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solution of this problem - june23am - 10-02-2009
this question is of topic "accounting from incomplete records"
a started business on 1st january 1991 with a capital of rs.5000, he did not keep any books of accounts beyond a cash book, a sumary of which for the year ending 31st december,1991 is given below.
receipts from sundry debtors rs.6500 cash sales rs.3500 commission rs.250
payments to sundry creditors rs.7850 cash purchase rs4500 trade expenses rs.1250 furniture rs.100 war charity rs.50
on 31st dececmber following information is also available.
credit sales rs.12000 credit purchase rs10200, <b>expenses owing rs.150 and prepaid expenses rs. 75</b>
other adjustments are
10% depreciation on furniture
writing off rs. 500 as bad debts
stock in hand rs.2250
here i need 2 issues to be sorted out 1st one is about prepaid expenses rs.75 and expenses owing rs.150.
if i am not wrong than "expenses owing" are accrued expenses, expenses payable . the entry should be expenses debit by rs.150 and accrued expenses credit by rs.150 and these expenses should be mentioned in income statement to adjust with revenue of this year.
2nd thing prepaid expenses rs.75, entry for these will be.. prepaid expenses debit by rs.75 and cash/bank credit by 75, as there is not mentioned that these prepaid expenses are consumed or not..if i treat these as asset than i might not put these in the income statement if i put it in income statement as an expense than i shuld not mention it in balance sheet as prepaid expense "am i right"?
dont know much about accounting need a little help thankyou.. assalamualykum
- hshamsi - 10-02-2009
@ above
for accrued expenses, dr income statement ( add in expenses ) and cr liabilities ( include after creditors and accrued expenses in short term liabilities)
for prepaid expenses, cr income statement ( less form expenses) and dr current assets ( include after inventory, debtors as prepaid and other receivables )
regards.
- june23am - 10-02-2009
how can i put these prepaid expense in income statement when i dont know that these are consumed or not?. if the expenses were consumed than it is so easy when they are not than how is this possible to treat these as expense for current accounting period?..
as far i have learnt, there are two treatments to deal with prepaid expenses. first is to take it as current asset (dr) and credit the cash or bank account..and at year end pass an adjusting entry with the amount being consumed during the year as an expense.
2nd treatment is to charge the whole amount as expense but still in the end have to pass the adjusting entry..so in the question author did not mentioned that these expenses are consumed or not..at same author did not mentioned those owing expense rs.150 in income statement, and he treated those prepaid expenses in income statement and answer is 1415 net profit..is there any logic? this question is from the book prncipal of accounting by m.a ghani, .. i dont find this book useful for students as here in bwp ppl realy need for a change, regarding adopting foreign authors or atleast indians. i blv i cannot have concepts through ths books ya but if i got the key book than i might be able to solve the questions, as every student in here do so. any ways thanks for your reply. assalamualykum
- hshamsi - 10-02-2009
@ above
u see u ur self 've mentioned the ans in ur ques.. forget abt the sol which author gave, the correct one is to charge whole expense in income statement n thn at year end for the sake of cut-off less all the expense which has not yet been consumed bt paid(called prepaid) as prepaid from income statement and take this to balance sheet in current asset as prepayments and other receivables.
i hope no confusion this time.
regards