AccountingQA Latest Questions

Jayesh Gupta
Jayesh GuptaCurious
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A. Trading Account B. Trial Balance C. Profit and Loss Statements D. Balance Sheet  

  2. Ayushi Curious Pursuing CA
    This answer was edited.

    The correct answer is Option C. The Profit and loss statement is also referred to as the statement of revenues and expenses. It is because the Profit and Loss statement reports all types of revenue that have been earned and all types of expenses that have been incurred during a particular period ofRead more

    The correct answer is Option C.

    The Profit and loss statement is also referred to as the statement of revenues and expenses. It is because the Profit and Loss statement reports all types of revenue that have been earned and all types of expenses that have been incurred during a particular period of time.

    Option A Trading Account reports only the operating revenues and operating expenses.

    Option B Trial Balance shows the balances of all the ledgers of a business and is prepared to check the arithmetical accuracy of the books of accounts.

    Option D Balance sheet reports the balances of assets and liabilities of a business as at a particular date.

    People often confuse the trading and the profit and loss statement to be the same. But they are different.

    Trading Account is prepared with aim of arriving at operating profit or gross profit whereas the profit and loss statement is prepared to arrive at the net profit of a business and reports every revenue and expense whether operating or non operating in nature.

    Operating revenue and operating expense are earned or incurred respectively are related to the chief business activities of a business.

    Features of profit and loss statement:

    1. It is prepared to measure the net profit of a business hence its profitability.
    2. It is usually prepared for a period of one year but many companies do prepare quarterly statements to better judge their performance.
    3. It helps the management in decision making and the other stakeholders like shareholders, creditors to make informed decisions.
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Jayesh Gupta
Jayesh GuptaCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares. Now let’s understand the reason behRead more

    Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares.

    Now let’s understand the reason behind it.

    We know preference shares are those shares that carry some preferential rights:

    • Dividend at a fixed rate
    • Right to get repaid before equity shareholders in event of winding up of the company
    • Other rights as specified in the Articles of Associations.

    Also, unlike equity shares, preference shares are redeemable i.e. repaid after a period of time (which cannot be more than 20 years).

    Generally, the creditors of a company have the right to be repaid first. So, in event of redemption of preference shares, the preference shareholders are repaid before creditors and the total capital of the company will but the total debt of the company is unaffected.

    The gap between the debt and equity of the company will further widen and this will also increase the debt-equity ratio of the company. It will be perceived to be a risky scenario by the creditors and lenders of the company because the

    So to protect the creditor and lender, Section 55 of the Companies Act comes to rescue.

    Section 55 of the Companies Act ensure that the creditors and lenders of a company do not find themselves in a riskier situation when the company decides to redeem its preference shares by making it mandatory for a company to either

    • issue new shares to fund the redemption of preference shares

    OR

    • create a capital redemption reserve if it uses profits for redemption

    OR

    • a combination of both

    This will fill up the void created by the redemption of preference shares and the debt-equity ratio will remain unaffected. Keeping an amount aside in Capital Redemption Reserve ensures that such amount will not be used for dividend distribution and capital will be restored because it can be only used to issue bonus shares.

    In this way the debt-equity ratio remains the same, the interest of the creditors and lenders secured.

    Bonus shares are fully paid shares that are issued to existing shareholders at no cost.

    Let’s take a numerical example for further understanding:

    ABC Ltd wants to redeem its 1,000 9% Preference shares at a face value of Rs 100 per share. It has decided to issue 8,000 equity shares @Rs 10 per share and use the profit and reserves to fund the deficit.

    The journal entries will be as follows:

    Working note:                                                                            Rs

    9% preference shares due for redemption (1,000 x 10) – 1,00,000

    Less: Amount of new shares issued (8,000 x 10)           –      80,000

    Amount to be transferred to CRR                                              20,000

    Hence, the reduction of total capital by Rs 1,00,000 due to the redemption of preference shares is reversed by issuing equity shares of Rs 80,000 and creating a Capital Redemption Reserve of Rs 20,000.

     

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Astha
AsthaLeader
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  2. Simerpreet Helpful CMA Inter qualified

    Outstanding Income is the income that is due and is being earned but not yet received. The person/ firm has the legal rights to receive that part of the income which it has earned. Outstanding Income is an Asset Account for the business/ the person. According to the modern approach, for Asset AccounRead more

    Outstanding Income is the income that is due and is being earned but not yet received. The person/ firm has the legal rights to receive that part of the income which it has earned.

    Outstanding Income is an Asset Account for the business/ the person.

