AccountingQA Latest Questions

Jayesh Gupta
Jayesh GuptaCurious
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  1. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    20 Journal Entries Journal is the book of initial entry, hence the transactions are at first recorded in the journal by the way of journal entries. Journal entries are made as per the double entry system of accounting, where for each transaction one account is debited and another account is creditedRead more

    20 Journal Entries

    Journal is the book of initial entry, hence the transactions are at first recorded in the journal by the way of journal entries.

    Journal entries are made as per the double entry system of accounting, where for each transaction one account is debited and another account is credited.

    In the case of compound journal entries, one set of accounts is debited and one set of accounts is credited.

    The amount of debit and credit always remains the same.

    For example, when cash is introduced into a business, it affects two accounts: Cash A/c and Capital A/c. The accounts are debited and. credited as per the golden rules of accounting.

    The journal entries which I have provided are based on the following transactions and events:

    1. The business started with Rs. 1,00,000 
    2. Bought machinery for Rs. 15,000 and furniture for Rs. 10,000
    3. Purchased goods of Rs. 20,000 with cash 
    4. Bought Stationery for Rs. 500 
    5. Cash deposited into bank Rs. 40,000 
    6. Goods sold to Matt for Rs. 15,000 
    7. Purchased goods from Uday of Rs. 30,000 
    8. Being Rs. 5,000 rent paid for premises 
    9. Cheque received from Matt of Rs. 15,000 
    10. Defective goods returned to Uday returned of Rs. 2,000 
    11. Cash sales of Rs. 25,000 
    12. Carriage Inward paid Rs. 700
    13. Cash withdrawn from bank Rs. 15,000 
    14. Full payment made to Uday in cash. Discount received from Uday Rs. 1000.
    15. Refreshments given to customers of Rs. 200
    16. Goods sold to Shyam for Rs. 7,500 
    17. Goods purchased from Ram of Rs. 50,000 
    18. Salaries paid to employees by bank Rs. 5,000 
    19. Good sold to Suri for Rs. 25,000 
    20. Insurance premium paid of Rs. 1,500 by the bank.

    Journal Entries

    The journal entries based on the above are as follows:

     

    Ledgers

    Ledger is known as the book of final entry. It is the book where the transactions related to a specific account are posted. This posting of transactions is done from journal entries.

    The posting of journal entries into the ledger is performed in the following way:

    The journal entry of cash sales is :

    Cash A/c                                                           Dr.            Amt
          To Sales A/c            Amt

    Here, Cash A/c is debited to Sales A/c. So, in the Cash A/c ledger, posting will be made on the debit side as “To Sales A/c”

    In the Sales A/c ledger, the posting will be made on the credit as “By Cash A/c” because Sales A/c is credited to Cash A/c

    For creating ledgers, journal entries are a prerequisite.

    Now, the ledgers to be created as per the journal entries made above are as follows:

    1. Cash A/c
    2. Bank A/c
    3. Capital A/c
    4. Furniture A/c
    5. Machinery A/c
    6. Purchase a/c
    7. Sales A/c
    8. Matt A/c (Debtor)
    9. Uday A/c (Creditor)
    10. Rent A/c
    11. Purchase Return A/c
    12. Stationery A/c
    13. Carriage Inward A/c
    14. Refreshment A/c
    15. Shyam A/c (Debtor)
    16. Ram A/c (Creditor)
    17. Suri A/c (Debtor)
    18. Refreshment A/c
    19. Discount Received A/c

    The account ledgers are as follows:

    Trial Balance

    A trial balance is a statement that is prepared to check the arithmetical accuracy of books of accounts.

    In this statement, the total of all accounts having debit balance and the total of all accounts having credit balance is computed. If the total of debit and credit matches, then it can be said that the books of accounts are arithmetically accurate.

    Here also we have prepared the trial balance by computing the total of accounts  having debit balances and the total of  accounts having credit balances

    The debit column total and credit column total are matching. Hence, we can say that the books of accounts we have prepared are arithmetically accurate.

    Note: Matt A/c and Uday A/c have not appeared in the trial balance because they do not have any carrying balance.

