AccountingQA Latest Questions

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

    Before answering your question directly, let’s 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 fRead more

    Before answering your question directly, let’s 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 the balance sheet equation.

    This equation always holds good due to the double-entry system of accounting i.e. every event has a dual effect on items of the 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 the P/L account if profit, is added to Capital and in case of loss it is subtracted from Capital. Hence, the rent outstanding is subtracted from the capital.

    I hope my answer was useful to you.

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA

    Introduction A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account. TyRead more

    Introduction

    A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account.

    Type of account

    A capital reduction account is a temporary account open just to carry out internal reconstruction. It represents the sacrifices made by the shareholders, debenture holders and creditors. Also, any appreciation in the value of assets is credited to this account. It is closed to capital reduction when internal reconstruction is completed.

    Entries passed through capital reduction account

    When paid-up capital is cancelled.

    When paid-up capital is cancelled, the share capital account is debited and the capital reduction account is debited as share capital is getting reduced.

    Share Capital A/c Dr. Amt
    To Capital Reduction A/c Cr. Amt

    When assets and liabilities are revalued

    At the time of internal reconstruction, the gain or loss on revaluation is transferred to the capital reduction account instead of the revaluation reserve.

    Writing off of accumulated losses and intangible assets

    The credit balance of the capital reduction account is used to write off the accumulated losses and intangible assets like goodwill, patents etc which are unrepresented by capital. The capital reduction account is debited and profit and loss account and intangible assets accounts are credited.

    Capital Reduction A/c Dr. Amt
    To Profit and loss A/c Cr. Amt
    To Goodwill/ Patents A/c Cr. Amt

    Treatment in books of account

    The balance in the capital reduction account, whether debit or credit, it is transferred to the capital reduction account. Hence, it doesn’t appear on the balance sheet.

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A_Team
A_Team
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    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 anRead 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:

    1. Business loss ( debit balance of Profit and loss A/c )*
    2. Prepaid expenses
    3. Discount on the issue of debentures.
    4. 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:

    1. 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:

    Fictitious 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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Jasmeet_Sethi
Jasmeet_SethiCurious
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Current AssetsLoose Tools
  2. Karan B.com and Pursuing ACCA
    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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prashant06
prashant06
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  2. Manvi Pursuing ACCA
    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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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use. Computation of effective capital is given in Explanation I to Schedule II of the CoRead more

    Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use.

    Computation of effective capital is given in Explanation I to Schedule II of the Companies Act. Schedule II deals with remuneration payable to managers in case of no profit or inadequate profit in the following manner:

    Computation of effective capital is done in the following manner:

    Numerical example:

    ABC Ltd reports its balance sheet as given below:

    We will compute its effective capital for both an investment company and a non-investment company.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    A cheque that has been issued but yet not presented to the bank for payment is known as an unpresented cheque Generally what happens is when a cheque is issued to a party or say, creditor, the business immediately records them in the bank column of the cash book but the creditor might not present thRead more

    A cheque that has been issued but yet not presented to the bank for payment is known as an unpresented cheque

    Generally what happens is when a cheque is issued to a party or say, creditor, the business immediately records them in the bank column of the cash book but the creditor might not present them immediately to the bank for payment on the same date. The bank will only debit the account when it will be presented to it, therefore as long as the cheque remains unpresented there will be a difference in both the books i.e cash book and passbook.

    Let me give you a short example of the above treatment

    Suppose on 27th January, in the books of Mr. Shyam, the balance of the bank column as per the cash book is Rs 10,000. He received a cheque of Rs 5,000 from Mr. Hari, one of his debtors, which was sent to the bank for collection. The amount of the cheque was not collected by the bank until 31st January. Due to this, there arises a difference of Rs 5,000 in the cash book and pass book of Mr. Shyam.

    Following will be the entry in Mr. Shyam cash book and passbook

    In the books of Mr. Shaym

    Cash book (bank column only)

    Date Particulars Bank (Rs) Date Particulars Bank (Rs)
    27th Jan To balance b/d 10,000
    27th Jan To Hari 5,000
    31st Jan By balance c/d 15,000
    15000 15000

      Mr. Shyam

       Bank Statement

    Date Particulars Debit (Withdraw) Credit (Deposite) Debit or Credit Balance
    31st Jan To balance b/d credit 10,000

    How it is treated in the bank reconciliation statement?

