AccountingQA Latest Questions

Aadil
AadilCurious
In: >

A. Trading Account B. Profit & Loss Statement C. Balance Sheet D. Cash Book

  2. Vijay Curious M.Com
    This answer was edited.

    The correct answer is C. Balance Sheet. A Balance Sheet is a financial statement prepared to know the financial position of a company at any particular point in time. Hence, the answer to your question is the balance sheet. It is also known as Position Statement (as it shows financial position) or SRead more

    The correct answer is C. Balance Sheet.

    A Balance Sheet is a financial statement prepared to know the financial position of a company at any particular point in time. Hence, the answer to your question is the balance sheet.

    It is also known as Position Statement (as it shows financial position) or Statement of Affairs (when it is prepared under the Single Entry System of accounting).

    The balance sheet shows the assets and liabilities of a firm at any specific point in time. It is a summary of the assets held by a firm and the liabilities owed to outsiders.

    As the name suggests, a balance sheet must always be balanced i.e, the total of assets should always be equal to the total of liabilities on any single day. To put it simply,

    Assets = Liabilities + Capital

    In the case of a sole proprietorship or partnership, capital means the amount invested by the proprietor/partners in the business. In the case of a company, capital means the funds contributed by the shareholders in the form of shares.

    Here is a link for the official balance sheet format as per the Companies Act 2013 (page 260 of the pdf),

    https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

    See less
    • 0
Manvi
Manvi
In: >

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

    The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is aRead more

    The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is a contra asset account which means an account with a credit balance.

    When a business first sets up a provision for doubtful debts, the full amount of the provision should be debited to bad debts expense as follows.

    Bad Debts A/c Debit Debit the increase in expense.
          To Provision for Doubtful Debts A/c Credit Credit the increase in liability.

    In subsequent years, when provision is increased the account is credited, and when provision is decreased the account is debited. This is so because provision for doubtful debts is a contra account to debtors and has a credit balance, and is treated as a liability.

    Effects of Provision for Doubtful Debts in financial statements:

    1. Trading A/c: No effect.
    2. Profit and Loss A/c: Debited to P&L A/c and charged as an expense.
    3. Balance Sheet: Deducted from Debtors.

    For example, ABC Ltd had debtors amounting to Rs 50,000. It creates a provision of 5% on debtors.

    Provision for Doubtful Debts = 50,000*5%

    = 2,500

    Journal entry for provision will be:

    Bad Debts A/c 2,500
          To Provision for Doubtful Debts A/c 2,500

    Effect on financial statements will be:

    See less
    • 0
Bonnie
BonnieCurious
In: >

  2. Ishika Pandey Curious ca aspirant
    This answer was edited.

    What is net credit sales? Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales. Formula  The formula for net credit sales is as follows: Net credit sales  = Sales on credit - Sales returns - SalRead more

    What is net credit sales?

    Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales.

    Formula

     The formula for net credit sales is as follows:

    Net credit sales  = Sales on credit – Sales returns – Sales allowances

    In the balance sheet, you can find credit sales in the “short-term assets “section. It can be calculated from account receivables, bills receivables, and debtors of the balance sheet.

    Credit sales = closing debtors + receipts – opening debtors

    Steps to calculate net credit sales

    • Calculate total sales for the period
    • Subtract the Sales Returns
    • Subtract the Sales Allowances
    • Subtract the Cash Sales ( if any )

     

    Terms relevant to understand before calculation

    Sales return:  A sales return is when a customer or client returns or sends a product back to the seller. And this can happen due to various reasons, including:

    • Excess quantity ordered
    • Not upto Customer expectations
    • Shipping delays ( product arrived late )
    • Accidentally ordered an item and there can be more such reasons.

    Sales allowance: A sales allowance is a discount that a seller offers a buyer as an alternative to the buyer for returning the product.

    Because of a problem or issue with the buyer’s order or we can say that he is not satisfied with the product.

    Cash sales: Cash sales are sales in which the payment is done at once or I can say that buyer has obligation to make payment to the seller.

    Cash sales are considered to include bills, checks, credit cards, and money orders as forms of payment.

