AccountingQA Latest Questions

Ishika Pandey
Ishika PandeyCurious
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Debtors are treated as an asset. A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered. When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise. Debtors are consRead more

    Debtors are treated as an asset.

    A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.

    When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise.

    Debtors are considered assets in the balance sheet and are shown under the head of current assets.

    For example – Ram Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ram because he owes the amount to Ram. This amount will be payable at a later date.

    Liabilities Vs Assets

    Liabilities

    It means the amount owed (payable) by the business.  Liability towards the owners ( proprietor or partners ) of the business is termed internal liability. For example, owner’s capital, etc

    On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability.
    For example creditors, bank overdrafts, etc.

    Assets

    An asset is a resource owned or controlled by a company. The benefit from the asset will accrue to the business in current and future periods. In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
    For example – machinery, building, etc.

    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 rendering of services in the normal course of business. They are readily realizable into cash.

    In other words, we can say that the expected realization period of current assets is less than the operating cycle period.

    For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.

     

    Why debtors are treated as assets?

    Now let me explain to you why debtors are treated as assets and not as liabilities because of the following characteristics :

    • We can say that the expected realization period is less than the operating cycle period.
    • Expected to be converted into cash in the normal course of business.
    • In the business, debtors are treated as current assets which we can see on the asset side of the balance sheet.
    • Debtors have a debit balance.

     

    Conclusion

    Now after the above discussion, I can conclude that debtors are considered to be an asset and not a liability.

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Karan
Karan
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more

    Negative working capital means the excess of current liabilities over current assets in an enterprise.

    Let’s understand what working capital is to get more clarity about negative working capital.

    Meaning of Working Capital

    Working Capital refers to the difference between current assets and current liabilities of a business.

    Working Capital = Current Assets – Current Liabilities

    It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.

    Items under Current Assets and Current Liabilities

    It is important to know about the items under current assets and current liabilities to understand the significance of working capital.

    Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.

    Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.

    Types of working capital

    Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:

    • Positive (Current assets > Current liabilities)
    • Zero  (Current assets = Current liabilities)
    • Negative (Current assets < Current liabilities)

    Hence, negative working capital exists when current liabilities are more than current assets.

    Implications of having negative working capital

    Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.

    An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.

    The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.

    Current Assets  = 2(Current Liabilities)

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Anushka Lalwani
Anushka Lalwani
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  2. Kajal
    This answer was edited.

    Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods)   ACCOUNTS PAYABLE Accounts payable refers to all short-term liaRead more

    Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods)

     

    ACCOUNTS PAYABLE

    Accounts payable refers to all short-term liabilities of the business that are to be paid. These are usually paid within a duration of  90 days. It includes both Trade payable (goods and services purchased on credit) as well as expenses payable (used but payment not made yet) like rent payable, electricity bill, etc.

    Businesses cannot make every payment on the spot. There can be cases when the business is facing a shortage of funds, can have funds but doesn’t have enough cash (or liquid funds) to make payment or simply doesn’t want to make payment on the spot to reduce its capital requirement.

    So, like us businessmen also purchase goods on credit or use services for which payment is to be made soon. All these are liabilities for the business.

    However, they must be related to the business to be considered as accounts payable.

     

    DEBIT BALANCE OF ACCOUNTS PAYABLE 

    Debit balance of accounts payable means money owed by others. There is Debit balance when

    OVERPAYMENT is made to the creditors or the supplier. It happens when the wrong amount is paid or payment is made twice for the same transaction.

    Suppose you need to pay $10,000 as rent within 30 days. After 25 days you mistakenly made a payment of $12,000.

    In this case,

    • Firstly, you will record the transaction by crediting Accounts payable (as liability increased) by $10,000
    • When payment is made after 25 days, Accounts Payable is debited by $12,000 (as liability decreased)
    • So, there will be a debit balance of $2,000 (which means the creditor owes you) till the creditor returns the excess amount.

     

    PURCHASE RETURN of already paid goods also result in debit balance of Accounts Payable.

