AccountingQA Latest Questions

Simerpreet
SimerpreetHelpful
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Working Capital
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    Let us first understand what working capital is. Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern. It also represents the exceRead more

    Let us first understand what working capital is.

    Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern.

    It also represents the excess of current assets, such as cash, accounts receivable and inventories, over current liabilities, such as accounts payable and bank overdraft.

    working capital formula

    Sources of Working Capital

    Any transaction that increases the amount of working capital for a company is a source of working capital.

    Suppose, Amazon sells its goods for $1,000 when the cost is only $700. Then, the difference of $300 is the source of working capital as the increase in cash is greater than the decrease in inventory.

    Sources of working capital can be classified as follows:

    short term and long term sources of working capital

    Short Term Sources

    • Trade credit: Credit given by one business firm to the other arising from credit sales. It is a spontaneous source of finance representing credit extended by the supplier of goods and services.
    • Bills/Note payable: The purchaser gives a written promise to pay the amount of bill or invoice either on-demand or at a fixed future date to the seller or the bearer of the note.
    • Accrued expenses: It refers to the services availed by the firm, but the payment for which is yet to be done. It represents an interest-free source of finance.
    • Tax/Dividend provisions: It is a provision made out of current profits to meet the tax/dividend obligation. The time gap between provision made and payment of actual payment serves as a source of short-term finance during the intermediate period.
    • Cash Credit/Overdraft: Under this arrangement, the bank specifies a pre-determined limit for borrowings. The borrower can withdraw as required up to the specified limits.
    • Public deposit: These are unsecured deposits invited by the company from the public for a period of six months to 3 years.
    • Bills discounting: It refers to an activity wherein a discounted amount is released by the bank to the seller on purchase of the bill drawn by the borrower on their customers.
    • Short term loans: These loans are granted for a period of less than a year to fulfil a short term liquidity crunch.
    • Inter-corporate loans/deposits: Organizations having surplus funds invest with other organizations for up to six months at rates higher than that of banks.
    • Commercial paper: These are short term unsecured promissory notes sold at discount and redeemed at face value. These are issued for periods ranging from 7 to 360 days.
    • Debt factoring: It is an arrangement between the firm (the client) and a financial institution (the factor) whereby the factor collects dues of his client for a certain fee. In other words, the factor purchases its client’s trade debts at a discount.

    Long Term Sources

    • Retained profits: These are profits earned by a business in a financial year and set aside for further usage and investments.
    • Share Capital: It is the money invested by the shareholders in the company via purchase of shares floated by the company in the market.
    • Long term loans: These loans are disbursed for a period greater than 1 year to the borrower in his account in cash. Interest is charged on the full amount irrespective of the amount in use. These shareholders receive annual dividends against the money invested.
    • Debentures: These are issued by companies to obtain funds from the public in form of debt. They are not backed by any collateral but carry a fixed rate of interest to be paid by the company to the debenture holders.

    Another point I would like to add is that, although depreciation is recorded in expense and fixed assets accounts and does not affect working capital, it still needs to be accounted for when calculating working capital.

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A_Team
A_Team
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  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Specimen of Ledger account This is the specimen of a ledger account. J.F. here represents the journal folio. A Ledger account is an account that consists of all the business transactions that take place during the current financial year. For Example, cash, bank, machinery, A/c receivable account, etRead more

    Specimen of Ledger account

    This is the specimen of a ledger account. J.F. here represents the journal folio.

    A Ledger account is an account that consists of all the business transactions that take place during the current financial year.

    For Example, cash, bank, machinery, A/c receivable account, etc.

    After the financial data is recorded in the Journal. It is then classified according to the nature of accounts viz. Asset, liability, expenses, revenue, and capital to be posted in the ledger account.

    With this head, the identification as to whether the opening balance will come under the debit side or the credit side is done.

    The table below would help to understand the concept of opening balance in the ledger.

    For further clarification of the concept let me give you a practical example.

    Suppose, a manufacturing firm Amul purchased machinery for, say, Rs 2,50,000. The installation charges were Rs 25,000 and the opening balance of machinery during the year was Rs 5,00,000.

    So as the machinery account comes under the category assets, its opening balance would come under the debit side of the ledger account.

    And as purchase and installation charges mean expenses for the firm, they would also come under the debit side of the account.

    And in case of any sale of a part of the machinery, it would be posted on the credit side of the account as the sales would generate revenue for the firm.

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Vijay
VijayCurious
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Capital Expenditure Revenue Expenditure Cash Expense Credit Expense

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

    The correct answer is 2. Revenue Expenditure. An honorarium is a voluntary payment paid to a person for the services provided. It is a type of cost incurred for the expenses of guests and volunteers. This is a payment made to the person who is not an employee of the institution. Revenue expendituresRead more

    The correct answer is 2. Revenue Expenditure. An honorarium is a voluntary payment paid to a person for the services provided. It is a type of cost incurred for the expenses of guests and volunteers. This is a payment made to the person who is not an employee of the institution.

    Revenue expenditures are the short-term expenses and consumed within one accounting year and are also known as operating expenses.

    Payment of honorarium to the secretary is treated as revenue expenditure because benefits from the expense are derived in the same accounting period. The honorarium is a type of outside expense and any outside expense is revenue in nature. It is a daily allowance incurred to cover the hotel/stay expense.

    Payment of honorarium to the secretary is shown on the Expenditure side of the Income and Expenditure Account.

    Capital Expenditure is the expense incurred on acquiring an asset and honorarium cannot be a capital expenditure as benefits derived from it cannot be carried forward to the next year.

    It cannot be treated as cash or credit expense although it is paid in cash or credit. In this case, it will be treated as a revenue expense while preparing financial statements.

