AccountingQA Latest Questions

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

    Sales Return is shown on the debit side of the Trial Balance. Sales Return is also called Return Inward. Sales Return refers to those goods which are returned by the customer to the seller of the goods. The goods can be returned due to various reasons. For example, due to defects, quality differenceRead more

    Sales Return is shown on the debit side of the Trial Balance.

    Sales Return is also called Return Inward.

    Sales Return refers to those goods which are returned by the customer to the seller of the goods. The goods can be returned due to various reasons. For example, due to defects, quality differences, damaged products, and so on.

    In a business, sales is a form of income as it generates revenue. So, when the customer sends back those goods sold earlier, it reduces the income generated from sales and hence goes on the debit side of the trial balance as per the modern rule of accounting Debit the increases and Credit the decreases.

    For Example, Mr. Sam sold goods to Mr. John for Rs 500. Mr. John found the goods damaged and returned those goods to Mr. Sam.

    So, here Sam is the seller and John is the customer.

    The journal entry for sales return in the books of Mr. Sam will be

    Particulars Amt Amt
    Sales Return A/c 500
         To Mr John 500

    Treatment in Trial Balance

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Simerpreet
SimerpreetHelpful
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Capital ExpenditureRevenue Expenditure
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    Capital Expense Capital expenses are incurred for acquiring assets including incidental expenses. Such expenses increase the revenue earning capacity of the business. These are incurred to acquire, upgrade and maintain long term assets such as buildings, machines, etc and are non-recurring in natureRead more

    Capital Expense

    Capital expenses are incurred for acquiring assets including incidental expenses. Such expenses increase the revenue earning capacity of the business. These are incurred to acquire, upgrade and maintain long term assets such as buildings, machines, etc and are non-recurring in nature.

    Revenue Expenses

    Revenue expenses are incurred to carry on operations of an entity during an accounting period. Such expenses help in maintaining the revenue earning capacity of the business and are recurring in nature.

    These include ordinary repair and maintenance costs necessary to keep an asset working without any substantial improvement that leads to an increase in the useful life of the asset.

    Suppose, company Takeaway ltd. purchases machinery for 50,000 and pays installation charges of 10,000. Salary of 15,000 is paid to the employees and existing machinery is painted costing 8,000. Here, the cost of machinery 50,000 and installation charges of 10,000 are treated as capital expenditure and the salary of 15,000 and painting cost of 8,000 is treated as revenue expenditure.

    Identification

    Points to categorize an expenditure as Capital or Revenue are as follows:

    • An expenditure that neither creates assets nor reduces liability is categorized as revenue expenditure. If it creates an asset or reduces a liability, it is categorized as capital expenditure.

    For example, a company Motors ltd. purchases furniture for 65,000, repays loans amounting to 1,00,000 and pays salary of 25,000.

    Here the company creates an asset of 65,000 and reduces liability by 1,00,000 as shown below and therefore is considered as capital expenditure.

    However, payment of salaries neither creates assets nor reduces liability. It only reduces profits and therefore is considered as revenue expenditure.

    • Usually, the amount of capital expenditure is larger than that of revenue expenditure. But it is not necessary that if the amount is small it is revenue expenditure and if the amount is large, it is a capital expenditure.

    For example, a company Stars ltd purchases machinery for 1,20,000, furniture for 35,000 and has a rental expense of 80,000.

    Here, the purchase of machinery is capital expenditure since it results in higher expense. However, the purchase of furniture cannot be regarded as a revenue expense and payment of rent cannot be regarded as a capital expense only because the rental expense is higher than the amount expended for the purchase of furniture.

    • Usually, capital expenditure is not frequent and is made at a time, in lump sum. On the other hand, revenue expenditure is paid periodically. However, it is possible that capital expenditure is paid in installments.

    For example, a company Caps ltd. purchases land for 1,00,00,000 on an equal monthly installment basis. Then such payments cannot be considered as revenue expense only because the payments are recurring. Since the installments are paid in lieu of the purchase of land which is a long term asset, the payments will be considered as capital expenditure.

    • Mostly capital expenditures are met out of capital whereas revenue expenditures are met out of revenue receipts. However, payments can be made vice-versa.
    • If an expenditure is incurred by the payer as a capital expenditure, it will remain a capital expenditure even if the amount may be revenue receipt in the hands of the payee.

    For example, a company Marks Ltd. purchases machinery directly from the manufacturer for 50,000. For the manufacturer, the proceeds from the sale of machine are revenue in nature but the amount expended by Marks Ltd. will be categorized as capital expenditure.

    Following conclusion can be inferred from the above explanation:

    *Such transactions may or may not hold true as explained above.

