AccountingQA Latest Questions

Aditi
Aditi
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  2. Mehak

    The terms outstanding expenses and accrued expenses are two accounting terms which are often used interchangeably. However, these two terms are not the same and have different meanings. The difference between these two terms is given below: What are Outstanding expenses? As the name suggests, outstaRead more

    The terms outstanding expenses and accrued expenses are two accounting terms which are often used interchangeably. However, these two terms are not the same and have different meanings. The difference between these two terms is given below:

    What are Outstanding expenses?

    As the name suggests, outstanding expenses are the expenses that are due but have not been paid yet. It means that the business is supposed to pay the amount due but it has not paid the same at the end of the accounting period.

    Outstanding expenses are recognized as a current liability because the business is liable to pay such expenses. These expenses are recorded in the books of accounts but the payment is still pending.

    Some examples of outstanding expenses are:

    1. The electricity bill is due for the month of January but has not yet been paid on 31st January.
    2. Salaries of employees of 50,000 is due for the month of March but have not been paid yet by the business.

    What are Accrued expenses? 

    Accrued expenses are the expenses that a business has incurred during the accounting period but they have not yet been recorded in the books of accounts because the bill has not yet been received or the payment is not due yet.

    The concept of Accrued expenses helps in complying with the accrual basis of accounting which says that the expense shall be recognised at the time it occurs regardless of the fact that payment is received or not.

    Examples of accrued expenses are:

    1. The electricity bill for December is received in the month of January. However, it shall be recognised as an expense in the month of December.
    2. The salaries of the employees for the month of April are paid in May. However, this expense shall be recognized in April.

     

    Key differences between outstanding expenses and accrued expenses

    To summarise the above discussion, the key differences between outstanding expenses and accrued expenses are given in the table below:

     

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Simerpreet
SimerpreetHelpful
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Explain Business entity, money measurement concept, Going concern concept etc.

Accounting ConceptsGAAP
  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Accounting Concepts Accounting concepts are the rules, assumptions and methods generally accepted by accountants in the preparation and presentation of financial statements of an entity. These concepts have been developed by the accounting profession for a long period. These concepts constitute theRead more

    Accounting Concepts

    Accounting concepts are the rules, assumptions and methods generally accepted by accountants in the preparation and presentation of financial statements of an entity. These concepts have been developed by the accounting profession for a long period.

    These concepts constitute the foundation of accounting and one has to be aware of them to maintain correct and uniform financial statements.

    I have listed and briefly explained the following accounting concepts.

    1. Entity Concept 
    2. Money Measurement concept 
    3. Going on concern 
    4. Periodicity concept 
    5. Accrual concept 
    6. Cost concept 
    7. Realisation concept 
    8. Matching concept 
    9. Dual aspect concept 
    10. Conservatism concept 
    11. Materiality concept 
    12. Consistency concept

     

    #1 Entity Concept 

    As per this concept, the business and its owner are separate entities from the point of view of accounting. It means the assets and liabilities of the business and owner are not the same. 

    However, in the eyes of law, the business and its owner may be a single entity.

     

    #2 Money measurement concept

    This concept states that the transaction which can be measured in terms of money shall only be recorded in the books of accounts.

    Any transaction which cannot be measured in terms of money shall not be recorded.

    #3 Going concern concept 

    Going concern concept is also a fundamental accounting assumption. It assumes that an enterprise will continue to be in business for the foreseeable future.

    It means its accounts will also be prepared to take such assumptions that the business will continue in future.

     

    #4 Periodicity concept 

    The periodicity concept states an entity needs to carry out accounting for a definite period, generally for a year known as the accounting period. The period can also be half-year or a quarter.

    The cycle of accounting restarts at the start of every accounting period.

     

    #5 Accrual concept 

    The word accrual comes from the word

    As per the accrual concept, the expense and incomes are recorded in the books of accounts in the period in which they are expected to incur whether payment in cash is made or cash is received or not.

    For example, the salary to be paid by a business is to be recorded as an expense in the year in which it is expected or liable to be paid.

     

    #6 Cost concept 

    It is concerned with the purchase of the assets of a business. As per the cost concept, a business shall record any asset in its books at the acquisition cost or purchase cost.

     

    #7 Realisation concept 

    This concept is concerned with the sale of assets. A business shall record the sale of the assets in its books only at the realised cost.

     

    #8 Matching concept 

    As per this concept, revenue earned during a period should be matched with the expenses incurred in that period. In short, an entity needs to record the income and the expenses of the same period.

     

    #9  Dual concept 

    This concept is the foundation of double-entry accounting. Dual concepts state that every transaction has two effects, debit and credit. 

    One or more accounts may be debited and other one or more accounts are credited so that the total amount of debit and credit equals.

