Accounting Ustad

What is Depreciation?
In accounting, depreciation refers to a reduction in the value of a fixed asset over its useful life. It is obvious that with the usage over time everything deteriorates, so the same rule goes for fixed assets purchased for the operations of the business. Hence depreciation shows how much asset’s value has been used till the reporting date. Depreciating assets helps companies earn money from an asset while expensing a portion of its cost each year the asset is in use if it is not considered, will overstate the reporting profit.

PURPOSE OF DEPRECIATION

Depreciation is used by companies to make their accounting in compliance with accounting standards. Since according to the matching concept all expenses used for generating revenue needs to be taken into consideration. In addition, depreciation can also be used for tax purposes as it is a cost and its inclusion in the income statement will reduce the tax payable. Though rates used by tax authorities and the accounting rates may differ but both of them treat depreciation as an expense.

RECORDING OF DEPRECIATION

In the first place when a fixed asset is purchased, the entire cash outlay might be paid but the expense is recorded incrementally for financial reporting purposes because assets provide a benefit to the company over a lengthy period of time. Due to this, depreciation is considered as a non-cash expense since it doesn’t represent an actual cash outflow. The total amount that is depreciated is represented as a percentage; referred to as depreciation rate. For Instance, if an asset’s value is $10,000 and the depreciation rate is 10%, hence per annum depreciation will be $1000.

Accounting principles are the rules and principles companies must comply with in preparing financial statements. The Financial Accounting Standards Board (FASB) is responsible for issuing a standardized set of accounting principles referred to as Generally Accepted accounting principles (GAAP). Following is the list of most common and fundamental accounting principles:

Accrual Principle
Consistency Principle
Conservatism Principle
Matching Principle
Materiality Principle
Cost Principle
Revenue Recognition Principle
Going concern Principle

ACCRUAL PRINCIPLE:

Accrual principle states that accounting is based on the theory that accounting transactions need to be recorded in the period they occurred rather than the period when there are cash flows associated with them. For instance, if a salary is not paid to an employee in the previous year but was rather paid in the following year, then this salary amount must have been shown in the income statement as Accrued salary expense while shown in the Balance sheet as Accrued Salary in the current liability section.

CONSISTENCY PRINCIPLE:

According to this principle, a business needs to continue with a specific method it used initially unless another method will give a true and fair view of transactions recorded. For example, if a business uses a Straight-line method for calculating depreciation in the first year then it cannot use another method rather would be required to continue with the existing method of depreciation. This is aimed to reduce the chances of accounting records not showing a true and fair view since the amount of depreciation will be different using different methods. Thus net profit reported might be not showing the true picture.

Single Entry Accounting:

Single entry accounting refers to accounting practice, usually adopted by small cash businesses, club, societies & associations, whereby accounting is not based on dual bookkeeping principle; rather these organizations maintain their accounts in a way showing only one side impact of a transaction. These businesses normally do not employ any professional accountants, but when they need a loan from a bank; Purchasing supplies on credit and when asked by the government to present their financial reports; they require the assistance of professional accountants in this regard.
Accountants normally come up with two methods to provide the required services to single entry based businesses. They calculate the value of profit through the first method; while the second method is being used for preparing financial statements.

For more details,https://accountingustad.com/financial-accounting/single-entry-accounting/

Retirement of a Partner
A partner may retire from a business through the following ways:
1. Sale of Interest to the existing partners: The retiring partner might sell his/her share of the partnership to the existing partners. In this case, nothing is paid from the partnership rather existing partners pay the retiring partner outside the partnership. This will be reflected in the journal entry as follow:

For more details,https://accountingustad.com/financial-accounting/retirment-of-a-partner/

Admission of a Partner:
A new partner can be admitted into a partnership through two ways:
1. By purchasing interest from a partner or partners: According to this method, the new partner will buy a share or percentage of ownership of a partnership from an existing partner outside the partnership, which means the new partner will not pay anything to the partnership rather pays existing partners privately. This activity will be accounted for as follow:

For more details,https://accountingustad.com/financial-accounting/admitting-partner-into-a-partnership/

