AccountingQA Latest Questions

Karan
Karan
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    Retained earnings are kept with the company for growth instead of distributing dividends to the shareholders. Therefore the cost of retained earnings refers to its opportunity cost which is the cost of foregoing dividends by the shareholders. Therefore the cost of retained earnings is similar to theRead more

    Retained earnings are kept with the company for growth instead of distributing dividends to the shareholders. Therefore the cost of retained earnings refers to its opportunity cost which is the cost of foregoing dividends by the shareholders.

    Therefore the cost of retained earnings is similar to the cost of equity without tax and flotation cost. Hence, it can be calculated as

    Kr = Ke (1 – t) (1 – f),

    Kr = Cost of retained earnings
    Ke = Cost of equity
    t = tax rate
    f = flotation cost

    Here, flotation cost means the cost of issuing shares.

    EXAMPLE

    If cost of equity of a company was 10%, tax rate was 30% and flotation cost was 5%, then
    cost of retained earnings = 10% x (1 – 0.30)(1 – 0.05) = 6.65%.

    From the above example and formula, it is clear that the cost of retained earnings would always be less than or equal to the cost of equity since retained earnings do not involve flotation costs or tax.

    A company usually acquires funds from various sources of finance rather than a single source. Therefore the cost of capital of the company will be the weighted average cost of capital (WACC) of each individual source of finance. The cost of retained earnings is thus an important factor in calculating the overall cost of capital.

    Another important factor of WACC is the cost of equity. The cost of equity is sometimes interchanged with the cost of retained earnings. However, they are not the same.

     

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A_Team
A_Team
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The balances as per cash column of cash book and passbook The balance as per bank column of cash book and passbook The balance as per Bank column of cash book and ...

Bank Reconciliation StatementDifference Between
  2. Radha M.Com, NET
    This answer was edited.

    A Bank Reconciliation Statement is prepared to know the causes for the difference between 2. the balance as per bank column of cash book and passbook. This is because transactions in Cash Book are recorded from the point of view of the business and the Bank Statement/Pass Book is prepared from the pRead more

    A Bank Reconciliation Statement is prepared to know the causes for the difference between 2. the balance as per bank column of cash book and passbook.

    This is because transactions in Cash Book are recorded from the point of view of the business and the Bank Statement/Pass Book is prepared from the point of view of the banker. Since both are prepared from a different point of view, differences are bound to occur.

    Bank Reconciliation is the process by which on a particular date the bank balance as per Cash Book is reconciled with the balance as per Pass Book/Bank Statement.

    Whenever bank reconciliation is done, we need to identify the reasons or transactions causing the differences between both balances. Then a statement highlighting the reasons or causes of differences is prepared. This statement is known as Bank Reconciliation Statement.

    A Bank Reconciliation Statement is prepared by starting with either the (a) bank balance as per Cash Book or the (b) balance as per Pass Book/Bank Statement. Only those entries which are recorded in the Cash Book but not in the Pass Book/Bank Statement or vice versa are considered while preparing the Bank Reconciliation Statement.

    The reasons for the differences between the two balances can be broadly classified into three categories:

    1. Differences due to timing.
    2. Transactions recorded by the Bank.
    3. Errors.

     

    For example, the debit bank balance as per the Cash Book of Mr. A on 31st March is 20,000. On the same date, his Bank Statement showed a credit balance of 30,000. When the Bank Reconciliation Statement is prepared on 31st March, he will find out the transactions causing the 10,000 (30,000 – 20,000) difference between both the balances. Once the transactions are identified he will reconcile the balance as per the Cash Book with the balance as per his Bank Statement.

     

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A_Team
A_Team
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Receipts and Payments A/C for the year ended 31st March 2020 Receipts Amt Payments Amt To Balance b/d  (Cash)        180,000 By Salary        480,000 To Subscriptions        900,000 By Rent           50,000 To Sale of Investments        200,000 By Stationery           20,000 To Sale ...

