AccountingQA Latest Questions

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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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Meaning of lease A lease is an agreement or a contract in which the right to use an asset like land, building, or machinery is given by one party to the other party for a fixed period of time against the consideration of a single payment or a series of payments. There are two parties in a lease agreRead more

    Meaning of lease

    A lease is an agreement or a contract in which the right to use an asset like land, building, or machinery is given by one party to the other party for a fixed period of time against the consideration of a single payment or a series of payments.

    There are two parties in a lease agreement:

    • Lessor: The party who gives the right to use its asset in return for a series of payments or a single payment.
    • Lessee: The party who receives the right to use the asset from the Lessor.

    This is similar to a rent agreement or contract. The only difference between lease and rent is duration. A rent agreement is generally for less than 12 months while a lease agreement is for more than 12 months like 5 years or 10 years, sometimes even for like 99years.

     

    Type of lease

    There are two types of lease:

    • Operating lease
    • Finance Lease

     

    Operating lease

    • An operating lease is a type of lease in which the possession of the leased asset is transferred back from the lessee to the lessor at the end of the lease period.
    • Here, all the risk and rewards incident to ownership remains with the lessor, not the lessee.
    • The depreciation on the leased asset in case of operating lease is not charged by the lessee to its profit and loss account as the leased asset is not shown in the balance sheet. A leased asset is an off-balance sheet item in the case of an operating lease.

     

    Finance lease

    • Unlike an operating lease, the ownership of the leased asset is transferred to the lessee at the end of the leased period.
    • Thus, at the inception of the lease agreement, all the risk and rewards incident to ownership is transferred from the lessor to the lessee.
    • The depreciation on the leased asset is charged by the lessee to its profit and loss account as the leased asset is shown in the balance sheet. A leased asset is a balance sheet item in the case of an operating lease.
    • Along with the leased asset, the obligation to pay the future lease payment is also shown in the balance sheet as a non-current liability or current liability as the case may be.

     

    Difference between operating lease and finance lease in tabular format

     

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A_Team
A_Team
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  2. ShreyaSharma none
    This answer was edited.

    Prepaid Payable Prepaid payable or prepaid expenses refer to the future expenses that have been paid in advance. It is an advance payment made by the business for the goods and services to be received by the business in the future. A prepaid expense is an asset on the balance sheet. The number of prRead more

    Prepaid Payable

    Prepaid payable or prepaid expenses refer to the future expenses that have been paid in advance. It is an advance payment made by the business for the goods and services to be received by the business in the future.

    A prepaid expense is an asset on the balance sheet. The number of prepaid expenses that will be used up within one year is reported on a company’s balance sheet as a current asset. According to generally accepted accounting principles (GAAP), expenses should be recorded in the same accounting period as the benefit generated from the related asset.

    Example

    ABC Ltd. purchases insurance for the warehouse. It was ₹2,000 per month. The company pays ₹24,000 in cash upfront for a 12-month insurance policy for the warehouse. Each month an adjusting journal entry will be passed, adjusting the amount of insurance used from the prepaid insurance.

    Journal Entry-

    Prepaid Expenses in Balance Sheet-

    Prepaid expenses are shown in the balance sheet under the current assets heading as it’s a short-term asset and to be consumed within one accounting year.

    Balance Sheet (for the year ending…)

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Simerpreet
SimerpreetHelpful
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  2. Mitika

    Types of Partnership A partnership is an agreement between two or more people who comes together to run a business. There are different types of partnerships formed with different perspectives as mentioned: General Partnership Limited Partnership Limited Liability Partnership Partnership at will ParRead more

    Types of Partnership

    A partnership is an agreement between two or more people who comes together to run a business.

    There are different types of partnerships formed with different perspectives as mentioned:

    General Partnership

    Limited Partnership

    Limited Liability Partnership

    Partnership at will

    Partnership for a fixed term

     

    General Partnership

    It refers to the partnership where all partners actively manage the business and have unlimited legal liability. Generally, all the partners share equal profit and loss in the business and are also equally liable for the outsider’s loan.

    All the partners are responsible for the business’s day-to-day operations and managerial responsibility.

    If the partners decided to share profit and loss in any other ratio (unequal ratio), then they have to disclose this in a agreement called a partnership deed.

    In this, debts are equally borne by selling the partners assets of all the partners. In case of dissolution, if the partnership firm has taken a loan from outsiders and does not have sufficient funds to repay the amount then the payment can be done by selling the partner’s personal property.

    It can be formed by signing the partnership agreement that would be proved as evident in case of disagreement among partners. For instance, if any partner dies or leaves the firm then they should follow the content of the agreement.

    A general partnership does not pay the tax instead the partners personally report their income tax return.

     

    Limited Partnership

    In a Limited partnership, all the partners contribute capital but not necessarily all of them manage the business.

    The old partners add a new partner into the partnership to fulfill the financial needs of the business i.e. for capital. The rights of decision-making are issued to new partners on the basis of their contribution of capital. The new partner is not associated with day-to-day business activities. He /She is called a limited partner or silent partner.

    The liability partner has limited liability to the extent of his capital. The personal assets of the limited partner can not be used for the payment of the firm’s liability.

     

    Limited Liability Partnership

    It is a more popular type of partnership in today’s world. To form an LLP you have to register under the Limited Liability Partnership Act, 2008.

    In this, all the partners have limited liability to the extent of the capital investment in the business. The personal assets of the partners can not be used to discharge the liability of the partnership.

    A Minimum of 2 partners are required to form an LLP. However, no maximum limit on a number of partners.