Partnership Accounting:
Partnership refers to the formation of a business by two or more people, who agreed to pool their resources together with an intention to earn profit in return. Normally a partnership agreement is written among the partners, which specify the details about the following:
• The duties of individual partners
• The amount of capital to be subscribed by each of the partners.
• The ways the profits to be shared
• The financial arrangements in case there are any changes to the structure of a partnership
On the other hand, if there is no agreement then the rules laid down by Partnership act 1890 needs to be applied, according to which:
for more details,https://accountingustad.com/financial-accounting/partnerhsip-accoutning-introduction/

What is depreciation?

In accounting, depreciation refers to a reduction in the value of a fixed asset over its useful life. It is obvious that with the usage over time everything deteriorates, so the same rule goes for fixed assets purchased for the operations of a business. Hence depreciation shows how much asset’s value has been used till the reporting date. Depreciating assets helps companies earn money from an asset while expensing a portion of its cost each year the asset is in use if it is not considered, operating profit will be overstated.
Purpose of Depreciation

Depreciation is used by companies to make their accounting in compliance with accounting standards.
For more details, https://accountingustad.com/financial-accounting/what-is-depreciation/

Bad debts & Provision for Doubtful debts:

Business cannot assume that it will receive all amounts due from its customers. This is because it is quite normal that customers for certain reasons fail to clear their dues. Therefore the business has to be mentally ready for this. Based on the accounting principle of Prudence, the business has to record the anticipated or expected loss in the books of account. the business makes an estimate based on the previous trends about trade receivables, about whom the business is in doubt whether they will clear their dues or not, referring to such sort of trade receivables as doubtful debts. While those Debtors about whom the business is sure that they will not pay their remaining dues are called Bad debts.
For more details,

Bad debts & Provision for doubtful debts - Accounting treatment Bad debts are treated as an expense in the Income statement; while provision for doubtful debts needs to be recorded as an expense in the Income statement

Accounting for Trade-in Allowance?

Trade-in allowance situation arises when a business disposed of an old asset by exchanging it with a new asset and in return gets an allowance in the price of a new asset. For example, Company ABC was using a Photocopy machine since 2010, purchased at $2,000. Now it decided to replace it with a new photocopy machine. The Supplier agreed to give an allowance of $500 on the old photocopy machine in the total price of $3000. This means that company ABC will have to pay its supplier $2,500 ($3,000 – $500). The accumulated depreciation for the asset to date was $1,800.
For more details,https://accountingustad.com/financial-accounting/trade-in-allowance/

How to Account for the disposal of a Fixed Asset?

A Fixed asset is bought by a business with an intention to produce goods and services for the business. Moreover, they are owned to support the primary objective of earning profit and ultimately increasing the wealth of owners. In addition, the international accounting standards, IAS 16 also emphasizes that only those items will fall into the category of fixed assets which will bring about economic benefit to the entity. But once the assets start depreciating with the passage of time, the business makes its mind to dispose of it. Since the maintenance cost of keeping asset operational might become higher than the benefits
for more details https://accountingustad.com/financial-accounting/disposal-account/

Prepaid Expenditures:

Prepaid expenditures are the payments made by a business for an obligation before it becomes due. In other words, the business has paid for a good or service it is yet to benefit from. Accounting treats prepaid expenditures from the perspective of both sellers and buyers. From point of view seller, prepaid expenditures will be treated as a current liability since it has not yet delivered either the good or rendered the agreed service. On the other hand for buyers the expenditure will be treated as a current asset since it is yet to receive the benefit of expenditures incurred.
for more details,https://accountingustad.com/financial-accounting/prepaid-expenditures/

Capital & Revenue expenditures:

Capital Expenditure refers to all those payments incurred by a business with an intention to add value to the business. Now, the question comes to the mind that how a business would know whether its expenditures would end up adding value to the business or not? The answer is straight forward! In case any expenditure that will increase the following factors of a business, that expenditure will fall under the category of capital expenditure, if it:
For more details, https://accountingustad.com/financial-accounting/capial-revenue-expenditures/