Accounting for Call Money
Call money is a type of short-term borrowing that is used by banks and other financial institutions to meet their immediate cash requirements. Call money is a very short-term loan that is usually repaid within a day or two, and is typically used for purposes such as interbank lending, money market operations, or bridging a temporary gap in funds. In this article, we will discuss the accounting treatment of call money.
Recording the Call Money Loan:
When a bank or financial institution borrows call money, it needs to record the loan in its books of accounts. The following journal entry is passed to record the call money loan:
Debit Call Money Account
Credit Bank Account
The call money account represents the liability arising out of the loan, while the bank account represents the asset that the bank received in exchange for the loan.
Interest on Call Money Loan:
Call money loans are typically charged at a high rate of interest, as they are very short-term in nature and involve a high degree of risk. The interest on call money loan is calculated on a daily basis and is usually settled at the end of the day or at the end of the borrowing period. The following journal entry is passed to record the interest on call money loan:
Debit Interest Expense Account
Credit Call Money Account
The interest expense account represents the cost of borrowing call money, while the call money account represents the liability arising out of the loan.
Repayment of Call Money Loan:
Call money loans are usually repaid within a day or two, and the repayment is typically done through the reverse process of the loan disbursement. The following journal entry is passed to record the repayment of call money loan:
Debit Bank Account
Credit Call Money Account
The bank account represents the asset that is being used to repay the loan, while the call money account represents the liability that is being settled.
Accounting for Premium
Premium in accounting refers to the amount paid by investors over and above the par or face value of a security such as a bond or a share. This premium amount represents the excess of the market value of the security over its par value. In this article, we will discuss the accounting treatment of premium in different scenarios.
Issuance of Securities at a Premium:
When a company issues securities such as bonds or shares at a premium, the premium amount is recorded separately in the books of accounts. The following journal entry is passed to record the issuance of securities at a premium:
- Debit Cash/Bank Account (for the total amount received)
- Debit Share Premium Account (for the premium amount)
- Credit Equity/Debt Account (for the face value of the security)
The share premium account represents the equity or capital reserve created out of the premium amount, while the equity or debt account represents the liability or equity created out of the face value of the security.
Redemption of Securities at a Premium:
When a company redeems securities such as bonds or shares at a premium, the premium amount is first adjusted against the securities account, and the remaining amount is treated as a gain or profit. The following journal entry is passed to record the redemption of securities at a premium:
- Debit Equity/Debt Account (for the face value of the security)
- Credit Share Premium Account (for the premium amount)
- Credit Gain on Redemption Account (for the gain/profit amount)
The gain on redemption account represents the profit or gain arising out of the redemption of securities at a premium.
Amortization of Premium:
Premium on securities is usually amortized over the life of the security, and the amortized amount is charged to the income statement as interest expense. The following journal entry is passed to record the amortization of premium:
- Debit Interest Expense Account (for the amortized amount)
- Credit Share Premium Account (for the premium amount)
The interest expense account represents the cost of borrowing, while the share premium account represents the equity or capital reserve created out of the premium amount.
Accounting for Discount
Discount in accounting refers to the amount by which the face value of a security such as a bond or a share is less than its market value. Discount is usually offered by companies to incentivize investors to buy their securities, and it represents the reduction in value that the investor incurs at the time of purchase. In this article, we will discuss the accounting treatment of discount in different scenarios.
Issuance of Securities at a Discount:
When a company issues securities such as bonds or shares at a discount, the discount amount is recorded separately in the books of accounts. The following journal entry is passed to record the issuance of securities at a discount:
- Debit Cash/Bank Account (for the amount received)
- Debit Discount on Issue of Securities Account (for the discount amount)
- Credit Equity/Debt Account (for the face value of the security)
The discount on issue of securities account represents the capital reserve created out of the discount amount, while the equity or debt account represents the liability or equity created out of the face value of the security.
Amortization of Discount:
Discount on securities is usually amortized over the life of the security, and the amortized amount is added to the carrying amount of the security. The following journal entry is passed to record the amortization of discount:
- Debit Interest Expense Account (for the amortized amount)
- Credit Discount on Issue of Securities Account (for the discount amount)
The interest expense account represents the cost of borrowing, while the discount on issue of securities account represents the capital reserve created out of the discount amount.
Redemption of Securities at a Discount:
When a company redeems securities such as bonds or shares at a discount, the discount amount is adjusted against the securities account, and the remaining amount is treated as a loss. The following journal entry is passed to record the redemption of securities at a discount:
- Debit Equity/Debt Account (for the face value of the security)
- Debit Loss on Redemption Account (for the loss amount)
- Credit Discount on Issue of Securities Account (for the discount amount)
The loss on redemption account represents the loss or expense arising out of the redemption of securities at a discount.
Accounting for Forfeiture
Forfeiture in accounting refers to the cancellation of shares that have been issued to shareholders who have failed to pay their call money or initial subscription amount. When a shareholder fails to pay their call money or subscription amount, the company may issue a forfeiture notice, giving the shareholder a specific period to pay the amount due. If the shareholder fails to pay the amount due within the specified period, the company may proceed with the forfeiture of the shares. In this article, we will discuss the accounting treatment of forfeiture in different scenarios.
