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OLevel

Accounting - 7707

Discounts

Paper-2

Discounts
There are two types of discounts:

  • Trade discount
  • Cash payment

Trade Discount

Paying 45000

Trade Discount = 5000

Cash Payment


Trade Discount has not recorded anywhere in the books of accounts; it is only present in the invoice.

A cash discount is recorded in the cash book, so its ledgers are present in the general ledgers.

(Invoice Price/List Price)- Trade Discount = Purchase Price

Purchase Price - Cash Discount =Amount Paid

When the business allows discounts to its customers, it is called discounts allowed.

When the business receives discounts from its suppliers, it is called a discount received.

Adjustment to Final Accounts

The final account comprises income statements and statements of financial position. At the end of the accounting period, all businesses must prepare the final account to show the performance of the business, but these final accounts are published three months after the end of the accounting period so that any relevant changes in the final statements could be incorporated. These changes are called adjustments. The major reason for the occurrence of these adjustments is the fact that the business must make financial statements in accordance with accounting concepts. The most important thing to be considered is accounting is based on the accrual concept, not the cash concept; thus, the following adjustments are to be considered.

1. Prepayments 

Prepayments are also called expenses. These are those expenses that are paid in advance. Prepayments are expenses paid but not incurred and hence, are current assets for the business. e.g., school fees.

2. Accruals

Accruals are also called owing or outstanding expenses. Accrued expenses are those expenses that are incurred but not paid, and since payment of these expenses is the obligation on the business; therefore, they are the liabilities of the business, e.g., utility bills.

3. Pre-Received Incomes

Pre-Received Incomes are the incomes received but not earned. They are also called advance income and hence are the current liabilities for the business as a person who has given an advance can ask for it back. E.g., school fees for school.

4. Accrued Income

Accrued income is also called arrears. These are the incomes earned but not received and hence are the current assets for the business. e.g., commission for the commission agent.


At the end of each A/C, all expenses and all revenues are transferred to the income statement.

EXAMPLE:

On 31st Dec 2016, the following balances appeared in the books of business.


The receipts and payments account showed the following


31st Dec 2017, the following balances appeared.


SOLUTION:


EXAMPLE#2:

On 31st Dec 2016, the following balances appeared in the books of the business


The receipts and payments account showed the following:


On 31st Dec 2017, the following balances appeared:


SOLUTION:



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