MGT101 Short Notes Quick Revision

LESSON NO. 8: ACCRUAL ACCOUNTING (واجب االدا بقایا جات کی اکاؤنٹنگ)

BASES OF REPORTING (رپورٹنگ کی بنیادیں) Financial performance (کارکردگی) is measured using two systems. Cash Basis records transactions only when cash is received or paid, ignoring whether the benefit belongs to the current period. Accrual Basis records transactions when they become due (واجب االدا), regardless of cash movement, following the Matching Principle (مماثلت کا اصول) to measure accurate performance. TECHNIQUE FOR CALCULATING ACCURATE EXPENSE (اخراجات کے حساب کا طریقہ) Under accrual accounting, the expense for the year is closed to the Income Statement. It is calculated as: Expenses Paid during the year + Closing Accrued (Liability) - Opening Accrued - Closing Prepayment (Asset) + Opening Prepayment. This ensures only costs belonging to the reporting period (رپورٹنگ کا دورانیہ) are charged. TECHNIQUE FOR CALCULATING ACCURATE INCOME (آمدنی کے حساب کا طریقہ) Income for the reporting period is calculated to ensure accurate performance measurement. The formula is: Income Received during the year + Closing Owing (Asset) - Opening Owing - Closing Unearned (Liability) + Opening Unearned. This accounts for income earned (کمائی ہوئی) during the period, even if cash collection is pending. CLASSIFICATION IN BALANCE SHEET (اثاثہ جات اور واجبات کی درجہ بندی) Accruals and prepayments must be reported as current items in the Statement of Financial Position (مالیاتی پوزیشن کا گوشوارہ). The categories include: Expense Due (Liability), Income Due (Asset), Advance Payment/Prepayment (Asset), and Advance Receipts/Unearned Income (Liability). ONE ACCOUNT AND TWO ACCOUNT METHODS (اکاؤنٹنگ کے دو طریقے) Entities use different ledger (کھاتہ) styles to manage accruals. In the One Account Method, a single ledger account (e.g., Rent Payable) handles both payments and period-end adjustments. In the Two Account Method, separate accounts are maintained for the Expense/Income and its respective Accrual/Prepayment, requiring a reversal (تبدیلی) of the opening balance at the start of the period. ADJUSTING ENTRIES (ترمیمی اندراج) These are passed on the reporting date (رپورٹنگ کی تاریخ) to update accounts for outstanding (بقایا) amounts. For Expenses: Debit Expense and Credit Expense Payable for closing due; Debit Prepaid Expense and Credit Expense for closing advance. For Incomes: Debit Income Receivable and Credit Income for closing due; Debit Income and Credit Unearned Income for closing advance. CLOSING ENTRIES (حتمی اندراج) These transfer the final adjusted balances to the Income Statement at the end of the year. For Expenses: Debit Income Statement and Credit Expense Account. For Incomes: Debit Income Account and Credit Income Statement. KEY TERMINOLOGY AND IMPACTS (اہم اصطالحات اور اثرات) Due/Owing/Accrued/In-arrear means unpaid for expenses or unreceived for incomes. Prepaid/Advance/Unearned means paid or received before the service is rendered. Recording an Accrued Expense reduces profit and net assets because it increases liabilities. Recording Prepayments ensures assets are not understated and profits are not mistakenly recognized early. COMPREHENSIVE EXAMPLE (جامع مثال) Scenario: A business pays rent quarterly (3 months) in advance. On Jan 1, 20X9, there was an Opening Advance of Rs. 3,000. Total Cash Paid for rent during the year was Rs. 40,000. On Dec 31, 20X9, the Closing Advance for the next year was Rs. 3,500. Required: Calculate Rent Expense for the Income Statement and show the entries.

Solution:

• Expense Calculation: 40,000 (Paid) + 3,000 (Op. Advance) - 3,500 (Cl. Advance) = Rs. 39,500.

Accounting Entries:

1. Payment: Rent Expense A/c (Dr) 40,000 | Cash A/c (Cr) 40,000.
2. Adjusting Opening: Rent Expense A/c (Dr) 3,000 | Advance Rent A/c (Cr) 3,000.
3. Adjusting Closing: Advance Rent A/c (Dr) 3,500 | Rent Expense A/c (Cr) 3,500.
4. Closing Entry: Income Statement (Dr) 39,500 | Rent Expense A/c (Cr) 39,500.

