AccountingQA Latest Questions

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

    Definition Net profit is defined as the excess of revenues over expenses during a particular period. For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits. When the result of this computationRead more

    Definition

    Net profit is defined as the excess of revenues over expenses during a particular period.
    For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits.

    When the result of this computation is negative it is called a net loss.

    Net profit may be shown before or after tax.

    Formula :
    Total Revenues – Expenses
    Or
    Total Revenues – Total Cost ( Implicit And Explicit Cost )

    Liabilities

    It means the amount owed (payable) by the business. liability towards the owners ( proprietor or partners ) of the business is termed an internal liability.

    On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability. For example – taxes owned, trade payables, etc.
    For example creditors, bank overdrafts, etc.

    Assets

    An asset is a resource owned or controlled by a company and will benefit the business in current and future periods.
    In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.

    For example – cash, building, etc.

    Why debtors are treated as a liability?

    Now let me explain to you why net profits are treated as a liability and not as an asset because of the following characteristics :

    • Net Profit shows the credit balance of the Profit And Loss Account.

    • It is treated directly in the balance sheet by adding or subtracting from the capital.

    • Net Profit is a measure of the profitability of the company after taking into consideration all costs incurred during the accounting period.

    • Net profit is the last line in an income statement and is the figure that concerns most people who use such a statement.

    • Net income is reported on the income statement (profit and loss account) and forms a key indicator of a company’s performance.

    Importance Of Net Profit

    Now I will let you know the importance of net profit which is as follows :

    Owners
    Net profit allows owners to calculate the tax to be paid and how much earnings need to be distributed to the business owners.

    Investors
    Investors need to see net profit as they need to access the risk before investing they basically judge the revenue-generating capacity of a firm based on net profit.

    Competitors
    For making the comparison competitors tend to look at the net profit of the company to know how are they performing in the industry so that they can build themselves strong.

    Creditors
    Creditors look at the net profit for the purpose of obtaining business loans or we can say that determines a prospective debtor’s capacity to pay future debts.

    Conclusion

    Now after the above explanation, we can say that,
    Net Profit is shown on the liability side as it belongs to shareholders so the company has to give it to shareholders so we are showing it under the liability side.

    Net Profit with respect to the company is a liability as it has to pay it to shareholders.

    Net Profit with respect to shareholders is an asset.

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

    The term "principal book of accounts'' refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account. So to put it simply, the principal book of accounts mean ledgers. Ledgers are prepared by posting the debits and credits of a joRead more

    The term “principal book of accounts” refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account.

    So to put it simply, the principal book of accounts mean ledgers.

    Ledgers are prepared by posting the debits and credits of a journal entry to the respective accounts.

    A ledger groups the transactions concerning the same account. For example, Mr B is a debtor of X Ltd. Hence all the transactions entered into with Mr. will be grouped into the ledger Mr B A/c in the books of X Ltd.

    Ledgers are of utmost importance because all the information to any account can be known by its ledger.

    Preparation of ledger is very important because all the information to any account can be known by its ledger. Ledgers also display the balance of each and every account which may be debit or credit. This helps in the preparation of the trial balance and subsequently the financial statements of an entity.

    Hence, it is the most important book of accounts and calling it the ‘books of final entry’ is also justified.

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

    Sales Return is shown on the debit side of the Trial Balance. Sales Return is also called Return Inward. Sales Return refers to those goods which are returned by the customer to the seller of the goods. The goods can be returned due to various reasons. For example, due to defects, quality differenceRead more

    Sales Return is shown on the debit side of the Trial Balance.

    Sales Return is also called Return Inward.

    Sales Return refers to those goods which are returned by the customer to the seller of the goods. The goods can be returned due to various reasons. For example, due to defects, quality differences, damaged products, and so on.

    In a business, sales is a form of income as it generates revenue. So, when the customer sends back those goods sold earlier, it reduces the income generated from sales and hence goes on the debit side of the trial balance as per the modern rule of accounting Debit the increases and Credit the decreases.

