AccountingQA Latest Questions

Aadil
AadilCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Introduction Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings. The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation aRead more

    Introduction

    Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings.

    The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation as shown in the example below:

    It is shown as a negative figure under both assets and capital heading. I will be explaining why it is so.

    Accounting Equation

    The accounting equation represents the relationship between assets, liabilities, and capital of an entity whether profit oriented or not, according to which, the total assets of a business equals to the sum of its total capital and total liabilities.

    Assets = Liabilities + Capital

    This equation holds good in every monetary transaction or event like the event given in the question.

    Cash withdrawn for personal use

    We know every transaction affects two accounts. In this case, too, the ‘cash withdrawn for personal use’ affects two accounts. Cash withdrawn for personal use is known as drawings.

    Let’s see the journal entry for drawings of cash from business:


    Here the drawing account is debited because it is a contra-equity account i.e. it is a mirror image of the capital account or opposite of the capital account. Here the cash account is an asset account; hence it is credited as it is reduced.

    As drawings represent the outflow of capital from the business, it is written off from the Capital account in the balance sheet.

    Hence, in the accounting equation, the drawing amount is deducted from the Asset side and from the capital side, indicating a balance.

    It does not appear in the statement of profit or loss despite having a debit balance because it is not an expense account.

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

    Goodwill In Accounting Aspect, Goodwill refers to an Intangible asset that facilitates a company in making higher profits and is a result of a business’s consistent efforts over the past years which can be the business's prestige, reputation, good name, customer trust, quality service, etc. GoodwillRead more

    Goodwill

    In Accounting Aspect, Goodwill refers to an Intangible asset that facilitates a company in making higher profits and is a result of a business’s consistent efforts over the past years which can be the business’s prestige, reputation, good name, customer trust, quality service, etc.

    Goodwill has no separate existence although the concept of goodwill comes when a company acquires another company with a willingness to pay a higher price over the fair market value of the company’s net asset in simple words the goodwill can be only realized while at the time of sale of a business.

     

    The formula for Goodwill

     

    Types of Goodwill

    there are two types of goodwill.

     

    1. Inherent Goodwill/Self-generated goodwill

    Inherent goodwill is the internally generated goodwill that was created or generated by the business itself. it is generally generated from the good reputation of the business.

    Inherent Goodwill or Self-generated goodwill is generally not shown in the books or never recognized in the books of Accounts and no journal entry for the inherent goodwill is passed.

     

    2. Purchased Goodwill/Acquired Goodwill

    At the time of acquisition of a business by another business, any amount paid over and above the net assets simply refers to the amount of Purchased Goodwill or Acquired goodwill.

    A Journal entry is passed in the case of the Purchase of goodwill.

     

    Type of Account

    generally, Goodwill is considered and recorded as an Intangible asset(long-term asset) due to its physical absence like other long-term assets.

     

    Modern rule of accounting:

    as per the Modern rule of accounting, all Assets or all possessions of a business are comes under the head Asset accounts.

    as Goodwill is treated as an Intangible asset it is an Asset Account.

     

    Journal entry for purchase of goodwill as per Modern rule

    Goodwill A/c Dr. – Amt

    To Cash/Bank A/c – Amt

    (The modern approach of accounting for the Asset account is: “Debit the increase in asset and Credit the decrease in the asset“)

     

    The golden rule of accounting

    As per the golden rule of accounting, all assets or possessions of a business other than those which are related to any person (debtor’s account) are considered Real accounts.

    Such accounts don’t close by the year-end and are carried forward.

    As Goodwill is an Intangible asset it is treated as a Real account as per the golden rule of accounting.

     

    Journal entry for purchase of goodwill as per Golden rule

    Goodwill A/c Dr. – Amt

    To Cash/Bank A/c – Amt

    (The golden rule of accounting for the Real account is: “Debit what comes in and Credit what Goes out“)

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

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

    Definition

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

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

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

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

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

    Meaning as per AS – 29

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

    • Contingent asset

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

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

    • Contingent liability

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

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

    Recognition In Financial Statements

    Contingent assets and liabilities are recognized as follows:-

    • Contingent Assets

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

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

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

    • Contingent liability

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

    When recognized?