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Simerpreet
SimerpreetHelpful
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  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    Under GST, Input Tax Credit (ITC) refers to the tax already paid by a person on input, which is available as a deduction from tax payable on output. This means that if you have paid tax on some purchases, then at the time of paying tax on the sale of goods, you can reduce it by the amount you alreadRead more

    Under GST, Input Tax Credit (ITC) refers to the tax already paid by a person on input, which is available as a deduction from tax payable on output. This means that if you have paid tax on some purchases, then at the time of paying tax on the sale of goods, you can reduce it by the amount you already paid on purchase and pay only the balance amount.

    EXAMPLE

    Suppose Ashok purchased goods worth Rs 100 while paying tax at 10%, that is Rs 10. He now sold the goods for Rs 200, with a tax payable of Rs 20. Now, Ashok can avail input tax credit of Rs 10 that he already paid for the purchase and hence the net tax payable is Rs 10 (20-10).

    METHOD OF UTILISATION OF ITC

    The central government collects CGST, SGST, UTGST or IGST based on whether the transactions are done intrastate or interstate.

    The amount of input tax credit on IGST is first used for paying IGST and then utilised for the payment of CGST and SGST or UTGST. Similarly, the amount of ITC relating to CGST is first utilised for payment of CGST and then for the payment of IGST. It is not used for the payment of SGST or UTGST. Meanwhile, the amount of ITC relating to SGST is utilised for payment of SGST or UTGST and then for the payment of IGST. Such amounts are not used for payment of CGST.

    We can see how Input Tax Credit is used from the below example and table:

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Aditi
Aditi
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  2. Mehak
    This answer was edited.

    Assets can be classified as Financial or Non-financial assets. One might wonder why this is necessary.  Let us dive into this concept, beginning with understanding what financial and non-financial assets are and why they are classified as such. What are Assets? Assets are things that have a monetaryRead more

    Assets can be classified as Financial or Non-financial assets. One might wonder why this is necessary.  Let us dive into this concept, beginning with understanding what financial and non-financial assets are and why they are classified as such.

    What are Assets?

    Assets are things that have a monetary value and are beneficial for a business. Assets are commonly classified as tangible, intangible, current, fixed, financial, non-financial, etc.

    Plant and machinery, land, buildings, cash, bank balance, patents, etc are some of the examples of assets that a business has.

    What are Financial Assets?

    Financial assets are the things of value that are held by a person for their underlying value. They are intangible and do not have a physical form. For example – Stocks, bonds, debentures, options, futures, etc.

    The value of these assets may change over time depending upon the market conditions, changes in government policies, fluctuations in interest rates, etc.

    In comparison to non-financial or physical assets, financial assets are more liquid as they can be traded and can be converted into cash.

    What are Non-financial assets?

    Non-financial assets are tangible or intangible assets that have a value but cannot be easily converted into cash. They are not as liquid and generally not traded.

    Examples of such assets are buildings, plant and machinery, patents, trademarks, etc.

    Why do we separate Financial and Non-Financial Assets?

    The following are several important reasons why it is important to segregate the same:

    1. It helps in the proper classification of assets on the Financial Statements.
    2. It helps in liquidity management.
    3. It helps in Risk assessment.
    4. Tax management can be done accurately.

    Difference between Financial and Non – Financial Asset

     

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Anushka Lalwani
Anushka Lalwani
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Introduction In Tally, journal entries are made in the vouchers. For each type of journal entry, there is a specific voucher. It is the vouchers where the transactions are recorded along with all the relevant details. Hence, when we speak of journal entries in tally, it is the vouchers which we haveRead more

    Introduction

    In Tally, journal entries are made in the vouchers. For each type of journal entry, there is a specific voucher. It is the vouchers where the transactions are recorded along with all the relevant details. Hence, when we speak of journal entries in tally, it is the vouchers which we have to master.

    In Tally, vouchers are of four types:

    1. Accounting vouchers
    2. Inventory vouchers
    3. Order voucher
    4. Payroll voucher

    The vouchers under the above voucher types are as shown below:

    To open the voucher creation menu follow these steps:

    In Tally ERP 9: Gateway of Tally→ Accounting Vouchers→ Voucher creation menu will open

    In Tally Prime: Gateway of Tally→ Vouchers→ Voucher creation menu will open

    Out of the above vouchers, the vouchers which I would suggest you practice are as follows (along with their short-cut keys):

    1. Contra Voucher – F4
    2. Payment Voucher – F5
    3. Receipt Voucher – F6
    4. Journal Voucher – F7
    5. Sales Voucher – F8
    6. Purchase Voucher – F9
    7. Credit note – Alt + F6
    8. Debit note – Alt + F5

     

    All of the above are accounting vouchers. You can simply press the short-cut keys to open the respective voucher while in the voucher creation menu

    If you are new to tally, I would suggest you practice only the accounting vouchers.

