The system of account vol iii

Volume – III

YEAR 2016

WRITTEN BY: SYED AQEEL RAZA

THE SYSTEM OF ACCOUNTING

Written by; Syed Aqeel Raza

FATHER OF ACCOUNTING

Fra Luca Bartolomeo de Pacioli (1445–1517) was an Italian mathematician and seminal contributor to the field now known as accounting. He is referred to as the Father of Accounting and Bookkeeping (he was the first to publish a work on a double-entry system of bookkeeping). He was also called Luca di Borgo after his birthplace, Borgo Sansepolcro, Tuscany.

https://en.wikipedia.org/wiki/Tuscany

https://en.wikipedia.org/wiki/Sansepolcro

https://en.wikipedia.org/wiki/Sansepolcro

https://en.wikipedia.org/wiki/Double-entry_bookkeeping_system

https://en.wikipedia.org/wiki/Accounting

https://en.wikipedia.org/wiki/Mathematician

https://en.wikipedia.org/wiki/Italy

THE PREFACEFirst and foremost, I thank Almighty Allah (swt) who attached me to the Door-of-knowledge and encouraged me to serve mankind by spreading education which made the human supreme in creation.

The object of writing this book “The System of Accounting” is to provide basic accounting concept in easy way of styles and illustrations makes readers, students and business executives acquainted with the concept of accounting.

This book is primarily written for the use of beginners of this subject and for those who wish to have knowledge of it to keep eyes on their finance applied in business.

At last in short, I shall say that this is my a little contribution based on your suggestions.

I tried my best to avoid errors, but errors may be being human then please notify and suggest anything for improvement with liberty on my email addresses [email protected].

ASSETSEXPENSESREVENUESLIABILITIES

F O R W A R D

I am in great pleasure of presenting my Book “The System of Accounting Volume III which I think, will be proved different others because of the reason that I tried utmost to select suitable words with Urdu translation where necessary to make it comprehensive to readers and the students of commerce.

I hope my a little struggle for this noble cause will be admirable with suggestions for improvement.

COPYRIGHT

Copyright of this book goes to writer and not allows others to use its contents to publish but downloads for reading and study

All the best to my readers

DISCLAIMER

The name of the book “The System of Accounting”, contents, definition, and written material of this book are of the writer not copied from any source but taken guideline from many other sources to complete thinking and saving errors. The name, amount, addresses, and anything relating to personal in written materials are imaginary and thinking of writer.

In the opinion of the writer, same views or concepts of accounting being the same subject with others may be resemblance but the difference in the idea of writing and presentation.

All the best to readers

7


Volume III

THE BASIS OF ACCOUNTING

WRITTEN BY:SYED AQEEL RAZAMASTER OF COMMERCE & POLITICS

C O N T E N T S

CHAPTER ONE THE BASIS OF ACCOUNTING

-----------------------------------------------------------------------------------------

Accounting for basis 1-1Cash Base Accounting 1-1- Cash accounting draw backs 1-2- How to remove draw backs 1-3- Advantage of Cash Accounting 1-3-4- Profit & Loss Sharing Accounting 1-5- Current Account 1-5-6- Bank Interest and charges 1-6- Bank Statement 1-7- Bank Reconciliation 1-7- Method of Bank Reconciliation Statement 1-8- Procedure of Bank Reconciliation 1-8-16Accrual Base Accounting 1-17- Cash and Accrual Base mix accounting 1-17- Cash Flow Statement 1-18

o Operating Expenses 1-19o Investing Activities 1-19o Financial Activities 1-20o Direct Method 1-20-26

- Indirect Method 1-27-28Funds Flow Statement 1-29Writer’s View 1-30

THE BASIS OF ACCOUNTING 1-1

ACCOUNTING FOR BASES

All accounting system is based on payment and receipt by cash and bank which depends on cash and accrual basis accounting and sometimes requires cash and accrual base mix accounting to remove drawbacks of cash accounting.

CASH BASE ACCOUNTING

In general, any item which a bank accepts at the face valve of deposit or which may be transferred to another party at face value may be considered cash.

In cash basis accounting system, transactions are recognized on receipt and payment of cash or a company records cash receipts in the period that they are received and expenses in the period in which they are paid. Revenues and expenses are reported in the income statement when the cash is received and expenses occurred.

It is usually applied or followed by individual or small and non-manufacturing businesses. If a business expands, it may move to the accrual method of accounting.

Cash accounting is the opposite of accrual accounting wherein revenue and expenses are recorded when they are incurred but controlled under cash accounting because the revenue and expense which were recorded in their respective accounts as they incurred and the effect in their accounts receivable or payable is paid by cash or bank.

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>


Cash accounting has some drawbacks;

- Daley in recognition of income

If a cheque from the customer and a cheque to the supplier is received and given on the 30th of the month but could not cash or deposited at the bank, it will be recognized in next month.

- Delay in recognition of taxable income

A business receives a cheque from a customer near the end of its fiscal year but does not cash it until the next year will make the cause of recognition of taxable income in the current year.

- Delay of expenses in recognition of taxable income.

A business pays its suppliers early in order to recognize more expenses in the current fiscal year which will reduce its taxable income in the current year.

- Unable to present profitability

The delay in recording revenue and expenses will make the cause of presenting accurate profitability which will also affect on company’s budget.



How to remove drawbacks?

- As soon as the cheque from the customer and the cheque to the supplier is received or given must be accounted for either cashed or not in their accounts. The Invoices of sale and purchase must be accrued as and when they incurred. As far as the expenses are concerned, they may be taken or accrued at the end of the year enable account to show clear picture somehow.

Hence, we can say that the drawbacks of cash accounting can be removed by mix accounting system “cash and accrual accounting.”

Advantage of cash accounting;

- Cash accounting can also be cost-effective in the case of sole proprietorship or partnership and for companies that conduct most cash transactions.

- Cash accounting requires less staff, financial resources and easy to understand.

- Cash accounting clearly represents cash flows and outflows in business than the accrual method of accounting.

- Cash accounting provides tax benefits of payments received in 2015 for the work of previous year would be counted as income for 2015 tax year and reduced net income for the year 2015 tax year.



Many devices for cash and receipt has been described such as cash book, petty cash book, General Journal and special journals; cash receipt journal, cash payment journal, purchase journal, sales journal, purchase return and allowances journal, sales return and allowances journal etc. on which we have discussed in our previous version.

All payments and receipt are done by cash with the company and the cash with the bank. The cash in the company is applied in small cash payments and small receipts in cash is also used in it but the payment to suppliers from whom we purchase goods is paid by bank issuing cheque in the name of supplier which goes in clearing and after processing the amount is transferred to supplier account and so on the cheque we deposit of the customer which we receive against sale or services rendered comes to our account.

Therefore, cash and bank are two names of one thing “cash” must be compared with company cash book and bank book and it is also necessary to have a complete knowledge regarding the bank procedures and documents used for banking.

There are many kinds of bank accounts used for keeping cash and operating for personal and business but profit and loss sharing account (PLS) and Current Account (CD) are mostly used in business which is described below to have complete knowledge of them;

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL [email protected]


mailto:[email protected]

PROFIT AND LOSS SHARING ACCOUNT (PLS A/C)

This kind of account can be operated by any person, firm or organization by depositing minimum balance Rs.100/= or above which allows profit variable on the amount deposited over a specified period and keeps in share the loss as the case may be to the account holder. The account holder can withdraw or deposit the amount up to the limit prescribed.

This account is operated under interest-free system but the interest is under question.

CURRENT ACCOUNT (CD A/C)

This account is usually operated by the business man and can be opened by Rs.1000/= as an initial deposit at the time of opening the account. The bank issues cheque book 25, 50, 100 leafs as per requirement.

There is no interest on this account.

Besides, profit and loss sharing account and current account, bank introduces many other accounts like;

- Home safe accounts- Student saving account- Saving account- Islami Banking account- Fixed Deposit Account- Credit card- Debit card- Visa card



Banks also issues certificates having interest on completion of specified period.

Bank uses many forms or documents to make transaction from him but the following forms are used mainly to operate any account or doing transaction:

- Cheque book- Pay-in-slip/deposit slip book- Pay order/demand draft making form- Online transfer Form

BANK’S INTEREST AND CHARGES

The bankers enjoy higher rate of interest or profit and allows the small rate of interest or profit to the account holder by whose money he enjoys the big income. The bank deposit or transfer the amount of interest in the account and informs the account holder by credit memo.

The bank also deducts charges of different nature from his account holders in making transaction through bank from which some are mentioned here;

Cheque book chargesMinimum balance chargesCommissionExcise dutyWithholding tax – fillerWithholding tax- non-fillerPay order making chargesDemand draft making chargesOnline transfer chargesPostage charges



BANK STATEMENT

A copy of the account for a period, monthly, half yearly or annually is sent by the bank to the account holder for checking of withdrawals, deposits and balance which is reconciled by company’s cash book.

BANK RECONCILIATION

The bank reconciliation is the matching statement of two balances at the end of the month or year such as cash book balance and bank statement balance. It is made to search the causes of disagreement in balances and to test the accuracy of the transactions posted in cash book. In the case of any unknown discrepancy or difference, the bank is informed within a reasonable time.

The balance in cash book and in bank statement may differ;

- Cheques issued but not presented to the bank for payment on the end date of the Bank Statement.

- Cheques deposited into the bank but not collected the amount un till the end of the date of bank statement.

- The interest of the bank is not recorded into cash book.- Bank charges, the markup on overdraft are not recorded in the cash

book.- Cheques issued but not recorded in the cash book.- Wrong posting of the amount by the bank in the account.- Wrong posting of the amount in the cash book.- Unknown collection or credit is shown in bank statement.- Unknown payment or debit is shown on the bank statement.- Bank commission, excise duty, cheque book charges, pay order charges,

demand draft charges, any instrument making charges, and tax on cash withdrawn are ascertained on seeing the bank statement.

- Many other causes of disagreement with cash and bank.- <THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>


METHOD OF BANK RECONCILIATION STATEMENT

There are two methods are applied for bank reconciliation wherein;

o Correct method o Adjusted method

In corrected method, the items which are shown in bank statement but not in cash book will be recorded in cash book before making bank reconciliation or on the way of finding out difference at once and in adjusting method after making bank reconciliation statement but the main object is to determine the correct balance of both cash book and the bank statement.

PROCEDUTURE OF BANK RECONCILIATION

Keep two books before you and examine each other by ticking the amount, cheque number, bank deposit slip number and any other reference match with cash book and bank statement. The ticked items are agreed but un-ticked items are under question and need clarification.

Following are the steps and points for making bank reconciliation statement;

- At first, both the balances are written like balance as per cash book (business record) and balance as per bank statement (Bank record) for example;

Bank statement Cash book

Balances 24,750 18,000



1- Outstanding cheques, unpaid cheques, un-presented cheques

Outstanding cheques or unpaid cheques are the cheques which are issued for payment but not presented or collected by the party to whom the cheque is issued remained unpaid by the bank before the end of the month or end date of bank statement June 30, 2015.

The out-standing cheques or unpaid cheques are reduced by the bank as and when they are presented by the party. The Cash book had already been reduced by the cheques as and when they were issued and the bank book would be reduced as and when they were presented in the bank.

Cheques issued for payment, but not presented for payment before June 30, 2015, as detailed below;

Cheque No. 500500 Rs. 1, 000Cheque No. 500510 Rs.2, 000Cheque No. 500515 Rs.3, 000Cheque No. 500518 Rs. 5,000


Balances 24,750 18,000

Less: un-presented chequesCheque No. 500500 Rs. 1, 000Cheque No. 500510 Rs.2, 000Cheque No. 500515 Rs.3, 000Cheque No. 500518 Rs. 5,000 (-) 11, 000



2- Deposit in transit, uncollected cheques

The deposit in-transit or uncollected cheques are the cheques which will be added in bank book but added in cash book and as and when the amount will be transferred from the bank of other branch or bank. Hence, the cheques which are in transit or uncollected are added in the column of bank statement. The reason of not showing in bank statement is deposit to near date of the end date of statement or some reasons having objections wherein insufficient balance, wrong date, amount difference in figures and words and many other reasons.

Cheque deposited into bank but not shown in bank statement or bank collection;

No.130025 dt: 28/6 Rs.3000/=No.313454 dt: 29/6 Rs.2000/=No. 505352 dt: 30/6 Rs. 1500/=


Balances 24,750 18,000


Add: deposit-in-transitNo.130025 DT: 28/6 Rs.3000/=No.313454 DT: 29/6 Rs.2000/=No. 505352 DT: 30/6 Rs. 1500/= (+) 6,500



3- Bank deductions such as collection charges, commission, excise duty, withholding tax, postage, cheque book charges, etc.

On viewing bank statement, we ascertained that bank has deducted many Charges in shape of collection charges, commission, excise duty, withholding tax, postage, cheque book charges, pay order making charges, demand draft making charges, online transfer charges, etc. etc. if these charges are not recorded in cash book, we record them and they will reduce the balance of cash book.

Bank deducted following charges during the month of June 2015 which are not shown in cash book;

10/6 Cheque Book charges 150/=15/6 Bank commission Rs.100/=16/6 Tax on Cash withdrawn Rs.50/=25/6 online transfer charges Rs.100/= (-) 400


Balances 24,750 18,000




Add: deposit-in-transitNo.130025 dt: 28/6 Rs.3000/=No.313454 dt: 29/6 Rs.2000/=No. 505352 dt. 30/6 Rs. 1500/= (+) 6,50010/6 Cheque Book charges 150/=

Less: Bank charges and Tax10/6 Cheque Book charges 150/=15/6 Bank commission Rs.100/=16/6 Tax on Cash withdrawn Rs.50/=25/6 online transfer charges Rs.100/= (-) 400

4- Bank collection not recorded in cash book.

