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AccountingQA Latest Questions
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This answer was edited.Current assets are all the assets of the company which are expected to be used, sold, or consumed within one year. Current assets are those assets that can be converted into cash easily. For example - Inventory, Accounts Receivable, Cash, and Cash Equivalents. Loose tools are parts of machinery or sRead more
Current assets are all the assets of the company which are expected to be used, sold, or consumed within one year. Current assets are those assets that can be converted into cash easily.
For example – Inventory, Accounts Receivable, Cash, and Cash Equivalents.
Loose tools are parts of machinery or spare parts of machinery. Loose can be classified on the nature of use whether it is a fixed asset or a current asset. If loose tools are used regularly or within one accounting year, it is classified as a current asset.
Loose tools are usually classified as a current asset, however, there is one exception i.e it is excluded from the current ratio.
They are excluded from the current ratio because the current ratio takes into account only current assets, and the nature of loose tools is either a fixed asset or a current asset and can’t be converted into cash easily.
The current ratio is calculated to check the liquidity of the company.
Loose tools appear in the Asset Side of the Balance Sheet under the head Current Asset, subhead Inventories.
The extract of the Balance Sheet is as follows:
When the balance sheet prepared under Schedule III loose tools is shown under notes to accounts under sub-head Inventories on the asset side.
When the balance sheet is in a T format loose appears as a current asset after recording fixed assets on the asset side.
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This answer was edited.Before answering to your question directly, let’s us first understand the two terms, ‘Rent Outstanding’ and ‘Accounting Equation’. Accounting Equation Accounting Equation depicts the relationship between the following items of a business:- Assets, Liabilities and Owner’s Equity ( Capital ) It is a sRead more
Before answering to your question directly, let’s us first understand the two terms, ‘Rent Outstanding’ and ‘Accounting Equation’.
Accounting Equation
Accounting Equation depicts the relationship between the following items of a business:-
- Assets,
- Liabilities and
- Owner’s Equity ( Capital )
It is a simple formula that implies that the total assets of a business are always equal to the sum of its liabilities and Owner’s Equity (Capital).
ASSETS = LIABILITIES + CAPITAL OR A = L + E
It is also known as balance sheet equation.
This equation always holds good due to double entry system of accounting i.e. every event has dual effect on items of balance sheet.
Outstanding Rent
We know rent is an expense for a business and rent outstanding means that rent is due, not paid which implies it is a liability which the business has to settle.
Hence Rent Outstanding is subtracted from the capital balance and added to liabilities.
Let’s take an example to see how rent outstanding affects the accounting equation. Suppose a business has the following figures:-
Assets – Rs: 3,00,000
Capital – Rs: 2,00,000
Liabilities – Rs: 1,00,000
Assets = Liabilities + Capital
3,00,000 = 1,00,000 + 2,00,000
Now if Rent outstanding of Rs: 20,000 arises, this will happen:-
Assets – Rs: 3,00,000
Capital – Rs: 2,00,000 – Rs: 20,000 = Rs: 2,80,000
Liabilities – Rs: 1,00,000 + Rs: 20,000 = Rs: 1,20,000
Assets = Liabilities + Capital
3,00,000 = 1,20,000 + 2,80,000.
Hence, when rent outstanding arises, it increases the liability and decreases the Capital by the same amount. Therefore both the sides tally and the accounting equations holds good.
Rent Outstanding is shown on the liabilities side of the balance sheet. Also, the rent outstanding of the current year is shown in the debit side profit and loss account and we know the balance of P/L account, if profit, is added to Capital and in case of loss it is subtracted from Capital.Hence, rent outstanding is subtracted from capital.
I hope my answer was useful to you.
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This answer was edited.Let us first understand what working capital is. Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern. It also represents the exceRead more
Let us first understand what working capital is.
Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern.
It also represents the excess of current assets, such as cash, accounts receivable and inventories, over current liabilities, such as accounts payable and bank overdraft.
Sources of Working Capital
Any transaction that increases the amount of working capital of a company is a source of working capital.
