AccountingQA Latest Questions

Bonnie
BonnieCurious
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Balance SheetCalls in Advance
  2. Radha M.Com, NET
    This answer was edited.

    Let us begin with a short explanation of what Calls-in-Advance is: Whenever a company accepts money from its shareholders for calls not yet made, then we call it calls-in-advance. To put it in even simpler terms, it is the amount not yet called up by the company but paid by the shareholder. An imporRead more

    Let us begin with a short explanation of what Calls-in-Advance is:

    Whenever a company accepts money from its shareholders for calls not yet made, then we call it calls-in-advance. To put it in even simpler terms, it is the amount not yet called up by the company but paid by the shareholder. An important thing to note here is that a company can accept calls-in-advance from its shareholders only when authorized by its Articles of Association.

    Calls-in-advance is treated as the company’s liability because it has received the money in advance, which has not yet become due. Till the amount becomes due, it will be treated as a current liability of the company.

    The journal entry for recording calls-in-advance is as follows:

    The money received from the shareholder is an asset for the company and therefore Bank A/c is debited with the amount received as calls-in-advance. The calls-in-advance A/c is credited because it is a liability for the company.

    Since Calls-in-Advance is a liability, it is shown in the Equities and Liabilities part of the Balance Sheet under the head Current Liabilities and sub-head Other Current Liabilities.

    For better understanding, we will take an example,

    ABC Ltd. made the first call of 3 per share on its 10,00,000 equity shares on 1st May. Max, a shareholder, holding 5,000 shares paid the final call amount 2 along with the first call money. Now let me show the journal entry to record calls-in-advance.

    In the Balance Sheet, I will show calls-in-advance in the following manner,

    The calls-in-advance of 10,000 is shown under the Equities and Liabilities side of the balance sheet under the head current liabilities and sub-head other current liabilities. It will be shown as a liability till the final call money becomes due. The amount received by the company from Max is shown on the Assets side of the balance sheet under head current assets and under the sub-head cash and cash equivalents.

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Vijay
VijayCurious
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Capital ExpenditureRevenue Expenditure
  2. Manvi Pursuing ACCA
    This answer was edited.

    Capital Expenditure: Capital expenditure is the expenditure incurred by an entity or organization to acquire or purchase a fixed asset. This expenditure forms part of non-current assets. The fixed asset is not expensed at the time of purchase instead, it is depreciated or amortized over its useful lRead more

    Capital Expenditure:

    Capital expenditure is the expenditure incurred by an entity or organization to acquire or purchase a fixed asset. This expenditure forms part of non-current assets. The fixed asset is not expensed at the time of purchase instead, it is depreciated or amortized over its useful life.

    Example of Capital Expenditure:

    • Machinery: Machinery is a tangible non-current asset purchased by a company for business purposes. Since it is a non-current asset company will be using it for more than one accounting period hence, it should be capitalized in the balance sheet under the head assets. Capitalization is a method in which cost is included in the value of the asset and expensed over its useful life.

    For example, XYZ Ltd purchased machinery worth $1,00,000 and its useful life is 10 years.

    In this case, XYZ Ltd will capitalize the amount of machinery because it will be using it for more than one accounting year. Any asset used for more than one accounting year should be capitalized.

    • Installation charges on machinery: This expense is incurred while installing machines in the business premises and is a one-time expenditure. The whole amount of installation will be capitalized along with the cost of machinery in the balance sheet.

    In the above example cost of the machine is given as $1,00,000 and at the time of installation company incurred a further expenditure of $10,000. Here, the company will add the amount of installation with the cost of machinery because the installation charge is a one-time expense. The total cost of the machine will be $1,10,000.

    • Improvement cost of machinery: Any cost incurred in the improvement of the machine will be capitalized. It is so as it will improve the quality or extend the life of the machinery. Hence, this cost should be added to the historic cost of the machine.

    In the above example, after installation charges were incurred historic cost of the machine was $1,10,000. After a few years, the company made some improvements to the machine which amounted to $20,000 and the machine’s useful life was extended to more 5 years.

    The improvement cost of $20,000 will be added to the historical cost of $1,10,000. The total amount of $1,30,000 ($1,10,000+$20,000) will be shown in the balance sheet.

    Revenue Expenditure:

    Revenue expenditure is expenditure incurred for the purpose of trade or to maintain non-current assets. These are short-term expenses and consumed within one accounting year and also known as operating expenses.