     

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Manvi
Manvi
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  1. Ayushi Curious Pursuing CA

    Let the business in our example be X Trading. The 15 transactions are as follows: 1st April - X Trading started its business with Rs. 10,000 cash and furniture of Rs. 5,000. 5th April - Purchased 1,000 units of goods for Rs. 1,000 in cash from Ram. 10th April – Bought stationery for Rs. 100 in cash.Read more

    Let the business in our example be X Trading. The 15 transactions are as follows:

    1. 1st April – X Trading started its business with Rs. 10,000 cash and furniture of Rs. 5,000.
    2. 5th April – Purchased 1,000 units of goods for Rs. 1,000 in cash from Ram.
    3. 10th April – Bought stationery for Rs. 100 in cash.
    4. 25Th April – Sold 500 goods for Rs. 750 in cash.
    5. 1st May – Paid a rent of Rs. 1200 ( 1st April to 31st March)
    6. 1st June – Took a loan of Rs. 15,000 from the bank at [email protected]%.
    7. 15Th June – Sold 400 goods for Rs. 600 to Shyam in credit.
    8. 1st August – Bought a computer for Rs. 10,000 in from ABC Computers in credit.
    9. 15th October – Received Rs. 300 from Shyam in cash.
    10. 1st November – Purchased 2,000 units of goods for 2,000 from Ram in credit.
    11. 15th November – Paid Rs. 5,000 to ABC Computers through cheque.
    12. 1st December – Sold 1,000 units of goods for Rs. 1,500. Received cheque as payment.
    13. 1st January – Obtained Trade license (valid for 5 years) by paying fees of Rs. 1000 through online bank transfer.
    14. 15Th February – Paid Rs. 1,500 to Ram. Through cheque.
    15. 15Th March – Drawings made of Rs. 2000 in cash.

    We will prepare the journal, ledgers and the trial balance from the above transactions.

    Journal

    Journal is known as the book of primary entry or book of original entry. It is because every transaction is recorded in form of journal entries in the journal. Every journal entry affects at least two accounts (dual effect). A transaction has to be a monetary transaction otherwise it cannot be recorded as a journal entry.

    The procedure of recording transactions as journal entries is simple if we follow the modern rules of accounting.

    So first we have to identify which and what type of account does a transaction affect. The types of accounts are:

    1. Asset – Debit in case of increase Credit in case of decrease.
    2. Liabilities – Debit in case of decrease Credit in case of increase.
    3. Capital – Debit in case of decrease Credit in case of increase.
    4. Expense – Debit in case of increase Credit in case of decrease.
    5. Income – Debit in case of decrease Credit in case of increase.

    Ledger

    Ledgers are known as the books of principal entry or book of final entry. All the journal entries recorded in the journal are posted to the ledgers. A Ledger is where the entries related to a particular account are recorded. For example, all the transactions related to salary will be recorded in the salary account ledger.

    It is very important to prepare the ledger to arrive at the balance of each account in the books of concern so that it can prepare its trial balance.

    The procedure of posting journal entries in the ledger account is done is as follows:

    The ledgers are as follows:

     

     

    Trial Balance

    The trial balance is not a part of the books of accounts. It is just a statement prepared to check the arithmetical accuracy of the books of the accounts. It also helps to know about the omission and posting mistakes. It is prepared after the ledger accounts have been drawn and their balances have been ascertained.

    The balance of all the ledger accounts is posted on either side of the trial balance. Debit balance of the account on the debit side and credit balance of the account on the credit side.

    Also, the closing stock from the financial statements of the previous year is posted on the debit side of the trial balance as opening stock to account for the stock with the business at the beginning of the financial year.

    Following is the trial balance of X trading:

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Aadil
AadilCurious
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  1. Ayushi Curious Pursuing CA

    When it is said that furniture is purchased for office use, it means it is an asset for the business and the journal entry for this event will be the following: Furniture A/c Dr. Amt To Cash/Bank / Vendor A/c Cr. Amt (Being furniture purchased for office use) Explanation of the journal as per the goRead more

    When it is said that furniture is purchased for office use, it means it is an asset for the business and the journal entry for this event will be the following:

    Furniture A/c Dr. Amt
    To Cash/Bank / Vendor A/c Cr. Amt
    (Being furniture purchased for office use)

    Explanation of the journal as per the golden rules of accounting

    The furniture account is a real account because it represents a material asset and the golden rule for real accounts is “Debit what comes in, credit what goes out”. Hence, the furniture account is debited as it is increased. The cash and bank are also real accounts and they are debited because there is an outflow from cash or bank.