Suppose, Amazon sells its goods for 1,000 when the cost is only 700. Then, the difference of 300 is the source of working capital as the increase in cash is greater than the decrease in inventory.
Sources of working capital can be classified as follows:
Short Term Sources
- Trade credit: Credit given by one business firm to the other arising from credit sales. It is a spontaneous source of finance representing credit extended by the supplier of goods and services.
- Bills/Note payable: The purchaser gives a written promise to pay the amount of bill or invoice either on-demand or at a fixed future date to the seller or the bearer of the note.
- Accrued expenses: It refers to the services availed by the firm, but the payment for which is yet to be done. It represents an interest-free source of finance.
- Tax/Dividend provisions: It is a provision made out of current profits to meet the tax/dividend obligation. The time gap between provision made and payment of actual payment serves as a source of short-term finance during the intermediate period.
- Cash Credit/Overdraft: Under this arrangement, the bank specifies a pre-determined limit for borrowings. The borrower can withdraw as required up to the specified limits.
- Public deposit: These are unsecured deposits invited by the company from the public for a period of six months to 3 years.
- Bills discounting: It refers to an activity wherein a discounted amount is released by the bank to the seller on purchase of the bill drawn by the borrower on their customers.
- Short term loans: These loans are granted for a period of less than a year to fulfil a short term liquidity crunch.
- Inter-corporate loans/deposits: Organizations having surplus funds invest with other organizations for up to six months at rates higher than that of banks.
- Commercial paper: These are short term unsecured promissory notes sold at discount and redeemed at face value. These are issued for periods ranging from 7 to 360 days.
- Debt factoring: It is an arrangement between the firm (the client) and a financial institution (the factor) whereby the factor collects dues of his client for a certain fee. In other words, the factor purchases its client’s trade debts at a discount.
Long Term Sources
- Retained profits: These are profits earned by a business in a financial year and set aside for further usage and investments.
- Share Capital: It is the money invested by the shareholders in the company via purchase of shares floated by the company in the market.
- Long term loans: These loans are disbursed for a period greater than 1 year to the borrower in his account in cash. Interest is charged on the full amount irrespective of the amount in use. These shareholders receive annual dividends against the money invested.
- Debentures: These are issued by companies to obtain funds from the public in form of debt. They are not backed by any collateral but carry a fixed rate of interest to be paid by the company to the debentureholders.
Another point I would like to add is that, although depreciation is recorded in expense and fixed assets accounts and does not affect working capital, it still needs to be accounted for when calculating working capital.
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This answer was edited.Revenue also called income is nothing but the income generated by individuals or businesses from the sale of goods or investing capital or assets. Some examples of revenue are as follows:- Sales revenue Dividend received Interest earned Rent received Commission 1. SALES REVENUE Sales revenueRead more
Revenue also called income is nothing but the income generated by individuals or businesses from the sale of goods or investing capital or assets. Some examples of revenue are as follows:-
- Sales revenue
- Dividend received
- Interest earned
- Rent received
- Commission
1. SALES REVENUE
Sales revenue is the income received by the individual or business by selling its product or provision of services. the words “sale” and “revenue” are used interchangeably to mean the same thing. It is to be noted that revenue does not necessarily mean it has been received in cash, it can be partly in cash or partly on credit also.
How to calculate sales revenue?
SALES REVENUE = NO. OF UNITS SOLD * AVERAGE PRICE PER UNIT
For example:- Amazon sold 4000 units of shirts @ 500 each. Therefore sales revenue for amazon is
Sales revenue = 4000 * 500
= 20,00,000
Treatment of sales revenue in the financial statement, since sales are part of a trading account and appear on the credit side of the trading account.
2. DIVIDEND RECEIVED
Naina, this can be explained in simple terms. Suppose you own shares of a company which declares dividend so the dividend received is income for you. Since it does not reduce the assets of a company nor creates a liability it is shown as income and posted on the credit side of profit & loss A/c.
Let me give you a short example of a dividend received, suppose you own 1000 shares of ABC.ltd. the company at the quarter-end calculate its earnings and decides to declare a dividend of Rs 5 per share. Therefore you would receive 1000* 5 i.e Rs 5000 as dividend income.