    Suppose you bought goods worth $50,000 from Mr A on credit and paid for the same. Later, you returned all the goods because they were defective. Now, there will be Debit balance of Accounts Payable till there is a full refund of $50,000 by Mr A.

     

    How is Accounts Payable Treated Normally?

    Accounts Payable are the current liabilities of the firm and are shown under the head Current Liabilities in the Balance Sheet. Its liability, thus has a credit balance which represents the amount owed by the firm to others. It is credited when increases and debited when decreases.

    For example – Suppose you purchased goods worth $30,000 and agreed to pay after 30 days. So, Accounts payable will be credited by $30,000 and purchases will be debited by $30,000.

    Purchases A/c – $30,000 (debit)

    To Accounts Payable A/c – $30,000

    After 30 days payment is made in cash, which means the liability decreased. So, Accounts Payable A/c will be debited.

    Accounts Payable A/c – $30,00

    To Cash – $30,000

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Spriha Sparsh
Spriha Sparsh
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company. Retained earnings are shown under shareholders’ equity in the balance sheet and are calculaRead more

    Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company.

    Retained earnings are shown under shareholders’ equity in the balance sheet and are calculated as follows:
    Retained earnings at the end of the year = Retained earnings at the beginning of the year + Net Income – Dividend

    From the above formula, Yes, it is possible for retained earnings to be negative. Negative earnings occur when the cumulative dividend payout is higher than the earnings made by a company during the year. This results in a negative balance as per the formula.

    Negative Retained earnings indicate a number of concerning facts about a company:

    • That the company is experiencing Long term losses.
    • That there are chances for the company to go into bankruptcy.
    • That the company may be paying out dividends to the shareholders from borrowed finance.

     

    Positive Retained Earnings

    When a company is said to have positive retained earnings, the company has several advantages. The company has excess profit to hold on to. This helps in expansion and also acts as a safety net in case of unforeseen expenses. Hence if a company shows positive Retained earnings it can be interpreted that the company is profitable.

    However, higher retained earnings mean the distribution of lesser dividends to shareholders. This makes the company look less attractive to investors. Another reason for high retained earnings could be that the company has not found any profitable investment for its earnings.

    Therefore, there should be adequate retained earnings with the company but at the same time, keep a check that the amount of retained earnings does not exceed a limit.

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Astha
AsthaLeader
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  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Financial analysis of a company means analyzing the previous data of the company and giving recommendations based on that whether the company will improve in the future on not. It is the process of evaluating the financial performance and stability of the company. There are various types of financiaRead more

    Financial analysis of a company means analyzing the previous data of the company and giving recommendations based on that whether the company will improve in the future on not.

    It is the process of evaluating the financial performance and stability of the company.

    There are various types of financial analysis. They are leverage, growth, cash flow, liquidity, profitability, etc.

    The main objectives of Financial analysis are

    1.Reviewing the current position: In order to know if the company is doing well, past analysis of data is required to be carried out. Regular recording of the transactions helps to understand the financial position of the company.

    For example, A company wants to generate a revenue of 2000 crores in the next 5 years. The last four years’ data shows revenue as 1100, 1300,1600, 1800 crores respectively.

    So from the above, we can say that the company is performing well and looks like it will reach the desired target in the fifth year or may perform better than the target desired.

    However, if the revenue declines, it will cause concern for the team but the team will get time to gear up and work efficiently to achieve the desired target.

    2. Ease in decision making: For Future decision-making, quarterly financials play an important role. Subsidiary books and accounts like the sales book, purchase orders, manufacturing a/c, etc. help in giving more reliable information.

    For example, If sales are increasing inconsistently in a quarter, and in the next quarter the level of sales decrease due to any reason then the management can analyze and change the strategy.

    3. Performance Comparison: It helps in comparing the performance of the business every month, quarterly, half-yearly, and yearly. Analyzing the data can help the management to compare if the company is proceeding in the right direction.

