All India Insurance Company received an insurance premium of Rs 50 lacs on an insurance policy whose coverage extends till the mid of the next accounting year.
3. b. Additionally, the company has a monthly salary expense of Rs 25 lacs. For the accounting year ended on March 31, 2019 the company paid 275 lacs on account of salary. The salary for the month end is paid in the first week of April 2019. Discuss the treatment of both of these payments in the books and disclosures in the financial statements, as on 31st March 2020
Answers
Treatment of the given case of payment of salary
Explanation:
Case : Salary of the last month paid in the next month i.e April 2019 of F.Y 2019-2020:
In the given case,it has been stated that the company incurs a monthly salary expense of Rs.25 lacs. At the year ended 31st March 2019,the company paid out salary of Rs.275 lacs but the salary of the last month was paid in the next month of F.Y 2019-2020 i.e April 2019.
In the Financial statements,the effect of this transactions will be recorded as follows-
The salary paid in the next F.Y will be taken as Outstanding Salary for the current F.Y 2018-2019,therefore its journal entry will be recorded as:
Salary A/c Dr. Rs.300,00,000
To Salary Outstanding A/c Rs.25,00,000
To Cash/Bank A/c Rs.275,00,000
(Being Salary paid and 1 month salary made due to employees)
*Salary outstanding,being a liability to the company,will be shown under the "Current Liabilities" heading of the Balance sheet of F.Y 2018-2019.
The above entry was made because of the concept of "Accrual" which is one of the fundamental concepts of Accounting.
"Accrual" concept states that the transactions,whether expenses or incomes,should be recorded in the financial statements even if the cash exchange of such is yet to take place.
In the next Financial year i.e 2019-2020,the outstanding salary will be paid and the following journal entry will be recorded:
Salary Outstanding A/c Dr. Rs.25,00,000
To Cash/Bank A/c Rs.25,00,000
(Being outstanding salary paid)