AccountingQA Latest Questions

A_Team
A_Team
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  2. Akash Kumar AK
    This answer was edited.

    Generally, Assets are classified into two types. Non-Current Assets Current Assets   Non-Current Asset Noncurrent assets are also known as Fixed assets. These assets are an organization's long-term investments that are not easily converted to cash or are not expected to become cash within an acRead more

    Generally, Assets are classified into two types.

    1. Non-Current Assets
    2. Current Assets

     

    Non-Current Asset

    Noncurrent assets are also known as Fixed assets. These assets are an organization’s long-term investments that are not easily converted to cash or are not expected to become cash within an accounting year.

    In general terms, In accounting, fixed assets are assets that cannot be converted into cash immediately. They are primarily tangible assets used in production having a useful life of more than one accounting period. Unlike current assets or liquid assets, fixed assets are for the purpose of deriving long-term benefits.

    Unlike other assets, fixed assets are written off differently as they provide long-term income. They are also called “long-lived assets” or “Property Plant & Equipment”.

     

    Examples of Fixed Assets

    • Land
    • Land improvement (e.g. irrigation)
    • Building
    • Building (work in progress)
    • Machinery
    • Vehicles
    • Furniture
    • Computer hardware
    • Computer software
    • Office equipment
    • Leasehold improvements (e.g. air conditioning)
    • Intangible assets like trademarks, patents, goodwill, etc. (non-current assets)

     

    Valuation of Fixed asset

    fixed assets are recorded at their net book value, which is the difference between the “historical cost of the asset” and “accumulated depreciation”.

    “Net book value = Historical cost of the asset – Accumulated depreciation”

     

    Example:

    Hasley Co. purchases Furniture for their company at a price of 1,00,000. The Furniture has a constant depreciation of 10,000 per year. So, after 5 years, the net book value of the computer will be recorded as

    1,00,000 – (5 x 10,000) = 50,000.

    Therefore, the furniture value should be shown as 50,000 on the balance sheet.

     

    Presentation in the Balance Sheet

    Both current assets and non-current assets are shown on the asset side(Right side) of the balance sheet.

     

    Difference between Current Asset and Non-Current Asset

    Current assets are the resources held for a short period of time and are mainly used for trading purposes whereas Fixed assets are assets that last for a long time and are acquired for continuous use by an entity.

    The purpose to spend on fixed assets is to generate income over the long term and the purpose of the current assets is to spend on fixed assets to generate income over the long term.

    At the time of the sale of fixed assets, there is a capital gain or capital loss but at the time of the sale of current assets, there is an operating gain or operating loss.

    The main difference between the fixed asset and current asset is, although both are shown in the balance sheet fixed assets are depreciated every year and it is valued by (the cost of the asset – depreciation) and current asset is valued as per their current market value or cost value, whichever is lower.

     

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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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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. 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. Sometimes debtors are unable to pay the amount due either partially or fully. the amount that is not receivableRead 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.

    Sometimes debtors are unable to pay the amount due either partially or fully. the amount that is not receivable is a loss and is called bad debt.

    Bad debts are neither assets nor liabilities they are expenses that are debited to the profit and loss account and reduced from debtors in the balance sheet.

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

     

    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 are 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.

     

    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. 

     

    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 the 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 expenses and debited to the profit and loss account.
      • For example, as I have explained above, before transferring to the balance sheet, bad debt will be debited to the profit and loss account as an expense.

    Now let me show you the extract of the profit and loss account and balance sheet showing bad debts and bad debts recovered which are as follows:-

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Manvi
Manvi
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  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is aRead more

    The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is a contra asset account which means an account with a credit balance.

    When a business first sets up a provision for doubtful debts, the full amount of the provision should be debited to bad debts expense as follows.

    Bad Debts A/c Debit Debit the increase in expense.
          To Provision for Doubtful Debts A/c Credit Credit the increase in liability.

    In subsequent years, when provision is increased the account is credited, and when provision is decreased the account is debited. This is so because provision for doubtful debts is a contra account to debtors and has a credit balance, and is treated as a liability.

    Effects of Provision for Doubtful Debts in financial statements:

    1. Trading A/c: No effect.
    2. Profit and Loss A/c: Debited to P&L A/c and charged as an expense.
    3. Balance Sheet: Deducted from Debtors.

