AccountingQA Latest Questions

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

    The profit and loss appropriation account is an account created in addition to the Trading & Profit and loss account in the case of partnership firms. It is a nominal account. The net profit or loss from the Profit and loss account is transferred to the Capital A/c when we do the accounting of sRead more

    The profit and loss appropriation account is an account created in addition to the Trading & Profit and loss account in the case of partnership firms. It is a nominal account.

    The net profit or loss from the Profit and loss account is transferred to the Capital A/c when we do the accounting of sole proprietors.

    But, while doing the accounting of partnership, there is a need to appropriate this profit or loss as there are two or more partners’ capital accounts. So, for this purpose, the Profit and loss appropriation account is created.

    The net profit or loss is appropriated among the partner’s capital after adjustment the items like partner’s salary, commission, interest on capital, interest on drawing etc. It consists of items related to the partner’s claim.

    The format of the profit and loss appropriation account is as below:

    Let solve a problem to sharpen our concept:

    A and B are partners in firm sharing profits and losses in the ratio of 4:1. On 1st January 2019, their capitals were ₹ 20,000 and ₹ 10,000 respectively. The partnership deed specifies the following:

    1. Interest on capital is to be allowed at 5% per annum.
    2. Interest on drawings charged to A and B are ₹ 200 and ₹ 300 respectively.
    3. The net profit of the firm before considering interest on capital and interest on drawings amounted to ₹ 18,000.
    4. A is to be paid an annual salary of ₹2000

    Prepare Profit and loss appropriation account for the year ending 31st December 2019.

    Solution:

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Rahul_Jose
Rahul_Jose
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  2. Pooja_Parikh Aspiring Chartered Accountant

    Statutory Liquidity ratio is the minimum percentage of reserves of liquid assets that the commercial bank should maintain. These liquid assets are in the form of gold, cash, and other securities. These reserves are kept with the bank itself and not with the Reserve Bank of India. The bank holds variRead more

    Statutory Liquidity ratio is the minimum percentage of reserves of liquid assets that the commercial bank should maintain. These liquid assets are in the form of gold, cash, and other securities. These reserves are kept with the bank itself and not with the Reserve Bank of India.

    The bank holds various demand and time deposits of the public, the total of which is called Net Demand and Time Liabilities (NDTL). This includes demand deposits that have to be paid on demand. Various other deposits like time deposits, fixed deposits, demand drafts, etc. are also included.

    Every bank must keep a portion of its NDTL in the form of cash, gold, or other liquid assets. Therefore, the Statutory Liquidity Ratio is the ratio of these liquid assets to the total demand and time liabilities. The authority to determine the ratio lies with the RBI, who can increase it to the extent of 40%.

    FORMULA

    PURPOSE OF SLR

    RBI controls the flow of cash in the economy by means of monetary policy measures through financial instruments like Statutory Liquidity Ratio. At the time of inflation, RBI increases SLR to reduce the flow of cash whereas, at the time of deflation, they reduce SLR to increase the flow of cash. Maintaining SLR also helps ensure the solvency of the commercial banks.

    If the banks do not maintain the necessary level of SLR, they would be liable to pay a penalty to RBI at 3% per annum above the bank rate, on the shortfall amount of that day.

     

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

    A balance sheet of a company is a financial statement that depicts the assets, liabilities and shareholders’ equity of the company at a point of time, usually at the end of the accounting year. A balance sheet of a company is reported in a vertical format which is different from that of a partnershiRead more

    A balance sheet of a company is a financial statement that depicts the assets, liabilities and shareholders’ equity of the company at a point of time, usually at the end of the accounting year. A balance sheet of a company is reported in a vertical format which is different from that of a partnership where the horizontal format is used.

    COMPONENTS OF A BALANCE SHEET

    The three main components of a balance sheet are Assets, Liabilities and Shareholders’ equity.

