AccountingQA Latest Questions

Astha
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  2. GautamSaxena Curious .
    This answer was edited.

    Current Assets & Examples Current Assets are those assets that are bought by the company for a short duration and are expected to be converted into cash, consumed, or written off within one accounting year. They are also called short-term assets. These short-term assets are typically called currRead more

    Current Assets & Examples

    Current Assets are those assets that are bought by the company for a short duration and are expected to be converted into cash, consumed, or written off within one accounting year. They are also called short-term assets.

    These short-term assets are typically called current assets by the accountants and have no long-term future in the business. Current assets may be held by a company for a duration of a complete accounting year, 12 months, or maybe less. A major reason for the conversion of current assets into cash within a very short amount of time is to pay off the current liabilities.

    Examples

    Some of the major examples of current assets are – cash in hand, cash at the bank, bills receivables, sundry debtors, prepaid expenses, stock or inventory, other liquid assets, etc.

    • All of these assets are converted into cash within one accounting year.
    • Liquid assets are a part of current assets. Although they are easier to be converted into cash than current assets.
    • Current assets (along with current liabilities) help in the calculation of the current ratio. And they’re also referred to as circulating/floating assets.
    • Current assets are shown on the balance sheet (on the asset side) under the heading, current assets.

    Current assets on the balance sheet

    Balance Sheet (for the year…)

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A_Team
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Goodwill Patents Preliminary Expense A/c Claims Receivable

  2. Karishma
    This answer was edited.

    Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence. In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are theRead more

    Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence.

    In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are the expenses incurred before the incorporation of a business. The word ‘fictitious’ means fake, these are not actually the assets of a company even though they are represented in the assets of the balance sheet.

    Since the benefit of a fictitious asset is received over a period of time, the whole amount is not charged to the profit and loss account. The amount is amortized over several years. These expenses are non-recurring in nature. These expenses are shown as assets under the head miscellaneous expenditure. Also known as deferred revenue expenditure.

     

    For example: A company incurred $50,000 as promotion costs before the formation of the business. This promotion cost will be deferred over 5 years. In the first year, $10,000 will be charged to the profit and loss account and the remaining $40,000 will be shown as an asset under the heading miscellaneous expenditure. Subsequently, $10000 will be charged to profit and loss for the next 4 years. The amount of $50,000 will be deferred over a span of 5 years.

    Some other examples of fictitious assets :

    • Promotional expenses: Expenses incurred for the promotion of business before the formation of the company such as advertising expenditures are amortized over many years.
    • Loss on the issue of shares or debentures: When a company issues shares or debentures at a discount, the discount is classified as a fictitious asset and is not treated as an expense or loss. It is amortized over several years.
    • Incorporation costs: Costs incurred during the formation of a business are incorporation costs. These include registration costs, licensing fees, legal fees and other costs incurred in setting up the business. These are fictitious assets and are amortized over several years.
    • Loss on Sale of Machinery: When a loss is incurred on the sale of machinery or equipment, that loss is also treated as a fictitious asset and is amortized over several years.

     

    Goodwill

    Goodwill is not a fictitious asset because goodwill has a realizable value and can be sold in the market. Goodwill is an intangible asset which does not have a physical existence but can be traded for monetary value. Goodwill has an indefinite life and is sold when the business is sold. Goodwill can be self-generated or purchased. Goodwill is shown as an intangible asset under the heading fixed asset in the financial statements.

     

    Patents

    Patents are intangible assets which do not have a physical existence but have realizable value and can be sold in the market. So, patents do not come under the category of fictitious assets. Patents are basically intellectual property. The purchase price of the patent is the initial purchase cost which is amortized over the useful life of the asset. Patents are shown as intangible assets under the heading fixed asset in the balance sheet of the company.

     

    Claim receivable

    Claim receivable is an asset if the claim has been authorized by the insurance company. Claim receivable has a monetary value, so does not come under the category of a fictitious asset. If the claim is not yet authorized by an insurance company, it will be shown as a footnote in the financial statements. Authorized claim receivable is shown as a current asset in the financial statement.

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  2. Saurav

    Accruals are not the same as provisions both are totally different from each other. Accruals and provision both are vital parts of accounts but work differently   Accrual Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irreRead more

    Accruals are not the same as provisions both are totally different from each other. Accruals and provision both are vital parts of accounts but work differently

     

    Accrual

    Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such an amount has been paid.

    An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be further divided into two parts

     

    Accrual Expense

    Accrual Expense means any transaction that takes place in a particular period but the amount for it will be paid on a later period.

