AccountingQA Latest Questions

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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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  2. Bonnie Curious MBA (Finance)

    Yes, non-current assets are also known as fixed assets. These are long-term assets that are not intended for sale but are used by a company in its business operations. Examples of non-current assets include property, plant, and equipment, as well as intangible assets like patents and trademarks. TheRead more

    Yes, non-current assets are also known as fixed assets. These are long-term assets that are not intended for sale but are used by a company in its business operations.

    Examples of non-current assets include property, plant, and equipment, as well as intangible assets like patents and trademarks. These assets are recorded on a company’s balance sheet and are reported at their historical cost or at their fair market value, depending on the type of asset.

     

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Astha
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  2. GautamSaxena Curious .
    This answer was edited.

    Current Assets & Examples Current Assets are those assets that are bought by the company for a short duration and are expected to be converted into cash, consumed, or written off within one accounting year. They are also called short-term assets. These short-term assets are typically called currRead more

    Current Assets & Examples

    Current Assets are those assets that are bought by the company for a short duration and are expected to be converted into cash, consumed, or written off within one accounting year. They are also called short-term assets.

    These short-term assets are typically called current assets by the accountants and have no long-term future in the business. Current assets may be held by a company for a duration of a complete accounting year, 12 months, or maybe less. A major reason for the conversion of current assets into cash within a very short amount of time is to pay off the current liabilities.

    Examples

    Some of the major examples of current assets are – cash in hand, cash at the bank, bills receivables, sundry debtors, prepaid expenses, stock or inventory, other liquid assets, etc.

    • All of these assets are converted into cash within one accounting year.
    • Liquid assets are a part of current assets. Although they are easier to be converted into cash than current assets.
    • Current assets (along with current liabilities) help in the calculation of the current ratio. And they’re also referred to as circulating/floating assets.
    • Current assets are shown on the balance sheet (on the asset side) under the heading, current assets.

    Current assets on the balance sheet

    Balance Sheet (for the year…)

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AbhishekBatabyal
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  2. GautamSaxena Curious .
    This answer was edited.

    The land is a fixed asset and is treated as a long-term asset account.  Explanation The land is a fixed asset which is also referred to as a long-term asset. The fixed assets are those assets that are not expected to be cashed, consumed, last, sold, or written off within one accounting year and areRead more

    The land is a fixed asset and is treated as a long-term asset account. 

    Explanation

    The land is a fixed asset which is also referred to as a long-term asset.

    The fixed assets are those assets that are not expected to be cashed, consumed, last, sold, or written off within one accounting year and are purchased for long-term use. The fixed assets are also called non-current assets and the reason behind it is that current assets are easily converted into cash within one year and they are not.

    Fixed assets are planned by the company to be used for the long term in order to generate income.

    Example- Land, building, furniture, plants & equipment, etc.

     

    Why is land an asset?

    Although the land is not depreciated, it is still considered to be an asset because just like other assets the business spends its own money to acquire it.

    It can also be used by the business for different operations and it doesn’t create any liability for the business. Instead, reselling the land after a few years can help the company earn a huge margin of profit.

     

    Land in the balance sheet

    On the asset side of the balance sheet, the land is stated under the heading long-term assets.

    Balance Sheet (for the year…)

     

    Therefore, the land is a fixed asset and is treated as a long-term asset account.

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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period.  For example, insurance is often paid for annually on tRead more

    Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period. 

    For example, insurance is often paid for annually on the basis of the calendar year. A business may pay insurance every year on 1st January for that entire year. While preparing the financial statements on 31st March, it will recognize the insurance premium for the period 1st April to 31st December of the next financial year as a prepaid insurance expense. 

    Why are prepaid expenses classified as assets? 

    First of all, let us understand what an asset is. An asset is anything over which the business has ownership rights and which it can sell for money. The benefits of this asset should accrue to the business. 

    In light of this definition, let us analyze prepaid expenses as an asset. As the business has already paid for these goods or services, it becomes a legal right of the business to receive the relevant goods or services at a later date. As the benefit of this expense would accrue to the business only at a later date, the prepaid expenses are classified as an asset. 

    Some examples of prepaid expenses are prepaid insurance, prepaid rent etc

    Treatment of Prepaid Expenses

    Prepaid expenses are recorded in the balance sheet under the heading “Current Assets” and sub-heading “Other Current Assets”

    As per the Generally Accepted Accounting Principles or GAAP, expenses must be recognized in the accounting period to which they relate or in which the benefit due to them is likely to arise. Thus, we cannot recognize the prepaid expenses in the accounting period in which they are incurred. 