    Examples of Revenue Expenditure:

    • Rent: It is an expense paid by the company for using the premises for business purposes to the owner of the premises. It is recurring in nature and hence, should be classified under revenue expenditure.

    For example, a company rented premises for business purposes and paid a monthly rent of $10,000. This expenditure of $10,000 incurred will fall under revenue expenditure because the company is incurring this expenditure monthly.

    • Depreciation: Depreciation is a non-cash expense and it is added back to the cash flow statement, alongside other expenses. This expense is incurred as a basis of consuming a portion of fixed assets for the current period. Depreciation is charged to the fixed assets to reduce their carrying amount as their value is consumed over time. This expense is of recurring in nature.

    For example, a company purchased an asset worth $2,00,000 and charges 10% depreciation every year for 10 years. Since, the company will charge 10% depreciation every year it is recurring in nature and hence, should be considered as revenue expenditure.

    • Purchase of raw material: Raw materials are materials used in primary production for the manufacturing of goods. These are needed on a regular basis and the cost of purchasing them is recurring in nature. Hence, they are classified under revenue expenditure.

    For example, a manufacturing company orders stock of its raw material every quarter. Here, the company is going to reorder stock in every quarter and hence, this will be a revenue expenditure.

    Capital expenditure can be capitalized as a part of non-current assets. Revenue expenditure cannot be capitalized and must be expensed in the statement of profit and loss.

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Bonnie
BonnieCurious
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  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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Simerpreet
SimerpreetHelpful
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Explain Business entity, money measurement concept, Going concern concept etc.

Accounting ConceptsGAAP
  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Accounting Concepts Accounting concepts are the rules, assumptions and methods generally accepted by accountants in the preparation and presentation of financial statements of an entity. These concepts have been developed by the accounting profession for a long period. These concepts constitute theRead more

    Accounting Concepts

    Accounting concepts are the rules, assumptions and methods generally accepted by accountants in the preparation and presentation of financial statements of an entity. These concepts have been developed by the accounting profession for a long period.

    These concepts constitute the foundation of accounting and one has to be aware of them to maintain correct and uniform financial statements.

    I have listed and briefly explained the following accounting concepts.

    1. Entity Concept 
    2. Money Measurement concept 
    3. Going on concern 
    4. Periodicity concept 
    5. Accrual concept 
    6. Cost concept 
    7. Realisation concept 
    8. Matching concept 
    9. Dual aspect concept 
    10. Conservatism concept 
    11. Materiality concept 
    12. Consistency concept

     

    #1 Entity Concept 

    As per this concept, the business and its owner are separate entities from the point of view of accounting. It means the assets and liabilities of the business and owner are not the same. 

    However, in the eyes of law, the business and its owner may be a single entity.

     

    #2 Money measurement concept

    This concept states that the transaction which can be measured in terms of money shall only be recorded in the books of accounts.

    Any transaction which cannot be measured in terms of money shall not be recorded.

    #3 Going concern concept 

    Going concern concept is also a fundamental accounting assumption. It assumes that an enterprise will continue to be in business for the foreseeable future.

    It means its accounts will also be prepared to take such assumptions that the business will continue in future.

     

    #4 Periodicity concept 

    The periodicity concept states an entity needs to carry out accounting for a definite period, generally for a year known as the accounting period. The period can also be half-year or a quarter.

    The cycle of accounting restarts at the start of every accounting period.

     

    #5 Accrual concept 

    The word accrual comes from the word

    As per the accrual concept, the expense and incomes are recorded in the books of accounts in the period in which they are expected to incur whether payment in cash is made or cash is received or not.

    For example, the salary to be paid by a business is to be recorded as an expense in the year in which it is expected or liable to be paid.

     

    #6 Cost concept 

    It is concerned with the purchase of the assets of a business. As per the cost concept, a business shall record any asset in its books at the acquisition cost or purchase cost.

     

    #7 Realisation concept 

    This concept is concerned with the sale of assets. A business shall record the sale of the assets in its books only at the realised cost.

     

    #8 Matching concept 

    As per this concept, revenue earned during a period should be matched with the expenses incurred in that period. In short, an entity needs to record the income and the expenses of the same period.

     

    #9  Dual concept 

    This concept is the foundation of double-entry accounting. Dual concepts state that every transaction has two effects, debit and credit. 

