AccountingQA Latest Questions

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

    As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts. Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future,Read more

    As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts.

    Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future, its creditors and lenders report to the firm about their dues.

    At that time, a firm may get to know that it had failed to record some liabilities in its books and it has settled them now.

    We know that when a partnership firm is dissolved, a realisation account is created to which all the assets and liabilities of the firm are transferred.  Entries are as given below:

    Realisation A/c     Dr.      ₹ Amt

    To Assets A/c                  ₹ Amt

    ( Asset transferred to realisation account)

    Liabilities A/c    Dr.        ₹ Amt

    To Realisation A/c       ₹ Amt

    (Liabilities transferred to realisation account)

    Hence, for transferring unrecorded liabilities, the procedure is the same for the recorded liabilities:

    Unrecorded Liabilities A/c        Dr.     ₹ Amt

    To Realisation A/c                               ₹ Amt

    ( Unrecorded liabilities transferred to realisation account)

    Then to pay off the unrecorded liability the entry is:

    Realisation A/c     Dr.    ₹ Amt

    To Cash / Bank A/c       ₹ Amt

    (Unrecorded liabilities paid off)

    That’s it, I hope I was able to make you understand.

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

    The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well. Amount tRead more

    The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well.

    Amount to any specific reserve is generally transferred from the Profit and Loss Appropriation Account.

    Various specific reserves are:

    • Debenture Redemption Reserve

    Debentures are debt instruments of a company and they have to be redeemed, that is, paid back after the expiry of the specified period. According to Accounting Standards, companies are required to set aside a specific amount in Debenture Redemption Reserve, when they are due for redemption.

    • Securities Premium Reserve

    When shares or debentures are issued at a price higher than its book value/face value, the difference between the market value and book value is called Securities Premium. The amount of Securities Premium is transferred to Securities Premium Account. This amount is utilized to issue fully paid bonus shares, write off preliminary expenses, write off commission discounts, etc., to provide a premium on redemption of debentures.

    • Investment Fluctuation Reserve

    The investments made by a company are subject to fluctuations in its market value. Company Law and Accounting Standards require companies to provide for such fluctuations by creating a reserve called Investment Fluctuation Reserve.

    • Dividend Equalisation Reserve

    Companies are required to pay a dividend to their shareholders. It is often difficult for a company to maintain a consistent rate of dividend as the dividend paid is equivalent to the profit made by a company during the financial year which is not consistent. So, Dividend Equalisation Reserve is created to maintain a consistent rate of dividend on shares over time, in the event of both high and low profits.

     

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Radha
Radha
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Meaning Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets. Examples of capital assets are plant, machineryRead more

    Meaning

    Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets.

    Examples of capital assets are plant, machinery, land, building, vehicles etc.

    To expense the capital assets for the economic benefits they provide, they are depreciated over their useful life on some equitable basis.

    When capital assets are sold, the gain on sale is credited to the capital reserve account. On loss, it is simply debited to the profit and loss account. Capital assets are shown under the heading ‘Plant, Property and Equipment’ under the asset head of the balance sheet.

    Assets that do not qualify as capital assets

    The assets which provide economic benefits for less than a year do not qualify as capital assets. Such as inventories, accounts receivables etc. are not capital assets.

    Also, those assets which are not intended to be held for more than 1 year are not capital assets even if such assets are capable of providing economic benefits for more than 1 year. Such assets will be considered current assets.

    For example, if a plot of land is purchased by a business but the intention is to sell it after 2 months then such land will not be considered a capital asset.

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Aadil
AadilCurious
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  2. Rahul_Jose Aspiring CA currently doing Bcom

    When a firm grants an extra amount of reward to its employees based on their performance, it is termed a bonus. An accrued bonus is contingent on performance. Bonus accruals are recorded in the books so that inaccuracies can be avoided in the financial statements. Such bonuses may be given as a singRead more

    When a firm grants an extra amount of reward to its employees based on their performance, it is termed a bonus. An accrued bonus is contingent on performance. Bonus accruals are recorded in the books so that inaccuracies can be avoided in the financial statements.

    Such bonuses may be given as a single flare amount or as a percentage of their salaries. These bonuses can be given quarterly or annually or in any manner in which the firm decides.

    If the bonus is accrued to its employees at 5% of their salary of Rs 30,000, then the accrual bonus can be shown in the journal as follows:

    The bonus expense account is debited because according to the modern rule of accounting “Increase in expense is debited”. Accrued bonus liability is credited because according to the rule of accounting, “Increase in liability is credited”.

    When it is time to pay such bonus amounts to its employees, then they can be journalised as:

    In this case, the accrued bonus liability is eliminated and hence debited because according to the rule of accounting, “ Decrease in liability is debited” whereas cash account is credited since “the decrease in the asset is credited.”:

    Failing to accrue these bonuses will lead to an overstatement of revenues in the financial statements and hence result in inaccurate data. If employees do not meet the required performance targets, then a bonus will not be given and hence the entries will be reversed.

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Simerpreet
SimerpreetHelpful
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  2. GautamSaxena Curious .
    This answer was edited.

    Interest on capital Interest on capital is interest payable to the owner/partners for providing a firm with the required capital to commence the business. Normally, it is charged for a full year on the balance of capital at the beginning of the year unless some fresh capital is introduced during theRead more

    Interest on capital

    Interest on capital is interest payable to the owner/partners for providing a firm with the required capital to commence the business. Normally, it is charged for a full year on the balance of capital at the beginning of the year unless some fresh capital is introduced during the year.

