AccountingQA Latest Questions

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

    Overview And Definition Shareholder's equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity. For example – retainRead more

    Overview And Definition

    Shareholder’s equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity.

    For example – retained earnings, common stock, etc.

     

    Liabilities

    Liabilities are the obligation or something a company or a person owes to another party. normally it is in cash form but it can be in other forms also.

    And these liabilities need to be settled as per the terms agreed upon by the party.

    For example – taxes owned, trade payables, etc.

     

    Assets

    Assets are those which has ownership of a company and controlling power with the company. In other words, Or something which will generate profits today and in the future.

    For example – cash, building, etc.

     

    Conclusion

    Therefore I can conclude that stockholders’ equity refers to the assets remaining in a business once all liabilities have been settled, or I can say as it is not the same thing as the company’s assets. Assets are what the business owns.

     

    How to Calculate Shareholders’ Equity

    Shareholders’ equity is the owner’s claim when assets are liquidated, and debts are paid up. It can be calculated using the following two formulas:

    Formula 1:

    Shareholders’ Equity = Total Assets – Total Liabilities

     

    Formula 2:

    Shareholders’ Equity = Share Capital + Retained Earnings – Treasury Stock

    Let me now take the example of a small business owner who is into the business of chairs in India.

    As per the balance sheet of the proprietorship firm for the financial year ending on March 31, YYYY, the following information is available. Determine the shareholders’ equity of the firm.

    Given, Total Assets = Net property, plant & equipment + Warehouse premises + Accounts Receivable + Inventory
    = Rs (1000,000 + 300,000 + 500,000 + 800,000)

    Total Assets = Rs 2600,000

     

    Again, Total liabilities = Net debt+ Accounts payable + Other current liabilities

    = Rs (700,000 + 700,000 + 600,000)

     

    Total Liabilities = Rs 2,000,000

    Therefore, the shareholders’ equity of the firm as on March 31, YYYY, can be calculated as,

    = Rs (2600,000 – 2,000,000)

     

    Shareholders’ Equity = Rs 600,000

    Therefore, the shareholders’ equity, as of March 31, YYYY, stood at Rs 600,000.

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A_Team
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  2. Vijay Curious M.Com
    This answer was edited.

    Fictitious assets are not actually assets. They are expenses/losses not written off in the year in which they are incurred. They do not have any physical presence. Their expense is spread over more than one accounting period. A part of the expense is amortized/written off every year against the compRead more

    Fictitious assets are not actually assets. They are expenses/losses not written off in the year in which they are incurred. They do not have any physical presence. Their expense is spread over more than one accounting period.

    A part of the expense is amortized/written off every year against the company’s earnings. The remaining part (which is yet to be written off) is shown as an asset in the balance sheet. They are shown as assets because these expenses are expected to give returns to the company over a period of time.

    Here are some examples of fictitious assets:

    • Preliminary expenses.
    • Promotional expenses.
    • Loss incurred on the issue of debentures.
    • Underwriting commission.
    • Discount on issue of shares.

     

    To make it simple I’ll explain the accounting treatment of preliminary expenses with an example.

    The promoters of KL Ltd. paid 50,000 as consultation fees for incorporating the company. The consultation fee is a preliminary expense as they are incurred for the formation of the company. The company agreed to write off this expense over a period of 5 years.

    At the end of every year, the company will write off 10,000 (50,000/5) as an expense in the Profit & Loss A/c.

    The remaining portion i.e. 40,000 (50,000 – 10,000) will be shown on the Assets side of the Balance Sheet under the head Non – Current Assets and sub-head Other Non – Current Assets. 

    Here are the financial statements of KL Ltd.,

    Note: As per AS 26 preliminary expenses are fully written off in the year they are incurred. This is because such expenses do not meet the definition of assets and must be written off in the year of incurring.

    Source: Some fictitious assets examples are from Accountingcapital.com & others from Wikipedia.

     

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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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Rahul_Jose
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  2. Radhika
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    The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio. The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI. CRR meansRead more

    The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio.

    The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI.

    CRR means that commercial banks cannot lend money in the market or make investments or earn any interest on the amount below what is required to be kept in CRR.

