Characteristics of Income

Characteristics of Income

In this article, the characteristic of income has been explained. Income is the gross inflow of economic benefit, other than equity contribution, which would increase the equity.

Important Characteristics of income

Some important characteristics of income have been briefly explained below.

1.   Gross Inflow

Income is gross inflow of economic benefit like revenue.

2.   Increase the equity

Second important characteristic of income its impact on the equity. Income would increase the equity of the entity. It is important to note that income increase the equity, while expense reduces the equity. Thus it is more appropriate to say that net income would reduce the equity i.e. income minus expenses.

3.   Other the Contribution

Share holder contribution is not treated as income. It is important to note that such contribution will be directly added to equity.

4.   Recognition of income

Income must be recognized, when it would satisfy the following conditions.

a.    Satisfy the definition of income.

b.    Can be measure reliably.

c.    It is probable the economic benefit will flow to organization.

Above condition are general conditions for income or revenue recognition. However, IAS specifies specific condition/circumstance for revenue recognition from different industries like construction contracts, sales of goods, interest etc.

5.   Gross Income & Net income

There is a difference between gross income & net income. Gross income is gross inflow like revenue, while net income is net inflow calculated by deducting expenses from the gross inflow; example of net income is profit.

6.   Types of Income

a.    Revenue.

b.    Interest on deposit.

c.    Royalties.

d.    Dividend.

e.    Rental income.

Characteristics of Liability

Characteristics of Liability

Characteristics of liability may be expressed in term of present obligation of past event, settlement of liability, and recognition etc. These characteristics have been briefly explained below

    Important Characteristics of Liability

Following are the important characteristics of liability.

1.   Obligation of Past Event

Liability is a present obligation of a past event.  Thus a future event cannot give rise to a liability. This concept has been explained with an example , Goods purchased on credit give rise to a liability, because this is a present obligation of a past event, however future plan of purchases goods does not create liability, because there is no present obligation for a past event.

2.   Settlement of Liability

A liability can be settled in many ways like payment of cash , transfer of other asset, providing a service, replacement of liability , convert liability into equity i.e. share issue, liability can also be settled by writing of the liability i.e. writing of bad debts. 

3.   Recognition of Liability

Two important conditions need to be satisfied for liability recognition.

a.    An items fulfills the liability definition criteria.

b.    Amount of liability can be measured reliably.

4.   Current & Non Current Liabilities

Liabilities can be broadly classified into current & non current liabilities. Current liability is to be settled within one year like creditor, while non current liabilities are to be settled after one year like long term loan etc. The concept of current & non current liabilities have been explained in more details in my other article.

List of important Characteristics of liability

1.    Liability is present obligation of past event.

2.    Liability required future economic flow for settlement.

3.    Liability must be able to measure reliably.

Balancing of Ledger Accounts

Balancing of Ledger Accounts

In this article we would explain the process of balancing the ledger accounts. This process has been explained with a sample example.

The recording, classification and balancing of ledger accounts have been explained with two simple journal entries. Purchase of PKR 10,000 and 20,000 from Mr. Ali at different dates have been explained below;

1.   Recording Journal Entries

   Purchases debited being in increase in expense  , while Ali account is credited being increase in liability.

No	Date	Particular	Folio	Dr.	Cr.
1	21.08.2016	Purchases		10,000
	21.08.2016	Ali			10,000
2	21.08.2016	Purchases		20,000
	21.08.2016	Ali			20,000

    2.   Ledger Accounts

Above journal entries have been classified into two accounts i.e. Purchase a/c and Ali a/c. The purchases account is debited, while Ali account is credited.

                                                   Purchase A/c

No	Particulars	Dr.	No	Particulars	Cr
1	Ali	10,000
2	Ali	20,000

                                                     Ali A/c

No	Particulars	Dr	No	Particulars	Cr
			1	Purchases	10,000
			2	Purchases	20,000

At the end of each period, the ledger accounts are balanced to calculate the closing         balance of each account. The process of balancing have been explained below

a)   Total Both Sides

Total of both sides  of an account is calculated and total of greater side would be written at the bottom of both sides ledger account or T account. Accountant can easily work out the closing balance with the help of this total.

b)   Difference is Closing Balance

Difference between the debit and credit side is calculated and such difference is known as balance or closing balance of the account. 

This process is quite straightforward, when all transactions are appearing on one side of the account. The balance may be calculated by simply adding all transaction appearing on one side. 

The process is a bit complicated, when the transactions are appearing on both sides of the account. In this case you need to perform simple mathematics of subtraction i.e. subtracting the greater side total from the smaller side total.

c)   Debit or Credit Balance.

If the debit side is greater than credit side, then balance would be debit balance, otherwise it would be credit balance.

In below example, the purchases account has debit balance, because purchases debit side is greater, while Ali’s account has credit balance, because Ali’s a/c credit side is greater.

                                                     Purchase A/c

No	Particulars	Dr	No	Particulars	Cr
1	Ali	10,000
2	Ali	20,000	Balance		30,000
Total		30,000	Total		30,000

                                                       Ali A/c

No	Particulars	Dr	No	Particulars	Cr
			1	Purchases	10,000
	Balance	30,000	2	Purchases	20,000
		30,000			30,000

d)  Transfer of Balance

Debit balance transfer to debit side of trial balance, while credit balance transfer on credit side. The following trial balance explains the balance transfer process

Head of Accounts	Debit	Credit
Purchases	30,000
Ali		30,000
Total	30,000	30,000

In this article we have briefly explained the balancing process of ledger accounts. Examples of balancing the ledger account are available in the example section of this blog.