AccountingQA Latest Questions

Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook. BRS is usuallRead more

    Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook.

    BRS is usually prepared by the accountant of an entity to find out the causes of the difference between the bank balance as per cashbook and the bank balance as reported in the passbook. The frequency of preparation of BRS is usually monthly. Nowadays, many enterprises have computerised accounting systems which help in automatic bank reconciliation.

    Sometimes, BRS is also prepared by auditors during the audit of financial statements.

    The balance of the bank account column of the cashbook does not match the bank balance as per the passbook. This is due to many transactions like the following that go unnoticed by the accountant:

    • The credit of bank interest,
    • Auto-debit of bank charges,
    • Delay in the clearing of cheques deposited, for which debit is already given by the accountant.
    • Late presentment of cheque issued by enterprise, for credit is already given by the account.

    Differences also occur due to accounting errors like posting wrong amounts in the cashbook.

    To prepare the BRS, we have to start either with the bank balance as per cashbook, then add or subtract amounts to arrive at the bank balance as per passbook. Or we can do the vice verse. Here, the amounts we add or subtract are the amounts of items that are causes for the difference between the two balances.

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA

    Introduction A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account. TyRead more

    Introduction

    A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account.

    Type of account

    A capital reduction account is a temporary account open just to carry out internal reconstruction. It represents the sacrifices made by the shareholders, debenture holders and creditors. Also, any appreciation in the value of assets is credited to this account. It is closed to capital reduction when internal reconstruction is completed.

    Entries passed through capital reduction account

    When paid-up capital is cancelled.

    When paid-up capital is cancelled, the share capital account is debited and the capital reduction account is debited as share capital is getting reduced.

    Share Capital A/c Dr. Amt
    To Capital Reduction A/c Cr. Amt

    When assets and liabilities are revalued

    At the time of internal reconstruction, the gain or loss on revaluation is transferred to the capital reduction account instead of the revaluation reserve.

    Writing off of accumulated losses and intangible assets

    The credit balance of the capital reduction account is used to write off the accumulated losses and intangible assets like goodwill, patents etc which are unrepresented by capital. The capital reduction account is debited and profit and loss account and intangible assets accounts are credited.

    Capital Reduction A/c Dr. Amt
    To Profit and loss A/c Cr. Amt
    To Goodwill/ Patents A/c Cr. Amt

    Treatment in books of account

    The balance in the capital reduction account, whether debit or credit, it is transferred to the capital reduction account. Hence, it doesn’t appear on the balance sheet.

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A_Team
A_Team
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Journal entry for goods purchased by cheque The journal entry for goods purchased by cheque is as follows: In this journal entry, purchase account and bank account are involved. The explanation is given below. Explanation Purchase Whenever there is a purchase of goods, the purchase account is debiteRead more

    Journal entry for goods purchased by cheque

    The journal entry for goods purchased by cheque is as follows:

    In this journal entry, purchase account and bank account are involved. The explanation is given below.

    Explanation

    Purchase

    Whenever there is a purchase of goods, the purchase account is debited.

    Goods refer to the items which an enterprise manufactures or purchases and sells to generate its business revenue.

    If there is a purchase of any other item which does not satisfy the above definition of goods, then the purchase account is not involved.

    For example, if stationery is purchased and the enterprise does not trade in stationery items, then the purchase account will not appear in the journal entry.

    Payment by cheque

    Payment by cheque means the payment amount will be deducted from the bank account balance. Hence, in the given journal entry, the bank account is involved.

    The logic behind the debit and credit

    The golden rules of accounting

    Purchase is an expense hence it is a nominal account. The golden rule for nominal accounts is “Debit all expense and loss and credit all incomes and gains”

    Hence, the purchase account is debited.

    Bank is a real account and the golden rule of accounting for real accounts is, “Debit what comes in, credit what goes out”.

    Hence, the bank account is credited as money is going out of the bank.