  2. Radha M.Com, NET
    This answer was edited.

    Here I've prepared the Income & Expenditure A/c. Income & Expenditure A/c for the year ended 31st March 2021 Expenditure Amt Income Amt To Salary      4,80,000 By Subscriptions      9,00,000 To Rent          50,000 By Donations          10,000 To Stationery          20,000 To Loss on sale ofRead more

    Here I’ve prepared the Income & Expenditure A/c.

    Income & Expenditure A/c for the year ended 31st March 2021

    Expenditure Amt Income Amt
    To Salary      4,80,000 By Subscriptions      9,00,000
    To Rent          50,000 By Donations          10,000
    To Stationery          20,000
    To Loss on sale of furniture (WN)          10,000
    To Surplus      3,50,000
         9,10,000      9,10,000

     

    Working Note: Calculation of Loss on sale of furniture

    The following calculation is made to identify the loss incurred on the sale of furniture.

    Particulars Amt
    Book Value of Furniture        40,000
    Less: Sale Value of Furniture        30,000
    Loss on Sale of Furniture        10,000

     

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Vijay Curious M.Com
    This answer was edited.

    Yes, I agree with your statement that accounting information should be comparable. Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company's financial statements across time and across other companies. Comparability oRead more

    Yes, I agree with your statement that accounting information should be comparable.

    Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company’s financial statements across time and across other companies.

    Comparability of financial statements is crucial due to the following reasons:

    1. Intra-Firm Comparison:

    Comparison of financial statements of two or more periods of the same firm is known as an intra-firm comparison.

    Comparability of accounting information enables the users to analyze the financial statements of a business over a period of time. It helps them to monitor whether the firm’s financial performance has improved over time.

    The intra-firm analysis is also known as Time Series Analysis or Trend Analysis.

    To understand intra-firm analysis, I have provided an extract of the balance sheet of ABC Ltd. for two accounting periods.

    2. Inter-Firm Comparison:

    Comparison of financial statements of two or more firms is known as an inter-firm comparison.

    Inter-firm comparison helps in analyzing the financial performance of two or more competing firms in an industry. It enables the firm to know its position in the market in comparison to its competitors.

    Inter-firm comparison is also known as Cross-sectional Analysis.

    I’ve provided the balance sheets of Co. A and Co.B to make an inter-firm comparison.

    Here is a piece of bonus information for you,

    Sector Analysis – it refers to the assessment of economical and financial conditions of a given sector of a company/industry/economy. It involves the analysis of the size, demographic, pricing, competitive, and other economic dimensions of a sector of the company/industry/economy.

    One more important thing to note here is that comparability can only be achieved when the firms are consistent in the accounting principles and standards they adopt. The accounting policies and standards must be consistent across different periods of the same firm and across different firms in an industry.

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Bonnie
BonnieCurious
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Calls in AdvanceCompanies Act
  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    To begin with, lets us understand what the Companies Act 2013 tells about calls-in-advance, so basically as per section 50 of the companies act 2013 "A company may if so authorized by its articles, accepts from any members the whole or part of amount remaining unpaid on any share held by him, even iRead more

    To begin with, lets us understand what the Companies Act 2013 tells about calls-in-advance, so basically as per section 50 of the companies act 2013 “A company may if so authorized by its articles, accepts from any members the whole or part of amount remaining unpaid on any share held by him, even if no amount has been called up”.

    To be more precise whenever excess money is received by the company than, what has been called up is known as calls-in-advance.

    Accounting Treatment

    Well, it is to be noted that calls-in-advance is never a part of share capital. A company when authorized by its article can accept those advance amounts and directly credit the amount received to the calls-in-advance account.

    As these advance amounts are a liability for the company these are shown under the head current liability of the balance sheet until calls are made and are paid to the shareholders.

    Since this is the liability of the company, it is liable to pay the interest amount on such call money from the date of receipt until the payment is done to the shareholders. The rate of interest is mentioned in the articles of association. If the article is silent regarding the rate on which interest is paid then it is assumed to be @6%.

