AccountingQA Latest Questions

A_Team
A_Team
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  2. Rahul_Jose Aspiring CA currently doing Bcom

    Working capital is defined as the difference between current assets and current liabilities of a business. Current assets include cash, debtors and stock whereas current liabilities include creditors and short term loans etc. FORMULA Current Assets - Current Liabilities = Working Capital Zero workinRead more

    Working capital is defined as the difference between current assets and current liabilities of a business. Current assets include cash, debtors and stock whereas current liabilities include creditors and short term loans etc.

    FORMULA

    Current Assets – Current Liabilities = Working Capital

    Zero working capital is when a company has the exact same amount of current assets and current liabilities. When both are equal, the difference becomes zero and hence the name, Zero working capital. Working Capital may be positive or negative. When current assets exceed current liabilities, it shows positive working capital and when current liabilities exceed current assets, it shows negative working capital.

    Zero working capital can be operated by adopting demand-based production. In this method, the business only produces units as and when they are ordered by the customers. Through this method, all stocks of finished goods will be eliminated. Also, raw material is only ordered based on the amount of demand.

    This reduces the investment in working capital and thus the investment in long term assets can increase. The company can also use the funds for other purposes like growth or new opportunities.

    EXAMPLE

    Suppose a company has Inventory worth Rs 3,000, Debtors worth Rs 4,000 and cash worth Rs 2,000. The creditors of the company are Rs 6,000 and short term borrowings are Rs 3,000.

    Now, total assets = Rs 9,000 ( 3,000 + 4,000 + 2,000)
    And total liabilities = Rs 9,000 ( 6,000 + 3,000)
    Therefore, working capital = 9,000 – 9,000 = 0

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

    Changing a Ledger name in Tally is an easy process. The requirement of changing the name of a ledger may arise in three situations: Situation 1: When we need to change a ledger's name, right after its creation while being in the ledger creation menu Situation 2: When we realize the need to change aRead more

    Changing a Ledger name in Tally is an easy process. The requirement of changing the name of a ledger may arise in three situations:

    • Situation 1: When we need to change a ledger’s name, right after its creation while being in the ledger creation menu
    • Situation 2: When we realize the need to change a ledger’s name during passing an entry in any voucher.
    • Situation 3: Other situations where we are not on the Voucher Creation window or ledger creation window.

     

    In Tally, there are plenty of shortcut keys that can ease the way we work on it. My methods will be based on such shortcuts on Tally ERP 9.0.

    Situation 1

     Often just after ledger creation, we realize that we have made mistake in entering the name of the ledger.

     Many opt to choose this long path to alter the ledger’s name.

    Exiting Voucher creation menu → Gateway of Tally menu → Accounts Info → Ledger option → Alter option → Select the ledger → Ledger alteration window opens.

    Instead of it, you can choose to use Page Up key while on the ledger creation window. Press the Page-up key till you reach that ledger. Then you can edit its name or any other details.

    Pressing the page up key automatically opens the ledger alteration mode and lets the user scroll through the ledgers available.

    The ledger alteration window looks like this:

    Situation 2

     Sometimes, while performing entries into vouchers, we feel the need to alter a ledger’s name.

    This can be done by pressing Ctrl + Enter key with the cursor on the ledger’s name in the voucher creation menu.

    On pressing Ctrl + Enter Key, the ledger alteration window will open, from where the user can alter the ledger name or any other details.

    Situation 3

    When the user is not either on the voucher creation menu or on the ledger creation menu, then the ledger’s name has to be altered by going through the following steps:

    Gateway of Tally menu → Accounts Info → Ledger option → Alter option → Select the required ledger → ledger alteration window opens.

    That’s it. These are different approaches to changing a ledger’s name.

    One thing that is common among all approaches is the opening of the Ledger alteration window at the end. Hence, it is only through the Ledger alteration window we can change a ledger’s details including its name.

     

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Ayushi
AyushiCurious
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  2. ShreyaSharma none
    This answer was edited.

    Journal entries in the ledger What is a Journal Entry? Journal entry is a form of bookkeeping. All the economic or non-economic transactions in the business are recorded in the journal entries showing a company's debit or credit balances. It is a double-entry accounting method and requires at leastRead more

    Journal entries in the ledger

    What is a Journal Entry?

    Journal entry is a form of bookkeeping. All the economic or non-economic transactions in the business are recorded in the journal entries showing a company’s debit or credit balances. It is a double-entry accounting method and requires at least two accounts or more in a transaction.

    The journal entry helps to identify the transactions. We use journals to get a running list of business transactions. Each journal entry provides this specific information about a transaction:

    • Date of the transaction.
    • Accounts involved in it.
    • Payer, payee, receiver, etc.
    • Account name.
    • Debit and credit of money.

     

    General Ledger 

    After the transactions are recorded in the journal, they are posted in the principal book called ‘Ledger’. A ledger account contains information about a specific account. It contains the opening balance as well as the closing balances of an account. It summarizes the business transactions.