    Here, I have discussed only the accounting vouchers:

    Payment Voucher – F5

    A payment voucher is used to record payments of cash or by the bank. Payment can be to creditors or for expenses.

    There are two modes to this voucher which you can change by clicking the ‘Change Mode’ option on the right-hand side menu or simply pressing Ctrl + H. This menu will open.

    Select the ‘Double Entry’ mode for sake of simplicity. In this mode, the entry will be just like the conventional journal entry as in the double entry system of accounting.

    You have to just select the account you want debit which can be an expense, creditor etc. and you can credit only the cash or bank accounts as it is a payment voucher. Below there is a narration field which you can fill too. After entering all the necessary details you have to accept the voucher.

    Here, is a filled payment voucher in which I have recorded an expense payment entry.

     

     The journal entries which you can practice on payment vouchers are as follows:

    • Payment of expenses like rent, electricity, wages, salaries, carriage, interest etc
    • Payment to trade creditors.
    • Purchase of Assets

     

    Receipt Voucher – F6

    A receipt voucher is used for the recorded receipt of cash in the business. Just like a payment voucher, I recommend you to use it in Double Entry mode. In Tally prime, it looks this:

     

    The receipt voucher given above is already filled. I have passed a ‘collection from the debtor’ entry here. 

    The journal entries you can practice in the receipt voucher are as follows:

    • Receipt of cash from trade debtors.
    • Receipt of interest from the bank.
    • Commission received
    • Sale of Assets.

    Purchase Voucher – F7

    A purchase voucher is a voucher for exclusively recording purchase of goods entries. Purchase whether cash or credit should be recorded in the purchase voucher only as it allows recording of additional details related to purchase as well as tracking with purchase order and receipt note.

    The purchase voucher looks like this:

    Here, the purchase voucher is opened in ‘Item invoice’ mode. Item invoice is easier to understand hence I advise you to this mode to use the purchase voucher. You can change the mode by pressing Ctrl + H.

    If you wish to record transactions like journal entries then you can choose the ‘As Voucher’ mode.

    The details which you have to fill in are as follows:

    • Reference number or Bill number
    • Party A/c Name or the name of the creditor. (If the creditor is not created, press Alt + C to create)
    • Name of item purchased ( Press Alt + C to create the stock item if not created)
    • Enter the quantity and rate of the item and the total amount will be auto-populated.
    • The accounting details menu will open asking for the account to be debited for the purchase. Select the purchase account you want to debit or create a purchase account by pressing Alt + C if not created.

    • Enter a narration if you want and accept the voucher.

    Below is a complete purchase voucher where a credit sale transaction is passed:

    Sales Voucher – F8

    A sales voucher is a voucher for exclusively recording sales of goods entries. Sales, whether cash or credit, should be recorded in the sales voucher only as it allows recording of additional details related to sales as well as tracking with Sales orders and Delivery notes.

    Here also, I recommend you to use the sales voucher in Invoice mode

    Filling up of details in sales voucher is same as in purchase voucher. The difference here is that in the ‘Accounting details’ section you have selected a sales account to be credited.

    Here is a completed sales voucher where I have recorded a credit sale transaction:

    Contra Voucher – F4

    A Contra voucher is used to record contra transactions. Contra transactions are those transactions which take place between:

    • A Bank account and cash account
    • Two different bank accounts 

    The journal entries which can be practised on contra voucher are as follows:

    1. Withdrawal of cash from the bank.
    2. Deposit from cash into the bank.
    3. Transfer of amount from one bank to another.

    Given below is a completed Contra voucher in which ‘cash deposited into bank’ transaction is recorded:

    Journal Voucher – F7

    There are many transactions which cannot be passed in any of the vouchers discussed above. The examples of such transactions or journal entries are as follows:

    1. Depreciation of assets
    2. Entries related to the provision
    3. Prepaid Expenses
    4. Outstanding expenses
    5. Rectification of error entries
    6. Accrued income entries
    7. Any other entry which cannot be passed in any other voucher.

    It is an important voucher in Tally as many crucial entries are recorded in it.
    The journal voucher looks like this:

    It looks like a journal book and it does not have any different mode like voucher discussed above:

    The journal entries to practice on journal vouchers are many. You can refer to the examples of transactions I have mentioned above.

