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Decrease in the value of a fixed assets due to use, passage of time, obsolescence etc. Permanent and continuous decrease in the value of assets Def. depreciation represents that part of cost of a fixed assets to its owner which is not recoverable when the assets is finally out of use by him. Provision against this loss of capital is an integral cost of conducting the business during the effective commercial life of the assets and is not dependent on the amount of profit earned
Def. depreciation accounting is a system of accounting which aims to distribute cost on the basic value of tangible capital assets less salvage value ( if any) over the estimated useful life of the assets in a systematic and rationale manner. It is a process of allocation and not of valuation.
problem
Mr X purchased a Machine on 1/4/2010 for Rs 90000 and spend Rs 10000 for its transporting and erecting. On 31/3/2011 he sold the Machine for Rs 82000. Record the following transaction in the books of Mr X assuming the depreciation rate is 20 % per annum. Record this by both the methods and prepare the ledgers.
disadvantages
Not scientific: initial stages depreciation is more
problem
Purchase price Erection cost Residual value Expected life in years Date of purchase
Machine A
Machine B
100000
50000
10000
5000
15000
7000
10
5
1/10/2010
1/1/2011
problem
On 1/10/2008 X purchased a new machine for Rs 50000 and spend Rs 20000 for its installation. The useful life of the machine is 5 years and its residual value is expected to be Rs 10000. On 1/7/2010 the machine was sold for Rs 55000. Prepare the machine A/c for the year 2008-09, 9-10 and 10-11 by charging to assets a/c method.
disadvantages
More difficult to calculate ( i.e. the rate ) It takes a lot of years to write off an assets It does not provide for the replacement of the assets
problem
On 1/10/2008 X purchased a truck for 500000 and spend 200000 for making its body. On 1/10/2010 the truck was sold for Rs 300000. Prepare the truck A/c for the year 2008-09,910, 10-11. depreciation is to be charged @ 20 % on written down value.
problem
Previous problem prepare all the ledgers. Method to be followed is by creating provision for depreciation a/c.
Bills of exchange
Cash sales: not always possible Credit sales: fund gets blocked, higher risk of bad debts, tendency of finding faults i.e.. Goods are defective
definition
a bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument Negotiable Instrument Act
features
The terms and conditions are specified The amount of money cannot be altered The date of payment is certain Drawee is the person on whom bill is raised. If he accepts it he is bound to make the payment Payee: the payee makes the payment. Generally the Drawee and payee are the same
Basic terms
Bills receivable: if payment is receivable Bills payable : if payment is payable Due date of bill of exchange: the date on which the payment is to be paid
journal
A sells Rs 10000 worth of goods to B on 1/4/2011. On 2/4/2011 A draws a bill for 10000 on B which B accepts. The due date for the same is 2/6/2011. On the due date B makes the payment. Pass the journal entries
In the books of A
date 1/4/2011 particulars B a/c To sales a/c 2/4/2011 Bills receivable a/c Debit To B a/c ( on raising the Bill) Bank A/c Debit To bills receivable A/c ( on receiving payment) 10000 10000 10000 debit LF Debit 10000 10000 Credit
2/6/2011
10000
In the books of B
date 1/4/2011 particulars Purchase A/c To A A/c A a/c To Bills Payable ( on accepting the Bill) Bills Payable A/c To Bank A/c ( on making the payment) Debit LF Debit 10000 10000 Debit 10000 10000 Debit 10000 Credit
2/4/2011
2/6/2011
10000
Dishonor of bill
date particulars B A/c Debit To bills receivable A/c LF Debit Credit
To Bank/ To C A/c
Noting charges
date particulars B a/c to cash ( if paid by A) B A/c Debit Debit LF Debit Credit
Insolvency
date particulars B A/c Debit To Bills receivable/ Bank/ C LF Debit Credit
Bank a/c Debit Bad debts A/c Debit To B A/c ( the amount not received is treated as bad debts)
problem
journal
date particulars LF Debit Credit