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Articles by Nagasravan Tamma
Page 21 of 27
How are the journal entries and legal entries recorded for contingent liabilities?
There is a lawsuit between company A and company B. Company A sued company B in violating patent rights of technology. Company A claimed $ 3 billion, when the lawsuit began in 2010 but in the final verdict in 2016, company A won $ 400 million. (Company B estimated contingent liability as $800 million in their books)SolutionPrepare journal entry for year end 2010 as shown below −ParticularsDebt (million $)Credit (million $)Lawsuit loss A/c To Lawsuit liability800800Being estimated amount of lawsuit losses recordedProbability of occurrenceIf the liability is not probable and will arise soon (journal entry is not passed)Disclosure is ...
Read MoreWhat are contra entries and how are they recorded?
The word “contra” means opposite or against. This entry involves both a cash account and bank account. In this, entries are recorded on the debit and credit sides of the cash book at same time.These entries are not recorded in ledger accounts because both aspects (credit and debit) are in double column cash books. Letter “C” is written in the posting reference column which represents contra entry.If cash is taken from the bank, due to business purposes then contra entry is made. If cash is taken for personal use, then it is recorded in the credit side of the bank ...
Read MoreState the importance and features of cash books
Cash book records all the transactions related to cash in an organization. Transactions are recorded according to their type (debit or credit). These are recorded in chronological order. Cash book can be both a journal and a ledgerFeatures of cash bookThe features of cash book are explained below −Act as both journal and ledger − Cash books records transactions as it happens and posts the transactions.Substitution − It serves as an alternative for cash accounts.Dual entry − Cash book has two sides namely, debit side and credit side.Identical − Debit side (total) = credit side (total).Debit balance − Business will ...
Read MoreExplain GAAP guidelines for contingent liabilities
Contingent liabilities include different liabilities like warranty costs, injury claims, lawsuits etc. Each of the expenses are treated differently and it should satisfy a set of conditions before realizing.General accepted accounting principles (GAAP) have some guidelines for recognition, measurement and reporting for contingent liabilities. These are explained below −IdentificationFirst step in identification is to determine the odds of each contingency occurring and then, they should be classified based on probable, possible or remote.Reevaluate the items, if there are any changes (if increase in percentage of contingency or not).Write the reasonable liabilities in footnotes.Finally, probable liabilities are listed in financial statements ...
Read MoreDistinguish between contingent liabilities and provisions
Contingent liabilities and provisions are governed by the international accounting standards 37 (IAS 37). The main objective is to match asset and liabilities = income and expenses in a particular financial year, so that the financial statements reflect in a realistic manner.ProvisionIt is the present obligation that arises due to previous events. Provision decreases asset values. This is for bad debts and doubtful debts are commonly recorded debts.Over provision or under provision are recognised by comparing with the previous years and are charged in an income statement. Provision amount is decided on the company’s policy.The basic accounting treatment for provision ...
Read MoreDifferentiate between contingent liabilities and liabilities
Liability is the amount owed to a creditor. Long term and short term liabilities are the types of liabilities.Long term liabilities are expected to pay over the years or the time frame is more than a year. However, short term liabilities are expected to pay within a year.A contingent liability is the liability which may or may not occur. That means the contingent liability will depend on future events.AccountingLiability is accounted for immediately as you owe the obligation. Amount is recorded in books as accounts or notes payable.Contingent account is accounted for only when the obligation is probable and amount ...
Read MoreCompare current liabilities, non-current liability, and contingent liabilities
Liabilities are current obligations which arise from the previous events. Settling these obligations causes the outflow of resources by decreasing their economic benefits. In simple words, liabilities are debt owed to others (may be a company or a person).The main types of liabilities are current liabilities, non-current liabilities and contingent liabilities.Current liabilitiesThese are also called short term liabilities. These liabilities are paid before 12 months or a year. Companies will have to look at their liquidity to guarantee these debts and ensure they can be met. Examples are accounts payable, income tax payable, interest payable, accrued expenses.Non-current liabilitiesThese are also ...
Read MoreDifferentiate between capital expenditures and revenue expenditures
For existence purposes, business incurs various expenditures. Some will have long term impact in profit making and some will have short term impact. To increase the business efficiency and get higher returns is the main reason by incurring expenditure.There are two types of expenditures which are capital expenditures and revenue expenditures respectively.Capital expenditureThese are expenditures incurred for long term benefits. The main purpose is to enhance the existing ones or to add a new asset. These are recorded on the asset side (balance sheet). Organizations increase operating capability by spending expenditure on land, equipment, furniture etc.Revenue expenditureThis expenditure is incurred ...
Read MoreWhat are revenue expenditures and factors considered in determining it?
Revenue expenditures are those expenditures which are incurred in normal business operations by an organization/company.In other words, revenue expenditures are the sum of expenses which are incurred in production of goods and expenses incurred in services in an accounting period. Benefits of revenue expenditure received in the same period.Revenue expenditure will not add in profits, but these are helpful in maintaining day to day operational activities and managing assets in a better way. These are also known as OPEX/revenue expenses.TypesThe types of revenue expenditures are as follows −Maintaining asset (revenue generated) − Repairs and maintenance.Revenue generating − Expenses to operate ...
Read MoreCompare capital receipts and revenue receipts
Let us understand what are capital receipts and revenue receipts, before learning about their differences.Capital receiptsThese are the non-recurring income received by the company and come under investing and financial activities.They are generated from issue of shares, government’s grants, insurance claims, bank loans or loans from financial institutions, issue of denatures etc. Capital receipts reduce an asset or will increase a liability.Revenue receiptsThese are recurring income received by the company. This comes under business activities and benefits are enjoyed in the current period only.These are generated from services rendered, interest and rent received, discount from creditors/suppliers, sale of scrap etc.ComparisonThe ...
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