    Accounting Entry

    Bonnie let us understand the entries with help of an example

    ADIDAS LTD issued 25,000 equity shares of Rs 10 each payable as follows:

    ON APPLICATION  Rs 5

    ON ALLOTMENT    Rs 3

    ON FINAL CALL     Rs 2

    Application on 30,000 shares was received. excess money received on the application was refunded immediately. Mr. X who was allotted 1,000 shares paid the call money at the time of allotment and all amounts were duly received assume interest rate @6% for 3 months, so the relevant accounting entry goes as follows:

    Important Points to be noted under calls-in-advance as per the companies act 2013

    • The shareholder is not entitled to any voting rights on money paid until the said money is called for.
    • No dividends are payable on advance money.
    • Board may pay interest on advance not exceeding 12%.
    • The shareholders are entitled to claim the interest amount as mentioned in the article, if there are no profits, then it must be paid out of capital because shareholders become the creditors of the company.
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Karan
Karan
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  2. Pooja_Parikh Aspiring Chartered Accountant

    No, Goodwill cannot be called a fictitious asset. A fictitious asset does not have any physical existence or realizable value. Although it is recorded in the assets column, it is not really an asset, rather it is an expense that is incurred during the accounting period. Its benefit, however, is realRead more

    No, Goodwill cannot be called a fictitious asset.

    A fictitious asset does not have any physical existence or realizable value. Although it is recorded in the assets column, it is not really an asset, rather it is an expense that is incurred during the accounting period. Its benefit, however, is realized for extended periods. This is why they are recorded as assets. They are recorded in a single year and are amortized over the years. A fictitious asset is neither tangible nor intangible.

    Examples of Fictitious Assets

    • Preliminary expenses
    • Promotional expenses
    • Discount on issue of shares/debentures etc.

    Now, goodwill is an intangible asset that relates to the purchase of a company. It is the amount that a company pays over the net worth of the company being purchased. This can be because of its brand value, good customer base, etc. As a company’s reputation improves, its goodwill increases accordingly. Therefore, It does not have a tangible existence but it does have a monetary value. They are also recorded on the asset side of the balance sheet under the head “Intangible assets”.

    Reason for not being a fictitious asset

    Since goodwill is an asset and not an expense, it cannot be called a fictitious asset. Moreover, goodwill has a realizable value. Unlike fictitious assets, goodwill can be purchased or sold. Therefore, goodwill is termed as an intangible asset but not a fictitious asset. The major difference between an intangible asset and a fictitious asset is:

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Aditi
Aditi
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  2. Mehak
    This answer was edited.

    What is Inventory? Inventory refers to the stock of goods or raw materials a business uses to produce the final goods sold to the customers. What is the Inventory Turnover Ratio? Inventory Turnover Ratio is the financial ratio that shows how efficiently a business sells and replenishes its inventoryRead more

    What is Inventory?

    Inventory refers to the stock of goods or raw materials a business uses to produce the final goods sold to the customers.

    What is the Inventory Turnover Ratio?

    Inventory Turnover Ratio is the financial ratio that shows how efficiently a business sells and replenishes its inventory. It shows how well a business manages its inventory.

    Inventory Turnover ratio is calculated as follows:

    Inventory Turnover Ratio = Cost of goods sold / Average Inventory 

    where Average Inventory = (Inventory at the beginning of the year + Inventory at the end of the year) / 2

    If inventory turnover is high, it means products are selling quickly. But if it’s too high, the company might not have enough stock, leading to fewer sales.

    If turnover is low, there are slow sales or too much stock. That can lead to higher storage costs and obsolete products. It is important to find the right balance between the two.

    Why is the Cost of Goods Sold taken as a numerator instead of revenue while calculating the Inventory Turnover Ratio?

    The cost of goods sold is the sum of all the direct costs involved in the production of goods. On the other hand, Revenue is the total amount of money earned through the sale of goods and services.

    The cost of goods sold (COGS)  includes materials, labor, and overhead costs. Inventory consists of these costs and hence, it is better to take (COGS) as the numerator.

    Revenue, however, considers things like markups, discounts, and other adjustments that don’t directly relate to the actual cost of inventory.

    Let us understand it better with the help of an example:

    Suppose the opening inventory is 20,000 and the closing inventory is 10,000. Average inventory can be calculated as (20,000 + 10,000)/2 = 15,000.

