What is Inventory – Types of Inventories – Example

What-is-Inventory

Inventory meaning that Material or Items which are owned by the business for further production of goods and for sale. To understand the meaning of Inventory more simply, first we have to divide the business into two types. These are shown below: 

Types of Business: 

  1. Production Business 
  2. Trading Business. 

1. Production Business: –

In this type of business, The business brought goods to produce further goods.An example is shown below.

  • Carpenter bought wood to make furniture.
  • Tata Motor bought iron or steel to produce Cars.
  • Building Bought Bricks and Cement to build a Building. 
  • Sultan Cand Publisher used paper to print a book. 

The inventory can be divided into three types. These are shown below: 

  1. Raw Material 
  2. Work In Progress 
  3. Finished Goods/Products
1. Raw Material 

The products that are used by business to make final products are known as raw material for business. Examples are shown below: 

  • For carpenter Woods are Raw Material.
  • For Tractor company, Iron is Raw Material.
  • For Sultan Cand Publisher papers are Raw Material.
2. Work In Progress:

Work In Progress means that product on which some part of the work is pending at the end of the Financial year or the day when we are calculating the value of Inventory. This will not be treated as Raw Material or not a Finished Product because neither it can be used to make another product nor It is not ready to Sell. Examples are shown below: 

  • A carpenter making a table but at the end of the day, or last day of the financial year the polishing work on it is pending.
3. Finished Goods/Products

The Products which are ready to sell are known as Finished Goods/Products. Examples are shown below: 

  • Wood Tables made by the carpenter. 
  • Book printed by Sultan Cand Publisher
  • The car produced by Tata Motors.

2. Trading Business 

In this type of business, The business brought goods to sell them to the end-user or consumer. In short, Trading Business means sale and purchase of goods. An example is shown below.

  • Furniture store-bought Table from Carpenter to sell it to end-user or consumer.
  • Books Seller bought Books from Sultan Cand Publisher to sell it to end-user or consumer.

Placement of an inventory in the balance sheet: –

The placement of an inventory in the balance sheet should be shown under the group Current Assets. This is shown in the following format of the balance sheet and highlighted with orange colour: –

Name of the Entity
Balance Sheet as on 31st March, _______
Liabilities  Amount Assets  Amount 
Current Liabilities    Current Assets   
Trade Creditors    Cash in hand   
Bills Payable    Cash at Bank  
Outstanding Expenses    Inventories   
Advance/Unearned Incomes   Bills payable   
Short term loans    Sundry Debtors   
Non-Current Liabilities    Prepaid Expenses   
long terms loans   Accrued Incomes   
Debentures    Fixed/Non-Current Assets  
Capital   Building   
Add:  Net profit    Land   
   interest on Capital
  Plant & machine   
Less:  Drawings    Furniture & fixture   
   Net Loss    Goodwill   
       
       

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What is Accounts Payable (AP) – Explanation

What-is-Accounts-Payable-min

Accounts Payable (AP) means that amount which will be payable to the vendor/Supplier against the credit purchase of goods and services from them. At the end of the financial year, the total amount of AP is shown on the balance sheet under the group of Current Liabilities. 

Normally, AP is also known as Trade Payable, But AP is the part of Trade Payable. Trade Payable also include Promissory Notes Payable. So, we can divide Trade Payable into two major types. These are shown below:

  1. Accounts Payable
  2. Promissory Notes Payable

1. Accounts Payable: 

AP is that amount of payables which has no maturity date. it will pay after 1 week or after 1 year, it depends on the availability of the funds.

2. Promissory Notes Payable: 

Promissory Notes Payable is that amount of Payable which has a maturity date. It will have to be paid on the maturity date in full. If a business fails to pay the due amount of Bills payables then the business has to pay some additional charges to the vendor/supplier. Bills Payable is the main example of Promissory Notes Payable.

Examples of Accounts Payable: –

A&B Co. Purchase goods to the C&D co. worth Rs 1,00,000 on credit. So, C&D Co. has now become an account Payable for the A&B Co. till the date of payment.