The bank collections such as bank interest on Deposit, notes receivable, interest on notes receivable and bank interest on notes if shown in bank statement but not shown in cash book shall increase the balance of cash book.

Bank collected following but not recorded in cash book.

20/6 Bank interest on deposit 100/=25/6 notes receivable 1000/=25/6 interest on notes receivable 50/=




Balances 24,750 18,000


Add: deposit-in-transitNo.130025 dt: 28/6 Rs.3000/=No.313454 dt: 29/6 Rs.2000/=No. 505352 dt: 30/6 Rs. 1500/= (+) 6,500

Less: Bank charges and Tax (C. Book)10/6 Cheque Book charges 150/=15/6 Bank commission Rs.100/=16/6 Tax on Cash withdrawn Rs.50/=25/6 online transfer charges Rs.100/= (-) 400

Add: Bank collection is not record in C. Book20/6 Bank interest on deposit 100/=25/6 notes receivable 1000/=25/6 interest on notes receivable 50/= (+) 1,150



5- Bank debit and credit not known

Because of having online most of the transactions, the amount could not be identified by some reasons and needs to be settled later but made the cause of increase and decrease in the balance of bank book not in cash book. The difference of two balances may keep on temporary in bank reconciliation shortly and later on in suspense account as “unknown parties” and find out the difference of the matter. As soon they are identified must be moved to their right place.

Bank can also debit the amount of any cheque of the other party wrongly in bank statement must be notified to the bank for correction immediately.

Less: unknown Debit (Cash Book)Unknown debit is shown in bank book)# 430449 18/6 Rs. 2000/=

Add: unknown credit (in cash book)Unknown credit is shown in bank book

# 535383 28/6 Rs.1000/= # 494693 30/6 Rs.1500/=


Balances 24,750 18,000


Add: deposit-in-transitNo.130025 dt: 28/6 Rs.3000/=No.313454 dt: 29/6 Rs.2000/=No. 505352 dt: 30/6 Rs. 1500/= (+) 6,500<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>


Less: Bank charges and Tax (C .Book)10/6 Cheque Book charges 150/=15/6 Bank commission Rs.100/=16/6 Tax on Cash withdrawn Rs.50/=25/6 online transfer charges Rs.100/= (-) 400

Add: Bank collection does not record in C. Book20/6 Bank interest on deposit 100/=25/6 notes receivable 1000/=25/6 interest on notes receivable 50/= 1,150

Less: unknown Debit (Cash Book)Unknown Debit shown in bank book)# 430449 18/6 Rs.2000/= (-) 2,000

Add: unknown credit (in cash book)Unknown credit is shown in bank book

# 535383 28/6 Rs.1000/= # 494693 30/6 Rs.1500/= 3,500

Corrected balance 20,250 20,250

BANK RECONCILIATION STATEMENT

Balance as per cash Bank Statement 24,750.-Less: Un-present/out-standing cheques 11,000.-Add: Deposit-in-transit 6,500.-

----------Balance as per Bank statement 20,250.-

======<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>


Balance as per Cash book 18,000.-Less: Bank charges 350 + 50 Tax - 400.-Add: Bank interest on deposit 100-Notes receivable 1,000.-Interest on notes receivable 50

Less: Unknown debit -2000

Add: Unknown credit 3500

--------

Balance as per Cash book 20,250

======

The journal entries of the amount that could not be shown in ledger account must be recorded in order to match balances with cash book and bank book and provide balance for issuing cheques.

Adjusting Entries;

Bank charges 350Tax on cash withdrawn 50

Bank 400

Bank 1,150Bank profit 100Notes receivable 1000Interest on notes receivable 50

Unknown parties 2000Bank 2000

Bank 3500Unknown parties 3500



ACCRUAL BASE ACCOUNTING

In accrual basis accounting, transactions are recorded in the ledger under journalizing and as when they transact and reported in the income statement when they earned or occurred to the period that closes accounting. Now, the cash received or paid will have no concern with revenues and expenses but receivable and payable which is the result of accrual basis accounting.

As far as usually expenses are concerned, the accrual of them daily is not in practice. Now, this question arises that will the profit cover the transaction of the date? The answer will be no, then the accrual base accounting needs to accrue all transactions on the accrual basis if we require profit and loss and balance sheet on daily basis.

CASH AND ACCRUAL BASE MIX ACCOUNTING

In cash base accounting cash is received or paid against transactions as and when they occurred and in accrual basis accounting, the journal entry of the transactions is recorded as and when it occurred before cash receipt and payment.

In cash and accrual mix base accounting, usually cash is received or paid against transactions but the transactions relate to receivable or payable are journalized and remaining transactions of the date of the accounting period are recorded at the time of closing accounts.

It is up to entity’s requirement that it adopts the system among cash, accrual, and mix accounting system.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>


CASH FLOW STATEMENT

Generally, the income statement and balance sheet are prepared under accrual basis of accounting but the cash flow statement is one of the main financial statements among balance sheet, income statement and statement of stockholders’ equity which reports the cash generated or actual cash-like assets from operating, investing and financial activities used during the time interval.

The cash flow statement includes only inflows and outflows of cash and excludes transactions that do not directly affect cash receipts and payments.

The cash flow statement is the reconciliation of opening balance of cash and closing balance of cash and cash equivalent at the beginning of the period and ending of the period.

The cash flow statement bases on cash report on three types of financial activities: operating activities, investing activities and financing activities.



1- OPERATING EXPENSES

Operative activities include production, sales, and delivery of the company’s product as well as collecting payment from its customers.

These activities usually deal with current assets and current liabilities and include;

Cash receipts from customersCash paid to suppliers for goods and servicesCash paid to employees/Accrued wagesInterest paid (can be reported under financial activities in IAS 7)Income tax paid

The receipts are reduced from payments.

2- INVESTING ACTIVITIES

The investing activities deal with sales and purchase of fixed assets and long-term investment as well as any return of investment like dividend and interest receipt and may include;

Purchase of fixed assets (actual cash paid)Sale of fixed assets (accrual cash received)Interest received on investments (actual cash received)Dividend received (actual cash received)Dividend paid (actual cash paid)



3- FINANCIAL ACTIVITIES

The financial activities involve in shareholder’s equity and long-term liabilities as well as dividend received and interest paid over it and may have;

Issue of share capital (actual cash received)Issue of debenture (actual cash received)Cash received from long-term loans (actual cash received)Payment of dividends (actual cash paid)Payment of long-term loans (actual cash paid

The balance sheet and income statement are the sources of making cash flow statement and enterprises can report cash flows from operating activities using a direct method or indirect method.

1- DIRECT METHOD

Direct method reports major classes of gross cash receipts and gross cash payments as actual.

DIRECT METHOD

Cash flow from operations xxxxxCash flow from investing (xxxx)Cash flow from financing (xxxx)

--------Net Cash flow xxxx

=====



EXAMPLE:

The cash flow statement under direct method is prepared as given balance sheet and income statement.

BALANACE SHEETASSETS 2013 2014 LIABILITIES 2013 2014

Cash & equivalents 4000 5000 Accounts payable 13000 15000Accounts Receivable 7000 10000 Accrued Wages 2000 3000Inventory 12000 15000 Accrued taxes 3000 2000

------------------ ------------------

Total Current Assets 23000 30000 Total Current Liabilities 18000 20000

Net fixed assets 40000 40000 Long-term debts 20000 20000Common Stock 10000 10000

Retained earnings 15000 20000------------------ ------------------63000 70000 63000 70000============ ============



INCOME STATEMENT 2014

Sales 85000

Cost of goods sold 50000Operating Expenses 15000Depreciation 3000Interest 2000 70000

------- --------Net income before taxes 15000

Income tax -10000---------

Net income 5000=====

- Cash Flow statement direct method- Find out net profit from balance sheet- Cash Flow statement indirect method- Statement of changes in working capital- Funds Flow Statement



CASH FLOW STATEMENT - DIRECT METHOD

Cash flows from operating activities----------------------------------------------------Cash received from customers (C-1) + 82000Less: Cash paid to creditors (C-2) - 51000Less: Cash paid for expenses (C-3) - 14000

-------Cash generated from operation 17000

Less: Income tax paid (C-4) - (11000)-------

Net cash generated from operating activities 6000

Cash flows from investing activities

Purchase of fixed assets (C-5) - 3000

Net cash used by investing activities (3000)

Cash flows from financing activities

Interest paid -2000

Net cash used by financing activities (2000)

--------Increase in net cash during the period 1000Add: Cash and cash equivalent at beginning of period 4000

-------Cash and cash equivalent at ending of period 5000

====

DIRECT METHOD

Cash flow from operations 6000Cash flow from investing (3000)Cash flow from financing (2000)

--------Net Cash flow 1000

=====<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>


Calculation 1 – Cash received from customer

Opening balance of a/c receivable 2013 7000Add: Sales 2014 85000

---------Total Credit sale 92000Less: closing balance of a/c receivable 2014 10000

---------Cash (balancing) 82000

======

Calculation 2 – Cash paid to creditors

Inventory account

Opening balance of Inventory 2013 12000Less: Inventory 2014 15000

-------Increase in inventory 3000Add: Cost of goods sold 2014 50000

-------Purchases (balancing) 53000

=====

Account payable account

Opening of account payable 2013 13000Add: Purchases 53000

-------66000

Less: closing of account payable 2014 15000-------

Cash (balancing) 51000=====



Calculation 3 - Cash paid for expenses

Opening of accrued expenses 2013 2000Add: Operating Expenses 15000

-------Total expenses 17000Less closing of accrued expenses 2014 3000

-------Cash (balancing) 14000

======

Calculation 4 – actual tax paid

Opening of accrued expenses 2013 3000Add: tax paid for the year 2014 10000

-------Total taxes 13000Less: closing of accrued taxes 2000

-------Cash (Balancing) 11000

=====

Calculation 5 – Fixed assets purchased or sold

Opening of fixed assets 2013 40000Add: depreciation 3000Less: Closing of fixed assets 2014 (-) 40000

-------Cash (Balancing) 3000

=====

- Calculation 6- Net profit before

Retained earnings (closing) 20000Less: Retained earnings (opening) (15000)

--------- 5000

Add: Interest expense for the period 2000Income tax for the current period 10000

-------Income before tax and interest 17000





INDIRECT METHOD

The indirect method converts actual basis net income or loss into cash flow by using a series of additions and deductions changing in operating activities reporting increase and decrease in assets and liabilities.

Operating Activitieso Net profit before interest and taxo Adjustment (non-cash item)

Add in net profit Depreciation Bad debt expenses Amortization of goodwill, patent or intangible assets Amortization of discount on debenture or share Loss on sale of fixed assetsLess in net profit Gain on sale of fixed assets Dividend and interest received on investment

The result of addition and deletion in net profit (Assets & Liabilities

o Increase in current Assets (except cash/bank)o Decrease in current assets (except cash/bank)o Increase in current liabilities (except tax, interest & dividend p/a)o Decrease in current liabilities (except tax, interest & dividend p/a)



Cash flows from operating activitiesNet profit before interest & tax (C-1) 17000Adjustment for: (non-cash items)Add: Depreciation 3000

-------Operating profit 20000

Increase in Accounts receivable (3000)Increase in inventory (3000)Increase in accounts payable 2000Increase in accrued wages 1000

-3000-------- ------

Net cash generated from operating activities 17000

Less: Income Tax paid (C-2) -11000---------

Net cash generated from operative activities 6000

Cash flows from Investing Activities Purchase of fixed assets (3000)

Net cash used by investing activities (3000)

Cash flows from financing activities

Interest paid (2000)

Net cash used by financing activities (2000)

-------Increase in net cash during the period 1000Add: Cash and cash equivalent at beginning of period 4000

Cash and cash equivalent at ending of period 5000=====



FUNDS FLOW STATEMENT:

The prior use of fund flow statement has been converted into cash flow statement under IAS 7 (Revised 1992) International standard of presenting financial statement.

The fund flow statement is based on accrual base accounting which represents the cash and cash equivalent in funds flow analysis.

Fund = working capital = current assets - current liabilities

SOURCES OF FUNDS

Net profit before interest & tax (C-6) 17000Adjustment of (non-cash items) Add:- Depreciation + 3000

Income from business operation 20000

APPLICATION OF FUNDS

Tax paid -11000Purchase of fixed assets (C-5) -3000Interest paid -2000Net increase in working capital -16000

Net increase in working capital 4000=====



All accounting functions are based on payments and receipts and it is up to the requirement of an entity to adopt cash base accounting system wherein cash payments and receipt are made at same time and in accrual base accounting system requires accruing all payments and receipts before payment and receipt or payment receipt may differ in time but in cash base accounting may require accruals at the time of finalization of accounts.

The cash flow and fund flow statements are made under comparison of the balance sheet and income statement and they were prepared under accrual base accounting based on paid and received cash.

The cash base accounting can be better for small businesses but in the business like share business, partnership business etc. wherein the capital of public is involved accrual base accounting may be adopted for the actual position of funds to be paid or to be received.

