AccountingQA Latest Questions

Manvi
Manvi
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External Users
  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    External users are people outside the business or entity who use accounting information. They do not have a direct link with the organization but can influence or can be influenced by the organization's activities. For example - Tax Authorities, Banks, Customers, Trade Unions, Government, Investors,Read more

    External users are people outside the business or entity who use accounting information. They do not have a direct link with the organization but can influence or can be influenced by the organization’s activities.

    For example – Tax Authorities, Banks, Customers, Trade Unions, Government, Investors, or Creditors.

    External Users:

    • Investors – Investors are interested in the past performance and future earnings of the business. They want to track the performance of their business whether it is giving them any benefit or not. A business’s past information helps investors in assessing their investments.
    • Creditors or Suppliers – Some suppliers provide goods and services on credit, and before providing any credit they check the company’s ability to pay. Creditors are interested in the company’s liquidity i.e to see if a company can fulfill short-term obligations.
    • Customers – Customers are more interested in a company’s financial statement as they rely on them for goods and services. They check the ability of the company whether it is providing them good quality goods and will continue to provide them in future.
    • Banks – Banks are most likely interested in the liquidity and profitability of the company. They keep track of whether the company can pay the debt when it is due along with interest.
    • Government – The company’s activities are central to the economy and must be met by them. The government controls a company’s actions if they break a law or damage the environment.
    • Environmental agencies – They keep an eye on organizations whether their activities are harming the environment or not.
    • Trade unions – They take an active part in the decision-making process. They want to see the financial statements of the company and want to decide the compensation of the employees they represent.
    • Tax authorities – They determine whether the business has declared the correct amount of tax in its tax returns. They conduct audits of the tax returns to verify them with the accounting records disclosed.

    Here is a summary of external users

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Bonnie
BonnieCurious
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Balance SheetCalls in Advance
  2. Radha M.Com, NET
    This answer was edited.

    Let us begin with a short explanation of what Calls-in-Advance is: Whenever a company accepts money from its shareholders for calls not yet made, then we call it calls-in-advance. To put it in even simpler terms, it is the amount not yet called up by the company but paid by the shareholder. An imporRead more

    Let us begin with a short explanation of what Calls-in-Advance is:

    Whenever a company accepts money from its shareholders for calls not yet made, then we call it calls-in-advance. To put it in even simpler terms, it is the amount not yet called up by the company but paid by the shareholder. An important thing to note here is that a company can accept calls-in-advance from its shareholders only when authorized by its Articles of Association.

    Calls-in-advance is treated as the company’s liability because it has received the money in advance, which has not yet become due. Till the amount becomes due, it will be treated as a current liability of the company.

    The journal entry for recording calls-in-advance is as follows:

    The money received from the shareholder is an asset for the company and therefore Bank A/c is debited with the amount received as calls-in-advance. The calls-in-advance A/c is credited because it is a liability for the company.

    Since Calls-in-Advance is a liability, it is shown in the Equities and Liabilities part of the Balance Sheet under the head Current Liabilities and sub-head Other Current Liabilities.

    For better understanding, we will take an example,

    ABC Ltd. made the first call of 3 per share on its 10,00,000 equity shares on 1st May. Max, a shareholder, holding 5,000 shares paid the final call amount 2 along with the first call money. Now let me show the journal entry to record calls-in-advance.

    In the Balance Sheet, I will show calls-in-advance in the following manner,

    The calls-in-advance of 10,000 is shown under the Equities and Liabilities side of the balance sheet under the head current liabilities and sub-head other current liabilities. It will be shown as a liability till the final call money becomes due. The amount received by the company from Max is shown on the Assets side of the balance sheet under head current assets and under the sub-head cash and cash equivalents.

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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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Jayesh Gupta
Jayesh GuptaCurious
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  2. Vijay Curious M.Com
    This answer was edited.

    Yes, I agree with your statement that accounting information should be comparable. Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company's financial statements across time and across other companies. Comparability oRead more

    Yes, I agree with your statement that accounting information should be comparable.

    Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company’s financial statements across time and across other companies.

    Comparability of financial statements is crucial due to the following reasons:

    1. Intra-Firm Comparison:

    Comparison of financial statements of two or more periods of the same firm is known as an intra-firm comparison.

    Comparability of accounting information enables the users to analyze the financial statements of a business over a period of time. It helps them to monitor whether the firm’s financial performance has improved over time.

    The intra-firm analysis is also known as Time Series Analysis or Trend Analysis.

    To understand intra-firm analysis, I have provided an extract of the balance sheet of ABC Ltd. for two accounting periods.

    2. Inter-Firm Comparison:

    Comparison of financial statements of two or more firms is known as an inter-firm comparison.

    Inter-firm comparison helps in analyzing the financial performance of two or more competing firms in an industry. It enables the firm to know its position in the market in comparison to its competitors.

    Inter-firm comparison is also known as Cross-sectional Analysis.

    I’ve provided the balance sheets of Co. A and Co.B to make an inter-firm comparison.

    Here is a piece of bonus information for you,

    Sector Analysis – it refers to the assessment of economical and financial conditions of a given sector of a company/industry/economy. It involves the analysis of the size, demographic, pricing, competitive, and other economic dimensions of a sector of the company/industry/economy.

