AccountingQA Latest Questions

Mehak
Mehak
In: >

  2. Mehak

    Everyone must have heard about the term “cooking the books”. This term is generally associated with Creative accounting. In simple words, Creative accounting is a method of accounting in which the management tries to show a better picture of the business than the reality. Let us now understand thisRead more

    Everyone must have heard about the term “cooking the books”. This term is generally associated with Creative accounting. In simple words, Creative accounting is a method of accounting in which the management tries to show a better picture of the business than the reality. Let us now understand this concept in detail.

    What is Creative accounting?

    Creative accounting is a method of accounting in which the management manipulates the books of accounts by finding loopholes to showcase a better image of the business.

    It is a practice of using accounting loopholes to make a company’s financial position look better than it really is. It is not exactly illegal but it is more of a gray area.

    For example, a business may delay reporting expenses to increase the profits to present a better short-term position.

    The goal of creative accounting is to impress the shareholders, investors, get loans or boost stock prices.

    However, this can also be very risky and have serious consequences. It can reduce the trust of the investors and customers. In some cases, like Enron and WorldCom the world has seen how creative accounting lead to legal consequences.

    Common Techniques of Creative Accounting

    Some of the common techniques used by the business to manipulate the financial position are as follows:

    1. Revenue Recognition: Techniques such as recognizing revenue before it is actually earned is a method of creative accounting.
    2. Expense manipulation: Delaying the recognition of expenses to show a better position of the business in a short-term.
    3. Undervaluing liabilities: Undervaluing the liabilities of the business by not recognizing any future costs such as insurance or warranty etc.
    4. Asset Valuation: Overstating the value of asses or high amount of depreciation can be some ways of manipulating the value of assets.
    5. Tax avoidance: This is a way of reducing the tax liability by manipulating the financial statements to lower the profits.
    6. Cookie jar accounting: This is a method in which profits in the good years are saved in excess to use in the years of difficulty.

    Ethical implications of Creative Accounting

    There are several ethical implications with respect to creative accounting. Some of these are discussed below:

    1. Misleading Stakeholders: Creative accounting is a method to mislead the stakeholders including the investors, creditors, government, etc. This can lead to loss of trust.
    2. Loss of trust: The shareholders will lose trust over the company if the manipulation is discovered. Creative accounting breaches the fundamental of honesty.
    3. Non – compliance: Creative accounting leads to the non-compliance of the rules and regulations of the country which requires the businesses to follow certain accounting and reporting standards.
    4. Unfair competition: Creative accounting can make a company look more profitable and stable than it actually is, misleading investors and customers. This can leave honest businesses, who follow the rules, at a disadvantage.
    5. Moral responsibility: Management and business has the moral responsibility of working in the best interest of the society and the stakeholders.

    Conclusion

    The key takeaways from the above discussion are as follows:

    1. Creative accounting is the practice of using accounting loopholes to make a company’s financial position look better than it really is.
    2. The goal of creative accounting is to impress the shareholders, and investors, get loans, or boost stock prices.
    3. Revenue recognition, expense manipulation, and asset valuation are some of the common techniques of Creative accounting.
    4. The ethical implications of creative accounting include misleading stakeholders, eroding trust, compromising regulatory compliance, promoting unfair competition, neglecting moral responsibility, etc.

     

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Spriha Sparsh
Spriha Sparsh
In: >

  2. Radhika
    This answer was edited.

    Working Capital is the capital used in the daily operations of the business. It is calculated as the difference between current assets and current liabilities. Gross working capital means current assets and net working capital means the difference between current assets and current liabilities. WorkRead more

    Working Capital is the capital used in the daily operations of the business. It is calculated as the difference between current assets and current liabilities. Gross working capital means current assets and net working capital means the difference between current assets and current liabilities.

    Working Capital indicates the short-term liquidity of its business. It means the ability of a company to meet its daily requirements through short-term financing.

    Working Capital can be;

    • Positive
    • Zero, or
    • Negative

    Positive or negative working capital follows a simple rule of math. If current assets are more than current liabilities, working capital is positive and if current assets are less than current liabilities, working capital is negative. When current assets are equal to current liabilities, working capital is zero.

    Negative working capital for a short period means that the company has made a big payment to its vendors, or a significant increase in the creditor’s account because of credit purchases.

    However, if working capital is negative for a longer period it indicates that the company is struggling with its operating requirements or that it has to finance its daily operations through long-term borrowings.

    The current ratio for a company is calculated as: 

    Current Assets divided by Current Liabilities.