    • Assets: They are divided into two main categories that are current assets and non-current assets. If an asset is expected to be realised within 12 months or is primarily held for being traded, or is cash or cash equivalent, then those assets are termed as current assets. All assets that are not current assets are grouped under non-current assets. They are normally realised after 12 months.
    • Liabilities: They are categorised as current liabilities and non-current liabilities. If the amount owed by the company to an outside party is due to be settled in 12 months, then it can be termed as a current liability. The rest of the liabilities are referred to as non-current liability.
    • Shareholders’ Equity: This is the money owed to the owners of the company, that is shareholders. It is also called net assets since it is equal to the difference between total assets and total liabilities. Their main categories are Shareholders’ Capital and Reserves and Surplus.

    FORMAT OF BALANCE SHEET

    As per the Companies Act 2013, the following format should be used for preparing a balance sheet.

    From the above Balance sheet, we should get:

    Assets = Liabilities + Shareholders’ Equity

    Relevant notes for each component should also be prepared when necessary.

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Jasmeet_Sethi
Jasmeet_SethiCurious
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  2. AishwaryaMunot

    Meaning of Working Capital Firstly, let’s understand the meaning of the working capital. Working capital is the factor which demonstrates the liquidity position of the business to carry out day to day operations. It majorly includes cash & bank balances and liquid assets. Managing working capitaRead more

    Meaning of Working Capital

    Firstly, let’s understand the meaning of the working capital. Working capital is the factor which demonstrates the liquidity position of the business to carry out day to day operations. It majorly includes cash & bank balances and liquid assets.

    Managing working capital is a crucial process to maintain short term liquidity and so ultimately resulting into achieving long term objectives efficiently. Working capital can be calculated by deducting business’s current liabilities from current assets.

    To achieve the ideal working capital requirement for any business, it is important to understand various types of working capital and various ways to manage it.

    Coming to Permanent Working Capital, also called as Fixed Working Capital, it is the minimum working capital required or maintained by businesses. Such type of working capital is maintained to take care of regular financial obligations like creditors, inventory, salaries etc.

    Irrespective of scale of operations carried out in business, Permanent Capital is maintained by businesses which can be in form of Net Working Capital.

    There is no specific formula for calculating Fixed Working Capital, it completely depends upon the business’s assets and liabilities. So accordingly, it can be estimated through the balance sheet of the business.

    For calculating Permanent Working Capital, you can follow below steps:

    1. Calculate Net Working Capital for each day for a whole month
    2. Find the smallest value among them
    3. That will be Permanent Working Capital for the month
    4. Follow the above steps for every month
    5. There you have the annual figure for Permanent Working Capital

    The requirement of Permanent Working Capital changes as the business expands. It is crucial to make sure that the working capital level does not fall below the Permanent Working Capital requirement.

    Types of Permanent Working Capital:

    Permanent working capital is further divided into two types:

    1. Regular working capital – This refers to capital required to maintain healthy cashflow for purchases of raw materials, payment of wages etc.
    2. Reserve working capital – This refers to amount which is more than regular working capital to take care of unexpected business expenses due to contingent events.
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Simerpreet
SimerpreetHelpful
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  2. GautamSaxena Curious .
    This answer was edited.

    Interest on capital Interest on capital is interest payable to the owner/partners for providing a firm with the required capital to commence the business. Normally, it is charged for a full year on the balance of capital at the beginning of the year unless some fresh capital is introduced during theRead more

    Interest on capital

    Interest on capital is interest payable to the owner/partners for providing a firm with the required capital to commence the business. Normally, it is charged for a full year on the balance of capital at the beginning of the year unless some fresh capital is introduced during the year.

    When the business firm faces a loss, the interest on capital will not be provided. It is permitted only when the business earns a profit. Such payment of interest is generally observed in partnership firms. It is provided before the division of profits among the partners in a partnership firm.

    If an owner or partner introduces additional capital to the business then, it is also taken into account for providing interest on capital.

    Interest on capital in the accounting equations

    Interest on capital is an expense from a business point of view, as it is payable to the owner and is not paid in cash. Being an income from the owner’s point of view, it is added to his capital account. And being a business expense from the business point of view, it is therefore deducted from the capital.