     

    #10 Conservatism concept 

    The conservatism concept states that an entity has to account for expected losses and expenses but not for future expected profits and gains.

     

    #11 Materiality concept 

    As per this concept, only those items which are material should be shown in the financial statements of an entity. It says that items which are immaterial or insignificant in terms of value or importance to stakeholders can be ignored.

     

    #12 Consistency concept 

    It says that an entity should follow consistent accounting policies every accounting period so that a comparison can be made among the financial statements of different accounting periods.

     

    GAAP 

    Generally Accepted Accounting Principles or GAAP is a combination of authoritative standards which are set by policy boards and commonly accepted methods of recording and presenting accounting information. 

    GAAP or US GAAP is formulated by the Financial Accounting Standards Board or FASB  and almost state in the USA is compliant with GAAP. 

    The main goal of the GAAP is to ensure that the financial statements of an entity are complete, consistent and comparable.

    It can be said accounting concepts are part of GAAP.

     

    Ten key principles of GAAP

    #1 Principle of regularity

    It states that an accountant has to comply with GAAP regulations as a standard.

     

    #2 Principle of Consistency

    Accountants should be committed to applying the same set of standards throughout the accounting and reporting process, from one period to another. This is to be done to ensure comparability of financial statements between periods.  

    Also, the accountants have to fully disclose and explain the reason behind any changed or updated standards in the note of accounts of financial statements.

     

    #3 Principle of sincerity

    It states that the accountant should strive to provide an accurate and unbiased view of the financial situation of a company.

     

    #4 Principle of Permanence of Methods

    As per this principle, a company should be consistent in procedures used in financial statements so that it allows the comparison of the company’s financial information.

     

    #5 Principle of Non-Compensation

    Both negative and positive should be reported with full transparency. There should be no debt compensation i.e. debt should not be set off against any asset or expenses against revenue.

    #6 Principle of Prudence

    It states that financial data presentation should be fact-based. This principle is similar to the conservatism concept.

     

    #7 Principle of Continuity

    This is as same the going concern concept. It states that while valuing assets, it should assume that the business will continue for the foreseeable future.

     

    #8 Principle of Periodicity

    It is the same as the matching concept. It states that the revenue and expenses should be recorded in the period in which they occur.

     

    #9 Principle of Materiality

    Accountants should disclose all the financial information that is significant in the decision-making of the users of financial statements.

     

    #10 Principle of Utmost Good Faith

    It states that all parties to a transaction should act honestly and not mislead or hide crucial information from one another.

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Nistha
Nistha
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Accounting PoliciesAccounting PrinciplesDifference Between
  2. Sandy CMA Final
    This answer was edited.

    To begin with, let me give you a brief explanation of both the terms i.e. Accounting policies and accounting principles- In order to maintain the financial statements, the company’s management adopts various Accounting Policies of its own. This generally includes the rules, the directions as to howRead more

    To begin with, let me give you a brief explanation of both the terms i.e. Accounting policies and accounting principles-

    In order to maintain the financial statements, the company’s management adopts various Accounting Policies of its own. This generally includes the rules, the directions as to how the financial statements will be prepared or how the valuation of depreciation would be done, and so on. These are flexible in nature and vary from company to company.

    For Example 1, Johnson Co. uses FIFO (first in first out) method to value the inventory. That is to say that, while selling its product, it sells those goods or products which it has acquired or produced first.

    It does not consider the LIFO or weighted average cost. The other company may adopt the other method as per its wish.

    Example 2, Johnson Co. uses the straight-line method of depreciating an asset, whereas the other company can opt for a written down value method depending upon the need of the company.

    So what I am trying to explain from this is that the accounting policies are flexible and can be adopted as per the needs of the company.

    Accounting Principles are the rules which the accountants adopt universally for recording and reporting the financial data. It brings uniformity in accounting throughout the practice of accounting. These are generally less flexible in nature.

    For Example, “Cost” is a principle. According to this accounting principle, an asset is recorded in the books at the price paid to acquire it and this cost will be the basis for all the subsequent accounting for the asset.  However, asset market value may change over time, but for the accounting purpose, it continues to be shown at its book value i.e. at which it is acquired.

    Some more examples would be of Matching principle, Consistency principle, Money measurement principle, etc.

    Differences

    Conclusion

    The point is Accounting Principles are the broad direction to reach a goal and to reach that goal helps the accounting policies.

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

    External users are people outside the business or entity who use accounting information. They do not have a direct link with the organization but can influence or can be influenced by the organization's activities. For example - Tax Authorities, Banks, Customers, Trade Unions, Government, Investors,Read more

    External users are people outside the business or entity who use accounting information. They do not have a direct link with the organization but can influence or can be influenced by the organization’s activities.

