Advance accounting, is a skill every business owner should be well aware of. The way advance accounting works may feel very overwhelming for business owners, but this is were this article will come in handy!
In the following article, we have listed 10 tips for advance accounting using journal entry.
1. Fixed Asset Purchase.
Depreciation allocates the cost of a fixed asset over its useful life. The entry involves debiting depreciation expense and crediting accumulated depreciation. Methods like straight-line, declining balance, or units of production are used. Spreading the cost over the asset’s life matches expenses with revenue, providing an accurate financial picture.
2. Depreciation Entry.
When a business purchases a fixed asset, it cannot fully expense the cost in the year of purchase. Instead, the cost is allocated over the asset’s useful life through depreciation. For instance, if a company buys a computer server for $5,000 with a five-year useful life, using straight-line depreciation, the annual expense would be $1,000. The depreciation entry involves debiting the depreciation expense account and crediting the accumulated depreciation account. By spreading the cost over time, businesses comply with accounting principles, ensuring expenses match revenue and providing an accurate portrayal of financial position and performance.
3. Taxes ledger adjustment entry.
During the book closing process in India, taxes related to different financial transactions, such as GST, income tax, and customs duty, must be accounted for and adjusted. To determine a single payable amount, the relevant tax ledgers are reconciled. This involves analyzing business transactions to identify tax implications and creating entries like GST payable. Adjustments are made to reconcile the tax ledgers and present a comprehensive financial picture in the income statement and other financial reports. Proper adjustment of tax ledgers ensures an accurate determination of tax liabilities, compliance with regulations, and an accurate representation of the business’s financial position.
4. Discounts, Writing off balances, and other adjustments.
In business, it is common to provide discounts to loyal customers as a gesture of appreciation or to incentivize continued patronage. Additionally, there may be instances where old outstanding balances become uncollectible and need to be written off. These adjustments are recorded through journal vouchers (JVs).
When a discount is given, a credit entry is made to the customer’s account to reflect the reduced amount payable. This adjustment recognizes the discount as a reduction in revenue for the current accounting period.
Similarly, when writing off old outstanding balances, a credit entry is made to the customer’s account to clear the unpaid amount. This adjustment acknowledges the loss in revenue as an expense for the business.
Through JVs, these adjustments are properly recorded, maintaining accurate financial records and reflecting the impact of these business transactions on the company’s credit balances and overall financial position for the current accounting period
5. Below-the-line expenses like Payment of Income Tax, Dividend Declaration, Deferred Tax, etc.
In the accounting cycle, below-the-line expenses such as payment of income tax, dividend declaration, and deferred tax are recorded separately from regular operating expenses. Income tax paid on profits is not considered a typical business expense but is recorded as an appropriation. These below-the-line expenses are accounted for through journal entries, reflecting the financial transactions related to income tax payments and dividend declarations. They are treated as account payables deducted from the net profits, ensuring accurate financial reporting and proper allocation of funds for tax obligations and shareholder distributions.
In certain situations, businesses may incur expenses in one year but make the payment in a subsequent year, creating a time gap between the expenditure and the actual outflow of funds. These types of expenses are recorded as provisions in the financial statements. Provisions represent the estimated amounts to be paid in the future for these expenses. The provisions are recorded through journal entries, typically involving a debit to the expense account and a credit to the provision account. This ensures accurate reporting of account payables and account receivables, reflecting the timing of expenditure and cash flow.
Having extra money idle in a current account that earns zero interest is not financially wise. Smart individuals and businesses opt to invest their surplus funds to generate returns. When such investments are made, they are recorded through journal vouchers (JVs) to properly document the transaction. By investing the surplus, individuals and businesses can potentially earn interest, dividends, or capital gains. These investment activities are reflected in the balance sheets, showcasing the value of the investments and their impact on the overall financial position.
8. Returns/Losses on Investments, like Accrued interest, etc.
Investments come with inherent risks, and as a result, there may be returns or losses associated with them. These returns or losses on investments, including accrued interest, dividends, or changes in market value, are accounted for through journal vouchers (JVs). In the accounting cycle, these transactions are recorded to reflect the financial impact on the business. The gains or losses on investments are subsequently reflected in financial statements, such as the income statement and balance sheets, providing a comprehensive view of the business’s investment activities and their impact on its financial position.
9. Loan and repayment.
One of the most popular methods of financing is borrowing. The same can be accounted for through a journal voucher.
See how to record loan transactions using journal entries.
10. Owner’s Contribution.
Owners or co-founders keep investing in their businesses during the early stage of their startup or even at a later stage. It is very important to account for the same using a journal entry. See how to record the owner’s contribution to the business using a journal voucher.
Once you get the helm of basics, the whole accounting can be done through journal entries.
- How do you reverse a journal entry in advanced accounting?
In advanced accounting, reversing journal entries are used to cancel out the effects of previously recorded entries. To reverse a journal entry, you create an entry with the same amounts but opposite debits and credits. Typically, the reversal entry is recorded on the first day of the subsequent accounting period. This helps in simplifying the accounting process and ensures that the original entry doesn’t affect the financial statements of the new period.
- What are some common types of adjusting journal entries in advanced accounting?
Adjusting journal entries in advanced accounting are made to ensure that financial statements accurately reflect the financial position and performance of a company. Common types of adjusting entries include accruals for revenues and expenses, depreciation or amortization adjustments, provisions for doubtful accounts, inventory valuation adjustments, and prepaid expenses or deferred revenue recognition.
- How are complex business combinations recorded using journal entries in advanced accounting?
Complex business combinations, such as mergers and acquisitions, require special journal entries to record the transaction. The specific entries depend on the nature of the combination, including whether it’s a purchase or a pooling of interests. Generally, the acquiring company records the fair value of the acquired company’s identifiable assets and liabilities, and any excess is recorded as goodwill. The entry also involves eliminating the acquired company’s equity accounts and recognizing any non-controlling interests or minority interests.
- What is the role of intercompany eliminations in advanced accounting journal entries?
Intercompany eliminations are necessary for advanced accounting when dealing with transactions between entities within the same group or company. These entries are made to remove the effects of transactions or balances between intercompany accounts, ensuring that the consolidated financial statements accurately reflect the group’s financial position. Intercompany eliminations can involve eliminating intercompany sales, intercompany loans, intercompany revenues and expenses, and intercompany dividends, among others.
- How are complex revenue recognition scenarios handled using journal entries in advanced accounting?
Advanced accounting often involves complex revenue recognition scenarios, such as long-term contracts, multiple deliverables, or performance obligations over time. In these cases, journal entries are used to appropriately recognize revenue and associated expenses. The entries can involve recognizing revenue based on a percentage of completion, recognizing revenue when specific criteria are met, deferring revenue recognition until a future period, or allocating revenue to various performance obligations within a contract. The specific journal entries will depend on the circumstances and the applicable accounting standards (such as ASC 606 in the United States).