WRITER’S VIEW



Volume III

ACCOUNTING FOR EMPLOYMENT


C O N T E N T SCHAPTER TWO EMPLOYMENT-----------------------------------------------------------------------------------------

Accounting for employment 2-1Wages salaries & allowances 2-2 - 11- Reconciliation of salaries 2-12- Summary of salaries 2 - 13 - 14- Accrual of Salaries 2- 15- Payment of salaries 2 - 16- Over time 2 – 17 -22- Gratuity 2- 22 - Pension 2 - 23- Provident Fund 2 - 24- Bonus 2 - 24- Leave encashment 2 – 25- Workers Participation Funds 2- 25 Writer’s View 2 - 26

ACCOUNTING FOR EMPLOYMENT 2-1

ACCOUNTING FOR EMPLOYMENT 2.1

The use of manpower in business is just like fuel to burn wood or spirit in the body, because of the reason, if one thinks about doing business the question of manpower comes into one’s mind. If he opens shop, he will give his power and on expanding it, hires someone to share in power.

The nature of manpower may be different business wise but the force of a man in business is not denied at all. There are three types of business named services, trading and manufacturing wherein a business man is an owner and the man who employed him and is providing services to him in other words, the employee who is providing services to a businessman is concerned with the business of services.

The partnership of two businessmen employee and owner empowers any business to run and make a profit.

This partnership is different a little wherein owner gives a share in capital to the employee and responsible alone in profit and loss of business.

The manpower applied in business is given different names under group employee like sale man, worker, supervisor, officer, manager, director, etc. who were paid salaries daily, fortnightly, monthly besides other benefits as that bonus, gratuity, provident fund, share in profit etc. etc.

The topic accounting for Employment discusses with employees relating to their payments which they earned during the period of providing services of any nature and these payments may be of their salary, wages, overtime, bonus, gratuity and other benefits providing under rules of a company or state.

Now, we will discuss on payment and accounting for in books the salaries, allowances and other related payments to employees which were earned during the period;

<THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>


WAGES, SALARIES, AND ALLOWANCES

The wages, salaries, and allowances may be defined as;

- Wages are paid work against cash basis Hourly, Daily, Weekly, Fortnightly, Monthly and/or on a work basis.

- Salaries are paid monthly basis at the end of the month including all allowances.

- Allowances are the part of salaries such as house rent allowance, medical allowance, conveyance allowances and as well as special allowances like dearness allowance, cost of living allowance, additional special allowance and many other allowances announced by company or government from time to time.

If a company wants to have the services of an employee, she hires employees direct or indirect and offers a package of emoluments in the agreement of services or employment.

The wages are paid on the spot as soon as work is completed for the outsider and the wages of employees engaged in the process of business are paid weekly, fortnightly and monthly according to the rate of wages or fixed amount.

The salaries paid monthly must have statement which I made it and it has following segments and requires;

Name of Concern: ABC & Co.

Name of Statement: STATEMENT OF SALARIES FOR MAR 2016.



Segment I

Personal Information of an employee- Serial Number: The serial number may be changed in adding and deleting persons.- Employee’s Number: not changeable- Name of employee: according to CNIC/C.V.- Designation: As given in appointment letter or nature of work.- Station: The person is deputed or the place of working.- Date of birth: As given in CNIC.- Date of Entry: The date employee joined services.

Segment II

Structure of pay and allowances

- Basic salary: basic salary does not include allowances- House Rent Allowance: This allowance is given to live.- Conveyance Allowance: Conveyance is given in the shape of allowance.- Medical Allowance: Medial is also given in the shape of allowance.- Ad hoc Relief: It is announced by State.- Cost of living allowance: Employees are also relieved by COLA.

Segment III

Details of salaries including allowances and other earnings

- Gross Salary: gross salary includes allowances.- Working days: working days include all holidays, Sunday but no excess leave.- Working Salary: it based on working days.- Other Allowances: other allowances or extra support do not belong to gross salary.- Arrears if any: any amount which has not been paid previously may include.

- Expense Claim: the claim of an employee working out of central point.- Total Gross: it has all sums of earning.- <THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>


Segment IV

Details of deductions- Tax: tax is deducted as per law.- Transport: share in transport may be deducted.- Advance: the advance taken from salary is deducted.- EOBI: the deduction of funds for a pension at the age

which is paid to EBOI.- Loan: the loan is deducted by monthly installments.- Others: any other deductions like loss/damage etc.

Total Deductions: it includes all deductions from gross salary.

Segment V

Salary after deductions- Net salary: net salary becomes by deducting total deductions

into gross salary.- Net salary (rounded): The salaries may have coins which are

better to round by minimum rupee.

Segment VI

Signature of Employee: Requires State fee or revenue stamp at value.<THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>

ACCOUNTING FOR EMPLOYMENT 2-5Segment I

S.NO.

Employee NAME OF

EMPLOYEEDESIGNATIO

NSTATIO

NDate of DATE OF

# Birth ENTRY

1 1 Employee 1 Manage Admin KARACHI 1970 1.1.2012

2 2 Employee 2 Admin Asst. KARACHI 1965 10.3.2013

3 3 Employee 3 Peon KARACHI 1970 15.4.2013

4 4 Employee 4 Accountant KARACHI 1975 18.3.2014

5 5 Employee 5 Assistant KARACHI1.1.198

5 19.5.2014

6 6 Employee 6 Supervisor KARACHI1.1.198

5 21.6.2015

7 7 Employee 7 Operator KARACHI1.1.198

5 05.6.2015

8 8 Employee 8 Worker KARACHI1.1.198

501.01.201

6

9 9 Employee 9 Supervisor KARACHI1.1.198

5 5.1.2011


5 3.1.2010


5 10.3.2012


5 5.3.2014


5 5.3.2014


5 1.3.2015

15 15 Employee 15 S.O. KARACHI1.1.198

5 1.3.2015

16 16 Employee 16 S.P.O. LAHORE1.1.198

5 1.1.2016

17 17 Employee 17 S.P.O. MULTAN1.1.198

5 1.1.2016

TOTAL<THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>

ACCOUNTING FOR EMPLOYMENT 2-6Segment II

SALALARIES & ALLOWANCES

BASICHOUSE RENT CONVEYANCE MEDICAL

ADOC RELIEF COLA

9,999 3,999 2,000 2,000 1,000 1,000

5,000 2,000 1,000 1,000 500 500

5,000 2,000 1,000 1,000 500 500

5,000 2,000 1,000 1,000 500 500

5,000 2,000 1,000 1,000 500 500

5,000 2,000 1,000 1,000 500 500

5,000 2,000 1,000 1,000 500 500

5,000 2,000 1,000 1,000 500 500

5,000 2,000 1,000 1,000 500 500

3,000 1,000 500 500 500 500

3,000 1,000 500 500 500 500

3,000 1,000 500 500 500 500

3,000 1,000 500 500 500 500

3,000 1,000 500 500 500 500

3,000 1,000 500 500 500 500

3,000 1,000 500 500 500 500

3,000 1,000 500 500 500 50073,99

9 27,999 14,000 14,000 9,000 9,000<THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>

ACCOUNTING FOR EMPLOYMENT 2-7Segment III

GROSS WORKING WORKING OtherArrears Expense TOTAL

SALARY DAYS SALARY Allows. if any Claim GROSS30

19,998 30 19,998 500 - - 20,498

10,000 30 10,000 200 - - 10,200

10,000 30 10,000 200 10,200

10,000 30 10,000 200 10,200

10,000 30 10,000 200 10,200

10,000 30 10,000 200 10,200

10,000 30 10,000 200 10,200

10,000 30 10,000 200 10,200

10,000 30 10,000 200 10,200

6,000 30 6,000 200 6,200

6,000 25 5,000 200 5,200

6,000 26 5,200 200 5,400

6,000 27 5,400 200 5,600

6,000 28 5,600 200 5,800

6,000 29 5,800 200 6,000

6,000 28 5,600 200 500 2,000 8,300

6,000 27 5,400 200 2,000 7,600147,99

8 143,998 3,700 500 4,000 152,198<THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>


Segment IVD E D U C T I O N S TOTAL

Tax Transport Advance EOBI L O A N Others DEDUCTIONS

Opening Ded.

Closing

400 200 - 130 5,000 500 4,500 50 1,280

100 100 130 3,000 300 2,700 100 730

100 100 500 130 - 830

100 100 1,000 130 - 1,330

100 100 130 - 330

100 130 2,000 300 1,700 530

100 130 - 230

100 130 - 230

100 130 - 230

130 - 130

130 - 130

130 - 130

1,000 130 - 1,130

130 - 130

130 - 130

2,000 130 - 2,130

130 - 130

1,200 600 4,500 2,210 10,000 1,100 8,900 150 9,760<THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>


Segment V

NETNET

SALARYSALARY ROUNDED

19,218 19,220

9,470 9,470

9,370 9,370

8,870 8,870

9,870 9,870

9,670 9,670

9,970 9,970

9,970 9,970

9,970 9,970

6,070 6,070

5,070 5,070

5,270 5,270

4,470 4,470

5,670 5,670

5,870 5,870

6,170 6,170

7,470 7,470

142,438 142,440<THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>


Segment VI

SIGNATURE



VIEW OF PAYROLL



RECONCILIATION OF SALARIES

The salaries which are paying must be reconciled from previous gross salaries by deletion and addition of employees into current salaries like;



SUMMARY OF SALARIES

The columns may be hidden or unhidden and added or deleted according to requirement and the required columns from segments mentioned above may be printed.

The statement of salaries may be made by computer in Excel wherein wide range of columns allow users to filter salaries by location wise, department wise, category wise, payment wise by coding.





ACCRUAL OF SALARIES

The salaries are accrued head wise before payment.

March 30, 2016Salaries – Admin 40,898Salaries – Accounts 20,400Salaries – Production 69,000Salaries – Sales/Dist. 6,000Salaries – Sales/Pro 15,900

TAX 1,200Transport 600Advance 4,500EOBI 2,210Loan 1,100Salaries – Admin 150Salaries Payable 142,438Misc. expense 2(To record salaries for March 2016)



PAYMENT OF SALARIESAfter accrual of salaries, the payment is made by cheque, by cash and by demand draft as per the statement filtered;

April 05, 20161- Salaries Payable 19,220

Bank 19,200

2- Salaries Payable 9,470.Bank 9,470

3- Salaries payable 100,110.-Cash 100,110

4- Salaries payable 13,640Bank 13,640

When salaries are accrued, the credit balance in Salaries payable account is shown and on payment salaries payment wise, it will be zero.


ACCOUNTING FOR EMPLOYMENT 2- 17

2- OVERTIME

According to the law, the normal working hours per day are 8 hours and these should not be more than 48 hours per week. By including the lunch and pray time in hours of work, working hours should not be greater than 9 hours a day.

After working hours, if an employer wants to take work overtime, he must give overtime according to labor laws by giving rest interval of an hour after every six hours of work and on the formula below;


ACCOUNTING FOR EMPLOYMENT 2 - 18

In order to meet the emergency of work, the departmental head who wants to take work from his subordinates after working hours will fill the request form of overtime and send it to administration department or human resources department as prescribed below;



The separate record of overtime as in over time form may be maintained in the department of Administration or human resources and after the closing of the month will be submitted to accounts department for payment.



The Accounts Department will prepare the statement of overtime as designed below for payment:


ACCOUNTING FOR EMPLOYEMENT 2- 22

The overtime may be accrued so that the expenses of the month may come in accounts under journal entry;

March 30, 2016ACCRUAL OF OVER TIME

Overtime xxxxOvertime payable xxxx

Later on, the payment may be made by cash or cheque which will contra to Overtime payable account;

April 5, 2016PAYMENT OF OVERTIME

Overtime payable xxxxCash/Bank xxxx

3- GRATUITY

Gratuity in private sector employment comes under retirement benefits payable in a lump sum to the permanent employee on leaving service.

In accordance with the provisions of law, the rate of gratuity is “thirty (30) days gross salary/wages last drawn for every completed year of service for any period in excess of six months”.

The gratuity is charged in expense account being the part of earning of an employee.

PAYMENT OF GRATUITY

Gratuity xxxxCash/Bank xxxx



4- PENSION (EOBI)

Pension is another retiring benefit given to workers in private sector employment through Employees’ Old-Age Benefits Institution (EOBI) and under EOBI Scheme, Insured persons are entitled to avail benefit like, Old Age Pension (on the event of retirement), invalidity pension (in case of permanent disability), old age grant (an insurance person attained superannuation age, but does not possess the minimum threshold for pension), survivor’s pension (in case an insured person is expired).

A contribution equal to 5% of minimum wages has to be paid by the Employers of all the Industrial and Commercial Organizations where EBO act is applicable and contribution equal to 1% of minimum wages by the employees of the Organizations.

The rate of pension is minimum Rs.5, 250 and maximum as per formula;

(Avg. monthly wages x No. of yrs of Insurable Employment) 50

The contributions from employees which were deducted from their salaries reduce the payment of EOBI Expense account.

Salaries & Allowances (debit) xxxxEOBI (credit) xxxx

PAYMENT OF EOBI

EOBI Expense A/c (Debit)xxxxCash/Bank (Credit xxxx


ACCOUNTING FOR EMPLOYMENT 2 -24

5- PROVIDENT FUND

A provident fund is a form of social safety wherein employees/workers contribute a portion of their salaries and employers contribute on behalf of their employees/workers and it provides financial support on retirement age.

The matter of accounting on provident fund depends on the system adopted for according to law and is a separate discussion.

6- BONUS

The bonus is the share of employees in the profit of an employer. The minimum qualifying employment period is 90 days or above whether permanent or temporary employee.

Many companies give bonus or bonuses on religious events but according to the law, bonus is paid on the profit and its distribution would be;

- 15% of the profit, if the profit is less than total/aggregate of one- month wages all workmen.

- 30% of the profit, if the profit is equal to the total/aggregate of one-month wages of workmen.

- 30% of the profit, if the profit is greater than the total/aggregate of one month wages of all workmen.

The bonus is charged to the expense account.

