AccountingQA Latest Questions

Bonnie
BonnieCurious
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  2. AishwaryaMunot

    Before we jump in the concept of valuation of Goodwill, let us first understand the meaning of term “Goodwill”. Goodwill is an Intangible asset of the business. As the definition of Intangible asset, Goodwill cannot be seen or felt. In simple words it is business’s worth or its reputation earned oveRead more

    Before we jump in the concept of valuation of Goodwill, let us first understand the meaning of term “Goodwill”.

    Goodwill is an Intangible asset of the business. As the definition of Intangible asset, Goodwill cannot be seen or felt. In simple words it is business’s worth or its reputation earned over a period of time.

    Calculation of value of the goodwill in monetary terms is done at the time of merger or acquisition of the business. Goodwill is often applied to businesses which are earning large number of profits, have crucial corporate links and large customer/client base.

    Self-earned goodwill is never shown in monetary terms in business’s own balance sheet while goodwill which is purchased is shown in the asset side of the balance sheet of the buyer business.

    Following are the methods under which goodwill can be valued:

    1. Average Profit Method – In this method, Goodwill is calculated by average profits multiplied by the number of years purchased. Typically, last 5-6 years profit figures are taken ignoring any abnormal gains or loss during the year. Formula for the same would be as follows:

               Goodwill = Average Profit x No. of Years Purchase

    1. Weighted Average Method – This method is updated method of average profit method, Profits of the previous years are calculated by specific number of weights. This method is useful when there is a lot of fluctuations in the profits and importance has to be given to current year’s profit. Formula for the same would be as follows:

              Goodwill = Weighted Average Profit x No. of Years Purchase

    Where,

    Weighted Average Profit = Sum of Profits multiplied by weights / Sum of Weights

    1. Super Profit Method – Super profit is additional profit generated by the business over normal profit. Further for the calculation, Super profit is capitalized by the normal rate of return and resulting figure is value of Goodwill.

    Formula for the same would be as follows:

             Goodwill = Super Profits x (100/Normal Rate of Return)

    1. Annuity Method – In this method, Discounted amount of the super profits is calculated by taking into consideration the current value of the annuity at rate of return.

    Formula for the same would be as follows:

             Goodwill = Super Profit x Discounting Factor

    1. Capitalization Method – In this method, existing capital employed is deducted from capitalized number of average profits or super profits. The resulting figure is Goodwill.

    Formula for the same would be as follows:

               a. Average Profit Capitalization Method –

                 Goodwill = [Average Profit / Normal Rate of Return x 100] – Capital                                                        Employed

               b. Super Profit Capitalization Method –

                Goodwill = Super Profits x (100/ Normal Rate of Return)

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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    A revaluation Account is an account created to record the changes in the value of assets and liabilities during: Change in profit sharing ratio Admission of a partner Retirement of a partner Death of a partner The realization Account is prepared to sell assets and pay liabilities in the event of theRead more

    A revaluation Account is an account created to record the changes in the value of assets and liabilities during:

    • Change in profit sharing ratio
    • Admission of a partner
    • Retirement of a partner
    • Death of a partner

    The realization Account is prepared to sell assets and pay liabilities in the event of the dissolution of the firm.

    Revaluation Account is prepared for dissolution of the partnership while Realization Account is prepared for dissolution of the partnership firm.

    The increase or decrease in the value of assets and liabilities is transferred to the Realisation Account and the gain or loss thereof is transferred to the old partner’s capital account.

    • A decrease in Assets and an Increase in Liabilities is debited since it is a loss for the firm and all the losses are debited.
    • An increase in Assets and a Decrease in Liabilities is credited since it is gained for the firm and all the profits are credited.

    Format of Revaluation Account will be:

     

    Format of Realization Account will be:

     

    The difference between Realisation and Revaluation Account is:

    Revaluation Account Realization Account
    Prepared to record changes in assets and liabilities Prepared to record sale of assets and payment of liabilities
    Prepared at the time of dissolution of the partnership Prepared at the time of dissolution of partnership firm
    Assets and liabilities still exist in the books only their values change Assets and liabilities do not exist in the books of the firm
    This account contains only those assets and liabilities that are to be revalued. This account contains all the assets and liabilities of the firm.
    A revaluation Account can be prepared any number of times during the lifetime of the firm. The realization Account is only made once during the dissolution of the firm.
    The gain or loss during revaluation is transferred to the old partner’s capital accounts. The gain or loss during realization is transferred to the capital account of all the partners.

     

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

    A balance sheet of a company is a financial statement that depicts the assets, liabilities and shareholders’ equity of the company at a point of time, usually at the end of the accounting year. A balance sheet of a company is reported in a vertical format which is different from that of a partnershiRead more

    A balance sheet of a company is a financial statement that depicts the assets, liabilities and shareholders’ equity of the company at a point of time, usually at the end of the accounting year. A balance sheet of a company is reported in a vertical format which is different from that of a partnership where the horizontal format is used.