    Modern rules of accounting

    Purchase is an expense account, and expenses are debited when increased and credited when decreased.

    Hence, the purchase account is debited here.

    A bank account is an asset account. Asset accounts are debited in case of an increase and credited in case of a decrease. Hence, the bank account is credited here.

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Anushka Lalwani
Anushka Lalwani
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  2. Akash Kumar AK
    This answer was edited.

    Depreciation is an accounting process of allocating the value of an asset over its estimated useful life. When a company purchases an asset, depreciation will be calculated at the end of every financial year on the asset. The company records the amount of depreciation in a separate ledger, i.e., AccRead more

    Depreciation is an accounting process of allocating the value of an asset over its estimated useful life.

    When a company purchases an asset, depreciation will be calculated at the end of every financial year on the asset. The company records the amount of depreciation in a separate ledger, i.e., Accumulated Depreciation. This expense will be debited instead of depreciation in the Asset ledger.

     

    Accumulated Depreciation

    Accumulated depreciation is the accumulated reduction in the cost of an asset over time.

    Depreciation is the reduction in the value of an asset over a specific timeframe, whereas accumulated depreciation is the sum of total depreciation on an asset since we bought it.

    we will understand this concept with a simple example.

    suppose machinery depreciates as follows

    Year 1 – Depreciation is 5,000

    Year 2 – Depreciation is 5,000

    Year 3 – Depreciation is 5,000

    Accumulated Depreciation in Year 3 = 5,000 + 5,000 + 5,000

    Therefore, overall 3 years of depreciation are accumulated at the last year-end.

     

    Journal entry for accumulated depreciation

    Example: Excellence Co. has purchased a new motor vehicle which costs $8,000 for their cab business. The motor vehicle is depreciated at @20% per annum. At the end of the year, Excellence Co. will record this accumulated depreciation journal entry.

    Year 1

    Depreciation A/c Dr. – $1600

    To Accumulated depreciation A/c – $1600

    Year 2

    Depreciation A/c Dr. – $1600

    To Accumulated Depreciation A/c – $1600

    Therefore, the Accumulated depreciation for the 2nd year end is $3200.

    At the time of the sale of the motor vehicle, the amount of accumulated depreciation will be reduced from the total value of the asset.

     

    Provision for depreciation

    Provision for depreciation is very similar to accumulated depreciation. Instead of reducing the amount of depreciation from the value of an asset, a separate provision A/C will be created, and the depreciation amount will be credited to the provision account, i.e., Provision for Depreciation account every year, and the asset will be shown the same value without reducing the depreciation from it.

     

    Journal entry for provision for depreciation

    Example: Yesman Co. purchased Machinery worth $40000 at the beginning of the current year for their production. The machinery will be depreciated at @10% per annum. At the end of the year, Yesman Co. will record this provision for depreciation journal entry.

    Year 1

    Depreciation A/c Dr. – $4000

    To Provision for Depreciation A/c – $4,000

    Year 2

    Depreciation A/c Dr. – $4000

    To Provision for Depreciation A/c –  $4000

    Therefore, the Provision for depreciation balance will be $8000 at the 2nd year-end.

    At the time of sale of the machinery, the amount of provision for depreciation created till the date will be reduced from the asset’s value.

     

    Conclusion

     

     

    Provision for depreciation and accumulated depreciation refers to the amount of depreciation accumulated over the useful life of an asset.

    The terms accumulated depreciation and provision for depreciation are different in hearing, but these are similar from the financial perspective.

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A_Team
A_Team
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Goodwill Patents Preliminary Expense A/c Claims Receivable

  2. Karishma
    This answer was edited.

    Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence. In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are theRead more

    Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence.

    In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are the expenses incurred before the incorporation of a business. The word ‘fictitious’ means fake, these are not actually the assets of a company even though they are represented in the assets of the balance sheet.

