AccountingQA Latest Questions

Anushka Lalwani
Anushka Lalwani
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  2. GautamSaxena Curious .
    This answer was edited.

    Interest on drawings Drawings refer to the money withdrawn by owners/partners for personal use from the business. The drawings, in accounting terms, can be of any type. It can be cash withdrawn from business or furniture or car etc. Drawings are money or assets that are withdrawn from a company by iRead more

    Interest on drawings

    Drawings refer to the money withdrawn by owners/partners for personal use from the business. The drawings, in accounting terms, can be of any type. It can be cash withdrawn from business or furniture or car etc. Drawings are money or assets that are withdrawn from a company by its owners for personal use and must be recorded as a reduction of assets. It’s paid back to the business with some interest.

    Interest on drawings is an income for the business and reduces the capital of the owner. Interest on drawings is the amount of interest paid by the partners, calculated concerning the period for which the money was withdrawn.

    • It’s an income for the business. Hence, credited to P&L Appropriation A/c.
    • It’s an expense for the owner/partner. Therefore, debited to owner’s/partner’s capital a/c
    • Interest on drawings is charged to the partners only when there is an agreement made among the partners in this regard or if it is mentioned in the Partnership Deed.

    Formulae for Interest on drawings

    There are three formulae used for calculating the interest on drawings. They are:

    1. Simple Method: In this method, as the name suggests, the amount of interest on drawings is calculated simply for the time the amount has been utilized.

    Interest on Drawings = Amount of drawings × Rate/100 × No. of Months/12 

    2. Product Method: This method is used when-

    • Drawings are made of unequal amounts at irregular intervals of time. Then this formula is used-

    Interest on Drawings = Total of Products × Rate/100 × 1/12

    • When drawings are made of equal amounts at regular/equal intervals of time. Then interest on drawings can be calculated on the total of the amount drawn, for the average of the period applicable to the first and last installment.

    Interest on Drawings= Total amount of drawings × Rate/ 100 × Average Period/12

    Also, note-

    Average Period = (No. of months left after first drawings+ No. of months left after last drawings)/2

    Example:

    Harish withdrew equal amounts at the beginning of every month for 9 months. Total drawings amounted to ₹6,000. Calculate the interest on drawings charged if the rate was 6% p.a.

    Solution:

    Average period = (No. of months left after first drawings+ No. of months left after last drawings)/2 = (9+1)/2 = 5 months 

    Interest on Drawings = Total of drawings × Rate/100 × 5/12

                                            = ₹ 6,000 × 6/100 × 5/12
                                            = ₹ 150.

    Journal entry for interest on drawings: 

    Interest transferred to Profit & Loss A/c:

     

     

     

     

     

     

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Ayushi
AyushiCurious
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  2. ShreyaSharma none
    This answer was edited.

    No, the building is not a current asset. Explanation Current assets are those in a business that is reasonably expected to be sold, consumed, cashed, or exhausted within one year of accounting through normal day-to-day business operations. Examples: Cash and cash equivalent, stock, liquid assets, etRead more

    No, the building is not a current asset.

    Explanation

    Current assets are those in a business that is reasonably expected to be sold, consumed, cashed, or exhausted within one year of accounting through normal day-to-day business operations.

    Examples: Cash and cash equivalent, stock, liquid assets, etc.

    The building is expected to have a valuable life for more than a year and is bought for a longer term by a company. The building is a fixed asset/non-current asset, those assets which are bought by the company for a long term and aren’t supposed to be consumed within just one accounting year.

    In order to understand it more clearly, let’s see the two types of assets in the classification of the assets on the basis of convertibility:

    In the classification of the assets on the basis of their convertibility, they are classified either as current assets or fixed assets. Also referred to as current assets/ non-current assets or short-term/ long-term assets.

    • Current Assets – As explained above, those assets in a business that is reasonably expected to be sold, consumed, cashed, or exhausted within one year of accounting.
    • Fixed Assets – Those assets which are not likely to be converted into cash quickly and are bought by the business for a long term.