Benefits of Accounts Payable: –

AP provides a lot of benefits to the business. It plays a vital role in the growth of the business because it is part of current liabilities. So, current liabilities use while calculating the liquidity ratio of the business. AP shows that the business will pay that amount in future. 

Placement of a Accounts Payable in the balance sheet: –

The placement of a Accounts Payable in the balance sheet should be shown under the group Current Liabilities. These are shown in the following format of the balance sheet and highlighted with orange colour:

Name of the Entity
Balance Sheet as on 31st March, _______
Liabilities  Amount Assets  Amount 
Current Liabilities    Current Assets   
Trade Creditors    Cash in hand   
Bills Payable    Cash at Bank  
Outstanding Expenses    Inventories   
Advance/Unearned Incomes   Bills payable   
Short term loans    Sundry Debtors   
Non-Current Liabilities    Prepaid Expenses   
long terms loans   Accrued Incomes   
Debentures    Fixed/Non-Current Assets  
Capital   Building   
Add:  Net profit    Land   
   interest on Capital
  Plant & machine   
Less:  Drawings    Furniture & fixture   
   Net Loss    Goodwill   
       
     

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What is Accounts Receivable (AR) – Explanation

What-is-Accounts-Receivable

Accounts Receivable (AR) means that amount which will be received from the customer against the credit purchase of goods and services from the business. At the end of the financial year, the total amount of AR is shown on the balance sheet under the group of Current Assets. 

Normally, AR is also known as Trade Receivable, But AR is the part of Trade Receivable. Trade Receivable also include Promissory Notes Receivable. So, we can divide Trade Receivable into two major types. These are shown below:

  1. Accounts Receivable 
  2. Promissory Notes Receivable

1. Accounts Receivable: 

AR is that amount of receivables which has no maturity date. it will receive after 1 week or after 1 year, it depends on the customer who purchased goods on credit.

2. Promissory Notes Receivable: 

Promissory Notes Receivable is that amount of receivables which has a maturity date. It can be encashed on or after the maturity date in full. If you want to encash it before the maturity, then you have to pay some amount of interest to the payee(Bank). Bills Receivable is the main example of Promissory Nated receivables.

Examples of Accounts Receivable: –

A&B Co. sold goods to the C&D co. worth Rs 1,00,000 on credit. So, C&D Co. has now become an account receivable for the A&B Co. till the date of payment.

Benefits of Accounts Receivable: –

AR provides a lot of benefits to the business. It plays a vital role in the growth of the business because of it the part of current assets. So, current assets use while calculating the liquidity ratio of the business. AR shows that the business will receive that amount in future. 

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What are Current liabilities – Explained with Examples

Meaning-of-Current-liabilities

Current liabilities are a type of loan that must be repaid within one year (maximum 1 year). These loans are better known as short-term liabilities. This type of liabilities is taken to achieve the smooth operation of the business. In simple words, they fulfil the working capital requirement of the business.

Current liabilities appear in favour of liabilities in the balance sheet. The following accounts are shown in this group of balance sheets: –

  1. Sundry Creditor/Trade Payables
  2. Bills Payables 
  3. Short Term Loans
    • From Banks
    • From Financial Institution
    • From Partners or investors
  4. Outstanding Expenses
  5. Pre received Income
  6. Dividend Payable to Shareholder
  7. Taxes & Duties Payable 

1. Sundry Creditor/Trade Payables: 

The business has to pay some people or firms against credit purchases of goods or any other assets, these are classified as Sundry creditors in the financial statements.

2. Bills Payables:

The bill payable is a provision note. It is similar to a check, but it has a maturity date, except the expiry date, like a check.

3. Short Term Loans: 

Short Term loans include the Bank overdraft and loan from the partner, for the period which is repayable within 1 year.

4. Outstanding Expenses:

Those expenses which are due but not paid due to some reasons like non-availability of funds. For example, Salary outstanding, Electricity Bill Outstanding, Rent Outstanding etc. 

