Video instructions and help with filling out and completing What Form 8815 Prepaid

Instructions and Help about What Form 8815 Prepaid

Students this is second adjustment in fine lagoons that is outstanding expenses trial balance show salary paid rupees fifty thousand adjustment says salary for the March 2014 was not paid the amount of rupees five thousand servants this is the concept with which we have introduced the concept of adjustment so the concept should be simple for you this outstanding expenses should be accounted because of one fundamental concept called accrual concept so what is that accrual concept says if in the accounting period if certain expenditures have been incurred whether they are paid or not okay whether they are paid or not if it is incurred if it is incurred then it should be accounted because the question of payment on time or not is a matter of cash flow management if you have cash you will pay if you don't have cash you will pay in future date but the point is when this expenditure was incurred so the salary which is incurred but not paid is an expenditure for that accounting period let whenever it be paid but the point is when it was incurred in that particular point of time it should be accounted so what is going to be the accounting effect for this adjustment will write see the salary for one full year or salary paid by the company till that date was fifty thousand so salary paid is fifty thousand whereas unpaid salary is how much five thousand so the actual salary expense for the company is how much fifty five thousand so only when the company show this entire 55,000 has salary in P&L it will reflect true and fair view otherwise it will not reflect the true and fair view so when P&L is prepared then profit and loss account is prepared on the debit side along with salary which will be shown at 50000 this unpaid salary or outstanding salary unpaid outstanding are all same should be added and it should be shown as total of 55,000 they should figure on the debit side the next question is what is its effect on the balance sheet in balance sheet see what is the nature of this unpaid salary it is an expense but it is not paid if it is not paid what does it communicate it is a liability if it is unpaid it has to be paid in future anything which has to be paid in future is a liability so on the balance sheet on liability side whatever be the unpaid salary amount that should be shown so entry it will be on the liability side as unpaid salary how much five thousand so the effect is simple the first effect will be it will be added with the corresponding expense and the second effect will be it will be shown on the liability side of the balance sheet so what is going to be the entry entry is simple we are increasing the expenditure by passing an adjustment entry for outstanding expense we are increasing the expenditure when the expenditure what is the general nature of expenditure it is debit and what is the expenditure here it is salary so salary account should be debited to the external it is unpaid that is 5,000 so we have debited this file react own which will be transferred to P&L and what the liability we are creating it is a unpaid salary account any liability should be created debit all assets and creditor liabilities and what is the liability it's unpaid salary so - unpaid salary account five thousand so entry is simple salary account is debited and unpaid salary account is created when you debit salary account the salary expense will increase and when you credit unpaid salary account a new liability is created the third adjustment entry prepaid expenses sheron's what is prepaid expenses okay let's read the question first trial balance for the period ending 31st March 2014 shows rupees twenty thousand as insurance premium but as there is an adjustment which says prepaid insurance premium rupees five thousand so trial balance says the company has paid rupees twenty thousand as insurance premium whereas adjustment says there is a prepaid element in it so to understand we'll have a small diagram let us start this as point April 2013 and it goes up to March 2014 trial balance says for this period insurance has been paid and it is twenty thousand whereas the adjustment says there is a prepaid element that his insurance has been paid for next year also so the insurance is not actually for this twelve months it starts somewhere in between and it goes up to next year so out of this 25000 M sorry twenty thousand five thousand is for next year and one Li fifteen thousand is for current here so will it be fair to account enter twenty as expensively current here answer is no because this 5000 is for next year so this 5000 should be shown as expense only in the next year so not in the current year next year the company is not going to incur expense or an insurance premium to the extent of this 5,000 so why it should be shown in the current year let it be removed from the current year and be shown in the next year and how that is possible it is possible by removing that 5000 from current here so that in current year we show only 15,000 and whatever is removed is kept as asset in the balance sheet but question is why it is kept as asset in the balance sheet it is because it is going to give future benefit to the company what is the future benefit in future this company need not incur those expenses right so in future it can be shown as expense but it need not incur this expense so it's a future benefit so for that