AccountingQA Latest Questions

Vijay
VijayCurious
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  1. Radha M.Com, NET
    This answer was edited.

    The entry for a loan (taken for any purpose) and a car loan are quite different. When you take a bank loan, you'll receive the money from the bank and subsequently, you'll start paying interest on it. In the case of a car loan, you don't receive the money from the bank. Once the car has been purchasRead more

    The entry for a loan (taken for any purpose) and a car loan are quite different. When you take a bank loan, you’ll receive the money from the bank and subsequently, you’ll start paying interest on it.

    In the case of a car loan, you don’t receive the money from the bank. Once the car has been purchased you’ll make the down payment and the remaining amount will be paid by the bank on your behalf. This car loan should then be paid to the bank in installments.

    The following journal entry is posted to record the car loan taken for office use:

    Car A/c is debited as there is an increase in the asset. Bank A/c is credited as the down payment for the car is made which reduces the assets. Car Loan A/c is credited as it increases liability.

    The following entry is recorded for the repayment of the loan (first installment) to the bank.

    Let me explain this with an example,

    Kumar purchased a car for 25,00,000 for his office use. He made a down payment of 2,00,000 and took a car loan from HDFC Bank for 23,00,000. The following entry will be made to record this transaction.

    Car A/c  25,00,000
       To Bank A/c    2,00,000
       To Car Loan A/c  23,00,000
    (Being car purchased through a loan from HDFC bank)

     

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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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Nistha
Nistha
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Journal EntrySubscriptionSubscription Received in Advance
  1. Sandy CMA Final
    This answer was edited.

    To start with let me give you a brief explanation of what a subscription is After joining a not-for-profit organization, a member is required to pay a certain amount of money every year at periodical intervals in order to keep his membership activated, such an amount of money is the subscription. FoRead more

    To start with let me give you a brief explanation of what a subscription is

    After joining a not-for-profit organization, a member is required to pay a certain amount of money every year at periodical intervals in order to keep his membership activated, such an amount of money is the subscription.

    For accounting purposes, subscription is always taken on an accrual basis which means the amount which is received during the current year is only taken into consideration.

    Now, Subscription received in advance means the amount of money that has been received during the current year but which relates to the year that is yet to come. In other words, we can say it is the unearned income by the organization.

    It is recurring in nature and liability for the organization as it does not relate to the current year.

    Journal Entry for Subscription received in advance

    Here, the Subscription received in advance is credited to the Subscription account for the current year.

    This is the adjustment entry made during the current year.

    Treatment of Subscription in Financial Statements

    • Receipts and payment account.
    • Income and expenditure account.
    • Balance sheet.

    Receipts and Payment account: In the receipts and payment account, the entire amount of subscription is written on the receipts side. That is to say, subscription amount relating to the previous year, current year, and the year to come (outstanding subscription, current year subscription, advance subscription).

    Income and Expenditure account: In the Income and Expenditure Account, the subscription comes on the Income side. It is shown as

    Here, a subscription received in advance in the current year is deducted to find the actual amount because although the money is received in advance the benefits related to it are yet to be provided by the organization.

    Balance sheet: In the balance sheet, a subscription received in advance comes in the liability side under current liabilities as the benefits related to it are yet to be derived.

    For Example, Lionel club received subscription from its members for the year 2020 as follows-

    • Subscription of 2020 was received in 2019 – 2,000
    • Subscription of 2021 was received in 2020 – 3,000

    The total subscription was received during the year – 10,000

    Here,

    Subscription of 2020 was received in 2019- It is an Outstanding Subscription.

    Subscription of 2021 was received in 2020- It is an advance Subscription.

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Sandy
Sandy
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InterestInterest Received in AdvanceJournal Entry
  1. Nistha Pursuing B.COM H (B&F) and CMA
    This answer was edited.