    Payment of honorarium is mainly a topic of not-for-profit organizations.

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A_Team
A_Team
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Receipts and Payments A/C for the year ended 31st March 2020 Receipts Amt Payments Amt To Balance b/d  (Cash)        180,000 By Salary        480,000 To Subscriptions        900,000 By Rent           50,000 To Sale of Investments        200,000 By Stationery           20,000 To Sale ...

  2. Radha M.Com, NET
    This answer was edited.

    Here I've prepared the Income & Expenditure A/c. Income & Expenditure A/c for the year ended 31st March 2021 Expenditure Amt Income Amt To Salary      4,80,000 By Subscriptions      9,00,000 To Rent          50,000 By Donations          10,000 To Stationery          20,000 To Loss on sale ofRead more

    Here I’ve prepared the Income & Expenditure A/c.

    Income & Expenditure A/c for the year ended 31st March 2021

    Expenditure Amt Income Amt
    To Salary      4,80,000 By Subscriptions      9,00,000
    To Rent          50,000 By Donations          10,000
    To Stationery          20,000
    To Loss on sale of furniture (WN)          10,000
    To Surplus      3,50,000
         9,10,000      9,10,000

     

    Working Note: Calculation of Loss on sale of furniture

    The following calculation is made to identify the loss incurred on the sale of furniture.

    Particulars Amt
    Book Value of Furniture        40,000
    Less: Sale Value of Furniture        30,000
    Loss on Sale of Furniture        10,000

     

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Karan
Karan
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A. Debit balance B. Credit balance C. Either Debit or Credit D. None of these

  2. Ayushi Curious Pursuing CA
    This answer was edited.

    The correct option is C. Either Debit or Credit. Partner’s Current account is prepared when the capital account is of fixed nature. We know that partner’s capital account can be of fluctuating nature or fixed nature. In the case of fluctuating partner’s capital, all the transactions relating to theRead more

    The correct option is C. Either Debit or Credit.

    Partner’s Current account is prepared when the capital account is of fixed nature. We know that partner’s capital account can be of fluctuating nature or fixed nature.

    In the case of fluctuating partner’s capital, all the transactions relating to the appropriation of profit, salary, commission, drawings, the introduction of capital, interest on capital etc. are passed through the partner’s capital account.

    The balance of partner’s capital is generally credit but sometimes it may show debit balance indicating that the business owes to partner.

    But when the partner’s capital account is of fixed nature, then separate partner’ current accounts are prepared. Through this account, all the transactions of revenue nature are passed like appropriation of profits, salary or commission paid to a partner, interest on capital and drawings. The balance of this account may be debit or credit.

    The debit balance means the partner has withdrawn a lot of amount as drawings in anticipation of profits. The credit balance means the partner owes to the business.

    The partner’s capital shows a fixed amount as capital and its balance is affected only when additional capital is introduced or capital is withdrawn. The balance of this account is always credit.

    The partner current account is prepared when the firm wants to show the revenue transactions and capital transactions related to the partner ‘capital separately.

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Aadil
AadilCurious
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A. For a certain given period B. At a particular point of time C. After a fixed date D. None of the above

  2. Ayushi Curious Pursuing CA

    The correct option is Option (b) at a particular point of time. A balance sheet discloses the financial position of an entity at a particular point of time. The particular point of time is generally the last date of an accounting year. Most of the business concerns follow an accounting year ending oRead more

    The correct option is Option (b) at a particular point of time.

    A balance sheet discloses the financial position of an entity at a particular point of time. The particular point of time is generally the last date of an accounting year. Most of the business concerns follow an accounting year ending on 31st March and prepare their balance sheet as at 31st March.

    By financial position, it means the value of assets and liabilities of the entity. As an entity may enter into monetary transactions every day, the values of the assets and liabilities may also vary every day. Hence, to prepare the balance sheet of an entity, a particular point of time is to be chosen which is generally the last date of an accounting year

    Option (a) for a given period of time is incorrect.

    It is because the values of assets and liabilities of concern may differ daily, a balance sheet cannot be prepared to disclose the financial position of an entity for a given period of time.

    The statement of profit or loss is prepared for a given period of time as it discloses the overall performance of an entity for a given period of time.

    Option (c) after a fixed date is also incorrect.

    The phrase, “after a fixed date” does not indicate a particular point of time. It may mean any day after a fixed date. For example, if there is an instruction to prepare a balance sheet that discloses the financial position of a concern after 30th March, it may mean 31st March, 1st April or any day thereafter.

    As we know that a balance can be prepared for a particular point of time, this option seems wrong.

    Option (d) None of these is incorrect too as Option (b) is the correct one.

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Radha
Radha
In: >

  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs arRead more

    Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs are recorded as capital work in progress.

    Depreciation is the systematic allocation of the cost of an asset over its useful life. Depreciation is charged on an asset from the date it is ready to use. Since Capital Work in Progress is not yet ready to use, depreciation cannot be charged on it.

    Example

    If a company owns a Machinery worth Rs. 45,000 out of which Rs. 15,000 is part of capital work in progress, then depreciation on such machinery would be calculated only on the part of machinery that is ready to use that is Rs. 30,000 (45,000-15,000).

    When an asset is undergoing construction, the journal entry for each expense would be recorded as

    Further, when all construction of the above asset is completed, it is transferred to fixed asset account. This would be recorded as

    After transfer to Fixed Asset account, depreciation can be calculated and shown as below

    If the construction of an asset is complete but has not been put to use till now, depreciation is still calculated as it is ready for use. It can be done through various methods like straight-line method, written down value method etc.

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