AccountingQA Latest Questions

Astha
AsthaLeader
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  2. Manvi Pursuing ACCA
    This answer was edited.

    An asset is an item of property owned by a company/business. It may be for a longer or shorter period of time. Assets are classified into two broad heads: Non-Current Assets Current Assets   The asset may be sold for several reasons such as: An asset is fully depreciated. It should be sold becaRead more

    An asset is an item of property owned by a company/business. It may be for a longer or shorter period of time. Assets are classified into two broad heads:

    1. Non-Current Assets
    2. Current Assets

     

    The asset may be sold for several reasons such as:

    1. An asset is fully depreciated.
    2. It should be sold because it is no longer needed.
    3. It is removed from the books due to unforeseen circumstances.

     

    The journal entry for profit on the sale of assets will be:

    Cash / Bank A/c Debit
             To Asset A/c Credit
             To Profit on Sale of Asset A/c Credit
    (Being sale of an asset made with a gain)

    According to the golden rules of accounting, in the above entry “Cash/Bank A/c” it is a Real Account and the rule says “Debit what comes in” and so is debited.

    “Asset A/c” is a real account and the rule says “Credit what goes out” and so is credited. Any Gain on sale of an asset goes to the Nominal account and according to the rule “Credit, all incomes and gains” and so is credited.

     

    The journal entry for loss on sale of the asset will be:

    Cash / Bank A/c Debit
    Loss on Sale of Asset A/c Debit
             To Asset A/c Credit
    (Being sale of an asset made and loss incurred)

    In the above entry, “Loss on Sale of Asset” is debited because according to Nominal account rules “Debit all losses and expenses” and so is debited.

    According to modern rules of accounting, “Debit entry” increases assets and expenses, and decreases liability and revenue, a “Credit entry” increases liability and revenue, and decreases assets and expenses.

    Cash / Bank A/c Debit Increases Asset
    Loss on Sale of Asset A/c Debit Increases Expenses
             To Asset A/c Credit Decreases Asset
             To Profit on Sale of Asset A/c Credit Increases Expenses

     

    For example, Mr. A sold furniture for $2,500 and incurred a loss on the sale which amounted to $2,500.

    According to modern rules, the journal entry will be:

    Particulars Amt Amt  
    Cash / Bank A/c 2,500 Increase in asset
    Loss on Sale of Asset A/c 2,500 Increase in expenses
             To Asset A/c 5,000 Decrease in asset
    (Being sale of an asset made and loss incurred)
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Radha
Radha
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Internal Users
  2. Vijay Curious M.Com
    This answer was edited.

    One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll beRead more

    One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll be explaining internal users of accounting information in detail.

    Internal users are people within an organization/business who need accounting information to make day-to-day decisions.

    The various internal users of accounting information include:

    • Owners/Promoters/Directors:

    Owners are the people who contribute capital to the business and therefore they are interested to know the profit earned or loss incurred by the business as well as the safety of their capital. In the case of a Sole Proprietorship, the proprietor is the owner of the business. In the case of a Partnership, the partners are considered as the owners of the firm.

    The use for them: To know how the business is doing financially, owners need to know the profit and loss reflected in the financial statements.

    • Management:

    Management is responsible for setting objectives, formulating plans, taking informed decisions, and ensuring that pre-planned objectives are met within the stipulated time period.

    The use for them: To achieve objectives, management needs accounting information to make decisions related to determining the selling price, budgeting, cost control and reduction, investing in new projects, trend analysis, forecasting, etc.

    • Employees/Workers:

    Employees and workers are the ones who implement the plans set by the management. Their well-being is dependent on the profitability of the business.

    The use for them: They are interested to check the financial statements so that they can get a better knowledge of the business. Some organizations also give their employees a share in their profits in the form of a bonus at the year-end. This also creates an interest in the employees to check the financial statements.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Vijay Curious M.Com
    This answer was edited.

    Yes, I agree with your statement that accounting information should be comparable. Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company's financial statements across time and across other companies. Comparability oRead more

    Yes, I agree with your statement that accounting information should be comparable.

    Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company’s financial statements across time and across other companies.

    Comparability of financial statements is crucial due to the following reasons:

    1. Intra-Firm Comparison:

    Comparison of financial statements of two or more periods of the same firm is known as an intra-firm comparison.

    Comparability of accounting information enables the users to analyze the financial statements of a business over a period of time. It helps them to monitor whether the firm’s financial performance has improved over time.

    The intra-firm analysis is also known as Time Series Analysis or Trend Analysis.

    To understand intra-firm analysis, I have provided an extract of the balance sheet of ABC Ltd. for two accounting periods.