    Classified under advance income, Interest received in advance is unearned income that pertains to the following accounting period but is received in the current period. Such interest is not related to the current accounting period and the related benefits for such income are yet to be provided. HencRead more

    Classified under advance income, Interest received in advance is unearned income that pertains to the following accounting period but is received in the current period. Such interest is not related to the current accounting period and the related benefits for such income are yet to be provided. Hence, it is a liability for the concern.

    The treatment of such advance interest is based on the Accrual concept of accounting.

    The journal entry for interest received in advance is:

    Now suppose, a firm Star shine receives interest on loan of 5,00,000 @ 7% p.a. extended to another firm. In the current accounting period, Star shine receives 50,000 as interest, excess being advance for the following year. Then the following journal entries should be passed:

       

    Cash received in form of interest is debited (Debit what comes in) and interest account is credited because of an increase in interest income (credit all incomes and gains).

    Interest account is debited because we have to decrease the interest income since 15,000 relates to the next accounting year. Interest received in advance is credited because such interest of 15,000 is not yet earned and is a liability for the concern.

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Radha
Radha
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  1. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    When a loan is taken from a person by a business, there is an asset and liability being created. Cash is being brought into the business which increases the asset whereas the financial obligation of the company rises when a loan is taken and hence a liability increases. For example, Mark Ltd. has taRead more

    When a loan is taken from a person by a business, there is an asset and liability being created. Cash is being brought into the business which increases the asset whereas the financial obligation of the company rises when a loan is taken and hence a liability increases.

    For example, Mark Ltd. has taken a loan from John for $5,000. Therefore the journal entry can be shown as:

    According to the modern rules of accounting, increase in assets is Debit and increase in liability is credit. The company may have taken the loan to finance its business or for some emergency. When it is time for the business to pay off the loan, they can either pay it off completely or in instalments. They must pay off the principal amount along with interest.

    Now for our above example, if Mark Ltd paid off the entire loan after one year at 10% interest, then the journal entry would be:

    Here, the interest on loan account is debited since an increase in expense is debited. Loan account will be debited because the obligation is now reduced and hence liability decreases. Finally, we credit cash since cash is leaving the business which implies a decrease in assets.

    If the entire loan is not paid off in that year, then the balance of the loan amount will be shown in the balance sheet under the head liabilities.

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Nistha
Nistha
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Journal EntryRentRent Received in Advance
  1. Simerpreet Curious CMA Inter qualified
    This answer was edited.

    Before starting with the main discussion, let me give you a brief explanation of what rent received is When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received. Rent can be monthly, quRead more

    Before starting with the main discussion, let me give you a brief explanation of what rent received is

    When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received.

    Rent can be monthly, quarterly, half-yearly, or yearly rent depending upon the organization’s agreement.

    The journal entry for rent received will be

    Here, Cash account is debited due to the increase in assets or because of a real account. Rent account is credited due to the increase in income or because of the nominal account.

    However, Rent received in advance means the amount of rent that is not yet due but is received in advance. It is treated as a current liability because the benefit related is yet to be provided to the tenant.

    The Journal entry for Rent received in advance will be-

    Here, rent is debited due to a decrease in income.

    Rent received in Advance is credited due to an increase in liability.

    For Example, Johnson company rented out a part of its building that was not used to earn some extra income from it. The monthly rent was fixed as 20000. Johnson company follows calendar year as their accounting year. The tenant, therefore, paid 4 months advance rent to Johnson company i.e. the tenant in January gave his advance rent for February, March, April, and May.

    While receiving the rent in the month of January. The journal entry would be

    Now, the adjustment entry of rent received in advance would be

    The rent received in advance will also be posted individually in each month of February, March, April, and May as

    Furthermore, Rent received in advance is deducted from the amount of rent in the income and expenditure account and thereafter the amount received in advance is posted on the liability side of the Balance sheet.

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Radha
Radha
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  1. AbhishekBatabyal Curious Pursuing CA, BCOM (HONS)
    This answer was edited.