Bonus account (Dr.) xxxxCash/Bank xxxx


ACCOUNTING FOR EMPLOYMENT 2 -25

7- LEAVE ENCASHMENT

A fourteen days paid annual leave on full wages/salary is allowed under Factories Act and Shop & Establishments Ordinance to permanent workers/employee.

The leave encashment being part of the salary is charged to the expense account.

Leave Encashment A/c (Dr.) xxxxCash/Bank(Cr.) xxxx

8- WORKERS’ PARTICIPATION FUND

According to Companies Profits (Workers’ Participation) Act, 1968, every company is required to pay five percent of its profits to Workers’ participation fund every year as per audited financial statements before charging such WPPF (Workers' Profit Participation Fund) under Workers’ Participation Fund.

Besides above, the employment has many other paying benefits in like workers welfare funds, maternity leave, social security, health, and safety, etc. etc. which are accounted for according to companies paying what benefit.



The employment relates to services and services to services business applied in all businesses or alone and without it the concept of business is just like a dream.

The employment may be controlled by Human Resource Department who appoints or disappoints employees, all matters relating to salaries i.e. increment, attendance, transfer, valuation of employees/workers etc., keeps records of employees, prepares statements relating to salaries and benefits and sends them to accounts department for payment.

Where there is no Human resources department, the accounts department has to prepare statements relating to salaries and benefits of employees.

WRITER’S VIEW

WRITTEN BY:

SYED AQEEL RAZAMASTER OF COMMERCE & POLITICS


ACCOUNTING FOR BUDGETING

C O N T E N T SCHAPTER THREE BUDGETING-----------------------------------------------------------------------------------------

Budget 3-1Budget work sheet 3-2- Picture 2 3-3- Picture 3 2 - 4- Picture 4 3-5- Writer’s view 3-6

Budgeting 3-1

BUDGET:

The planning of spending and saving money from the income about to earn in near future and/or the planning of expenditures for keeping them under the shade of revenues comes under budgeting based on defined period which describes if the spending in budget is less than income, it means the estimation is under budget and if the total income is below than expenditure, it indicates the need of reduction in expenditures immediately otherwise debt will increase to fill the gap or will have to increase the source of income.

A good monthly budget ensures helps in overcoming unexpected emergencies and in reaching financial goals in comparison to revenues and expenses or may include assets and liabilities.

We may say that budget is the name of cash inflow and cash outflow rounding in assets, liabilities, proprietorship, revenue and expenses.

In order to create your monthly budget, you may follow the simple steps as in picture I;

Your monthly income includes salary, investment, interest and other sources

The budget includes total income which may be from salary, investment, interest and other sources provide finances to expenditures and to debt payment.

The expenditure will have two segments as flexible expenses and fixed expenses. The flexible expenses are not of permanent nature like hospitality, entertainment, repairs, clothing, incidentals etc. and fixed assets are the expenses which are necessary to pay for housing, grocery, utilities, transportation, health, and others.

The total expenditures flexible, nonflexible and debt are paid by monthly income and the balance remains unpaid may be saved or invest.

Budgeting 3-2

Budgeting 3-3

Picture 2 is showing budget of a business doing trading;

Budgeting 3-4

Besides the whole budget of individual or company, we can make budget partially; sales budget in value and in unit, expenses budget wholly or departmentally as in picture 3

Budgeting 3-5

Picture 4

Budgeting 3-6

Actually, the plan of spending from the sources of income and saving something from income and spending may call budget either written or kept in mind because nobody wants to go in debt because of this it is said that cut your coat according to your cloth.

In these busiest days, the most of the individuals and businessmen think the budget is useless, waste of time, waste of paper and waste of labor and do work according to cash flow but the concept of the budget; spending against revenues is in its place.

The estimation values shown in the budget may be journalized to keep in control the budget under accrual system and/or on meeting the purpose, the estimation values can be reversed to keep them in actual position.

The budget is based on estimation values based on spending against sources of income.

WRITER’S VIEW



C O N T E N T SCHAPTER THREE DEPRECIATION-----------------------------------------------------------------------------------------

Depreciation 4.1Cost of Depreciation 4.1- Salvage value/residual value of the asset 4.2- Estimated useful life of the asset 4.2The Method of computing depreciation 4.2- Straight line method 4.3-4- Sum of year digit method 4.4- Sum of output depreciation 4.5- Production hours method 4.6- Diminishing/declining balance method 4.8- Further for depreciation 4.9- Writer’s view 4.10

DEPRECIATION 4-1

The depreciation in accounting is an income tax deduction that allows recovering the cost of an asset used in a trade or business or for the production of income under depreciation expense allowed annually allowance for the wear and tear, deterioration, or obsolescence of the asset.

Most types of tangible assets except land such as building, machinery, vehicles, furniture, equipment etc come under depreciation and likewise, the certain intangible asset like patent, copyright, computer software etc. is depreciable.

Therefore, the decrease in value of tangible/non-current assets or the allocation of the cost of assets to the period in which they are used for accounting or tax purposes comes under depreciation involves in;

- Cost of the asset- Expected salvage value/residual value of the asset- Estimated useful life of the asset- The method of calculating the cost over such life.

COST OF ASSETS

Examples of fixed assets are building, furniture, plant and machinery, office equipment, vehicles, etc. that can be depreciated when the land is non-current assets but does not depreciate because of its natural value. The cost of the fixed asset is declined by depreciation as depreciation expense which affects revenue and the declined amount is shown by accumulated depreciation as a contra asset.

The cost of an asset contains purchase price excluding trade discount, cash discount, and direct expenses like insurance in transit, transporting, installation charges, the foundation of the plant, additional part as replacement etc. <THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL [email protected]


DEPRECIATION 4-2

SALVAGE VALUE/RESIDUAL VALUE OF THE ASSET

When the estimated life of an asset is timed out, the company disposes of and sells it for some reduced amount which is salvage value based on asset cost, less any estimated salvage value and if the salvage value is expected to be quite small, it is generally ignored for the purpose of calculating depreciation.

ESTIMATED USEFUL LIFE OF THE ASSETS

The depreciation is recognized over the estimated useful life of an asset and the estimated useful life of an asset is expected to be productive and on ending useful life of the asset is expected to be disposed of.

THE METHOD OF COMPUTING DEPRECIATION

There are several methods for calculating depreciation but most common;

Straight line depreciationSum of years digits methodUnits of output depreciationProduction hour’s methodDiminishing/declining balance methodDouble-declining balance method


DEPRECIATION 4.3

STRAIGHT LINE DEPRECIATION

The straight line depreciation method is the simplest method used widely. In this method, an equal portion of the cost of an asset is allocated to each year or month and may call it constant annual depreciation.

The annual depreciation according to this method is calculated as under;

Depreciation = cost - Salvage/Residual value / useful life.Or depreciation = cost-salvage/residual value

Useful life

Assume that on April 2010, a company purchased furniture at the cost of Rs.100, 000/=. The useful life of the furniture is estimated for five years. At the end of useful life, the salvage value or residual value will be Rs.20, 000/=.

Suppose that the furniture includes on list price Rs. 100,000/= at 10% trade discount, 5% cash discount and direct charges amounting to Rs.3,960/= including insurance in transit, transportation, labor charges, fixing charges etc.

= LIST PRICE 100,000LESS: 2% trade discount 2,000

----------98,000

Less: 2% cash discount 1,960---------96,040

Add: direct expenses 3,960---------

Net cost of the furniture 100,000======


DEPRECIATION 4.4

STRAIGHT LINE DEPRECIATION CALCULATION

Depreciation for April 2010; = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 9/12 = 12,000Depreciation 2011; = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 12/12 = 16,000Depreciation 2012; = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 12/12 = 16,000Depreciation 2013; = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 12/12 = 16,000Depreciation 2014; = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 12/12 = 16,000Depreciation Jan-Mar 2015 = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 3/12 = 4,000

Sum of years digit method

In this method, the depreciation rate is used as to the life of an asset is 5 years which fraction is 1+2+3+4+5=15 which means that 5 years is the remaining life of the asset and 15 is the sum total of its useful life.

Assume that an asset was purchased at Rs.5000/= which has estimated residual value Rs.500/= and estimated life 5 years. Under the method of sum of year digit method, it is computed as under;

Depreciation Schedule: Sum of year digits method

Year Computation depreciation Accumulated Book ValueExpense Depreciation

Cost 5000

1st 5/15 x 4500 1500 1500 35002nd 4/15 x 4500 1200 1200 23003rd 3/15 x 4500 900 900 14004th 2/15 x 4500 600 600 8005th 1/15 x 4500 300 300 500


DEPRECIATION 4.5

Units of output depreciation

In this method, a more equitable distribution of the cost of some assets can be obtained by dividing the original depreciation cost with the estimated life in units rather than the year of useful life. This method states the capacity of machinery to produce units.

Suppose that a machine was purchased at Rs.100,000 when its residual value is estimated by Rs.10,000 and production capacity by 100,000 units with normal repair and maintenance. In this method, the depreciation can be made as;

Depreciation rate per unit = cost – salvage valueEstimated life in units

Depreciation rate per unit = 100,000 – 10,000 = 90,000------------------------ ----------

100,000 100,000= 0.90 Paisa per unit/depreciation expenses

DATA FOR DEPRECIATION BY UNITS OF OUTPUT METHOD

COST OF DEPRECIABLE ASSET 100,000LESS: ESTIMATED SCRAP VALUE 10,000TOTAL AMOUNT TO BE DEPRECIATED 90,000ESTIMATED USEFUL LIFE IN UNITS 100,000DEPRECIATION EXPENSE PER UNNIT = 90,000/10000 = 0.90 PAISA

SCHEDULE OF DEPRECIATION ON MACHINERY

Life Depreciation Units depreciation Accumulated Written down Rate Produced Expense Depreciation Value

Cost………………………………………………………………………………………………… 1000001 0.90 8000 7200 7200 928002 0.90 8000 7200 14400 856003 0.90 8000 7200 21600 784004 0.90 11000 9900 31500 685005 0.90 10000 9000 40500 595006 0.90 15000 13500 54000 460007 0.90 15000 13500 67500 325008 0.90 10000 9000 76500 235009 0.90 15000 13500 90000 10000


DEPRECIATION 4.6

PRODUCTION HOURS METHOD

In this method, plant or machinery is depreciated by hourly underestimated life in hours.

Suppose that; Machine cost Rs.30000, salvage value Rs.10, 000, estimated life for 50,000 hours with normal maintenance

Production hours rate = cost – scrap valueEstimated life in hours

Production hours rate = 30000 – 10000 = 20000 = 0.40 50000 50000

SCHEDULE OF DEPRECIATION

Life Depreciation Hours depreciation Accumulated Written down Rate/hour worked Expense Depreciation Value

Cost………………………………………………………………………………………………… 300001 0.40 5000 2000 2000 280002 0.40 5000 2000 4000 260003 0.40 5000 2000 6000 240004 0.40 5000 2000 8000 220005 0.40 5000 2000 10000 200006 0.40 5000 2000 12000 180007 0.40 5000 2000 14000 160008 0.40 5000 2000 16000 140009 0.40 10000 4000 20000 10000


DEPRECIATION 4.7

DIMINISHING/DECLINING BALANCE METHOD

In this method a certain percentage is determined to fix rate of calculating the depreciation on any asset which applied to the total cost of asset of the amount kept in balance year wise or in other words the rate will be applied to the total cost of asset and in the second year the same rate will be applied to the total cost reduce the first year depreciation and so on.

Assume that if the cost of an asset is Rs.100, 000 and the fixed percentage applicable to this asset 10%, the depreciation will be as shown in schedule;

SCHEDULE OF ASSET DEPRECIATION

Life Rate Depreciation Accumulated Written down Depreciation Expense Depreciation Value

Cost………………………………………………………………………………………………………… 1000001 10% 10000 10000 90000

2 10% 9000 19000 810003 10% 8100 27100 729004 10% 7290 34390 656105 10% 6561 40951 590496 10% 5905 46856 531447 10% 4214 51070 489308 10% 4893 55963 44037

DOUBLE DECLINING/DIMINISHING BALNAE METHOD

The double declining balance method also known as diminishing balance method is the same method as declining or diminishing balance method but in this method the percentage as of diminishing balance method will be double to calculate depreciation of an asset. If the rate of depreciation is not known the straight line method help to find out the rate with the formula;

Amount of yearly depreciation x 100 Depreciation amount


DEPRECIATION 4.8

The rate will be multiplied by 2 to make it rate double which will be applied in this method to depreciate an asset;

Suppose that a company purchased equipment which cost to Rs.200000 and estate its life for 10 years and salvage value Rs.20000 and used them used double declining balance method for this equipment.

COMPUTATION OF DEPRECIATION

STEP 1Straight line depreciation = Cost-Salvage value = Depreciation per year

Estimate life in year

= 200000-20000 = 200000 = 20000 depreciation per year 10 10

STEP 2COMPUTATION OF RATE OF DEPRECIATION

Depreciation per year x 100 = rate of depreciation Depreciable cost

20000 x 100 2000000 = 10% 200000 200000

STEP 3DOUBLE RATE

Depreciation rate 10% x 2 = 20% double rate

STEP 4COMPUTATION OF DEPRECIATION

Cost 200000First year depreciation @ 20% -20000

W.D. Value 1800002nd year depreciation @ 20% -36000

W.D. value 144000


DEPRECIATION 4.9

The depreciation expense account is debited and the accumulated depreciation account was credited. The accumulated depreciation is a contra account to non-current asset or the conversion value account of an asset from where the amount reduced from an asset migrates into it which appears in the balance sheet as a deduction from the original purchase price of an asset.