    Hence, it further doesn’t create any change in the accounting equation mathematically but it’s mandatory to be shown as it plays a vital role in the profit and loss a/c and even helps the business save tax.

    Example

    Z started a business with cash and stock of ₹45,000 and ₹5,000 respectively. Further, he received interest on capital of ₹1,000. The accounting equation for the following transactions will be as follows:

    Accounting Equation

     

     

     

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

    Depreciation is an accounting process of allocating the value of an asset over its estimated useful life. When a company purchases an asset, depreciation will be calculated at the end of every financial year on the asset. The company records the amount of depreciation in a separate ledger, i.e., AccRead more

    Depreciation is an accounting process of allocating the value of an asset over its estimated useful life.

    When a company purchases an asset, depreciation will be calculated at the end of every financial year on the asset. The company records the amount of depreciation in a separate ledger, i.e., Accumulated Depreciation. This expense will be debited instead of depreciation in the Asset ledger.

     

    Accumulated Depreciation

    Accumulated depreciation is the accumulated reduction in the cost of an asset over time.

    Depreciation is the reduction in the value of an asset over a specific timeframe, whereas accumulated depreciation is the sum of total depreciation on an asset since we bought it.

    we will understand this concept with a simple example.

    suppose machinery depreciates as follows

    Year 1 – Depreciation is 5,000

    Year 2 – Depreciation is 5,000

    Year 3 – Depreciation is 5,000

    Accumulated Depreciation in Year 3 = 5,000 + 5,000 + 5,000

    Therefore, overall 3 years of depreciation are accumulated at the last year-end.

     

    Journal entry for accumulated depreciation

    Example: Excellence Co. has purchased a new motor vehicle which costs $8,000 for their cab business. The motor vehicle is depreciated at @20% per annum. At the end of the year, Excellence Co. will record this accumulated depreciation journal entry.

    Year 1

    Depreciation A/c Dr. – $1600

    To Accumulated depreciation A/c – $1600

    Year 2

    Depreciation A/c Dr. – $1600

    To Accumulated Depreciation A/c – $1600

    Therefore, the Accumulated depreciation for the 2nd year end is $3200.

    At the time of the sale of the motor vehicle, the amount of accumulated depreciation will be reduced from the total value of the asset.

     

    Provision for depreciation

    Provision for depreciation is very similar to accumulated depreciation. Instead of reducing the amount of depreciation from the value of an asset, a separate provision A/C will be created, and the depreciation amount will be credited to the provision account, i.e., Provision for Depreciation account every year, and the asset will be shown the same value without reducing the depreciation from it.

     

    Journal entry for provision for depreciation

    Example: Yesman Co. purchased Machinery worth $40000 at the beginning of the current year for their production. The machinery will be depreciated at @10% per annum. At the end of the year, Yesman Co. will record this provision for depreciation journal entry.

    Year 1

    Depreciation A/c Dr. – $4000

    To Provision for Depreciation A/c – $4,000

    Year 2

    Depreciation A/c Dr. – $4000

    To Provision for Depreciation A/c –  $4000

    Therefore, the Provision for depreciation balance will be $8000 at the 2nd year-end.

    At the time of sale of the machinery, the amount of provision for depreciation created till the date will be reduced from the asset’s value.

     

    Conclusion

     

     

    Provision for depreciation and accumulated depreciation refers to the amount of depreciation accumulated over the useful life of an asset.

    The terms accumulated depreciation and provision for depreciation are different in hearing, but these are similar from the financial perspective.

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

    Definition Journal Entry is an entry made in the journal is called journal entry. And the process of recording a transaction in a journal is called journalizing. Broadly journal entries are of two types : 1. Simple entry 2. Compound entry Otherwise, they are categorized into seven types which are asRead more

    Definition

    Journal Entry is an entry made in the journal is called journal entry. And the process of recording a transaction in a journal is called journalizing.

