Example of prepayment

Example of prepayment

Prepayment is asset for the organization because benefit has not yet received by the organization. Item which has deliver benefit to the organization are charges as expenses but item which has not yet delivered benefit to the organization is recorded as asset.

Example # 1

ABC Co paid a rent of 2 years amount 20,000 for current year and next year. Rent of $ 10,000 is expenses because the benefit has been received by the organization where the remaining $ 10,000 is as asset because the benefit is to be received in next year.

Date	Particulars	Dr	Cr
31 Dec ,2014	Rent a/c	10,000
31 Dec ,2014	Pre paid rent a/c	10,000
	Cash a/c		20,000

Example # 2

ABC & CO paid an advance salary to its employee at the year of amounting 120,000. The advance salary will be recorded as asset because the worker will perform duties in next year. It means organization will receive benefit in next year. This year transaction will be recorded as under

Date	Particulars	Dr	Cr
31 Dec ,2014	Advance Salary a/c	120,000
31 Dec ,2014	Cash a/c		120,000

Next year when the duties will be performed by the employee the advance salary will be adjusted.

Date	Particulars	Dr	Cr
31 Jan ,2015	Salary a/c	120,000
31 Jan ,2015	Advance Salary a/c		120,000

Example of Journal Entries

Example of Journal Entries

The General Entries is the language of accounting and transaction are recorded in term of debit and credit.  All General entries are recorded on the bases of basic rules of debit and credit described as under

Item	Decision bases	Debit /Credit
Asset and Expenses	increases	Debit
Asset and Expenses	Decrease	Credit
Income and Liabilities	Increase	Credit
Income and Liabilities	Decrease	Debit
Equity or Capital	Increase	Credit
Equity or Capital	Decrease	Debit

Learning point

The rule of debit and credit is same for asset and expenses

The rule of debit and credit is same for income, liabilities and equity

Example of Expenses Journal entry

ABC & CO paid a salary of $ 200 to Mr. Ali Khan for the month of March, 2012 and also paid a rent for the shop $ 3000 for the month of March, 2012. Salary and rent account will be debited being increase in expenses and cash account is credited due to decrease in asset.

Date	Particulars	Debit	Credit
March,2012	Salary	200
March,2012	Cash		200
March,2012	Rent a/c	300
March,2012	Cash		300

Example of Journal entry for asset purchases

ABC & Co purchase furniture of $ 500 in cash from the market. Furniture account will be debited being increase in asset and cash account is credited being decrease in asset. In this example one asset increasing and other is decreasing.

Date	Particulars	Debit	Credit
March,2012	Furniture a/c	500
March,2012	Cash		500

Example of journal entry for income

ABC & Co sold sugar of $ 600. The cash account will be debited because of increase in asset and sales account will be credited due to increase income.

Date	Particulars	Debit	Credit
March,2012	Cash a/c	600
March,2012	Sales		600

Example of journal entry for Liability

ABC Company has made purchases of $ 3000 from XYZ & Co. But payment shall be made in next year. According to accrual rule of accounting transaction are recorded as and when they incur and not bases of the cash payment.

Date	Particulars	Debit	Credit
March,2012	Purchases a/c	3,000
March,2012	XYZ & Co		3,000

Example of journal entry for equity

ABC Company directors invested $ 10,000 in the company. Equity is just another type of liability which is to be paid by the business in long term this is the reason that rule of debit and credit are same for equity and liability.

Date	Particulars	Debit	Credit
March,2012	Cash a/c	10,000
March,2012	Equity		10,000