On disposing of an asset, the fixed asset account in which the asset was originally recorded is credited and debit the account accumulated depreciation which will remove the amount shown in shown in balance sheet.

If an asset not fully depreciated at the time of its disposal, it will be recorded as a loss on un-depreciated portion and on the sale of the asset, the loss will be reduced.

A taxpayer must use Form 4562, Depreciation and Amortization, to report depreciation on a tax return.


DEPRECIATION 4.10

WRITER’S VIEW

Suppose that the life of an asset is expected for ten years and was purchased one hundred thousand rupees but after ten years it sells one hundred twenty-five thousand rupees when the life of it was ten years and is would be scraped according to depreciation rules but increase in rates even though scraped tells us that the asset will work for further years and if sells give profit. So, it comes to mind that the depreciation is allowed to reduce income by income tax to businessman to save income tax and does not mean to live because the depreciation expense reduces to gross profit and after ten years the depreciation expense relief would be ended. If the value of the asset comes to income and/or remains in business will give benefit to it but do not apply on depreciation.

Therefore, the depreciation is the relief to operate the business reducing income which saves income tax.



ACCOUNTING FOR DEBTVolume III


C O N T E N T SCHAPTER THREE ACCOUNTING FOR DEBTS-----------------------------------------------------------------------------------------

ACCOUNTING FOR DEBTS 5.1-2Trade debtors and creditors 5.2-4- Accounts Receivable 5.4-8- Accounts payable 5.8-11THE AGING 5.12-13- Account payable aging report 5.14-15- Accounts receivable aging report 5.16- Notes payable & notes receivable 5.16-19THE BILL OF EXCHANGE 5.20-21- Writer’s view 5.22

Accounting for debt 5.1

ACCOUNTING FOR DEBT

The debt is an amount of money which is borrowed by one party from another party under the condition to pay back at a later date with or without interest and it may be borrowed by individual, bank for personal loan like auto loan, house loan, credit card loan etc. and for business loan on markup, debt against selling of goods or services with our without interest. It may have a mortgage, personal and assets’ guarantee.

Most of the companies are operating them to take a loan from the financial institution for meeting their financial demands or increasing their volume. This is right that the debt or loan may increase the efficiency of any business in many ways one side as to increase production, to purchase assets; plant and machineries, equipment, raw materials, and to purchase finished goods for trading; to pay the salaries of employee, bills of suppliers and to get the rid of many other financial difficulties in the operation of any business but on the other side may become the cause of financial troubles in future because of paying huge amount in shape of mark-up or interest. The profit is generated by investment involves more investment more profit and less investment less profit and if the investment of his own, the profit is of his own but the investment acquired from other sources, the profit is distributed among others. The result is same means profit earned that amount of his own but change of growing and loss of his own assets are under questions.



All debts involve cash and other than trade are considered as a loan or some time sundry debtors as the trade involves goods which are given to sellers on credit or cash, the seller is bound to pay the debt of goods to the party time to time revolving sales and purchase. The seller who took goods on credit is called trade debtor.

Trade debtor and creditors

A trade debtor is an entity that owes a debt to another entity during the course of business in the shape of goods or services. The trade debtor credits the account of the entity that supplied goods or services to him under account payable controlled by trade creditors and the entity who supplied goods and services to the debtor must debit his account under account receivable which is controlled by trade debtor’s account.

Generally, the account of individual party’s receivable is opened in general ledger but in the case of various parties, another ledger called subsidiary ledger is created named trade debtors under controlled by account receivable or debtors ‘control account in general ledger account.

The subsidiary ledger is sub book of the particular account involving journals like sales journal, sales return and allowances journal, cash receipt journal, and adjustments through journal voucher.

The subsidiary ledger for sale either on cash or credit may be useful to control the variety of units sold under control account sale.

Trade debtors relate to goods or services for doing business.



The trade debtors are who they purchased goods for doing business and the party from whom the trade debtor purchased goods is called trade creditors. The goods sold on cash to parties doing trade are also considered debtors because the goods are supplied on taking an advance against sale come under advance from customers under debtors account.

Then, the trade creditor will have to maintain accounts of the parties to whom the goods sold on credit.

We know that all individual debtor’s account go in the debtor’s ledger and creditor’s account in creditor’s ledger under control general ledger account receivable and account payable or debtors and creditors control account and for making subsidiary ledger of accounts receivable or debtor accounts, we have to maintain journals like sales journal, sales return and allowances journal, cash receipt journal and adjustments through journal vouchers of those transactions that do not belong to journals or come after posting of entries from journals as shown in our volume II Chapter III Ledger Making.

And for this, Accounts payable refers to creditors who deliver goods for business and get payment after some time. The amount of invoice is journalized as inventory account debit and party’s account credit in ledger account directly or through purchase journal. The purchases in business may be from different persons or firm may require a separate account of the separate book of accounts like subsidiary ledger which provide detailed information about each person or firm to an accountant. It is controlled in general ledger by Account payable control account as referred to our volume II Chapter III Ledger Making.



Therefore, debtors are ascertained by accounts receivable and creditors by account payable.

ACCOUNTS RECEIVABLE:

Account receivable means to receive the amount from parties to whom the goods sold on credit or from the purchaser of goods and have to maintain parties’ ledger account individually as well as sales journal and sales return journal as illustrated below;

Jan 1. 2015 Sold merchandise to Hakim & Co. Rs.4, 000/= vide Invoice No1003.Jan 5. Sold merchandise to Jasco Traders for Rs.5, 000/= vide invoice No.1004.Jan 10. An Invoice No.1005 for Rs.10, 000/- was issued against merchandise sold to Star G/Store.Jan 15. Sold merchandise to Usman Brothers on credit for Rs.6, 000/- against Invoice No.1006.Jan 30. Merchandise consigned to Wali Brothers Rs.6, 000/= vide Invoice No. 1007.



SALES JOURNALPage No.1

DATE ACCOUNT DEBITED INVOICE NO.POST

AMOUNTRef.

1.1.2015 Hakim & Co. 1003 _/ 4,000 5.1.2015 Jasco Traders 1004 _/ 5,000 10.1.2015 Star G/Store 1005 _/ 10,000 15.1.2015 Usman Brothers 1006 _/ 6,000 30.1.2015 Wali Brothers 1007 _/ 6,000 TOTAL 31,000

Accounts receivable (Dr.) 31,000.-Sales (Cr.) 31,000.-

The entry of sales journal will be recorded through journal voucher as to account receivable debit and sales credit narrating to record sales for the month of January 2015 and to individual parties’ account or debtors account in subsidiary ledger making reference sales journal.



In case of sold goods returns, the following sales return journal is made to record sales returns from the selected transactions below;

Jan 20. Merchandise returned from Jasco Traders Rs.500/- vide credit memo No.1050.Jan 30. Received merchandise from Star G/Store vide credit memo No. 1055 for Rs.1000/=

SALES RETURNS AND ALLOWANCES JOURNALPage No.1

DATE ACCOUNT CREDITEDCREDIT POST

AMOUNTMEMO Ref.

20.1.2015 Jasco Traders 1050 _/ 500 30.1.2015 Star G/Store 1055 _/ 1,000 TOTAL 1,500

Sales Return & Allowances (Dr.) 1500 Accounts Receivable (Cr.) 1500



The entry of sales return and allowances journal will be made by journal voucher narrating to record sales return for the month of January 2015 and to individual accounts of the party.



The total of carry forward balance of customer accounts must be equal to the carry forward balance of account receivable as shown below;

Hakim & Co. 4,000Jasco Traders 4,500Star G/Store 9,000Usman Brothers 6,000Wali Brothers 6,000

TOTAL 29,500.-

ACCOUNT PAYABLE

Accounts payable means to pay the amount to the parties who supplied goods on credit or to the seller of goods.

Account payable account is made like account receivable account as illustrated below’;PURCHASES

Jan 1. Purchased merchandise from Aftab Traders Rs.10, 000/= vide Invoice No. 3201.Jan 10. Purchased merchandise from Iqbal & Co. Rs.5000/= vide Invoice No.1312.Jan 15. Merchandise purchased on account from Jamshed Brothers for Rs.5000/= vide Invoice No. 4242.Jan 20. Received an invoice No.2323 for purchase of Rs.5000/= from Azad TradersJan 30. Goods purchased for Rs.10000/- against Purchase Inv. # 1035 from Amjad Brothers.



Account payable is recorded by journal voucher narrating to record purchases for the month of January 2015 making reference purchase journal.



PURCHASE RETURN

Jan 15. Debit Note Issued to Aftab Traders for Rs.1000/- against damaged goods returns and received credit memo No.4322.Jan 30. Damaged goods returned to Jamshed Brothers for Rs.500/- with Debit Note No.3343 and received credit Note.4633.

Purchase returns are recorded by journal vouchers narrating to record purchase return and allowances for January 2016 making reference PRJ-1.




The total of carry forward balance of parties account must be equal to the carry forward balance of account payable as shown below;

Aftab Traders 9,000Iqbal Brothers 5,000Jamshed Brothers 4,500Azad Traders 5,000Amjad Brothers 10,000

TOTAL 33,500



THE A G I N G

An aging schedule has to design which shows invoices and its due dates and enables to settle or receive on maturity. It can be made for both accounts payable and accounts receivable.

In accounts payable aging, the analysis of payment to suppliers from whom the goods purchased on credit for business indicates which supplier is paid first in order to avoid any credit or supply problem or the maturity of invoice date.

ACCOUNT PAYABLE AGING REPORT

Accounts payable is the result of all purchases made by a business from regular vendors on a credit basis. Many businesses pay for services and materials 30, 60, 90 or 120 days after receipt of invoice for controlling their cash flow. With this information, a company can decide which items can be paid on time based on the amount of cash the company has on hand and which invoices the company may need to pay late.

An account payable aging report lists the due date of payments that a company owes to vendors and has generally set up with 30 days time but consists on;

00 to 30 days old 31 to 60 days old 61 to 90 days old Older than 90 days

The report helps the user in determining which invoices are overdue for payment and assumes that all invoices are due for payment within 30 days.



The aging of account payable schedule shows that the company had purchased goods on credit from customer1 and customer2 and paid them within the credit limit of 30 days when customer3, customer4, and customer5 were not paid older than 45, 40 and 90 days.

In the case of paying the part amount into the bill, the balance will be treated older than the date of purchase as shown in customer1.



ACCOUNTS RECEIVABLE AGING

This report directs management’s attention to accounts that are slow to receive first by the customer and then by the date of the sales invoice. It is also useful in determining Allowance for doubtful accounts.

AGING OF ACCOUNTS RECEIVABLE

If we assume the credit terms are net 30 days and invoices are within 30 days will be classified as current and;

Any unpaid invoices in April are classified as 1-30 days past due.Any unpaid invoices in March are classified as 31-60 past due and so on.



The aging of accounts receivable is used to calculate the estimation of allowance for uncollectible bad debts like;

The estimated amount of uncollectible is recorded in the ledger by debiting allowance for uncollectible bad debt and crediting accounts receivable.

The individual account will also affect.

In the case of collection some part of the uncollectible amount, the balance of accounts receivable and allowance for doubtful accounts will increase by reversing the entry above.



NOTES PAYABLE AND NOTES RECEIVABLE

In order to enjoy maximum benefit from the business, firms or persons borrow money from banks, financial institutions, friends or relative and mostly against notes which may be interest bearing or non-interest bearing depends on the receiver and the payer. Interest bearing notes will be paid on the due date of the note along with the actual amount.

A promissory note is an instrument in writing unconditional undertaking, signed by the maker to pay a certain amount only to, or to the order of, a certain person, or to the bearer of the instrument.

The firm or person who gave amount on promissory note would enjoy the interest at the rate specified in the notes which called interest income and the firm or person who took the amount on promissory notes would pay the interest on notes payable called interest expense.

The note is treated as an asset by the holder and liability by the giver.

NOTE PAYABLE

The note payable is current liability taken in any of the following cases;

- To receive cash as a loan- To clear the liabilities- To purchase assets- To pay for expenses



Suppose that;

- To receive cash as loan;Cash xxxx

Notes Payable xxxx

- To clear the liability by notes for 90 days at 5% interest;

Accounts payable xxxx5% Notes payable xxxx

- Purchase machinery against notes for 60 days

Machine xxxxNotes payable xxxx

- The payment of expenses;

Advertising expenses xxxxNotes Payable xxxx

At the time of maturity or due date, the money lender pays the liability, if the note is non-interest bearing as;

Notes Payable xxxCash/Bank xxxx

If the note is interest bearing means face value of note along with interest for the cost of furniture Rs.10000 issued a note for 3 months @ 6% p.a. interest;

Furniture 100006% Notes payable 10000

6% notes payable 10000Interest expense 150

Cash/bank 10150




NOTES RECEIVEABLE

The principal amount of notes receivable is a current asset and the interest on interest bearing notes is interest income under calculation; principal amount x interest rate x time period = interest earned.

The payee is the party who receives the amount of the note and the maker is the party who give notes to the payee. The principal amount is to be paid on the maturity date of the note.

The notes receivable is given in the following cases;

- To pay cash as loan- To receive acceptance of note in payment of an account- To sell assets

- A loan provided to others against a noteNotes receivable

Cash/bank

- Received a note in payment of an accountNotes receivable

Account receivable (customer)

- A sale of asset/merchandise against a noteNotes receivable

Sales<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL [email protected]



A note can be endorsed to others in payment of his liabilities, it means that the holder can transfer /endorse notes to others, the entry will be;

Account payable (party)Notes receivable

The holder of the note may keep it till maturity, and collect the amount on the due date

1- In cash of non-interest bearing note ta. Cash

i. Notes receivable

In case of interest-bearing note;Cash/bank

Notes receivableInterest income




THE BILL OF EXCHANGE

A bill of exchange is an unconditional duly written and signed order form given one to another directing to pay the certain sum of money to a person or firm, either on demand or at a fixed or future date and time.