    If the cost of goods sold is 45,000 the Inventory turnover ratio comes out to be 45,000/15,000 = 3.

    On the other hand, if the revenue of 60,000 is taken as the numerator, the Inventory turnover ratio comes out to be 60,000/15,000 = 4

    A high inventory turnover ratio shows that the inventory is moving faster than it is which is misleading for the stakeholders.

    Hence, the Cost of goods sold is taken as the numerator for the calculation of the Inventory turnover ratio.

     

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Aadil
AadilCurious
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  2. GautamSaxena Curious .
    This answer was edited.

    Meaning of Opening Stock Opening stock is the inventory or stock of goods that are available at the beginning of the new accounting year carried down from the previous year's closing stock which is recorded in the books of accounts. In simple words, Opening stock is the goods/quantity/products thatRead more

    Meaning of Opening Stock

    Opening stock is the inventory or stock of goods that are available at the beginning of the new accounting year carried down from the previous year’s closing stock which is recorded in the books of accounts.

    • In simple words, Opening stock is the goods/quantity/products that are held by a business at the beginning of a new accounting period and it is the closing stock of the preceding year carried down.
    • Similarly, the closing stock is the number of unsold goods that remain with the business at the end of an accounting year and is further carried down to the next year as Opening Stock.

     

    Formula

    There are 3 main formulas used for Opening Stock’s calculation. They are-

    • For manufacturing companies

    Opening Stock = Raw Material Cost + Work in Progress + Finished Goods Cost

    • When only Sales, GP, COGS, and Closing Stock are given

    Opening Stock = Sales – Gross Profit – Cost of Goods Sold + Closing Stock

    • You can use this one when only limited information is provided

    Opening Stock = COGS + Closing Inventory – Purchases

     

    Types of Opening Stock

    There are three types of Opening Stock or we may also say that Opening  Stock consists of these 3 elements. They are-

    • Raw Materials- These are the unprocessed goods held by a business that is yet to be converted into finished goods.
    • Work in Progress- These include the goods that are in process but not converted into finished goods.
    • Finished Goods- These are the goods/products that have completed the manufacturing process but have not yet been sold.

    Opening Stock in Final Accounts

    Opening stock is a part of the Trading Account while preparing the Final Accounts. And this is how it is posted in the Trading A/c.

    Trading A/c (for the year ending…)

     

    Example of Opening Stock

    Example

    IKEA, the biggest Furniture manufacturer collected this data on April 1, 2021,

    Timber – $300,000

    Wood – $30,000

    Nails – $15,000

    Pre-cut Wood – $120,000

    Assembled Furniture – $400,000

    Now, adding them (as said earlier, Opening stock is a combination of these three.)

    Opening Stock (Raw Material + Work in Progress + Finished Goods) = $865,000

    Therefore, that’s how one can calculate Opening Stock.

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Aditi
Aditi
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  2. Mehak
    This answer was edited.

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

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

    What is Revenue?

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

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

    What is Income?

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

    Which is a broader term between the two?

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

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

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

     

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Vijay
VijayCurious
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Companies Act
  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use.  It is also called economic lRead more

    Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use.  It is also called economic life or service life

    It is a useful concept in accounting as it is used to work out depreciation. By knowing this useful life of an asset an entity can easily analyze how to allot the initial cost of an asset across the relevant accounting period rather than doing it unfairly manner.

    How do we calculate the useful life of an asset?

    The useful life of an asset is not an accounting policy, but an accounting estimate. calculating useful life is not an exact phenomenon but an estimate that is done because it directly impacts how much an asset is to expense every year.

    Factors affecting “how long an asset is expected to be useful” depends on some stated points as below:

    1. Usage, the more the assets are used, the more quickly it will deteriorate.
    2. Whether the asset is new at the time of purchase or reused model.
    3. Change in technology.

    As per the companies act 2013, some of the useful life of assets are stated below

    To know more about the different categories of assets you can follow the given link useful life of assets.

    POINT TO BE NOTED:- There lies a huge difference in the useful life v/s the physical life of an asset. It is very important to note that amount of time an asset is used in a business is not always be same as an asset’s entire life span.

     

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