    2. Inter-Firm Comparison:

    Comparison of financial statements of two or more firms is known as an inter-firm comparison.

    Inter-firm comparison helps in analyzing the financial performance of two or more competing firms in an industry. It enables the firm to know its position in the market in comparison to its competitors.

    Inter-firm comparison is also known as Cross-sectional Analysis.

    I’ve provided the balance sheets of Co. A and Co.B to make an inter-firm comparison.

    Here is a piece of bonus information for you,

    Sector Analysis – it refers to the assessment of economical and financial conditions of a given sector of a company/industry/economy. It involves the analysis of the size, demographic, pricing, competitive, and other economic dimensions of a sector of the company/industry/economy.

    One more important thing to note here is that comparability can only be achieved when the firms are consistent in the accounting principles and standards they adopt. The accounting policies and standards must be consistent across different periods of the same firm and across different firms in an industry.

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A_Team
A_Team
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Wages Outstanding Wages and Salaries Director’s Remuneration Advance Payment of Wages All of the Above

  2. SidharthBadlani CA Inter Student
    This answer was edited.

    The correct answer is option B. Wages and salaries are debited to the trading account. The trading account helps us to determine the Gross Profit Or Loss that a company earns or incurs by carrying on its core manufacturing or trading activities. Let us discuss the above items and their treatments inRead more

    The correct answer is option B. Wages and salaries are debited to the trading account.

    The trading account helps us to determine the Gross Profit Or Loss that a company earns or incurs by carrying on its core manufacturing or trading activities.

    Let us discuss the above items and their treatments in the final accounts one at a time:

    Wages Outstanding

    Firstly, “wages outstanding” is not debited into the trading account. It is a liability that is shown in the balance sheet.

    Outstanding wages imply remuneration due to be paid to the workers for the services they have already rendered to the business.

    Since the company has already received the service, it becomes a legal obligation for it to pay the wages to the workers for those services. Hence, outstanding wages are a liability.

    Wages and Salaries

    Wages and Salaries are debited to the trading account.

    Wages Vs Salaries

    Let us understand the difference between wages and salaries. Wages are the regular payments that are made daily, weekly or fortnightly. Such payments are mostly made to factory workers.

    Salaries, on the other hand, are assumed to imply the remuneration paid to office workers and sales staff.

    Wages are debited to the trading account, while salaries are debited to the Profit and Loss account.

    Director’s Remuneration

    No, the director’s remuneration is not debited to the trading account. This is because director’s generation is a business expense. It is a kind of salary provided to the director for the services rendered by him to the company.

    Directors’ remuneration refers to compensation the company gives to its directors for the services rendered. It is debited to the Profit and Loss Account.

    Advance Payment of Wages

    No, advance payment of wages is not debited to a trading account. It is shown by reducing it to wages. Advance payment of wages implying paying remuneration to the workers before the commencement of the period for which the wages relate to.

    However, one must note that if both wages and prepaid wages appear within the trial balance, then only the figure written against wages would appear in the trading account. There would be no treatment for prepaid wages.

    Let us consider a scenario where wages of amount 5,000 is appearing inside trial balance. Outside the trial balance, the following information is provided

    • Wages prepaid for the current financial year = 1,000
    • Wages prepaid for the next financial year = 2,000

    In the above case, the total wages to be debited to the trading account would be 5,000 + 1,000 – 2,000 = 4,000

    Significance of the Final Accounts

    • It helps in determining the net profit or loss of the entity for the current financial year.
    • It is a major source of guidance for investors. Shareholders decide whether or not to invest in a company on the basis of final accounts.
    • It allows banks and investors to see your business’s total income, debt load a,nd financial stability.

     

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Anushka Lalwani
Anushka Lalwani
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  2. ShreyaSharma none
    This answer was edited.

    Ledger Folio A ledger folio, in simple words, is a page number of the ledger account where the relevant account appears. The term 'folio' refers to a book, particularly a book with large sheets of paper. In accounting, it's used to maintain ledger accounts. The use of ledger folio is generally seenRead more

    Ledger Folio

    A ledger folio, in simple words, is a page number of the ledger account where the relevant account appears. The term ‘folio’ refers to a book, particularly a book with large sheets of paper. In accounting, it’s used to maintain ledger accounts.

    The use of ledger folio is generally seen in manual accounting, i.e the traditional book and paper accounting as it is a convenient tool used for tracking the relevant ledger account from its journal entry. Whereas, in computer-oriented accounting (or computerized accounting), it’s not really an issue to track your relevant ledger account.