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

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

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

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

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

    Disclosure

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

    • Contingent asset

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

    • Contingent Assets

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

     

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Simerpreet
SimerpreetHelpful
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  2. Karishma

    Realisation account  A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more

    Realisation account 

    A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.

    All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.

    If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.

     

    Credit side of realisation account

    • Liabilities: All the liabilities including sundry creditors, outstanding expenses, bills payable, loans and advances, bank overdrafts and cash credit are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred.
      • Accounting entry for this is as follows:

    Liabilities A/c Dr…..

    To Realisation A/c …..

    (All the liabilities transferred to realisation account)

    • Provisions: All the provisions including provision for doubtful debts and provision for taxation are transferred to the credit side of the realisation account.
      • Accounting entry for this is as follows:

    Provision A/c Dr…..

    To Realisation A/c …..

    (All the provisions transferred to the realisation account)

    • Cash and bank A/c: Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.
      • Accounting entry for this is as follows:

    Bank A/c Dr…..

    To Realisation A/c …..

    (Asset sold for cash)

    • Loss on realisation: If the debit side of the realisation account exceeds the credit side, it results in loss then the capital account is debited.
      • Accounting entry for this is as follows:

    Capital A/c Dr…..

    To Realisation A/c …..

    (Being loss transferred to the capital account)

     

    The debit side of the realisation account

    All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.

     

    Format for realisation Account is as under:

    Realisation A/c
    Particulars Amount Particulars Amount
    To Land & Building By Provision for Doubtful Debts A/c
    To Plant & Machinery By Sundry Creditors A/c
    To Furniture By Bills Payable A/c
    To Debtors By Outstanding Expenses A/c
    To Goodwill A/c By Bank Loan, Overdraft, Cash Credit A/c
    To Investment A/c By Bank/ Cash A/c (Assets realized):
    To Bank/ Cash A/c (Liabilities Paid): Land and Building
    Sundry Creditors Plant and Machinery
    Bill Payable Furniture
    Outstanding Expenses Stock
    Bank Loan, Debtors
    Overdraft, Bad Debts recovered
    Cash Credit Investment
    To Bank/ Cash A/c By Partner’s Capital A/cs
    (Realisation Expenses) (assets taken over)
    To Partner’s Capital A/c By Partner’s Capital A/cs
    (Realisation Expenses) (Loss on Realisation)
    To Partner’s Capital A/cs
    (Profit on Realisation)
    Total Total

     

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Jasmeet_Sethi
Jasmeet_SethiCurious
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Current AssetsLoose Tools
  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    Current assets are all the assets of the company which are expected to be used, sold, or consumed within one year. Current assets are those assets that can be converted into cash easily. For example - Inventory, Accounts Receivable, Cash, and Cash Equivalents. Loose tools are parts of machinery or sRead more

    Current assets are all the assets of the company which are expected to be used, sold, or consumed within one year. Current assets are those assets that can be converted into cash easily.

    For example – Inventory, Accounts Receivable, Cash, and Cash Equivalents.

    Loose tools are parts of machinery or spare parts of machinery. Loose can be classified on the nature of use whether it is a fixed asset or a current asset. If loose tools are used regularly or within one accounting year, it is classified as a current asset.

    Loose tools are usually classified as a current asset, however, there is one exception i.e it is excluded from the current ratio.

    They are excluded from the current ratio because the current ratio takes into account only current assets, and the nature of loose tools is either a fixed asset or a current asset and can’t be converted into cash easily.

    The current ratio is calculated to check the liquidity of the company.

    Loose tools appear in the Asset Side of the Balance Sheet under the head Current Asset, subhead Inventories.

    The extract of the Balance Sheet is as follows:

    When the balance sheet prepared under Schedule III loose tools is shown under notes to accounts under sub-head Inventories on the asset side.

