AccountingQA Latest Questions

Karan
Karan
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more

    Negative working capital means the excess of current liabilities over current assets in an enterprise.

    Let’s understand what working capital is to get more clarity about negative working capital.

    Meaning of Working Capital

    Working Capital refers to the difference between current assets and current liabilities of a business.

    Working Capital = Current Assets – Current Liabilities

    It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.

    Items under Current Assets and Current Liabilities

    It is important to know about the items under current assets and current liabilities to understand the significance of working capital.

    Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.

    Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.

    Types of working capital

    Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:

    • Positive (Current assets > Current liabilities)
    • Zero  (Current assets = Current liabilities)
    • Negative (Current assets < Current liabilities)

    Hence, negative working capital exists when current liabilities are more than current assets.

    Implications of having negative working capital

    Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.

    An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.

    The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.

    Current Assets  = 2(Current Liabilities)

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

    Sales return shows the sale price of goods returned by customers. It is deducted from sales or gross sales in the income statement. It is a contra revenue account that represents returns from the customers and deductions to the original selling price, in case of any defective product received by theRead more

    Sales return shows the sale price of goods returned by customers. It is deducted from sales or gross sales in the income statement.

    It is a contra revenue account that represents returns from the customers and deductions to the original selling price, in case of any defective product received by the customer or any other manufacturing default.

    Sales allowances arise when any customer accepts the product at a lower price than the original price or, in other words, a reduction in the price charged by a seller, due to any problem related to the sold product like a quality issue, an incorrect price charged or shipment issue.

    Sales allowances are created before the final billing is paid by the buyer.

    Journal entry for sales return and allowances:

    Dr. Sales return and allowances Amt  
    Cr. Accounts receivable   Amt
    • Sales Return Account is debited because it is reverse of Sales Account which is credited at the time of sale.
    • Account Receivable Account is credited to reverse the debtors debited at the time of sale.
    • Hence Sales Return entry is just reverse of the entry recorded at the time of sale.

     

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Karan
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  2. Pooja_Parikh Aspiring Chartered Accountant

    No, Goodwill cannot be called a fictitious asset. A fictitious asset does not have any physical existence or realizable value. Although it is recorded in the assets column, it is not really an asset, rather it is an expense that is incurred during the accounting period. Its benefit, however, is realRead more

    No, Goodwill cannot be called a fictitious asset.

    A fictitious asset does not have any physical existence or realizable value. Although it is recorded in the assets column, it is not really an asset, rather it is an expense that is incurred during the accounting period. Its benefit, however, is realized for extended periods. This is why they are recorded as assets. They are recorded in a single year and are amortized over the years. A fictitious asset is neither tangible nor intangible.

    Examples of Fictitious Assets

    • Preliminary expenses
    • Promotional expenses
    • Discount on issue of shares/debentures etc.

    Now, goodwill is an intangible asset that relates to the purchase of a company. It is the amount that a company pays over the net worth of the company being purchased. This can be because of its brand value, good customer base, etc. As a company’s reputation improves, its goodwill increases accordingly. Therefore, It does not have a tangible existence but it does have a monetary value. They are also recorded on the asset side of the balance sheet under the head “Intangible assets”.

    Reason for not being a fictitious asset

    Since goodwill is an asset and not an expense, it cannot be called a fictitious asset. Moreover, goodwill has a realizable value. Unlike fictitious assets, goodwill can be purchased or sold. Therefore, goodwill is termed as an intangible asset but not a fictitious asset. The major difference between an intangible asset and a fictitious asset is:

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

    The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors. Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business. WriRead more

    The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors.

    Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business.

    Written off means an expense, income, asset, liability is no more recorded in the books of accounts because they no longer hold relevance for the business.

    When doubtful debts turn into bad debt, they are written off from the books after a stipulated time as they no longer seem recoverable.

    If any cash is received against such bad debts that were written off, it is known as cash received against bad debts written off. Cash is received against bad debts usually when the debtor is declared insolvent and money is recovered from its estate.

    Bad debts recovered are considered an income for the company as they were previously written off as a loss and any cash received against it is considered as income.

    Journal entry for such situation is:

    Cash or Bank A/c (Dr.)

    To Bad Debts Recovered A/c

    We debit the increase in assets, and since cash is coming into the business it is debited.

    We credit the income, and since bad debts recovered is an income to the business it is credited.

     

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

    The profits earned by a company are mainly divided into two parts: Dividend, and Retained Earnings The part of profit distributed to its shareholders is called a dividend. The part of the profit that the company holds for future expansion or diversification plans is called retained earnings. As theRead more

    The profits earned by a company are mainly divided into two parts:

    • Dividend, and
    • Retained Earnings

    The part of profit distributed to its shareholders is called a dividend. The part of the profit that the company holds for future expansion or diversification plans is called retained earnings.

    As the name suggests, retained earnings are the profit that is retained in the company. Retained earnings can be used for various purposes:

    • To distribute as dividends to shareholders
    • Expansion of business
    • Diversification
    • For an expected merger or acquisition

    As the profits of the company belong to shareholders, retained earnings are considered as profits re-invested in the company by the shareholders.

