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Thanks a lot for your brief explanation.
| | | ---------------Original Message---------------
From: Vidhya Dhar
Sent: Sunday, October 30, 2011 11:35 AM
Subject: Open Item Management for P/L Accounts
Hi
Let us consider the following scenario:
You take a ride in a cab. As soon as your ride is over, you pay the cabbie
driver immediately. As far as you are concerned, you got the comfort of a
cab ride and you have paid him as well. As far as the cab driver is
concerned, he did a service and got paid immediately. Therefore the entire
transaction is complete and requires no further follow up. You do not need
to remember the cabdriver's name or the transaction. The cabdriver does not
have to remember you or your transaction any more since the deal is all
over.
What is the accounting transaction in your books?
Conveyance Expenses Debit and Cash Credit. *Conveyance expense* is a *profit
and loss related item* requiring no further follow up. Since the deal is
all over, you do not need open item management for this item (Open item
management requires a tab on incomplete deals which need to be followed up
until the point of subsequent settlement).
What is the accounting transaction in the cab driver's books?
Cash Debit and Service Revenue Credit. *Service Revenue* is a *profit
and loss related item* requiring no further follow up. Since the deal is
all over , the cab driver does not need open item management for this item
( Open item management requires a tab on incomplete deals which need to be
followed up until the point of subsequent settlement ).
Now let us consider another scenario:
Let us assume that you have taken a Loan of 12000 USD from a bank ,
repayable three months later. Until you repay this amount this loan is a
Liability , *A Balance Sheet Item*, and is an incomplete transaction (
settlement of the loan completes the transaction ). Your Banker would also
treat it alike , in his *Balance Sheet*, since he needs to follow the loan
up with you until he receives his money back ( Open item management
requires a tab on incomplete deals which need to be followed up until the
point of subsequent settlement ).
Did you get the difference ?
An Expense / Revenue pertaining to a specific period and the deal being
over appears in the profit and loss account and therefore does not require
open item management. An Asset or Liability , appearing in the balance
sheet requiring to be followed up for settlement at a later date obviously
requires open item management since the deal is incomplete until
settlement.
Regards
VidhyaDhar |
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