Contingent liability | Meaning | Example

Contingent liability is a liability that ‘may’ occur depending on the outcome of a certain event. It is a provision or reserve to meet an unforeseen event which might end up being a liability.

 

For example: Your friend needs a loan from the bank and you have agreed to be the guarantor.

If you are wise enough you might provide a provision for the monthly premium amount as a contingent liability in your books. Just in case your friend defaults you will have to clear/pay back the loan.

Therefore, it is a liability only if your friend defaults.

If you have a great friend who religiously clears his loan then it won’t be a liability for you.

 

Contingent liabilities are recorded in the books if the amount can be reasonably estimated. In case of a lawsuit it might be difficult to estimate an exact amount, whereas in case of a Product warranty (Also a contingent liability) the amount can be estimated. Few other examples of contingent liabilities are income tax disputes, sales tax disputes, government investigation, liquidation damages etc.

List of all the items shown in Balance Sheet – Asset side

Here is a list of (almost) all the items appearing in the Asset side of a Balance Sheet

 

ASSETS
Fixed assets
Tangible – Movable and immovable assets
Land and buildings	xxx
Plant and machinery	xxx
Furniture and fixtures	xxx
Lease hold	xxx
Vehicles	xxx
Less: Accumulated depreciation	(xx)	xxx
Intangible assets
Patent		xxx
Goodwill		xxx
Copywrites		xxx
Trademarks		xxx
Mineral rights		xxx
Investments
Bonds		xxx
Mutual funds		xxx
Market securities		xxx
Current Assets (Quick Assets)
Cash in hand		xxx
Cash at bank		xxx
Accounts receivables (Sundry Debtors)		xxx
Inventory (Closing Stock)		xxx
Due from affiliates		xxx
Bills relivable		xxx
Fixed deposits		xxx
Security deposits		xxx
Loans and advances
Advance/loans to subsidiaries		xxx
Loans to partner		xxx
Tax paid in advance		xxx
Prepaid expenses		xxx
Salary advance		xxx
Loan to employees		xxx
Total assets		xxxxx

 

Deferred income | Meaning | Journal entries | Examples

Meaning of ‘Deferred income’

Deferred income/revenue is nothing but income/revenue received in advance. It is also known as ‘unearned revenue or unearned income’. Meaning, you received the money but you haven’t yet provided any service or supplied any goods against the money received. In simple terms, you did not earn this money as yet!

 
For example: In January a Chinese company receives $12,000 in advance from an American Company for yearly website maintenance service. ($1,000/month from Jan to Dec). The service is yet to be provided. Therefore, the Chinese Company did not earn this amount as yet.

 

Key points:

The Chinese company…
1.            Received money through bank or cash. Amount received in advance
2.            Did not earn this amount as yet because service is yet to be provided.
(Therefore, this amount is a liability and might have to be returned if service is not provided)
3.            May earn this amount if the service is provided in future.
4.            May not earn this amount if the service cannot be provided.

 

Deferred income/revenue is a liability (remember that this amount might have to be returned if the obligation is not met) and hence a Balance Sheet item.

Balance Sheet > Current Liabilities > Deferred income/revenue   

Journal Entries in the books of the Chinese company:

In Jan:

Dr…Bank account                             $ 12,000
Cr…Deferred income/revenue  $ 12,000
(Full amount received. From the American Company)

2^nd entry in Jan:

Dr…Deferred income/revenue  $ 1,000
Cr…Sales account                             $ 1,000
(Note that the remaining $11,000 still stays in the ‘Deferred income account’ which is still a liability)

In Feb

Dr…Deferred income/revenue  $ 1,000
Cr…Sales account                             $ 1,000
(Like so, every month $1,000 is transferred to sales when actual maintenance of the website is done.)

In case the Chinese company decides to stop the service for whatever reason in JUNE, the remaining amount has to be returned back to the American company. The entry will be:

Dr…Deferred income/revenue  $6,000
Cr…Bank Account                             $6,000
(Now, ‘Deferred income/revenue account’ will show a zero balance. $6,000 in sales and $6,000 returned back)

 

Hope this helps:

This was all about deferred income. Please click here for deferred expenses.

Thinking of quitting your job because of your evil boss/supervisor?

