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FINANCIAL ACCOUNTING. TOPICS BASIC CONCEPTS BASIC CONCEPTS BANK RECONCILIATION BANK RECONCILIATION TRIAL BALANCE TRIAL BALANCE CAPITAL & REVENUE EXPENDITURE.

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Presentation on theme: "FINANCIAL ACCOUNTING. TOPICS BASIC CONCEPTS BASIC CONCEPTS BANK RECONCILIATION BANK RECONCILIATION TRIAL BALANCE TRIAL BALANCE CAPITAL & REVENUE EXPENDITURE."— Presentation transcript:

1 FINANCIAL ACCOUNTING

2 TOPICS BASIC CONCEPTS BASIC CONCEPTS BANK RECONCILIATION BANK RECONCILIATION TRIAL BALANCE TRIAL BALANCE CAPITAL & REVENUE EXPENDITURE CAPITAL & REVENUE EXPENDITURE MODEL QUESTIONS MODEL QUESTIONS

3 BASICS OF ACCOUNTING DOUBLE ENTRY SYSTEM DOUBLE ENTRY SYSTEM 3 TYPES OF ACCOUNTS: 3 TYPES OF ACCOUNTS: -- REAL: ASSETS OF BUSINESS, TANGIBLE AND -- REAL: ASSETS OF BUSINESS, TANGIBLE AND IDENTIFIABLE. IDENTIFIABLE. -- PERSONAL: THEY ARE HEADED WITH THE NAME OF -- PERSONAL: THEY ARE HEADED WITH THE NAME OF PERSON/BUSINESS/FIRM. DEBTORS OR CREDITORS. PERSON/BUSINESS/FIRM. DEBTORS OR CREDITORS. -- NOMINAL: THEY RECORD TRANSACTIONS OF -- NOMINAL: THEY RECORD TRANSACTIONS OF INTANGIBLES SUCH AS RENT EXPENSES. INTANGIBLES SUCH AS RENT EXPENSES..

4 BASIC RULES OF ACCOUNTING RULES: -- REAL : DEBIT THE ACCOUNT WHEN WE PURCHASE -- REAL : DEBIT THE ACCOUNT WHEN WE PURCHASE AN ASSET & CREDIT WHEN WE SELL OR AN ASSET & CREDIT WHEN WE SELL OR DEPRECIATE. DEPRECIATE. -- PERSONAL : DEBIT THE RECEIVER OF GOODS & -- PERSONAL : DEBIT THE RECEIVER OF GOODS & CREDIT THE GIVER OF GOODS. CREDIT THE GIVER OF GOODS. -- NOMINAL : DEBIT LOSSES & EXPENSES, CREDIT -- NOMINAL : DEBIT LOSSES & EXPENSES, CREDIT INCOMES & GAINS. INCOMES & GAINS. -- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT -- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT BALANCE WHILE LIABILITIES OR GAINS HAVE BALANCE WHILE LIABILITIES OR GAINS HAVE CREDIT BALANCE. CREDIT BALANCE.

5 BANK RECONCILIATION STATEMENT BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE OF DOUBLE ENTRY. BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE OF DOUBLE ENTRY. CREDIT THE GIVER AND DEBIT THE RECEIVER CREDIT THE GIVER AND DEBIT THE RECEIVER B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH BOOK AND PASS BOOK BALANCE B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH BOOK AND PASS BOOK BALANCE DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE AS PER PASS BOOK = POSITIVE BALANCE DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE AS PER PASS BOOK = POSITIVE BALANCE CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN PASS BOOK = NEGATIVE BALANCE/OVERDRAFT CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN PASS BOOK = NEGATIVE BALANCE/OVERDRAFT WHETHER WE START WITH CASH OR PASS BOOK RECONCILIATION ENTRIES WILL REMAIN SAME AS PER PRINCIPLES WHETHER WE START WITH CASH OR PASS BOOK RECONCILIATION ENTRIES WILL REMAIN SAME AS PER PRINCIPLES