3. INTEREST INCOME EARNED
Interest income is the earnings the entity receives on any investments made. To be more precise it is money earned by an individual or business for lending their fund either by putting them as deposit in the bank. It is shown on the credit side of the profit & loss A/c.
A very simple example for interest earned is when a business or an individual deposits money in the bank as savings and decided not to touch it for the coming years then such a depositor will gain interest on such savings by the bank. such type of income so received is treated as interest received and shown as income in the profit & loss A/c.
3. RENT RECEIVED
When money is received by the business for exchange of use of assets of the business by the other person, then it will be called rent received. Rent can be received by the business firm in respect of land, building, machinery, etc. As rent received is income for the business firm, it is shown on the credit side of profit & loss A/c.
For example, X. ltd received Rs 20,000 via cash on one of its properties to Mr. Z. Then rent so received shall be treated as income in the books of ABC. ltd and same shall be treated as income and shown in the profit & loss statement.
Summarised extract of profit & loss account is shown below for dividend received, Rent received and interest earned.
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This answer was edited.
Fictitious assets are the expenses and losses which are yet to be written off, so they appear in the Asset side of the balance sheet of the relevant financial year because expenses and losses have a debit balance. They are not assets in substance. Examples:- Business loss ( debit balance of Profit aRead more
Fictitious assets are the expenses and losses which are yet to be written off, so they appear in the Asset side of the balance sheet of the relevant financial year because expenses and losses have a debit balance. They are not assets in substance.
Examples:-
- Business loss ( debit balance of Profit and loss A/c )*
- Prepaid expenses
- Discount on the issue of debentures.
- Huge promotional expenditure.
*business loss is shown as a negative figure under the head Reserve and Surplus, when the balance sheet is prepared as per Schedule III of The Companies Act, 2013.
Deferred revenue expenditures are the expenses incurred for which the benefits are expected to flow to the enterprise beyond the current year. Such expenses are huge and are not written off completely in a financial year. The part of the expenditure which is not written off is shown on the assets side of the balance sheet.
Examples:-
- Huge advertisement expense.
As you can see, there is some similarity between the two. Deferred revenue expenditure can be called a type of fictitious asset as it is shown in the asset side of the balance sheet but it isn’t an asset.
The term ‘fictitious asset’ has a broader meaning than deferred revenue expenditure and also includes the losses such as discounts on the issue of debenture and business loss.
The difference between fictitious assets and deferred revenue expenditure are as follows:-
See lessFictitious Assets Deferred Revenue Expenditure 1 These are no real assets but expenses and losses that are not completely written off in an F.Y. These are expenses incurred from which benefits are expected to flow for more than one accounting period. 2 It has a broader meaning. It has a narrower meaning. 3 Examples:- business loss, discount on issue of debentures, prepaid expenses etc. Examples:- huge promotional expenditure etc.
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This answer was edited.Return inwards in simple terms means sending back goods by the customer to the seller. Simply speaking when your customer purchases items from your business but is not satisfied with the items so received they return those items back to you. Some of the reasons for sending back the items are statedRead more
Return inwards in simple terms means sending back goods by the customer to the seller. Simply speaking when your customer purchases items from your business but is not satisfied with the items so received they return those items back to you. Some of the reasons for sending back the items are stated below:
- Incorrect items delivered by the seller
- The excess amount delivered to the buyer
- Return of expired/ spoiled good
In such a case, the return is initiated by the buyer and a credit note is issued to the buyer, and the same is recorded in the books of accounts. Also, this return inward is deducted from the total sales.
Example: M/s Pest ltd sold 4 units of fertilizers spraying tools of Rs 10,000 each to Mr. Zen. On inspection, he found 1 unit worth Rs 10,000 so received to be defective. Therefore the return of Rs 10,000 was initiated and goods were returned to the seller. A credit note of Rs 10,000 will be raised by the seller (M/s Pest ltd) to the buyer (Mr. Zen). The following adjustment will be shown in the trading account.