    Broadly journal entries are of two types :

    1. Simple entry
    2. Compound entry

    Otherwise, they are categorized into seven types which are as follows :

    1. Opening entries
    2. Closing entries
    3. Rectification entries
    4. Transfer entries
    5. Adjusting entries
    6. Entries on dishonor of bills
    7. Miscellaneous entries

    Explanation

    Now let me explain to you the above types of entries mentioned which are as follows ;

    Simple entry
    • Is a journal entry in which one account is debited and another account is credited with an equal amount.
    • For example, the purchase of goods of Rs 5000 cash. It will affect two accounts,i.e., purchase A/C and cash A/C with the amount of Rs 5000.

    Compound entry
    • Is a journal entry in which one or more accounts are debited and/or one or more accounts credited or vice versa.
    • For example the sale of goods to Sati for Rs 5000, Rs 2000 is received in cash, and the balance is to be received later.
    • This transaction of the sale has an effect on three accounts i.e cash or bank A/C, Sati A/C, and sales A/C.

    Opening entries
    • Are defined as when books are started for the new year, the opening balance of assets and liabilities are journalized. For example bills payable, short-term loans, etc.

    Closing entries
    • At the end of the year, the profit and loss account has to be prepared. For this purpose, the nominal accounts are transferred to this account. This is done through journal entries called closing entries.

    Rectification entries
    • If an error has been committed, it is rectification through a journal entry.

    Transfer entries
    • If some amount is to be transferred from one account to another, the transfer will be made through a journal entry.

    Adjusting entries
    • At the end of the year, the number of expenses or income may have to be adjusted for amounts received in advance or for amounts not yet settled in cash.
    • Such an adjustment is also made through journal entries. Usually, the entries pertain to the following :

    Outstanding expenses,i.e., expenses incurred but not yet paid;

    Prepared expenses,i.e., expenses paid in advance for some period in the future ;

    Interest on capital is the interest proprietor’s investment in the business entity investment; and

    Depreciation fall in the value of assets used on account of wear and tear. For all these, journal entries are necessary.

    Entries on dishonor of bills
    • If someone who accepts a promissory note ( or bill) is not able to pay in on the due date, a journal entry will be necessary to record the non–payment or dishonor.

    Miscellaneous entries
    The following entries will also require journalizing
    • Credit purchase of things other than goods dealt in or materials required for the production of goods e.g. Credit purchase of furniture or machinery will be journalized.
    • An allowance to be given to the customers or a charge to be made to them after the issue of the invoice.
    • Receipt of promissory notes or issue to them if separate bills books have not been maintained.
    • On an amount becoming irrecoverable, say, because, of the customer becoming insolvent.
    • Effects of accidents such as loss of property by fire.
    • Transfer of net profit to capital account.

    Here are some examples of journal entries showing the above types :

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Anushka Lalwani
Anushka Lalwani
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  2. Kajal
    This answer was edited.

    Profit refers to the excess of total revenue over total expenses. According to the rule "Debit all expenses and losses, Credit all incomes and gains", expenses are recorded on the debit side while revenues are recorded on the credit side. There is profit when Total revenue > Total expenses, whichRead more

    Profit refers to the excess of total revenue over total expenses. According to the rule “Debit all expenses and losses, Credit all incomes and gains”, expenses are recorded on the debit side while revenues are recorded on the credit side.

    There is profit when Total revenue > Total expenses, which means the balance of the credit side > the balance of the debit side. Since, in accounting Dr. side is always equal to the credit side, a balancing figure (representing profit or loss) is shown on the shorter side, to make both sides equal.

    When Credit side > Debit side, Profit(balancing figure) is shown on the Dr. side so that both sides are equal. 

     

    PROFIT

    Profit refers to the excess of total revenue over the total expenses of the business for an accounting year. In simple words, it shows how much extra the firm earned after deducting all the expenses it incurred during the year.

    Profit = Total Revenue – Total Expenses

    Suppose, the firm earned a total revenue of $10,000 for the accounting year 2022-23. Also, it incurred total expenses of $6,000 during the year. So, Profit for the AY 2022-23 is $4,000.

     

    ASCERTAINING PROFIT

    To ascertain profit earned or loss incurred by the firm during an accounting year, it prepares two accounts.