6 BANK RECONCILIATION STATEMENT CAUSES OF DIFFERENCES TREATMENT CAUSES OF DIFFERENCES TREATMENT CASH/PASS BOOK CASH/PASS BOOK DT. CR. DT. CR.. CHEQUES ISSUED BUT NOT PRESENTED √ CHEQUES ISSUED BUT NOT PRESENTED √ CHEQUES DEPOSITED BUT NOT COLLECTED √ CHEQUES DEPOSITED BUT NOT COLLECTED √ BANK CHARGES √ BANK CHARGES √ INTEREST ON SAVINGS BANK √ INTEREST ON SAVINGS BANK √ INTEREST ON LOAN √ INTEREST ON LOAN √ AMOUNT PAID BY BANK AS PER √ AMOUNT PAID BY BANK AS PER √ STANDING INSTRUCTIONS STANDING INSTRUCTIONS. DIRECT PAYMENTS MADE BY CUSTOMERS √. DISHONOUR OF CHEQUES RECEIVED √

7 BANK RECONCILIATION STATEMENT CAUSES OF DIFFERENCES TREATMENT CAUSES OF DIFFERENCES TREATMENT CASH/PASS BOOK CASH/PASS BOOK DT. CR. DT. CR.. PAYMENTS SIDE OF CASH BOOK UNDERCAST √ UNDERCAST √. DEPOSIT SIDE OF CASH BOOK OVERCAST √ OVERCAST √. CHEQUE ISSUED BUT NOT TAKEN IN BANK COLUMN √ IN BANK COLUMN √. DEBIT BALANCE X BROUGHT FORWARD AS CREDIT BALANCE 2X FORWARD AS CREDIT BALANCE 2X. CHEQUE ISSUED BUT RECORDED TWICE √ TWICE √

8 BANK RECONCILIATION STATEMENT IMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASH BOOK, EACH OF THE RECTIFICATION ENTRIES WILL BOOK, EACH OF THE RECTIFICATION ENTRIES WILL APPEAR ON THE SAME SIDE. ADDITION OR SUBRACTION APPEAR ON THE SAME SIDE. ADDITION OR SUBRACTION OF ENTRIES FROM THE OPENING OR GIVEN BALANCE OF ENTRIES FROM THE OPENING OR GIVEN BALANCE DEPENDS UPON WHICH SIDE OF THE LEDGER THEY ARE DEPENDS UPON WHICH SIDE OF THE LEDGER THEY ARE CAST OR TO BE CAST. THUS WHAT WE SIMPLY NEED TO CAST OR TO BE CAST. THUS WHAT WE SIMPLY NEED TO KNOW IS WHETHER EACH FIGURE GIVEN IN THE KNOW IS WHETHER EACH FIGURE GIVEN IN THE PROBLEM IS A DEBIT OR CREDIT ENTRY. I WILL EXPLAIN PROBLEM IS A DEBIT OR CREDIT ENTRY. I WILL EXPLAIN WITH THE HELP OF A PROBLEM LATER. WITH THE HELP OF A PROBLEM LATER.

9 BANK RECONCILIATION STATEMENT SIMPLY PUT, IF AN ENTRY IS ALREADY THERE BUT EITHER SIMPLY PUT, IF AN ENTRY IS ALREADY THERE BUT EITHER THE WHOLE OR PART IT HAS TO BE RECTIFIED THEN THAT THE WHOLE OR PART IT HAS TO BE RECTIFIED THEN THAT PORTION IS POSTED ON THE OPPOSITE SIDE OF THE PORTION IS POSTED ON THE OPPOSITE SIDE OF THE ORIGINAL ENTRY. ORIGINAL ENTRY.

10 BANK RECONCILIATION STATEMENT ADVANTAGES OF BANK RECONCILIATION. VERIFICATION OF ACCURACY OF ENTRIES. TIMELY CORRECTIVE ACTION. PREVENTS FRAUDS. CONTROL TOOL FOR MANAGEMENT

11 TRIAL BALANCE DEFINITION DEFINITION IT IS A STATEMENT SHOWING CREDIT AND DEBIT IT IS A STATEMENT SHOWING CREDIT AND DEBIT BALANCES FROM THE LEDGER. BALANCES FROM THE LEDGER. HELPS ARITHMETICAL ACCURACY AND FACILITATES HELPS ARITHMETICAL ACCURACY AND FACILITATES FINAL ACCOUNTS. FINAL ACCOUNTS.