    RBI mandates Cash Reserve Ratio so that a percentage of the bank’s deposit is kept safe with the RBI, hence, in an uncertain event bank can still fulfill its obligation against its customers.

    CRR also helps RBI to control liquidity in the economy. When CRR is kept at a higher rate, the lower the liquidity in the economy, and similarly when CRR is kept at a lower rate, there is higher liquidity in the economy.

    The Reserve Bank of India also regulates inflation through the Cash Reserve Ratio:

    • During inflation, that is when RBI wants to apply contractionary monetary policy, it increases CRR so that the money left with banks to lend is reduced. Such measures reduce the money supply in the economy and therefore help combat inflation.
    • During deflation, that is when RBI wants to apply expansionary monetary policy, it reduces CRR, so that the money left with banks to lend is increased. Such measures increase the money supply in the economy and therefore help combat deflation.

    The formula for CRR is- 

    Reserves maintained with Central Banks / Bank Deposits * 100%

    For example:

    The current CRR is 3% which means that for every Rs 100 deposit in the commercial banks have to keep Rs 3 as a deposit with RBI.

     

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Aadil
AadilCurious
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  2. Mehak
    This answer was edited.

    To understand why we do not record self-generated goodwill in accounting, let us first understand what goodwill is and its accounting treatment. What is Goodwill? Goodwill is an intangible asset of a business.  It represents the reputation and brand value of a business built over time. It is a valueRead more

    To understand why we do not record self-generated goodwill in accounting, let us first understand what goodwill is and its accounting treatment.

    What is Goodwill?

    Goodwill is an intangible asset of a business.  It represents the reputation and brand value of a business built over time. It is a value over and above the tangible assets of the business.

    Goodwill often arises when a business purchases another business and pays a premium, which means a price higher than the fair value of the business.

    Characteristics of Goodwill

    Goodwill has the following characteristics:

    1. It is an Intangible asset, meaning it has no physical existence and cannot be seen or touched.
    2. It is generally recognized during transactions in mergers and acquisitions.
    3. It is the value attributed to the brand value and reputation of the business.
    4. It adds value to a business beyond its tangible assets.

    Example of Goodwill

    Let us take an example to understand the concept of goodwill better.

    Suppose there is a company ABC Ltd. It is planning to acquire XYZ Ltd. The fair value of the assets of XYZ is calculated to be 600,000. However, ABC has agreed to pay a sum of 650,000 to acquire the company. This difference of 50,000 is goodwill.

    Impact on Financial Statements

    Goodwill is shown under the assets side of the Balance Sheet.

    What is self-generated goodwill?

    Self-generated goodwill in simple words means the positive reputation or trust that a business earns over time through their own hard work and decisions. It’s not something bought or inherited but something built from scratch internally, like a brand’s reputation, loyal customers, strong relationships, or unique ideas.

    For example, a small business that goes the extra mile to offer great customer service or always delivers high-quality products over the years will naturally build goodwill.

    It is also known as internally generated goodwill.

    Why do we not record sef-generated goodwill?

    Self-generated goodwill is not recorded in the financial statements because of the following reasons:

    1. Measurement may not be reliable: The measurement of self-generated goodwill is majorly based on the judgment of the managers. It is based on the value creation because of a good reputation or consumer base of the business, which might not be measured accurately.
    2. Conservatism principle: As per the conservatism principle, a business shall not overstate its assets or liabilities. However, self-generated goodwill might be overstated.
    3. Lack of market transaction: There is a lack of a market transaction that ensures verification of the value of goodwill as in the case of purchased goodwill.
    4. Manipulation: There are higher chances of manipulation of financial statements through self-generated goodwill.

    Conclusion

    On a concluding note, self-generated goodwill is something that adds real value to a business, but it’s not something that can easily be measured or captured in financial statements. Accounting is all about providing clear, reliable information, and including goodwill would make things murky and open to manipulation. Even though it doesn’t show up on the books, you can still see its effects in a company’s reputation and success. Maybe in the future, businesses will find a way to highlight it better, but for now, leaving it out helps keep financial reports honest and straightforward.

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A_Team
A_Team
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  2. Vishnu_K Nil
    This answer was edited.