    Building in the balance sheet

    Let us take a look at the balance sheet’s asset side and see where building and current assets are shown

    Balance Sheet (for the year ending…)

     

    As we can see, the building is shown on the long-term assets side and not in the current assets.

    Therefore, the building is not a current asset.

     

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A_Team
A_Team
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  2. Ishika Pandey Curious ca aspirant
    This answer was edited.

    Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not on a particular period. Importance As the tRead more

    Definition

    The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.

    A trial balance is prepared on a particular date and not on a particular period.

    Importance

    As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheet or profit and loss

    Purpose of trial balance which are as follows:

      • To verify the arithmetical accuracy of the ledger accounts
      • This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
      • It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
      • To help in locating errors
      • There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
      • To facilitates the preparation of financial statements
      • A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.

     

    Preparation of trial balance

      • To verify the correctness of the posting of ledger accounts in the terms of debit credit amounts periodically, a periodic trial balance may be prepared ( say ) at the end of the month or quarter, or half year.
      • There is no point in denying that a trial balance can be prepared at any time.
      • But it should at least be prepared at the end of the accounting period to verify the arithmetical accuracy of the ledger accounts before the preparation of financial statements.

     

    Methods of preparation

    • Balance method
    • Total amount methods

     

    These are two methods that you can use to prepare trail balance, now let me explain to you in detail about these methods which are as follows:-

     

    Balance method

    • The balances of all the accounts ( including cash and bank account ) are incorporated in the trial balance.
    • When ledger accounts are balanced only this method can be used.
    • This method is generally used by accountants for preparation of the financial statements.

     

    Total amount method

    • Under this method, the total amount of debit and credit items in each ledger account is incorporated into the trial balance.
    • This method can be used immediately after the completion of posting from the books of the original entry ledger.

     

    Steps to prepare a trial balance

    • First, we need to decide the method to opt for the preparation of the trial balance which is mentioned above.
    • Then once opted, collect all the balances as per the method adopted and prepare accordingly by posting the debit and credit side of the trial balance.
    • After this process arrange all the accounts in order of their nature (assets, liabilities, equity, income, and expenses ).
    • Then you have to total debit and credit balances separately.
    • After the above steps if there is any difference between the total debit and credit side balances then that is adjusted through the suspense account.

     

    A suspense account is generated when the above case arises that is trial balance did not agree after transferring the balance of all ledger accounts including cash and bank balance.

    And also errors are not located in  timely, then the trial balance is tallied by transferring the difference between the debit and credit side to an account known as a suspense account.

     

    Rules of trial balance

    When we prepare a trial balance from the given list of ledger balances, the following rules to be kept in mind that are as follows :

    • The balance of all
    • Assets accounts
    • Expenses accounts
    • Losses
    • Drawings
    • Cash and bank balances

    Are placed in the debit column of the trial balance.

    • The balances of
    • liabilities accounts
    • income accounts
    • profits
    • capital

    Are placed in the credit column of the trial balance.

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Atreya
AtreyaCurious
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  2. Ishika Pandey Curious ca aspirant

    Definition A limited liability partnership (LLP)is a business vehicle like a partnership that features the partners ‘ liability is limited. Thus, it has elements of partnership and company. Another important feature of LLP is that each partner is not responsible or liable for another partner’s miscoRead more

    Definition

    A limited liability partnership (LLP)is a business vehicle like a partnership that features the partners ‘ liability is limited. Thus, it has elements of partnership and company.

    Another important feature of LLP is that each partner is not responsible or liable for another partner’s misconduct or negligence.

    LLP as constituted in INDIA:

    The limited liability partnership act, 2008 came into effect on 31st march, 2009. LLP is different from a partnership as it operates like a partnership, but in an LLP each partner is protected from personal liability, except to the extent of his capital contribution in the LLP.

    • LLP is subject to income tax like any other partnership firm.

    • A partner is not liable for independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner‘s wrongful business decisions or misconduct.

    • LLP is a body corporate and legal entity separate from its partners. It has perpetual succession like a limited liability company.

    Indian partnership act 1932 is not applicable to LLPs and also the limit on the number of partners in an LLP is not applicable, unlike an ordinary partnership firm where the maximum number of partners cannot exceed the number specified under SEC 464 of Companies Act 2013, which at present is 50.

