AccountingQA Latest Questions

Radha
Radha
In: >

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

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

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

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

    Example

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

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

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

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

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

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Aditi
Aditi
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  2. Mehak
    This answer was edited.

    Revenue and income are two accounting terms that are often used interchangeably. However, it is important to understand that these two terms are different. Let us know the difference between the two through the discussion below: What is Revenue? Revenue is the total amount of a business's sales. ItRead more

    Revenue and income are two accounting terms that are often used interchangeably. However, it is important to understand that these two terms are different. Let us know the difference between the two through the discussion below:

    What is Revenue?

    Revenue is the total amount of a business’s sales. It is the total amount earned by a business before deducting any expenses. Revenue is recognized in accounting as soon as a sale happens, even if the payment hasn’t been received yet.

    For example, XYZ Ltd sold 100 pens at a selling price of 10 per pen. The total revenue of the business is hence 1,000.

    What is Income?

    Income is the amount earned by a business after deducting any direct or indirect expenses. It is the amount that is left after subtracting all expenses, taxes and other costs from Revenue.

    Which is a broader term between the two?

    Revenue is a broader term as it includes the total earnings a business generates before deducting any expenses. It includes all sales of goods or services during a specific period.

    On the other hand, income is calculated after deducting certain expenses like taxes, interest, etc. This makes it more specific and refined than revenue.

    Revenue provides a measure of a company’s ability to generate sales and income reflects the efficiency in managing costs and generating profits.

     

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Aditi
Aditi
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  2. Mehak

    The terms outstanding expenses and accrued expenses are two accounting terms which are often used interchangeably. However, these two terms are not the same and have different meanings. The difference between these two terms is given below: What are Outstanding expenses? As the name suggests, outstaRead more

    The terms outstanding expenses and accrued expenses are two accounting terms which are often used interchangeably. However, these two terms are not the same and have different meanings. The difference between these two terms is given below:

    What are Outstanding expenses?

    As the name suggests, outstanding expenses are the expenses that are due but have not been paid yet. It means that the business is supposed to pay the amount due but it has not paid the same at the end of the accounting period.

    Outstanding expenses are recognized as a current liability because the business is liable to pay such expenses. These expenses are recorded in the books of accounts but the payment is still pending.

    Some examples of outstanding expenses are:

    1. The electricity bill is due for the month of January but has not yet been paid on 31st January.
    2. Salaries of employees of 50,000 is due for the month of March but have not been paid yet by the business.

    What are Accrued expenses? 

    Accrued expenses are the expenses that a business has incurred during the accounting period but they have not yet been recorded in the books of accounts because the bill has not yet been received or the payment is not due yet.

    The concept of Accrued expenses helps in complying with the accrual basis of accounting which says that the expense shall be recognised at the time it occurs regardless of the fact that payment is received or not.

    Examples of accrued expenses are:

    1. The electricity bill for December is received in the month of January. However, it shall be recognised as an expense in the month of December.
    2. The salaries of the employees for the month of April are paid in May. However, this expense shall be recognized in April.

     

    Key differences between outstanding expenses and accrued expenses

    To summarise the above discussion, the key differences between outstanding expenses and accrued expenses are given in the table below:

     

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Aadil
AadilCurious
In: >

CapitalReserve CapitalReservesUncalled CapitalUnsubscribed Capital
  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called. A company may issue its shares and receive the money either in full or in instalments. The instalments are named: Application money – Received by a compRead more

    Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called.

    A company may issue its shares and receive the money either in full or in instalments. The instalments are named:

    • Application money – Received by a company from the people who apply for allotment of the shares.
    • Allotment money – Called by the company from the people to whom the shares are allotted at the time of allotment.
    • Call money – The outstanding amount is called by way of call money in one or more instalments.

     For example, X Ltd issues 1000 shares at a price of Rs. 100 per share which is payable Rs. 25 at application, Rs. 30 at the allotment, Rs. 25 at the first call and Rs. 20 at the second and final call.

    The shares at fully subscribed and X Ltd has called and received money till the first call. The second call is not made yet.

     This amount of Rs 20,000 (1000 x Rs.20) will be uncalled capital.