    Example

    Now after understanding the terms used in the formula let me explain to you with an example which is as follows:-

      • First, we will calculate the Total Sales for the Period:- In the month of May, Flipkart company had cash sales of Rs 80,000. The total amount in Accounts Receivables is Rs 150,000, with Rs 30,000 as the carryover from April’s receivables.
      • Since you only want to know about credit sales in the current period (September), you subtract Rs 30,000 from the total. This means that for the month of September, Flipcart Company had sales totaling Rs 200,000 (80,000 + 120,000).

     

      • Second, we will subtract the Sales Returns:- During the month of September, Flipcart Company issued Rs 20,000 in refunds, because several items were damaged during shipment, so the customer could not use them.
      • This amount would reduce the total number of cash sales if the accounts receivable balance was from a credit customer. This reduces the total sales to Rs 180,000 (Rs 200,000 in total sales – Rs 20,000 in returns).

     

      • Thirdly we will subtract the Sales Allowances:- Sales allowances are discounts offered to customers for not asking for full refunds.
      • For example, an item that had been shipped to a customer was the wrong size, but the customer told that he will agree to keep the item if the price could be adjusted. Flipcart Company issued Rs 10,000 in allowances in May.
      • After this deduction, the total sales for May are Rs 170,000 (Rs 180,000 – Rs 10,000).

     

      • Then at last there are any cash sales then subtract:- After figuring out the total number of sales for September and then subtracting the sales returns and allowances, the cash sales are deducted since you are focusing on net credit sales for the period.
      • After deducting the Rs 60,000 in cash sales, Flipcart Company has Rs 110,000 as net credit sales.

     

    Why do we need net credit sales?

    • Net Credit sales help to calculate the accounts receivable turnover ratio.

     

    • Net credit sales also indicate the amount of credit you offer to your customer.

     

    •  Net credit sale is also used to calculate other financial analysis items like days sales outstanding.
    See less
    • 0
Radha
Radha
In: >

(a) Potential investors (b) The owners or managers of the concern (c) Creditors and Lenders (d) Government​

  2. Simerpreet Helpful CMA Inter qualified

    The correct option is (b) and (d) As the internal analysis is done for the internal assessment of the firm, only those persons can carry out the assessment who has access to the internal accounting records of a business firm. As the owners or managers are the members of the top-level management execRead more

    The correct option is (b) and (d)

    As the internal analysis is done for the internal assessment of the firm, only those persons can carry out the assessment who has access to the internal accounting records of a business firm. As the owners or managers are the members of the top-level management executives they can carry out the work of internal analysis. Also, the government agencies can carry out internal analysis as they have been given the statutory powers of doing such works.

    To make it clear, let me explain a little about internal analysis-

    To determine the profitability of various activities and operations or to know the performance of the business concern, the top-level executives along with the management accountant carry out an internal assessment of the financial statements within the concern, this process is known as internal analysis.

     

    See less
    • 0
Jayesh Gupta
Jayesh GuptaCurious
In: >

  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. Unlike a balance sheet that provides information about the company on a particular date, a cash flow statement proviRead more

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. Unlike a balance sheet that provides information about the company on a particular date, a cash flow statement provides information about the flow of cash over a period of time.

    OBJECTIVE

    Information obtained through cash flow statements is aimed to assess the ability of a business to generate cash and at the same time, maintain liquidity. Therefore, important economic decisions can be made by evaluating these cash flow statements.

    Cash Flow statements are categorized into

    • Operating Activities: These activities refer to the main activities of the business during an accounting period. They involve revenue-generating activities. As per the indirect method, profit before tax is taken as the starting point and all non-cash expenses are added while non-cash incomes are deducted. Whereas in direct method, cash receipts and cash expenses are added and subtracted respectively. Eg: sale of goods.
    • Investing Activities: These activities involve the sale and purchase of non-current assets and investments. Eg: cash payment for machinery.
    • Financing Activities: These activities result in a change in capital or borrowings. Eg: cash proceeds from the issue of equity shares.

    Importance of Cash Flow

    A cash flow statement gives us knowledge about the liquidity and solvency of the company. These are necessary for the survival and expansion of the company. It also helps in predicting future cash flows by using information from previous cash flows. It also helps in comparison between companies which shows the actual cash profits.

    See less
    • 0
A_Team
A_Team
In: >

  2. Ishika Pandey Curious ca aspirant
    This answer was edited.

    Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. Bad debts will be treated in the following ways : On the debit side of the profit and loss account. In the curreRead more

    Definition

    Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.

