AccountingQA Latest Questions

Bonnie
BonnieCurious
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  2. Spriha Sparsh
    This answer was edited.

    Journal Entry Prepaid Rent A/c Dr. To Cash A/C (Being rent paid in advance) "Prepaid Account" is treated as an asset and as per the modern rules debit the increase in the asset. "Cash Account" is an asset and as per the accounting rules credit the decrease in the asset.   Adjustment entry: TheRead more

    Journal Entry

    Prepaid Rent A/c Dr.

    To Cash A/C

    (Being rent paid in advance)

    “Prepaid Account” is treated as an asset and as per the modern rules debit the increase in the asset.

    “Cash Account” is an asset and as per the accounting rules credit the decrease in the asset.

     

    Adjustment entry: The prepaid rent entry has an adjustment entry when the rent expense account is due. The journal entry for that is

    Rent Expense A/c

    To Prepaid Rent A/c

    (Being the rent expense due and adjusted from the prepaid expense)

     

    Example:  ABC.Ltd signs a one-year lease on an office floor for Rs 10,000 a month. The landlord requires that the Company pays the annual amount Rs 120,000 at the beginning of the year.

    The journal entry for Company would be as follows:

    At the beginning

    Prepaid Rent A/c – 1,20,000

    To Cash A/c – 1,20,000

    (Being rent paid in advance for the year)

     

    At the time rent was due (Month 1)

    Rent Expense A/c – 10,000

    To Prepaid Rent A/c – 10,000

    (Being the rent expense due and adjusted from the prepaid expense)

     

    The same entry done in month 1 will be repeated in the next 11 months.

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

    The Income Tax 1961 does not provide any rate of depreciation specifically for cameras. But we can consider camera within the block of ‘Computer including software’ for which the rate of depreciation is 40% at WDV method. It is a general practice for non-corporates to charge depreciation at rates slRead more

    The Income Tax 1961 does not provide any rate of depreciation specifically for cameras. But we can consider camera within the block of ‘Computer including software’ for which the rate of depreciation is 40% at WDV method.

    It is a general practice for non-corporates to charge depreciation at rates slightly lower than the rate provided by the Income Tax Act, 1961. But one cannot charge depreciation more than it.

    In the case of corporate, the rates for charging depreciation are provided by the Companies Act 2013, which is

    • 20.58% WDV and 7.31% SLM for cameras to be used for the production of cinematography and motion pictures.
    • 25.89% WDV and 9.50% SLM for cameras which is part of electrical installations and equipment (CCTV cameras).

    Let’s take an example:

    Mr X is a jewellery shop owner and has installed CCTV cameras on 1st April 2021, costing ₹ 40,000 at various points in his shop to ensure safety and security. Keeping in mind the Income-tax rates, his accountant decided to charge depreciation @ 30% p.a. on the CCTV cameras.

    Following is the journal entry:

    The balance sheet will look like this:

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Ayushi
AyushiCurious
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  2. Spriha Sparsh
    This answer was edited.

    Based on duration, expenses can be categorized as capital expenditure and revenue expenditure. A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility inRead more

    Based on duration, expenses can be categorized as capital expenditure and revenue expenditure.

    A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility in the long-term i.e. more than one year.

    The formula of CAPEX can be given as –

    Capital expenditure = Net increase in PP & E + Depreciation Expense

    . It is showed in companies’ cash flow statement and in its Balance Sheet under the head of fixed assets. These capital expenditures are capitalized.

    List of some capital expenses –

    • Buildings (Including costs of purchase and other cost that extend the useful life of a building)
    • Computer equipment (Cost of purchase and installation cost)
    • Office equipment (Purchase cost)
    • Furniture and fixtures (Cost of purchase and installation cost)
    • Intangible assets (i.e. patent, trademark)
    • Land (Including the cost of purchasing and upgrading the land)
    • Machinery (Purchase cost and costs that bring the equipment to its location and for its intended use)
    • Software (Installation cost)
    • Vehicles

    Example- If an asset costs Rs10,000 when bought and installation cost is Rs2000. The total capital expenditure will be Rs12000 and is expected to be in use for five years, Rs2,500 may be charged to depreciation in each year over the next five years.

    B) Revenue expenditure or OPEX are those expenses that are incurred during its course of the operation. It can also be termed as  total expenses that are incurred by firms through their production activities. Such costs do not result in asset creation, and the benefits resulting from it are limited to one accounting year. These are for managing operational activities and revenue within a given accounting period.