    If the furniture is purchased on credit then the vendor account is credited. A vendor account represents a person and the golden rule for personal accounts is, “Debit the receiver, credit the giver”. It is credited as the furniture is given by the vendor.

    Explanation of journal as per modern rules of accounting

    The furniture account is an asset account hence it is debited as asset accounts are debited on increase. Cash and bank accounts are also assets accounts and they are credited as they are decreased on the purchase of furniture.

    A vendor account is a liability account as there is an obligation to pay the vendor. It is credited as it is increased. Liability accounts are credited on the increase and vice versa.

    When furniture is purchased for personal use

    If the furniture is purchased for personal use and the payment is made or is to be made out of business, then the asset will not be recognised as an asset for the business and it will be recorded as a drawing. It will be deducted out of capital. The journal entry will be the following:

    Capital  A/c Dr. Amt
    To Drawings A/c Cr. Amt
    (Being furniture purchased for personal use)

     

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A_Team
A_TeamCurious
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Final AccountsLoose Tools
  1. Vijay Helpful M.Com
    This answer was edited.

    Let me begin by giving a small explanation of what loose tools are before we dive into their accounting treatment. Loose tools are assets that are used in various steps of the production process and therefore are vital for the conversion of raw materials into finished goods. They are considered as cRead more

    Let me begin by giving a small explanation of what loose tools are before we dive into their accounting treatment.

    Loose tools are assets that are used in various steps of the production process and therefore are vital for the conversion of raw materials into finished goods. They are considered as current assets of the business as their useful life is limited. They have a small monetary value (cost-efficient) and high turnover. Examples of loose tools include screwdrivers, hammers, etc.

    One may say loose tools like screwdrivers and hammers can be used for more than one year and therefore should be classified as non-current assets. But unlike fixed assets, these loose tools have a high probability of being misplaced or lost. Hence they are classified as current assets.

    Since loose tools are treated as an asset for the business, they are shown as a debit balance in the trial balance.

    The cost of loose tools consumed for the year will be shown on the debit side of the Profit & Loss A/c as an expense. In the balance sheet, loose tools are shown on the Assets side under the head Current Assets and sub-head Inventories. Since they aid the production process, loose tools are shown as a part of the inventory of the business.

    Let us take an example,

    XYZ Ltd. at the beginning of the year had loose tools worth 5,000. During the year they purchased loose tools worth 500. At the end of the year, the company valued its loose tools at 4,500.

    Now let us find the cost of loose tools consumed. The formula for finding the cost of loose tools consumed is as follows:

    Cost of loose tools consumed  = Opening inventory of loose tools + Purchases of loose tools – Closing inventory of loose tools

    Cost of loose tools consumed = 5,000 + 500 – 4,500 = 1,000

    So, the cost of loose tools consumed (1000) will be shown on the debit side of the P&L A/c as follows:

    The closing inventory of loose tools worth 4,500 will be shown on the assets side of the balance sheet under the head current assets and sub-head inventory in the following manner:

    One thing to remember here is there is an exception to loose tools. While calculating liquidity ratios like the Current ratio, Quick ratio, etc. loose tools are excluded from current assets. The reason for this is loose tools cannot be easily converted into cash i.e. they are less liquid. The purpose of calculating the current ratio is to check the liquidity of a company. Including loose tools (which cannot be easily converted into cash) in current assets defeats the purpose of calculating the ratio.

     

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Aadil
AadilCurious
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RECEIPTS AND PAYMENTS ACCOUNT OF BHARTI CLUB for the year ended 31st March, 2019 Receipts Amount Payments Amount To Balance b/d           10,500 By Salary           25,000 To Subscriptions           70,500 By Travelling Expenses             4,000 To Donations             5,000 By Stationery           ...