    Prepaid assets are classified as assets and carried forward in the balance sheet to be debited in the income statement of the accounting period to which they relate. 

    Adjusting Entries

    Adjusting entries are those entries that are used to recognize prepaid expenses in the income statement of the period to which they relate. These entries are not used to record new transactions. They ensure compliance with GAAP by recognizing the expenses in the period to which they relate. 

    Conclusion

    The GAAP and basic definition of an asset govern the treatment of prepaid expenses as an asset. The business incurs them in an accounting period different from the accounting period in which their benefit would accrue to the business. The business has a legal right to receive those goods or services. 

    The business carries them as a current asset on the balance sheet. In the relevant accounting period, they are recognized in the income statement. 

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

    The word, “deferred” means delayed or postponed and “revenue” in layman’s terms means income. Therefore deferred revenue means the revenue which is yet to be recognised as income. It is actually unearned income. In accrual accounting, income is recognised only when it is accrued or earned. DeferredRead more

    The word, “deferred” means delayed or postponed and “revenue” in layman’s terms means income. Therefore deferred revenue means the revenue which is yet to be recognised as income. It is actually unearned income.

    In accrual accounting, income is recognised only when it is accrued or earned. Deferred revenue is the income received before the performance of the economic activity to earn it.

    Example:  A shoe shop owner gives an order to a shoe manufacturer of 1000 pair of shoes which is to be delivered after 4 months. He also gives him a cheque of ₹15,000 in advance, the rest ₹5000 is to be given at the time of delivery.

    So, in this case, the ₹15,000 is actually is unearned revenue i.e. deferred revenue. It will be recognised as revenue when the shoe manufacture completes the order and deliver it.

    Till then, the deferred revenue is reported as a liability in the balance sheet. Like this:

    After recognition as revenue, it will be reported in the statement of profit or loss:

    Hence, to summarise, deferred revenue is:

    • Unearned revenue
    • Recognised as income till it is earned
    • Till then it is recognised and reported as a liability in the balance sheet.

    Some examples of deferred revenue are as follows:

    • Advance rent received
    • Advance payment for goods to be delivered.
    • Advanced payment for services to be provided.

    Now the question arises why deferred revenue is recognised as a liability. It is due to the fact that the business may not be able to perform the economic activity successfully to earn that revenue.

    Taking the above example, suppose the shoe manufacturer is not able to honour its commitment and the shoe shop owner can wait no more, then the advanced money of ₹ 15,000 is to be refunded. That’s why deferred revenue is recognised as a liability because it is a liability if we consider the principle of conservatism (GAAP).

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

    Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. Gross profit and net profit are gross profit estimates of the profitability of a company. WhRead more

    Definition

    Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.

    Gross profit and net profit are gross profit estimates of the profitability of a company.

    When the result of this computation is negative it is referred to as gross loss

    Formula :

    Total Revenues – Cost Of Goods Sold

    Net profit is defined as the excess of revenues over expenses during a particular period.
    Net profit is to show the performance of the company.

    When the result of this computation is negative it is called a net loss.

    Net profit may be shown before or after tax.

    Formula :

    Total Revenues – Expenses
    Or
    Total Revenues – Total Cost ( Implicit And Explicit Cost )

    Examples

    Now let me explain to you by taking an example which is as follows :

    In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
    Then,

    COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.

    = Rs ( 73000 + 10000+ 7000- 5000)
    = Rs 85000

    GROSS PROFIT = REVENUE – COST OF GOODS SOLD

    = Rs ( 100000 – 85000 )
    = Rs 15000

    Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
    Then,

    NET PROFIT = GROSS PROFIT – INDIRECT EXPENSES + OTHER INCOMES

    = Rs ( 15000 – 2000 + 1000)
    = Rs 14000

    Treatment

    Treatment of gross profit and net profit is given as follows :

    Gross profit

    • Gross profit appears on the credit side of the trading account.
    • Gross profit is located in the upper portion beneath revenue and cost of goods sold.

    Net profit

    • Net profit appears on the credit side of the profit and loss account.
    • It is treated directly in the balance sheet by adding or subtracting from the capital.