    When the balance sheet is in a T format loose appears as a current asset after recording fixed assets on the asset side.

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Karan
Karan
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  2. prashant06 B.com, CMA pursuing
    This answer was edited.

    As per the Income-tax act, solar panels are categorized under the heading renewal energy devices. The rate of depreciation for these devices is mentioned below. As per the act, the rate of depreciation for solar panels is given as 40% as per the WDV method. Generally, these devices are treated as inRead more

    As per the Income-tax act, solar panels are categorized under the heading renewal energy devices. The rate of depreciation for these devices is mentioned below.

    As per the act, the rate of depreciation for solar panels is given as 40% as per the WDV method. Generally, these devices are treated as investments in fixed assets. Therefore they are treated accordingly like other fixed assets and are depreciated periodically in an organized and regular time period. The useful life of such solar devices is taken to be 5 years.

    Giving you a small example of the depreciation on solar panels.

    Solar panels were purchased by Agro Farm ltd. for installing them to be used for electricity generation. These panels were bought for Rs 2,00,000. Therefore depreciation to be charged as per income tax act over its useful life of 5 years is as follows:

    Depreciation as per WDV = (Cost of an asset – salvage value)* rate of depreciation

    Depreciation for 1st year = (2,00,000 – 0)* 40% = Rs 80,000

    WDV at the end of 1st year = (2,00,000 – 80,000) = Rs 1,20,000

    Depreciation for 2nd year = (1,20,000 – 0)* 40% = Rs 48,000

    the same process will continue till the useful life of an asset.

    The depreciation amount will be written off from the book value as shown below:

    Useful life Value at the beginning of the year Depreciation amount Value at the end of the period
    1 2,00,000 80,000 1,20,000
    2 1,20,000 48,000 72,000
    3 72,000 28,800 43,200
    4 43,200 17,280 25,920
    5 25,920 10,368 15,552

     

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Aadil
AadilCurious
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A. True B. False

  2. prashant06 B.com, CMA pursuing
    This answer was edited.

    The answer is B. False. Before jumping on the solution to know why goodwill is not fictitious, we need to know what are fictitious assets? Fictitious assets are false assets or not true assets. These are not assets but expenses & losses that are not written off from the profit & loss accountRead more

    The answer is B. False. Before jumping on the solution to know why goodwill is not fictitious, we need to know what are fictitious assets?

    Fictitious assets are false assets or not true assets. These are not assets but expenses & losses that are not written off from the profit & loss account but shown in the balance sheet as assets under the head miscellaneous expenditure. For example preliminary expenses, loss on issue of debentures, etc.

    Goodwill is not a fictitious asset but an intangible asset which means it has no actual physical appearance and cannot be touched and felt like other assets like buildings and machinery. It is nothing but a firm’s reputation which can be sold just like other assets help the business grow and earn revenue. Goodwill is shown in the balance sheet as follows:

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

    No, they are not the same. They are both used to measure the short term liquidity of a business but their approach is different. Following are the differences between the two : Let’s take an example. Following is the balance sheet of X Ltd: Hence, as per the following information, Current Ratio = CuRead more

    No, they are not the same. They are both used to measure the short term liquidity of a business but their approach is different. Following are the differences between the two :

    Let’s take an example.

    Following is the balance sheet of X Ltd:

    Hence, as per the following information,

    Current Ratio = Current Assets / Current Liabilities

      = Inventories + Trade debtors + Bills receivables + Cash  and bank + Prepaid Expenses / Trade Creditors + Bills Payables + Outstanding Salaries

    = ₹85,000 + ₹2,50,000+ ₹95,000 + ₹1,50,000 + ₹10,000/ ₹2,00,000 + ₹75,000 + ₹25,000

    = ₹6,00,000 / ₹3,00,000

    = 2/1 or 2:1

    Quick Ratio = Quick Assets / Current Liabilities

     = Trade debtors + Bills receivables + Cash and bank / Trade Creditors + Bills Payables + Outstanding Salaries

    = ₹2,50,000+ ₹95,000 + ₹1,50,000 / ₹2,00,000 + ₹75,000 + ₹25,000

    = ₹5,05,000/ ₹3,00,000

    = 41 / 25 or 1.68 : 1

    Let’s discuss both ratios in detail.