    The accounting treatment for revenue expenditure for an accounting period is shown in a companies Income Statement, but it is not recorded in the firm’s Balance Sheet. OPEX is not capitalized and depreciation is not levied on such expenses.

    Examples for revenue expenditures are as follows –

    • Direct expenses

    These types of expenses are mostly incurred directly through the production process. Common direct expenses include – direct wages, freight charge, rent, material cost, legal expenses, and electricity cost.

    • Indirect expenses

    These expenses are indirectly related to production like during sale, distribution, and management of finished goods or services. They include expenses like selling salaries, repairs, interest, commission, depreciation, rent, and taxes, among others.

     

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

    The word, “deferred” means delayed or postponed and “revenue” in layman’s terms means income. Therefore deferred revenue means the revenue which is yet to be recognised as income. It is actually unearned income. In accrual accounting, income is recognised only when it is accrued or earned. DeferredRead more

    The word, “deferred” means delayed or postponed and “revenue” in layman’s terms means income. Therefore deferred revenue means the revenue which is yet to be recognised as income. It is actually unearned income.

    In accrual accounting, income is recognised only when it is accrued or earned. Deferred revenue is the income received before the performance of the economic activity to earn it.

    Example:  A shoe shop owner gives an order to a shoe manufacturer of 1000 pair of shoes which is to be delivered after 4 months. He also gives him a cheque of ₹15,000 in advance, the rest ₹5000 is to be given at the time of delivery.

    So, in this case, the ₹15,000 is actually is unearned revenue i.e. deferred revenue. It will be recognised as revenue when the shoe manufacture completes the order and deliver it.

    Till then, the deferred revenue is reported as a liability in the balance sheet. Like this:

    After recognition as revenue, it will be reported in the statement of profit or loss:

    Hence, to summarise, deferred revenue is:

    • Unearned revenue
    • Recognised as income till it is earned
    • Till then it is recognised and reported as a liability in the balance sheet.

    Some examples of deferred revenue are as follows:

    • Advance rent received
    • Advance payment for goods to be delivered.
    • Advanced payment for services to be provided.

    Now the question arises why deferred revenue is recognised as a liability. It is due to the fact that the business may not be able to perform the economic activity successfully to earn that revenue.

    Taking the above example, suppose the shoe manufacturer is not able to honour its commitment and the shoe shop owner can wait no more, then the advanced money of ₹ 15,000 is to be refunded. That’s why deferred revenue is recognised as a liability because it is a liability if we consider the principle of conservatism (GAAP).

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

    No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use. Drawings are actually shown in the balance sheet as a deduction from the capital account. Let’s take an example, Mr X runs a tradingRead more

    No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use.

    Drawings are actually shown in the balance sheet as a deduction from the capital account.

    Let’s take an example, Mr X runs a trading business. For meeting his personal expense we withdrew cash from his business cash of amount Rs. 15,000. It shall be reported like this:

    Journal Entries:

    Balance sheet:

    Profit and loss account reports only the nominal accounts i.e. incomes and expenses. That’s why drawings are not shown in the statement of profit or loss because it is neither an expense nor an income.

    It represents the owner’s withdrawal of capital from business for personal use. Hence, the drawings account is a personal account. Drawings lead to a simultaneous reduction in capital and cash or stock of a business which has nothing to do with Profit and loss A/c.

    Therefore it is reported in the balance sheet only.

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Bonnie
BonnieCurious
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    No, capital account is not a real account. Capital account represents the amount of money invested by the owner/owners of the business along with the retained earnings net of drawings or dividends. Capital account has a natural credit balance because it is an internal liability of the business. CapiRead more

    No, capital account is not a real account.

    Capital account represents the amount of money invested by the owner/owners of the business along with the retained earnings net of drawings or dividends. Capital account has a natural credit balance because it is an internal liability of the business.

    Capital account is a personal account because, as discussed above, it represents the investment of the owner or owners. Personal account represents person or persons.

    Whereas a real account represents the material assets of a business. Example:-  Cash A/c, Fixed assets A/c etc. That’s why the capital account is not a real account.

    Being a personal account, the following golden rule of accounting applies to capital account:-

    “Debit the receiver and credit the giver”

    Here, as the owner gives an amount as an investment into the business (owner and the business are separate entities), the capital account has a credit balance.

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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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