    When the business firm faces a loss, the interest on capital will not be provided. It is permitted only when the business earns a profit. Such payment of interest is generally observed in partnership firms. It is provided before the division of profits among the partners in a partnership firm.

    If an owner or partner introduces additional capital to the business then, it is also taken into account for providing interest on capital.

    Interest on capital in the accounting equations

    Interest on capital is an expense from a business point of view, as it is payable to the owner and is not paid in cash. Being an income from the owner’s point of view, it is added to his capital account. And being a business expense from the business point of view, it is therefore deducted from the capital.

    Hence, it further doesn’t create any change in the accounting equation mathematically but it’s mandatory to be shown as it plays a vital role in the profit and loss a/c and even helps the business save tax.

    Example

    Z started a business with cash and stock of ₹45,000 and ₹5,000 respectively. Further, he received interest on capital of ₹1,000. The accounting equation for the following transactions will be as follows:

    Accounting Equation

     

     

     

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Anushka Lalwani
Anushka Lalwani
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1) Liability 2) Asset 3) Expenses 4) Income

  2. ShreyaSharma none
    This answer was edited.

    Therefore, 2) Asset is the correct option. Explanation   The petty cash book is managed and made by not an accountant but the petty cashier and is done to record small incomes and expenditures that are not recordable in the cash book. Therefore, the desired result we obtain from the deduction oRead more

    Therefore, 2) Asset is the correct option.

    Explanation

     

    The petty cash book is managed and made by not an accountant but the petty cashier and is done to record small incomes and expenditures that are not recordable in the cash book. Therefore, the desired result we obtain from the deduction of the total expenditure and total cash receipt is the closing balance of the petty cash book.

    Petty cash refers to the in-hand physical cash that a business holds to pay for small and unplanned expenses.

    Asset: The closing balance of the petty cash book is considered an asset because the petty cash book is a type of cash book. The petty cash book also deals in outflow and inflow of the cash, it also maintains and records income and expenditure that are similar to the cash book.

     

    The petty cash book since being a part of the cash book, which records all the inflow and outflow of cash in a business, which is an asset, thus petty cash book’s closing balance is considered an asset. Also, the balance of the petty cash book is never closed. Their closing balance is carried forward to the next year.

     

    Liability: The closing balance of the petty cash book is not considered a liability because that closing balance of the petty cash book doesn’t create a liability for the business. In fact, the closing of the petty cash book is placed under the head current asset in the balance sheet as mentioned above, it’s a part of the cash book which records the transactions of cash a/c which is an asset itself.

     

    Expenses or Income: It is not an expense because the closing balance of the petty cash book is calculated by deducting the total expenditure from the total cash receipt.

    That is an asset and it is considered to be a current asset, neither an income nor an expense. It is used for paying out petty expenses.

     

    Therefore, the closing balance of the petty cash book is considered an asset.

     

     

     

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

    Bad debts mean the money owed by customers who have gone bankrupt or the likelihood of who's ever returning the money is significantly low. Bad debt is a nominal account. A nominal account is an account that records the business transactions belonging to a certain category of income, expense, profitRead more

    Bad debts mean the money owed by customers who have gone bankrupt or the likelihood of who’s ever returning the money is significantly low. Bad debt is a nominal account.

    A nominal account is an account that records the business transactions belonging to a certain category of income, expense, profit or loss. The balances on nominal accounts are normally written off at the end of each financial year. For example, sales A/c, purchases A/c, interest income, loss from the sale of assets etc.

    Why are bad debts A/c classified as a nominal account?

    First of all, let us understand the other two types of accounts – personal accounts and real accounts.

    Personal accounts deal with the records of the business’ transactions with a particular person or entity. For example Mukesh A/c, Mahesh A/c, Reliance A/c, Suresh and Co. A/c etc.

    Real accounts deal with transactions and records related to assets. The balance in these accounts is normally carried forward from one period to another. For example “Furniture A/c “, ” Building A/c ” etc.

    Now that we have understood the basic definitions of all three types of accounts, we can discuss the reason behind the classification of bad debts as nominal accounts.

    A bad debt is a loss that the company has incurred. It may be due to bankruptcy of customers, customer fraud etc. The company isn’t going to receive that money. The bad debts are written off at the end of the year by transferring them to profit and loss A/c.

    Thus, bad debts relate to loss and are normally not carried forward from one period to another. Hence, they are classified as nominal accounts.

    Treatment of Bad Debts

    Bad debts are written off at the end of each year by debiting them to the profit and loss A/c. The amount of bad debts is reduced from the amount of debtors that the company has.

    A company may also choose to create a provision for bad debts for the balance amount of debtors that the company has after adjusting for bad debts. This provision represents a rough estimate of the amount due to debtors that the business expects to not receive. In other words, it is an estimate of customer bankruptcy that the business expects.

    Conclusion

    We can conclude that

    • There are primarily three types of accounts – real, personal and nominal.
    • Bad debts are a nominal account.
    • Bad debts is a loss that the business has incurred
    • It may be due to bankruptcy of customers, fraud etc
    • Bad debts are written off each year by transferring them to the income statement
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