AccountingQA Latest Questions

Karan
Karan
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more

    Negative working capital means the excess of current liabilities over current assets in an enterprise.

    Let’s understand what working capital is to get more clarity about negative working capital.

    Meaning of Working Capital

    Working Capital refers to the difference between current assets and current liabilities of a business.

    Working Capital = Current Assets – Current Liabilities

    It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.

    Items under Current Assets and Current Liabilities

    It is important to know about the items under current assets and current liabilities to understand the significance of working capital.

    Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.

    Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.

    Types of working capital

    Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:

    • Positive (Current assets > Current liabilities)
    • Zero  (Current assets = Current liabilities)
    • Negative (Current assets < Current liabilities)

    Hence, negative working capital exists when current liabilities are more than current assets.

    Implications of having negative working capital

    Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.

    An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.

    The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.

    Current Assets  = 2(Current Liabilities)

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA

    Introduction Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity.  An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fairRead more

    Introduction

    Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity.  An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fair view of the affairs of the entity.

    In audit reports, an auditor uses the term ‘true and fair’ is used to express that the financial statements are free from any kind of material misstatement and depict a correct financial image of the entity.

    The term holds great significance in the audit reports of entities and auditors have to use this term carefully.

    Meaning of ‘True’ and ‘Fair’

    The term consists of two words, ‘True’ and ‘Fair’. Let’s understand what each of these words actually means.

    True

    The word ‘true’ suggests that the auditor, after examining the financial statements, has found no material misstatement whether due to error or fraud. The financial information depicted by the financial statements and the underlying accounting records is correct. The preparation and presentation of the financial statements are in accordance with the accounting standards applicable to the entity.

    Fair

    The word ‘fair’ means the financial information presented through the financial statement does not have an element of bias or sugar coating. There is a faithful presentation of financial information and the amounts at which the assets and liabilities, income and expenses and equity are shown is justified.

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Aadil
AadilCurious
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  2. GautamSaxena Curious .
    This answer was edited.

    Business commencement with cash The term 'started the business with cash' is basically the commencement of business. In order to start any business, a certain sum of money has to be invested by the owner, which is known as the business's capital in accounting. Commencement of business refers to theRead more

    Business commencement with cash

    The term ‘started the business with cash’ is basically the commencement of business. In order to start any business, a certain sum of money has to be invested by the owner, which is known as the business’s capital in accounting.

    Commencement of business refers to the starting or beginning of the business. In companies, it’s a declaration issued by the company’s directors with the registrar stating that the subscribers of the company have paid the amount agreed. In a sole proprietorship, the business can be commenced with the introduction of any asset such as cash, stock, furniture, etc.

    Therefore, we may also call it the first journal entry of business because generally, people tend to start the business with cash rather than something else.

    Journal entry

    Explanation via rules

    As per the golden rules of accounting, the cash a/c is debited as the rule says “debit what comes in, credit what goes out.” Whereas the capital a/c is credited because “debit all expenses and losses, credit all incomes and gains”

    As per modern rules of accounting, cash is a current asset, and assets are debited when they increase. Whereas, on the increment on liabilities, they are credited, therefore, capital a/c is credited.

     

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Aadil
AadilCurious
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  2. ShreyaSharma none
    This answer was edited.

    Drawings of goods The drawings of the goods, in a business, take place when the owner/partner of a business withdraws goods for their personal use. It's hence called drawings as it reduces the capital invested by the owner(s). It's also called the withdrawal account. The drawings are generally madeRead more

    Drawings of goods

    The drawings of the goods, in a business, take place when the owner/partner of a business withdraws goods for their personal use. It’s hence called drawings as it reduces the capital invested by the owner(s). It’s also called the withdrawal account.

    The drawings are generally made for cash or stock by the owner/partner and the relevant account is thus reduced causing the adjustment done on the owner/partner’s capital at the cost price.

     

    Journal entry

    The journal entry for the goods withdrawn for personal use will be as follows:

     

    Explanation via rules

    The drawings account is debited because it decreases the balance of the capital account. Whereas, the purchases account is credited as it causes a reduction in the purchases account.

    As per the modern rules of accounting, we credit the decrease in assets, thus, the purchases account is credited. Whereas, the withdrawal account when increased is debited. Therefore, the drawing account is debited here.

    As per the golden rules of accounting, “debit what comes in and credit what goes out.” Hence, the purchase account is credited. And, “if any expense or loss is incurred for the business, the expense or loss account shall be debited“. Thus, the drawing account is debited.

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Simerpreet
SimerpreetHelpful
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them. For example, X Ltd took an insurance policy on 30th September 20XX. The premium is to be paid annually on 30th SeptemRead more

    Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them.

    For example,

    • X Ltd took an insurance policy on 30th September 20XX. The premium is to be paid annually on 30th September every year for the next 20 years.
    • While preparing the financial statements for the year 20XX – 20XX+1, the business will recognize insurance premiums for the period 30th September, 20XX to 31st March 20XX+1 as an accrued expense. The premium would be actually paid on September 20XX+1.
    • As we can see, the company has already incurred the insurance premium for the period 30th September, 20XX to 31st March 20XX+1.
    • Thus, it has to recognize the same as an expense of that period only even though it will be actually paid in the next accounting period.