    For Example, Mr. Sam sold goods to Mr. John for Rs 500. Mr. John found the goods damaged and returned those goods to Mr. Sam.

    So, here Sam is the seller and John is the customer.

    The journal entry for sales return in the books of Mr. Sam will be

    Particulars Amt Amt
    Sales Return A/c 500
         To Mr John 500

    Treatment in Trial Balance

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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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Astha
AsthaLeader
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes: Raw Material Work-in-Progress Finished Goods Example: If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then valueRead more

    The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes:

    • Raw Material
    • Work-in-Progress
    • Finished Goods

    Example:

    If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then value of Closing Stock will be Rs (10,000 + 5,000 + 15,000) = Rs 30,000

    Adjustment entries are done on the accrual basis of accounting, that is, income is recorded when earned and not received and expenses are recorded when incurred and not paid. Adjustment entries are usually made before or after the preparation of the trial balance at the end of the accounting period.

    If the entries are made after the preparation of the trial balance, then two adjustment entries are recorded while preparing Trading and Profit & Loss A/c.

    Since closing stock is an item outside the trial balance, the double-entry would be:

    The journal entry

    Closing Stock A/c  (Dr.) Amt
    To Trading and Profit & Loss A/c Amt
    • Trading and Profit & Loss A/c is credited because it is of profit to the company and hence will be shown on the credit side.
    • Closing Stock is debited as an asset for the company and it will be recorded for the first time in accounting books, hence, will be debited.

    The second adjustment would be to show closing stock on the balance sheet and since the closing stock is an asset it is shown under the head Current Assets.  

    In case where adjustment for Closing Stock is to be done before preparation of Trial Balance, then it will be shown on the credit side of the Trial Balance, since it is an asset for the company and will have a credit brought down balance as shown in the image.

    Later, while preparing Balance Sheet, Closing Stock will be shown on the Asset side of the Balance Sheet.

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

    As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts. Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future,Read more

    As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts.

    Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future, its creditors and lenders report to the firm about their dues.

    At that time, a firm may get to know that it had failed to record some liabilities in its books and it has settled them now.

    We know that when a partnership firm is dissolved, a realisation account is created to which all the assets and liabilities of the firm are transferred.  Entries are as given below:

    Realisation A/c     Dr.      ₹ Amt

    To Assets A/c                  ₹ Amt

    ( Asset transferred to realisation account)

    Liabilities A/c    Dr.        ₹ Amt

    To Realisation A/c       ₹ Amt

    (Liabilities transferred to realisation account)

    Hence, for transferring unrecorded liabilities, the procedure is the same for the recorded liabilities:

    Unrecorded Liabilities A/c        Dr.     ₹ Amt

    To Realisation A/c                               ₹ Amt

    ( Unrecorded liabilities transferred to realisation account)

    Then to pay off the unrecorded liability the entry is:

    Realisation A/c     Dr.    ₹ Amt

    To Cash / Bank A/c       ₹ Amt

    (Unrecorded liabilities paid off)

    That’s it, I hope I was able to make you understand.

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prashant06
prashant06
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A. Normal wear and tear B. Foreseen obsolescence C. Normal wear & tear & foreseen obsolescence D. Unforeseen obsolescence  

DepreciationFixed Assets
  2. Vijay Curious M.Com
    This answer was edited.

    Depreciation of fixed capital assets refers to C. Normal wear & tear & foreseen obsolescence. Normal wear & tear refers to the damage caused to an asset due to its continuous usage. Even when the asset is properly maintained, wear and tear occurs. Hence, it is considered to be inevitableRead more

    Depreciation of fixed capital assets refers to C. Normal wear & tear & foreseen obsolescence.

    Normal wear & tear refers to the damage caused to an asset due to its continuous usage. Even when the asset is properly maintained, wear and tear occurs. Hence, it is considered to be inevitable and natural.

    For example, Kumar has purchased a car for 25,00,000. After five years he wishes to sell his car. Now the market price of his used car is 12,00,000. This reduction in the value of the car from 25,00,000 to 12,00,000 is because of its usage. This fall in the value of the asset due to usage is known as normal wear & tear.