    It has also some features of the company. It has a separate legal entity. The LLP can buy property in its own name and sue and be sued in its name.

    LLPs are often formed by professionals like Chartered Accountants, doctors and Legal firms.

     

    Features

    • It has a separate legal entity.
    • The cost of forming is low.
    • It requires less compliance and regulations.
    • Minimum two partners are required, no limit on the maximum number of partners.
    • The partners has limited liability.

     

    Partnership at will

    Partnership at will is a form of business where there is no fixed tenure of the partnership. That means there is no expiration of the partnership. But if the partnership is formed for a fixed duration and its period has expired and still continues then it will become a partnership at will.

     

    Partnership for a fixed term

    The partnership is created for a fixed duration of the interval. After the expiration of such duration, the partnership may come to an end.

    If the partners share profit and loss even after the expiration of the duration of the partnership then it will become a partnership at will.

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SidharthBadlani
SidharthBadlani
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  2. Ishika Pandey Curious ca aspirant
    This answer was edited.

    Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more

    Definition

    Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.

    However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.

    For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.

    Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.

    For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.

    Meaning as per AS – 29

    Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-

    • Contingent asset

    A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
    Not wholly within the control of the enterprise.

    It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.

    • Contingent liability

    A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
    Not wholly within the control of the enterprise.

    A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
    A reliable estimate of the amount of obligation cannot be made.

    Recognition In Financial Statements

    Contingent assets and liabilities are recognized as follows:-

    • Contingent Assets

    As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.

    It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.

    However, when the realization of income is virtually certain, the related asset no longer remains contingent.

    • Contingent liability

    As per the rules, it is not recognized by an enterprise.

    When recognized?

    Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.

    The assets and the related income are recognized in the financial statements of the period in which the change occurs.

    Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.

    And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.

    A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.

    Disclosure

    Now we will see how contingent assets and liability are disclosed which is mentioned below:-

    • Contingent asset

    These contingent assets are not disclosed in financial statements.
    A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.

    • Contingent Assets

    A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.

     

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Simerpreet
SimerpreetHelpful
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  2. Karishma

    Realisation account  A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more

    Realisation account 

    A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.

    All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.

    If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.

     

    Credit side of realisation account

    • Liabilities: All the liabilities including sundry creditors, outstanding expenses, bills payable, loans and advances, bank overdrafts and cash credit are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred.
      • Accounting entry for this is as follows:

    Liabilities A/c Dr…..

    To Realisation A/c …..

    (All the liabilities transferred to realisation account)

    • Provisions: All the provisions including provision for doubtful debts and provision for taxation are transferred to the credit side of the realisation account.
      • Accounting entry for this is as follows:

    Provision A/c Dr…..

    To Realisation A/c …..

    (All the provisions transferred to the realisation account)

    • Cash and bank A/c: Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.
      • Accounting entry for this is as follows:

    Bank A/c Dr…..

    To Realisation A/c …..

    (Asset sold for cash)

    • Loss on realisation: If the debit side of the realisation account exceeds the credit side, it results in loss then the capital account is debited.
      • Accounting entry for this is as follows:

    Capital A/c Dr…..

    To Realisation A/c …..

    (Being loss transferred to the capital account)

     

    The debit side of the realisation account

    All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.

     

    Format for realisation Account is as under:

    Realisation A/c
    Particulars Amount Particulars Amount
    To Land & Building By Provision for Doubtful Debts A/c
    To Plant & Machinery By Sundry Creditors A/c
    To Furniture By Bills Payable A/c
    To Debtors By Outstanding Expenses A/c
    To Goodwill A/c By Bank Loan, Overdraft, Cash Credit A/c
    To Investment A/c By Bank/ Cash A/c (Assets realized):
    To Bank/ Cash A/c (Liabilities Paid): Land and Building
    Sundry Creditors Plant and Machinery
    Bill Payable Furniture
    Outstanding Expenses Stock
    Bank Loan, Debtors
    Overdraft, Bad Debts recovered
    Cash Credit Investment
    To Bank/ Cash A/c By Partner’s Capital A/cs
    (Realisation Expenses) (assets taken over)
    To Partner’s Capital A/c By Partner’s Capital A/cs
    (Realisation Expenses) (Loss on Realisation)
    To Partner’s Capital A/cs
    (Profit on Realisation)
    Total Total

     

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Sandy
Sandy
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InterestInterest Received in AdvanceJournal Entry
  2. Nistha Pursuing B.COM H (B&F) and CMA
    This answer was edited.

    Classified under advance income, Interest received in advance is unearned income that pertains to the following accounting period but is received in the current period. Such interest is not related to the current accounting period and the related benefits for such income are yet to be provided. HencRead more

    Classified under advance income, Interest received in advance is unearned income that pertains to the following accounting period but is received in the current period. Such interest is not related to the current accounting period and the related benefits for such income are yet to be provided. Hence, it is a liability for the concern.

    The treatment of such advance interest is based on the Accrual concept of accounting.

    The journal entry for interest received in advance is:

    Now suppose, a firm Star shine receives interest on loan of 5,00,000 @ 7% p.a. extended to another firm. In the current accounting period, Star shine receives 50,000 as interest, excess being advance for the following year. Then the following journal entries should be passed:

       

    Cash received in form of interest is debited (Debit what comes in) and interest account is credited because of an increase in interest income (credit all incomes and gains).

    Interest account is debited because we have to decrease the interest income since 15,000 relates to the next accounting year. Interest received in advance is credited because such interest of 15,000 is not yet earned and is a liability for the concern.

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