12 TRIAL BALANCE BASIC PRINCIPLE : BASIC PRINCIPLE : SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE, SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE, ASSETS AND EXPENSES ARE DEBIT BALANCES ASSETS AND EXPENSES ARE DEBIT BALANCES LIABILITIES AND INCOMES ARE CREDIT BALANCES LIABILITIES AND INCOMES ARE CREDIT BALANCES. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY CLERICAL/PRINCIPLE ERRORS AND RECTIFY CLERICAL/PRINCIPLE ERRORS AND RECTIFY

13 TRIAL BALANCE TYPES OF ERRORS: TYPES OF ERRORS: A) CLERICAL ERRORS A) CLERICAL ERRORS -- ERRORS OF OMISSION -- ERRORS OF OMISSION --- OMISSION OF TRANSACTION FROM BOOKS --- OMISSION OF TRANSACTION FROM BOOKS --- COMPLETE OMISSION NOT AFFECTING TRIAL --- COMPLETE OMISSION NOT AFFECTING TRIAL BALANCE BALANCE --- PARTIAL OMISSION AFFECTING TRIAL --- PARTIAL OMISSION AFFECTING TRIAL BALANCE BALANCE

14 TRIAL BALANCE -- ERRORS OF COMMISSION -- ERRORS OF COMMISSION --- FIGURE POSTED ON THE WRONG SIDE OR WITH --- FIGURE POSTED ON THE WRONG SIDE OR WITH WRONG AMOUNT WRONG AMOUNT -- COMPENSATING ERRORS -- COMPENSATING ERRORS --- ONE ERROR BALANCES ANOTHER ERROR --- ONE ERROR BALANCES ANOTHER ERROR. B) ERRORS OF PRINCIPLE -- ERRORS IN CONTRAVENTION OF ACCOUNTING -- ERRORS IN CONTRAVENTION OF ACCOUNTING PRINCIPLES PRINCIPLES

15 TRIAL BALANCE RECTIFICATION OF ERRORS IS A SERIES OF STEPS: RECTIFICATION OF ERRORS IS A SERIES OF STEPS: PASS THE CORRECT ENTRY PASS THE CORRECT ENTRY COMPARE THE WRONG ENTRY WITH THE CORRECT ONE COMPARE THE WRONG ENTRY WITH THE CORRECT ONE PASS THE RECTIFICATION ENTRY PASS THE RECTIFICATION ENTRY IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE IS TRANSFERRED TO SUSPENCE ACCOUNT IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE IS TRANSFERRED TO SUSPENCE ACCOUNT

16 TRIAL BALANCE TYPICAL TRIAL BALANCE TYPICAL TRIAL BALANCE N A M E DEBIT CREDIT N A M E DEBIT CREDIT CAPITAL X CAPITAL X DRAWINGS X DRAWINGS X PURCHASES X PURCHASES X SALES X SALES X EXPENSES X EXPENSES X DEBTORS(CUSTOMRES) X DEBTORS(CUSTOMRES) X CREDITORS(SUPPLIERS) X CREDITORS(SUPPLIERS) X CASH X CASH X SALES RETURN X SALES RETURN X

17 TRIAL BALANCE TYPICAL ERRORS: TYPICAL ERRORS: -- CLERICAL: -- CLERICAL: A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-. A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-. RECTIFICATION: CREDIT SALARY WITH 9000/-. RECTIFICATION: CREDIT SALARY WITH 9000/-. B) SALARY PAID 1000/- BUT POSTED IN RENT A/C. B) SALARY PAID 1000/- BUT POSTED IN RENT A/C. RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH 1000/ /-. C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY RECORDED IN PURCHASE REGISTER. RECORDED IN PURCHASE REGISTER. RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs WITH 100/- EACH AND DEBIT VIJAY WITH 200/-. WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.