Explanation: The opening advance is added because it was paid last year for this year's benefit. The closing advance is subtracted because it is paid this year for next year's benefit, remaining as an asset (اثاثہ) on the balance sheet MODULE 9: PROVISION FOR DOUBTFUL DEBTS AND ALLOWABLE DISCOUNTS ( مشکوک قرضوں کے لیے گنجائش اور جائز رعایت) BASIC CONCEPTS (بنیادی تصورات) Bad Debts are accounts receivables (debtors) that an entity will never be able to collect, also known as irrecoverable (ناقابل واپسی) debts. Doubtful Debts are accounts receivables where there is a high risk (خطرہ) that they will not be recovered. While both are recognized as expenses (اخراجات) in the income statement, their accounting treatment and credit effects differ. MEASUREMENT OF DOUBTFUL DEBTS (مشکوک قرضوں کی پیمائش) Provision for doubtful debts is calculated using different approaches to ensure the prudence (احتیاط) of financial information. Specific Provision is created for identified debtors whose recovery is doubtful due to specific issues like bankruptcy (دیوالیہ پن). General Provision is based on past experience (سابقہ تجربہ) applied to the remaining "good" debtors. Aging Analysis (عمر کا تجزیہ) categorizes debtors by how long balances have been overdue ( واجب ا الدا ), applying higher provision rates to older balances. ACCOUNTING FOR BAD AND DOUBTFUL DEBTS (اکاؤنٹنگ اندراج) When a debt is confirmed as bad, it must be written off (ختم کرنا) by debiting Bad Debts and crediting Debtors. To create or increase (اضافہ) a provision, debit Bad Debts and credit Provision for Doubtful Debts. To decrease (کمی) a provision, debit Provision for Doubtful Debts and credit Bad Debts. If a debt previously written off is recovered, debit Bank and credit Bad Debts Recovered as income. PROVISION FOR ALLOWABLE DISCOUNTS (جائز رعایت کے لیے گنجائش) Businesses may provide for potential discounts that customers might take for early payment. This involves debiting Discount Allowed and crediting Provision for Discount. This provision is calculated on the remaining "good" debtors after subtracting (منہا کرنا) the provision for doubtful debts. PRESENTATION IN FINANCIAL STATEMENTS (مالیاتی گوشواروں میں پیشکش) In the Income Statement, total bad debt expense includes specific bad debts written off plus any increase (or minus any decrease) in the provision. In the Statement of Financial Position (Balance Sheet), the provision for doubtful debts is set off (وضع کرنا) against the total Debtors' balance to show the Net Realizable Value (قابل وصول قدر). Bad debts already appearing in the Trial Balance are not subtracted again as they have already been accounted for.

Scenario: On January 1, 20X9, a business has Debtors of Rs. 20,400 and an Opening Provision of Rs. 1,200. During the year, Bad Debts of Rs. 400 were identified to be written off. At year-end, the business decides to maintain a 5% Provision on remaining debtors. Required: Calculate the amount charged to the Income Statement and the Net Debtors for the Balance Sheet.

Solution:

1. Adjusted Debtors: Rs. 20,400 (Total) - Rs. 400 (Written off) = Rs. 20,000.
2. Required Closing Provision: Rs. 20,000 x 5% = Rs. 1,000.
3. Decrease in Provision: Rs. 1,200 (Old) - Rs. 1,000 (New) = Rs. 200 (Decrease).
4. Income Statement Charge: Rs. 400 (Bad Debt) - Rs. 200 (Prov. Decrease) = Rs. 200.
5. Net Debtors (Balance Sheet): Rs. 20,000 - Rs. 1,000 = Rs. 19,000.