The bill of exchange is similar to cheque and promissory note drawn able by an individual or bank and/or transferable by endorsement. If the bill is issued by the bank, it can be referred to as bank draft and by individual as trade draft.

BILLS RECEIVABLE/PAYABLE

Like account receivable and account payable, the account of bill of exchange is maintained as explained below;

On May 1, 2015 – Hameed sold goods to Karim on credit for Rs.3000/= and sent him a draft of a bill for 3 months after date. Karim accepted the bill and returned duly signed it to Hameed on May 10. Hameed presents the bill for payment and met the bill.




JOURNAL ENTIRES OF HAMEED - RECEIVER

May 1, 2015 – Hameed sold goods on credit to Karim for Rs.3, 000/=Accounts Receivable (Karim) 3,000

Sales 3,000May 10, Hameed received a bill for Rs.3, 000/=

Bills Receivable 3,000/=Accounts Receivable (Karim)

July 10, 2015 – Hameed received cash against bill

CashBills receivable

JOURNAL ENTRIES OF KARIM (PAYER)

May 1, 2015 – Karim goods on credit from Hameed for Rs.3, 000/=Purchases 3,000

Accounts Payable (Hameed) 3,000

May 10, Karim paid a bill for Rs.3, 000/=

Account payable (Hameed) 3,000/=Bills payable 3000/=

July 10, 2015 – Karim paid cash against billBills payable

Cash




The accounting for debts involves two parties receiver and payer wherein who gives money will receive and who takes it will pay with or without interest as agreed mutually. The receiver will maintain account receivable and payer account payable.

In trade, the debt is given to increase sales volume in the shape of goods and services as well as for paying liabilities and purchasing assets against negotiable instruments with or without interest.

The businessman is forced to work more and more to gain profit to pay the debt of borrowed money. One side the debt increases the volume of business and another side opens the door of employment but sometimes caused the trouble in business due to mismanagement.

WRITER’S VIEW

WRITTEN BY:

SYED AQEEL RAZAMASTER OF COMMERCE & POLITICS


Volume III


C O N T E N T SCHAPTER SIX PURCHASES-----------------------------------------------------------------------------------------

Purchases 6.1-2- Personal purchases 6.2-3- Purchases for business 6.4

o Merchandise for trading 6.4o Materials for manufacturing 6.4o Assets for business 6.5o Direct expenses 6.5o Work against services 6.5o Direct purchases 6.7

- Purchase for expenses 6.7- Type of purchases 6.7

Cash Purchases 6.8Credit purchases 6.8-9

- The procedure of purchasing and recording 6.10-24- Accounts payable aging 6.25- Kind of stores 6.26-27- Maintaining of businesses records 6.28-32- Writer’s view 6.33

PURCHASES 6.1

ACCOUNTING FOR PURCHASES

The purchase is the result of exchanging values for material and work by means of money or its equivalent for the satisfaction of need and for generating profit in business by the process of purchasing and selling. There are three types of businesses involve purchases and sells as in trading business, the person purchases goods and sells it in anticipation of gain, in manufacturing business, the concern purchases materials, gives it any shape and sells and in services business which has no purchase apparently but actually the services which are given to service provider are the purchases for which the concern who does purchase the services pays money to service provider.

The purchases for business is considered a kind of temporary asset involve in profit and loss under income statement. It may also be said a kind of expense because of purchasing for goods or expense for goods involves in the cost of goods sold and can also say it the helping tool for generating profit.

Purchase plays an important role in accounting.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.2

The purchase is debited to purchase account which increases in expense or temporary asset and cash does credit to a cash account which decreases the assets of an entity.

There may be following three kinds of purchasing in accounting;

1- PURCHASE FOR PERSONAL2- PURCHASE FOR BUSINESS3- PURCHASE FOR EXPENSES

PURCHASE FOR PERSONAL

No purchase is allowed in business for personal use and if the proprietor does purchase something or takes anything from the purchased goods, he will be withdrawing his capital or goods at value.

If the owner or partner draw cash, the drawing is debited to drawing account; drawing is a contra capital account; and cash is credited which is a current asset and asset is decreasing as;

Purchase moves accounting cycle.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.3

Drawing (Cash)/debitCash (credit)/asset

In case of drawing goods by owner, the drawing reduces merchandise at the value to Inventory account.

Drawing (Stock) /debitInventory (credit)

At the end of the period or in balance sheet the drawing account is reduced by owner’s equity or capital account as;

Capital (Cash)/debitDrawing (Cash)/credit

Capital (Stock)/debitDrawing (Inventory/Credit

No purchase is allowed in business for personal use.


PURCHASES 6.4

PURCHASES FOR BUSINESS:

- Merchandise for trading- Materials for manufacturing - Assets for business- Work against services- Direct purchases- Goods Receipt Note (GRN)- Debit Note- Account payable aging

Merchandise for Trading

In trading business, merchandise is purchased for sale against profit. The trading business involves a person or persons who buy products and sell to customer and links with manufacturers and service providers.Materials for manufacturing

The manufacturing business deals with materials wherein manufacturer does purchases materials for making goods which he wants to make something and then sells to traders, whole sellers and also to retailers. The manufacturing business requires manpower which is provided by services business in the shape of employees. Thus, manufacturing business needs the help of trading and services. It also requires land, building, plant and machinery for operation.

The purchase is made for sale against profit.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.5

Assets for business

In order to operate any business, assets are purchased like land, building, plant, machinery, furniture, office equipment, air conditioners, etc. etc. The depreciation does contra to the most of the assets.

Direct Expenses

Most of the purchases involve in cartage wages, labor, customs duty, octroi, taxes etc. are the direct expenses which we can say that the direct purchase is because of adding in the price of goods purchased and add in the purchase in the income statement.

Work against services

The plant, machinery, furniture, office equipment or any asset requires services for installation, inspection, fixing and like these works the services are purchased for the time being and the cost includes in the asset purchased. It does not belong to profit and loss but become the part of the asset.

Direct expenses are involved in business purchase.


PURCHASES 6.7

PURCHASES FOR EXPENSES

Actually, the expenses which are paid for operating business activities decrease income or increase loss than in other words we can say that the expenses belong to profit and loss as low expense high profit or high expense low income.

The purchases are made for operating business activities as to works and goods, reduce income and do not belong to merchandise.

TYPES OF PURCHSAES

All purchases revolve around cash purchases and credit purchases and any purchase can be made in cash or on credit.

- Cash Purchases- Credit Purchases

The purchase against expense is the part of income.


PURCHASES 6.8

Cash Purchases

The cash purchase is the purchase which is made on payment against getting anything on the spot or exchange of value on the spot.

When a cash purchase is made, the following double entry is made;

Purchases (Debit/Income Statement)Cash (Credit/Asset)

The purchase is debited to purchase account which belongs to the cost of goods sold and cash is credited to cash account decreases assets of an entity.

Credit Purchase

Credit purchase is the purchase which is made later under an agreement or mutual understanding of seller and purchaser. Like this purchase, goods are obtained without paying cash and cash is paid later.

Cash purchase orders payments on the spot but credit on later.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.9

The credit purchase is the liability of purchaser and asset of seller when it made, the following double entry is made;

Purchase (Debit)/Income StatementAccount Payable (Credit) Liability

When the liability is paid, the balance in payable account will be reduced and to zero as;

Account payable (Debit)/LiabilityCash (Credit)/Asset

The result of purchase is to increase in purchase account or expense account and decrease in an asset of the entity. A purchase also results in the increase of inventory requires further discussion.

The result of purchase is to pay money.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.10

THE PROCEDURE OF PURCHASING AND RECORDING

The following documents or formats for purchasing and maintaining purchases are simply made depend on the nature of purchase;

- Purchase Requisition- Indent- Requisition- Job Order- Purchase Order- Delivery Order- Goods Receipt Note (GRN)- Debit Note- Account Payable AgingThe formats work like ladder to support recording the system of accounting

The formats are designed to reach the desired result and the desired to reach the balance of quantity and cost of the item which identified in summary of stock.

The purchase requires a procedure to control it.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.11

PURCHASE REQUISITION

In case of having no store for consumable items, the purchases for departments are made by purchase requisition and the purchase requisition is the document which is prepared before purchasing of anything either on cash or on credit. It is an internal document which is made by the person who wants to require the item for his department and sends it to purchase manager. The purchase manager submits it to chief executive officer for approval and on approval; he arranges to buy the items required.

The purchase requisition may contain serial number, description, quantity and cost approximately which is prepared by the person who wants to require the item or items for machinery, repair, maintenance, etc. for department and sends it to purchase department duly signed by the departmental head. The Purchase requisition will be checked by purchase department. The purchase department also ascertains the cost of the item or items approximately and submits gets it approved for purchase.


PURCHASES 6.12

The purchase requisition is designed below or may be designed according to the requirement;

The Purchase requisition is an order to purchase in cash.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.13

INDENTIndent means to ask for consumable items useable in office like printing, stationery, and general items. It will be required in case of having a store for these items.

The indent for issuing consumable items may be specified below;

Indent means to ask for consumable items.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.14

REQUISITION

The requisition may relate to production which requires raw materials, packing materials and plant, machinery and building require repair and maintenance.

The requisition may be designed as;

Requisition relates items required for production and building use.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.15

JOB ORDER

Job order is a written instruction to provide a particular goods or services in order to perform a work according to specified requirements, time frame, and cost estimates.

Generally, the Job order relates to services business and for manufacturing business wherein services or goods required.

The following kinds of formats for job order or work order may be made;

- Material issue for production- Acquiring services from customer- Issuing materials to engineers for outside clients;

It is also known as a work order form.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.16

Material issue order form;


PURCHASES 6.17

Job order for acquiring services from customer;


PURCHASES 6.18

PURCHASE ORDER:

The purchase order is an agreement between purchaser and seller and states that the purchaser indents to purchase goods and confirm the legal identity of the purchaser. It also helps in comparison with purchase invoice because of having column quantity, description, unit price and the value of goods. The deduction of sales tax or any other instruction is known by purchase order.

The purchase order is placed to buy goods on credit subject to the delivery order.

Purchase order means the agreement of purchase.


PURCHASES 6.19


PURCHASES 6.20

DELIVERY ORDER

The delivery order is a document which confirms the delivery of goods as per purchase order. It requires the receiving and checking of goods by the purchaser.

The seller sends invoice, copy of purchase order and delivery challan duly checked and received by the purchaser.

Delivery order confirms the receipt goods ordered.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.21

The form or format means to cover any transaction.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.22

GOODS RECEIVED NOTE (GRN)

The Goods Received Note (GRN) indicates that the goods which were ordered have been received by the purchaser. On receiving the goods, the purchaser does a signature on Goods Received Note as a receipt of goods.

The goods received note contains serial number, description of goods, pack size, price, ordered quantity, delivered quantity, and remarks.

This document is very important for payment of invoice which confirms the transaction.

The goods receipt note works like delivery order.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.23

The form or format is made according to requirement.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.24

DEBIT NOTE

If any defect in commodities is found, the purchaser will inform the supplier for deduction of the amount payable by debit memorandum. If the supplier accepts the request, he will issue a credit memorandum for the deduction of amount receivable.

The debit memorandum reduces the liability to vendor and credit memorandum reduces accounts receivable to the vendor.

Debit note is issued for deduction against the claim.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.25

ACCOUNT PAYABLE AGING

Account payable aging is made to pay the amount which is payable to supplier against purchase on credit under the agreement of time for payment.

Account payable aging controls payments payable.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.26

KIND OF STORES

There may be required many kinds of stores in businesses dealing with materials or goods relating to trading and producing. The manufacturing business has wide expansion involves in materials and finished goods so that; it must have stores for consumable and materials in finished and unfinished forms when the trading business must have Store for trading goods.

1 - Consumable Store- Stationery - Machinery, Building Materials

2- Production Materials- Materials- Finished goods

Goods require stores.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.27

CONSUMABLE STORES

In case of having Store for consumable items, it must require stores where all general items relating to building, plant and machinery, office equipment and others in store 1 and stationery or office supplies in store 2 must be maintained. It depends on the volume of business.

The benefit of maintaining stores for consumable is to save time and money because of purchasing small items in need requires person to purchase it, the person require time and money, and time and money can be wasted for in shape of conveyance and purchase from retailers for tiny items and time which can be utilized in other works. Besides time and money, the risk of handling cash is minimized.

In order to purchase for stores, the purchase will be made in cash or credit from whole sellers against cheques instead of cash.

The items are of daily use in business come under consumable store.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.28

The purchase order and delivery order may be used for consumable stores in case of purchasing items on credit as they are mostly used for purchasing goods for business on credit.

STORE I

In case of maintaining store for general items relating to plant, machinery, office equipment and building, the procedure of keeping record must be considered.

STORE II

The office supplies and stationery are frequently used in business communication and maintaining records. The store for office supplies can be maintained which saves time, money and risk of cash.

The stores depend on the nature of business.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.28

MAINTAINING OF BUSINESS STOCK

In order to maintain stock of any kind either of consumable or of business, a device is required to

Stock register

The stock register

- Consumable items- Business stock

1- Trading2- Manufacturing3- Services

CONSUMABLE ITEMS

The stock register which contains pages of every item could work like ledger is required to control consumable items store one and store two which I have designed below. The format is designed to reach the desired result and the desired for them is a balance of quantity and cost of the item which identified in summary of stock.

