AccountingQA Latest Questions

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  2. GautamSaxena Curious .
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    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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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    The profit earned by an entity is determined through the profit and loss account. All the expenses are recorded on the debit side of the profit and loss account while all the incomes are recorded on the credit side. The profit is shown as the credit balance of profit and loss A/c. When the sum of itRead more

    The profit earned by an entity is determined through the profit and loss account. All the expenses are recorded on the debit side of the profit and loss account while all the incomes are recorded on the credit side.

    The profit is shown as the credit balance of profit and loss A/c. When the sum of items on the debit side of a profit and loss account is less than the sum of those on the credit side, it implies profit while when the sum of the items on the credit side is less than the sum of those on the debit side, it implies a loss for the entity.

    The Reason for Credit

    Profit is recorded as an increase in equity

    To understand the reason why profit is recorded as a credit balance, we must first understand the basic principle of debit and credit.

    The basic principle of debits and credits is that debits increase asset accounts and decrease liability and equity accounts while credits decrease asset accounts and increase liability and equity accounts.

    The revenue that a company earns is credited to the income account and increases equity.

    The expenses that a company incurs to earn that revenue are debited to the expense account and decrease equity.

    The difference between revenue and expenses is the profit, which is recorded as an increase in equity.

    Increase in equity due to revenue – decrease in equity due to expense = profit

    Gross Profit Vs Net Profit

    Revenue is the total income that a business or profession earns. Profit is the excess revenue that remains after reducing all expenses from it.

    Gross profit is the profit that a company earns after reducing the cost of goods sold from sales revenue while net profit is the profit that a business earns after reducing the total of all its direct and indirect expenses from its direct as well as indirect allowable business income.

     

    Conclusion

    The basic principle of debit and credit governs the classification of profit as a debit or credit. Since profit increases our equity, it is a credit.

    In the case of a company, it belongs to the shareholders. It is usually recorded in the retained earnings account. Profit can be reinvested in the business or can be distributed as a dividend. In the case of a sole proprietorship, the profit belongs to the owner and is recorded in the owner’s capital account.

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Aadil
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  2. Astha Leader Pursuing CA, BCom (Hons.)
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    General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity.  General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves. General reserve forms a part of the Profit & Loss ApprRead more

    General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity.  General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves.

    General reserve forms a part of the Profit & Loss Appropriation account and is created to strengthen the financial position of the entity and serves as a sources of internal financing. It is upon the discretion of the management as to how much of a reserve is to be created. No reserve is created when the entity incurs losses.

    General reserve is shown in the Reserves & Surplus head on the liability side of the balance sheet of the entity and carries a credit balance.

    Suppose, an entity, ABC Ltd engaged in the business of electronics earns a profit of 85000 in the current financial year and has an existing general reserve amounting to 100000. The management decides to keep aside 20% of its profits as general reserve.

    Then the amount to be transferred to general reserve will be = 85000*20% = 17000.

    In the financial statements it will be shown as follows-

    Now, in the next financial year, the entity incurs losses amounting to 45000. In this case, no amount shall be transferred to the general reserve of the entity and will be shown in the financial statement as follows-

    The creation of general reserve can sometimes be deceiving since it does not show the clear picture of the entity and absorbs losses incurred.

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Anushka Lalwani
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  2. Akash Kumar AK
    This answer was edited.

    Expenses are of two types, are Direct Expenses Indirect Expenses   Direct Expenses Direct expenses are those expenses are which are directly related to the manufacturing or production of the final goods. These expenses are also known as Manufacturing expenses. Manufacturing or production of gooRead more

    Expenses are of two types, are

    1. Direct Expenses
    2. Indirect Expenses

     

    Direct Expenses

    Direct expenses are those expenses are which are directly related to the manufacturing or production of the final goods. These expenses are also known as Manufacturing expenses.

    Manufacturing or production of goods indicates the conversion of Raw material into finished goods. the expenses incurred in the stage of conversion are treated as Direct expenses or Manufacturing expenses.

    Direct expenses are shown on the Debit side of the Trading Account.