    COMPONENTS OF A BALANCE SHEET

    The three main components of a balance sheet are Assets, Liabilities and Shareholders’ equity.

    • Assets: They are divided into two main categories that are current assets and non-current assets. If an asset is expected to be realised within 12 months or is primarily held for being traded, or is cash or cash equivalent, then those assets are termed as current assets. All assets that are not current assets are grouped under non-current assets. They are normally realised after 12 months.
    • Liabilities: They are categorised as current liabilities and non-current liabilities. If the amount owed by the company to an outside party is due to be settled in 12 months, then it can be termed as a current liability. The rest of the liabilities are referred to as non-current liability.
    • Shareholders’ Equity: This is the money owed to the owners of the company, that is shareholders. It is also called net assets since it is equal to the difference between total assets and total liabilities. Their main categories are Shareholders’ Capital and Reserves and Surplus.

    FORMAT OF BALANCE SHEET

    As per the Companies Act 2013, the following format should be used for preparing a balance sheet.

    From the above Balance sheet, we should get:

    Assets = Liabilities + Shareholders’ Equity

    Relevant notes for each component should also be prepared when necessary.

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  2. Radhika
    This answer was edited.

    A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company. The Cash Flow Statement provides a picture to the sRead more

    A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company.

    The Cash Flow Statement provides a picture to the shareholders, government, and the public of how the company manages its obligations and fund its operations. It is a crucial measure to determine the financial health of a company.

    The Cash Flow Statement is created from the Income Statement and the Balance Sheet. While Income Statement shows money engaged in various transactions during the year, the Balance Sheet presents information about the opening and closing balances.

    The primary objective of a Cash Flow Statement is to present a record of inflow and outflow of cash, cash equivalents, and marketable securities through various activities of a company.

    Various activities in a company can be broadly classified into three parts or heads:

    • Cash Flow from Operating Activities: it represents how money from regular business activities is derived and spent. It includes Net Profit from Income Statement after adjusting for tax and extra-ordinary activities. Items included in Operating Activities are adjustments in Working Capital. If current liabilities are paid or current assets are bought it means outflow of cash, hence it is deducted and if liabilities are increased or assets are sold it means the inflow of cash, hence it is added. Operating Activities take into account taxation, dividend, depreciation, and other adjustments.
    • Cash Flow from Investing Activities: it represents aggregate inflow or outflow of cash due to various investments activities that the company was engaged in. Purchase and sale of non-current assets like fixed assets and long-term investments are considered under this head. If there is an investment made, it means outflow of cash, hence it is deducted and if there is an investment sold it means the inflow of cash, and hence it is added.
    • Cash Flow from Financing Activities: it represents the activities that are used to finance a company’s operations, like, issue of cash or debentures, paying dividends and interest, long-term borrowing taken by a company, etc. If these are paid, it means outflow of cash and is hence deducted and if they are acquired, it means the inflow of cash and hence ae added.

    Cash Flow Statements also present a picture of the liquidity of the company and are therefore used by the management of a company to take decisions with the help of the right information.

    Cash Flow Statements are a great source of comparison between a company’s last year’s performance to its current year or with other companies in the same industry and hence, helps shareholders and potential investors to make the right decisions.

    It also helps to differentiate between non-cash and cash items; incomes and expenditures are divided into separate heads.

     

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  2. Ayushi Curious Pursuing CA

    ‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘sRead more

    ‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘surplus’ generally means the surplus amount in the profit and loss A/c or the operating surplus in case of a non-profit organisation, reserves are of many types:

    1. Revenue reserve
    2. Specific reserves
    • Reserves created from shareholder’s contribution
    1. Capital reserve
    2. Secret reserves

    Let’s discuss each of the above:

    1. Revenue reserves:

    Revenue reserve has two different definitions.

    First – Revenue reserves are the reserves that are created out of the profit made by an enterprise in the ordinary course of business. As per this definition, the examples of revenue reserves are:

    • General reserve: There is no restriction on the purpose for which this reserve can be used. It is a free reserve. Generally, this reserve is used to pay dividends.
    • Debenture Redemption Reserve: This reserve is mandatory to be created by law. The purpose is to ensure the timely redemption of debentures.
    • Dividend Equalisation Reserve: This reserve is created to maintain a steady rate of dividend every year even if the enterprise reports loss in any financial year.
    • Capital Redemption Reserve: This reserve can be solely used to issue bonus shares to fill the void created in total capital by redemption of preference shares.
    • Workmen Compensation Reserve: This reserve is created to pay for uncertain compensation that an enterprise may be liable to pay to its employees.
    • Investment Fluctuation Reserve: This reserve is created out of the profit of

     

       Second: Revenue reserve is a reserve from which can be used to any use. It can be the payment of dividends, creation of other reserves or reinvestment in the business. It is another name for general reserve.