18 TRIAL BALANCE AFTER TRIAL BALANCE IS PREPARED ONE FINDS AFTER TRIAL BALANCE IS PREPARED ONE FINDS. D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID 500/- POSTED AS 5000/-.. RECTIFICATION: DEBIT SALES WITH 4500/-, CREDIT SUSPENCE WITH 4500/-, CREDIT RENT WITH 4500/-, DEBIT SUSPENCE WITH 4500/-. DEBIT SUSPENCE WITH 4500/-. E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- IN RENT A/C. E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- IN RENT A/C. RECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENCE WITH 9000/-; CREDIT RENT WITH 10000/- RECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENCE WITH 9000/-; CREDIT RENT WITH 10000/- F) A PURCHASER’S DEBIT BALANCE OF 9000/- HAS NOT BEEN TAKEN. F) A PURCHASER’S DEBIT BALANCE OF 9000/- HAS NOT BEEN TAKEN. RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TO THE EXTENT OF 9000/-. RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TO THE EXTENT OF 9000/-.

19 CAPITAL AND REVENUE EXPENDITURE BASIC PRINCIPLE:. ALL EXPENSES AND RECEIPTS OF REVENUE NATURE. ALL EXPENSES AND RECEIPTS OF REVENUE NATURE ARE TAKEN TO TRADING AND PROFIT & LOSS ARE TAKEN TO TRADING AND PROFIT & LOSS ACCOUNT ACCOUNT. ALL EXPENDITURES AND RECEIPTS OF CAPITAL. ALL EXPENDITURES AND RECEIPTS OF CAPITAL NATURE ARE TAKEN TO BALANCE SHEET NATURE ARE TAKEN TO BALANCE SHEET

20 CAPITAL AND REVENUE EXPENDITURE REVENUE RECEIPTS/PAYMENTS :. ARE SMALLER IN SIZE(RELATIVELY). ARE RECURRING IN NATURE. THE BENEFITS ARE OVER A SHORTER PERIOD (1 YEAR). THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO DAY BASIS DAY BASIS. MAINTAIN ASSETS IN WORKING CONDITION

21 CAPITAL & REVENUE EXPENDITURE CAPITAL RECEIPTS/PAYMENTS: CAPITAL RECEIPTS/PAYMENTS: ARE USUALLY LARGE(RELATIVELY) ARE USUALLY LARGE(RELATIVELY) ARE NON-RECURRING IN NATURE ARE NON-RECURRING IN NATURE THE BENEFITS ARE OVER LONGER DURATION THE BENEFITS ARE OVER LONGER DURATION THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF THE ASSETS THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF THE ASSETS

22 CAPITAL AND REVENUE EXPENDITURE THERE ARE CERTAIN EXPENDITURES WHICH ARE THERE ARE CERTAIN EXPENDITURES WHICH ARE OTHERWISE REVENUE IN NATURE BUT SOMETIMES OTHERWISE REVENUE IN NATURE BUT SOMETIMES UNUSUALLY LARGE AND WHOSE BENEFIT TO THE UNUSUALLY LARGE AND WHOSE BENEFIT TO THE ORGANISATION MAY ACCRUE AFTER FEW YEARS.THESE ORGANISATION MAY ACCRUE AFTER FEW YEARS.THESE MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE, MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE, CARRIED TO THE BALANCE SHEET, AND WRITTEN OFF TO CARRIED TO THE BALANCE SHEET, AND WRITTEN OFF TO THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME. THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME.