    Here is an extract of the trading and profit/loss account and balance sheet showing GROSS PROFIT & NET PROFIT :

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Simerpreet
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them. For example, X Ltd took an insurance policy on 30th September 20XX. The premium is to be paid annually on 30th SeptemRead more

    Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them.

    For example,

    • X Ltd took an insurance policy on 30th September 20XX. The premium is to be paid annually on 30th September every year for the next 20 years.
    • While preparing the financial statements for the year 20XX – 20XX+1, the business will recognize insurance premiums for the period 30th September, 20XX to 31st March 20XX+1 as an accrued expense. The premium would be actually paid on September 20XX+1.
    • As we can see, the company has already incurred the insurance premium for the period 30th September, 20XX to 31st March 20XX+1.
    • Thus, it has to recognize the same as an expense of that period only even though it will be actually paid in the next accounting period.

    Why does the concept of accrued expenses arise in accounting?

    The concept of accrued expenses arises in accounting because accounting records transactions on an accrual and not cash basis.

    Accounting on an accrual basis implies recording transactions as and when they are incurred while recording transactions on a cash basis means recording them as and when cash is actually paid for receiving those services.

    For example,

    • X Ltd ordered 5 televisions from LG. It received the delivery of all 5 televisions on 1st March, 20XX. However, it received the invoice for those televisions on 31st April, 20XX.
    • Now, the question arises as to whether while preparing the financial statements on 31st March, 20XX, X Ltd will recognize the cost of those 5 televisions as a purchase expenditure.
    • If X Ltd were recording transactions on a cash basis, they would not have recognized the cost of those 5 televisions as a purchase expenditure in the financial statements prepared on 31st March 20XX as the payment had been made in the next financial year.
    • Thus, in that case, that purchase would be recorded in the financial statements of the next year.
    • However, accounting is done on an accrual basis. As per accrual basis, as the event of purchase has occurred during the financial year ending 31st March 20XX, it must be recorded in financial statements for that period only.
    • Thus, due to the accrual basis, X Ltd will record that expenditure in the financial statements prepared on 31st March 20XX even though cash has been paid in the next financial year.

    Treatment of Accrued Expenses

    Accrued expenses are classified as current liabilities. That is because the business has a short-term obligation to pay these expenses. The other party has a legal right to receive the amount due. In other words, accrued expenses become payable in the near term.

    As current liabilities, accrued expenses are carried in the balance sheet on the liabilities side. They are also recognized in the income statement as an expense as per the concept of accrual basis of accounting.

    Conclusion

    Accrued expenses are the expenses for which the business has already received the benefit of goods or services but which are payable in an accounting period other than the one in which such benefit is received.

    As per the accrual basis of accounting, they are recognized in the year in which the expense is incurred. The expense is carried forward as a current liability until the period in which it is actually paid.

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Aadil
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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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Rahul_Jose
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  2. Radhika
    This answer was edited.

    An asset is a resource in the name of the company or controlled by the company that holds economic value and will provide it future benefits. A company invests in various kinds of assets for manufacturing purposes and investment purposes as well. Some examples of assets are: Plant and Machinery InveRead more

    An asset is a resource in the name of the company or controlled by the company that holds economic value and will provide it future benefits.

    A company invests in various kinds of assets for manufacturing purposes and investment purposes as well. Some examples of assets are:

    • Plant and Machinery
    • Investments
    • Inventory
    • Cash and Cash Equivalents, etc.

    Assets can be broadly divided into two categories based on their physical existence:

    • Tangible Assets
    • Intangible Assets

    Tangible Assets can be further divided into two categories based on their life and role in the operating cycle:

    • Non-Current Assets
    • Current Assets

    Since the company derives benefit from the asset, an asset account is debit in nature. If an asset account has a credit balance, it would fundamentally make it a liability. However, there are certain exceptions to it.

    In the case of Bank Overdraft, which means a company withdraws more from the bank than it has deposited in its account, Bank Account can also be shown having a credit balance.

    Contra Assets Accounts are the accounts that are contrary to the basic nature of an assets account, that is it is contrary to the debit nature of the assets account and hence are credit in nature.

    Examples of Contra Assets Account are:

    Accumulated Depreciation Account which is essentially Plant Assets Account also has a credit balance as it is used to depreciate the asset, or in other words, reduce the value of the assets, hence it also has a credit balance.

    When there are balances in the Account Receivables Account that are not paid to the company or have a very low probability of being paid, they are recorded in a separate account called Bad Debts Account, which is also credit in nature.

     

     

     

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