    One more important thing to note here is that comparability can only be achieved when the firms are consistent in the accounting principles and standards they adopt. The accounting policies and standards must be consistent across different periods of the same firm and across different firms in an industry.

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Simerpreet
SimerpreetHelpful
In: >

  2. prashant06 B.com, CMA pursuing
    This answer was edited.

    QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ARE AS FOLLOWS: 1. COMPARABILITY: Comparison of financial statements is one of the most frequently used and effective tools of financial analysis. It helps the users of accounting information to compare, analyze and take decisions accordingly. CoRead more

    QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ARE AS FOLLOWS:

    1. COMPARABILITY: Comparison of financial statements is one of the most frequently used and effective tools of financial analysis. It helps the users of accounting information to compare, analyze and take decisions accordingly. Comparability enables inter-firm and intra-firm comparisons. It helps to ascertain the growth and progress of the business over time and in comparison to other businesses.

    For example, managers of ITC ltd want to know which business of his is performing well and which needs progress so they would compare the financial statement of its different businesses and make the decision accordingly.

    2. RELEVANCE: It generally means that the essential information should be easily and readily available and any irrelevant information should be avoided. The user of accounting information needs relevant accounting information for a good decision-making process, planning, and predicting future circumstances.

    For example, a firm is expected to provide the total amount owed by the debtors in the balance sheet, whereas the total number of debtors is not important.

    3. UNDERSTANDIBILITY: The financial statement should be presented so that every user can interpret the information without any difficulty in a meaningful and appropriate manner. To be more precise it should be complete, concise, clear, and organized.

    For example, mentioning note number in the financial statement for any items which needs disclosure. This helps the users of accounting to interpret the financial statement without any difficulty.

    4. RELIABILITY: This means the accounting information must be free from material error and bias. All accounting information is verifiable and can be verified from the source documents basically, information should not be vague or false.

    For example, any significant matters like amount due, damages, losses, etc. which impact the financial stability shall be mentioned as disclosure since it is useful for all the users of accounting to be aware of such facts and not to be misguided by incomplete information.

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A_Team
A_Team
In: >

  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Specimen of Ledger account This is the specimen of a ledger account. J.F. here represents the journal folio. A Ledger account is an account that consists of all the business transactions that take place during the current financial year. For Example, cash, bank, machinery, A/c receivable account, etRead more

    Specimen of Ledger account

    This is the specimen of a ledger account. J.F. here represents the journal folio.

    A Ledger account is an account that consists of all the business transactions that take place during the current financial year.

    For Example, cash, bank, machinery, A/c receivable account, etc.

    After the financial data is recorded in the Journal. It is then classified according to the nature of accounts viz. Asset, liability, expenses, revenue, and capital to be posted in the ledger account.

    With this head, the identification as to whether the opening balance will come under the debit side or the credit side is done.

    The table below would help to understand the concept of opening balance in the ledger.

    For further clarification of the concept let me give you a practical example.

    Suppose, a manufacturing firm Amul purchased machinery for, say, Rs 2,50,000. The installation charges were Rs 25,000 and the opening balance of machinery during the year was Rs 5,00,000.

    So as the machinery account comes under the category assets, its opening balance would come under the debit side of the ledger account.

    And as purchase and installation charges mean expenses for the firm, they would also come under the debit side of the account.

    And in case of any sale of a part of the machinery, it would be posted on the credit side of the account as the sales would generate revenue for the firm.

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Aadil
AadilCurious
In: >

book value replacement value depreciable value market value

Depreciation
  2. Vijay Curious M.Com
    This answer was edited.

    The total depreciation of an asset cannot exceed its 3. depreciable value.  Depreciable value means the original cost of the asset minus its residual/salvage value. The asset's original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simplRead more

    The total depreciation of an asset cannot exceed its 3. depreciable value. 

    Depreciable value means the original cost of the asset minus its residual/salvage value. The asset’s original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simply,

    The accumulated depreciation on an asset can never exceed its depreciable value because depreciation is a gradual fall in the value of an asset over its useful life. Only a certain percentage of the asset’s book value/original cost is shown as depreciation every year. So, it is impossible/illogical for the accumulated depreciation of an asset to exceed its depreciable value.

    Let me show you an example to make it more understandable,

    Amazon installs machines to automate the job of packing orders. The original cost of the machine is $1,000,000. Now let’s assume,

    The estimated useful life of the machine – 10 years.

    Residual value at the end of 10 years – $50,000.

    Method of depreciation – Straight-line method.

    The depreciable value of the machine will be $950,000 (1,000,000 – 50,000). The depreciation for each year under SLM will be calculated as follows:

    Depreciation = (Original cost of the asset – Residual/Salvage Value) / (Useful life of the asset)

    Applying this formula, $95,000 (1,000,000 – 50,000/10) will be charged as depreciation every year. The accumulated depreciation at the end of 10 years will be $950,000 (95,000*10). As you can see, the accumulated depreciation ($950,000) of the machine does not exceed its depreciable value ($950,000).

    Thus, the total depreciation of an asset cannot be more than its depreciable value.

     

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