    The LLP Act, 2008 specifies that a least one of the partners in the LLP is a citizen of India and an Indian national.

    • The Registrar Of Companies ( ROC) is authorized to register and control LLPs.

     

    Characteristics

    • Separate legal entity :

    Like a company, LLP also has a separate legal entity. Therefore partners and LLP are distinct from each other, like a company where the company has a legal entity separate from its shareholders.

    • Minimum capital :

    LLP is not required to maintain minimum capital. Thus partners in LLP decide how much capital will be contributed by each partner.

    • The Minimum number of members :

    An LLP can be established with at least two members who shall also be the designated partners and shall have Director Identification Number (DIN).

    There is no limit on the maximum number of partners. Members other than designated partners are required to have DIN.

    • Audit is not mandatory :

    All companies, whether private or public, are required to get their accounts audited. However, an audit of LLP‘s books of accounts is not mandatory except :

    • If the contribution of the LLP exceeds Rs 25 lakhs: or
    • If the annual turnover of the LLP exceeds Rs 40 lakhs.

     

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Aditi
Aditi
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  2. Mehak
    This answer was edited.

    What is Inventory? Inventory refers to the stock of goods or raw materials a business uses to produce the final goods sold to the customers. What is the Inventory Turnover Ratio? Inventory Turnover Ratio is the financial ratio that shows how efficiently a business sells and replenishes its inventoryRead more

    What is Inventory?

    Inventory refers to the stock of goods or raw materials a business uses to produce the final goods sold to the customers.

    What is the Inventory Turnover Ratio?

    Inventory Turnover Ratio is the financial ratio that shows how efficiently a business sells and replenishes its inventory. It shows how well a business manages its inventory.

    Inventory Turnover ratio is calculated as follows:

    Inventory Turnover Ratio = Cost of goods sold / Average Inventory 

    where Average Inventory = (Inventory at the beginning of the year + Inventory at the end of the year) / 2

    If inventory turnover is high, it means products are selling quickly. But if it’s too high, the company might not have enough stock, leading to fewer sales.

    If turnover is low, there are slow sales or too much stock. That can lead to higher storage costs and obsolete products. It is important to find the right balance between the two.

    Why is the Cost of Goods Sold taken as a numerator instead of revenue while calculating the Inventory Turnover Ratio?

    The cost of goods sold is the sum of all the direct costs involved in the production of goods. On the other hand, Revenue is the total amount of money earned through the sale of goods and services.

    The cost of goods sold (COGS)  includes materials, labor, and overhead costs. Inventory consists of these costs and hence, it is better to take (COGS) as the numerator.

    Revenue, however, considers things like markups, discounts, and other adjustments that don’t directly relate to the actual cost of inventory.

    Let us understand it better with the help of an example:

    Suppose the opening inventory is 20,000 and the closing inventory is 10,000. Average inventory can be calculated as (20,000 + 10,000)/2 = 15,000.

    If the cost of goods sold is 45,000 the Inventory turnover ratio comes out to be 45,000/15,000 = 3.

    On the other hand, if the revenue of 60,000 is taken as the numerator, the Inventory turnover ratio comes out to be 60,000/15,000 = 4

    A high inventory turnover ratio shows that the inventory is moving faster than it is which is misleading for the stakeholders.

    Hence, the Cost of goods sold is taken as the numerator for the calculation of the Inventory turnover ratio.

     

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Astha
AsthaLeader
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Contingent Assets
  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    To begin with, let me first give you a small explanation of what Contingent assets are A contingent asset is a potential asset or economic benefit that does not exist currently but may arise in the near future. Such an asset arises from an uncertain and unpredictable event. To make it clear with anRead more

    To begin with, let me first give you a small explanation of what Contingent assets are

    A contingent asset is a potential asset or economic benefit that does not exist currently but may arise in the near future. Such an asset arises from an uncertain and unpredictable event.

