AccountingQA Latest Questions

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

    Depreciation is an accounting method that is used to write off the cost of an asset. The company must record depreciation in the profit and loss account. It is done so that the cost of an asset can be realised over the years rather than one single year. Furniture is an important asset for a businessRead more

    Depreciation is an accounting method that is used to write off the cost of an asset. The company must record depreciation in the profit and loss account. It is done so that the cost of an asset can be realised over the years rather than one single year.

    Furniture is an important asset for a business. As per the Income Tax Act, the rate of depreciation for furniture and fittings is 10%. However, for accounting purposes, the company is free to set its own rate.

    JOURNAL ENTRY

    Journal entry for depreciation of furniture is:

    Here, depreciation is debited since it is an expense and as per the rules of accounting, “increase in expenses are debited”. Furniture is credited because a “ decrease in assets is credited”, and the value of furniture is reducing.

    TYPES OF DEPRECIATION

    Furniture can be depreciated in any of the following ways:

    • Straight-Line Method – It is calculated by finding the difference between the cost of the asset and its expected salvage value, and the result is divided by the number of years the asset is expected to be used.
    • Diminishing Value Method – It is calculated by charging a fixed percentage on the book value of the asset. Since the book value keeps on reducing, it is called the diminishing value method.
    • Units of Production

    For accounting purposes, the two many methods used for depreciating furniture is the straight-line method and the diminishing value method. However, for tax purposes, they are combined into a block of furniture, where the purchase of new furniture is added and the sale of furniture is subtracted and the resulting amount is depreciated by 10% based on the written downvalue method.

    EXAMPLE

    If a company buys furniture worth Rs 30,000 and charges depreciation of 10%, then by straight-line method, Rs 3,000 would be depreciated every year for 10 years.

    Now if the company decided to use the diminishing value method (or written down value method), then Rs 3,000 (30,000 x 10%) would be depreciated in the first year, and in the second year, the book value of the furniture would be Rs 27,000 (30,000-3,000). Hence depreciation for the second year would be Rs 2,700 (27,000 x 10%) and so on.

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Radhika
Radhika
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Plant and Machinery are the equipment attached to the earth that supports the manufacturing of the company or its operations. These are tangible non-current assets to the company and as a result, have a debit balance. Depreciation is the decrease in the value of an asset that is spread over the expeRead more

    Plant and Machinery are the equipment attached to the earth that supports the manufacturing of the company or its operations. These are tangible non-current assets to the company and as a result, have a debit balance.

    Depreciation is the decrease in the value of an asset that is spread over the expected life of the asset. Not depreciating an asset presents a false image of the company as the asset is recorded at a higher value and profit is overstated as depreciation expense is not provided for.

    There are two ways that a company provide depreciation:

    • By reducing the balance of an asset in the Asset Account by passing a journal entry.
    • By maintaining a separate account for depreciation called Accumulated Depreciation A/c. The nature of this account is naturally credit since it is created to reduce the value of an asset.

    For most of the depreciation methods, we need a rate to provide for depreciation every year. Now, for accounting purposes, the management can use a rate they think is suitable depending on the use and expected life of the machinery.

    Depreciation is calculated on the basis of the Companies act, 2013 for the purpose of book-keeping. According to Schedule 2 of the Companies Act, depreciation on plant and machinery is calculated on the basis of either SLM or WDV.

    Plant and machinery for those special rates are not assigned useful life is considered to be 15 years and depreciation is calculated @ 18.10% on WDV and @6.33% on SLM.

    According to the Income Tax Act, 15% depreciation is provided every year on Plant and Machinery and, an additional 20% depreciation is provided in the first year of installation of machinery.

    Depreciation on Machinery is charged on the basis of usage of such machinery. if it is used for 180 days or more then full depreciation is allowed and if it is used for less than 180 days then only 50% depreciation is allowed.

     

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA

    Today, mobile phones especially smartphones are an indispensable part of most businesses and they qualify as fixed assets as they usually last for more than a year. Being a fixed asset, the depreciation on mobile phones is to be provided. The rate of depreciation to be charged on mobile phones is 15Read more

    Today, mobile phones especially smartphones are an indispensable part of most businesses and they qualify as fixed assets as they usually last for more than a year. Being a fixed asset, the depreciation on mobile phones is to be provided.