    Ledger folio, abbreviated as ‘L.F.’, is typically seen in journal entries. The ledger folio is written in the journal entries, after the ‘date’ and ‘particulars’ columns. It is really convenient when we’re dealing with and recording a large number of journal entries. As we will be further posting them into ledger accounts, thus, ledger folio comes in as a really useful component of journal entries.

    • The number in the ledger folio may be numeric or alphanumeric.
    • The ledger folio column in the journal has nothing to do with the accounting principles and rules. It’s used by us as per our methods and needs.

     

    Example

    We’ll look at how the ledger folio column is used while recording journal entries.

     

    We can find the relevant ledger accounts on the page numbers of the book as mentioned in the above entries, i.e. the cash and sales account on page – 1 whereas, the purchases and sundry creditors on page – 2 of the relevant ledger book.

     

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Simerpreet
SimerpreetHelpful
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  2. Karishma
    This answer was edited.

    A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period.  It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more

    A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period.  It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.

    When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.

    The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.

    Accounting entry for loss transferred is as follows :

    Capital A/c   …Dr.

    To Profit & Loss A/c

    (being net loss transferred to capital account)

     

    Example

    A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.

    Extract of a Profit and loss a/c showing net loss is as under:

    Profit and loss A/c for the year ended …..

    Particulars Amount (Dr.) Particulars Amount (Cr.)
    To gross loss b/d xxx By gross profit b/d xxx
    To salaries xxx By bank interest xxx
    To office rent xxx By commission received xxx
    To printing and stationery xxx By rent received xxx
    To insurance xxx By dividend xxx
    To audit fees xxx By profit on sale of asset xxx
    To electricity chares xxx By Net Loss xxx
    To depreciation xxx
    To bad debts xxx
    To bank charges xxx
    To miscellaneous expenditure xxx
    To interest on loans xxx
    Total xxx

    The debit balance for a non-corporate entity is shown as a reduction from the capital account

    Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :

    Balance Sheet as on…

    Liabilities Amount
    Equity and liabilities
    Capital

    Less: Profit & Loss A/c

    While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.

    Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :

    Balance Sheet as on..

    Liabilities Amount
    Equity and liabilities
    Reserves And Surplus

    Less: Profit & Loss A/c

    Conclusion:  Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.

    The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.

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Aadil
AadilCurious
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  2. GautamSaxena Curious .
    This answer was edited.

    Meaning of Opening Stock Opening stock is the inventory or stock of goods that are available at the beginning of the new accounting year carried down from the previous year's closing stock which is recorded in the books of accounts. In simple words, Opening stock is the goods/quantity/products thatRead more

    Meaning of Opening Stock

    Opening stock is the inventory or stock of goods that are available at the beginning of the new accounting year carried down from the previous year’s closing stock which is recorded in the books of accounts.

    • In simple words, Opening stock is the goods/quantity/products that are held by a business at the beginning of a new accounting period and it is the closing stock of the preceding year carried down.
    • Similarly, the closing stock is the number of unsold goods that remain with the business at the end of an accounting year and is further carried down to the next year as Opening Stock.

     

    Formula

    There are 3 main formulas used for Opening Stock’s calculation. They are-

    • For manufacturing companies

    Opening Stock = Raw Material Cost + Work in Progress + Finished Goods Cost

    • When only Sales, GP, COGS, and Closing Stock are given

    Opening Stock = Sales – Gross Profit – Cost of Goods Sold + Closing Stock

    • You can use this one when only limited information is provided

    Opening Stock = COGS + Closing Inventory – Purchases

     

    Types of Opening Stock

    There are three types of Opening Stock or we may also say that Opening  Stock consists of these 3 elements. They are-

    • Raw Materials- These are the unprocessed goods held by a business that is yet to be converted into finished goods.
    • Work in Progress- These include the goods that are in process but not converted into finished goods.
    • Finished Goods- These are the goods/products that have completed the manufacturing process but have not yet been sold.

    Opening Stock in Final Accounts

    Opening stock is a part of the Trading Account while preparing the Final Accounts. And this is how it is posted in the Trading A/c.

    Trading A/c (for the year ending…)

     

    Example of Opening Stock

    Example

    IKEA, the biggest Furniture manufacturer collected this data on April 1, 2021,

    Timber – $300,000

    Wood – $30,000

    Nails – $15,000

    Pre-cut Wood – $120,000

    Assembled Furniture – $400,000

    Now, adding them (as said earlier, Opening stock is a combination of these three.)

    Opening Stock (Raw Material + Work in Progress + Finished Goods) = $865,000

    Therefore, that’s how one can calculate Opening Stock.

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