    There lies a temporary difference in both the books as the represented cheques will eventually be presented. Therefore we will not alter the cash book. The bank statement shows the greater amount of Rs 5,000 as compared to the cashbook, therefore we will debit the amount of unpresented cheque which will eventually make it balance to the level of bank statement.

     

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Jasmeet_Sethi
Jasmeet_SethiCurious
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CreditorsDebtorsDifference BetweenGainProfit
  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    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

    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 balance. The creditors will have a credit balance.
    Receipt of payment The payment or amount owed is received from the debtor. The payment of the amount owed is made to the creditors.
    Nature of account Debtors are account receivables. Creditors are accounts payable.
    Status They are shown under assets in the balance sheet under the head current assets. They are shown as an asset because the amount is receivable from them. They are shown under liabilities in the balance sheet under the head current liabilities. They are shown as a liability because the amount is payable to them.
    Credit / Loan period Debtors are the one who takes a loan or purchase goods on credit and has to pay the money in the agreed time period, with or without interest. Creditors are the ones who provide loans or extend the duration of the credit period.
    Discounts They are the ones who receive discounts. They can offer discounts to debtors.
    Provision for doubtful debts Provision for doubtful debts is created for debtors. No such provision is created for 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

    Points of Distinction Profit Gain
    Meaning The excess of revenue of a period over its expenses is termed as profit.

    Profit = Total Income-Total Expenses

    		 Gain means profit that arises from incidental events and transactions, such as capital gain.
    Generation It is generated within the operations of a business. It is generated outside the business operation.
    Nature of account Profit calculated will appear in the Profit and Loss A/c. The gain will appear in the income statement.
    Types Gross profit

    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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A_Team
A_Team
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    When a company issues shares to shareholders at a price over the face value (at a premium), that amount is termed as securities premium. This amount is transferred to what we call the securities premium reserve. The company is required to maintain a separate reserve for securities premium. UtilizatiRead more

    When a company issues shares to shareholders at a price over the face value (at a premium), that amount is termed as securities premium. This amount is transferred to what we call the securities premium reserve. The company is required to maintain a separate reserve for securities premium.

    Utilization

    Securities premium reserve can be used for the following reasons:

    • Issue of fully paid Bonus share capital.
    • To cover preliminary expenses of a company.
    • For funding the buy-back of securities.

    Since it is not a free reserve, it can only be used for a few specific purposes. The amount received as securities premium cannot be used to transfer dividends to shareholders

    Treatment

    When a company issues shares at a premium, the securities premium reserve account is credited along with share capital as an increase in capital is credited according to the modern rule of accounting.

    For example,
    Sonly Ltd. issues 1,000 shares of $10 face value at $15. Here, the amount of premium would be $5 (15 – 10) per share. Therefore, the journal entry would show:

    Bank a/c (15 x 1,000)        Dr                                                15,000
    To Share Capital (10 x 10,000)                                                             10,000
    To Securities Premium Reserve a/c (5 x 10,000)                                   5,000

    From the above example, we can see that the company receives $15,000, but transfers $10,000 to share capital and the excess $5,000 to securities premium reserve.
    In the balance sheet, this securities premium reserve is shown under the title “Equity and Liabilities” under the head ‘‘Reserves and Surplus”.

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

    Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs arRead more

    Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs are recorded as capital work in progress.

    Depreciation is the systematic allocation of the cost of an asset over its useful life. Depreciation is charged on an asset from the date it is ready to use. Since Capital Work in Progress is not yet ready to use, depreciation cannot be charged on it.

    Example

    If a company owns a Machinery worth Rs. 45,000 out of which Rs. 15,000 is part of capital work in progress, then depreciation on such machinery would be calculated only on the part of machinery that is ready to use that is Rs. 30,000 (45,000-15,000).

    When an asset is undergoing construction, the journal entry for each expense would be recorded as

    Further, when all construction of the above asset is completed, it is transferred to fixed asset account. This would be recorded as

    After transfer to Fixed Asset account, depreciation can be calculated and shown as below

    If the construction of an asset is complete but has not been put to use till now, depreciation is still calculated as it is ready for use. It can be done through various methods like straight-line method, written down value method etc.

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