    1. Current ratio:

    The current ratio represents the relationship between current assets and current liabilities

    Current ratio =  Current Assets/Current Liabilities

    It measures the adequacy of the current assets to current liabilities. The main question this ratio tries to answer is: – “Does your business have enough current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets?”

    The generally acceptable current ratio is 2:1.  But it depends on the characteristics of the assets of a business to judge whether a specific ratio is satisfactory or not.

    2. Quick Ratio: Quick ratio is the ratio between quick assets and current liabilities. It is also known as the Acid Test Ratio. By quick assets, we mean cash or the assets that can be quickly converted into cash ( near cash assets)

    Quick Assets = Current Assets – Inventories – Prepaid assets

     Quick ratio =  Quick Assets/Current Liabilities

    Inventories are not considered near cash assets.

    The quick ratio is a more conservative approach than the current ratio to measure the short term liquidity of a firm.

    It answers the question, “If sales revenues disappear, could my business meet its current obligations with the readily convertible quick funds on hands?”

    1:1 is considered satisfactory unless the majority of the quick asset are accounts receivable and the receivables turnover ratio is low.

     

     

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Aadil
AadilCurious
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  2. Rahul_Jose Aspiring CA currently doing Bcom

    A statutory reserve is any reserve that has to be maintained by an Act or law. When it comes to insurance, a statutory reserve is a reserve that an insurance company is legally bound to maintain to ensure that the company is able to meet its policy obligations. In India, as per the Banking RegulatioRead more

    A statutory reserve is any reserve that has to be maintained by an Act or law. When it comes to insurance, a statutory reserve is a reserve that an insurance company is legally bound to maintain to ensure that the company is able to meet its policy obligations. In India, as per the Banking Regulations Act, every banking company has to maintain at least 25% of its net profits as statutory reserves.

    The companies are required to maintain such reserves to guarantee the availability of cash when it is required by the customer. Common examples of statutory reserves are Cash reserve ratio (CSR), Statutory Liquidity Ratio (SLR).

    Treatment

    • Statutory reserves are shown in the Profit and Loss account under the head “appropriations”.
    • It is also shown under the head Reserves and Surplus (Schedule 2) in the Balance Sheet.

    Method

    Rule-Based Approach – The company calculates the amount required by using standard formulas. However, since they are pre-determined formulas, it does not cover all risk determining factors.

    Principle-based approach – This method is used to protect customers and ensure that the company stays solvent. They hold a higher amount of reserves than required after predicting all possible risks.

    Statutory reserves are different from general reserves as general reserves are maintained voluntarily by the company. A company that does not follow statutory requirements will face financial penalties. These reserves are mostly maintained in the form of cash.

    Maintenance of reserves gives confidence to investors that their money is secure. However, funds from these reserves can be used only for specific purposes. They should also maintain such reserves whether or not they earn profits.

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

    Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more

    Negative working capital means the excess of current liabilities over current assets in an enterprise.

    Let’s understand what working capital is to get more clarity about negative working capital.

    Meaning of Working Capital

    Working Capital refers to the difference between current assets and current liabilities of a business.

    Working Capital = Current Assets – Current Liabilities

    It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.

    Items under Current Assets and Current Liabilities

    It is important to know about the items under current assets and current liabilities to understand the significance of working capital.

    Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.

    Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.

    Types of working capital

    Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:

    • Positive (Current assets > Current liabilities)
    • Zero  (Current assets = Current liabilities)
    • Negative (Current assets < Current liabilities)

    Hence, negative working capital exists when current liabilities are more than current assets.

    Implications of having negative working capital

    Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.

    An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.

    The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.

    Current Assets  = 2(Current Liabilities)

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