There are so many reasons to quit your job and there are so many reasons to stay unemployed! It is very easy to quit your job but very difficult to find a replacement. Therefore, before you even think of quitting your job please read this article just once.

Can you afford quitting your job?

This is the first question you have to ask yourself. You may not find a replacement as quick as you think you can. Chances are high that you might have to stay unemployed for a very long period of time. Are you prepared for this? Do you have enough money to support yourself (and your family)? If your answer to this is “NO” then it is not the right time for you to quit your job. Please have patience.

Bad boss/supervisor?

Bosses are evil! Well, at least in your case they are. Your boss may be all over you, backbiting you, oppressing you, talking ill about you to others, overloading you with work, not recognising whatever you do, not appreciating your good work, holding you responsible for everything that goes bad at work, nagging, too bossy, secretive and the list goes on.

But think about it. Is quitting the only solution? Imagine ending up with an even worse boss/supervisor in your next job? How long are you going to quit? You don’t want to be a quitter for ever, do you? Learn to fight back. It may be hard but not impossible.

The best solution is for you to continue your work as if nothing has happened. Make more friends at work (more at the senior/higher level) but don’t nag about your boss/supervisor at any time because that won’t change anything. Be genuine, concentrate on your job, learn new things, be helpful to others, make suggestions, be on time, and work late if necessary. Remember, slow and study wins the race.

Should you talk to the HR about this?

Please don’t! They are merely employees just like you. They do not have super powers to make your life better for you. You have to fight your battle yourself. Be confident and you will win over time.

Still not convinced?

If you HAVE to change your job then look out for a better opportunity while you are still at this ‘miserable’ work place! Don’t quit as yet. Remember, your value is high when you are employed. People always want things that are not easy to get. Hunt for a job while learning how to be tough at work place. This will help you in the future.

You don’t care a damn?

My previous boss once said that if I quit my job the company will still move on doing what it does: with or without me. I will be the loser and not the company. So, I highly recommend you to think about your decision, not once but 10 times and more. Take a long walk, listen to music, join some fun group if it helps but don’t quit until you have something in your hand.

I am stressing this over and over again. You might be unemployed for a long time and regret your decision. Prepare for the worse or think wise!

I hope you will find this helpful. 

 

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What is reverse charge mechanism in VAT?

VAT amount is normally paid by the buyer of a product/service. This is known as ‘forward charge mechanism’. Every time a good/service is bought tax is generated as the buyer is paying tax along the way. However, in case of ‘reverse charge mechanism’ the VAT amount is paid by the seller/supplier.

Reverse charge takes place when goods/services are imported from an outside country. For example, a company that is registered in Dubai imports goods/service from China. In this case the Dubai based company is eligible for ‘reverse charge’ of VAT. However, If a Dubai based company imports goods/services from Saudi Arabia this mechanism will not be triggered because all the GCC (Gulf Cooperation Council) countries are treated as one single zone. Imports has to be from any country outside the GCC circle.

Reverse charge of VAT is zero rated. Meaning, company (importer) do not have to pay any money to the government. The company only reports/shows the VAT amount but on both the columns: Input VAT (VAT on purchases) and output VAT (VAT on sales). Thus, Plus and minus equals ZERO. Bear in mind that this (VAT amount) has to be reported/shown in the same quarter/period.

Why is this done?

The reporting of VAT as a form of reverse charge is done to inform the local government of the arrival of such a goods/service into the country.

Who can avail this option?

Only companies that are registered for VAT can go for this mechanism. If a company is not registered for VAT then they have to pay (input tax) to the government but cannot claim it back (through output tax). Therefore it is not zero rated for a non VAT registered company.

Key points:

• VAT reverse charge is a mechanism where the VAT amount is paid by the supplier and not by the buyer.
• This happens when goods/services are imported.
• Reverse charge of VAT is zero rated.
• Reverse charge of VAT amount has to be shown in the same quarter.

What is VAT or Value Added Tax?

Value Added Tax or VAT is an indirect form of tax which is paid to the government by the customers or the end users of goods and services but via service providers. In other words, when a customer pays a bill/invoice that includes VAT (tax) amount in it the supplier pays it back to the government.