    For example, ABC Ltd had debtors amounting to Rs 50,000. It creates a provision of 5% on debtors.

    Provision for Doubtful Debts = 50,000*5%

    = 2,500

    Journal entry for provision will be:

    Bad Debts A/c 2,500
          To Provision for Doubtful Debts A/c 2,500

    Effect on financial statements will be:

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Spriha Sparsh
Spriha Sparsh
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company. Retained earnings are shown under shareholders’ equity in the balance sheet and are calculaRead more

    Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company.

    Retained earnings are shown under shareholders’ equity in the balance sheet and are calculated as follows:
    Retained earnings at the end of the year = Retained earnings at the beginning of the year + Net Income – Dividend

    From the above formula, Yes, it is possible for retained earnings to be negative. Negative earnings occur when the cumulative dividend payout is higher than the earnings made by a company during the year. This results in a negative balance as per the formula.

    Negative Retained earnings indicate a number of concerning facts about a company:

    • That the company is experiencing Long term losses.
    • That there are chances for the company to go into bankruptcy.
    • That the company may be paying out dividends to the shareholders from borrowed finance.

     

    Positive Retained Earnings

    When a company is said to have positive retained earnings, the company has several advantages. The company has excess profit to hold on to. This helps in expansion and also acts as a safety net in case of unforeseen expenses. Hence if a company shows positive Retained earnings it can be interpreted that the company is profitable.

    However, higher retained earnings mean the distribution of lesser dividends to shareholders. This makes the company look less attractive to investors. Another reason for high retained earnings could be that the company has not found any profitable investment for its earnings.

    Therefore, there should be adequate retained earnings with the company but at the same time, keep a check that the amount of retained earnings does not exceed a limit.

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

    Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods)   ACCOUNTS PAYABLE Accounts payable refers to all short-term liaRead more

    Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods)

     

    ACCOUNTS PAYABLE

    Accounts payable refers to all short-term liabilities of the business that are to be paid. These are usually paid within a duration of  90 days. It includes both Trade payable (goods and services purchased on credit) as well as expenses payable (used but payment not made yet) like rent payable, electricity bill, etc.

    Businesses cannot make every payment on the spot. There can be cases when the business is facing a shortage of funds, can have funds but doesn’t have enough cash (or liquid funds) to make payment or simply doesn’t want to make payment on the spot to reduce its capital requirement.

    So, like us businessmen also purchase goods on credit or use services for which payment is to be made soon. All these are liabilities for the business.

    However, they must be related to the business to be considered as accounts payable.

     

    DEBIT BALANCE OF ACCOUNTS PAYABLE 

    Debit balance of accounts payable means money owed by others. There is Debit balance when

    OVERPAYMENT is made to the creditors or the supplier. It happens when the wrong amount is paid or payment is made twice for the same transaction.

    Suppose you need to pay $10,000 as rent within 30 days. After 25 days you mistakenly made a payment of $12,000.

    In this case,

    • Firstly, you will record the transaction by crediting Accounts payable (as liability increased) by $10,000
    • When payment is made after 25 days, Accounts Payable is debited by $12,000 (as liability decreased)
    • So, there will be a debit balance of $2,000 (which means the creditor owes you) till the creditor returns the excess amount.

     

    PURCHASE RETURN of already paid goods also result in debit balance of Accounts Payable.

    Suppose you bought goods worth $50,000 from Mr A on credit and paid for the same. Later, you returned all the goods because they were defective. Now, there will be Debit balance of Accounts Payable till there is a full refund of $50,000 by Mr A.

     

    How is Accounts Payable Treated Normally?

    Accounts Payable are the current liabilities of the firm and are shown under the head Current Liabilities in the Balance Sheet. Its liability, thus has a credit balance which represents the amount owed by the firm to others. It is credited when increases and debited when decreases.

    For example – Suppose you purchased goods worth $30,000 and agreed to pay after 30 days. So, Accounts payable will be credited by $30,000 and purchases will be debited by $30,000.

    Purchases A/c – $30,000 (debit)

    To Accounts Payable A/c – $30,000

    After 30 days payment is made in cash, which means the liability decreased. So, Accounts Payable A/c will be debited.

    Accounts Payable A/c – $30,00

    To Cash – $30,000

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