     

    Indirect Expenses

    Indirect expenses are those expenses that are incurred to run a business day-to-day and maintenance of the company.  In other words, they are not directly related to making a product or service or buying a wholesale product to resell.

    Indirect expenses are classified into three types, which are

    1. Factory Expenses
    2. Administrative Expenses
    3. Selling & Distribution Expenses

    Indirect Expenses are shown on the Debit side of the Profit and Loss Account.

     

    Presentation of Direct Expenses in Trading Account

     

    Examples of Direct Expenses

    1. Gas, water, and Fuel: Gas, water, and fuel are the essentials to run a factory and are used in machinery to manufacture its final goods.
    2. Wages: Wages are the daily payments to the workers or Labours working in the factory premises on a daily or weekly payment basis.
    3. Freight and Carriage: Freight and Carriage are the expenses related to the importing of raw materials from the godown or from the outsiders to the Factory.
    4. Factory Rent: Rent paid for the factory area or any payment related to the place of the factory is known as factory rent.
    5. Factory Lighting: The expenses related to the uniform distribution of light over the working plane are obtained in the factory premises.
    6. Factory Insurance: The payment of insurance related to the factory will come under direct expenses.
    7. Manufacturing Expenses: Any other expenses related to the manufacturing process of finished goods are manufacturing expenses.
    8. Cargo Expenses: These are the expenses related to goods or freight being shipped or carried by the ocean, air, or land from one place to another.
    9. Upkeep and Maintenance: These are the expenses related to the maintenance of the factory for smooth running.
    10. Repairs on Machinery: The expenses related to any repair on machinery which is used in the production.
    11. Coal, Oil, and Grease: Coal, oil, and grease are the essentials to run machinery which results in the conversion of raw material to finished goods.
    12. Custom Charges: The expenses related to the payment of any Customs duty for the material imported.
    13. Clearing Charges: A clearing charge is a charge assessed on securities transactions by a clearing house for completing transactions using its own facilities.
    14. Depreciation on Machinery: Generally it is a nonmonetary expense but recorded in the trading account as a direct expense as per the accrual accounting.
    15. Import duty: any payment related to the importing of any machinery or any material from other countries is known as import duty.
    16. Octroi: this is the tax levied by a local political unit, normally the commune or municipal authority, on certain categories of goods as they enter the area.
    17. Shipping expenses: any expense related to the shipment charges of the raw material is known as shipping expenses.
    18. Motive power: Motive Power basically means any power, such as electricity or steam energy, etc, used to impart motion to any source of mechanical energy.
    19. Dock dues: a payment that a shipping company must pay for the use of a port.
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company. Workmen Compensation Reserve Account is generally given effect in case of admiRead more

    Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company.

    Workmen Compensation Reserve Account is generally given effect in case of admission, retirement of partners or dissolution of firm.

    If there is a change in the estimated value of reserve it is given effect during the revaluation of assets and liabilities.

    Journal entry if the existing reserve is less than the new estimated amount:

    Revaluation A/c (Dr)

    To Workmen Compensation Reserve A/c

    The reserve is credited because we need to create more than the existing reserve, since the new estimated liability is more than the existing.

    Journal entry if the existing reserve is more than the new estimated amount:

    Workmen Compensation Reserve A/c (Dr)

    To Revaluation A/c

    The reserve is debited because we need to decrease the existing reserve, since the new estimated liability is less than the existing.

    If a worker claims compensation, it is said to be a liability against the reserve. In case of dissolution, any such liability against workmen compensation reserve takes priority to be paid off according to the law.

    Journal entry in case of claim against reserve is:

    Workmen Compensation Reserve A/c (Dr)

    To Workmen Compensation Claim

    The amount is transferred from the reserve to a new liability, hence the reserve is debited and the claim is credited.

    If there are not sufficient funds in the firm to pay the liability, partners will have to bring funds from their personal assets to pay the workers.

    Journal entry when partner’s have to bring funds:

    Partner’s Capital Account (Dr)

    To Workmen Compensation Reserve A/c

    Partner’s need to bring funds to fulfill the liability, hence there account is debited and since the reserve is increased, hence it is credited.