    The rate of depreciation to be charged on mobile phones is 15% WDV* as per the Income Tax Act. The rates as per the companies act, 2013 are 4.75% SLM** and 13.91% WDV*.

    *Written Down Value **Straight Line Method

    A company has to charge depreciation on mobiles in their books as per the rates of Companies Act, 2013.

    Any business or entity other than a company can choose the rate as per the Income Tax Act, 1961 which is 15% WDV. It is a general practice for non-corporates to charge depreciation in their books as per the rates of the Income Tax Act.

    An important thing to know is that as per the Income Tax Act, 1961, mobile phones are treated as plants and machinery and the general rate of 15% is applied to it.

    One may consider mobile phones as computers and charge depreciation at the rate of 40%. However, such a practice is not correct. Mobile phones are not considered equivalent to computers and there is case judgment given by Madras High Court which backs this consideration. The case is of Federal Bank Ltd. vs. ACIT (supra).

    Therefore we are bound to this case judgment and should treat mobile phones as part of plant and machinery and charge depreciation on it accordingly for the time being.

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Anushka Lalwani
Anushka Lalwani
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  2. Radhika
    This answer was edited.

    Unrecorded Assets are the assets that are completely written off but still physically available in the company or assets that are not shown in the books of the company. Unrecorded assets are generally recorded or recognized at the event of admission, retirement, death of a partner when all the assetRead more

    Unrecorded Assets are the assets that are completely written off but still physically available in the company or assets that are not shown in the books of the company.

    Unrecorded assets are generally recorded or recognized at the event of admission, retirement, death of a partner when all the assets and liabilities are revalued or dissolution of the firm.

    Since Accounting Standards require firms to record all the assets and liabilities in their books, it is therefore mandatory to record such unrecorded assets.

    There can be two cases for treatment of such unrecorded assets:

    • Unrecorded Asset entered into the business and recorded in books
    Unrecorded Asset A/c (Dr.) Amt
     To Revaluation A/c Amt

    The unrecorded asset is now debited since it has to be recorded in the books now and Revaluation Account is credited since it is again for the business which will eventually be transferred to Partners’ Capital Account.

    • Unrecorded Asset taken over by a partner and paid cash   
    Cash A/c (Dr.) Amt
     To Partners’ Capital A/c Amt

    If a partner decides to take over an unrecorded asset then his account is credited with that amount and since cash paid by the partner comes into business Cash Account is debited.

    • Unrecorded Asset discovered during Dissolution
    Cash/ A/c (Dr) Amt
     To Realization A/c Amt

    When an unrecorded asset is discovered during the dissolution of the firm, such an asset is sold directly to the outsider and as a result, cash A/c is debited since the cash is entering the business. The entry is made through the Revaluation A/c and it is hence credited.

    Example:

    At the time of revaluation, firms find a typewriter that has not been recorded in the books and is valued at Rs 10,000.  The journal entry to record that typewriter will be:

    Typewriter A/c (Dr.) 10,000
      To Revaluation A/c 10,000

     

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Anushka Lalwani
Anushka Lalwani
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Interest on capital is the interest provided on the capital invested in the business. It is calculated as a percentage on the capital invested. Interest on capital is provided if there is any rule established by the owner of the capital. Otherwise, it is not provided. We generally encounter ‘InteresRead more

    Interest on capital is the interest provided on the capital invested in the business. It is calculated as a percentage on the capital invested. Interest on capital is provided if there is any rule established by the owner of the capital. Otherwise, it is not provided.

    We generally encounter ‘Interest on capital’ in partnership accounting but a sole proprietorship can also provide interest on capital.

    Interest on capital is charged or appropriated from the profits of the firm. Hence, it appears on the debit side of the profit and loss account.

    The journal entry is as follows:

    The partners, in case the firm makes profit, are provided interest on their capital balance apart from their share of profit if provision of interest on capital is mentioned in the partnership deed.

    Hence, interest on capital is an appropriation of profit in partnership accounting. The journal in case of partnership account is as follows:

    The Interest on capital is credited to the capital/ partners’ capital account thereby increasing the capital balance.  The journal is as follows:

    In the balance sheet it is shown as an addition to the capital account.

