Amortisation means distribution of cost of intangible asset over a periods of time. Only intangible assets (assets which don’t have physical existence) are amortised, tangible assets (assets which have physical existence) can’t be amortised.Steps to record amortisation in a journal are as follows −Identify initial value of the asset.Life span of the asset.Residual value.DebitCreditAmortisation expenseXXXXAccumulated amortisationXXXXXFormula to calculate is − amortisation expenses = (initial value-residual value)/lifespanAdvantages of amortisation are −Reduces tax burdens.Firms can show higher value of an asset.Firms can show more income in financial statements.Amortising intangible assets includes −Note the starting date.Calculate initial cost.Estimate life span.Calculate amortisation value per ... Read More

Fictitious assets are the assets which has no tangible existence, but are represented as actual cash expenditure. The main purpose is to create this account for expenses which are not placed in any account headings.In other words, fictitious means fake or not real, these are not assets at all but they show in financial statements. Expenses incurred in starting a business, goodwill, patents, trademarks, copy rights comes under expenses which cannot be placed any headings.Fictitious assets have no physical existence.No realisable value.They are amortised in one or more profitable financial years.ExamplesPromotional marketing expenses.Underwriting commission.Preliminary expenses.Discount allowed on shares.Loss incurred (issue ... Read More

Bank reconciliation concept is comparing of balance sheet with bank statement. There is no fixed date for preparing bank reconciliation so its prepared periodically to check the balances and adjustments are made, if needed.It helps in detecting errors, cash manipulations, frauds etc. One thing we have to remember is that, not always both the balances are equal.Some of the reasons are as follows −Cash and check transactions are recorded in bank statement.Outstanding checks.Bank service fees.Interest.Bank reconciliation terminology includes −Deposit in transit − It occurs when the deposit arrives at bank too late, entity not deposited in the bank. Mont end ... Read More

Trial balance is a worksheet which consists of all ledger balance in a single sheet. All ledger balances are compiled into credit and debit columns (total should match). In other way, it can also be explained by the following steps −Recording of business transaction in a journal entry.Summarise and categorise them into a ledger.Create a worksheet and make a trial balance (balances credit and debit).Purpose of trial balance is −Trail balance is the first step in preparing financial statements.If balances are not matched in trail balance, difference will be rectified and adjusted before preparing financial statements.Ensures account balances.Assists in identification ... Read More

Journal is called as book of original entry. Journal is a detail record of business transactions that are made in a date. The word JOUR means a day, so it is a day book or daily book of accounting.Journal entry has following structure −A header line (journal entry number and entry date).First column includes account number and account name (credited).Second column to enter debited amount.Third column to enter credited amount.A footer line (brief description of entry).Features of the journal are −Book of primary entry.Daily record book.Chronological order.Dual aspect of transactions.Use of explanation.Different columns.Subsidiary book.Rules in journal are as follows −Debit ... Read More

Ledger is a summary of all transactions in a journal. A ledger is a record of all business transactions made by a firm. This is often called as chart of accounts.General ledger has three account types namely assets, liabilities and equity accounts. Most of the firms have almost same accounts like cash, account payable and retained earnings, but some may have specialised accounts for specific projects.Types of ledgers are −Sales ledger −Maintains sales transactions (service or goods sold) of a firmPurchase ledger −Maintain purchase transactions (services, goods purchased) of a firmGeneral ledger −Records expenses, income, depreciation etc. in nominal ledger ... Read More

Accounting is a process of making a financial report which consists of business transactions and preparing income statements, profit and loss accounts and balance sheets. The system which maintain these financial records are known as accounting system.There are different types of accounting systems, each has its own functionality. The main aim is to manage the financial activities (revenue, expenses and liabilities).Accounting systems can be maintained manually and are computerised. Manually accounting is difficult to maintain and chances for miscalculations and errors are high, whereas computerised accounting is easier to maintain, is accurate and saves lot of time.Types of accounting systems ... Read More

Matching concepts tells about expenses incurred during a period to be recorded in the same period in which revenues are earned. Revenues and expenses in income statement are matched for a period of time. Investors get a better idea about economics of the business.Product cost − These are tied directly to products and in turn revenues.Period cost − These don’t have corresponding revenues.Commission − If an employee earned x% of commission on sales in current month and that commission is paid in next month, then that transaction is recorded in present month.Depreciation − If a company buys a machine and ... Read More

Accounting period is a time frame in which, business financial activities are summarised. It can be yearly, mid-year or quarterly.Accounting period is useful to analyse company performance through its financial statements. A public held company must report to Securities and Exchange Commission (SEC) on quarterly basis.If the 12-month accounting period ends other on December 31st then, that period is called fiscal year. Accounting period only limited to income statement and statement of cash flows.Advantages of accounting period are −Preparation of financial statements.Maintains business records.Valuation of business.Decision making.Evidence in legal matters.Limitations of accounting period are −It measures only things/events that have ... Read More

In accrual concept, the transactions are recorded in the given time frame (accounting time). In this, transactions are recorded irrespective of payment made or not. Main idea is to recognise economic events by matching revenue and expenses.In this, some may pay for the goods to be delivered for the seller. In this type, the transactions are recorded in liability account for the seller. When the goods are delivered, the payment is then transferred into revenue account. Generally accepted accounting principles (GAAP) and International financial reporting standards (IFRS) supports accrual concept.Reasons to use accrual concept are explained below −Complexity of business ... Read More