5. Pre received Income

Those incomes which business are received prior to their due date. For example, Advance rent received, Advance commission received, etc.

6. Dividend Payable to Shareholder:

The amount of Dividend which is declared but not paid to shareholder yet. 

7. Taxes & Duties Payable:

There are many types of taxes are collected from the business by the government of the country. So, if any type of tax is due but not paid will be grouped under current liability.

In India, there is some example of taxes are given below: 

  1. Income Tax
  2. Goods and Services Tax
  3. Custom Duty
  4. Municipal Tax
  5. Electricity Duty 

Placement of Current liabilities in the balance sheet: –

The placement of a current liabilities in the balance sheet, This is a group of the balance sheet which shown separately. These are shown in the following format of the balance sheet and highlighted with orange colour: –

Name of the Entity
Balance Sheet as on 31st March, _______
Liabilities  Amount Assets  Amount 
Current Liabilities    Current Assets   
Trade Creditors    Cash in hand   
Bills Payable    Cash at Bank  
Outstanding Expenses    Inventories   
Advance/Unearned Incomes   Bills payable   
Short term loans    Sundry Debtors   
Non-Current Liabilities    Prepaid Expenses   
long terms loans   Accrued Incomes   
Debentures    Fixed/Non-Current Assets  
Capital   Building   
Add:  Net profit    Land   
   interest on Capital
  Plant & machine   
Less:  Drawings    Furniture & fixture   
   Net Loss    Goodwill   
       
       

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Non Current liabilities – Explained with Examples

Meaning-of-Fixed-liabilities

Non Current liabilities are the type of debts which is payable over a term exceeding one year. These debts are better known as Fixed or long-term liabilities. These type of liabilities are taken to achieve the long term goal of business or organisation.

For Examples: –

  • Debenture
  • Mortgage Loan 
  • Long Term Loans
    • From Banks
    • From Financial Institution
    • From Partners or investors
  • Security Deposit 
    • Vendors
    • Customers

Importance of Non Current Liabilities: –

Non-current liabilities play a vital role in every new growing business. These are shown as follows: –

  1. Expansion of business without sacrificing a share of profit
  2. Fix Rate of interest
  3. Easy to raise as compared with equity or preference shares.
  4. Simply repayable

1. Expansion of business without sacrificing a share of profit:

As explained above Non current liabilities are the type of long term loans, So business has to pay a little amount of interest to money lender not share of the business. In Equity, the business has to provide a share of the profit of the business. If our business is very much profitable then we have to select the option of the long term debts rather then equity.

2. Fix Rate of interest

The business has to provide only a fix rate of interest on the borrowed amount of debt. So it is very easy to pay if the business is in profit.

3. Easy to raise as compared with equity or preference shares.

The long term loans like a bank loan are easy to raise from the financial institution for profitable businesses because of business shows their profitability.

4. Simply repayable

The long terms debts are very easy to repayment. The business can repay it any time to the financial institution but in Equity, you have to buy back it from the share market. It is a long process.

Placement of Non Current Liabilities in the balance sheet: –

The placement of non current liabilities in the balance sheet will be shown under the group head non current liabilities. These are shown in the following format of the balance sheet and highlighted with orange colour: –

Name of the Entity
Balance Sheet as on 31st March, _______
Liabilities  Amount Assets  Amount 
Current Liabilities    Current Assets   
Trade Creditors    Cash in hand   
Bills Payable    Cash at Bank  
Outstanding Expenses    Inventories   
Advance/Unearned Incomes   Bills payable   
Short term loans    Sundry Debtors   
Non-Current Liabilities    Prepaid Expenses   
long terms loans   Accrued Incomes   
Debentures    Fixed/Non-Current Assets  
Capital   Building   
Add:  Net profit    Land   
   interest on Capital
  Plant & machine   
Less:  Drawings    Furniture & fixture   
   Net Loss    Goodwill   
       
       

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Liabilities – Meaning, Types and Examples

Meaning-of-liabilities

The liabilities are those valuable things that the business owes (Loans) someone else or other business and which have to pay in the future. These arise during the course of business operations. 

