Meaning of Reserves
Reserves are amounts set aside out of the profits. It is accumulated profits to make stronger the financial position of business. It is not a charge against profits. Reserves are not meant to cover any liability or depreciation in the value of assets. Examples are General Reserve, Reserve for Expansion, Reserve for Equalisation [...]
RESERVES
PROVISIONS
Provision is the amount set aside, by charging it in the Profit and Loss Account, to provide for depreciation or a known liability the amount of which cant be determined with complete accuracy. A provision is therefore, different from liability which is to provide for a known liability of known amount. For example, provision for [...]
Full Story »METHODS OF DEPRECIATION
The amount of depreciation for the year is measured using various methods out of which two main methods for evaluating depreciation are:
1. Fixed Percentage on Original Cost or Fixed Instalment or Straight Line Method; and
2. Fixed Percentage on Diminishing Balance or Reducing Instalment Method or Written-Down Value Method.
Straight Line Method
Under this method, a suitable percentage of [...]
METHODS OF RECORDING DEPRECIATION
In Books of account,depreciation is recorded by any of the two methods, a) when depreciation is charged to the assets account; and b) when provision depreciation/accumulated depreciation account is created.
The two methods in detail are :
When Depreciation is Charged to Assets Account: Under this method, depreciation is directly charged to the Asset Account, provision for depreciation [...]
FACTORS OR BASIS OF PROVIDING DEPRECIATION
Factors for evaluating the amount of depreciation are:
1. Original (Historical) Cost of the Asset: Cost will include all expenses incurred like freight and installation charges up to the point the asset is ready for use.
2. The Estimated Residual or Scrap Value at the End of its Life: Resident value is an estimated sale value of [...]
Tangible and intangible Costs and Benefits
Tangible benefits means that benefit which is definite and can be determined in advance. Tangible cost means that it is known and can be estimated quite accurately. For example, the cost of salary of employees, the expense of specific piece of equipment, would be tangible cost.
Intangible cost refers to something which we know exists, but [...]
COST – BENEFIT ANALYSIS
Cost –benefit analysis is a tool for evaluating the effectiveness of the project. It may be used by the management to decide as to what extent benefits outweigh the costs. The costs associated with the proposed business system are the expenses arising from developing, installing, training and implementing the systems. The benefits are the advantages [...]
Full Story »OBJECTIVES OR NEED FOR PROVIDING DEPRECIATION
The need for providing considerable amount of depreciation over the useful life of an asset comes up for the following purposes:
1. To Ascertain the Correct Profit or Loss: The first objective is to ascertain the correct profit or loss. If depreciation is ignored, the loss that is occurring (though not being paid for in cash) in respect [...]
Accounting Concept of Depreciation
The accounting concept of depreciation refers to distribute the cost of fixed assets over its presumed life in a reasonable manner. Annual depreciation in the value of assets can be charged to that accounting period. Annual depreciation in the value of assets is an expense which is due to use of assets in business functions and therefore, [...]
Full Story »Suspense Account
A Suspense Account is an account to which the difference in the Trial Balance is placed temporarily. If the credit side is short, the Suspense Account will be credited and if the credit side is bigger, this account will be debited. With the inclusion of this account in the Trail Balance, the Trial Balance will [...]
Full Story »DEPRECIATION AND OTHER RELATED CONCEPTS
The terms depletion, obsolescence, amortization, etc are used interchangeably with depreciation. But, these terms are used in different contexts. Thus, let us understand the distinction between depreciation and such other related concepts.
1. Depreciation and Depletion: The term ‘depletion’ is used in respect of the extraction of natural resources like quarries, mines, etc that reduces the [...]
Depreciation
Depreciation means a fall in the value of an asset because usage or with efflux of time or due to obsolescence or accident. Every fixed asset looses its value, once it is put to use. Let us consider some important definitions of depreciation. These are:
“The permanent and continuing diminution in the quality, quantity or value [...]
PURCHASES BOOK OR PURCHASES JOURNAL
Credit purchases of goods dealt in or materials and stores used in the factory are recorded in a separate register, called the Purchases Book or the Purchases Journal. On the basis of the invoice received from the supplier, necessary record in made in the Purchase Book.
Features of Purchases Book
1. Credit purchases of goods traded in [...]
SALES RETURN OR RETURN INWARDS BOOK
Sales Return or Return Inwards Book is maintained to record the goods or materials returned by the purchaser that had been sold on credit. This book is maintained if the return of goods is frequent otherwise it can be recorded in the journal.
A ‘Credit Note’ is prepared on receipt of goods in duplicate. The original [...]
Cash Discount
Cash Discount is an allowance or deduction allowed to encourage prompt or early cash payment. The usual way to encourage payment within the specific time, the seller usually allows cash discount say@2% of invoice value to the buyer. The amount of cash discount is calculated after deducting trade discount from the invoice price. In other [...]
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