    Now, It is up to the management when to make the second and final call.

    If the management shows no intention of calling the outstanding money on such shares, then the uncalled capital will be called reserve capital.

    Such shares which are not fully called are known as party paid shares.

    It is ultimately payable to the company by the shareholders of partly paid shares at the time of dissolution.

    Reserve capital is not shown either in the balance sheet or in the notes to accounts to the balance sheet. But one can ascertain it just by examining the notes to accounts to the balance. If the shares are partly paid and the management seems to have no intention of calling the outstanding money then such uncalled share capital is reserve capital.

    Reserve capital is neither a liability nor an asset for the company.

    But at the time of winding up of the company, it becomes a liability for the shareholders to pay the balance amount of their shares.

    By now, you must have understood why reserve capital is not part of unsubscribed capital. It is because reserve capital is related to shares that are issued and subscribed.

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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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Bonnie
BonnieCurious
In: >

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

    A revaluation Account is an account created to record the changes in the value of assets and liabilities during: Change in profit sharing ratio Admission of a partner Retirement of a partner Death of a partner The realization Account is prepared to sell assets and pay liabilities in the event of theRead more

    A revaluation Account is an account created to record the changes in the value of assets and liabilities during:

    • Change in profit sharing ratio
    • Admission of a partner
    • Retirement of a partner
    • Death of a partner

    The realization Account is prepared to sell assets and pay liabilities in the event of the dissolution of the firm.

    Revaluation Account is prepared for dissolution of the partnership while Realization Account is prepared for dissolution of the partnership firm.

    The increase or decrease in the value of assets and liabilities is transferred to the Realisation Account and the gain or loss thereof is transferred to the old partner’s capital account.

    • A decrease in Assets and an Increase in Liabilities is debited since it is a loss for the firm and all the losses are debited.
    • An increase in Assets and a Decrease in Liabilities is credited since it is gained for the firm and all the profits are credited.

    Format of Revaluation Account will be:

     

    Format of Realization Account will be:

     

    The difference between Realisation and Revaluation Account is:

    Revaluation Account Realization Account
    Prepared to record changes in assets and liabilities Prepared to record sale of assets and payment of liabilities
    Prepared at the time of dissolution of the partnership Prepared at the time of dissolution of partnership firm
    Assets and liabilities still exist in the books only their values change Assets and liabilities do not exist in the books of the firm
    This account contains only those assets and liabilities that are to be revalued. This account contains all the assets and liabilities of the firm.
    A revaluation Account can be prepared any number of times during the lifetime of the firm. The realization Account is only made once during the dissolution of the firm.
    The gain or loss during revaluation is transferred to the old partner’s capital accounts. The gain or loss during realization is transferred to the capital account of all the partners.

     

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Bonnie
BonnieCurious
In: >

  2. Spriha Sparsh
    This answer was edited.

    Order of Liquidity Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so onRead more

    Order of Liquidity

    Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so on and further. In the end, we will write goodwill.

    Liabilities are presented based on the order of urgency of payment. On the liabilities side, we start from short-term liabilities for example outstanding expenses, creditors and bill payable, and so on. In the end, we write capital adjusted with net profit and drawings if any.

    This approach is generally used by sole traders and partnerships firms. The following is the format of Balance sheet in order of liquidity:

     

    Order of Permanence

    Under this method, while preparing a balance sheet by a company assets are listed according to their permanency. Permanent assets are shown at first and then less permanent assets are shown afterward. On the assets side of the balance sheet starts with more fixed and permanent assets i.e. it begins with goodwill, building, machinery, furniture, then investments and ends with cash in hand as the last item.

    The fixed or long-term liabilities are shown first under the order of permanence method, and the current liabilities are listed afterward. On the liabilities side, we start from capital, Reserve and surplus, Long term loans and end with outstanding expenses.

    The following is the format of the Balance sheet in order of permanence:

     

     

    Such order or arrangement of balance sheet items are refer as ‘Marshalling of Balance Sheet’. 

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

    Let me first explain the meaning of both the terms CapEx and OpEx Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or imRead more

    Let me first explain the meaning of both the terms CapEx and OpEx

    Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or improve an existing one or maintain the asset in use.