23 CAPITAL AND REVENUE EXPENDITURE SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK VALUE IS DEDUCTED FROM THE ASSET, AND, IF VALUE IS DEDUCTED FROM THE ASSET, AND, IF BETWEEN BOOK VALUE & COST AS REVENUE BETWEEN BOOK VALUE & COST AS REVENUE RECEIPT & ABOVE COST AS CAPITAL RECEIPT. RECEIPT & ABOVE COST AS CAPITAL RECEIPT.. THERE IS A THIN LINE BETWEEN CAPITAL & REVENUE CLASSIFICATION. FOR INSTANCE REPAIRS TO CLASSIFICATION. FOR INSTANCE REPAIRS TO MACHINERY WHICH KEEPS THE ASSET IN WORKING MACHINERY WHICH KEEPS THE ASSET IN WORKING CONDITION IS CHARGED TO THE P & L A/C WHILE CONDITION IS CHARGED TO THE P & L A/C WHILE BETTERMENT EXPENSE IS CAPITALISED. BETTERMENT EXPENSE IS CAPITALISED.

24 CAPITAL & REVENUE EXPENDITURE EXAMPLES OF EACH TYPE OF CLASSIFICATION: EXAMPLES OF EACH TYPE OF CLASSIFICATION: CAPITAL NATURE: CAPITAL NATURE: -- PURCHASE OF ASSETS SUCH AS BUILDING, -- PURCHASE OF ASSETS SUCH AS BUILDING, MACHINERY, VEHICLES. MACHINERY, VEHICLES. -- EXPENDITURE IN PURCHASE /SETTING UP OF -- EXPENDITURE IN PURCHASE /SETTING UP OF CAPITAL GOODS/ASSETS CAPITAL GOODS/ASSETS -- EXCESS OF SALE PRICE OF ASSET OVER ITS COST -- EXCESS OF SALE PRICE OF ASSET OVER ITS COST PRICE PRICE -- FUNDS RAISED THRU BANKS/INSTITUTIONS -- FUNDS RAISED THRU BANKS/INSTITUTIONS -- FUNDS RAISED THRU ISSUE OF SHARES, & -- FUNDS RAISED THRU ISSUE OF SHARES, & DEBENTURES DEBENTURES

25 CAPITAL AND REVENUE EXPENDITURE REVENUE NATURE: REVENUE NATURE: ALL TRANSACTIONS RELATING TO NOMINAL ACCOUNTS ALL TRANSACTIONS RELATING TO NOMINAL ACCOUNTS EVEN CERTAIN EXPENSES OF NON-RECURRING NATURE BASED ON MATERIALITY CONCEPT EVEN CERTAIN EXPENSES OF NON-RECURRING NATURE BASED ON MATERIALITY CONCEPT EXCESS OF SALE VALUE OF ASSET OVER W D VALUE EXCESS OF SALE VALUE OF ASSET OVER W D VALUE UPTO COST OF ASSET UPTO COST OF ASSET

26 CAPITAL AND REVENUE EXPENDITURE DEFERRED REVENUE EXPENDITURE: DEFERRED REVENUE EXPENDITURE: LARGE ADVERTISING EXPENDITURE FOR(SAY) LAUNCH OF A PRODUCT LARGE ADVERTISING EXPENDITURE FOR(SAY) LAUNCH OF A PRODUCT EXPENDITURE FOR RAISING OF FUNDS INCLUDING EXPENDITURE FOR RAISING OF FUNDS INCLUDING PREPARATION OF PROJECT REPORT PREPARATION OF PROJECT REPORT INITIAL EXPENSES FOR SETTING UP OF A COMPANY INITIAL EXPENSES FOR SETTING UP OF A COMPANY

27 DEPRECIATION DEPRECIATION IS A CHARGE ON PROFITS, TO ACCOUNT FOR THE FALL IN THE VALUE( NOTIONAL OR OTHERWISE ) OF AN ASSET DURING THE PERIOD OF USE. DEPRECIATION IS A CHARGE ON PROFITS, TO ACCOUNT FOR THE FALL IN THE VALUE( NOTIONAL OR OTHERWISE ) OF AN ASSET DURING THE PERIOD OF USE. DEPRECIATION OR WRITING OFF OF A CERTAIN PORTION OF AN ASSET ON AN ANNUAL BASIS IS A PRUDENT WAY OF SAVINGS FOR REPLACEMENT OF THE ASSET AFTER ITS USEFUL LIFE IS OVER. DEPRECIATION OR WRITING OFF OF A CERTAIN PORTION OF AN ASSET ON AN ANNUAL BASIS IS A PRUDENT WAY OF SAVINGS FOR REPLACEMENT OF THE ASSET AFTER ITS USEFUL LIFE IS OVER. SINCE DEPRECIATION IS AN OPERATING COST AND THEREFORE TAX DEDUCTIBLE, EACH YEAR THE SAVING IS TO THE EXTENT OF (TAX RATE)* ANNUAL DEPRECIATION. SINCE DEPRECIATION IS AN OPERATING COST AND THEREFORE TAX DEDUCTIBLE, EACH YEAR THE SAVING IS TO THE EXTENT OF (TAX RATE)* ANNUAL DEPRECIATION.