The business stock must have store and recording.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.30

The designing of format is to focus the transaction.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.31

PURCHASES 31

The stock register controls stock received and issued.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.32

The summary of stock register facilitates in making cost of goods sold statement.

The result of stock is a summary of stock.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

PURCHASES 6.33

WRITER’S VIEW

The purchase involves transactions and transaction is made through payment on cash on the spot or on later. As soon as the purchase occurs, the accounting cycle starts. The purchase relates to the cost of goods which is made after passing through many processes of purchasing. The profit or loss is generated by sale and purchase and purchase is the part of profit and loss. In the services business, the purchase is the service of a person acquired for completing the job just like employees, repairers etc.

The stock maintaining is because of purchasing.

Then we can say the purchase pays an important role in accounting because of which no concept of sale is created and the stock maintaining is because of purchasing.



Volume III


C O N T E N T SCHAPTER SEVEN SALES-----------------------------------------------------------------------------------------

Accounting for Sales 7.1- The Types of sales 7.2

o Cash sales 7.2o Credit Sales 7.2

- The Procedure of Sales 7.3o Sales Return 7.4o Sales Discount 7.5o Bad Debt expenses 7.6

Sales 7.1

ACCOUNTING FOR SALE

The sale in accounting means the commodities or services of economical value are purchased by someone and someone must receive the commodities or services in good condition underpayment in cash or in credit.

Although the sale is confirmed after receiving the cash when in business some parties pay cash against goods and some parties take goods and pay later but in accounting the profit is confirmed when a sale occurs and the goods delivered and the matter of payment is between the seller and the purchaser. If the purchaser does not pay the debt, the seller will do credit party’s payable account and considers it expense under debiting bad debt expense account.

The commodities which were sold may be returned in case of any defect under mutual understanding. The return of goods does contra effect on sale.

No business is made without a sale.


Sales 7.2

THE TYPES OF SALE

All sales transactions require exchanging value in shape of cash. The cash which receives on the spot on account of selling goods comes under cash transaction and that cash which was not received in the time of handing over goods comes under credit sales and they record under double entry system create following two type of sales as to cash sales and credit sales.

Cash sales may offer a discount for quick sales but credit sales may have discount but increase in price and many legal conditions under the agreement.

CASH SALES:

Cash (debit)Sales (Credit)

(To record sales as cash)

Cash increases in liquid asset accounts of the entity and sales increases in the income.

CREDIT SALES:

Accounts Receivable/Party name (Debit)Sales (Credit)

The accounts receivable/party name account increases in liquid asset accounts and sales increases in the income.

Cash sale and credit sale are both the technique of sale.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

Sales 7.3

THE PROCEDURE OF SALE:

On receiving a purchase order, the seller issue sales invoice to purchaser and deliver it to the place of purchaser along with the delivery order. In case of any defect in goods, the purchaser informs to the seller about the defect under debit memorandum and seller credit the account of purchaser issuing him credit memorandum.

The cash sale does not require many formalities like credit sale in which the matter of giving and take is occurred on the spot and in case of warranty or guarantee of the product the condition of sale applies either credit or on cash payment.

The credit sales are recorded under sales journal and transferred to in subsidiary ledger parties’ account under control account in general ledger account as accounts receivable;

Accounts receivable (debit)Sales (Credit)

The minimum procedure and maximum sale must be the aim of the seller.


Sales 7.4

SALE RETURN:

The sale return in case of a defect in goods from purchaser reduces the amount in balance of Purchaser account in seller’s ledger. The sales return and allowance journal are for recording sales return and allowances and at the end of the month sales returns and allowances are transferred to the subsidiary ledger of parties under reference sales journal and the total amount of sales return and allowances is transferred to control account of accounts receivable;

Sales return & allowances (debit)Accounts receivable (credit)

The sale return may apply on credit sale and on cash sale as;

Sales return (debit)Accounts receivable (credit)

Sales return (debit)Cash (credit)

The sale return is contra revenue account and reduces the sale in the income statement.

Return in the sale is under question for the seller.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

Sales 7.5

SALES DISCOUNT:

In order to increase sale or to sell old stock or for early payment, the sales discount or reduction in the price of a product is given to the Purchaser. The Sales discount is a contra revenue account and reduces the sale in the income statement.

The sales discount is used in place of sales which reduce the amount of balance in account receivable of party when the sales discount is given, the journal entry is recorded as;

Sales Discount (debit)Accounts receivable (credit)

The discount in sales shows the stability of the product.


Sales 7.6

BAD DEBT EXPENSES

The cause of bad debt expense is of credit sale wherein the seller sells products to all parties wherein some pay the debt in time and some pay after time and some do not pay the debt because of many reasons thus the category of customer is made as to fine customers, good customers, the best customers and bad customers.

Then we can say the bad debt is the debt which recoverable chance is equal to not receive and in case of receiving the bad debt, the entry of bad debt and reversal entry are made as;

Bad debt Expense (debt)Accounts receivable (credit)

Account receivable (debit)Bad debt (credit)

The bad debt is an expense which reduces gross income in the income statement.

The result of sale war is bad debt expense.



Volume III


C O N T E N T SCHAPTER EIGHT INVENTORIES-----------------------------------------------------------------------------------------

Inventories 8.1- Periodic System 8.1-2- Perpetual system 8.2-4- Average cot 8.5

o Simple Average 8.5o Simple Moving Average 8.6-7o Weighted Average 8.7o Weighted Moving Average 8.8

- Writer’s view 8.9

INVENTORIES 8.1

Inventory is the most important item on the subject of accounting which indicates status of merchandise and in manufacturing business and it says the actual position of materials or stock held by the producer as finished goods or unfinished goods or raw materials or we can inventory is an asset kept by a business for the purpose of sale includes raw materials, work in process and finished goods.

The inventory does up and down profit as low inventory low profit and high inventory high profit.

There are two main systems of inventory in accounting;

PERIODIC SYSTEM

Small organizations update their inventory records at the end of an accounting period or when financial statements are prepared which is called periodic inventory method. Under this method, the revenue from sale is recorded when sale is made and no credit entry is made in inventory account or purchase account and at the end of the accounting period, the inventory is determined by the cost of goods sold statement as;


INVENTORIES 8.2

Cost of merchandise in hand at the beginning of the periodxxxxxx

Add: Cost of merchandise purchased during the period xxxxxx

---------

Cost of merchandise available for sale during the period xxxxxx

Less: Cost of merchandise sold during the period. xxxxxx

----------

Cost of merchandise on hand at the end of the period xxxxxx

=====

PERPETUAL SYSTEM

Big organizations have to maintain up to date records of the cost and quantity of each item of inventory in finished or unfinished forms and maintain a subsidiary ledger of each item show increase or decrease in material and the balances of the account.

The perpetual system requires method and method has many has many kinds for calculation of inventories wherein some kind of methods in perpetual system are described;

First in first out (F.I.F.O) method

Under this method, the items bought first are used or sold first or in other words, the item or material which was purchased or received first would be used or issued first.

This method covers the cost price of material and the stocks remain near to the recent market price. The closing stock of materials may be valued at the cost of market price as shown in illustration 1;


INVENTORIES 8.3


INVENTORIES 8.4

Last in first out (L.I.F.O) method

Under the LIFO method, the items bought last are used or sold first which also means that the items still in stock are the oldest ones.


INVENTORIES 8.5

Average cost

The average cost method is based on mixing materials and the material cannot be issued from any particular lot of stock.

Average cost method may be of four types;- Simple average- Weighted average- Simple moving average- Weighted moving average

Simple Average

In simple average method, the price of every material is calculated by dividing the purchased price of different materials as shown under;

500 units purchased at price Rs. 11/=



The simple average price will be calculated Rs.12 as calculated below:

11 + 12 + 13 = 36/3 = 12


INVENTORIES 8.6

Weighted average

A price which is calculated by dividing the total cost of materials in the stock from which the materials to be priced could be drawn, the total quantity of materials in that stock as;

1,000 x 15 + 2,000 x 17 + 3,000 x 19 = Rs.17.67

1,000 + 2,000 + 3,000

Simple moving average

Under the simple moving average inventory method, the average cost of each inventory item in stock is re-calculated after every inventory purchase under FIFO or LIFO methods.The calculation is the total cost of the items purchased divided by the number of items in stock. The cost of ending inventory and the cost of goods sold are then set at this average cost as shown in the table below:-


INVENTORIES 8.7


INVENTORIES 8.8

Weighted Moving AverageThe weight average method just work same as simple average method but it is better to issue the materials at weighted average price method because it recovers the cost price of the materials from production as shown in table below;


INVENTORIES 8.9

The inventory plays an important role in accounting and without it the concept of accounting is incomplete because it helps in ascertaining the profit and loss. The increase or decrease have an effect on profit or loss and we can say that more stock more loss and less stock more profit and this is the separate talk the stock is an asset but the sale converts stock to profit and the profit covers expenses which have already been consumed on achieving the stock and the expenses are also the part of profit.

WRITER


Volume III

WRITTEN BY:SYED AQEEL RAZA

C O N T E N T SCHAPTER NINE TAXES-----------------------------------------------------------------------------------------

Accounting for taxes 9.1- Income tax 9.2-5

o Income Tax Slab salaried persons 9.6o Income tax salaries 9.7-8o Income Tax W/H on goods and services 9.8o How to maintain Income Tax on goods and services 9.9o What is National Tax Number NTN? 9.10

- Sales Tax 9.11-15o What is value-added tax (VAT)? 9.16o What do you mean by F.B.R. & S.R.B.? 9.16.18o Maintenance of Sales Tax record 9.19-23

- Writer’s view 9.25

Accounting for Taxes 9.1

ACCOUNTING FOR TAXES

In accounting, no one can deny the importance of taxes and taxes involves various stages of various kinds end to the result covering the period of Accounting. Therefore, all accounting process revolves around taxes and taxes force to owners to keep a complete set of the book of accounts audited by the chartered accountant or may be required to tax offices for verification of the purity of tax matters.

Besides other taxes, there are mainly two kinds of taxes involve in the business of manufacturing, trading, and services wherein taxes on sales and income are under discussion.



INCOME TAX


INCOME TAXTaxation according to a person’s ability to pay is universally accepted the principle. Income Tax is, therefore, generally recognized as a highly equitable from taxation. Tax rates and method of calculating taxable income varies with the fiscal status of the taxpayer.

Following are the broad categories of taxpayers:-

- Companies- Association of Persons (AOP)- Non-salaried Individuals- Salaried individuals

Companies

A company is a person who encompasses all legal rules and regulations for businesses under registered with the security and exchange commission of Pakistan (S.E.C.P.) The SECP checks financial and corporate entities to ensure stakeholder’s interest.

The corporate sector in Pakistan is governed by the Companies Ordinance 1984 which was promulgated on 8th October 1984 and repealed the Companies Act, 1913.

There are two kinds of companies;

PRIVATE COMPANY -Private Company has the following restriction while these restrictions do not apply to other companies.

(1) It cannot have members more than 50 excluding those are the employees of the company.

(2) It cannot invite the general public to subscribe the share of the company. (3) It restricts freely transfer of share.

PUBLIC COMPANY - Companies Ordinance define the public company as a company that is not a private company. It means every company that is registered in Pakistan either it is a private company or a public company.



Association of Persons (AOP)

An association of persons (AOP) under the Income Tax Act is an entity or unit of assessment. It means two or more persons who join for a common purpose with a view to earning an income. The term Person includes any company or association or body of individuals, whether incorporated or not.

Non-salaried individual

Non-salaried individual means the total earnings of a person from wages, investment, interest and other sources. This kind of individual is not employed in any business concern but we say him the self-employed who works himself by means of performing services or he generates income with his investments and other sources which become the cause of earnings from him.

Salaried individual

The salaried individual means a person who is employed in the business concern. Actually, he sells his knowledge and efforts and the amount which he gets comes under services business. If he comes under the specified limit of income tax, the concern where he works deducts his income tax because of having withholding agent; a withholding agent is responsible for deducting income tax and deposit to bank on behalf of income tax.



Capital Value Tax

It is payable by individuals, firms, and companies which acquire an asset by purchase or a right to use for more than 20 years.

Corporate Asset Tax

It is levied under section 12 of the Finance Act, 1991. This is one-time levy payable by a company as defined in Companies Ordinance, 1984, on the value of fixed assets of the company on the “specified date”.

The withholding agent is who that deducts taxes on salaries and goods/services on behalf of the government and deposit them to the bank under the specified rates declared from time to time. The taxes which it deducts are chargeable in returns or shown in return as to employee when he shall fill his return shows the amount which has been deducted by his behalf and like this, the entity shall adjust the deducted amount at the time of filing income tax or sales tax returns.

The rates which are presently declared are shown below;<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>


Income Tax Slabs 2016-17 Salaried Persons Finance Act 2016

Where the income of an individual chargeable under the head “salary” exceeds fifty percent of his taxable income, the rates of tax to be applied are as follows:

Z



INCOME TAX SALARIES:

The withholding agent means the employer who is liable to deduct tax from salaries of his employees according to the declared slab from government and the employee whose tax was deducted is bound to fill his return wherein he will show his incomes from salaries or any other source. Now a day, the government has introduced electronic e-filing of return where anyone can easily register himself and fill the required fields within the given time.

The employer is only responsible for deducting tax from salaries and deposit into the bank. He is also responsible for filing the return electronically monthly, quarter and annually.