  1. Vijay Helpful M.Com
    This answer was edited.

    Here I have prepared the Income & Expenditure A/c and Balance Sheet of Bharti Club: Income & Expenditure A/c for the year ended 31st March 2019 Expenditure Amt Income Amt To Salary          25,000 By Subscriptions (WN 1)          69,900 To Travelling Expenses            4,000 By Donations   Read more

    Here I have prepared the Income & Expenditure A/c and Balance Sheet of Bharti Club:

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

    Expenditure Amt Income Amt
    To Salary          25,000 By Subscriptions (WN 1)          69,900
    To Travelling Expenses            4,000 By Donations            5,000
    To Stationery          13,000 By Life Membership Fees          10,000
    To Rent          32,000 By Income from Investments            2,000
    To Surplus (Balancing figure)          12,900
             86,900          86,900

     

    Balance Sheet as on 31st March 2019

    Liabilities  Amt Assets  Amt
    Capital Fund (WN 2)     44,900 Cash         30,000
    Add: Surplus     12,900         57,800 9% Investments         25,000
    Advance Subscription           3,500 Books         12,000
    Life Membership Fees         10,000 Outstanding Subscription           4,300
            71,300         71,300

     

    Working Note 1: Calculation of Subscriptions

    Particulars Amt
    Total subscriptions received in 2018-19        70,500
    Add: Advance subscription for 2018-19          2,000
              Subscription outstanding for 2018-19          4,300          6,300
           76,800
    Less: Advance subscription for 2019-20          (3,500)
              Subscription outstanding for 2017-18          (3,400)          (6,900)
           69,900

    Working Note 2: Calculation of Capital Fund

    We prepare the previous year’s balance sheet of Bharti Club to identify the capital.

    Balance Sheet as on 31st March 2018

    Liabilities  Amount Assets  Amount
    Capital Fund (Balancing figure)    44,900 Cash    10,500
    Advance Subscription      2,000 9% Investments    25,000
    Books      8,000
    Outstanding Subscription      3,400
       46,900    46,900
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Bonnie
BonnieCurious
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Receipts Amount Payments Amount To Balance b/d 32,500 By Salaries 31,500 To Subscription By Postage 1,250 2016-17            1,500 By Rent 9,000 2017-18          60,000 By Printing and 2018-19            1,800 63,300 Stationery 14,000 To Donations (Billiards Table) 90,000 By Sports Material 11,500 By Miscellaneous Expenses 3,100 To Entrance Fees 1,100 By Furniture (1.10.2017) 20,000 To Sale of old magazines 450 By 10% investment (1.10.2017) 70,000 By Balance ...

  1. Manvi Pursuing ACCA
    This answer was edited.

    In the books of Youth Ltd. Income & Expenditure A/c for the year ended 31 March 2018 Expenditure Amt (₹) Income Amt (₹) To Salaries 31,500 By Subscription (W.N.1) 75,000 To Postage 1,250 By Entrance fees 1,100 To Rent 9,000 By Sale of old magazines 450 To Printing and Stationery 14,000 By IntereRead more

    In the books of Youth Ltd.

    Income & Expenditure A/c for the year ended 31 March 2018

    Expenditure Amt (₹) Income Amt (₹)
    To Salaries 31,500 By Subscription (W.N.1) 75,000
    To Postage 1,250 By Entrance fees 1,100
    To Rent 9,000 By Sale of old magazines 450
    To Printing and Stationery 14,000 By Interest on investment (W.N.3) 3,500
    To Sports material consumed (W.N.2) 10,000
    To Miscellaneous expenses 3,100
    To Depreciation on furniture (W.N.4) 1,000
    To Surplus 10,200
    80,050 80,050

     

    Working Notes:

    1. Calculation of Subscription:
    Subscription for the year 60,000
    Add: Outstanding subscription 16,200
    Less: Subscription in arrears (1,200)
    75,000
    2. Calculation of sports material consumed:
    Opening stock of Sports Material 3,000
    Add: Purchased during the year 11,500
    Less: Closing stock of Sports material (4,500)
    10,000
    3. Calculation of Interest on investment:
    Investment as on 1.10.2017 = 70,000
    The investment will be calculated for 6 months i.e starting from 1.10.2017 to 31.3.2018
    For 6 months = 70,000 * 10% * 6/12
    = 3,500
    4. Calculation of Depreciation on furniture:
    Furniture as on 1.10.2017 = 20,000
    Depreciation on the furniture will be calculated for 6 months i.e starting from 1.10.2017 to 31.3.2018
    For 6 months = 20,000 * 10% * 6/12
    = 1,000

     

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  1. Ayushi Curious Pursuing CA

    Today, mobile phones especially smartphones are an indispensable part of most businesses and they qualify as fixed assets as they usually last for more than a year. Being a fixed asset, the depreciation on mobile phones is to be provided. The rate of depreciation to be charged on mobile phones is 15Read more

    Today, mobile phones especially smartphones are an indispensable part of most businesses and they qualify as fixed assets as they usually last for more than a year. Being a fixed asset, the depreciation on mobile phones is to be provided.

    The rate of depreciation to be charged on mobile phones is 15% WDV* as per the Income Tax Act. The rates as per the companies act, 2013 are 4.75% SLM** and 13.91% WDV*.

    *Written Down Value **Straight Line Method

    A company has to charge depreciation on mobiles in their books as per the rates of Companies Act, 2013.

    Any business or entity other than a company can choose the rate as per the Income Tax Act, 1961 which is 15% WDV. It is a general practice for non-corporates to charge depreciation in their books as per the rates of the Income Tax Act.

    An important thing to know is that as per the Income Tax Act, 1961, mobile phones are treated as plants and machinery and the general rate of 15% is applied to it.

    One may consider mobile phones as computers and charge depreciation at the rate of 40%. However, such a practice is not correct. Mobile phones are not considered equivalent to computers and there is case judgment given by Madras High Court which backs this consideration. The case is of Federal Bank Ltd. vs. ACIT (supra).

    Therefore we are bound to this case judgment and should treat mobile phones as part of plant and machinery and charge depreciation on it accordingly for the time being.

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Simerpreet
SimerpreetHelpful
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  1. Radha M.Com, NET
    This answer was edited.

    The journal entry for the closing stock is passed at the year-end as closing stock is the inventory held by a business at the end of its accounting period. However, the entry for recording closing stock depends on how it is treated in the books of accounts. The two types of the accounting treatmentRead more

    The journal entry for the closing stock is passed at the year-end as closing stock is the inventory held by a business at the end of its accounting period. However, the entry for recording closing stock depends on how it is treated in the books of accounts.

    The two types of the accounting treatment of closing stock are as follows:

    • Closing stock is not shown in the Trial Balance.
    • Closing stock is shown in the Trial Balance.

     

    Closing stock is not shown in the Trial Balance:

    As per this treatment, the closing stock is not shown in the Trial Balance because it is already a part of the purchases of the business. Showing it in the Trial Balance would lead to a double effect. This will not give us accurate profit/loss at the end of the year.

    The closing stock is transferred to Trading A/c by passing a closing entry.

    Closing stock is an asset. It is debited because there is an increase in the assets. Trading A/c is credited because of the Matching concept as the value of the closing stock is adjusted against the cost of goods sold.

    At the end of the year, it is shown on the Asset side of the Balance Sheet, under the head Current Assets and sub-head Inventory.

    For example,

    ABC Ltd. at the beginning of the year had an opening inventory of 20,000. During the year, purchases worth 5,000 were made and goods worth 10,000 were sold. At the end of the year, the value of the closing stock will be 15,000 (20,000 + 5,000 – 10,000).

    Now the closing stock worth 15,000 will be recorded through this journal entry:

    Closing Stock A/c  15,000
       To Trading A/c  15,000
    (Being closing stock worth 15,000 transferred to Trading A/c)

    Closing stock is shown in the Trial Balance:

    This scenario is possible only when the closing stock is adjusted against purchases. By adjusting against purchases, the double effect of showing both purchases and closing stock in Trial Balance is eliminated.

    The following entry is recorded to adjust closing stock against purchases.