    If there is no liability against the Workmen Compensation Reserve then it is distributed amongst the partners in their existing profit-sharing ratio.

    Journal entry for distribution of reserve is:

    Workmen Compensation Reserve A/c (Dr)

    To Partner’s Capital Account

    Since, reserve is more than required it is distributed among partners, hence their account is credited and as the reserve decreases, it is debited.

     

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

    Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more

    Definition

    Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.

    However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.

    For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.

    Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.

    For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.

    Meaning as per AS – 29

    Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-

    • Contingent asset

    A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
    Not wholly within the control of the enterprise.

    It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.

    • Contingent liability

    A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
    Not wholly within the control of the enterprise.

    A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
    A reliable estimate of the amount of obligation cannot be made.

    Recognition In Financial Statements

    Contingent assets and liabilities are recognized as follows:-

    • Contingent Assets

    As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.

    It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.

    However, when the realization of income is virtually certain, the related asset no longer remains contingent.

    • Contingent liability

    As per the rules, it is not recognized by an enterprise.

    When recognized?

    Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.

    The assets and the related income are recognized in the financial statements of the period in which the change occurs.

    Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.

    And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.

    A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.

    Disclosure

    Now we will see how contingent assets and liability are disclosed which is mentioned below:-

    • Contingent asset

    These contingent assets are not disclosed in financial statements.
    A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.

    • Contingent Assets

    A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.

     

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

    Definition A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions. Or in other words, we can say a group of accounts with different characteristics. It is also called the Principal Book of accounts. For example:- salary account, aRead more

    Definition

    A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions.

    Or in other words, we can say a group of accounts with different characteristics.

    It is also called the Principal Book of accounts.

    For example:– salary account, and debtor account.

    Sub- ledger it is defined as a group of accounts with common characteristics. And is a part of ledger accounts.

    For example:- customer account, vendor account, etc.

    The difference between a ledger and a sub-ledger is that ledger accounts control sub-ledger accounts whereas a sub-ledger is a part of the ledger account.

    Features Of Ledger

    • Ledger is prepared from the journal.
    • Ledger is a master record of all the accounts of the business.
    • The Ledger account shows the current balances of all accounts.
    • Ledger accounts summarize the effect of transactions upon assets, liabilities, capital, incomes, and expenditures.

    Features Of Sub-Ledger

    • Sub-ledger in accounting provides up-to-date information about the daily activities of the business.
    • It keeps individual track of all balances.
    • Help locate errors in individual accounts.
    • A sub-ledger is a collection of different ledgers used in an account.

     

    Utilities of ledger

    The main utilities of a ledger are summarized as follows :

    • Provides complete information about a particular account: Complete information relating to a particular account is available in one place in the ledger.

    • Information on income and expenses: In the ledger, a separate account is maintained for each income and expense. The amount of total income and total expenses are known from the ledger accounts.

    • Preparation of trial balance: Ledger helps in preparing trial balances which ensure arithmetical accuracy of the transaction recorded in the books of account.

    • Helps in preparing final accounts: After preparing the trial balance, final accounts are prepared to know the profitability and financial position of the business.

    Utilities of sub-ledger

    The utilities of the sub-ledger are as follows :

    • Track customer information: If a client has an outstanding credit debt or needs money refunded, a company can use a sub-ledger to verify the information quickly.

    • Protect financial information: A sub-ledger allows a financial supervisor to isolate certain records so that employees can view only parts of the company’s financial information. This added level of security is important for large corporations.

    • Create separate databases: Large companies usually process large amounts of financial data that may be too big for one database. Software programs organize this data into isolated files to calculate financial information in the general ledger of a business.

    Conclusion

    So here I conclude that a ledger is compulsory in the recording process whereas a sub-ledger is optional.

    The ledger is used for preparing trial balance but the sub-ledger is not used for the same.
    Sub ledger is controlled by the ledger.

    The sub-ledger supports the transaction of each specific account indicated on the ledger.

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  2. Saurav

    Accruals are not the same as provisions both are totally different from each other. Accruals and provision both are vital parts of accounts but work differently   Accrual Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irreRead more

    Accruals are not the same as provisions both are totally different from each other. Accruals and provision both are vital parts of accounts but work differently

     

    Accrual

    Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such an amount has been paid.

