting – Accounting Records

ACCOUNTING RECORDS

A proper record of all transactions relating to a particular consignment is necessary for ascertaining Net Profit or Net Loss on each separate consignment. To attain this objective the consignor usually maintains three accounts:

(1) Consignment Account.

(2) Consignee’s Account

(3) Goods Sent On Consignment Account.

Consignment Account is a Nominal Account. It is in fact a special Trading and Profit & Loss Account and, therefore, its balance shows the Profit or Loss made on a garticular consignment Consignee’s Account is a Personal Account and, therefore, in case the Consignee has not remitted the balance due by him in full, he will be a debtor, whereas it he has remitted more than the balance due by him, he will be a creditor.

Goods sent on Consignment Account is a Real Account. It is closed up by transferring its balance to Purchases Account (sometimes it is also transferred to the credit side of Trading Account).

The above accounts are maintained in respect of each of the consignments. For example, if goods have’been sent on Consignment to Bombay, Calcutta and Madras, Consignment Account, Consignee’s Account and Goods sent on Consignment Account will be maintained in respect of each of these consignments.

Objects of preparing Trial Balance

Trial  Balance

The total of all the accounts with debit balances should equal the total of all the accounts with credit balances. This list is known as a trial balance.

In the double entry system every entry has its corresponding credit and debit. It follows, that at any given point of time, the posting from Journal, day books and cash book to the ledger is completed, the debit balances standing in all the ledgers including the cash book will equal the credit balances.

The next stage after posting accounts to the ledger is the preparation of a Trial Balance. The debit and credit balances of accounts are entered in this statement. The total of the debit and the total of the credit side must agree.

The trial balance is thus a list of the balances on the ledger accounts. If the totals of the debit and credit balances entered on the trial balance are not equal, then an error or errors have been made either:

1. In the posting of the transactions to the ledger accounts; or

2. In the balancing of the accounts; or

3. In the transferring of the balances from the ledger accounts to the trial balance.

Objects of preparing Trial Balance :

1. It forms the very basis on which final accounts are prepared.

2. It helps in knowing the balance on any particular account in the ledger.

3. It is used as a test of arithmetical accuracy.

The trial balance is the stepping stone for the preparation of financial statements.