    Closing Stock is debited as there is an increase in the asset. Purchase A/c is credited because of the Matching concept.

    After recording the adjustment entry, the closing stock is shown on the debit column of the Trial Balance. It is not shown in the Trading A/c as it is already adjusted against purchases. In the Balance Sheet, it is shown as a Current Asset.

     

     

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Jasmeet_Sethi
Jasmeet_Sethi
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Final AccountsLoose ToolsRevaluation
  1. prashant06 B.com, CMA pursuing
    This answer was edited.

    To begin with, let me explain what is revaluation all about. So basically revaluation is a method of calculating the depreciation of assets where there are multiple identifiable assets of low value such as loose tools, live stocks, etc. Under this method assets like loose tools are revalued at the eRead more

    To begin with, let me explain what is revaluation all about. So basically revaluation is a method of calculating the depreciation of assets where there are multiple identifiable assets of low value such as loose tools, live stocks, etc.

    Under this method assets like loose tools are revalued at the end of the accounting period and the same is compared with the value at the beginning of the year. the difference amount is considered as depreciation.

    The formula goes as :

    REVALUATION= OPENING VALUE + PURCHASES – CLOSING VALUE

    Let me take an example to show the same. Opening balance of Loose tools amounts to Rs.2,000 during the year, the business purchased loose tools of Rs.500 and at the year-end loose tool amounted to Rs.1,500 then revalued figure which will be shown as depreciation will be

    REVALUATION=  Rs.(2,000+ 500 – 1,500)

    = Rs.1,000

    The main discussion is”how to show adjustment of revaluation of the loose tool in financial statements”?

    As we all know, loose tools are considered assets for the business, hence shown under the head current assets or fixed assets depending upon the nature of the business and the time for which it is held.

    When the trial balance shows the debit value of loose tools, later on in the year-end the loose tools are revalued to a certain amount then the difference amount will be shown as depreciation in the Profit & Loss A/c and the revalued figure will be posted in the balance sheet asset side.

    Let me support my explanation with an example,

    Given is the extracted trial balance of XYZ & Co.

     

    we see the value of Loose tools in the given trial balance as Rs.50,000. At the year-end, these Loose tools were revalued at Rs.40,000.

    Therefore the adjustment in the financial statement would be like Rs (50,000 – 40,000) i.e Rs. 10,000 would be shown as depreciation under Profit & Loss A/c

     

    and the adjusted figure of Rs. 40,000 (i.e Rs.50,000 – Rs.10,000), will be shown on the asset side under the head fixed assets of the Balance Sheet.

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Simerpreet
SimerpreetHelpful
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  1. Rahul_Jose Aspiring CA currently doing Bcom

    Preliminary expenses are those expenses that are incurred before the company’s business commences. These expenses are written off annually which does not involve any flow of cash. Therefore, in the cash flow statement, preliminary expenses are added back to net profit before tax and extraordinary itRead more

    Preliminary expenses are those expenses that are incurred before the company’s business commences. These expenses are written off annually which does not involve any flow of cash. Therefore, in the cash flow statement, preliminary expenses are added back to net profit before tax and extraordinary items under the head operating activities (indirect method).

    A cash flow statement is a financial statement that summarises the cash and cash equivalents entering and leaving the company. They can be classified into operating activities, investing activities and financing activities.

    Reason for Treatment

    Operating activities refer to those sources or usage of cash that relates to business activities.
    As per the indirect method, the cash flow statement for operating activities begins with net profit before tax and extraordinary items. Since the company records non-cash expenditures also, they should add these back to net profit to find out the true cash flows. This is why preliminary expenses are added to net profit in the indirect method.

    As per the direct method, all cash receipts are added and all cash expenses are subtracted to get cash flow from operating activities. Since preliminary expenses are a non-cash activity, they do not require any treatment in the direct method.

    Preliminary expenses do not fall under the head investing activities as investing activities involve the acquisition or disposal of long term assets or investments. They do not fit in financing activities either as financing activities relate to change in capital or borrowings of the company.

    Example

    If the balance in preliminary expenses for the year 2019 was Rs.5,000 and its balance in 2020 reduced to 3,000, then its treatment in the cash flow statement would be:

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