Therefore, the customer pays a form of tax to the government for using goods and services via business-houses that are registered under VAT category. Hence, in case of VAT, the end-consumer ultimately bears the cost

By definition, VAT is a tax on the consumption or use of goods and services levied at each point of sale.

Let’s consider a simple example:

A farmer sells 1 litre of milk to you (end customer) for AED 10/- PLUS (5% VAT) AED 0.50 which totals to AED 10.50

On a period stipulated by the government (Quarterly/yearly) the farmer pays AED 0.50 that was collected from you to the government.

The farmer, thus acts as a tax collecting agent for the government. You (end user) on the other hand paid a tax to the government indirectly which is why VAT is also known as an indirect form of tax/indirect tax.

What is Input VAT and Output VAT?

Tax that you pay when you purchase goods/service is Input VAT
Tax that you receive when you sell your goods/service is Output VAT
Here is a simple way to remember this:

When you purchase goods/service VAT (tax) comes IN to your court= VAT input
Purchase = IN
Here, you pay the tax amount to the seller and the seller pays it back to the government on your behalf.

When you sell goods/service you put VAT (tax) OUT of your court = VAT output
Sale=OUT
Here, you receive the tax amount from your customer and you pay it back to the government on your customer’s behalf.

Excel tips: Auto fit cell/column to text/numbers

Microsoft Excel is full of surprises. Today while working in it I realized a simple yet tedious work ahead of me. It so happened that I had to copy a tab/sheet full of numbers and paste it into a new spreadsheet. When I did that I noticed the numbers were larger than the default cell size. Therefore all I could see was ‘########’!! Since the sheet was full of numbers, double clicking on the column header would have taken a long time. I googled and found some solutions:

OPTION 1:

Select the whole sheet (CTRL + A) or a part/section of it as necessary:

Press and hold ALT key; then press ‘O’, then ‘C’ and then again ‘A’ keys. Once those keys are pressed release ALT key.

ALT + (O,C,A) keys

OPTION 2:

Select the whole sheet (CTRL + A) or a part/section of it as necessary:

Press and hold ALT key; then press ‘H’, then ‘O’ and then again ‘I’ keys. Once those keys are pressed release ALT key.

ALT + (H,O, I) keys

OPTION 3:

If you like using mouse too often then go for this option:

Make your selections and use this navigation: HOME > Format > Autofit column width

OPTION 4:

This is the simplest option if your data table is small or with only few columns.

Select the columns that you want from the header; keep your cursor right in the middle of the last column header (of your selection) and the column header next to it. You will see your cursor turn into a header pointer/marker …..something like that 😉 Double click! Your columns will autofit your numbers into the cell.

I tried the first option for a change and Bingo! Cells adjusted itself to the text/numbers that were in-there or more correctly, the columns expand so the texts/numbers within the cell can stretch their legs as far as they can and be visible! This, simplified my work. Hope it helps you as well. Good luck!

What is a Trial Balance?

A Trial Balance is a list of all the general ledgers a company maintains and their closing balances on a certain date (month end/year end).

Generally:

• Expenses a/c, purchase a/c, inventory a/c and asset a/c will have a DEBIT closing balance
• Sales/other income a/cs and all liabilities a/cs will have a CREDIT closing balance

It looks like this:

Trial Balance of XYZ company as on 31.12.2017
Particulars	Debit	Credit
General expenses	XXX
(Purchase/Salary/Rent…)
Income		XXX
(Sales/interest received…)
Assets	XXX
(Cash/Land/Receivables…)
Liabilities		XXX
(Capital/Payables…)
Total	XXX	XXX
(Dr & Cr Balances will/must match)

 

A Trial Balance is drawn at the end of certain period (month end/year end/Quarterly etc). Trial Balance is used as a base in preparing financial statements (P/L a/c or Income statement and the Balance Sheet).

In accounting software Trial Balance is automatically done. You just have to click a button to fetch them. This can be done at any time and any number of times.

In manual accounting this is mostly prepared during the year end while closing books. This is when all General Ledger a/cs are finalized and closed. Thereafter those closing balance numbers are mentioned in the Trial Balance. If all the General Ledger closing balance is accurately taken into Trial Balance, the debit and credit side will automatically match.