Forfeiture of Shares:
When shares are forfeited, the amount already paid by the shareholder is forfeited, and the shares are canceled. The following journal entry is passed to record the forfeiture of shares:
Debit Share Capital Account (for the face value of the shares forfeited)
Credit Share Forfeiture Account (for the amount already paid by the shareholder)
The share forfeiture account represents the amount forfeited by the shareholder, while the share capital account represents the capital raised by the company from the issuance of the shares.
Reissue of Forfeited Shares:
Forfeited shares may be reissued by the company to new shareholders. The following journal entry is passed to record the reissue of forfeited shares:
- Debit Bank Account (for the amount received from the new shareholder)
- Debit Share Forfeiture Account (for the amount already paid by the forfeiting shareholder)
- Credit Share Capital Account (for the face value of the shares)
The bank account represents the amount received from the new shareholder, while the share forfeiture account represents the amount already paid by the forfeiting shareholder, and the share capital account represents the capital raised by the company from the issuance of the shares.
Forfeiture and Reissue of Shares:
Sometimes, a shareholder may fail to pay their call money or subscription amount, and the shares may be forfeited. However, the shareholder may subsequently pay the amount due and request the reissue of the shares. The following journal entry is passed to record the forfeiture and reissue of shares:
- Debit Share Forfeiture Account (for the amount already paid by the forfeiting shareholder)
- Debit Bank Account (for the amount received from the forfeiting shareholder)
- Credit Share Capital Account (for the face value of the shares)
The share forfeiture account represents the amount already paid by the forfeiting shareholder, while the bank account represents the amount received from the forfeiting shareholder, and the share capital account represents the capital raised by the company from the issuance of the shares.
Accounting for Surrender
Surrender in accounting refers to the cancellation of shares voluntarily by a shareholder. In some cases, shareholders may choose to surrender their shares to the company, either to reduce their shareholding or to exit the company. In this article, we will discuss the accounting treatment of surrender in different scenarios.
Surrender of Shares at Par:
When a shareholder surrenders shares at par, the shareholder receives the face value of the shares, and the company cancels the shares. The following journal entry is passed to record the surrender of shares at par:
- Debit Share Capital Account (for the face value of the shares surrendered)
- Credit Share Surrender Account (for the face value of the shares surrendered)
The share surrender account represents the amount paid by the company to the shareholder for the surrendered shares, while the share capital account represents the capital raised by the company from the issuance of the shares.
Surrender of Shares at Premium:
When a shareholder surrenders shares at a premium, the shareholder receives the face value of the shares plus the premium paid, and the company cancels the shares. The following journal entry is passed to record the surrender of shares at a premium:
- Debit Share Capital Account (for the face value of the shares surrendered)
- Debit Share Premium Account (for the premium paid on the shares surrendered)
- Credit Share Surrender Account (for the face value of the shares surrendered plus the premium paid)
The share premium account represents the premium paid by the shareholder for the shares, while the share surrender account represents the amount paid by the company to the shareholder for the surrendered shares, and the share capital account represents the capital raised by the company from the issuance of the shares.
Surrender of Shares at Discount:
When a shareholder surrenders shares at a discount, the shareholder receives the face value of the shares minus the discount allowed, and the company cancels the shares. The following journal entry is passed to record the surrender of shares at a discount:
- Debit Share Surrender Account (for the amount paid by the company to the shareholder for the surrendered shares)
- Credit Share Capital Account (for the face value of the shares surrendered minus the discount allowed)
- Credit Share Discount Account (for the discount allowed on the shares surrendered)
The share discount account represents the discount allowed by the company for the surrendered shares, while the share surrender account represents the amount paid by the company to the shareholder for the surrendered shares, and the share capital account represents the capital raised by the company from the issuance of the shares.
Accounting for Redemption
When a company redeems its shares, it purchases them back from the shareholders. The following journal entry is passed to record the redemption of shares:
- Debit Share Capital Account (for the nominal value of the shares redeemed)
- Credit Bank Account (for the amount paid to the shareholders)
The share capital account represents the amount of capital originally raised by the company from the issuance of the shares, and the bank account represents the cash outflow from the company for the redemption of shares.
If the company redeems its shares at a premium, the following journal entry is passed:
- Debit Share Capital Account (for the nominal value of the shares redeemed)
- Debit Share Premium Account (for the premium paid)
- Credit Bank Account (for the amount paid to the shareholders)
The share premium account represents the premium paid by the company to the shareholders for the redemption of shares.
If the company redeems its shares at a discount, the following journal entry is passed:
- Debit Share Capital Account (for the nominal value of the shares redeemed minus the discount allowed)
- Debit Discount on Redemption of Shares Account (for the discount allowed)
- Credit Bank Account (for the amount paid to the shareholders)
The discount on redemption of shares account represents the discount allowed by the company to the shareholders for the redemption of shares.