    In generic terms, obsolescence means something that has become outdated or is no longer being used. Foreseen obsolescence is nothing but obsolescence that is expected.

    In the context of business, whenever the value of an asset falls because it has become outdated or is replaced by a superior version, we call it obsolescence. The fall in the value of the asset due to obsolescence expected by the purchaser of the asset is known as foreseen obsolescence.

    When an asset becomes obsolete it doesn’t mean it is not in working condition. Even when an asset is in good working condition it can become obsolete due to the following reasons:

    • Technology advancement.
    • Change in demand (change in fashion, change in taste and preferences of the consumers, etc.)

     

    For example, before the invention of computers, people used typewriters for getting their paperwork done. With the invention of computers, laptops, etc. it is easier to type as well as save our documents, spreadsheets, etc. Thus typewriters became obsolete with the invention of computers. It has become a technology of the past.

    Here is a summarised version of wear & tear and obsolescence:

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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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ShreyaSharma
ShreyaSharma
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  2. GautamSaxena Curious .
    This answer was edited.

    Subsidiary Books Introduction & Definition In large business organizations, it is practically impossible to keep a record of every single business affair, while neglecting them and not recording them wouldn't be an ideal choice, this is where subsidiary books come into the role. As we were introRead more

    Subsidiary Books

    Introduction & Definition

    In large business organizations, it is practically impossible to keep a record of every single business affair, while neglecting them and not recording them wouldn’t be an ideal choice, this is where subsidiary books come into the role. As we were introduced to the basics of accounting in the 11th standard, we learned about different elements like journals, ledgers, trial balances, etc. It is practically impossible for a business to keep track of every single affair just through only those elements. Thus, the Subsidiary book is the next step here.

    Subsidiary books are the books of original entry. They are a dedicated form of books that maintains an analysis of a specific account. It records financial transactions of a similar nature. They are sub-division of a journal.

    In big business organizations, it’s very hard for a bookkeeper or accountant to record all the transactions in one journal and post them into various accounts.  This is where special purpose books or subsidiary books may be required for more efficient bookkeeping. They are a subdivision of journals and for every type of transaction, there is a separate book.

     

    Types of Subsidiary Books

    There are eight types of subsidiary books that are required for recording transactions. The list of various subsidiary books is as follows:

    1. Cash Book
    2. Purchase Book
    3. Sales Book
    4. Purchase Return Book
    5. Sales Return Book
    6. Journal Proper
    7. Bills Receivable Book
    8. Bills Payable Book

     

    Types of Subsidiary Books

    Now, we’ll be taking a closer look at each and every subsidiary book.

     

    Cash Book

     The cash book is the most important subsidiary book, it’s a book of a prime entry recording all the cash spent or received by the business, either in cash form or from the bank. In simple words, recording all the transactions made by the business.

    It is of three types i.e single-column cash book, double-column cash book, and triple-column cash book. As the name indicates, the column of cash, bank, and discount increases/decreases as per the column of the cash book stated.

    Format 

     

    Note: this is a triple-column cash book format, for the double-column cash book format, we remove the discount column from both sides, and for the single column, we may remove the bank column as well.

    Purchase Book

    A purchase book is a subsidiary book that records all the transactions related to the credit purchase in a business. Thereby, the normal purchasing of assets is never recorded in the purchase book.

    The credit purchases are directly recorded in the purchase book from the journals or the source documents. The source document indicates bills payable, invoices, etc.

    Format

     

    Sales Book

    A sales book, similar to a purchase book, is a special book where all the credit sales are recorded. The sales book doesn’t record the transactions related to the normal sale of assets and hence, is a special type of book, just like the purchase book.

    Format

     

    Purchase Return Book

    The purchase return book, also known as the return outwards book, is that book that records the goods that were returned by us to the supplier. Thereby, called purchase return book.

    When the goods are returned, a debit note is issued against every return and hence, recorded in the purchase return book.