    One or more accounts may be debited and other one or more accounts are credited so that the total amount of debit and credit equals.

     

    #10 Conservatism concept 

    The conservatism concept states that an entity has to account for expected losses and expenses but not for future expected profits and gains.

     

    #11 Materiality concept 

    As per this concept, only those items which are material should be shown in the financial statements of an entity. It says that items which are immaterial or insignificant in terms of value or importance to stakeholders can be ignored.

     

    #12 Consistency concept 

    It says that an entity should follow consistent accounting policies every accounting period so that a comparison can be made among the financial statements of different accounting periods.

     

    GAAP 

    Generally Accepted Accounting Principles or GAAP is a combination of authoritative standards which are set by policy boards and commonly accepted methods of recording and presenting accounting information. 

    GAAP or US GAAP is formulated by the Financial Accounting Standards Board or FASB  and almost state in the USA is compliant with GAAP. 

    The main goal of the GAAP is to ensure that the financial statements of an entity are complete, consistent and comparable.

    It can be said accounting concepts are part of GAAP.

     

    Ten key principles of GAAP

    #1 Principle of regularity

    It states that an accountant has to comply with GAAP regulations as a standard.

     

    #2 Principle of Consistency

    Accountants should be committed to applying the same set of standards throughout the accounting and reporting process, from one period to another. This is to be done to ensure comparability of financial statements between periods.  

    Also, the accountants have to fully disclose and explain the reason behind any changed or updated standards in the note of accounts of financial statements.

     

    #3 Principle of sincerity

    It states that the accountant should strive to provide an accurate and unbiased view of the financial situation of a company.

     

    #4 Principle of Permanence of Methods

    As per this principle, a company should be consistent in procedures used in financial statements so that it allows the comparison of the company’s financial information.

     

    #5 Principle of Non-Compensation

    Both negative and positive should be reported with full transparency. There should be no debt compensation i.e. debt should not be set off against any asset or expenses against revenue.

    #6 Principle of Prudence

    It states that financial data presentation should be fact-based. This principle is similar to the conservatism concept.

     

    #7 Principle of Continuity

    This is as same the going concern concept. It states that while valuing assets, it should assume that the business will continue for the foreseeable future.

     

    #8 Principle of Periodicity

    It is the same as the matching concept. It states that the revenue and expenses should be recorded in the period in which they occur.

     

    #9 Principle of Materiality

    Accountants should disclose all the financial information that is significant in the decision-making of the users of financial statements.

     

    #10 Principle of Utmost Good Faith

    It states that all parties to a transaction should act honestly and not mislead or hide crucial information from one another.

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Simerpreet
SimerpreetHelpful
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Working Capital
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    Let us first understand what working capital is. Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern. It also represents the exceRead more

    Let us first understand what working capital is.

    Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern.

    It also represents the excess of current assets, such as cash, accounts receivable and inventories, over current liabilities, such as accounts payable and bank overdraft.

    working capital formula

    Sources of Working Capital

    Any transaction that increases the amount of working capital for a company is a source of working capital.

    Suppose, Amazon sells its goods for $1,000 when the cost is only $700. Then, the difference of $300 is the source of working capital as the increase in cash is greater than the decrease in inventory.

    Sources of working capital can be classified as follows:

    short term and long term sources of working capital

    Short Term Sources

    • Trade credit: Credit given by one business firm to the other arising from credit sales. It is a spontaneous source of finance representing credit extended by the supplier of goods and services.
    • Bills/Note payable: The purchaser gives a written promise to pay the amount of bill or invoice either on-demand or at a fixed future date to the seller or the bearer of the note.
    • Accrued expenses: It refers to the services availed by the firm, but the payment for which is yet to be done. It represents an interest-free source of finance.
    • Tax/Dividend provisions: It is a provision made out of current profits to meet the tax/dividend obligation. The time gap between provision made and payment of actual payment serves as a source of short-term finance during the intermediate period.
    • Cash Credit/Overdraft: Under this arrangement, the bank specifies a pre-determined limit for borrowings. The borrower can withdraw as required up to the specified limits.
    • Public deposit: These are unsecured deposits invited by the company from the public for a period of six months to 3 years.
    • Bills discounting: It refers to an activity wherein a discounted amount is released by the bank to the seller on purchase of the bill drawn by the borrower on their customers.
    • Short term loans: These loans are granted for a period of less than a year to fulfil a short term liquidity crunch.
    • Inter-corporate loans/deposits: Organizations having surplus funds invest with other organizations for up to six months at rates higher than that of banks.
    • Commercial paper: These are short term unsecured promissory notes sold at discount and redeemed at face value. These are issued for periods ranging from 7 to 360 days.
    • Debt factoring: It is an arrangement between the firm (the client) and a financial institution (the factor) whereby the factor collects dues of his client for a certain fee. In other words, the factor purchases its client’s trade debts at a discount.

