AccountingQA Latest Questions

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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Simerpreet
SimerpreetHelpful
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  2. Rahul_Jose Aspiring CA currently doing Bcom
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    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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A_Team
A_Team
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  2. Ishika Pandey Curious ca aspirant
    This answer was edited.

    Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. Bad debts will be treated in the following ways : On the debit side of the profit and loss account. In the curreRead more

    Definition

    Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.

    Bad debts will be treated in the following ways :

    On the debit side of the profit and loss account.

    In the current assets side of the balance sheet, these are deducted from sundry debtors.

    For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.

    Now I will show you an extract of the profit and loss account and balance sheet   

    Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or the rendering of services in the ordinary course of business.

    For example,  debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.

     

    Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.

    For example bills payable, short-term loans, etc.

     

    Accounting treatment

    Now let me try to explain to you the accounting treatment for bad debts which is as follows :

    • Balance sheet
      • In the balance sheet either it can be shown on the asset side under head current assets by reducing from that specific assets.
      • For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.

     

    • Profit and loss account
      • Bad debts are treated as an expense and debited to the profit and loss account.
      • For example, as I have explained above, but before transferring to the balance sheet, bad debt will be debited to the profit and loss account as an expense.

     

    Reasons for bad debts

    There are several reasons why businesses may have bad debts some of them are as follows:-

    • Offered credit to customers who were unable to pay them back, or they may have been the victim of fraud.

     

    • When there is conflicts or dispute arise with respect to product size, color, quality, delivery, credit term, price, etc therefore debts becomes bad.

     

    • Debtors have poor financial management or they are not able to pay debts on time.

     

    • Debtors’ unwillingness to pay is also a reason for debts to become bad.

     

    • Or there can be more cases where debtors are unable to collect debts and debts turns out to be bad.

     

    Accounting methods

    There are two methods for accounting for bad debts which are mentioned below:-

    • First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement, which is called the profit and loss account.

     

    • Second, is the allowance method which means we create provisions for doubtful debts accounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.

     

      • Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
      • Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
      • The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
      • Provision for doubtful debts is shown in the debit side of the profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet. 

     

    Related terms

    So there are a few related terms whose meanings you should know

    • Further bad debts :
      • It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
      • That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.

     

    • Bad debts recovered :
      • It may happen that the amount written off as bad debts is recovered fully or partially.
      • In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
      • Thus amount recovered is a ‘gain’  and is credited to the profit and loss account.

     

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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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A_Team
A_Team
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Bank statement and bank column of cash book Bank statement and cash column of cash book Bank column of cash book and cash column of cash book None of the above

Bank Reconciliation Statement
  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    The correct answer is the 1. Bank statement and bank column of the cash book, because it will help the business to verify whether amounts entered and entries recorded are correct or not. It will also help in verifying the balances of bank statements and cash books whether they tally or not. What isRead more

    The correct answer is the 1. Bank statement and bank column of the cash book, because it will help the business to verify whether amounts entered and entries recorded are correct or not. It will also help in verifying the balances of bank statements and cash books whether they tally or not.

    What is Reconciliation?

    Reconciliation is an accounting procedure that compares two sets of records to check figures are correct and in agreement. Reconciliation can also be used for personal purposes.

    What is a Bank Reconciliation Statement?

    A statement showing causes of disagreement between the balance of bank statement and bank column of the cash book at the end of a specific period is called a Bank Reconciliation Statement.

    Steps in preparation of Bank Reconciliation Statement

    Step 1: Comparing items appearing on the debit and credit sides of the bank statement and bank column of the cash book.

    Step 2: Make a list of missed entries.

    Step 3: Analyse the causes of differences.

    Step 4: Select the date for the preparation of the Bank Reconciliation Statement.

    Step 5: Choose the starting point i.e balance as per cash book or balance as per bank statement.

    Step 6: Adjust the starting point by adding or subtracting the missed entries.

    Step 7: Bank Statement must match with the cash book.

    To prepare a bank reconciliation statement a business will need a bank statement from its bank and cash book which it prepares to record entries.

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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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Vijay
VijayCurious
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Companies Act
  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use.  It is also called economic lRead more

    Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use.  It is also called economic life or service life

    It is a useful concept in accounting as it is used to work out depreciation. By knowing this useful life of an asset an entity can easily analyze how to allot the initial cost of an asset across the relevant accounting period rather than doing it unfairly manner.

    How do we calculate the useful life of an asset?

    The useful life of an asset is not an accounting policy, but an accounting estimate. calculating useful life is not an exact phenomenon but an estimate that is done because it directly impacts how much an asset is to expense every year.

    Factors affecting “how long an asset is expected to be useful” depends on some stated points as below:

    1. Usage, the more the assets are used, the more quickly it will deteriorate.
    2. Whether the asset is new at the time of purchase or reused model.
    3. Change in technology.

    As per the companies act 2013, some of the useful life of assets are stated below

    To know more about the different categories of assets you can follow the given link useful life of assets.

    POINT TO BE NOTED:- There lies a huge difference in the useful life v/s the physical life of an asset. It is very important to note that amount of time an asset is used in a business is not always be same as an asset’s entire life span.

     

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