    To make it clear with an example: String Co. filed a lawsuit against a competitor company Weave Tech Co. for infringing on company ABC’s patent. Even if it is probable (but not certain) that Strings Co. will win the lawsuit, it is a contingent asset.

    As such, it will not be recorded in Strings Co. general ledger accounts until the lawsuit is settled.

    At most the Strings Co. can do is, prepare a note disclosing the fact that it has filed the lawsuit the outcome of which is uncertain.

    Disclosing Contingent Assets

    • The probability of occurrence is virtually certain or probable: It will be disclosed as an asset in the balance sheet.

    For Example, The court orders for reimbursement to Strings Co. say 1,00,000 for the damages, but it has not yet received the money. Although it is virtually certain that the company will receive the money in the near future, it will be treated as an asset and can be disclosed in the balance sheet on the assets side.

    • The probability of occurrence is probable: It will be disclosed as notes to accounts below the balance sheet.

    For Example, Strings Co. filed a lawsuit against a competitor company Weave Tech for infringing on Strings Co. patent. Even if it is probable (but not certain) that Strings Co. will win the lawsuit, it is a contingent asset.

    As such, it will not be recorded in Strings company’s general ledger until the lawsuit is settled.

    At most the Strings Co. can do is, prepare a note disclosing the fact that it has filed the lawsuit the outcome of which is uncertain. 

    • The probability of occurrence is remote or not probable:  It will not be treated as a contingent asset.

    In this case, the disclosure of it is not permitted.

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Jasmeet_Sethi
Jasmeet_SethiCurious
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CreditorsDebtorsDifference BetweenGainProfit
  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    Debtors and Creditors Points of Distinction Debtors Creditors Meaning A debtor is a person or entity that owes money to the other party (the other party is also known as the creditor). A creditor is a person or entity to whom money is owed or who lends money. Nature The debtors will have a debit balRead more

    Debtors and Creditors

    Points of Distinction Debtors Creditors
    Meaning A debtor is a person or entity that owes money to the other party (the other party is also known as the creditor). A creditor is a person or entity to whom money is owed or who lends money.
    Nature The debtors will have a debit balance. The creditors will have a credit balance.
    Receipt of payment The payment or amount owed is received from the debtor. The payment of the amount owed is made to the creditors.
    Nature of account Debtors are account receivables. Creditors are accounts payable.
    Status They are shown under assets in the balance sheet under the head current assets. They are shown as an asset because the amount is receivable from them. They are shown under liabilities in the balance sheet under the head current liabilities. They are shown as a liability because the amount is payable to them.
    Credit / Loan period Debtors are the one who takes a loan or purchase goods on credit and has to pay the money in the agreed time period, with or without interest. Creditors are the ones who provide loans or extend the duration of the credit period.
    Discounts They are the ones who receive discounts. They can offer discounts to debtors.
    Provision for doubtful debts Provision for doubtful debts is created for debtors. No such provision is created for creditors.

     Example:

    Mr. A purchases raw materials from its supplier Mr. D on credit.

    Here for Mr. D, Mr. A will be a debtor because the amount is receivable from him.

    Similarly, for Mr. A, Mr. D will be his creditor because the amount is payable to him.

    Profit and Gain

    Points of Distinction Profit Gain
    Meaning The excess of revenue of a period over its expenses is termed as profit.

    Profit = Total Income-Total Expenses

    		 Gain means profit that arises from incidental events and transactions, such as capital gain.
    Generation It is generated within the operations of a business. It is generated outside the business operation.
    Nature of account Profit calculated will appear in the Profit and Loss A/c. The gain will appear in the income statement.
    Types Gross profit

    Net profit

    Operating profit

    		  

    Capital gain

    Long term capital gain

    Short term capital gain

     

    Example: A company’s sales for the period are $60,000 and expenses incurred are $40,000. Here the profit calculated will be $20,000 because revenue exceeds expenses.

    Profit = Total Income-Total Expenses

    = 60,000 – 40,000

    = $20,000

    Mr. X owned land worth $10,00,000 and after 10 years he sold it at a current market value of $14,00,000. So the gain he earned is $4,00,000. This gain of $4,00,000 will be termed as a capital gain since land is a capital asset.

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