    For example – Tax Authorities, Banks, Customers, Trade Unions, Government, Investors, or Creditors.

    External Users:

    • Investors – Investors are interested in the past performance and future earnings of the business. They want to track the performance of their business whether it is giving them any benefit or not. A business’s past information helps investors in assessing their investments.
    • Creditors or Suppliers – Some suppliers provide goods and services on credit, and before providing any credit they check the company’s ability to pay. Creditors are interested in the company’s liquidity i.e to see if a company can fulfill short-term obligations.
    • Customers – Customers are more interested in a company’s financial statement as they rely on them for goods and services. They check the ability of the company whether it is providing them good quality goods and will continue to provide them in future.
    • Banks – Banks are most likely interested in the liquidity and profitability of the company. They keep track of whether the company can pay the debt when it is due along with interest.
    • Government – The company’s activities are central to the economy and must be met by them. The government controls a company’s actions if they break a law or damage the environment.
    • Environmental agencies – They keep an eye on organizations whether their activities are harming the environment or not.
    • Trade unions – They take an active part in the decision-making process. They want to see the financial statements of the company and want to decide the compensation of the employees they represent.
    • Tax authorities – They determine whether the business has declared the correct amount of tax in its tax returns. They conduct audits of the tax returns to verify them with the accounting records disclosed.

    Here is a summary of external users

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Jasmeet_Sethi
Jasmeet_SethiCurious
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  2. Simerpreet Helpful CMA Inter qualified

    Sundry Debtors Sundry Debtors are those persons or firms to whom goods have been sold or services rendered on credit and the payment has not been received from them. In other words, Debtors are the persons or firms from whom the payment is to be received by the business. For Example, Ramen Sold goodRead more

    Sundry Debtors

    Sundry Debtors are those persons or firms to whom goods have been sold or services rendered on credit and the payment has not been received from them. In other words, Debtors are the persons or firms from whom the payment is to be received by the business.

    For Example, Ramen Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ramen because he owes the amount to Ramen.

    Another Example, If goods worth Rs 7000 have been sold to Sid on credit, he will continue to remain as debtor of the business so long as he does not make the full payment.

    Treatment:

    Sundry Debtor is considered as a current asset and hence it is shown on the assets side of the balance sheet under the Current Assets heading.

    Sundry Debtors are not considered as an item of profit and loss because it is not considered as an item of income or expense. However, the items associated with sundry debtors such as bad debts or provision for doubtful debts or bad debts recovered are shown in profit and loss accounts in the debit and credit sides respectively.

    Sundry Creditors

    Sundry creditors are those persons or firms from whom goods have been purchased or services rendered on credit and for which payment has not been made. In other words, Creditors are the person or firms to whom some money has to be paid by the business.

    For Example, Ramen purchased goods from Sam on credit, Ramen did not pay for the goods immediately, so here Ramen is the creditor for Sam because he owes money to Sam.

    Another Example, If Mr. Johnson purchased goods worth Rs 3000 from M/s. Rick & Co. on credit, Mr. Johnson will continue to remain as a creditor of M/s. Rick & Co. as long as the full payment is made by Mr. Johnson.

    Treatment:

    Sundry Creditor is shown in the liabilities side of the balance sheet under the heading Current Liabilities.

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Aditi
Aditi
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  2. Mehak
    This answer was edited.

    Assets can be classified as Financial or Non-financial assets. One might wonder why this is necessary.  Let us dive into this concept, beginning with understanding what financial and non-financial assets are and why they are classified as such. What are Assets? Assets are things that have a monetaryRead more

    Assets can be classified as Financial or Non-financial assets. One might wonder why this is necessary.  Let us dive into this concept, beginning with understanding what financial and non-financial assets are and why they are classified as such.

    What are Assets?

    Assets are things that have a monetary value and are beneficial for a business. Assets are commonly classified as tangible, intangible, current, fixed, financial, non-financial, etc.

    Plant and machinery, land, buildings, cash, bank balance, patents, etc are some of the examples of assets that a business has.

    What are Financial Assets?

    Financial assets are the things of value that are held by a person for their underlying value. They are intangible and do not have a physical form. For example – Stocks, bonds, debentures, options, futures, etc.

    The value of these assets may change over time depending upon the market conditions, changes in government policies, fluctuations in interest rates, etc.

    In comparison to non-financial or physical assets, financial assets are more liquid as they can be traded and can be converted into cash.

    What are Non-financial assets?

    Non-financial assets are tangible or intangible assets that have a value but cannot be easily converted into cash. They are not as liquid and generally not traded.

    Examples of such assets are buildings, plant and machinery, patents, trademarks, etc.

    Why do we separate Financial and Non-Financial Assets?