Return outwards means returning the goods by the buyer to the supplier. In layman language, when you purchase items for your business and you are not happy with the items then you may decide to return them.
In this case, a debit note is issued to the seller and is recorded in the books of accounts, and the same is reduced from the total purchases in the trading account so prepared.
Example: Suppose you are dealing in a business of clothing. You purchased 20 shirts for Rs.10,000 from a wholesale market. When you sold these shirts, you found 10 shirts worth Rs 5,000 to be defective which were returned by your customer. Therefore you will return these shirts to the wholesale market from where you purchased them. The following adjustment will be shown in the trading account.
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This answer was edited.Return inwards are the goods returned by the customer to the seller. The goods are returned for reasons like defects, excess delivery, and low quality. Return inwards are also known as Sales Returns. Sales returns are a contra account to sales revenue. The amount of sales returns is deducted from thRead more
Return inwards are the goods returned by the customer to the seller. The goods are returned for reasons like defects, excess delivery, and low quality. Return inwards are also known as Sales Returns.
Sales returns are a contra account to sales revenue. The amount of sales returns is deducted from the total sales in the Trading section of the Trading and Profit & Loss Account.
In subsidiary books, return inwards are recorded only for those goods which are sold on credit to the customer.
For example, On 1 August E Electronics sold 50 units of television to Hill Hotels on credit for Rs.25,000 each. Out of which 5 units were found to be defective and were returned back to E Electronics. In that accounting period, E Electronics made a total sales of Rs.20,00,000 (including the item sold to Hill Hotels).
E Electronics in its Trading section of Trading and P&L A/c will account for a sales return of Rs.1,25,000 (Rs.25,000*5) and this amount will be deducted from the total sales. The same will be recorded in the subsidiary books as it accounts for sales made on credit.
Extract of Profit & Loss Account:
For a business, sales returns will either have a decrease in the sales revenue or it will increase the sales returns and allowances which is a contra account to sales revenue. An increase in sales returns will decrease gross profit.
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This answer was edited.
Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use. It is also called economic lRead more
Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use. It is also called economic life or service life
It is a useful concept in accounting as it is used to work out depreciation. By knowing this useful life of an asset an entity can easily analyze how to allot the initial cost of an asset across the relevant accounting period rather than doing it unfairly manner.
How do we calculate the useful life of an asset?
The useful life of an asset is not an accounting policy, but an accounting estimate. calculating useful life is not an exact phenomenon but an estimate that is done because it directly impacts how much an asset is to expense every year.
Factors affecting “how long an asset is expected to be useful” depends on some stated points as below:
- Usage, the more the assets are used, the more quickly it will deteriorate.
- Whether the asset is new at the time of purchase or reused model.
- Change in technology.
As per the companies act 2013, some of the useful life of assets are stated below
To know more about the different categories of assets you can follow the given link useful life of assets.
POINT TO BE NOTED:- There lies a huge difference in the useful life v/s the physical life of an asset. It is very important to note that amount of time an asset is used in a business is not always be same as an asset’s entire life span.
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Debtors and Creditors Points of Distinction Debtors Creditors Meaning A debtor is a person or entity that owes money to the other party (the other party is also known as the creditor). A creditor is a person or entity to whom money is owed or who lends money. Nature The debtors will have a debit balRead more
Debtors and Creditors
Example:
Mr. A purchases raw materials from its supplier Mr. D on credit.
Here for Mr. D, Mr. A will be a debtor because the amount is receivable from him.
Similarly, for Mr. A, Mr. D will be his creditor because the amount is payable to him.
Profit and Gain
Profit = Total Income-Total Expenses
Net profit
Operating profit
Capital gain
Long term capital gain
Short term capital gain
Example: A company’s sales for the period are $60,000 and expenses incurred are $40,000. Here the profit calculated will be $20,000 because revenue exceeds expenses.
Profit = Total Income-Total Expenses
= 60,000 – 40,000
= $20,000
Mr. X owned land worth $10,00,000 and after 10 years he sold it at a current market value of $14,00,000. So the gain he earned is $4,00,000. This gain of $4,00,000 will be termed as a capital gain since land is a capital asset.
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