    1. Specific reserves

    These are the reserves that are restricted to specific purposes only. These reserves are not free reserves i.e. dividends cannot be declared out of these reserves. However, if in case such reserve is not a statutory reserve, an enterprise can very well use such reserves for other purposes too. Specific reserves can be further classified into two types:

    • Statutory specific reserves: These are reserves that are mandatory to be created to comply with legal provisions applicable to an enterprise. Use of such reserves is restricted to some specific purposes.

    If such reserves are not created whenever applicable or if the amount in such reserves is used for a purpose other than the purpose for which it is created, the enterprise can invite face legal consequences. The examples of statutory reserves are as follows:

    • Capital Redemption Reserve
    • Debenture Redemption Reserve
    • Securities Premium Reserve
    • Non – Statutory specific reserves: It is not mandatory to create such reserves. They are created to meet with specific uncertainties of the future.
    • Workmen Compensation Reserve
    • Investment Fluctuation Reserve

    Important Note: Statutory reserve in the context of insurance companies means the minimum amount of cash and marketable securities to be set aside to comply with legal requirements.

    • Reserves created from shareholder’s contribution

    This is a reserve that is created out of a shareholder’s contribution. Securities premium reserve is the only such reserve that is created out of such shareholder’s contribution.

     

    Securities Premium Reserve: It is a reserve that is created when securities of a company such as shares or debentures are issued at a premium. The share or debenture premium money is created for this reserve. The purposes of which this reserve may be used as per section 52 of the Companies Act, 2013 are as follows:

    • For the issue of fully paid bonus shares.
    • For meeting preliminary expenses incurred by the company
    • For meeting the expense, commission or discount allowed on the issue of securities of the company.
    • In providing premium payable on the redemption of preference shares.
    • For the purchase of its own shares or other securities under section 68.
    1. Capital Reserve:

    Capital reserve is a reserve that is created out of the profit made by an enterprise from its non-operating activities like

    • selling of capital assets(fixed assets) at a profit
    • buying a business at profit (where net assets acquired is more than the purchase consideration)

    This reserve is used to finance long term projects of a company like buying or construction of fixed assets, writing off capital losses( selling of fixed assets at loss).

    1. Secret Reserve:

    A secret reserve is a reserve that exists but its existence is not shown in the balance sheet of an enterprise. An enterprise creates such reserves to hide from its competitor that it is in a better financial position than it appears in its balance sheet. Although the creation of secret reserves is prohibited by law, there are provisions for banking companies to create such reserves.

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  2. Spriha Sparsh
    This answer was edited.

    Order of Liquidity Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so onRead more

    Order of Liquidity

    Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so on and further. In the end, we will write goodwill.

    Liabilities are presented based on the order of urgency of payment. On the liabilities side, we start from short-term liabilities for example outstanding expenses, creditors and bill payable, and so on. In the end, we write capital adjusted with net profit and drawings if any.

    This approach is generally used by sole traders and partnerships firms. The following is the format of Balance sheet in order of liquidity:

     

    Order of Permanence

    Under this method, while preparing a balance sheet by a company assets are listed according to their permanency. Permanent assets are shown at first and then less permanent assets are shown afterward. On the assets side of the balance sheet starts with more fixed and permanent assets i.e. it begins with goodwill, building, machinery, furniture, then investments and ends with cash in hand as the last item.

    The fixed or long-term liabilities are shown first under the order of permanence method, and the current liabilities are listed afterward. On the liabilities side, we start from capital, Reserve and surplus, Long term loans and end with outstanding expenses.

    The following is the format of the Balance sheet in order of permanence:

     

     

    Such order or arrangement of balance sheet items are refer as ‘Marshalling of Balance Sheet’. 

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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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  2. Spriha Sparsh
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    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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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Fictitious assets On seeing or hearing ‘fictitious’, the words which come to our mind are ‘not true, ‘fake’ or ‘fantasy’. So, fictitious assets are those items that appear on the assets side of the balance sheet but are actually not assets. In substance, fictitious assets are the expenses and lossesRead more

    Fictitious assets

    On seeing or hearing ‘fictitious’, the words which come to our mind are ‘not true, ‘fake’ or ‘fantasy’. So, fictitious assets are those items that appear on the assets side of the balance sheet but are actually not assets.

    In substance, fictitious assets are the expenses and losses that are not completely written off in a financial year and are required to be carried forward to the next financial year.