    4. Assessing the profitability: Financial statements are used to assess the profitability of the firm. The analysis is made through the accounting ratios, trend line, etc. Accounting ratios calculated for a number of years shows the trend of change of position i.e. positive, negative or static. The assessing of the trend helps the management to analyze if the company is making profits or not.

    5. Measure the solvency of the firm: Financial analysis helps to measure the short-term and long-term efficiency of the firm for the benefit of the Stakeholders.

    6. Helps the end-users: The owners are the end-users for whom the financial statements are prepared. Financial statements are the summaries that are prepared for providing various disclosures to the owners which helps them understand the statements in a better way. If the end-users arrive at the right decision with the help of financial statements that means the objective is achieved.

    7. Other objectives:

    • It helps to settle disputes among the parties.
    • It helps in the expansion decision of the firm.
    • It helps in analyzing the amount of tax to be paid.
    • It reduces the chances of fraud.
    • It provides information about resources.
    • It provides a true and fair view of financial position.
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Aadil
AadilCurious
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Firstly, let’s understand the meaning of both terms. Revenue receipts:  The term 'revenue' suggests these are the amounts received by a business due to its operating activities. These receipts arise in a recurring manner in a business. Such receipts don’t affect the balance sheet. They are shown inRead more

    Firstly, let’s understand the meaning of both terms.

    Revenue receipts:  The term ‘revenue‘ suggests these are the amounts received by a business due to its operating activities. These receipts arise in a recurring manner in a business. Such receipts don’t affect the balance sheet. They are shown in the statement of profit or loss. Such receipts are essential for the survival of the business.

    Examples of revenue receipts are as follows:

    • Proceeds from the sale of goods.
    • Proceeds from the provision of services
    • Rent received
    • Interest received from deposits in banks or financial institutions
    • Discount received from creditors (shown in the debit side of P/L A/c)

    Capital receipts: The term ‘capital’ that such receipts are do not arise due to operating activities, hence not shown in the Profit and loss statement.  These are the money received by a business when they sell any asset or undertake any liability. These receipts do not arise in a  recurring manner in a business.  They don’t affect the profit or loss of the business. They are not essential for the survival of the business.

    Examples of capital receipts are as follows:

    • Loan from a bank or financial institution. (Increase in liabilities)
    • Proceeds from the sale of an asset. (decrease in assets)
    • Proceeds from sale of  investments. (decrease in assets)
    • Proceeds from the issue of equity shares. (Increase in liabilities)
    • Proceeds from issue of debentures. (Increase in liabilities)

    I have given a table below for more understanding:

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A_Team
A_Team
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  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. Sometimes debtors are unable to pay the amount due either partially or fully. the amount that is not receivableRead 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.

    Sometimes debtors are unable to pay the amount due either partially or fully. the amount that is not receivable is a loss and is called bad debt.

    Bad debts are neither assets nor liabilities they are expenses that are debited to the profit and loss account and reduced from debtors in the balance sheet.

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

     

    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 are 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.

     

    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. 

     

    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 the 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 expenses and debited to the profit and loss account.
      • For example, as I have explained above, before transferring to the balance sheet, bad debt will be debited to the profit and loss account as an expense.

    Now let me show you the extract of the profit and loss account and balance sheet showing bad debts and bad debts recovered which are as follows:-

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Anushka Lalwani
Anushka Lalwani
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    In a partnership firm, the partners may withdraw certain amounts from the firm for their personal use. Such amounts withdrawn by the partners are called drawings. This amount is usually deducted from their capital. The partners are required to pay an amount as interest, based on the time period forRead more

    In a partnership firm, the partners may withdraw certain amounts from the firm for their personal use. Such amounts withdrawn by the partners are called drawings. This amount is usually deducted from their capital. The partners are required to pay an amount as interest, based on the time period for which the money was withdrawn. This amount is called Interest on Drawings.

    The journal entry for interest on drawings is as follows:

    Since interest on drawings is an income to the firm, it is credited based on the rule that “increase in incomes are credited”. Since the partner has to bear the interest amount, his capital account is debited as a “ decrease in capital is debited”.

