Question

1. Why would a business want to keep separate account for recording sales of service and sales of goods?

2. How is a finance charge entered in a firm's accounting records?

Answer 1

Answer to Q 1 :

There can be a number of reasons to why a business want to keep separate account for recording sales of service & sales of goods. Following are some of the reasons from my perspective :-

1) Taxation : In many countries there is a separate tax for services & goods. That means, that taxation of sale of goods & services does not come within the scope of a single act due to which it is makes more sense to have separate acounts for both, so as to be able to ascertain the monthly, quarterly, semi annually or periodical liability of each easily.

2) Comparison : It is often a source of comparison for comparative analysis in order to ascertain how much revenue has been generated from sale of goods and services respectively. Weekly or monthly reports are made which are called MIS or profitability report which involve profound analysis of different business heads.

On the basis of the same the business can take strategic decision for future and proceed accordingly.

3) Auditing : Books of accounts are prepared and maintained keeping in mind the purpose of audit as well. Statutory auditors often require business to properly distinguish between different sales accounts to be able to ascertain liability and to be able to verify fair presentation of the same in financial statements.

4) Reporting : It is responsibility of a business to report the financials to the shareholders & to government in the most transparent & fair manner.

5) Presentation : It is a better presentation of financials, so that shareholders can xpress their views on the ongoing affairs in the business.

6) Tax Rates, one tax : In many countries where there is a single act governing the taxability on sale of goods and services, have different tax rates for both. It becomes cubersome to ascertain the taxability on goods and services having different tax rates if a single account is maintained for both.

Answer to Q No 2 :

Entry for finance charge in accounts :

1) At the time of booking of charge (period of booking depends upon terms, generally it is booked monthly in case of loan)

Finance charge A/c Dr......XXX

To loan A/c...............................XXX

(Being finance charge transferred to loan account)

2) At the time of payment (the installment includes payment of both principal and finance charge, which are fixed as per the payment schedule)

Loan A/c Dr..................XXX

To Bank A/c...........................XXX

Finance charge automatically hits revenue account :

Revenue A/c Dr..............XXX (by the amount of finance charge in entry 1)

To Finance Charge.....................XXX