    According to the modern approach, for Asset Account:

    • When there is an increase in the Asset, it is Debited.
    • When there is a decrease in Asset, it is Credited.

    So the journal entry  will be-

     

    For Example, Mr. Rashid works as a laborer in a factory and he earns wages @Rs 500/day.

    So by the end of the week, he receives a payment of Rs 3000 of Rs 3500 i.e. he receives payment of 6 days instead of 7 days. So here Rs 500 would be an outstanding income of Mr. Rashid as he has earned that income but has not received it yet.

    Journal Entry –

     

    Another example, Yes Bank gave a loan of Rs 10,00,000 to company Ford @ 10% as interest payable monthly. The interest for one month i.e. Rs 1,00,000 has not been received by Yes Bank which is being due. So it will be outstanding income for Yes Bank since it is due but not yet received.

    Journal entry-

     

    Accounting Treatment for Outstanding Income-

    • Treatment in Income Statement

    The Outstanding Income is shown on the credit side of the income statement as the income is earned for the current year but not yet received.

    • Treatment in Balance Sheet

    Outstanding Income is an Asset for the business and hence shown on the Assets side of the balance sheet.

     

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

    The term "principal book of accounts'' refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account. So to put it simply, the principal book of accounts mean ledgers. Ledgers are prepared by posting the debits and credits of a joRead more

    The term “principal book of accounts” refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account.

    So to put it simply, the principal book of accounts mean ledgers.

    Ledgers are prepared by posting the debits and credits of a journal entry to the respective accounts.

    A ledger groups the transactions concerning the same account. For example, Mr B is a debtor of X Ltd. Hence all the transactions entered into with Mr. will be grouped into the ledger Mr B A/c in the books of X Ltd.

    Ledgers are of utmost importance because all the information to any account can be known by its ledger.

    Preparation of ledger is very important because all the information to any account can be known by its ledger. Ledgers also display the balance of each and every account which may be debit or credit. This helps in the preparation of the trial balance and subsequently the financial statements of an entity.

    Hence, it is the most important book of accounts and calling it the ‘books of final entry’ is also justified.

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Sandy
Sandy
In: >

Fictitious AssetsFinancial Statements
  2. Nistha Pursuing B.COM H (B&F) and CMA
    This answer was edited.

    Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expeRead more

    Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expenses are amortized over a period of time.

    These assets do not have any realizable value except for the cash outflow. These are created to delay the recognition of the expense and defer it to future periods.

    Fictitious assets actually qualify as an expense but are treated as assets only for the fact that they are expected to give returns over a course of more than one year. Examples are Advertisement expenses, preliminary expense, etc.

    Treatment

    Fictitious assets are shown on the assets side of the balance sheet under the head miscellaneous expenditure. A part of these expenses are shown in the profit and loss statement and the remaining amount is carried forward to the following years.

    For example, a company Timber Ltd. incurs expenses relating to advertisement of its products worth 8,000,000 and this advertisement campaign can earn revenue for the company for around 10 years. Hence, such expense of 8,000,000 would be amortized over a period of 10 years.

    For the first year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 7,200,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet.

    For the second year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 6,400,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet. And so on.

    We can say that fictitious assets are deferred revenue expenditures as well as intangible assets. But goodwill, etc are not fictitious assets. Hence, all fictitious assets are intangible assets but all intangible assets are not fictitious assets.

    Common fictitious assets that could generally be seen are:

    • Advertisement expenses
    • Preliminary expenses
    • Discount allowed on the issue of shares
    • Loss incurred on issue of debentures
    • Underwriting Commission
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A_Team
A_Team
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a) Current Liability b) As an appropriation of profits c) Either a or b d) None of the above

  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    The correct option is (d) None of these. AS-3(Revised) deals with the preparation and presentation of cash flow statements. A cash flow statement is a statement that summarises the movement of cash and cash equivalents of an enterprise in an accounting year. It helps the stakeholder to know: the amoRead more

    The correct option is (d) None of these.

    AS-3(Revised) deals with the preparation and presentation of cash flow statements. A cash flow statement is a statement that summarises the movement of cash and cash equivalents of an enterprise in an accounting year. It helps the stakeholder to know:

    • the amount of cash generated by operating activities,
    • amount of cash invested in various assets or sale of assets,
    • the types of finance source utilised by an enterprise and
    • the net cash flow of the business.

    Provision for depreciation is actually a charge on profit, i.e. it will be deducted even if there is loss. Also, there is nothing mentioned in the AS-3(revised) from which we can consider the provision for tax as an appropriation of profit.