Accounting for Redemption of Debentures:
When a company redeems its debentures, it pays off the principal amount plus any interest due to the debenture holders. The following journal entry is passed to record the redemption of debentures:
- Debit Debenture Redemption Reserve Account (for the amount transferred from the debenture redemption reserve)
- Debit Interest on Debentures Account (for the interest due to the debenture holders)
- Credit Bank Account (for the amount paid to the debenture holders)
The debenture redemption reserve account represents the reserve created by the company out of profits for the redemption of debentures, while the interest on debentures account represents the interest payable to the debenture holders.
If the company redeems its debentures before maturity, it may have to pay a premium for the early redemption. In this case, the following journal entry is passed:
- Debit Debenture Redemption Reserve Account (for the amount transferred from the debenture redemption reserve)
- Debit Loss on Redemption of Debentures Account (for the premium paid for the early redemption)
- Debit Interest on Debentures Account (for the interest due to the debenture holders)
- Credit Bank Account (for the amount paid to the debenture holders)
The loss on redemption of debentures account represents the premium paid by the company for the early redemption of debentures.
Accounting for Advance
An advance refers to a payment made by a company to a third party, such as a supplier or an employee, in anticipation of receiving goods or services in the future. Advances are considered as assets in the balance sheet of a company until they are used or consumed. In this article, we will discuss the accounting treatment for advances.
Accounting for Advances to Suppliers:
When a company pays an advance to a supplier for the purchase of goods or services, the following journal entry is passed:
- Debit Advance to Supplier Account (for the amount of advance paid)
- Credit Bank Account (for the amount paid to the supplier)
The advance to supplier account represents the amount paid by the company to the supplier in advance of receiving the goods or services. The bank account represents the cash outflow from the company for the advance payment.
When the goods or services are received, the advance to supplier account is adjusted as follows:
- Debit Purchase Account (for the value of goods or services received)
- Credit Advance to Supplier Account (for the amount of advance paid)
The purchase account represents the cost of the goods or services received by the company, while the advance to supplier account represents the balance of the advance after adjusting for the value of goods or services received.
If the company does not receive the goods or services and the advance becomes non-refundable, the advance to supplier account is written off as an expense in the income statement.
Accounting for Advances to Employees:
When a company pays an advance to an employee, such as a travel advance or a salary advance, the following journal entry is passed:
- Debit Advance to Employee Account (for the amount of advance paid)
- Credit Bank Account (for the amount paid to the employee)
The advance to employee account represents the amount paid by the company to the employee in advance of the employee’s expenses or salary. The bank account represents the cash outflow from the company for the advance payment.
When the employee’s expenses are incurred or the salary is due, the advance to employee account is adjusted as follows:
- Debit Expense Account or Salary Account (for the value of expenses incurred or salary due)
- Credit Advance to Employee Account (for the amount of advance paid)
- The expense account represents the cost of the employee’s expenses, while the salary account represents the amount due to the employee for salary.
If the employee does not incur any expenses or the salary is already paid, the advance to employee account is adjusted as follows:
- Credit Advance to Employee Account (for the amount of advance paid)
- Debit Bank Account (for the amount refunded to the company by the employee)
- The bank account represents the cash inflow from the employee for the refund of the advance.
Accounting for Arrears
Arrears refer to any payment that is overdue or past due. In accounting, arrears are generally related to the payment of interest or dividends on debt or equity instruments. In this article, we will discuss the accounting treatment for arrears.
Accounting for Interest Arrears:
When a company fails to make interest payments on its debt securities, it creates interest arrears. Interest arrears are recorded as a liability on the balance sheet of the company until they are paid. The accounting treatment for interest arrears is as follows:
Accrual of Interest:
When interest payments are due but not paid, the interest expense is accrued by debiting the interest expense account and crediting the interest payable account. This is done to recognize the interest expense in the financial statements, even if the payment has not been made.
Recording of Arrears:
When interest payments are not made on time, the interest payable account becomes a liability and the interest arrears are recorded by debiting the interest payable account and crediting the interest arrears account. This is done to recognize the amount of interest that is overdue.
Payment of Arrears:
When the interest arrears are paid, the interest payable account is reduced by debiting it and the interest arrears account is reduced by crediting it. This is done to recognize the payment of interest arrears and to reduce the liability on the balance sheet.
Accounting for Dividend Arrears:
When a company fails to pay dividends on its equity shares, it creates dividend arrears. Dividend arrears are recorded as a liability on the balance sheet of the company until they are paid. The accounting treatment for dividend arrears is as follows:
Declaration of Dividend:
When the board of directors of a company declares a dividend, it becomes a liability of the company. The liability is recorded by debiting the retained earnings account and crediting the dividend payable account.
Recording of Arrears:
When a dividend is not paid on time, the dividend payable account becomes a liability and the dividend arrears are recorded by debiting the dividend payable account and crediting the dividend arrears account. This is done to recognize the amount of dividend that is overdue.
Payment of Arrears:
When the dividend arrears are paid, the dividend payable account is reduced by debiting it and the dividend arrears account is reduced by crediting it. This is done to recognize the payment of dividend arrears and to reduce the liability on the balance sheet.