    Long Term Sources

    • Retained profits: These are profits earned by a business in a financial year and set aside for further usage and investments.
    • Share Capital: It is the money invested by the shareholders in the company via purchase of shares floated by the company in the market.
    • Long term loans: These loans are disbursed for a period greater than 1 year to the borrower in his account in cash. Interest is charged on the full amount irrespective of the amount in use. These shareholders receive annual dividends against the money invested.
    • Debentures: These are issued by companies to obtain funds from the public in form of debt. They are not backed by any collateral but carry a fixed rate of interest to be paid by the company to the debenture holders.

    Another point I would like to add is that, although depreciation is recorded in expense and fixed assets accounts and does not affect working capital, it still needs to be accounted for when calculating working capital.

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Bonnie
BonnieCurious
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  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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Simerpreet
SimerpreetHelpful
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  2. Kajal

    A Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities to be pRead more

    A Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities to be paid are transferred to the Realisation A/c.

    So, Cash and Bank (already in liquid form), fictitious assets (doesn’t have any value to be realised), Partner’s Loan (internal liability) and Undistributed profits (not something that can be realised) are not included in the Realisation account.

     

    DISSOLUTION OF PARTNERSHIP FIRM

    It means the firm closes down its business and comes to an end. Simply, it means the firm will cease to exist in the future. As the firm is closing down, its assets are sold, liabilities are paid off, and the remaining amount (if any) is distributed among the partners.

     

    REALISATION ACCOUNT

    This account is prepared only once, at the time of dissolution of the Partnership firm. It is opened to dispose of all the assets of the firm and make payments to all the external creditors of the firm.

    It ascertains the profit earned or loss incurred on the realisation of assets and payment of liabilities.

     

    Items not included in Realisation A/c

     

    1. ASSETS

    CASH AND BANK BALANCES are not included in the Realisation account as the purpose of the Realisation account is to sell assets to realise cash, but cash and bank are already in liquid form and thus, not included.

    These are directly used for the payment of liabilities and if there is any remaining amount, then that amount is distributed among the partners.

     

    FICTITIOUS ASSETS are huge expenses or losses that are written off over the years by writing off a portion of it every year for the next few years like accumulated losses, balance of Advertisement expenses, Preliminary expenses, Loss on the issue of Debentures, etc. They don’t have any physical existence or realisable value.

    Since nothing can be realised from these assets they are not included in the Realisation account. These are transferred to the Partner’s Capital A/c.

     

    2. LIABILITIES

     

    PARTNER’S LOAN refers to the loan given to the firm by any partner of the firm. 

    Suppose, there are three Partners A, B and C. ‘C’ gave the firm a loan of $5,000. This $5,000 will be recorded as a Partner’s Loan and not just as a normal loan taken from an external party.

    Since, Partner’s Loans are the internal obligation of the firm, they are not included in the realisation account instead a separate account is prepared to settle Partner’s Loan after all external liabilities are settled.

    So, we can say in the Realisation account only external liabilities are included and paid.

     

    UNDISTRIBUTED PROFITS  are the  Profits that are not distributed among the Partners like General Reserve, Reserve Fund, and Credit balance of P&L A/c.

    They are not included in the realisation account as they can’t be sold as an asset neither they are any liabilities that should be paid. Undistributed profits belong to the Partners of the firm and thus, are transferred to Partner’s capital A/c.

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Astha
AsthaLeader
In: >

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

    Revaluation of Assets is an adjustment made in the carrying value of the fixed asset in case the company finds there is a difference between the current price and the market value of the asset. Generally, the value of the asset decreases due to depreciation but in some cases like inflation in the ecRead more

    Revaluation of Assets is an adjustment made in the carrying value of the fixed asset in case the company finds there is a difference between the current price and the market value of the asset. Generally, the value of the asset decreases due to depreciation but in some cases like inflation in the economy, it may increase. so, in order to know the correct value of the asset Revaluation is to be done.