    Generally, the cash flow statement is prepared as per the ‘indirect method’ by most enterprises.

    As per the indirect method, the computation starts from Net Profit before tax and extraordinary items. To calculate this, we have to take the current year’s profit and add the current year’s provision for tax to it.

    The reason behind it is that we need to obtain the cash flow from operations and the provision for tax is a non-cash item that has reduced the net profit. So, we have to add it back to the current year’s profit.

     

    Option (A) Current Liabilities is wrong.

    Though the provision for tax is classified as a current liabilities in the balance sheet, it is not considered as a current liability when making adjustments for changes in working capital while preparing cash flow statement.

     Option (B) as appropriation of profit is wrong.

    An appropriation of profit is an item for which an amount is put aside when there is profit. For example, transfer to reserves. But the provision for tax is a charge on profit.

    Option (C) either (A) or (B) is also wrong because both the options are incorrect as discussed above.

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Simerpreet
SimerpreetHelpful
In: >

  2. Kajal
    This answer was edited.

    The Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities thatRead more

    The Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities that are to be paid are recorded in the Realisation A/c.

     

    DISSOLUTION OF PARTNERSHIP FIRM

    It means the firm closes down its business and comes to an end. Simply, it means the firm will cease to exist in the future. As the firm is closing down, it will sell all its assets to realise all the value blocked in the assets, it is liable to pay off all of its liabilities whether due now or on some future date, and the remaining amount (if any) is distributed among the partners.

     

    REALISATION ACCOUNT

    This account is prepared only once, at the time of dissolution of the Partnership firm. It is opened to dispose of all the assets of the firm and make payments to all the external creditors of the firm.

    It ascertains the profit earned or loss incurred on the realisation of assets and payment of liabilities.

    The Realisation account is a NOMINAL ACCOUNT (Debit all expenses and losses, Credit all incomes and gains)

     

    ITEMS RECORDED IN THE REALISATION ACCOUNT

    DEBIT SIDE OF REALISATION ACCOUNT

    1. TRANSFER OF ASSETS

    Assets are any property or the possession of the business enterprise that allows it to get cash or any other benefit in the future.

    Since all assets are sold at the time of the dissolution, all assets that can be converted into cash are transferred to the  Debit side of the Realisation A/c at their book values.

    Such as Plant & Machinery, Building, Debtors, etc.

    EXCEPTIONS

    • Cash and Bank balances (as already in the most liquid form)
    • Fictitious assets ( Don’t have any realisable value)

     

    NOTE – If there is any provision against any asset, such as ‘Provisions for Bad debts’ or ‘Provision for Depreciation, then such assets are transferred to the Debit side of the Realisation A/c at its gross value and the Provision is transferred to the Credit side of the Realisation A/c.

    For example – Suppose there are Debtors of $50,000 and the Provision for Doubtful Debts is $2,000.

    Then, Debtors will be recorded on the Debit side with a value of $50,000 and the Provision for Doubtful Debt on the Credit side with the amount of $2,000.

     

    2. PAYMENT OF LIABILITIES

    All liabilities are either paid in cash or the Partner agrees to pay for some liabilities. Since they are expenses, they are recorded on the debit side of the Realisation A/c as “Debit all expenses and Losses”

     

    3. PROFIT ON REALISATION

    There is profit when Cr. side > Dr. side, as it means incomes are more than the payments made. This profit is distributed among the partners.

     

    CREDIT SIDE OF THE REALISATION ACCOUNT

     

    1. TRANSFER OF LIABILITIES

    Liabilities refer to the amount owed by the firm to outsiders. All liabilities must be paid off before accounts are closed. So, all external liabilities are transferred to the Credit side of the Realisation account, to make their payment.

    Such as creditors, bills payable, loans, outstanding expenses, partner’s wife’s loan, etc.

    EXCEPTION (not included)

    • Partner’s loan (internal liability and a separate account is created for it)
    • Undistributed Profits (like General reserve, Credit balance of P&L A/c, etc. because they belong to partners and are distributed among them. Also, they can’t be sold)

     

    2. SALE OF ASSETS

    Assets can be sold for cash or taken by the Partner. The amount received from the sale of assets is recorded on the credit side of the Realisation account as “Credit all incomes and gains”.

    Also, if any asset is given to the creditors in part or full payment of his dues, then the agreed amount is deducted from the creditor’s claim and no other entry is passed.

     

    3. LOSS ON REALISATION:

    There is a loss, if the Dr. side> Cr. side, which means Expenses > Incomes. This loss is also distributed among the Partners.

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