Explanation: The bad debt reduces the debtor asset directly because it is certain. The provision decrease is credited back to the Bad Debts account because the estimated risk (خطرہ) for the remaining debtors has reduced compared to the start of the year. MODULE 10: ACCOUNTING FOR FIXED ASSETS AND DEPRECIATION (مستقل اثاثہ جات اور فرسودگی کی اکاؤنٹنگ) PROPERTY, PLANT, AND EQUIPMENT - PPE (ٹھوس اثاثہ جات) These are tangible (ٹھوس) assets held for use in production, supply of goods, administration (انتظامیہ), or rental to others for more than one year. They are not intended for resale in the normal course of business. Recognition (تسلیم کرنا) occurs when the cost can be measured reliably and it is probable that future economic benefits (معاشی فوائد) will flow to the entity. MEASUREMENT AND COST COMPONENTS (پیمائش اور الگت کے اجزاء) Assets are initially measured at cost. Cost Components include the purchase price (less discounts), import duties (درآمدی ڈیوٹی), non-refundable taxes, and directly attributable costs (براہ راست متعلقہ اخراجات) required to bring the asset to its working condition. After recognition, assets follow the Cost Model (Cost less accumulated depreciation) or the Revaluation Model (revalued amount less subsequent depreciation). CONCEPT OF DEPRECIATION (فرسودگی کا تصور) Depreciation is the systematic allocation (منظم تقسیم) of the depreciable amount (قابلِ فرسودگی رقم) of an asset over its useful life (کارآمد زندگی). The Depreciable Amount is the cost of an asset minus its residual value (بچی کھچی قدر). Useful life is either the period of expected use or the number of production units expected from the asset. DEPRECIATION METHODS (فرسودگی کے طریقے) Entities select a method based on the expected pattern of economic benefits. Straight Line Method allocates an equal amount every year; Reducing Balance Method applies a fixed rate to the net book value (کتابی مالیت); Sum of Years Digit uses a fractional approach; Units Output and Service Hours methods calculate depreciation based on actual usage/production. ACCOUNTING FOR DEPRECIATION (فرسودگی کا اندراج) To record the annual charge: Debit Depreciation Expense and Credit Provision for Depreciation (also called Accumulated Depreciation). The expense is closed to the Income Statement, while the Provision (جمع شدہ فرسودگی) is subtracted from the asset's cost in the Statement of Financial Position (Balance Sheet) to show the Net Book Value. DISPOSAL OF FIXED ASSETS (اثاثوں کو ٹھکانے لگانا) When an asset is sold, it is removed from the books through an Asset Disposal Account. The steps involve: transferring the asset's cost to the disposal account, transferring the accumulated depreciation (جمع شدہ فرسودگی) to the disposal account, and recording the sale proceeds (فروخت سے حاصل رقم). The balancing figure results in either a Gain (Income) or a Loss (Expense). ASSET EXCHANGE AND TRADE-IN ALLOWANCE (اثاثوں کا تبادلہ) In an exchange, the cost of the new asset equals the cash paid plus the Trade-in Allowance (پرانے اثاثے کی قیمتِ رعایت) offered by the seller. If the exchange has Commercial Substance (تجارتی اہمیت), the new asset is measured at fair value; if it lacks substance, it is measured at the carrying amount ( کتابی مالیت) of the asset given up.

Scenario: On Jan 1, 20X9, a business has a machine costing Rs. 25,000 with Accumulated Depreciation of Rs. 10,000. On July 1, 20X9, it buys a new machine for Rs. 20,000. On the same day, it sells an old machine (part of the opening balance) for Rs. 2,500; this machine originally cost Rs. 5,000 and had accumulated depreciation of Rs. 2,000 on Jan 1. Accounting Policy: 10% Straight Line Method (SLM) on a Time Proportionate ( وقت کے تناسب سے) basis. Required: Calculate Depreciation Expense for 20X9 and Gain/Loss on Disposal.

Solution:

1. Depreciation on Remaining Opening Assets: (25,000 - 5,000 sold) = 20,000 × 10% = Rs. 2,000.
2. Depreciation on New Asset: 20,000 × 10% × 6/12 (July to Dec) = Rs. 1,000.
3. Depreciation on Sold Asset (till July 1): 5,000 × 10% × 6/12 = Rs. 250.

• Total Depreciation Expense for the year: 2,000 + 1,000 + 250 = Rs. 3,250.

4. Disposal Calculation:

• Cost of asset sold: Rs. 5,000.
• Total Accum. Dep. on date of sale: 2,000 (opening) + 250 (current) = Rs. 2,250.