    Brief Introduction The stock of finished goods left unsold at the end of the year is known as closing stock. As closing stock represent an asset i.e. the unsold finished goods,  it has a debit balance. Closing stock appears on the credit side of the trading account and on the asset side of the balanRead more

    Brief Introduction

    The stock of finished goods left unsold at the end of the year is known as closing stock. As closing stock represent an asset i.e. the unsold finished goods,  it has a debit balance.

    Closing stock appears on the credit side of the trading account and on the asset side of the balance sheet. But, if closing stock is adjusted against purchase i.e. deducted from purchase account balance, then it doesn’t appear in the trading account.

    It is always shown on the asset of the balance irrespective of its treatment as discussed above because it is an asset.

    Though no ledger is maintained for closing stock in financial accounts of a business, the journal entry for the closing stock is passed and is as below:

    Closing stock A/c     Dr    Amt

      To Trading A/c                    Amt

    (When the closing stock appears in trading a/c)

    OR

    Closing stock A/c     Dr       Amt

      To Purchase A/c                   Amt

    (When closing stock is adjusted against purchase A/c and not shown in trading a/c)

    Generally, the closing stock is shown separately in the trial balance because it is already part of the purchase account balance.

    Closing stock is ascertained at the end of the financial year and it has great importance as it directly affects the gross profit or loss of a business. Closing stock at end of a year becomes the opening stock of the next financial year.

    Numerical Example

    ABC trading reported the following particulars at the end of the financial year 20X2-20X3:

    We will draw the trading and P/L account and balance sheet of ABC Trading using the above information.

    As the closing stock is not given, we will calculate the closing stock as a balancing figure.

    It can be also calculated using this formula:

    Closing stock = Opening stock + Purchase + Gross Profit – Sales

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Karan
Karan
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  1. 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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Simerpreet
SimerpreetCurious
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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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Karan
Karan
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  1. prashant06 B.com, CMA pursuing
    This answer was edited.

    The journal entry for a loan to an employee is as follows: Loans to employee A/c                                            …..Dr xxx             To Bank/Cash A/c xxx (Being loan given to employee) From the above journal entry, we see that there are two accounts-first one is "Loan to employee accounRead more

    The journal entry for a loan to an employee is as follows:

    Loans to employee A/c                                            …..Dr xxx
                To Bank/Cash A/c xxx
    (Being loan given to employee)

    From the above journal entry, we see that there are two accounts-first one is “Loan to employee account” and the second one is “Bank/cash account“. Both are assets for the company.

    Loan to employees is considered an asset because they are expected to be returned by the employee within the stipulated time period. If the loan is repaid within one year it will be shown under the current asset and if it is not expected to be collected within a year or in short might be repaid after a year then it will be shown under long-term assets.

    Also, we all know Bank/cash is an asset for the company.

    Why loan to employee A/c is debited and Bank/cash A/c is credited?

    As per the modern rule:

    ASSETS
    Increase Debit
    Decrease Credit

    Connecting the above-stated entry with the modern rule “loan to an employee” is debited as money comes back into the business hence there is an increase in an asset therefore debited. While in the second case “bank/cash account” is credited as the money goes out of the business, there is a decrease in assets of the company therefore credited.

    Loan to employee The inflow of cash in a future date Increase in an asset Debit
    Bank/ cash The outflow of cash Decrease in an asset Credit

    We notice that in this entry there is an increase in one asset while a decrease of another asset. Therefore the impact on the balance sheet is Nil.

    Let me give you a simple illustration of the above entry

    Mr. Ross was an employee of Maxwell Pvt ltd. Mr. Ross was lent Rs 2,00,000 by the company for some emergency purpose. So as per modern rules the accounting entry in the books of the company will be as follows:

    Loans to Mr. Ross A/c                                            …..Dr 2,00,000
                To Bank/Cash A/c 2,00,000
    (Being loan given to Mr. Ross)
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