     

    FORMULAS

    The basic formula for interest on drawings is:
    Interest on drawings = Amount of Drawings x Rate/100 x No. of months/12

    1. When equal amounts of drawings are withdrawn at the beginning of every month, then
      Interest on Drawings = Total Drawings x Rate/100 x (12+1)/2
    2. When equal amounts of drawings are withdrawn at the end of every month, then the Interest on Drawings = Total Drawings x Rate/100 x (12-1)/2
    3. When the date of the drawing is not specified, it is assumed to be withdrawn evenly. Hence Interest on Drawings = Total Drawings x Rate/100 x 6/12

    The calculations in 1,2 and 3 are done so that drawings can be calculated for the average period.

     

    EXAMPLE

    Jack is a partner who withdrew $20,000 on 1st April 2020. Interest on drawings is charged at 10% per annum. If we have to calculate interest on drawings as of 31st December, then

    Interest on Drawings = 20,000 x 10/100 x 9/12 = $1,500
    (Here, interest on drawings is outstanding for 9 months, that is from April to December)

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Rahul_Jose
Rahul_Jose
In: >

  2. Pooja_Parikh Aspiring Chartered Accountant

    Any person, company, or organization that owes us money is a debtor. The amount that is owed to us is called debt. When you are unsure if a debtor is going to pay back the amount owed to you, then a provision for doubtful debts is created. Here, the debtor may or may not pay back the amount owed. WhRead more

    Any person, company, or organization that owes us money is a debtor. The amount that is owed to us is called debt. When you are unsure if a debtor is going to pay back the amount owed to you, then a provision for doubtful debts is created. Here, the debtor may or may not pay back the amount owed. When the debts owed to us is irrecoverable, it is termed as bad debts.

    Provision for doubtful debts may become a bad debt at some point. Usually, companies keep a small portion of their debtors as a provision for doubtful debts in accordance with the prudence concept that tells us to account for all possible losses. Provision for doubtful debts is a liability whereas bad debts are recorded as an expense.

    Journal entries for Doubtful debts and bad debts are as follows:

    EXAMPLE

    If the balance in the debtors’ account shows an amount of Rs 20,000 and 5% of debtors are treated as doubtful, then Rs 1,000 is recorded as a provision for doubtful debts. This amount is deducted from debtors in the balance sheet.

    Now if Rs 400 was recorded as actual bad debts, then it is deducted from the provision for doubtful debts instead of debtors. Further another 400 is added back to provision for doubtful debts to maintain the percentage.

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A_Team
A_Team
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  2. GautamSaxena Curious .
    This answer was edited.

    Non-debt capital receipts As we're aware, there are two main sources of the government’s income — revenue receipts and capital receipts. Revenue receipts are all those receipts that neither create any liability nor cause any reduction in assets for the government, whereas, capital receipts are thoseRead more

    Non-debt capital receipts

    As we’re aware, there are two main sources of the government’s income — revenue receipts and capital receipts. Revenue receipts are all those receipts that neither create any liability nor cause any reduction in assets for the government, whereas, capital receipts are those money receipts of the government that either create a liability for a government or cause a reduction in assets.

    Revenue receipts comprise both tax and non-tax revenues while capital receipts consist of capital receipts and non-debt capital receipts. Non-debt capital receipt is a part of capital receipt.

    Definition

    Non-debt capital receipts, also known as NDCR, are the taxes and duties levied by the government forming the biggest source of its income. Those receipts of the government lead to a decrease in assets, and not an increase in liabilities. It accounts for just 3% of the central government’s total receipts.

    The union government usually lists non-debt capital receipts in two categories:

    • Recovery of loans – Recovery of loans means the amount recovered when a loan defaults.
    • Other receipts – Other receipts basically mean disinvestment proceeds from the sale of the government’s share in public-sector companies.
    • Money accrued to the union government from the listing of central government companies and the issue of bonus shares.

     

    For Example – Disinvestment and recovery of loans are non-debt creating capital receipts.

     

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