Rahul M

Recording an Accrued Expense

Situation: A company has consumed electricity worth
₹15,000 during March. The supplier’s invoice will arrive in April, but
the expense belongs to March.

Entry — At the end of March

Why this entry?

• The company has consumed the electricity, so the expense belongs to March.
• The amount is payable even though the supplier’s invoice has not arrived.
• The liability is recognized in March rather than waiting until April.

Recording a Prepaid Expense

Situation: On 1 January, a company pays ₹60,000 for
insurance covering six months, from January through June.

Entry 1 — When the payment is made

Entry 2 — Monthly insurance expense

Monthly expense: ₹60,000 ÷ 6 months = ₹10,000.

Why this entry?

• The payment initially creates a prepaid asset because the insurance coverage extends into future periods.
• Each month, the portion relating to that month is recognized as an expense.
• After January, the remaining prepaid balance is ₹50,000.

Recording Depreciation on Fixed Assets

Situation: A company owns equipment with a depreciable
cost of ₹1,20,000. Its estimated useful life is five years, with no
residual value. The company uses straight-line depreciation.

Annual depreciation: ₹1,20,000 ÷ 5 = ₹24,000.

Entry — At the end of the year

Why this entry?

• Depreciation allocates the depreciable amount of an asset over its useful life.
• The expense reduces the profit for the period.
• Accumulated depreciation records the depreciation recognized to date without directly reducing the asset’s original cost in this presentation.

Recognizing Employee Salary Payable

Situation: Employees have earned salaries of ₹2,00,000
for March. The company will pay them in April.

Entry 1 — At the end of March

Entry 2 — When salaries are paid in April

Why this entry?

• The salary expense belongs to March because employees performed the work during that month.
• The unpaid salary creates a liability at month-end.
• When payment is made, the liability is cleared and bank balance decreases.

Recording a Provision for an Expense

Situation: Based on available evidence, a company
estimates that it has a present obligation for a warranty claim and
reliably estimates the required provision at ₹50,000.

Entry — When the provision is recognized

Why this entry?

• The company recognizes an expense relating to the warranty obligation.
• The provision represents the estimated liability arising from that obligation.
• The amount is based on an appropriate estimate rather than simply an arbitrary reserve.

Correcting an Expense Posted to the Wrong Account

Situation: A company paid ₹25,000 for office furniture.
The amount was incorrectly recorded as Office Supplies Expense.
The furniture qualifies for recognition as a fixed asset under the
company’s capitalization policy.

Original incorrect entry

Correcting entry

Why this entry?

• The original expense is reversed.
• The furniture is recognized as an asset instead.
• Depreciation may subsequently be recorded over the asset’s useful life.

Reclassifying an Expense to the Correct Department

Situation: A company initially records a software
subscription of ₹12,000 under the Administration Department. Later,
it confirms that the subscription belongs to the Finance Department.

Reclassification entry

Why this entry?

• The expense remains in the same overall expense category.
• The departmental allocation changes to reflect the correct cost owner.
• The reclassification improves departmental reporting without changing total company expense.

Recording a Month-End Accrual for Professional Fees

Situation: A company received consulting services worth
₹40,000 in March. The consultant will issue the invoice in April.
The service has been delivered and the amount can be reasonably estimated.

Entry — At the end of March

When the invoice arrives in April

If the invoice matches the accrual and the company’s process uses the
accrued liability account, the invoice can be recorded against that
liability rather than recording the expense a second time.

Why this entry?

• The expense is recognized in March, when the services were received.
• The April invoice transfers the obligation from the accrual account to the supplier payable account.
• The same expense is not recorded twice.

Reversing an Accrual in the Next Accounting Period

Situation: At the end of March, a company records
an estimated expense of ₹20,000. Its accounting policy is to reverse
this accrual on 1 April and record the supplier invoice through the
normal accounts payable process.

Entry 1 — Accrual recorded in March

Entry 2 — Reversal on 1 April

Why this entry?

• The March accrual ensures the expense is recognized in March.
• The reversal clears the accrual at the beginning of April.
• When the actual invoice is posted in April, the expense can be recorded through the normal invoice process without duplicating the accrual.

Recording a Month-End Foreign-Exchange Loss

Situation: A company has a USD-denominated monetary
payable originally recorded at ₹83,000. At the reporting date, the
applicable closing rate increases the payable’s INR value to ₹85,000.

Foreign-exchange loss: ₹85,000 − ₹83,000 = ₹2,000.

Entry — At the reporting date

Why this entry?

• The company owes a fixed amount in USD.
• The payable is worth more in INR at the closing exchange rate.
• The increase in the INR liability creates a foreign-exchange loss under the applicable accounting requirements.