    The formula to calculate the cost of retained earnings is:

    (Expected dividend per share / Net proceeds) + growth rate

    • Expected dividend is the dividend an investor expects for his investment in the company’s shares based on the last year’s dividend, trends in the markets, and financial statements presented by the company.
    • Net proceeds is the market value of a share, that is, how much an investor would get if he sells his shares today.
    • Growth rate represents growth of company’s revenue, dividend from previous years in the form of a percentage.

    The expected dividend per share is divided by net proceeds or the current selling price of the share, to find out the market value of retained earnings.

    The growth rate is then added to the formula. It’s the rate at which the dividend grows in the company.

    For example:

    The net proceeds from share is Rs 100, expected dividend growth rate is 2% and expected dividend is 5.

    Cost of retained earnings

    = (Expected dividend per share / Net proceeds) + Growth rate

    = (5 / 100) + 0.02

    = 0.07 or 7%

     

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Karan
Karan
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    Retained earnings are kept with the company for growth instead of distributing dividends to the shareholders. Therefore the cost of retained earnings refers to its opportunity cost which is the cost of foregoing dividends by the shareholders. Therefore the cost of retained earnings is similar to theRead more

    Retained earnings are kept with the company for growth instead of distributing dividends to the shareholders. Therefore the cost of retained earnings refers to its opportunity cost which is the cost of foregoing dividends by the shareholders.

    Therefore the cost of retained earnings is similar to the cost of equity without tax and flotation cost. Hence, it can be calculated as

    Kr = Ke (1 – t) (1 – f),

    Kr = Cost of retained earnings
    Ke = Cost of equity
    t = tax rate
    f = flotation cost

    Here, flotation cost means the cost of issuing shares.

    EXAMPLE

    If cost of equity of a company was 10%, tax rate was 30% and flotation cost was 5%, then
    cost of retained earnings = 10% x (1 – 0.30)(1 – 0.05) = 6.65%.

    From the above example and formula, it is clear that the cost of retained earnings would always be less than or equal to the cost of equity since retained earnings do not involve flotation costs or tax.

    A company usually acquires funds from various sources of finance rather than a single source. Therefore the cost of capital of the company will be the weighted average cost of capital (WACC) of each individual source of finance. The cost of retained earnings is thus an important factor in calculating the overall cost of capital.

    Another important factor of WACC is the cost of equity. The cost of equity is sometimes interchanged with the cost of retained earnings. However, they are not the same.

     

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Karan
Karan
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Accumulated profit is the amount of profit left after the payment of dividends to the shareholders. It is also known as retained earnings. It is the profit that is not distributed as dividends to shareholders, hence called retained earnings. This accumulated profit is an important source of internalRead more

    Accumulated profit is the amount of profit left after the payment of dividends to the shareholders. It is also known as retained earnings. It is the profit that is not distributed as dividends to shareholders, hence called retained earnings. This accumulated profit is an important source of internal finance for a company. Accumulated profit or retained earnings can be ascertained using the following formula:

    Accumulated profit = Opening balance of accumulated profit + Net Profit/Loss (loss being in the negative figure) – Dividend paid

    Accumulated profit can be put to the following uses:

    • To reinvest into the business in form of capital assets or working capital.
    • To repay the debt of the company.
    • To pay dividends in future.
    • To set off the net loss made by the company.

    Accumulated profit and reserves are often considered the same. But in substance, they are not. The reserves are actually part of the accumulated profit, but the converse is not true. They are created by transferring amounts from the accumulated profit. While reserves are created for purpose of strengthening the financial foundation of a firm, the accumulated profit’s main purpose is to make reinvest in the business to increase its growth.

    The amount of accumulated profits depends upon the retention ratio and dividend payout ratio of a company.  The retention ratio is the opposite of the dividend payout ratio.

    The formula of dividend pay-out ratio = Dividend payable/Net Income

    And retention ratio = 1 – (Dividend payable/Net Income)

    If the retention ratio is more than the dividend payout ratio, the accumulated profit remains positive.

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Karan
Karan
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Difference BetweenFixed CapitalFluctuating Capital
  2. Radhika
    This answer was edited.

    Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business. Capital Accounts in a partnership firm can be ofRead more

    Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business.

    Capital Accounts in a partnership firm can be of two types:

    • Fixed Capital Account
    • Fluctuating Capital Account

    A fixed Capital Account is one where only non-recurring transactions related to capital accounts are recorded. For example:

    • Capital introduced
    • Capital withdrawn/ Drawings

    For transactions that are recurring in nature like interest on capital, the interest of drawings a separate account called Partner’s Current Account is created.

    Fluctuating Capital Accounts are the ones where there is a single account to record all types of transactions related to the partner’s capital account, whether recurring or nonrecurring.

    Fixed Capital Accounts are usually created in cases where there are numerous recurring transactions and partners want to keep a record of the fixed amount invested in the business by all the partners at any point in time.