    Transferring the entries from journals to respective ledger accounts is called ledger posting or posting to the ledger accounts. Balancing of ledgers is carried out to find differences at the year’s end, it means finding the difference between the debit and credit amounts of a particular account.

     

    For instance,

    Suppose goods were bought for cash. While passing the journal entry, we’ll be debiting the purchases a/c and crediting the cash a/c by stating it as, ‘To Cash A/c’.

    Now, this entry will be affecting both the purchases account and the cash account. In the cash account, we’ll be debiting purchases. Whereas in the purchases account, we’ll be crediting the cash. That’s how it works in the double-entry bookkeeping system of accounting.

     

    Example

    Mr. Tony Stark started the business with cash of $100,000. He bought furniture for business for $15,000. He further purchased goods for $75,000. He hired an employee and paid him a salary of $5,000.

    Now, we’ll be journalizing the transactions and posting them into the ledger accounts.

    Journal Entries

    Recording into Ledger Account

    Cash A/c

    Capital A/c

    Furniture A/c

    Purchases A/c

    Salary A/c

    Note: The balance b/d is not applicable as this is the business’ commencement year.

     

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A_Team
A_Team
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period.  For example, insurance is often paid for annually on tRead more

    Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period. 

    For example, insurance is often paid for annually on the basis of the calendar year. A business may pay insurance every year on 1st January for that entire year. While preparing the financial statements on 31st March, it will recognize the insurance premium for the period 1st April to 31st December of the next financial year as a prepaid insurance expense. 

    Why are prepaid expenses classified as assets? 

    First of all, let us understand what an asset is. An asset is anything over which the business has ownership rights and which it can sell for money. The benefits of this asset should accrue to the business. 

    In light of this definition, let us analyze prepaid expenses as an asset. As the business has already paid for these goods or services, it becomes a legal right of the business to receive the relevant goods or services at a later date. As the benefit of this expense would accrue to the business only at a later date, the prepaid expenses are classified as an asset. 

    Some examples of prepaid expenses are prepaid insurance, prepaid rent etc

    Treatment of Prepaid Expenses

    Prepaid expenses are recorded in the balance sheet under the heading “Current Assets” and sub-heading “Other Current Assets”

    As per the Generally Accepted Accounting Principles or GAAP, expenses must be recognized in the accounting period to which they relate or in which the benefit due to them is likely to arise. Thus, we cannot recognize the prepaid expenses in the accounting period in which they are incurred. 

    Prepaid assets are classified as assets and carried forward in the balance sheet to be debited in the income statement of the accounting period to which they relate. 

    Adjusting Entries

    Adjusting entries are those entries that are used to recognize prepaid expenses in the income statement of the period to which they relate. These entries are not used to record new transactions. They ensure compliance with GAAP by recognizing the expenses in the period to which they relate. 

    Conclusion

    The GAAP and basic definition of an asset govern the treatment of prepaid expenses as an asset. The business incurs them in an accounting period different from the accounting period in which their benefit would accrue to the business. The business has a legal right to receive those goods or services. 

    The business carries them as a current asset on the balance sheet. In the relevant accounting period, they are recognized in the income statement. 

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Atreya
AtreyaCurious
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  2. Ishika Pandey Curious ca aspirant

    Definition Goodwill is an intangible asset that places an enterprise in an advantageous position due to which the enterprise is able to earn higher profits without extra effort. For example, if the enterprise has rendered good services to its customers, it will be satisfied with the quality of its sRead more

    Definition

    Goodwill is an intangible asset that places an enterprise in an advantageous position due to which the enterprise is able to earn higher profits without extra effort.

    For example, if the enterprise has rendered good services to its customers, it will be satisfied with the quality of its services, which will bring them back to the enterprise.

    Features

    The value of goodwill is a subjective assessment of the valuer.
    • It helps in earning higher profits.
    • It is an intangible asset.
    • It is an attractive force that brings in customers to the business.
    • It has realizable value when the business is sold out.

    Need for goodwill valuation

    The need for the valuation of goodwill arises in the following circumstances :
    • When there is a change in profit sharing ratio.
    • When a new partner is admitted.
    • When partner retires or dies.
    • When a partnership firm is sold as a going concern.
    • When two or more firms amalgamate.

    Classification of goodwill

    Goodwill is classified into two categories:
    • Purchased goodwill
    • Self-generated goodwill

    Purchased goodwill :

    Is that goodwill acquired by the firm for consideration whether paid or kind?
    For example: when a business is purchased and purchase consideration is more than the value of net assets the difference amount is the value of purchase goodwill.

    Self-generated goodwill

    It is that goodwill that is not purchased for consideration but is earned by the management’s efforts.
    It is an internally generated goodwill that arises from a number of factors ( such as favorable location, efficient management, good quality of products, etc ) that a running business possesses due to which it is able to earn higher profits.