     

    Debit Note Voucher – Alt + F5

    A debit note voucher is to record purchase return transactions in Tally. Hence, the only transaction you can record here is of purchase return. The debit note voucher looks like this:

     

    Credit Note Voucher– Alt + F5

    In credit note vouchers, the sale return transactions are recorded. The credit note voucher looks like this:

    That’s all.  These are vouchers I would recommend one to practice on Tally.

     

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Simerpreet
SimerpreetHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Introduction The term 'gain ratio' is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners. There is a method of calculating this gain ratio. The method alongRead more

    Introduction

    The term ‘gain ratio’ is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners.

    There is a method of calculating this gain ratio. The method along with the concept behind gain ration is discussed below.

    Concept behind gain ratio

    A partnership firm is a form of business organisation which is conducted and carried on by members known as partners. It requires at least two partners to start a firm and the maximum limit is 50.

    The partners share the profit and loss of a business in a ratio known as Profit and loss sharing ratio.

    For example, Amanda, Bill and Chang are partners, having a P/L sharing ratio of 3:2:1 i.e. Amanda is getting 3/6, Bill is getting  2/6 of the same and Chang is getting ⅓ of the profit and loss

    If the profit is $6,000 , then Amanda will get $3,000 (3/6 of $6,000) and Bill will get $2,000 (2/6 of $6,000) and Chang will get $1,000 (1/6 of $6,000).

     

    Now if Amanda retires from the firm, then naturally, Bill and Chang’s share of profit will increase.

    The profit and loss sharing ratio will now be 2:1 (earlier it was 3:2:1) and the share of profit of Bill will be $4,000 and of Chang will be $2,000.

     

     

    Calculation of gain ratio

    The formula for calculating gain ratio = New ratio – Old Ratio

    As per the  above case:

    • Gain ratio of Bill = 2/3 – 2/6 = 2/6
    • Gain ratio of Chang = 1/3 – 1/6 = 1/6

     

    Therefore the gain ratio in which Bill and Chang gained the share of profit of Amanda is 2/6 : 1/6 or simply 2:1

    This is how we can calculate the gain ratio. But one thing to notice is that the gain ratio is equal to the P/L sharing ratio of the partnership between Bill and Chang.

    Hence, whenever a partner retires and the existing partner keep the P/L sharing ratio unchanged among themselves then, the gain ratio will be equal to their P/L sharing ratio. In that case, there is no need to calculate the gain ratio from the formula given above.

    But, when the remaining partners change the P/L sharing ratio among themselves after a partner retires, then the gain ratio is to be calculated using the formula given above.

    Suppose, upon retirement of Amanda, Bill and Chang change the P/L sharing between them to from 2:1 to 3:2

     In that case,

    • The gain ratio of Bill = 3/5 – 2/6 = 8/30
    • The gain ratio of Chang = 2/5 – 1/6 = 7/30

     

     Therefore the gain ratio in which Bill and Chang will gain the share of profit of Amanda is 8/30 : 7/30 or simply 8:7

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Astha
AsthaLeader
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Capital ExpenditureRevenue Expenditure
  2. GautamSaxena Curious .
    This answer was edited.

    Capital Expenditure Capital expenditure refers to the money a business spends to buy, maintain, or improve the quality of its assets. Capital expenditures are the expenses incurred by an organization for long-term benefits, i.e on the long-term assets which help in improving the efficiency or capaciRead more

    Capital Expenditure

    Capital expenditure refers to the money a business spends to buy, maintain, or improve the quality of its assets. Capital expenditures are the expenses incurred by an organization for long-term benefits, i.e on the long-term assets which help in improving the efficiency or capacity of the company. These expenses are borne by the company to boost its earning capacity.

    The investment done by the companies on assets is capital in nature and through capital expenditure, the company may use it for acquiring new assets or may use it in the maintenance of previous ones. These expenditures are added to the asset side of the balance sheet.

    Example: Purchase of machinery, patents, copyrights, installation of equipment, etc.

    Revenue Expenditure

    Revenue expenditure refers to the routine expenditures incurred by the business to manage day-to-day expenses. They are incurred for a shorter duration and are mostly limited to an accounting year. These expenses are borne by a company to sustain its profitability. These expenditures are shown in the income statement.

    These expenditures do not increase the revenue but stay maintained. These expenses are not capitalized.

    They are divided into two sub-categories:

    1. Expenditures for generating revenue for a business- Those expenditures essential for meeting the operational cost of the business are further classified as operating expenses.
    2. Expenditures for maintaining revenue-generating assets- Those expenses incurred by the business for repairing and maintenance of the assets of an organization to keep them in a working state.

     

    Example: Wages, salary, insurance, rent, electricity, taxes, etc.

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