28 DEPRECIATION DEPRECIATION CAN ALSO BE LOOKED IN A DIFFERENT WAY. DEPRECIATION CAN ALSO BE LOOKED IN A DIFFERENT WAY. DEPRECIATION IS AN ACCOUNTING PROCESS FOR THE GRADUAL CONVERSION OF THE CAPITALIZED COST OF FIXED(TANGIBLE) ASSETS INTO EXPENSE. DEPRECIATION IS AN ACCOUNTING PROCESS FOR THE GRADUAL CONVERSION OF THE CAPITALIZED COST OF FIXED(TANGIBLE) ASSETS INTO EXPENSE. SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED INTO EXPENSE BY AMORTISATION. SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED INTO EXPENSE BY AMORTISATION. WHILE ASSETS SUCH AS NATURAL RESOURCES ARE CONVERTED BY PROCESS CALLED DEPLETION. WHILE ASSETS SUCH AS NATURAL RESOURCES ARE CONVERTED BY PROCESS CALLED DEPLETION.

29 DEPRECIATION WHAT CAUSES DEPRECIATION ? WHAT CAUSES DEPRECIATION ? SIMPLY WEAR AND TEAR SIMPLY WEAR AND TEAR OBSOLESCENCE OBSOLESCENCE PASSAGE OF TIME PASSAGE OF TIME FALL IN VALUE FALL IN VALUE

30 DEPRECIATION IN ORDER TO CALCULATE DEPRECIATION THERE ARE BASIC ISSUES TO BE ASCERTAINED : IN ORDER TO CALCULATE DEPRECIATION THERE ARE BASIC ISSUES TO BE ASCERTAINED : -- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS). -- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS). -- THE RESIDUAL VALUE OF THE ASSET. -- THE RESIDUAL VALUE OF THE ASSET. -- METHOD TO BE USED FOR PROVIDING -- METHOD TO BE USED FOR PROVIDING DEPRECIATION. DEPRECIATION.

31 DEPRECIATION METHODS OF DEPRECIATION : METHODS OF DEPRECIATION :. STRAIGHT LINE METHOD. EQUAL FRACTION OF THE NET COST(COST OF THE ASSET LESS THE RESIDUAL VALUE) IS CHARGED EACH YEAR. WRITTEN DOWN VALUE METHOD. EQUAL PERCENTAGE OF THE WRITTEN DOWN VALUE IN THE BOOKS OF THE COMPANY IS CHARGED EACH YEAR. WRITTEN DOWN VALUE METHOD. EQUAL PERCENTAGE OF THE WRITTEN DOWN VALUE IN THE BOOKS OF THE COMPANY IS CHARGED EACH YEAR. SINKING FUND METHOD. IT IS STRAIGHT LINE METHOD BUT THE DEPRECIATION CHARGED OR A PORTION OF IT IS KEPT AS A RESERVE, INVESTED IN MARKETABLE SECURITIES. THE FUND GROWS INTO REPLACEMENT VALUE OF THE ASSET. SINKING FUND METHOD. IT IS STRAIGHT LINE METHOD BUT THE DEPRECIATION CHARGED OR A PORTION OF IT IS KEPT AS A RESERVE, INVESTED IN MARKETABLE SECURITIES. THE FUND GROWS INTO REPLACEMENT VALUE OF THE ASSET.

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