When Provision for Doubtful Debts is set up for the first time Accounting Entries

Doubtful Debts Account Dr. Provision for doubtful debts (Being creation of provision for doubtful debts) Closing Entries Doubtful Debts Account is an expense for the business and thus it will be debited to the Profit and Loss account

Profit and Loss Account Dr. Doubtful debts Account (Being transfer of doubtful debts expense to the Profit and Loss Account) It will be deducted from the Sundry Debtors in the Balance Sheet. Increasing the Existing Provision for Doubtful Debts Adjusting Entry

Doubtful debts Account Dr. Provision for doubtful debts Account (Being increase of provision for doubtful debts) Closing Entry Being a loss for the business the Doubtful Debts Account is transferred to the debit side of Profit and Loss Account.

Profit and Loss Account Doubtful Debts

Dr.

(Being transfer of doubtful debts expense to the Profit and Loss Account) Decreasing the Existing Provision for Doubtful Debts Adjusting Entry

Provision for doubtful debts Account Doubtful debts Account

Dr.

(Being decrease of provisions for doubtful debts) Closing Entry Being a gain for the business the Doubtful Debts Account is transferred to the Credit side of Profit and Loss Account.

Doubtful Debts Account Profit and Loss Account

Dr.

(Being transfer of doubtful debts expense to the Profit and Loss Account) In the Balance Sheet the debtors will appear net of the Provision for Doubtful debts. Closing Stock Closing stock refers to the goods remaining unsold during the year. They are valued at Cost price or Market Price whichever is lower. Closing entries Closing Stock Account Dr. Trading Account (For closing Stock transferred to trading account) Treatment in Final Accounts When closing stock is given outside the Trial Balance, it will appear on the credit side of the Trading Account and under Current Assets in the Balance Sheet.

When closing stock appears inside the Trail Balance, This means that the Closing stocks have already been deducted from the Purchases and thus it will ONLY appear in the Balance Sheet under Current Assets. Writing off Bad Debts There may be occasions when the business might not be able to collect its debts. This may be due to the dishonesty of a debtor or may be due to the death or insolvency of a debtor.

Bad Debts Account Debtors Account (Bad debts written off)

Dr.

This amount is then written off the books as Bad debts. It is a loss for the business and thus it is written on the debit side of the Profit and Loss account. Closing Entry

Profit and Loss Account Dr. Bad Debts Account (Transfer of bad debts to Profit and loss Account) Accounting Treatment Bad debts appear on the debit side of the Profit and Loss account because it is a loss. Bad debts are deducted from the Debtors in the Current assets in the Balance Sheet. Recovery of Bad Debts Sometime a debts written off as Bad debts may be recovered later on. Cash is coming in thus Cash account is debited whereas Recovery of bad debts is credited because it a gain. Accounting Entries Cash Account Dr.

Recovery of bad debts

(Being bad debts recovered)

Recovery of bad debts Dr. Profit and Loss account (Being transfer of recovery of bad debts to Profit and Loss Account) Partial Settlement of Debtors Sometimes, a business might only be able to recover a part of the debts. This means the rest of the unrecovered debts will be written off as bad debts. Accounting Entries

Cash Account

Dr. Dr.

Bad Debts Account Debtors Account

(Being partial recovery of debts) Depreciation Depreciation may be defined as the permanent and continuing diminution in the quality or the value of an asset. William Pickles Depreciation is the gradual and permanent decrease in the value of an asset from any cause. R.N. Carter. Depreciation is fall in the value of the fixed assets (except Land). Depreciation is charged as an expense in the Profit and Loss Account in order to spread the cost of a fixed asset over the assets useful life. Depreciation is charged on a continuous basis. Once the depreciation is charged, it must be charged on regular basis in the succeeding period also. Calculation of Depreciation Straight line or Fixed Installment Method

A fixed or equal amount is to be charged as depreciation every year during the life time of the asset. The amount of depreciation remains equal from year to year. The expected lifetime of the asset is calculated and the cost of the asset is spread over its lifetime.

Depreciation expense per annum=Original cost/number of years of useful life

If the fixed asset is expected to have a scarp value at the end of its useful life, then

Depreciation expense per annum= (Original cost-Estimated scrap value)/Number of years of useful life Reducing Balance or Diminishing Balance Method The value of asset goes on diminishing year after year, the amount of depreciation charged every year also goes on declining. Every year a fixed percentage of the net book value of the asset is reduced. For example 20% depreciation is charged. If the asset has a value of $10000, the depreciation for the first year will be 20% of $10000 i.e. $4000. The book value for the next year will be now $6000. This year the depreciation will be again 20% of the remaining value i.e. 20% of 6000=$1200. So the remaining value of the asset is now $6000-$1200=$4800. Revaluation Method Under this method, the fixed asset is valued at the end of every accounting period. The difference between its value at the end of the period and the beginning of the period will be the depreciation for that period.

Depreciation expense=Value of asset at the end-Value of asset at the beginning + Any new purchase Capital Expenditure Capital expenditure occurs when a business gets a long term advantage due to that expenditure. It is usually incurred for accusation of an asset. These expenditures do not occur in the regular day to day transactions of the business. Common examples Purchase of furniture, office building etc. Purchase of additional furniture or machinery

Expenditure incurred in connection with the purchase of a fixed asset. For example, carriage paid of machinery purchased. Purchase of patent right, copy rights etc. Revenue Expenditure Expenditure which is not for increasing the value of fixed assets, but for running the business on a day to day basis, is known as revenue expenditure. Difference between Capital and Revenue expenditure Buy a car is capital expenditure because its benefit to the business will be spread over a long time. Fuel cost for running this care is revenue expenditure and it will be used up in few days and does not add to the value of the fixed asset. Capital receipts Capital receipts consist of additional payments made to the business either by owner or shareholder of the business; or from sale of fixed assets of the business. Revenue receipts Any receipt in the normal running or through day to day transactions of the business is categorized as Revenue receipt. Sales receipts of the business are revenue receipts.