AccountingQA Latest Questions

Manvi
Manvi
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  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    Discount received is the reduction in the price of the goods and services which is received by the buyer from the seller. It is an income for the buyer and is credited to the discount received account and credited to the seller/supplier’s account. Journal entry for discount received as per modern ruRead more

    Discount received is the reduction in the price of the goods and services which is received by the buyer from the seller. It is an income for the buyer and is credited to the discount received account and credited to the seller/supplier’s account.

    Journal entry for discount received as per modern rules:

    Creditor’s A/c Debit Decrease in liability
            To Cash A/c Credit Decrease in asset
            To Discount Received A/c Credit Increase in income
    (Being goods purchased and discount received)

    Discount allowed is the reduction in the price of the goods which is granted by the seller to the buyer on prompt payment of their account. It is an expense for the seller and is debited to the discount allowed account and credited to the buyer’s account.

    Journal entry for discount allowed as per modern rules:

    Cash A/c Debit Increase in asset
    Discount Allowed A/c Debit Increase in expense
        To Debtor’s A/c Credit Decrease in asset
    (Being goods sold and discount allowed)

    For example, A Ltd. offers a 10% discount to the customers who settle their debts within two weeks. Mr.B a customer purchased goods worth Rs.20,000.

    According to modern rules, A Ltd will record this sale as:

    Particulars Amt Amt
    Cash A/c                                    Dr. 8,000
    Discount Allowed A/c             Dr. 2,000
                To Mr.B’s A/c 10,000

     

    Mr.B will record this purchase as:

    Particulars Amt Amt
    A Ltd A/c                                    Dr. 10,000
       To Cash A/c 8,000
       To Discount Received A/c 2,000

    For a business, the discount received is an income, and the discount allowed is an expense. In the above example, A Ltd has granted a discount and B is the receiver of the discount. Hence, for A Ltd discount allowed is an expense and for B discount received is an income.

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Samar Sparsh

    The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months. The current ratio is calculated using two standard figures thatRead more

    The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months.

    The current ratio is calculated using two standard figures that are shown in the company’s balance sheet: current assets and current liabilities. The formula for the same goes as:

    Current ratio = Current Assets / Current Liabilities

    A current ratio of 2:1 is considered ideal. Generally, a ratio between 1.5 to 2 is considered beneficial for the business, which means that the company has more financial resources (Current Assets) to cover its short-term debt (Current Liabilities).

    A high current ratio may indicate that the business is having difficulties managing its capital efficiently to generate profits.

    On the other hand, a lower current ratio (especially lower than 1) would signify that the company’s current liabilities exceed its current assets and the business may have difficulty covering its short-term debt. Although the definition of a good current ratio may vary in the different industry groups.

    Example- Where,

    1) CR is 2:1, the company is in a good situation as it has double the Current Assets in order to cover the short-term debt.

    2) CR is 0.5:1, the company is not in a good situation as it has only half the Current Assets in order to cover the short-term debt.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Ayushi Curious Pursuing CA

    External liabilities are the amounts which a business is obliged to pay to the outsiders (who are not owners of the business). Here is the list of external liabilities:- Accounts payable ( trade creditors and bills payables) Loan taken from outsiders Loan from bank Debentures Public deposits accepteRead more

    External liabilities are the amounts which a business is obliged to pay to the outsiders (who are not owners of the business).

    Here is the list of external liabilities:-

    1. Accounts payable ( trade creditors and bills payables)
    2. Loan taken from outsiders
    • Loan from bank
    • Debentures
    • Public deposits accepted
    1. Outstanding expenses
    • Outstanding salary
    • Outstanding rent
    • Outstanding tax
    1. Interest due on loans taken from outsiders

    The list is not exhaustive.

    Just for more understanding, internal liabilities are those liabilities which a business is supposed to pay back to its owners.  Such as capital balance, profit surplus etc.

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

    Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. Bad debts will be treated in the following ways : On the debit side of the profit and loss account. In the curreRead more

    Definition

    Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.

    Bad debts will be treated in the following ways :

    On the debit side of the profit and loss account.

    In the current assets side of the balance sheet, these are deducted from sundry debtors.

    For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.

    Now I will show you an extract of the profit and loss account and balance sheet   

    Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or the rendering of services in the ordinary course of business.

    For example,  debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.

     

    Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.

    For example bills payable, short-term loans, etc.

     

    Accounting treatment

    Now let me try to explain to you the accounting treatment for bad debts which is as follows :

    • Balance sheet
      • In the balance sheet either it can be shown on the asset side under head current assets by reducing from that specific assets.
      • For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.