    Bad debts will be treated in the following ways :

    On the debit side of the profit and loss account.

    In the current assets side of the balance sheet, these are deducted from sundry debtors.

    For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.

    Now I will show you an extract of the profit and loss account and balance sheet   

    Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or the rendering of services in the ordinary course of business.

    For example,  debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.

     

    Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.

    For example bills payable, short-term loans, etc.

     

    Accounting treatment

    Now let me try to explain to you the accounting treatment for bad debts which is as follows :

    • Balance sheet
      • In the balance sheet either it can be shown on the asset side under head current assets by reducing from that specific assets.
      • For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.

     

    • Profit and loss account
      • Bad debts are treated as an expense and debited to the profit and loss account.
      • For example, as I have explained above, but before transferring to the balance sheet, bad debt will be debited to the profit and loss account as an expense.

     

    Reasons for bad debts

    There are several reasons why businesses may have bad debts some of them are as follows:-

    • Offered credit to customers who were unable to pay them back, or they may have been the victim of fraud.

     

    • When there is conflicts or dispute arise with respect to product size, color, quality, delivery, credit term, price, etc therefore debts becomes bad.

     

    • Debtors have poor financial management or they are not able to pay debts on time.

     

    • Debtors’ unwillingness to pay is also a reason for debts to become bad.

     

    • Or there can be more cases where debtors are unable to collect debts and debts turns out to be bad.

     

    Accounting methods

    There are two methods for accounting for bad debts which are mentioned below:-

    • First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement, which is called the profit and loss account.

     

    • Second, is the allowance method which means we create provisions for doubtful debts accounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.

     

      • Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
      • Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
      • The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
      • Provision for doubtful debts is shown in the debit side of the profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet. 

     

    Related terms

    So there are a few related terms whose meanings you should know

    • Further bad debts :
      • It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
      • That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.

     

    • Bad debts recovered :
      • It may happen that the amount written off as bad debts is recovered fully or partially.
      • In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
      • Thus amount recovered is a ‘gain’  and is credited to the profit and loss account.

     

    See less
    • 0
Astha
AsthaLeader
In: >

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

    Provisional financial statements are prepared on the basis of past data i.e. for the period which is already over. For example, the bank requested for Q4 financial statement but there were still 15 days left for the quarter to get over. In this case, the business/company will prepare a provisional fRead more

    Provisional financial statements are prepared on the basis of past data i.e. for the period which is already over. For example, the bank requested for Q4 financial statement but there were still 15 days left for the quarter to get over. In this case, the business/company will prepare a provisional financial statement.

    Provisional financial statements can be requested by banks, investors, and large vendors while making decisions regarding business and want current financial statements which can be obtained easily.

    It is prepared with the help of past actual figures on a particular date or before the end of a financial statement. The main purpose of preparing is to show the company’s financial position on a particular date. Items of the provisional financial statement are assets, liabilities, and equity/capital.

    See less
    • 0
Jayesh Gupta
Jayesh GuptaCurious
In: >

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

    A Cash Flow Statement analyzes the effect of various activities in the company on cash and, that is, it shows the inflow and outflow of cash and cash equivalents. A Fund Flow Statement analyzes the financial position of a company by the inflow and outflow of funds. Both the statements are financialRead more

    A Cash Flow Statement analyzes the effect of various activities in the company on cash and, that is, it shows the inflow and outflow of cash and cash equivalents.

    A Fund Flow Statement analyzes the financial position of a company by the inflow and outflow of funds.

    Both the statements are financial statements and are used to analyze the financial performance of the company of two different reporting periods. Both the statements record the inflow and outflow of cash or funds, as the case may be.

    The primary objective of preparing a Cash Flow Statement is to gain an understanding of the changes in the net working capital of the company and to classify the activities in the company under three different heads which helps in better analysis of Financial Statements for management, outsiders, and investors.

    The primary objective of preparing a Fund Flow Statement is to track the movements of funds in the company, as the extent of use of long-term and short-term borrowings, frequency of their procurement, its application, etc.