Example: –

  • Debenture
  • Mortgage Loan 
  • Long Term Loans
    • From Banks
    • From Financial Institution
    • From Partners
  • Security Deposit 
    • Vendors
    • Customers
  • Sundry Payable 
    • Trade Creditors
    • Other Creditors 
  • Outstanding Expenses 
  • Pre received Incomes

Type of Liabilities: –

All liabilities can be classified into three types shown below: 

  1. Non-Current Liability
  2. Current Liability
  3. Contingent Liability

1. Non-Current Liability

A fixed liability is a type of debt that is payable over a term exceeding one year. These debts are better known as Fixed or long-term liabilities. These types of liabilities are taken to achieve the long term goal of business or organization.

For Examples: –

  • Debenture
  • Mortgage Loan 
  • Long Term Loans
    • From Banks
    • From Financial Institution
    • From Partners or investors
  • Security Deposit 
    • Vendors
    • Customers

2. Current Liability

A current liability is a type of debt that is expected to be pay within a year (Maximum 1 year). These are also known as short-term liabilities. These types of liabilities are taken to maintained the business credit cycle. These are also taken to meet the working capital requirements of the business. 

Example – 

  • Short Term Loans
    • From Banks
    • From Financial Institution
    • From Partners or investors
  • Sundry Payable 
    • Trade Creditors
    • Other Creditors
    • Bills Payable
  • Outstanding Expenses

3. Contingent Liability

It refers to that amount of Liability which may or may not become payable in the future.

Example – 

  • The decision of the court (Financial) case pending. So, when the result will be unfavorable then we have to pay the amount of fine or charges charged by the court or if the result will be favorable then we do not need to pay any amount.
  • Guarantees Undertaken of other persons or businesses. If that person or business makes any financial fraud to that company then we have to pay for it because we had undertaken the guarantee or vice versa.

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What is Drawing – Meaning and Examples

What-is-Drawing

In accounting, Drawing means anything withdrawal by the owner from the business in cash or in-kind(any item). In other words, The owner or owners have all the rights on the business transactions but the drawing account is that account which is operated to record the total amount or value of the things (assets) withdrawal by owner or owners in the book of business. 

“The Drawing Account is maintained in the Sole proprietorship and in Partnership, not in the company books of accounts.” In the Partnership firm there will we open a different account for each partner. 

Is TDS is applicable on Drawing?: –

The answer to the above question is NO. There is no such provision to deducted TDS on the amount of Drawing by the Owner. Because this amount will be added in the personal income of the owner and he will pay Income tax on it. 

Journal Entry for the Drawing. 

The accounting transaction is recorded in the journal daybook as shown following: –

For Example: –

Mr A is withdrawal the following assets from the business

  • Cash withdrawal Rs 10,000/-,
  • Daughter College Fee paid of Rs 50,000/- by cheque,
  • Owner’s Income tax paid by the Business worth Rs 5,000/- by cheque.

 

Date  Particulars   L.F. Debit  Credit  
  Drawing a/c Dr.   65,000  
  To Cash a/c       10,000
  To Bank       55,000
  (Being Withdrawal by the owner )        

Note: –

We assume that in the above example all the business transactions occurred on the same day. That’s why we post the combine journal entry rather than it will be posted differently as per date of the transaction.

Closing of The Drawing Account: – 

The drawing account is maintained to record all transactions which are related to the cash or kind withdrawal by the owner from the Business. This is not our expenses and not treated as assets account. This is a temporary account, So we have to close it at the end of each financial year by directly debited to the capital account. 

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You can also check out the Meaning of Capital. 

What is Capital – Meaning and Example

What-is-Capital

In accounting, capital means anything brought by the owner into the business in cash or in-kind(any item). In other words, capital means that balance amount of assets which is left after a subtracting amount of liabilities from total assets. It can be written as follows:- 

Capital = Total Assets – Liabilities. 