    The following are several important reasons why it is important to segregate the same:

    1. It helps in the proper classification of assets on the Financial Statements.
    2. It helps in liquidity management.
    3. It helps in Risk assessment.
    4. Tax management can be done accurately.

    Difference between Financial and Non – Financial Asset

     

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Simerpreet
SimerpreetHelpful
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Impairment
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    What is Impairment of Assets? Impairment of assets means a decline in the value of assets due to unforeseen circumstances. Assets are impaired when the carrying value of assets increases its market value or “realizable value”. Impairment can be caused due to factors that are internal or external toRead more

    What is Impairment of Assets?

    Impairment of assets means a decline in the value of assets due to unforeseen circumstances. Assets are impaired when the carrying value of assets increases its market value or “realizable value”.

    Impairment can be caused due to factors that are internal or external to the firm. Internal factors such as physical damage, obsolescence or poor management and external factors such as a change in legal or economic circumstances, increased competition or reduction in asset’s fair value in the market result in impairment.

    Impairment Vs Depreciation

    Asset impairment is often confused with asset depreciation, which is rather a recurring and expected event, unlike impairment that reflects an abrupt decrease in the value of the asset.

    Impairment Loss

    Impairment is always treated as a loss in accounting. It is the amount by which the carrying value or the asset’s book value exceeds its fair market value.

    Before recording Impairment loss, a company must determine the recoverable value of the asset which is higher of the asset’s net realizable value or value in use. Then it is to be compared with the book value of the asset.

    If the carrying value exceeds the recoverable value then the impairment loss is to be recorded at the exceeding value i.e. difference of carrying value and realizable value.

    Example

    Suppose a company Royal Ltd. has an asset with a carrying value of 50,000, which has suffered physical damage. According to the company’s calculation, the asset has a net realizable value of 30,000 and a value in use of 25,000.

    Then, the recoverable value would be higher of the asset’s net realizable value or value in use, i.e., 30,000 which is still lower than the carrying amount of 50,000. Therefore, Royal ltd. will have to record 20,000 (50,000-30,000) as impairment loss.

    This is will increase Royal Ltd’s expenses by 20,000 and decrease the asset’s value by the same amount.

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

    The term "principal book of accounts'' refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account. So to put it simply, the principal book of accounts mean ledgers. Ledgers are prepared by posting the debits and credits of a joRead more

    The term “principal book of accounts” refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account.

    So to put it simply, the principal book of accounts mean ledgers.

    Ledgers are prepared by posting the debits and credits of a journal entry to the respective accounts.

    A ledger groups the transactions concerning the same account. For example, Mr B is a debtor of X Ltd. Hence all the transactions entered into with Mr. will be grouped into the ledger Mr B A/c in the books of X Ltd.

    Ledgers are of utmost importance because all the information to any account can be known by its ledger.

    Preparation of ledger is very important because all the information to any account can be known by its ledger. Ledgers also display the balance of each and every account which may be debit or credit. This helps in the preparation of the trial balance and subsequently the financial statements of an entity.

    Hence, it is the most important book of accounts and calling it the ‘books of final entry’ is also justified.

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Jayesh Gupta
Jayesh GuptaCurious
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A. Trading Account B. Trial Balance C. Profit and Loss Statements D. Balance Sheet  

  2. Ayushi Curious Pursuing CA
    This answer was edited.

    The correct answer is Option C. The Profit and loss statement is also referred to as the statement of revenues and expenses. It is because the Profit and Loss statement reports all types of revenue that have been earned and all types of expenses that have been incurred during a particular period ofRead more

    The correct answer is Option C.

    The Profit and loss statement is also referred to as the statement of revenues and expenses. It is because the Profit and Loss statement reports all types of revenue that have been earned and all types of expenses that have been incurred during a particular period of time.

    Option A Trading Account reports only the operating revenues and operating expenses.

    Option B Trial Balance shows the balances of all the ledgers of a business and is prepared to check the arithmetical accuracy of the books of accounts.

    Option D Balance sheet reports the balances of assets and liabilities of a business as at a particular date.

    People often confuse the trading and the profit and loss statement to be the same. But they are different.

    Trading Account is prepared with aim of arriving at operating profit or gross profit whereas the profit and loss statement is prepared to arrive at the net profit of a business and reports every revenue and expense whether operating or non operating in nature.

    Operating revenue and operating expense are earned or incurred respectively are related to the chief business activities of a business.

    Features of profit and loss statement:

    1. It is prepared to measure the net profit of a business hence its profitability.
    2. It is usually prepared for a period of one year but many companies do prepare quarterly statements to better judge their performance.
    3. It helps the management in decision making and the other stakeholders like shareholders, creditors to make informed decisions.
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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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