    Capital expenditure is commonly found in the Cash flow statement under Investing activities as Investment in plant, machinery, equipment, etc.

    Operating Expenditure (in short OpEx) are day-to-day expenses incurred by a firm in order to carry its normal business.

    Expenses such as rent, advertisement, inventory costs, etc.

    Operating Expenses are shown in the income statement of the company as expenses incurred during the period.

    For Example: If a company purchases a printer, the printer would be a capital expenditure and the papers used for the printer would be operating expenditure.

    Difference between CapEx and OpEx

    Example 1: A company wants to lease machinery instead of buying it, in this case buying machinery would be capital expenditure, and leasing the machinery would be an Operating expense.

    Example 2: Buying machinery would cost a company for 50000 and leasing the same would cost 35000. So in this case leasing will be more preferred by a company which means operating expenditure would be preferred instead of a capital expenditure.

    From the point of view of tax treatment operating expenditure is more preferred over Capital expenditure because the expenses incurred during the year are deducted during the same year which reduces the tax levied on net income.

    Some real Examples from the Company Amazon

    This is the cash flow statement of Amazon, where the investing activities shows the capital expenditure incurred by the company during the years.

    This is the income statement of Amazon, it shows the operating expenditure incurred by the company during the year.

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Bonnie
BonnieCurious
In: >

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

    To start with let me first explain the difference between receipts and income & payment and expenditure. Although Receipts and Income may look similar terms, there are some differences. Receipts have their relation with both cash and cheques received on account of various items of the organizatiRead more

    To start with let me first explain the difference between receipts and income & payment and expenditure.

    Although Receipts and Income may look similar terms, there are some differences.

    Receipts have their relation with both cash and cheques received on account of various items of the organization. Whereas, income is considered as a revenue item for finding surplus or deficit of the organization. All the receipts collected during the year may not be considered as income.

    For Example, if an organization sale of its assets that is of a capital nature, it would not be considered as an item of income and hence would be treated in the balance sheet.

    Similarly, Payment and Expenditure are two different terms. Payments are those that have their relation with cash and cheques given for various activities of the organization. Whereas, Expenditure is considered as revenue expenditure for ascertainment of surplus or deficit in the case of a not-for-profit organization. All payments made during the year may not be considered as expenditures.

    Differences

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Nistha
Nistha
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Accounting PoliciesAccounting PrinciplesDifference Between
  2. Sandy CMA Final
    This answer was edited.

    To begin with, let me give you a brief explanation of both the terms i.e. Accounting policies and accounting principles- In order to maintain the financial statements, the company’s management adopts various Accounting Policies of its own. This generally includes the rules, the directions as to howRead more

    To begin with, let me give you a brief explanation of both the terms i.e. Accounting policies and accounting principles-

    In order to maintain the financial statements, the company’s management adopts various Accounting Policies of its own. This generally includes the rules, the directions as to how the financial statements will be prepared or how the valuation of depreciation would be done, and so on. These are flexible in nature and vary from company to company.

    For Example 1, Johnson Co. uses FIFO (first in first out) method to value the inventory. That is to say that, while selling its product, it sells those goods or products which it has acquired or produced first.

    It does not consider the LIFO or weighted average cost. The other company may adopt the other method as per its wish.

    Example 2, Johnson Co. uses the straight-line method of depreciating an asset, whereas the other company can opt for a written down value method depending upon the need of the company.

    So what I am trying to explain from this is that the accounting policies are flexible and can be adopted as per the needs of the company.

    Accounting Principles are the rules which the accountants adopt universally for recording and reporting the financial data. It brings uniformity in accounting throughout the practice of accounting. These are generally less flexible in nature.

    For Example, “Cost” is a principle. According to this accounting principle, an asset is recorded in the books at the price paid to acquire it and this cost will be the basis for all the subsequent accounting for the asset.  However, asset market value may change over time, but for the accounting purpose, it continues to be shown at its book value i.e. at which it is acquired.

    Some more examples would be of Matching principle, Consistency principle, Money measurement principle, etc.

    Differences

    Conclusion

    The point is Accounting Principles are the broad direction to reach a goal and to reach that goal helps the accounting policies.

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