    Fluctuating Capital Account is usually created in cases where the number of recurring transactions is not high or partners want to keep a record of the amount due to all the partners in business at any point in time.

    However, the decision to choose what kind of capital account should be implemented in the firm is complete with the partners. They may choose whatever they think is a more suitable fit.

    To summarise the difference between the two following table can be used:

    Fixed Capital Account Fluctuating Capital Account
       
    Non-recurring transactions are recorded. Recurring transactions are recorded.
    Created where the number of recurring transactions is high to maintain a separate record. Created where the number of recurring transactions is low.
    Examples:

    ·       Capital introduced

    ·       Capital withdrawn

    		 Examples:

    ·       Interest on capital

    ·       Interest in drawings

     

     

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Karan
Karan
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Difference BetweenDissolution of FirmDissolution of Partnership
  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be: Admission of a partner Death of a partner Retirement of a partner Dissolution of firm In the event of the above cases, the existing partnership is dRead more

    Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be:

    • Admission of a partner
    • Death of a partner
    • Retirement of a partner
    • Dissolution of firm

    In the event of the above cases, the existing partnership is dissolved and a new partnership is created with the new partners without affecting the firm.

    A new partnership deed is created, in case there is a partnership deed agreed among partners and new profit-sharing ratios among the partners are decided, while the assets and liabilities of the firm remain the same.

    Dissolution of a firm means the firm no longer exists. Various reasons for the dissolution of a partnership firm could be:

    • Mutual decision of partners
    • By the court of law

    A partnership firm is dissolved by a court of law when there has been a non-compliance of law, the firm is engaged in illegal practices, or that the court’s opinion is that it is in the public interest for the firm to be dissolved.

    The partnership is also dissolved with the dissolution of the firm but the converse need not be true.

    When a firm is dissolved, there is a sequence that is followed to pay creditors and partners.

    • First, outside creditors like banks, third party creditors are paid firstly with the cash available with the firm and then by selling the assets.
    • Second, partners who have lent money in the form of a loan to the firm are paid.
    • Lastly, if there is any surplus, partners are paid with the amount of their capital. In case of loss, partners are required to pay from their personal assets.

    Dissolution of the firm can be done by the partners themselves and they could also appoint a third person to do so on the payment of fees, charges, the proportion of surplus, or any contract that has been agreed to.

    To summarize, we can a draw a difference table as follows:

    Dissolution of Partnership Dissolution of Partnership Firm
    The partnership ends but the firm still stands. A partnership firm no longer exists.
    A new partnership deed is created by the mutual agreement of partners. A new partnership firm is created if the partners decide.
    Reasons:

    ·        Admission

    ·        Retirement

    ·        Death

    		 Reasons:

    ·        By court

    ·        Mutual decision of partners
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Karan
Karan
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Let’s understand what a cashbook is: A petty cash book is a cash book maintained to record petty expenses. By petty expenses, we mean small or minute expenses for which the payment is made in coins or a few notes like tea or coffee expense, bus or taxi fare, stationery expense etc. Such expenses areRead more

    Let’s understand what a cashbook is:

    • A petty cash book is a cash book maintained to record petty expenses.
    • By petty expenses, we mean small or minute expenses for which the payment is made in coins or a few notes like tea or coffee expense, bus or taxi fare, stationery expense etc.
    • Such expenses are numerous in a day for a business and to account for such small expenses along with major bank and cash transactions may create an extra hassle for the chief cashier of a business.
    • So, the cash is allocated for petty expenses and a petty cashier is appointed and the task of recording the petty expenses in the petty cashbook is delegated to him.

    The manner in which entries are made

    When cash is given to the petty cashier, entry is made on the debit side and in the petty cashbook and credit entry in the general cashbook.

    Entries for all the expenses are made on the credit side.

    Generally, the petty cashbook is prepared as per the Imprest system. As per the Imprest system, the petty expenses for a period (month or week) are estimated and a fixed amount is given to the petty cashier to spend for that period.

    At the end of the period, the petty cashier sends the details to the chief cashier and he is reimbursed the amount spent. In this way, the debit balance of the petty cashbook always remains the same.

    Format and items which appear in the petty cashbook

    The format of the petty cashbook depends upon the type of petty cash book is prepared and the items appearing in it are nothing but petty expenses. Let’s see an example:-

    A business incurred the following petty expenses for the month of April:-

    1. Stamp – Rs. 10
    2. Postage – Rs. 50
    3. Cartage- Rs. 100
    4. Telephone expense – Rs. 500
    5. Refreshments – Rs. 250

    Now we will prepare two types of cashbooks:

    • Ordinary Petty Cashbook:

    Here, the Petty cash book is of the same format as the general cash book.

    The cash allocated for petty expenses is recorded on the debit side of the petty cash book and on the credit side of the general cash book.

    • Analytical Petty Cashbook

    Here, there are separate amount columns for each type of expense. As the name suggests, this type of petty cashbook helps to analyse the petty cash spending on basis of the type of expense.

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