    Since the benefit of a fictitious asset is received over a period of time, the whole amount is not charged to the profit and loss account. The amount is amortized over several years. These expenses are non-recurring in nature. These expenses are shown as assets under the head miscellaneous expenditure. Also known as deferred revenue expenditure.

     

    For example: A company incurred $50,000 as promotion costs before the formation of the business. This promotion cost will be deferred over 5 years. In the first year, $10,000 will be charged to the profit and loss account and the remaining $40,000 will be shown as an asset under the heading miscellaneous expenditure. Subsequently, $10000 will be charged to profit and loss for the next 4 years. The amount of $50,000 will be deferred over a span of 5 years.

    Some other examples of fictitious assets :

    • Promotional expenses: Expenses incurred for the promotion of business before the formation of the company such as advertising expenditures are amortized over many years.
    • Loss on the issue of shares or debentures: When a company issues shares or debentures at a discount, the discount is classified as a fictitious asset and is not treated as an expense or loss. It is amortized over several years.
    • Incorporation costs: Costs incurred during the formation of a business are incorporation costs. These include registration costs, licensing fees, legal fees and other costs incurred in setting up the business. These are fictitious assets and are amortized over several years.
    • Loss on Sale of Machinery: When a loss is incurred on the sale of machinery or equipment, that loss is also treated as a fictitious asset and is amortized over several years.

     

    Goodwill

    Goodwill is not a fictitious asset because goodwill has a realizable value and can be sold in the market. Goodwill is an intangible asset which does not have a physical existence but can be traded for monetary value. Goodwill has an indefinite life and is sold when the business is sold. Goodwill can be self-generated or purchased. Goodwill is shown as an intangible asset under the heading fixed asset in the financial statements.

     

    Patents

    Patents are intangible assets which do not have a physical existence but have realizable value and can be sold in the market. So, patents do not come under the category of fictitious assets. Patents are basically intellectual property. The purchase price of the patent is the initial purchase cost which is amortized over the useful life of the asset. Patents are shown as intangible assets under the heading fixed asset in the balance sheet of the company.

     

    Claim receivable

    Claim receivable is an asset if the claim has been authorized by the insurance company. Claim receivable has a monetary value, so does not come under the category of a fictitious asset. If the claim is not yet authorized by an insurance company, it will be shown as a footnote in the financial statements. Authorized claim receivable is shown as a current asset in the financial statement.

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Bonnie
BonnieCurious
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  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    There are two types of ledger accounts in the accounting system – temporary and permanent. Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are traRead more

    There are two types of ledger accounts in the accounting system – temporary and permanent.

    Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are transferred to the profit and loss account and therefore are not balanced.

    Permanent accounts are those whose balances are carried forward to the next accounting year in form of opening balances. These accounts are balanced and such balances are transferred to the balance sheet. Examples are assets, liability and capital accounts or personal and real accounts.

    Balancing an account means equaling both the debit and the credit side of the account. Generally, there is a difference between the accounts recorded as a carry down balance in the case of permanent accounts and as a transfer balance in the case of temporary accounts.

    Balancing serves as a check to the double-entry rule of accounting.

    Balanced accounts

    As discussed above, the balanced accounts are shown in the balance sheet and the balancing figure for such accounts are carried forward to the next accounting period.

    Unbalanced accounts

    As per the above discussion, the balancing figures of unbalanced accounts are transferred to the profit and loss account and no balances are carried forward to the next accounting period.

    Suppose a company Shine Ltd. has machinery costing 5,00,000 at the beginning of the accounting period and charges depreciation of 10% on the asset. The company also has creditors amounting to 50,000 at the beginning of the period and purchases goods amounting to 30,000 on credit. It has a cash balance of 95,000 at the beginning of the period and earns interest amounting to 10,000.

    Following ledgers would be prepared to record the above entries:

    The above ledgers can be shown as follows:

    The balance of the machinery account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore depreciation account is an unbalanced account.

    The balance of creditors account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore purchases account is an unbalanced account.

    The balance of the cash account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore interest account is an unbalanced account.

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