Expenses

Expenses

Expenses are cost of doing business. Expenses are necessary to run day to day operations of business. Thus expenses are critical to generate profits. Equity reduction is an important characteristic of expense.

Examples of Expenses

a)    Rent.

b)   Salary paid.

c)    Utilities.

d)   Deprecation.

e)    Interest.

Recognition of Expenses

Expenses can be recognized in the books of account subject to fulfillment of following conditions.

a)    A Financial item qualifies the definition of expense.

b)   The amount of expense can be measured reliably.

Recording Rules of Expense

Increase in expense is debited in the journal, while decrease in expense is credited in the books of account or journal. This rule has been explained with an easy example

a)    Salary paid in cash of 30,000

b)   Rent paid in cash 40,000.

Salary shall be debited being increase in expense, while cash paid shall be credited being decrease in cash (asset).

Date	Particular	Folio	Dr.	Cr.
	Salary A/c		30,000
	Cash A/c			30,000

Rent shall be debited in the books of being increase in expense, while cash paid shall be credited in books of accounts being decrease in cash (asset).

Date	Particular	Folio	Dr.	Cr.
	Rent A/c		40,000
	Cash A/c			40,000

 Dividend is not Expense

Payment to shareholder is not profit and such payments are directly deducted from the equity. The technical name used for profit distribution is dividend.

Capital & Revenue Expenditure

Capital expenditure is long term expenditure; it means that capital expenditure would provide long term benefit like purchase of asset, while revenue expenditure would provide short term benefit like rent, salary. This topic has been covered in my other article in more detail

Deductible expenditure & non deductible expenses

Those expenses which are allowed to be deducted under income tax laws are known as deductible expenditure. Some expenditure is not allowed under income tax laws are known as non deductible.

The deductible expenditure is primarily for tax calculation purposes and therefore these expenses are charged as business expense, but tax authorities add back these expenses for tax calculation purposes. For example entertainment may not be disallowed under a tax law, and then this expense is charged as business expenses, but not qualifies to be a deductible expense.

Liabilities

Liabilities

Liabilities are the obligation which needs to be fulfilled by the entity. In simplest word the liability is a due amount to be paid. Some important characteristics of liabilities are

a)    Liabilities are present obligation.

b)   Liabilities require flow for settlement.

c)    Liabilities arise from past event.

Example of Liabilities

Some important examples of liabilities are

a)    Long term loan.

b)   Trade payable.

c)    Accrued expenses.

d)   Interest payable.

e)    Income tax payable.

f)     Advance or unearned revenue.

Recognition of Liabilities

Liabilities are recognized in the books of account on fulfillment of the following conditions

a)    Liability qualifies the definition.

b)   Liability can be measured reliably.

Recording of Liabilities

Increase in liabilities shall be credited, while decrease in liabilities shall be debited. This rule for liabilities has been explained with below examples

a)    Salary payable amounting 90,000.

b)   Machinery purchased 100,000 on credit from Ali.

Salary is expense and debited, while salary still to be paid, thus a liability is created by crediting the salary payable account.

Date	Particular	Folio	Dr.	Cr.
23.09.2016	Salary		90,000
23.09.2016	Salary payable A/c			90,000

Machinery purchased is an increase in asset, therefore it the machinery account is debited, while a liability has arisen due this purchase and therefore Ali Account is credited for increase in liability.

Date	Particular	Folio	Dr.	Cr.
10.10.2016	Machinery A/c		100,000
10.10.2016	Ali A/c			100,000

 Current & Non Current Liabilities

Liabilities which are expected to settle within a period of 12 months (within a year) is known current liabilities, all other liabilities are classified as non current liabilities.

Assets

Assets

Assets are things or resources which will either provide benefits in future or to be consumed by the organization in future. It is important to remember that such asset must controlled by the organization, and entity must be responsible for risk and rewards of asset. Some important characteristics of asset are listed below

a)    Asset is controlled by entity.

b)   Economic benefit will flow to entity.

c)    Risk and rewards belongs to entity.

Examples of Assets

a)    Property, Plant & machinery.

b)   Inventory.

c)    Receivables.

d)   Cash.

e)    Prepaid Expenses.

f)     Goodwill.

g)   Investments.

Recognition of Assets

Assets are recognized in the books of account subject to fulfillment of following conditions.

a)    Asset quality the asset definition.

b)   Asset amount can be measured reliably.

c)    Asset will provide future benefits.

Recording Rules of Assets

Increase in asset is debited, while decrease in asset is credited. This rule has been explained with an example

a)    Advance Rent paid of 60,000

b)   Plant purchased 80,000 on cash

Advance Rent is an asset as explained above shall be debited, while decrease in cash shall be credited. In this entry one asset is increasing, while other is decreasing.

Date	Particular	Folio	Dr.	Cr.
23.09.2016	Advance Rent		60,000
23.09.2016	Cash A/c			60,000

Plant purchased in cash shall be debited being increase in asset, while cash paid shall be credited due to decrease in cash.

Date	Particular	Folio	Dr.	Cr.
10.10.2016	Plant A/c		80,000
10.10.2016	Cash A/c			80,000

Tangible & Intangible Assets

Asset with physical existence is known as tangible asset. Examples of tangible asset are plant, machinery, inventory, cash etc.

 Assets without physical existence are called non tangible assets. Examples of intangibles assets are goodwill, patent rights, customer lists, etc.

Current & Non Current Assets

Assets which are expected to consumed or realized within one year are known as current asset. Examples of current asset are cash, receivables, prepaid expenses .

Assets which shall be realized after one year are known as noncurrent. Examples of noncurrent assets are plant, machinery, furniture, long term investments.

Non Current Asset
Property ,Plant & Equipment	10,000
Long Term Asset	5,000
Current Asset
Inventories	10,000
Trade Receivable	8,000
Cash	5,000

Arrangement of Assets

International accounting standard does not prescribe method for arranging the assets; however, generally assets are arranged in term of their liquidity. The most liquid asset is shown at the end as shown above.