    Working Capital and Current Ratio are interrelated. If the Current Ratio is more than 1, it means current assets exceed current liabilities and Working Capital is positive. However, if the Current Ratio is less than 1, it means current liabilities exceed current assets and Working Capital is negative.

    For example-

    If Current Assets are Rs 50,000 and Current Liabilities are Rs 70,000 then

    Working Capital= Current Assets – Current Liabilities

    WC           =        Rs 70,000   –     Rs 50,000

    WC           =                   Rs. 20,000

    Current Ratio = Current Assets / Current Liabilities

    CR        =         Rs.50,000/ Rs. 70,000

    CR        =                           0.71< 1

     

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Radha
Radha
In: >

  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Yes, Capital Work in Progress is Tangible Asset. To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets. Capital work in progress is the cost incurred on fixed aRead more

    Yes, Capital Work in Progress is Tangible Asset.

    To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets.

    Capital work in progress is the cost incurred on fixed assets that are under construction as on the balance sheet date. Since the asset cannot be used for operation it cannot be classified as a Fixed Asset.

    For example:

    If an asset takes 1.5 years to be constructed as on 1.4.2020 then on the balance sheet date 31.3.2021, the cost incurred on the asset will be classified as Capital Work in Progress.

    Common examples of Capital Work in Progress include immovable assets like Plant and Machinery, Buildings.

    It is shown under the head Non-Current Assets in the balance sheet. Examples of cost included in Capital Work in Progress can be:

    • Advance payment to the contractor
    • Material used/purchased
    • Cost of labor incurred, etc.

    Since the assets under the head Capital Work in Progress are in the process of completion and not completed, hence they are not depreciable until completed. Once the asset is completed it is moved under the head Fixed Assets.

    Capital Work in Progress is shown in the Balance Sheet as:

     

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SidharthBadlani
SidharthBadlani
In: >

  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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Vijay
VijayCurious
In: >

Companies Act
  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use.  It is also called economic lRead more

    Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use.  It is also called economic life or service life

    It is a useful concept in accounting as it is used to work out depreciation. By knowing this useful life of an asset an entity can easily analyze how to allot the initial cost of an asset across the relevant accounting period rather than doing it unfairly manner.

    How do we calculate the useful life of an asset?

    The useful life of an asset is not an accounting policy, but an accounting estimate. calculating useful life is not an exact phenomenon but an estimate that is done because it directly impacts how much an asset is to expense every year.

    Factors affecting “how long an asset is expected to be useful” depends on some stated points as below:

    1. Usage, the more the assets are used, the more quickly it will deteriorate.
    2. Whether the asset is new at the time of purchase or reused model.
    3. Change in technology.

    As per the companies act 2013, some of the useful life of assets are stated below

    To know more about the different categories of assets you can follow the given link useful life of assets.

    POINT TO BE NOTED:- There lies a huge difference in the useful life v/s the physical life of an asset. It is very important to note that amount of time an asset is used in a business is not always be same as an asset’s entire life span.

     

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Jayesh Gupta
Jayesh GuptaCurious
In: >

  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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A_Team
A_Team
In: >

Cash Stock in trade Furniture Advance Payment

  2. GautamSaxena Curious .
    This answer was edited.

    The correct option is 3.) The term current assets do not include furniture. Explanation A current asset is any asset that can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within one accounting year. Thus, current assets don't have life for morRead more

    The correct option is 3.)

    The term current assets do not include furniture.

    Explanation

    A current asset is any asset that can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within one accounting year. Thus, current assets don’t have life for more than a year.

    Example: Cash and cash equivalent, stock, liquid assets, etc.

    Furniture is expected to have a useful life for more than a year and they are bought for a long term by a company.

    Cash is a more liquid asset of a company making it a more “current” asset. It requires no conversion and is spendable as it is. Thus, making it a vital current asset.

    Stock in trade is a current asset because it can be converted into cash within one year and all the stock in trade of a company is expected to be sold within one accounting period and should not stick for a longer period.

    Advance payment, on the other hand, is an amount paid to an employee, essentially a short-term loan by the employer. It’s recorded on the asset side of the balance sheet and as these assets are used, they are expended and recorded on the income statement for the period in which they are incurred, making it a short-term asset ending within an accounting year.

    Thus, on the asset side of the balance sheet, we can clearly see which current assets are and which are not included in the current asset

    Balance Sheet (As at…..)

    Therefore, (3) Furniture, won’t be included in current assets.

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