     

    • Profit and loss account
      • Bad debts are treated as an expense and debited to the profit and loss account.
      • For example, as I have explained above, but before transferring to the balance sheet, bad debt will be debited to the profit and loss account as an expense.

     

    Reasons for bad debts

    There are several reasons why businesses may have bad debts some of them are as follows:-

    • Offered credit to customers who were unable to pay them back, or they may have been the victim of fraud.

     

    • When there is conflicts or dispute arise with respect to product size, color, quality, delivery, credit term, price, etc therefore debts becomes bad.

     

    • Debtors have poor financial management or they are not able to pay debts on time.

     

    • Debtors’ unwillingness to pay is also a reason for debts to become bad.

     

    • Or there can be more cases where debtors are unable to collect debts and debts turns out to be bad.

     

    Accounting methods

    There are two methods for accounting for bad debts which are mentioned below:-

    • First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement, which is called the profit and loss account.

     

    • Second, is the allowance method which means we create provisions for doubtful debts accounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.

     

      • Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
      • Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
      • The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
      • Provision for doubtful debts is shown in the debit side of the profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet. 

     

    Related terms

    So there are a few related terms whose meanings you should know

    • Further bad debts :
      • It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
      • That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.

     

    • Bad debts recovered :
      • It may happen that the amount written off as bad debts is recovered fully or partially.
      • In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
      • Thus amount recovered is a ‘gain’  and is credited to the profit and loss account.

     

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Aadil
AadilCurious
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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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Bonnie
BonnieCurious
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Calls in AdvanceJournal Entry
  2. Manvi Pursuing ACCA
    This answer was edited.

    Journal Entry for Calls in Advance  Calls in advance mean excess money received by the company than what has been called up. Calls in advance are treated as Current Liability and shown in the Balance Sheet on the liability side. Journal Entry will be : Here we will "Debit" Bank A/c as it will increaRead more

    Journal Entry for Calls in Advance 

    Calls in advance mean excess money received by the company than what has been called up. Calls in advance are treated as Current Liability and shown in the Balance Sheet on the liability side.

    Journal Entry will be :

    Here we will “Debit” Bank A/c as it will increase assets of the company and “Credit” Calls in Advance A/c because it will increase the company’s current liabilties.

    For Example:

    Mr.Z shareholder of ABC Ltd was allotted 2,000 equity shares of Rs.10 each. He paid call money at the time of allotment.

    On Application Rs 5
    On Allotment Rs 2
    On First and final call Rs 3

     

    Journal Entry is as follows:

    Here, the company received an excess amount of Rs.6,000 (2,000*3) from a shareholder Mr.Z who paid the call money in advance. ABC Ltd will record this under Calls in Advance A/c. While passing journal entry ABC Ltd will debit its Bank A/c by Rs.6,000 and credit calls in advance account by Rs.6,000.

    When share calls are called up, calls received in advance are adjusted. The company will hold only the required amount which will make allotted shares fully paid.

    Once the amount is transferred to relevant call accounts, calls in advance account will be written off.

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

    Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft. Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the lRead more

    Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft.

    Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the loan taken from the bank. When there is an overdraft balance the treatment is just the opposite of that of favorable balance.

    Generally for business overdraft occurs when there is immediate or emergency funding for the short term. This can be seen for small and medium-sized businesses. This is considered to be convenient for these businesses because there is no requirement to pay interest on the lump-sum loan, only have to pay interest on the fund you use. Generally linked to an existing transaction account.

    To reconcile this we need to prepare a Bank reconciliation statement. The procedure of preparing BRS under unfavorable conditions is as follows

    • If we start from the cash book balance then “ADD” all the transactions resulting in an increase in the passbook. “DEDUCT” all the transactions that resulted in a decrease in the balance of the passbook. Then the net overdraft balance should be the same as in the passbook.
    • If we start from the balance as per the passbook then “ADD” all the transactions resulting in an increase in the balance of the cashbook and “DEDUCT” all the transactions related to a decrease in the balance of the cash book. The net overdraft balance as per the passbook should reconcile with the cash book.

     

    Let us take one example considering one of the above conditions.

    The cash book of M/s Alfa ltd shows a credit balance of Rs 6,500.

    • A Cheque of Rs 3,500 was deposited but not collected by the bank.
    • The firm issued a cheque of Rs 1,000 but was not presented for payment.
    • There was a debit balance in the passbook of Rs 200 and Rs 400 for interest and bank charges.

