Tag: Ledger Maintenance

Journal Proper is mainly used for original records of a transaction which due to their importance or rareness of occurrence do not find a place in any of the subsidiary books of accounting. It is also known as a Miscellaneous Journal and it looks much like any other journal.

Journal proper [or General Journal] is a simple book of chronological record of business transactions. The use of this book is very much restricted in modern accounting system.

Only those transactions, which cannot be conveniently recorded in any of the other books of original entry i.e., subsidiary books or which are not sufficiently numerous to necessitate a special book being devised for them, are recorded in this book.

Sample Format of a Journal Proper

Types of entries that are entered in the journal proper:

1. Opening Entries
2. Closing Entries
3. Rectification Entries
4. Transfer Entries
5. Adjustment Entries
6. Miscellaneous Entries

Opening Entries

As the name suggests, opening entries are recorded at the beginning of a financial period. The balances mentioned in the balance sheet of the previous year are brought forward by recording the liabilities, capital, and assets from the previous year.

Example

The rule to be applied to make an opening entry is

Sample Format of an Opening Entry in a Journal Proper

All amounts mentioned in the sample format are the closing balances of the previous year balance sheet.

Closing Entries

Almost the opposite of the opening entries, they are recorded at the end of a financial period; closing entries are related to nominal accounts. These accounts are closed by transferring their balances to trading and profit and loss accounts. A record is not included in the ledger without a journal entry, so closing entries are recorded with the help of a journal proper and then recorded in the ledger.

Example

At the end of a period Salary account is closed by transferring its balance to profit and loss account.

Rectification Entries

In the world of accounting erasing or removing a journal entry once recorded is a strict NO!. Mistakes should only be corrected by passing another entry in the journal.

Example

A purchase for 10,000 was omitted by mistake, it belonged to Unreal Pvt Ltd.

Rectification entry, in this case, will be

Transfer Entries

In simple terms, the transfer entry is used to transfer an item from one account into another. All such transfers are made with the help of journal entries.

Example

Let us take an example where a general reserve is created for a business by transferring 5,00,000 from the profits.

Adjustment Entries

The amount of expenses or incomes may need to be adjusted for advances paid or received at the end of a financial period, these types of adjustments are made with the help of a journal entry. They are very common at the end of an accounting period. Adjustment entries are mainly used for accrual or depreciation related entries.

Example

There are outstanding wages of 50,000 which need to be accounted for

Miscellaneous or Other Entries

In addition to the above entries, there are other entries that can be recorded in a journal proper.

• Discount allowed and received
• Purchase or sale of items on credit other than goods
• Effects of accidents such as losses due to fire
• Consignment and joint venture transactions
• Endorsement and dishonor of bills of exchange
• Transaction for goods distributed as samples
• Sale of obsolete assets

Depreciation Accounting refers to the process of allocating the cost of a tangible asset over its useful life. It reflects the wear and tear, obsolescence, or decline in value of the asset over time. Depreciation is recorded as an expense on the income statement, reducing taxable income, and it helps match the cost of the asset with the revenue it generates. Common methods of calculating depreciation include Straight-Line, Declining Balance, and Units of Production. Depreciation affects the asset’s book value on the balance sheet and ensures that the asset is depreciated gradually until it reaches its salvage value.

Calculation Choices:

Depending on their preferences, companies are free to choose from several methods to calculate the depreciation expense.

1. Straight-line Method

This takes an estimated scrap value of the asset at the end of its life and subtracts it from its original cost. This result is then divided by management’s estimate of the number of useful years of the asset. The company expenses the same amount of depreciation each year.

Here is the formula for the straight-line method:

Straight-line depreciation = (Original costs of asset – Scrap value)/estimated asset life

2. Accelerated Methods

These methods write-off depreciation costs more quickly than the straight-line method. Generally, the purpose behind this is to minimize taxable income. A popular method is the ‘double declining balance,’ which essentially doubles the rate of depreciation of the straight-line method:

Double Declining Depreciation = 2 x (Original costs of asset – Scrap value / estimated asset life)

Accounting Treatment

The accounting for depreciation requires an ongoing series of entries to charge a fixed asset to expense, and eventually to derecognize it. These entries are designed to reflect the ongoing usage of fixed assets over time.

Depreciation is the gradual charging to expense of an asset’s cost over its expected useful life. The reason for using depreciation to gradually reduce the recorded cost of a fixed asset is to recognize a portion of the asset’s expense at the same time that the company records the revenue that was generated by the fixed asset. Thus, if you charged the cost of an entire fixed asset to expense in a single accounting period, but it kept generating revenues for years into the future, this would be an improper accounting transaction under the matching principle, because revenues are not being matched with related expenses.

In reality, revenues cannot always be directly associated with a specific fixed asset. Instead, they can more easily be associated with an entire system of production or group of assets.

The journal entry for depreciation can be a simple entry designed to accommodate all types of fixed assets, or it may be subdivided into separate entries for each type of fixed asset.

The basic journal entry for depreciation is to debit the Depreciation Expense account (which appears in the income statement) and credit the Accumulated Depreciation account (which appears in the balance sheet as a contra account that reduces the amount of fixed assets). Over time, the accumulated depreciation balance will continue to increase as more depreciation is added to it, until such time as it equals the original cost of the asset. At that time, stop recording any depreciation expense, since the cost of the asset has now been reduced to zero.

For example, ABC Company calculates that it should have $25,000 of depreciation expense in the current month. The entry is:

In the following month, ABC’s controller decides to show a higher level of precision at the expense account level, and instead elects to apportion the $25,000 of depreciation among different expense accounts, so that each class of asset has a separate depreciation charge. The entry is:

Depreciation is considered an expense, but unlike most expenses, there is no related cash outflow. This is because a company has a net cash outflow in the entire amount of the asset when the asset was originally purchased, so there is no further cash-related activity. The one exception is a capital lease, where the company records it as an asset when acquired but pays for the asset over time, under the terms of the associated lease agreement.

Finally, depreciation is not intended to reduce the cost of a fixed asset to its market value. Market value may be substantially different, and may even increase over time. Instead, depreciation is merely intended to gradually charge the cost of a fixed asset to expense over its useful life.

Depreciation and a number of other accounting tasks make it inefficient for the accounting department to properly track and account for fixed assets. They reduce this labor by using a capitalization limit to restrict the number of expenditures that are classified as fixed assets. Any expenditure for which the cost is equal to or more than the capitalization limit, and which has a useful life spanning more than one accounting period (usually at least a year) is classified as a fixed asset, and is then depreciated.

Need for providing Depreciation:

• Matching Principle:

Depreciation ensures that the cost of an asset is matched with the revenue it generates over its useful life. This provides a more accurate representation of profits for each accounting period.

• Asset Valuation:

Depreciation helps in adjusting the book value of an asset to reflect its reduced value due to wear, tear, and obsolescence.

• Tax Deduction:

Depreciation is a non-cash expense that reduces taxable income, leading to lower tax liabilities.

• Cost Allocation:

It allows for a systematic allocation of the asset’s cost over its useful life, spreading the burden rather than expensing the entire cost in one period.

• Financial Reporting:

It ensures that financial statements accurately reflect the current value of assets, making them more reliable for investors, creditors, and other stakeholders.

• Compliance:

Providing depreciation is a legal requirement in many jurisdictions to ensure adherence to accounting standards (e.g., GAAP, IFRS).