    Methods of valuation

    1. Average profit method
    2. Super profit method
    3. Capitalization method

    Average profit method: goodwill under the average profit method can be calculated either by :
    • Simple average profit method or
    • Weighted average profit method

     

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Mehak
Mehak
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  2. Mehak

    Everyone must have heard about the term “cooking the books”. This term is generally associated with Creative accounting. In simple words, Creative accounting is a method of accounting in which the management tries to show a better picture of the business than the reality. Let us now understand thisRead more

    Everyone must have heard about the term “cooking the books”. This term is generally associated with Creative accounting. In simple words, Creative accounting is a method of accounting in which the management tries to show a better picture of the business than the reality. Let us now understand this concept in detail.

    What is Creative accounting?

    Creative accounting is a method of accounting in which the management manipulates the books of accounts by finding loopholes to showcase a better image of the business.

    It is a practice of using accounting loopholes to make a company’s financial position look better than it really is. It is not exactly illegal but it is more of a gray area.

    For example, a business may delay reporting expenses to increase the profits to present a better short-term position.

    The goal of creative accounting is to impress the shareholders, investors, get loans or boost stock prices.

    However, this can also be very risky and have serious consequences. It can reduce the trust of the investors and customers. In some cases, like Enron and WorldCom the world has seen how creative accounting lead to legal consequences.

    Common Techniques of Creative Accounting

    Some of the common techniques used by the business to manipulate the financial position are as follows:

    1. Revenue Recognition: Techniques such as recognizing revenue before it is actually earned is a method of creative accounting.
    2. Expense manipulation: Delaying the recognition of expenses to show a better position of the business in a short-term.
    3. Undervaluing liabilities: Undervaluing the liabilities of the business by not recognizing any future costs such as insurance or warranty etc.
    4. Asset Valuation: Overstating the value of asses or high amount of depreciation can be some ways of manipulating the value of assets.
    5. Tax avoidance: This is a way of reducing the tax liability by manipulating the financial statements to lower the profits.
    6. Cookie jar accounting: This is a method in which profits in the good years are saved in excess to use in the years of difficulty.

    Ethical implications of Creative Accounting

    There are several ethical implications with respect to creative accounting. Some of these are discussed below:

    1. Misleading Stakeholders: Creative accounting is a method to mislead the stakeholders including the investors, creditors, government, etc. This can lead to loss of trust.
    2. Loss of trust: The shareholders will lose trust over the company if the manipulation is discovered. Creative accounting breaches the fundamental of honesty.
    3. Non – compliance: Creative accounting leads to the non-compliance of the rules and regulations of the country which requires the businesses to follow certain accounting and reporting standards.
    4. Unfair competition: Creative accounting can make a company look more profitable and stable than it actually is, misleading investors and customers. This can leave honest businesses, who follow the rules, at a disadvantage.
    5. Moral responsibility: Management and business has the moral responsibility of working in the best interest of the society and the stakeholders.

    Conclusion

    The key takeaways from the above discussion are as follows:

    1. Creative accounting is the practice of using accounting loopholes to make a company’s financial position look better than it really is.
    2. The goal of creative accounting is to impress the shareholders, and investors, get loans, or boost stock prices.
    3. Revenue recognition, expense manipulation, and asset valuation are some of the common techniques of Creative accounting.
    4. The ethical implications of creative accounting include misleading stakeholders, eroding trust, compromising regulatory compliance, promoting unfair competition, neglecting moral responsibility, etc.

     

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Bonnie
BonnieCurious
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  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    There are two types of ledger accounts in the accounting system – temporary and permanent. Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are traRead more

    There are two types of ledger accounts in the accounting system – temporary and permanent.

    Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are transferred to the profit and loss account and therefore are not balanced.

    Permanent accounts are those whose balances are carried forward to the next accounting year in form of opening balances. These accounts are balanced and such balances are transferred to the balance sheet. Examples are assets, liability and capital accounts or personal and real accounts.

    Balancing an account means equaling both the debit and the credit side of the account. Generally, there is a difference between the accounts recorded as a carry down balance in the case of permanent accounts and as a transfer balance in the case of temporary accounts.

    Balancing serves as a check to the double-entry rule of accounting.

    Balanced accounts

    As discussed above, the balanced accounts are shown in the balance sheet and the balancing figure for such accounts are carried forward to the next accounting period.

    Unbalanced accounts

    As per the above discussion, the balancing figures of unbalanced accounts are transferred to the profit and loss account and no balances are carried forward to the next accounting period.

    Suppose a company Shine Ltd. has machinery costing 5,00,000 at the beginning of the accounting period and charges depreciation of 10% on the asset. The company also has creditors amounting to 50,000 at the beginning of the period and purchases goods amounting to 30,000 on credit. It has a cash balance of 95,000 at the beginning of the period and earns interest amounting to 10,000.

    Following ledgers would be prepared to record the above entries:

    The above ledgers can be shown as follows:

    The balance of the machinery account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore depreciation account is an unbalanced account.

    The balance of creditors account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore purchases account is an unbalanced account.

    The balance of the cash account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore interest account is an unbalanced account.

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