    An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be further divided into two parts

     

    Accrual Expense

    Accrual Expense means any transaction that takes place in a particular period but the amount for it will be paid on a later period.

    For example- 10,000 for the month of March was paid in April month then this rent will be accounted for in the books in March

    These are the following accrued expense

    • Accrual Rent– Accrual rent means the amount for using the land of the landlord is paid at a later period than the period when it is put into use.
    • Insurance– Accrual insurance means the amount paid as a premium to the insurance company paid on a later period than the period when it is due
    • Expense- Acrrual expense means the amount for any expense paid on a later period then the period when it pertains to be paid
    • Wages- Accrual wages means the amount which is paid to employees on a later period than the period when the wages get due

     

    Accrual Revenue

    Accrual Revenue means any transaction that takes place in a particular period but the amount for it will be received on later period. For example- If interest of 10,000 on bonds for the period of March is received in April months then this amount will be accounted for in March. These are the following accrued revenue

    • Accrual Rent– Accrual rent means the amount for using the land of an entity by another party is received on a later period than the period when it was put into use.
    • Accrued Interest– Accrued interest means the amount of interest received on a later period than the period when it pertains to receive

     

    PROVISIONS

    Provision refers to making a provision/allowance against any probable future expense that the company might incur in the near future. This amount is uncertain and difficult to predict its surety.

    However, as per the prudence concept of accounting a company needs to anticipate the losses that will incur in the near future due to which provision is made.

    For example- A company has debtors of 10,000 but as per the company’s previous records company anticipates that 1% of debtors will become bad debts. So in this case company will make a provision of 1% that is 100 on it.

    There are various types of provisions which are-

    • Provision on Depreciation– Provision for Depreciation means a provision for future depletion of assets has been already created
    • Provision for Doubtful Debts– Provision for Doubtful Debts means a provision created against debtors that doesn’t seem to be recovered in the near future
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well. Amount tRead more

    The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well.

    Amount to any specific reserve is generally transferred from the Profit and Loss Appropriation Account.

    Various specific reserves are:

    • Debenture Redemption Reserve

    Debentures are debt instruments of a company and they have to be redeemed, that is, paid back after the expiry of the specified period. According to Accounting Standards, companies are required to set aside a specific amount in Debenture Redemption Reserve, when they are due for redemption.

    • Securities Premium Reserve

    When shares or debentures are issued at a price higher than its book value/face value, the difference between the market value and book value is called Securities Premium. The amount of Securities Premium is transferred to Securities Premium Account. This amount is utilized to issue fully paid bonus shares, write off preliminary expenses, write off commission discounts, etc., to provide a premium on redemption of debentures.

    • Investment Fluctuation Reserve

    The investments made by a company are subject to fluctuations in its market value. Company Law and Accounting Standards require companies to provide for such fluctuations by creating a reserve called Investment Fluctuation Reserve.

    • Dividend Equalisation Reserve

    Companies are required to pay a dividend to their shareholders. It is often difficult for a company to maintain a consistent rate of dividend as the dividend paid is equivalent to the profit made by a company during the financial year which is not consistent. So, Dividend Equalisation Reserve is created to maintain a consistent rate of dividend on shares over time, in the event of both high and low profits.

     

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

    Yes, a creditor is a liability. Creditors are treated as current liability. A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest. Creditors may be secureRead more

    Yes, a creditor is a liability. Creditors are treated as current liability.

    A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.

    Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.

    In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.

    Why are Creditors treated as a liability?

    An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc

    A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.

    As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.

    Treatment and Importance of Creditors

    Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.

    The significance/importance of creditors is as follows:

    • The amount due to creditors affects the current and acid test ratio of a company significantly.
    • It affects the short-term cash requirements of a company.
    • It affects the credit policy of the company. A company can extend longer credit periods to customers if it can avail longer credit periods from its suppliers.
    • Having too many creditors or a large amount due to creditors can affect investor sentiment negatively regarding the business.

    We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.

    Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.

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