Account M.C.Q (1 Marks)

An accrued expense is a liability that represents an expense that has been recognized but not yet paid. Not every transaction requires an immediate exchange of cash for goods and services. Sometimes, especially when there is a prolonged history of ongoing transactions between two parties, formal invoicing and payment requirements can occur after the expense associated with the transaction has been recognized.

Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year.
If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it is brought into business.
Such interest is treated as expense for the business and the following entry is recorded in the books of account:
Interest on Capital A/c Dr.
To Capital A/c

Capital expenditure is a money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.
Hence, Purchase of a truck by a company is a capital expenditure.

Interest on partner's capital is an amount at an agreed rate of interest which is credited to a partner based on the amount of capital contributed by him/her.
Interest on partner's capital is an expense to the firm and hence debited to profit and loss appropriation A/c. On the other hand it is an income for partners and hence credited to partner's capital A/c.

Accrued income is usually listed in the current assets section of the balance sheet in an accrued receivables account.

It is quite possible that whole of he amount of debtors may not be realised in future. However, it is not possible to accurately know the amount of such bad debts. Hence, a reasonable estimate of such loss is made and provided for the same. Such provision is called provision for bad debts and is created by debiting profit and loss account. The following journal entry is recorded as:
Profit and Loss A/c Dr.
To Provision for Doubtful Debts A/c
New Reserve for Doubtful Debts is deducted from the debtors on the asset side of the balance sheet.

Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it is brought into the business. Such interest is treated as expense for the business on debit side of profit and loss account.

Adjustment entries are the entries which are passed at the end of each accounting period to adjust the nominal and other accounts so that correct net profit or net loss is indicated in profit and loss account and balance sheet may also represent the true and fair view of the financial condition of the business.

Depreciation on fixed assets, interest on capital, etc. are not recorded on day-to-day basis. These are adjusted at the time of preparing financial statements.

Generally, the amount of prepaid expenses that will be used up within one year are reported on a company's balance sheet as a current asset. As the amount expires, the current asset is reduced and the amount of the reduction is reported as an expense on the income statement.

Rent prepaid a/c appearing in the trial balance is debit of trial balance.
Prepaid rent is an asset which is shown under the current asset of balance sheet.

It is quite possible that the whole amount may not be realised in future. However, it is not possible to actually know the amount of such debts. Hence, a reasonable estimate of such loss is made and provided the same. Such provision is called provision for bad debts and is created by debiting profit and loss account. The following journal entry is recorded as:
Profit and Loss A/c Dr.
To Provision for Doubtful Debts A/c
It is shown as a deduction from the debtors on the asset side of the balance sheet. Reserve for doubtful debts is made out of revenue profit.

Adjusting entries refers to a set of journal entries recorded at the end of the accounting period to have an updated and accurate balances of all the accounts. Adjusting entries are mere application of the accrual basis of accounting and not based on transactions. For example, accrued interest on loan, depreciation, writing off prepaid expenses, etc.

Interest will be allowed to each partner on the capital contributed by him . Interest on capital of the partners is calculated for the relevant period for which the amount of capital has been used in the business. Capital introduced or withdrawn by a partner during the accounting year has to be taken for the purpose of calculation and definitely is not a reward for the partners.

Interest on capital is a charge on the profits of a firm and it decreases the net available profit for appropriation.

Unpaid Wages Under the accrual basis of accounting, unpaid wages that have been earned by employees but have not yet been recorded in the accounting records should be entered or recorded through an accrual adjusting entry which will: Debit Wages Expense. Credit Wages Payable or credit Accrued Wages Payable.

Sometimes, a certain income is received but the whole amount of it does not belong to the current period. The portion of income which belongs to the next accounting period is termed as income received in advance or an Unearned Income. Income received in advance is adjusted by recording the following entry:
Concerned Income A/c Dr.
To Income Received in Advance A/c
The effect of this entry will be that the balance in the income account will be equal to the amount of income earned for the current accounting period, and the new account of income received in advance will be shown as a liability in the balance sheet. The amount of income received in advance will be deducted from the credit side of profit and loss account.

Financial capital is the money used to help pay for the acquisition of plants, equipment, and other items needed to build products or offer services. Hence, it can be referred to money capital.

The expenses accrued but not paid is an outstanding expense and is a liability of the business.

When there is no partnership deed then interest on capital will not be charged. There will be no interest provided on the capital.

A prepaid expense refers to an amount that a company has paid and a portion or all of it will be an expense in a later accounting period.
A prepaid expense can be recorded initially as an expense or as a current asset.

It may happen that certain items of income such as interest on loan, commission, rent, etc. are earned during the current accounting year but have not been actually received by the end of the same year. Such incomes are known as accrued income, outstanding income or incomes earned but not yet received. Common examples of such incomes are commission receivable, income on investments due but not yet received etc. The adjusting entry for accrued income is:
Accrued Income A/c Dr.
To Concerned Income A/c
The amount of accrued income will be added to the related income in the profit and loss account and the new account of accrued income will appear on the asset side of the balance sheet.

It may happen that certain items of income, such as interest on loan, commission, rent, etc., are earned during the current accounting year but have not been received by the end of the same year. Such incomes are known as accrued income. It is the income that has been earned during a particular accounting period, also known as outstanding income.
Examples include accrued interest, accrued rent (to be received), etc. Accrued income is recorded in the books at the end of an accounting period to show the true numbers of a business.