    The components of the Cash Flow Statement are:

    • Cash Flow from Operating Activities- activities concerning the regular business operations and working capital are classified under this head.
    • Cash Flow from Investing Activities- investment in long-term assets or sale of such assets are considered under this head.
    • Cash Flow from Financing Activities- borrowings that a company makes to fund its operations, their interest payment, and repayment are covered under this head.

    The components of the Fund Flow Statement are:

    Sources of Funds:

    • Owners
    • Outsiders

    Application of Funds:

    • Funds deployed in Fixed Assets
    • Funds deployed in Current Assets

    A sample format of the Cash Flow Statement will be:

    Particulars Amount
    Cash Flow from Operating Activities XXX
    Cash Flow from Investing Activities XXX
    Cash Flow from Financing Activities XXX
    Net Increase (Decrease) in Cash and Cash Equivalents XXX
    Cash and Cash Equivalents at the beginning XXX
    Cash and Cash Equivalents at the end XXX

    A sample format of the Fund Flow Statement will be:

    Particulars Amount
    Sources of Funds XXX
    Funds from Operations XXX
    Sale of Fixed Assets XXX
    Issue of Shares XXX
    Issue of Debentures XXX
    Long Term Borrowings XXX
    Total (A) XXX
    Application of Funds XXX
    Loss from Operations XXX
    Payment of Tax XXX
    Repayment of Loan XXX
    Redemption of Debentures XXX
    Redemption of Preference Shares XXX
    Total (B) XXX
    Net Increase (Decrease) in Working Capital XXX

    To conclude the difference between Fund Flow and Cash Flow Statement will be:

    Cash Flow Statement Fund Flow Statement
    Record of inflow and outflow of cash. Record of sources and application of funds.
    Prepared to analyze cash used in various activities. Prepared to track the movement of funds and their applications.
    Components include:

    • Operating Activities
    • Investing Activities
    • Financing Activities
    		 Components include:

    ·       Sources of Funds

    ·       Application of Funds

     

     

    See less
    • 0
Simerpreet
SimerpreetHelpful
In: >

  2. Kajal
    This answer was edited.

    Trading A/c is a nominal account which follows the rule "Debit all expenses and losses, Credit all incomes and gains". So, all expenses relating to the purchase or manufacturing of goods are shown on the debit side of the Trading A/c. It includes Opening Stock, Purchases, Wages, Carriage Inward, ManRead more

    Trading A/c is a nominal account which follows the rule “Debit all expenses and losses, Credit all incomes and gains”.

    So, all expenses relating to the purchase or manufacturing of goods are shown on the debit side of the Trading A/c. It includes Opening Stock, Purchases, Wages, Carriage Inward, Manufacturing Expenses, Dock charges, and other direct expenses that are directly related to the manufacturing or purchase.

     

    TRADING ACCOUNT

    Trading A/c is prepared for calculating the Gross Profit or Gross Loss arising from the trading activities of a business.

    Trading activities are mostly related to buying and selling of goods. However, in between buying and selling, a lot of activities are involved like transportation, warehousing, etc. So, all the expenses that are directly related to manufacturing or purchase of goods are also recorded in the Trading A/c.

     

     

    DEBIT SIDE OF TRADING A/C

    The items shown on the Dr. side are,

    OPENING STOCK – Stock is nothing but goods that are either obtained for resale or manufactured for sale and are yet unsold on any particular date.

    The value of stock at the beginning of an accounting year is called Opening stock while the value of the stock at the end of an accounting year is called closing stock.

    The closing stock of the last year becomes the opening stock of the current year.

    Opening stock includes,

    1. Opening Stock of Raw materials
    2. Opening Stock of Semi-finished goods
    3. Opening Stock of Finished goods

    For example – Suppose you are in the business of manufacturing and trading shirts. On 31st March 2023, there was unused raw material worth $10,000 and shirts worth $50,000 remained unsold.

    So, we have Closing Stock of Raw material – $10,000

    Closing Stock of Finished Goods – $50,000

    This closing stock of last year becomes your opening stock during the current year i.e. on 1st April 2023, we have

    Opening Stock of raw material – $10,000

    Opening Stock of Finished Goods – $50,000

    PURCHASES – Goods that have been bought for resale or raw materials purchased for manufacturing the product are terms as Purchases. These goods must be related to the business you are doing.

    It includes cash as well as credit Purchases.