    Accounting standard allows two models.

    • Cost model
    • Revaluation model

    Under the cost model, the carrying value of fixed assets equals their historical cost less accumulated depreciation and accumulated impairment losses.

    For Example, Amazon ltd purchased a Plant for 5,00,000 on January 1, 2010, with a useful life of 10 years, and uses straight-line depreciation.

    Here, the journal entry would be passed as

    As the useful life of the asset is 20 years, so the yearly depreciation would be

    5,00,000/10 i.e. 50,000.

    So the accumulated depreciation at the end of December 31, 2012, would be 50,000×2= 1,00,000 and

    the carrying amount would be 5,00,000-1,00,000= 4,00,000.

    Under the Revaluation method, the assets are revalued at their current market value. If there is an increase in the value of an asset, the difference between the asset’s market value and current book value is recorded as a revaluation surplus.

    For Example, Amazon ltd purchased an asset two years ago at a cost of 2,00,000. Depreciation @ 10% under straight-line method.

    Therefore, the accumulated depreciation for two years would be 40,000,

    i.e. 20,000 for a year.

    Carrying cost of the asset = 1,60,000

    Assuming, the company revalues its assets and finds that the worth of assets is 1,85,000.

    Under this method, the company needs to record 25,000 as a surplus.

    Accounting entry for the above will be

    Depreciation calculated during the third year would be based on the new carrying value of 1,60,000.

    Therefore, Depreciation for the 3rd year= 1,60,000/3

    = 53,333.33

    Accounting entry:

    Alternatively, the incremental depreciation due to the revaluation i.e. 13,333.33 can be charged to the revaluation surplus account.

    In case, if there is a revaluation loss, the entries would be interchanged.

    In case of admission of a partner, the new partner may not agree with the value of assets as stated in the balance sheet, with time the values may have arisen or may have fallen, so in order to bring them to their correct values revaluation is done so that the new partner doesn’t suffer.

    Where the assets and liabilities are to be shown in the books at the revised (new) values after the admission of the new partner.

    The accounting entries are

    1. For Increase in the value of an asset

    2. For a decrease in the value of an asset

    3. For transfer of profit on revaluation i.e. if the total of credit side exceeds the debit side.

    4. For transfer of loss on revaluation i.e. if the total of debit side exceeds the credit side.

    Note: If the total of both sides is equal it signifies that there is no profit or loss on the revaluation of assets. Hence no entry is to be passed.

    After preparing for the journal entry, a revaluation ledger account is also prepared wherein the accounts carrying a debit balance are transferred to the debit side and the accounts carrying a credit balance are transferred to the credit side.

    In the case of retirement of a partner, the same journal entries are to be passed as in the case of Admission of a partner for revaluation of assets.

    Generally, the value of an asset decreases with time but it may increase in certain circumstances especially in inflationary economies.

    Conclusion

    An entity should do the revaluation of its assets because revaluation provides the present value of assets owned by an entity and upward revaluation is beneficial for the entity and hence the company can charge more depreciation on upward revaluation and can get tax benefits.

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Jasmeet_Sethi
Jasmeet_SethiCurious
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  2. GautamSaxena Curious .
    This answer was edited.

    Sundry Debtors in Trial Balance The debtor is a company's asset, and assets are always debited in the trial balance. The trial balance is a statement maintained at the end of an accounting period, listing the ending balances in each general ledger account. There are two sides to this account, debit,Read more

    Sundry Debtors in Trial Balance

    The debtor is a company’s asset, and assets are always debited in the trial balance.

    • The trial balance is a statement maintained at the end of an accounting period, listing the ending balances in each general ledger account.
    • There are two sides to this account, debit, and credit and they include all the transactions done in the business over a particular accounting period.

     

    As we know, assets, expenses, and drawings are always debited. That applies not only in journals but here as well, hence, all of your assets are to be debited.

    Trial Balance Statement

     

    As we can see here, the sundry debtors (on the 4th) are debited like all the other assets, expenses, and losses. In the end, if the basic accounting equation i.e. assets=capital+liability is violated, a mismatch arises which in the balancing figure is shown under the name of suspense account. Such errors must not be found and corrected to avoid any mismatch in the balance sheet of the company.

    Total Assets = Capital + Other Liabilities.

    Therefore, this is how the sundry debtors are treated in the Trial Balance.

     

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