    • Trading A/c
    • Profit and Loss A/c

     

    Points to be noted:

    • Both accounts are Nominal Account which follows the rule “Debit all expenses and losses, Credit all incomes and gains”
    • The debit side records expenses while the Credit side records incomes.
    • Both are balanced accounts, which means its Dr. side is always equal to its Cr. side.
    • If they are not balanced, then a balancing figure is added to the shorter side which represents profit or the loss depending on which side is greater.
    • If Dr. side > Cr. side, it means expenses are more than the incomes and thus, there is a loss.
    • If Cr. side > Dr. side, it means there are more incomes than expenses and thus, there is Profit.

     

    TRADING ACCOUNT

    It is the first final account prepared for calculating gross profit or gross loss during the year because of the trading activities of the firm.

    Trading activities are related to the buying and selling of goods. In between buying and selling a lot of activities are there like transportation, warehousing, loading, unloading, etc. All expenses that are directly related to buying and selling as well as manufacturing of goods are known as Direct expenses and are also recorded in the trading accounts.

    Items included on the debit side:

    • Opening stock
    • Purchases
    • Direct expenses like wages, import duty, royalty, manufacturing expenses, etc.
    • Gross Profit

     

    Items included on the credit side:

    • Sales
    • Closing stock
    • Gross loss

     

    Gross Profit is when Cr. side (incomes) > Dr. side (expenses). It is recorded on the debit side as a balancing figure.

     

    PROFIT AND LOSS ACCOUNT

    A businessman incurs a lot of expenses during the year which may be directly related or indirectly related to the business.

    As the Trading account only considers direct expenses, the businessman prepares the P&L A/c which considers all the expenses incurred during a year to ascertain net profit or loss.

    Items written on the Debit side

    • Gross loss (transferred from the trading a/c)
    • Office and administrative expenses (like employee’s salary, office rent, office lighting bills, legal charges, printing expenses, etc.)
    • Selling and distribution expenses (like advertisement fees, commission, carriage outward, packaging charges, etc.
    • Miscellaneous expenses (like interest on loan, interest on capital, repair, depreciation, etc.)
    • Net Profit

     

    Items written on the Credit side

    • Gross Profit (transferred from trading a/c)
    • Other incomes and gains (Like income from investments, interest received, rent received, etc.)
    • Net loss

     

    Net Profit is when the Cr. side (incomes)> Dr. side(expenses). It is recorded on the Debit side as a balancing figure.

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Bonnie
BonnieCurious
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  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    There are two types of ledger accounts in the accounting system – temporary and permanent. Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are traRead more

    There are two types of ledger accounts in the accounting system – temporary and permanent.

    Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are transferred to the profit and loss account and therefore are not balanced.

    Permanent accounts are those whose balances are carried forward to the next accounting year in form of opening balances. These accounts are balanced and such balances are transferred to the balance sheet. Examples are assets, liability and capital accounts or personal and real accounts.

    Balancing an account means equaling both the debit and the credit side of the account. Generally, there is a difference between the accounts recorded as a carry down balance in the case of permanent accounts and as a transfer balance in the case of temporary accounts.

    Balancing serves as a check to the double-entry rule of accounting.

    Balanced accounts

    As discussed above, the balanced accounts are shown in the balance sheet and the balancing figure for such accounts are carried forward to the next accounting period.

    Unbalanced accounts

    As per the above discussion, the balancing figures of unbalanced accounts are transferred to the profit and loss account and no balances are carried forward to the next accounting period.

    Suppose a company Shine Ltd. has machinery costing 5,00,000 at the beginning of the accounting period and charges depreciation of 10% on the asset. The company also has creditors amounting to 50,000 at the beginning of the period and purchases goods amounting to 30,000 on credit. It has a cash balance of 95,000 at the beginning of the period and earns interest amounting to 10,000.

    Following ledgers would be prepared to record the above entries:

    The above ledgers can be shown as follows:

    The balance of the machinery account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore depreciation account is an unbalanced account.

    The balance of creditors account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore purchases account is an unbalanced account.

    The balance of the cash account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore interest account is an unbalanced account.

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