    Format

     

     

    Sales Return Book

    The sales return book, also known as the return inwards book, refers to that subsidiary book that records the goods which were returned to us by the customer.

    For every good returned to us, a credit note is issued to the customer. And thus, it is recorded in the sales return book.

    Format

     

     

    Journal Proper

    Just like we recently learned in class 11th about what a journal entry is and how it is made, it’s a little different from the journal proper. Journal proper is a subsidiary book that records all the transactions which are not recorded in other subsidiary books.

    A journal is an original book of entries that records all the business transactions, while a journal proper is a subsidiary book in which all types of miscellaneous credit business transactions are recorded that do not fit anywhere in the other subsidiary books. Its format is the same as the journal entries’ format. Therefore, it’s also known as a miscellaneous journal.

    Format

     

     

     Bills Receivable Book

    The bills receivable book is the book that draws the bills favorable to the business i.e when the goods or services are provided to any customer on credit, they become a debtor, and bills receivable is a written note received from the customer indicating that they formally agree to pay the sum of money owed.

    Therefore, it helps in recording these types of transactions. The sum total of the bills receivable book is posted to the bills receivable account.

    Format

     

     

    Bills Payable Book

    The bills payable book is the subsidiary book that records all the bills that are drawn on the company. The bills payable is drawn on the company when we buy a good/service on credit and agrees to pay the amount to the supplier by signing a written note with the date we agree to pay.

    It’s a liability of the business and the total of the bills payable book is posted on the credit side of the bills payable account.

    Format

     

     

     

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

    Definition Prepaid expenses are those expenses whose payments are done in advance which can be for the goods or services whose benefit will accrue in the subsequent accounting period. A prepaid expense is a current asset. prepaid expenses are classified under the head current assets in the balance sRead more

    Definition

    Prepaid expenses are those expenses whose payments are done in advance which can be for the goods or services whose benefit will accrue in the subsequent accounting period.

    A prepaid expense is a current asset. prepaid expenses are classified under the head current assets in the balance sheet.

    This is because they provide future economic benefits to the company. As such, they are assets that can be used to generate revenue in the future.

    For example prepaid rent, prepaid insurance, etc.

     

    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 rendering of services in the normal course of business.

    Or in other words, we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.

    For example, goods are purchased with the purpose to resell and earn a profit, 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 liabilities that are payable generally 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.

     

    Why current assets and not a  current liability?

    Now let me try to explain to you that prepaid expenses are classified as current assets  and not as a current liability which is as follows :

      • we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.
      • expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
      • In the business prepaid expense are treated as an asset which we can see on the asset side of the balance sheet.
      • Or in other words, we can say that it is initially recorded as a prepaid expense as an asset in the balance sheet and subsequently its value is expensed over time in the profit and loss account.

     

    Example

    Now let us take an example for explaining prepaid expenses which are mentioned below.

    An insurance premium of Rs 50000 has been paid for one year beginning (previous year). The financial year ends on 31st  march YYYY.

    It means the premium for 6 months i.e., 1st April, YYYY(current year) to 30th September, YYYY(current year) amounting to Rs 25000 is paid in advance.

    Thus, of premium paid in advance (Rs 25000)  is a Prepaid Expense. It will be accounted as an expense in the financial year ending  31st  march next year. In the balance sheet as of 31st march YYYY ( current year ) it will be shown as Current Asset.

    Here is an extract of the profit /loss account and balance sheet of the above example:

     

    Key points

    There are a few things to keep in mind when dealing with prepaid expenses.

    • First, is that the expenses are actually prepaid. This means that the expenses were paid for before they were used.

     

    • Second, it is essential to track the number of prepaid expenses that have been used. That is to make sure that the prepaid expenses are not overstated on the company’s financial statements. This can happen if the company pays for more goods or services than it actually

     

    • Last but not least it is important to keep in mind that changes in the value of prepaid expenses can impact the company’s net income. For example, if the company’s prepaid insurance increases in value, this will increase the company’s net income.

     

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