    Continuing with the above example, suppose you bought raw material worth $ 1,00,000 for manufacturing and shirts worth $50,000 for resale (and not for personal consumption) then both these will be termed as purchases for you. So, your purchases will be $1,50,000 ($1,00,000 + $50,000)

    PURCHASES RETURN – When goods bought are returned to the suppliers due to any reason. This is known as Purchase return. Purchase return is deducted from the Purchases.

    In the above example, you bought shirts worth $50,000 for resale. Out of which shirts worth $20,000 were defective. So, you returned them to the supplier. This return of $20,000 is your purchase return or return outwards (as goods are going out)

    WAGES – Wages are paid to the workers who are directly engaged in the loading, unloading and production of goods.

    For example – Paid $10,000 to workers for manufacturing shirts.

    However, it would be included in Trading A/c only if the wages are paid for work which is directly related to the manufacturing or purchase of goods otherwise it will be shown in P&L A/c.

    Suppose you hired a manager to take care of your business and paid him $20,000 as salary. This salary is indeed an expense for the business but is not directly related to the manufacturing of goods. Since it is an indirect expense, it can only be recorded in P&L  A/c and not in the Trading A/c.

    CARRIAGE or CARRIAGE INWARDS or FREIGHT – It refers to the cost of transporting goods from the supplier.

    Suppose, you ordered raw material in bulk which was transported to you by a van and you paid its fare. This fare is nothing but your carriage inwards.

    However, if carriage or freight is paid on bringing an asset, the amount should be added to the asset account and must not be debited to the trading account.

    MANUFACTURING EXPENSES – All expenses incurred in the manufacture of goods such as  Coal, Gas, Fuel, Water, Power, Factory rent, Factory lighting etc.

    DOCK CHARGES – These are charged by port authorities when unloading goods at a dock or wharf. Such charges paid in connection with goods purchased are considered direct expenses and are debited to Trading a/c.

    IMPORT DUTY or CUSTOM DUTY – It is a tax collected on imports and specific exports by a country’s customs authorities. If import duty is paid on the import of goods, then they are shown on the Dr. side of the Trading A/c.

    For example –  Paid $15,000 as import duty for importing shirts for resale.

    ROYALTY – Royalty refers to the amount paid for the use of assets belonging to another person. It includes royalty for the use of intangible assets, such as copyrights, trademarks, or franchisee agreements. It is also paid for the use of natural resources, such as mining leases.

    Royalty is charged to the Trading A/c as it increases the cost of production.

    GROSS PROFIT – When sales exceed the amount of purchases and the expenses directly connected with such purchases i.e. when Credit side> Debit side.

     

    CREDIT SIDE OF TRADING A/C

    SALES – When goods are sold to earn a profit, it is called sales. It can be cash sales or credit sales.

    SALES RETURN – When the goods sold are returned by the customer, it is known as a sales return. Sales return is deducted from the sales.

    CLOSING STOCK – The goods remaining unsold at the end of the year are termed as closing stock. It is valued at cost price or market price whichever is less.

    GROSS LOSS – If purchases and direct expenses exceed sales, then it is a Gross loss. In other words, when Debit side > Credit side.

     

    See less
    • 0
Ayushi
AyushiCurious
In: >

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

    No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use. Drawings are actually shown in the balance sheet as a deduction from the capital account. Let’s take an example, Mr X runs a tradingRead more

    No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use.

    Drawings are actually shown in the balance sheet as a deduction from the capital account.

    Let’s take an example, Mr X runs a trading business. For meeting his personal expense we withdrew cash from his business cash of amount Rs. 15,000. It shall be reported like this:

    Journal Entries:

    Balance sheet:

    Profit and loss account reports only the nominal accounts i.e. incomes and expenses. That’s why drawings are not shown in the statement of profit or loss because it is neither an expense nor an income.

    It represents the owner’s withdrawal of capital from business for personal use. Hence, the drawings account is a personal account. Drawings lead to a simultaneous reduction in capital and cash or stock of a business which has nothing to do with Profit and loss A/c.

    Therefore it is reported in the balance sheet only.

    See less
    • 0

Most Helping Users

Astha

Astha

Leader
Simerpreet

Simerpreet

Helpful
AbhishekBatabyal

AbhishekBatabyal

Helpful