    For example- 10,000 for the month of March was paid in April month then this rent will be accounted for in the books in March

    These are the following accrued expense

    • Accrual Rent– Accrual rent means the amount for using the land of the landlord is paid at a later period than the period when it is put into use.
    • Insurance– Accrual insurance means the amount paid as a premium to the insurance company paid on a later period than the period when it is due
    • Expense- Acrrual expense means the amount for any expense paid on a later period then the period when it pertains to be paid
    • Wages- Accrual wages means the amount which is paid to employees on a later period than the period when the wages get due

     

    Accrual Revenue

    Accrual Revenue means any transaction that takes place in a particular period but the amount for it will be received on later period. For example- If interest of 10,000 on bonds for the period of March is received in April months then this amount will be accounted for in March. These are the following accrued revenue

    • Accrual Rent– Accrual rent means the amount for using the land of an entity by another party is received on a later period than the period when it was put into use.
    • Accrued Interest– Accrued interest means the amount of interest received on a later period than the period when it pertains to receive

     

    PROVISIONS

    Provision refers to making a provision/allowance against any probable future expense that the company might incur in the near future. This amount is uncertain and difficult to predict its surety.

    However, as per the prudence concept of accounting a company needs to anticipate the losses that will incur in the near future due to which provision is made.

    For example- A company has debtors of 10,000 but as per the company’s previous records company anticipates that 1% of debtors will become bad debts. So in this case company will make a provision of 1% that is 100 on it.

    There are various types of provisions which are-

    • Provision on Depreciation– Provision for Depreciation means a provision for future depletion of assets has been already created
    • Provision for Doubtful Debts– Provision for Doubtful Debts means a provision created against debtors that doesn’t seem to be recovered in the near future
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Anushka Lalwani
Anushka Lalwani
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  2. Kajal
    This answer was edited.

    Profit refers to the excess of total revenue over total expenses. According to the rule "Debit all expenses and losses, Credit all incomes and gains", expenses are recorded on the debit side while revenues are recorded on the credit side. There is profit when Total revenue > Total expenses, whichRead more

    Profit refers to the excess of total revenue over total expenses. According to the rule “Debit all expenses and losses, Credit all incomes and gains”, expenses are recorded on the debit side while revenues are recorded on the credit side.

    There is profit when Total revenue > Total expenses, which means the balance of the credit side > the balance of the debit side. Since, in accounting Dr. side is always equal to the credit side, a balancing figure (representing profit or loss) is shown on the shorter side, to make both sides equal.

    When Credit side > Debit side, Profit(balancing figure) is shown on the Dr. side so that both sides are equal. 

     

    PROFIT

    Profit refers to the excess of total revenue over the total expenses of the business for an accounting year. In simple words, it shows how much extra the firm earned after deducting all the expenses it incurred during the year.

    Profit = Total Revenue – Total Expenses

    Suppose, the firm earned a total revenue of $10,000 for the accounting year 2022-23. Also, it incurred total expenses of $6,000 during the year. So, Profit for the AY 2022-23 is $4,000.

     

    ASCERTAINING PROFIT

    To ascertain profit earned or loss incurred by the firm during an accounting year, it prepares two accounts.

    • Trading A/c
    • Profit and Loss A/c

     

    Points to be noted:

    • Both accounts are Nominal Account which follows the rule “Debit all expenses and losses, Credit all incomes and gains”
    • The debit side records expenses while the Credit side records incomes.
    • Both are balanced accounts, which means its Dr. side is always equal to its Cr. side.
    • If they are not balanced, then a balancing figure is added to the shorter side which represents profit or the loss depending on which side is greater.
    • If Dr. side > Cr. side, it means expenses are more than the incomes and thus, there is a loss.
    • If Cr. side > Dr. side, it means there are more incomes than expenses and thus, there is Profit.

     

    TRADING ACCOUNT

    It is the first final account prepared for calculating gross profit or gross loss during the year because of the trading activities of the firm.

    Trading activities are related to the buying and selling of goods. In between buying and selling a lot of activities are there like transportation, warehousing, loading, unloading, etc. All expenses that are directly related to buying and selling as well as manufacturing of goods are known as Direct expenses and are also recorded in the trading accounts.

    Items included on the debit side:

    • Opening stock
    • Purchases
    • Direct expenses like wages, import duty, royalty, manufacturing expenses, etc.
    • Gross Profit

     

    Items included on the credit side:

    • Sales
    • Closing stock
    • Gross loss

     

    Gross Profit is when Cr. side (incomes) > Dr. side (expenses). It is recorded on the debit side as a balancing figure.