    Why does the concept of accrued expenses arise in accounting?

    The concept of accrued expenses arises in accounting because accounting records transactions on an accrual and not cash basis.

    Accounting on an accrual basis implies recording transactions as and when they are incurred while recording transactions on a cash basis means recording them as and when cash is actually paid for receiving those services.

    For example,

    • X Ltd ordered 5 televisions from LG. It received the delivery of all 5 televisions on 1st March, 20XX. However, it received the invoice for those televisions on 31st April, 20XX.
    • Now, the question arises as to whether while preparing the financial statements on 31st March, 20XX, X Ltd will recognize the cost of those 5 televisions as a purchase expenditure.
    • If X Ltd were recording transactions on a cash basis, they would not have recognized the cost of those 5 televisions as a purchase expenditure in the financial statements prepared on 31st March 20XX as the payment had been made in the next financial year.
    • Thus, in that case, that purchase would be recorded in the financial statements of the next year.
    • However, accounting is done on an accrual basis. As per accrual basis, as the event of purchase has occurred during the financial year ending 31st March 20XX, it must be recorded in financial statements for that period only.
    • Thus, due to the accrual basis, X Ltd will record that expenditure in the financial statements prepared on 31st March 20XX even though cash has been paid in the next financial year.

    Treatment of Accrued Expenses

    Accrued expenses are classified as current liabilities. That is because the business has a short-term obligation to pay these expenses. The other party has a legal right to receive the amount due. In other words, accrued expenses become payable in the near term.

    As current liabilities, accrued expenses are carried in the balance sheet on the liabilities side. They are also recognized in the income statement as an expense as per the concept of accrual basis of accounting.

    Conclusion

    Accrued expenses are the expenses for which the business has already received the benefit of goods or services but which are payable in an accounting period other than the one in which such benefit is received.

    As per the accrual basis of accounting, they are recognized in the year in which the expense is incurred. The expense is carried forward as a current liability until the period in which it is actually paid.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Karishma

    Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more

    Debit Balance

    A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.

    Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.

    Credit Balance

    A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.

    The credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.

     

    Credit Balance in the Passbook

    A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. “Credit balance in the passbook is also called bank balance”.

    The bank balance is the amount available for withdrawal. A bank balance is an asset to the individual or an enterprise which can be used for the purchase of another asset or payment of liability or expenses.

    All the transactions either debit or credit are recorded in the passbook. When the total amount of all credit entries in a passbook is more than the total of debit entries, it results in a credit balance. It means that the bank owes to an individual or enterprise.

    The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s credit balance is a positive or favourable balance while the passbook’s debit balance is a negative balance or unfavourable balance.

    For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $30,000. So here, the passbook will show a bank balance of $20,000 i.e. the credit balance of the passbook. It signifies the positive cash flow of the individual and that the bank owes $20,000 to the individual.

     

    Debit balance in Pass Book

    When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. Debit balance in the passbook is also called “Overdraft”. It means that an individual or enterprise owes to the bank.

     

    Reconciliation

    It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.

     

    Debit Balance Reconciliation

    The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.

     

    Credit Balance Reconciliation

    The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.

     

    Conclusion

    The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A credit balance signifies more deposits than withdrawals resulting in a positive bank balance.

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Astha
AsthaLeader
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CapexCapital ExpenditureOperating ExpenditureOpex
  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Let me first explain the meaning of both the terms CapEx and OpEx Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or imRead more

    Let me first explain the meaning of both the terms CapEx and OpEx

    Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or improve an existing one or maintain the asset in use.

    Capital expenditure is commonly found in the Cash flow statement under Investing activities as Investment in plant, machinery, equipment, etc.

    Operating Expenditure (in short OpEx) are day-to-day expenses incurred by a firm in order to carry its normal business.

    Expenses such as rent, advertisement, inventory costs, etc.

    Operating Expenses are shown in the income statement of the company as expenses incurred during the period.

    For Example: If a company purchases a printer, the printer would be a capital expenditure and the papers used for the printer would be operating expenditure.

    Difference between CapEx and OpEx

    Example 1: A company wants to lease machinery instead of buying it, in this case buying machinery would be capital expenditure, and leasing the machinery would be an Operating expense.

    Example 2: Buying machinery would cost a company for 50000 and leasing the same would cost 35000. So in this case leasing will be more preferred by a company which means operating expenditure would be preferred instead of a capital expenditure.

    From the point of view of tax treatment operating expenditure is more preferred over Capital expenditure because the expenses incurred during the year are deducted during the same year which reduces the tax levied on net income.

    Some real Examples from the Company Amazon

    This is the cash flow statement of Amazon, where the investing activities shows the capital expenditure incurred by the company during the years.

    This is the income statement of Amazon, it shows the operating expenditure incurred by the company during the year.

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