Journal Entry for the Capital. 

The accounting transaction is recorded in the journal daybook as shown following: –

For Example: –

Mr A is starting a business with Cash Rs 1,00,000/-, bank balance Rs 10,00,000/-, Land and Building worth Rs 25,00,000/-, Furniture Rs 2,00,000/-, Office Equipment worth Rs 1,50,000/-, and Inventories worth Rs 5,00,000/-.

Date  Particulars   L.F. Debit  Credit  
  Cash a/c Dr.   1,00,000  
  Bank a/c Dr.   10,00,000  
  Land And Building a/c Dr.   25,00,000  
  Furniture a/c Dr.   2,00,000  
  Office Equipment a/c Dr.   1,50,000  
  Inventories a/c Dr.   5,00,000  
  To Capital a/c       44,50,000
  (Being capital introduced by the business)        

Examples of Capital as per the Type of Business: –

There are mainly three types of business which is explained as follows: –

  1. Sole-Proprietorship 
  2. Partnership 
  3. Company

1. Sole-Proprietorship: –

Sole-Proprietorship means that type of business which has only one owner. Only he is liable for all the activities of the business. The profit which is earned by the business only belongs to him. and all losses are also born by him. 

In this type of business, anything brought into the business by him is called Capital of the business. 

For Example: –

Mr A is starting a business with Cash Rs 1,00,000/-, bank balance Rs 10,00,000/-, Land and Building worth Rs 25,00,000/-, Furniture Rs 2,00,000/-, Office Equipment worth Rs 1,50,000/-, and Inventories worth Rs 5,00,000/-.

The Total of all these assets become the Capital of the Business. 

Name of Assets Amount
Cash  1,00,000
bank balance  10,00,000
Land and Building 25,00,000
Furniture  2,00,000
Office Equipment 1,50,000
Inventories 5,00,000
Total –  Capital  44,50,000

These all thing are necessary to start a business if the owner did not invest his personal cash on it than he has to borrow a loan from other person or institutions. All loan are known as liabilities. 

Note: –

“Whenever anything brought by the owner into the business in the whole life of the business is known as capital not only when he is investing at the time of starting a business.”

2. Partnership: –

The partnership means that type of business, which has two or more owners. All persons involved in the business are liable to the extent of their share in the business for all the activities of the business. The profit which is earned by the business will be distributed among all partners in their profit sharing ratio. and all losses are also born by all partners in their profit sharing ratio. 

So, in this type of business, anything brought into the business by all partners is called Capital of the business. It will be shown on the name of partners in the business books. 

For Example: –

A, B, and C are starting a new business by investing their cash and thing into the business. These all are shown as follows: –

A brought Land and Building worth Rs 40,00,000/-, and Furniture Rs 10,00,000/-,

B brought Cash Rs 1,50,000/- Plant and Machine worth Rs 24,00,000 and Office Equipment worth Rs 4,50,000/-,

C brought Cash Rs 1,00,000/-, Bank Deposit worth Rs 14,00,000/-,  and Inventories worth Rs 5,00,000/-.

The Total of all these assets become the total Capital of the Business.

Name of Assets Mr A Mr B Mr C Total
Land and Building         40,00,000                          –                            –           40,00,000
Furniture          10,00,000                          –                            –           10,00,000
Cash                           –             1,50,000           1,00,000            2,50,000
Plant and Machine                          –           24,00,000                          –           24,00,000
Office Equipment                          –             4,50,000                          –              4,50,000
Bank Deposit                          –                            –           14,00,000         14,00,000
Inventories                          –                            –             5,00,000            5,00,000
Total Capital       50,00,000      30,00,000      20,00,000  1,00,00,000

Note: – Partnership type of business has more sub-type here we are explained the capital in that type. 

2. Company: –

The Company has two sub-types one is Private Limited and second is Public limited company. In a private limited company, the meaning of capital is the same as the partnership firm. just difference is that the partnership firm the owners are known as partners but in the company, the owners are known as shareholders.