     

    PROFIT AND LOSS ACCOUNT

    A businessman incurs a lot of expenses during the year which may be directly related or indirectly related to the business.

    As the Trading account only considers direct expenses, the businessman prepares the P&L A/c which considers all the expenses incurred during a year to ascertain net profit or loss.

    Items written on the Debit side

    • Gross loss (transferred from the trading a/c)
    • Office and administrative expenses (like employee’s salary, office rent, office lighting bills, legal charges, printing expenses, etc.)
    • Selling and distribution expenses (like advertisement fees, commission, carriage outward, packaging charges, etc.
    • Miscellaneous expenses (like interest on loan, interest on capital, repair, depreciation, etc.)
    • Net Profit

     

    Items written on the Credit side

    • Gross Profit (transferred from trading a/c)
    • Other incomes and gains (Like income from investments, interest received, rent received, etc.)
    • Net loss

     

    Net Profit is when the Cr. side (incomes)> Dr. side(expenses). It is recorded on the Debit side as a balancing figure.

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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
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period.  For example, insurance is often paid for annually on tRead more

    Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period. 

    For example, insurance is often paid for annually on the basis of the calendar year. A business may pay insurance every year on 1st January for that entire year. While preparing the financial statements on 31st March, it will recognize the insurance premium for the period 1st April to 31st December of the next financial year as a prepaid insurance expense. 

    Why are prepaid expenses classified as assets? 

    First of all, let us understand what an asset is. An asset is anything over which the business has ownership rights and which it can sell for money. The benefits of this asset should accrue to the business. 

    In light of this definition, let us analyze prepaid expenses as an asset. As the business has already paid for these goods or services, it becomes a legal right of the business to receive the relevant goods or services at a later date. As the benefit of this expense would accrue to the business only at a later date, the prepaid expenses are classified as an asset. 

    Some examples of prepaid expenses are prepaid insurance, prepaid rent etc

    Treatment of Prepaid Expenses

    Prepaid expenses are recorded in the balance sheet under the heading “Current Assets” and sub-heading “Other Current Assets”

    As per the Generally Accepted Accounting Principles or GAAP, expenses must be recognized in the accounting period to which they relate or in which the benefit due to them is likely to arise. Thus, we cannot recognize the prepaid expenses in the accounting period in which they are incurred. 

    Prepaid assets are classified as assets and carried forward in the balance sheet to be debited in the income statement of the accounting period to which they relate. 

    Adjusting Entries

    Adjusting entries are those entries that are used to recognize prepaid expenses in the income statement of the period to which they relate. These entries are not used to record new transactions. They ensure compliance with GAAP by recognizing the expenses in the period to which they relate. 

    Conclusion

    The GAAP and basic definition of an asset govern the treatment of prepaid expenses as an asset. The business incurs them in an accounting period different from the accounting period in which their benefit would accrue to the business. The business has a legal right to receive those goods or services. 

    The business carries them as a current asset on the balance sheet. In the relevant accounting period, they are recognized in the income statement. 

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AbhishekBatabyal
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  2. GautamSaxena Curious .
    This answer was edited.

    The land is a fixed asset and is treated as a long-term asset account.  Explanation The land is a fixed asset which is also referred to as a long-term asset. The fixed assets are those assets that are not expected to be cashed, consumed, last, sold, or written off within one accounting year and areRead more

    The land is a fixed asset and is treated as a long-term asset account. 

    Explanation

    The land is a fixed asset which is also referred to as a long-term asset.

    The fixed assets are those assets that are not expected to be cashed, consumed, last, sold, or written off within one accounting year and are purchased for long-term use. The fixed assets are also called non-current assets and the reason behind it is that current assets are easily converted into cash within one year and they are not.

    Fixed assets are planned by the company to be used for the long term in order to generate income.

    Example- Land, building, furniture, plants & equipment, etc.

     

    Why is land an asset?

    Although the land is not depreciated, it is still considered to be an asset because just like other assets the business spends its own money to acquire it.

    It can also be used by the business for different operations and it doesn’t create any liability for the business. Instead, reselling the land after a few years can help the company earn a huge margin of profit.

     

    Land in the balance sheet

    On the asset side of the balance sheet, the land is stated under the heading long-term assets.

    Balance Sheet (for the year…)

     

    Therefore, the land is a fixed asset and is treated as a long-term asset account.

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