    Numerical example

    P, Q and R are partners. Their firm reported a net profit of ₹ 20,000. Their capitals are ₹30,000, ₹45,000 and ₹60,000. It is in their partnership deed to provide the partners 4% interest on capital and a salary of ₹5,000 per annum for Q. Calculate the interest on capital.

    Solution:

    Interest on capital to be provided to the partners:

    P – ₹30,000 x 6% = ₹1,800

    Q – ₹45,000 x 6% = ₹2,700

    R – ₹60,000 x 6% = ₹3,600

    This interest will be credited to the partners’ capital. The journals are as follows:

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Anushka Lalwani
Anushka Lalwani
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    In a partnership firm, the partners may withdraw certain amounts from the firm for their personal use. Such amounts withdrawn by the partners are called drawings. This amount is usually deducted from their capital. The partners are required to pay an amount as interest, based on the time period forRead more

    In a partnership firm, the partners may withdraw certain amounts from the firm for their personal use. Such amounts withdrawn by the partners are called drawings. This amount is usually deducted from their capital. The partners are required to pay an amount as interest, based on the time period for which the money was withdrawn. This amount is called Interest on Drawings.

    The journal entry for interest on drawings is as follows:

    Since interest on drawings is an income to the firm, it is credited based on the rule that “increase in incomes are credited”. Since the partner has to bear the interest amount, his capital account is debited as a “ decrease in capital is debited”.

     

    FORMULAS

    The basic formula for interest on drawings is:
    Interest on drawings = Amount of Drawings x Rate/100 x No. of months/12

    1. When equal amounts of drawings are withdrawn at the beginning of every month, then
      Interest on Drawings = Total Drawings x Rate/100 x (12+1)/2
    2. When equal amounts of drawings are withdrawn at the end of every month, then the Interest on Drawings = Total Drawings x Rate/100 x (12-1)/2
    3. When the date of the drawing is not specified, it is assumed to be withdrawn evenly. Hence Interest on Drawings = Total Drawings x Rate/100 x 6/12

    The calculations in 1,2 and 3 are done so that drawings can be calculated for the average period.

     

    EXAMPLE

    Jack is a partner who withdrew $20,000 on 1st April 2020. Interest on drawings is charged at 10% per annum. If we have to calculate interest on drawings as of 31st December, then

    Interest on Drawings = 20,000 x 10/100 x 9/12 = $1,500
    (Here, interest on drawings is outstanding for 9 months, that is from April to December)

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Bonnie
BonnieCurious
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    A revaluation Account is an account created to record the changes in the value of assets and liabilities during: Change in profit sharing ratio Admission of a partner Retirement of a partner Death of a partner The realization Account is prepared to sell assets and pay liabilities in the event of theRead more

    A revaluation Account is an account created to record the changes in the value of assets and liabilities during:

    • Change in profit sharing ratio
    • Admission of a partner
    • Retirement of a partner
    • Death of a partner

    The realization Account is prepared to sell assets and pay liabilities in the event of the dissolution of the firm.

    Revaluation Account is prepared for dissolution of the partnership while Realization Account is prepared for dissolution of the partnership firm.

    The increase or decrease in the value of assets and liabilities is transferred to the Realisation Account and the gain or loss thereof is transferred to the old partner’s capital account.

    • A decrease in Assets and an Increase in Liabilities is debited since it is a loss for the firm and all the losses are debited.
    • An increase in Assets and a Decrease in Liabilities is credited since it is gained for the firm and all the profits are credited.

    Format of Revaluation Account will be:

     

    Format of Realization Account will be:

     

    The difference between Realisation and Revaluation Account is:

    Revaluation Account Realization Account
    Prepared to record changes in assets and liabilities Prepared to record sale of assets and payment of liabilities
    Prepared at the time of dissolution of the partnership Prepared at the time of dissolution of partnership firm
    Assets and liabilities still exist in the books only their values change Assets and liabilities do not exist in the books of the firm
    This account contains only those assets and liabilities that are to be revalued. This account contains all the assets and liabilities of the firm.
    A revaluation Account can be prepared any number of times during the lifetime of the firm. The realization Account is only made once during the dissolution of the firm.
    The gain or loss during revaluation is transferred to the old partner’s capital accounts. The gain or loss during realization is transferred to the capital account of all the partners.

     

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