    The examples of fictitious assets are as follows:

    1. Deferred Advertisement expense
    2. Loss on the issue of debentures.
    3. Debit balance of Profit and Loss account ( Net loss )*
    4. Preliminary expenses.

    Fictitious assets appear on the asset side of the balance sheet as expenses and losses have a debit balance.

    *when the balance sheet is prepared as per Schedule III of Companies Act, the Net loss is shown as a negative figure under the head Reserve and Surplus.

    Intangible Assets

    Intangible assets mean the assets which don’t have any physical existence. They cannot be seen or touched but are assets because they do provide future economic benefits to the business. Like tangible assets (like machinery and building), they can be also created, purchased or sold.

    Like tangible assets are depreciated, intangible assets are gradually written over by amortization over their useful lifespan to account for the economic benefits provided by them.

    Following are the examples of intangible assets:

    1. Goodwill
    2. Brand name
    3. Trademark
    4. Patents
    5. Copyrights

    Intangible assets which are created by the business-like goodwill or brand recognition do not appear in the balance sheet.

    Only acquired intangible assets can be shown in the balance sheet. Like purchased goodwill, patents, trademarks etc.

    Intangible assets also face impairment if their fair value is less than their carrying value after deducting amortization expense. The difference between carrying value and fair value is shown in the Profit and loss A/c as impairment charge and the asset is valued at fair value in the balance sheet.

     

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Bonnie
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Receipts and Payments Account for the year ended 31st March 2019 Receipts Amt Payments Amt To Balance b/d By General Expenses 32,000 Cash in Hand 40,000 By Newspapers 18,500 Cash at Bank 155,500 By Electricity 30,000 To Subscription By Fixed Deposits with Bank 180,000       2017-18                         12,000      (On 30 ...

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

    In the books of Rural Literacy Society Income & Expenditure A/c for the year ended 31 March 2019 Expenditure Amt Amt Income Amt Amt To General Expenses 32,000 By Subscription (W.N.1) 2,72,000 To Newspapers 18,500 By Legacy 12,500 To Electricity 30,000 By Government Grant 1,20,000 To Rent 65,000Read more

    In the books of Rural Literacy Society

    Income & Expenditure A/c for the year ended 31 March 2019

    Expenditure Amt Amt Income Amt Amt
    To General Expenses 32,000 By Subscription (W.N.1) 2,72,000
    To Newspapers 18,500 By Legacy 12,500
    To Electricity 30,000 By Government Grant 1,20,000
    To Rent 65,000 By Interest Received on Fixed Deposit 9,000
    Less: Prepaid Rent (65,000/13) -5,000 60,000     (1,80,000*10%*6/12)
    To Salary 36,000
    Add: Outstanding Salary 6,000 42,000
    To Postage Charges 3,000
    To Loss on Sale of Furniture (W.N.2) 13,000
    To Surplus (excess of income over expenditure) 2,15,000
    4,13,500 4,13,500

     

    Balance Sheet as on 31 March 2019

    Liabilities Amt Amt Assets Amt Amt
    Capital Fund (W.N.3) 3,85,500 Fixed Deposit 1,80,000
    Add: Surplus 2,15,000
    Advance Subscription 5,000 Books 50,000
    Outstanding Salaries 6,000 Add: Purchased 70,000 1,20,000
    Furniture 1,20,000
    Add: Purchased 1,05,000
    Less: Sold -50,000 1,75,000
    Outstanding Subscription 15,000
    Prepaid Rent 5,000
    Cash in Hand 30,000
    Cash at Bank 82,000
    Accrued Interest (W.N.4) 4,500
    6,11,500 6,11,500

     

    Working Notes:

    W.N.1: Calculation of Subscription

    Subscription for 2018-19 2,65,000
    Add: Outstanding Subscription (31 March 2019) 15,000
    Less: Outstanding Subscription (2017-18) -8,000
                     Total Subscription 2,72,000

    In the above calculation, for the year 2017-18 subscription amount was 12,000, and in the adjustment at the end of the year subscription was 20,000 so the difference of 8,000 is the amount of subscription that was outstanding.

     

    W.N.2: Calculation of loss on sale of furniture

    Book Value of Furniture 50,000
    Less: Sold -37,000
                    Loss on Sale of Furniture 13,000

     

    W.N.3: Calculation of Capital Fund

    Balance Sheet as on 31 March 2018

    Liabilities  Amt  Assets Amt
    Capital Fund (Balancing Figure) 3,85,500 Books 50,000
    Furniture 1,20,000
    Outstanding Subscription 20,000
    Cash in Hand 40,000
    Cash at Bank 1,55,500
    3,85,500 3,85,500

     

    W.N.4: Calculation of Accrued Interest

    Interest as of 30 September 2018 9,000
    Less: Interest as of 31 March 2019 -4,500
                   Accrued Interest 4,500
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