P-1: M/s. Moon Light is a manufacturing concern involves in making Electrical items has 30 employees and from which 6 persons including director come under the taxable limit of salary as below;1 Employee 1 Rs.456, 000/= per annum2 Employee 2 Rs.540, 000/= per annum3 Employee 3 Rs.792, 000/= per annum4 Employee 4 Rs.888, 000/= per annum5 Employee 5 Rs. 1,416,000/= per annum6 Director 6 Rs.1, 860, 000/=per annum

S-1: TABLE



TABLE2

INCOME TAX WITHHOLD ON GOODS AND SERVICES

The Income tax withholding rates W.E.F. 01.07.2014;

- Supply of goods by Companies = 4%- Supply of goods by other than companies 4.5% (Previously 4%)- Services rendered by Companies 8% (Previously 6%)- Services rendered by other than companies 10% (Previously 7%)- Execution of contract by Companies 7% (Previously 6%)- Execution of contract by other than companies 7.5% (Previously 6.5%)- Export-oriented services 1% (Previously 0.5%)- Commission (Excluding advertising agents) including Petrol Pump

operators 12% (Previously 10%).- Advertising agents 7.5% (Previously 10%) U/S233- The rate of tax to be deducted under section 155, in the case of

company shall be 14% of the gross amount of rent (Previously 15%)

The above rates are in respect of payment u/s 153, 155, 233.<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>


How to maintain income tax withholding on goods and services?

The withholding agent has the responsibility to deduct tax according to the nature of the business transaction and deposit it into Bank and gives the proof of its deduction and deposition to the party and submits the return monthly, quarterly or annually.

The withholding agent has to keep the summary of taxes withheld for quick reference as in table;

There are some parties are exempt from the deduction of income tax which will also be summarized. The parties who are exempted from the deduction of withholding tax are also required to show in e-filing.

The statement for summarizing the record of non-deduction parties;



What is income Tax number NTN?

Income tax number is the number which is allotted by Income Tax Department and the certificate of it is issued to the person who is eligible

for paying income tax. Nowadays, the CNIC number of a person works as Income Tax number which is registered in taxpayer portal sites which government has introduced in most recent years.

Who is Withholding Agent?

The withholding agent is the entity whose responsibility is to withhold tax and deposited into the treasury of government. It works on behalf of another and is responsible under laws. The benefit of making withholding agent is to ensure the increase in taxes and transparency in checking system of taxes.

Do you mean by Income tax withholding?

The income tax withholding may be called the advance system of taxes and who deduct taxes is called withholding agent. The tax which is withheld may be adjusted or refunded. The income tax withholding may be on the salaries of employees and of material or services.

What is an advance tax?

The tax which is deducted by the purchaser comes under the advance tax. This kind of tax is for purchaser withholding income tax which he shall deposit into the bank and deliver the copy of the paid challan. The purchaser shall debit his account as account receivable debit and credit to income tax withholding parties and like his seller

The purchaser does debit his account as an advance income tax and credit to party account and seller does debits account receivable and does credit advance



SALES TAX


SALES TAX

The Sales tax is a tax which is paid to a governing body for the sales of certain goods and services. Usually, laws allow the seller to collect tax from the consumer at the point of purchase. Often laws provide for the exemption of certain goods of services from sales.

A system of licensed manufacturers and wholesalers was instituted whereby they were allowed to purchase goods free of sales tax from each other and pay tax on sales to unlicensed traders. Imports were chargeable to sales tax but the licensed manufacturers and wholesalers were allowed to import goods without the payment of sales tax. Later on, Sales Tax became chargeable on locally produced & imported goods at the time of their sales & import, respectively. The sales tax was collected under the Finance Ordinance, 1956, on goods which were chargeable to Central Excise Duty, as if it were a duty of Central Excise. In April 1981, by virtue of an amendment to the Sales Tax act, 1951, the collection of Sales Tax on non-excisable goods was also entrusted to the Central Excise Department.

In the late eighties, the government decided to replace Sales Tax with the Value Added Tax in the country as a part of its structural adjustment program which was undertaken to correct anomalies & distortions both in our tax & non-tax regimes. Accordingly, new enactment titled Sales Tax Act 1990 replaced Sales Tax Act 1951 with effect from 1-11-1990.



LIABILITY OF SALES TAX

Following sectors are required to get registration for sales tax and charge sales tax on their supplies/services;-

- Manufacturing- Import- Services- Distribution, Wholesale and Retail stage

Previously it was being charged at the manufacturing and import stage, and its scope has been extended now to remaining sectors.

Sales tax is chargeable on all locally produced and imported goods except computer software, poultry feeds, medicines and unprocessed agricultural produce of Pakistan and other goods specified in Sixth Schedule to the Sales Tax Act, 1990.

REGISTRATION

Every person in sectors mentioned above, who makes a taxable supply in Pakistan is required to be registered under the Sales Tax Act. However, manufacturers having taxable turnover below five million rupees and also utility bill below rupees seven hundred thousand during the last twelve months are exempted from registration and payment of sales tax. Similar exemption is also available to retailers having total turnover below rupees five million in the last twelve months.

The rate of sales tax is 16% of the value of supplies. However, there are some items which are chargeable to sales tax at 18.5% or 21% of the value of supplies (see SRO 644(I)/2007 as amended by SRO 537(I)/2008 dated 11th June 2008.



The Registration Form(s) are submitted to the Central Registration Office, FBR, or Sales Tax Collect-orates/ RTOs for the allotment of a Registration Number by the persons liable to be registered under the Sales Tax Act. The taxpayer has then issued a Certificate of Registration.

RETURNS

As per law, each registered person must file a return by the 15th of each month regarding the sales made in the last month.

All registered persons are required to file returns electronically and in such cases, the payment is to be made by the 15th and return can be submitted on FBR’s e-portal by 18th.

A detailed procedure in this respect is given in Sales Tax General Order no. 04 of 2007.

There are some sectors which are required to file returns on a quarterly (tri-monthly) basis e.g. retailers including dealers of specified electric goods and CNG dealers.

MAINTENANCE OF RECORDS

All registered persons are required to maintain records at their business premises of the goods purchased and supplied made by them. All the records are required to be kept for a period of 5 years.

REFUNDS OF SALES TAX

In cases where the Input Tax exceeds the Output Tax due from the registered person in respect of a tax period because of exports or other zero-rated supplies, the excess amount of input is refunded back to the taxpayer within 45 days. In all other cases of excess input tax, the Board can specify the procedure for refund.



ADDITIONAL TAX

If a registered person does not pay the tax within the specified time or claims a tax credit or refund which is not admissible to him or incorrectly applies the rate of zero percent to the supplies made by him, he has to pay the additional tad at the following rates:

One and a half percent of tax due or the part thereof per month;However, in case of tax fraud, the rate of additional tax shall be two percent per month.

ARREARS

The work regarding Arrears gets initiated in the following cases:

Late or no submission of the Returns Amount paid is less than the tax amount payable

A demand is raised after an audit/ scrutiny is upheld after adjudication.

SALES TAX WITHHOLDING

Sales tax withholding means some portion of sales tax as declared by Federal Board of Revenue from time to time is retained by the sales tax withholding agent; the sales tax withholding agent refer to the party which purchased goods/services, and that amount is adjusted by the entity whose tax was withheld.



What is value-added tax (VAT)?

A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of general consumption tax that is collected incrementally, based on the value added, at each stage of production and is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer.

Therefore, sales tax, general sales tax, and value added tax work same with the procedures and regulations of the country where it enforced.

What do you mean by F.B.R. & S.R.B.?

FEDERAL BOARD OF REVENUE

FBR means Federal Board of Revenue formerly known Central Board of Revenue under enactment of FBR Act 2007. The Federal Board of Revenue is a federal agency of Pakistan responsible for enforcing fiscal laws and collecting revenue for the government of Pakistan.

FBR has two major wings; Inland Revenue and Customs. The Inland Revenue Services formerly known as Income Tax Department administers domestic taxation including Sales Tax, Income Tax, and Federal Excise Duties. The Pakistan Customs service administers import duties and other taxes collected at import stage as well regulates international trade with regard to prohibitions and restrictions imposed by the government. For the purpose of collection of revenue and pursuing tax evaders, FBR’s powers and functions also include but are not limited to; carrying out inquiries and audits/investigations into the tax affairs, commanding arrests, attachment as well as public auction of movable and immovable assets of non- compliant.



SINDH REVENUE BOARD

SRB means Sindh Board of Revenue controlled under provincial government Sind, Pakistan is responsible for collecting all tax revenues for the government of Sindh. Sindh Board of revenue is the controlling authority in all matters connected with the administration of Revenue collection including land taxes, land revenue, preparation of land record, sales tax on services, and other matters relating thereto. The Ministry of Revenue is the minister responsible for Board of Revenue, Sindh.

P-1: Print Tech packages (Pvt.) Ltd. supplied 4500 cartons of Rs. 33,750/=involving 17% sales Tax Rs.5, 738/= to Umair Enterprises (Pvt.) Limited vide Invoice # 1560 dated 2.2.2017.

In this problem, Print Tech is the seller and Umair Enterprises is purchaser. The purchaser is liable to withhold 20% on sales tax under head Sales Tax Withholding purchase F.B.R. being a sales tax withholding agent.

The purchaser Umair Enterprises will record journal entry in his ledger as;

Purchase Dr 33,750.-

Sales Tax on Purchase (FBR) Dr 5,738.-Print Tech Packages Dr 1,147.-

Sales Tax withholding Purchase FBR Cr 1,147.-Print Tech Packages Cr 39,488.-

At the time of payment to Print Tech Packages, Umair Enterprises debit the liability account of Print Tech as;

Print Tech Packages Dr 38,341.-Income Tax payable 1,724.-

Cash/Bank Cr. 36,617.-



We have to deduct withholding tax on sales tax as soon as we receive invoice or at the time of creating liability account of seller because the sales tax department has no concern the payment of invoice but involves in deduction resulting in e-filing of sales tax return of that month.

The amount which was withheld will be paid or adjusted in sales automatically in sales tax return by purchaser.

The seller Print Tech Packages (Pvt.) Ltd will record journal entry as;

A/c Receivable Umair Dr 38,341.-Advance Sales Tax W/H 1,147.-

Sales Tax Payable Cr 5,738.-Sales 33,750.-

On receiving the amount in balance, Print Tech Packages will record the transaction as;

Cash/Bank Dr 38,341.-A/c Receivable Umair Cr 38,341.-

The Sales tax payable account will be reversed on payment of tax as;

Sales Tax payable Dr 5,738.-Advance Sales Tax W/H 1,147.-Cash/Bank 4,591.-

The sales tax and advance tax which was withheld by the purchaser will be adjusted automatically in the sales tax return of the seller.

The income tax which the withholding agent withheld will be journalized as;

Advance Income Tax 1,724.-Print Tech Packages 1,724.-

The advance income tax is the asset of the company may be claimed from Income Tax Department or adjustment in finalizing the return.



MAINTAINANCE OF SALES TAX RECORD

Sales tax is the main issue of any concern dealing with business. The product which the seller sells and the purchaser buys includes sales tax.

It is the requirement of sales tax to have accurate records of the sales and all transactions made to each customer up to 5 years as evidence of transaction. Additionally, proper upkeep of electronically stored data on accounting or sales tax programs is essential to stay compliant with these rules and regulations.

OUT PUT TAXOut put tax means the supplies of products which include sales tax to registered or unregistered persons who may be distributor, whole seller, person etc.

The output tax requires Tax Invoice Section 23 of sales tax act 1990 containing;

- Serior number and date- Name, address and registration number of the supplier- Name, address and registration number of the recipient- Discription and quantity of goods- Value exclusive of tax- Amount of sales tax- Amount of further tax as specified, if the supplies are made to an

undregistered person.- Value inclusive of tax.

- <THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>


KIND OF SUPPLIES

1- Taxable supplies2- Exempt supplies3- Zero-rate supplies

TAXABLE SUPPLIESTaxable supplies mean a supply of taxable goods made by an importer, manufacturer, whole seller, distributor or retailer.

Exempt suppliesExempt supplies mean a supply which is exempted from levy of the sales tax by the Federal Board of Revenue as in the list of sixth schedule.



ZERO RATE SUPPLIES

It means a taxable supply, which is charged to tax of zero percent under section 4. In other words, where a supply is exported to a foreign country, tax is charged at the rate of 0% on that supply and the output tax becomes zero. In case of zero rate supply the person making the supply is entitled to refund of all input tax paid on raw materials used in the manufacturing of the product.

INPUT TAXPurcahse made by registered persons for busienss purposes are nown as inputs and the tax which includes in it is called input tax.



ADJUSTMENTS:The seller adjusts input tax which he pays on purchasing of goods, electricity, telephone, and service in taxable supplies and can carry forward or refund the excess amount under the provision of sub-section (2).

In case of cancellation of supply or return of goods or a change in the nature of supply or change in the value of supply or some such event, the amount shown in the tax invoice or the return needs to be modified, the registered person may issue a debit or credit note and make corresponding adjustment against input tax in the return.

E-FILINGE-filing is automatic system of maintenance of records relating to sales tax which may be studied under user guide for sales tax on taxpayer facilitation portal of FBR.



The Accounting for taxes is not matter to say that the concept of debit and credit are the same as its basic but the creation of head of accounts according to the situation is a separate matter. The party whose tax will be deducted by someone will create receivable account as advance tax which perhaps return or adjusted from tax departments and the party who will withhold tax will create liability account and responsible to deposit into government treasuries and deliver the evidence of deposition to the party whose tax was withheld.

The tax chapter is an essential to businesses for operation any business and then it is very necessary to care keeping clean in taxes. The rules and regulation of government are being changed from time to time which may be studied and applied.

Everything has no end and the change is end but for the time being.

Writer’s view


Education

The system of account vol iii