But in Public Limited Company, The company issue their share in the share market for subscription by the public.

So, in this type of business, The subscription(or value of share) paid by the public or shareholder is known as capital. 

For Example: –

Mr A & B Ltd get authorized capital of Rs 1 Crore. They issued 50 lac in the share market for the public and it is fully subscribed and paid up. So the Capital shown in the balance sheet of the business will be 50 lac.

The Company will get cash only from the public against the value of the share. Then after receiving cash, the company board of director can use this cash in the expansion of the business. 

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Non Performing Assets or NPA- Meaning and Examples

Non-Performing-Assets-or-NPA

Non-Performing Assets or NPA means those loan(Asset for the lender) provided by the Banks or financial Institutions which is not performing. It means these loans on which amount of interest, as well as the amount of principle, are not repaid by the customers(borrower) to banks or financial institutions.

The main source of income for banking sectors is interest earned on loans. Because most of the loan accounts are maintained for a long period and banks or financial institutions will get benefits from them for a long period of time so that’s why loans are treated as assets for the banks or financial institutions.  

So, If the interest earned from loan not received by the banks for the period of more then 90 days they will declare this asset as Non-performing Assets.

Types of Non-performing Assets or NPA: –

To understand the types of Non-performing assets first we have to know about the different types of loan provided by the banking system to their customers. These are shown as follows: –

  1. Term Loan 
  2. Agriculture Loan 
  3. Cash Credit or Overdraft 

1. Term Loans: – 

Term loans mean those type of loans which have fixed term of repayment. In other words in this type of loan customer knows the Predefine EMI for the fixed period of time. 

Examples of Term loans: –

House Loan, Car loan, Personal Loan and consumer goods loans

When Term Loans converted into the Non-performing Assets or NPA?

When customer or borrower did not pay interest and the principal amount of loans more than 90 days, then this loan will declare as Non-performing Asset or NPA.

2. Agriculture Loans: –

Agriculture Loans means that loan which is provided to the farmer for cultivation. The amount of loan is sanction as per the land owned by the farmer. 

When Agriculture Loans converted into the Non-performing Assets or NPA?

When the payment of interest, as well as the principal amount of loans, remain unpaid more than two crops(if short term crops) and one crop (if long term crop), then this loan will declare as Non-performing Asset or NPA.

3. Cash Credit or Overdraft: 

Cash Credit or Overdraft limit is provided by the banks or financial institution to their customer by providing credit card and limit on house building with housing loan, on agriculture land and to the business owner on their stock or inventories. 

When Cash Credit or Overdraft converted into the Non-performing Assets or NPA?

When customer or borrower did not pay interest and the principal amount of loans more than 91 days, then this loan will declare as Non-performing Asset or NPA.

and for business, if they did not submit the stock statement for the last three quarters. 

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Intangible Assets – Explained with example

Meaning-of-intangible-Assets

Those assets which cannot be touch, feel, and see are called intangible assets. in other words, all those assets which don’t have any physical existence are known as intangible assets. 

They don’t have any risk from the human being activities i.e. theft, destroyed or any accident happened at business premises. So, that’s why most of the businesses don’t need to get insurance of these type of assets. 

Example of Intangible Assets: –

Example of Intangible Assets are shown as follows: –

  • Goodwill 
  • Patent
  • Trade Marks 
  • Copyrights 
  • Business Name
  • Computer Software 

The lifespan of Intangible Assets: –

This type of assets has both types of lifespan shown as follows: –

  1. A definite period of life.
  2. Indefinite Period of Life.

1. A definite period of life.

A definite period of life means that asset which has a fixed expiry date.  

Example 

Most of the computer software has validity for a one or two year then after they will expire automatically. 

2. Indefinite Period of Life.

Indefinite Period of Life means that asset which has not a fixed expiry date.

Example 

Trade Name of the business which will continue with business till the end of the business. 

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