     

    Bank Reconciliation Statement

    Particulars Add Deduct
    1. Balance as per cash book 6,500
    2. Cheque issued but not yet presented 1,000
    3. cheque deposited but not yet credited by the bank 3,500
    4. bank and interest charges 600
    Balance as per passbook (overdraft) 9,600
    10,600 10,600
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Simerpreet
SimerpreetHelpful
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Impairment
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    What is Impairment of Assets? Impairment of assets means a decline in the value of assets due to unforeseen circumstances. Assets are impaired when the carrying value of assets increases its market value or “realizable value”. Impairment can be caused due to factors that are internal or external toRead more

    What is Impairment of Assets?

    Impairment of assets means a decline in the value of assets due to unforeseen circumstances. Assets are impaired when the carrying value of assets increases its market value or “realizable value”.

    Impairment can be caused due to factors that are internal or external to the firm. Internal factors such as physical damage, obsolescence or poor management and external factors such as a change in legal or economic circumstances, increased competition or reduction in asset’s fair value in the market result in impairment.

    Impairment Vs Depreciation

    Asset impairment is often confused with asset depreciation, which is rather a recurring and expected event, unlike impairment that reflects an abrupt decrease in the value of the asset.

    Impairment Loss

    Impairment is always treated as a loss in accounting. It is the amount by which the carrying value or the asset’s book value exceeds its fair market value.

    Before recording Impairment loss, a company must determine the recoverable value of the asset which is higher of the asset’s net realizable value or value in use. Then it is to be compared with the book value of the asset.

    If the carrying value exceeds the recoverable value then the impairment loss is to be recorded at the exceeding value i.e. difference of carrying value and realizable value.

    Example

    Suppose a company Royal Ltd. has an asset with a carrying value of 50,000, which has suffered physical damage. According to the company’s calculation, the asset has a net realizable value of 30,000 and a value in use of 25,000.

    Then, the recoverable value would be higher of the asset’s net realizable value or value in use, i.e., 30,000 which is still lower than the carrying amount of 50,000. Therefore, Royal ltd. will have to record 20,000 (50,000-30,000) as impairment loss.

    This is will increase Royal Ltd’s expenses by 20,000 and decrease the asset’s value by the same amount.

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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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Satyamkumar
Satyamkumar
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What is the difference between expense and revenue expenditure

  2. Mukarram

    Expense Expenditure: Expense expenditures refer to the costs incurred by a company in its day-to-day operations. These expenses are deducted from revenue to calculate the net income. Here are some examples of expense expenditures: Salaries and wages: The payments made to employees for their servicesRead more

    Expense Expenditure:
    Expense expenditures refer to the costs incurred by a company in its day-to-day operations. These expenses are deducted from revenue to calculate the net income. Here are some examples of expense expenditures:

    Salaries and wages: The payments made to employees for their services are considered expense expenditures. This includes salaries, wages, bonuses, and commissions.

    Rent: The cost of leasing office space or other business premises is an expense expenditure. It includes monthly rent payments, property taxes, and insurance premiums associated with the rented space.

    Utilities: Expenses related to utilities such as electricity, water, gas, and internet services are considered expense expenditures.

    Office supplies: The cost of purchasing and replenishing office supplies like stationery, printer ink, pens, paper, and other consumables is categorized as an expense expenditure.

    Advertising and marketing: Expenditures incurred to promote a company’s products or services, such as advertising campaigns, online marketing, social media promotions, and print media advertisements, are considered expense expenditures.

    Revenue Expenditure:
    Revenue expenditures are expenses incurred to acquire or improve assets that are expected to generate revenue over multiple accounting periods. Unlike expense expenditures, revenue expenditures are typically not capitalized. Here are some examples of revenue expenditures:

    Repairs and maintenance: Costs incurred to repair and maintain existing assets, such as machinery, equipment, and vehicles, are considered revenue expenditures. Routine maintenance expenses, like oil changes, servicing, and small repairs, fall into this category.

    Software and technology upgrades: Expenses incurred to upgrade or enhance software systems, computer hardware, or other technological infrastructure are considered revenue expenditures.

    Training and development: Expenditures on employee training programs, workshops, seminars, and skill development courses that enhance the productivity and capabilities of the workforce are classified as revenue expenditures.

    Advertising campaigns for new products: While advertising expenses are generally classified as expense expenditures, when they are specifically related to the launch or introduction of new products or services, they can be considered revenue expenditures.

    Renovation and improvements: Costs incurred to renovate or improve existing assets, such as office spaces, stores, or warehouses, can be classified as revenue expenditures if they enhance the earning capacity or extend the useful life of the asset.

    These examples highlight the distinction between expense and revenue expenditures based on their purpose and treatment in financial statements.

     

     

     

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