    Shareholder's Equity Meaning - Shareholder's Equity is the amount invested into the Company. It represents the Net worth of the Company. It is also where the owners have the claim on the Assets after the Debts are settled. It Calculation of Shareholder's Equity Method 1 Shareholder's Equity = TotalRead more

    Shareholder’s Equity

    Meaning – Shareholder’s Equity is the amount invested into the Company. It represents the Net worth of the Company. It is also where the owners have the claim on the Assets after the Debts are settled. It

    Calculation of Shareholder’s Equity

    Method 1

    Shareholder’s Equity = Total Assets – Total Liabilities

    Method 2

    Shareholder’s Equity = Share Capital + Retained Earnings – Treasury Stock/Treasury Shares

    Components of the Shareholder’s Equity

    From the above Method 1,  it can be understood that shareholder’s equity comprises of

    Net Assets = Current Assets + Non-current Assets, reduced by

    Net liabilities = Current liabilities + Long-term liabilities

    where Long-term liabilities = Long-term debts + Deferred long-term liabilities + Other liabilities

     

    Also from the method 2,

    Share Capital = Outstanding shares + Additional Paid-up share capital

    Retained Earnings are the sum of the company’s earnings after paying the dividends

    Treasury stocks = Shares repurchased by the company

    Example of Shareholder’s Equity

     

    The shareholder’s Equity is represented in the Balance Sheet as below;

     

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Astha
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  2. Manvi Pursuing ACCA
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    An asset is an item of property owned by a company/business. It may be for a longer or shorter period of time. Assets are classified into two broad heads: Non-Current Assets Current Assets   The asset may be sold for several reasons such as: An asset is fully depreciated. It should be sold becaRead more

    An asset is an item of property owned by a company/business. It may be for a longer or shorter period of time. Assets are classified into two broad heads:

    1. Non-Current Assets
    2. Current Assets

     

    The asset may be sold for several reasons such as:

    1. An asset is fully depreciated.
    2. It should be sold because it is no longer needed.
    3. It is removed from the books due to unforeseen circumstances.

     

    The journal entry for profit on the sale of assets will be:

    Cash / Bank A/c Debit
             To Asset A/c Credit
             To Profit on Sale of Asset A/c Credit
    (Being sale of an asset made with a gain)

    According to the golden rules of accounting, in the above entry “Cash/Bank A/c” it is a Real Account and the rule says “Debit what comes in” and so is debited.

    “Asset A/c” is a real account and the rule says “Credit what goes out” and so is credited. Any Gain on sale of an asset goes to the Nominal account and according to the rule “Credit, all incomes and gains” and so is credited.

     

    The journal entry for loss on sale of the asset will be:

    Cash / Bank A/c Debit
    Loss on Sale of Asset A/c Debit
             To Asset A/c Credit
    (Being sale of an asset made and loss incurred)

    In the above entry, “Loss on Sale of Asset” is debited because according to Nominal account rules “Debit all losses and expenses” and so is debited.

    According to modern rules of accounting, “Debit entry” increases assets and expenses, and decreases liability and revenue, a “Credit entry” increases liability and revenue, and decreases assets and expenses.

    Cash / Bank A/c Debit Increases Asset
    Loss on Sale of Asset A/c Debit Increases Expenses
             To Asset A/c Credit Decreases Asset
             To Profit on Sale of Asset A/c Credit Increases Expenses

     

    For example, Mr. A sold furniture for $2,500 and incurred a loss on the sale which amounted to $2,500.

    According to modern rules, the journal entry will be:

    Particulars Amt Amt  
    Cash / Bank A/c 2,500 Increase in asset
    Loss on Sale of Asset A/c 2,500 Increase in expenses
             To Asset A/c 5,000 Decrease in asset
    (Being sale of an asset made and loss incurred)
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Radha
Radha
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Internal Users
  2. Vijay Curious M.Com
    This answer was edited.

    One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll beRead more

    One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll be explaining internal users of accounting information in detail.

    Internal users are people within an organization/business who need accounting information to make day-to-day decisions.

    The various internal users of accounting information include:

    • Owners/Promoters/Directors:

    Owners are the people who contribute capital to the business and therefore they are interested to know the profit earned or loss incurred by the business as well as the safety of their capital. In the case of a Sole Proprietorship, the proprietor is the owner of the business. In the case of a Partnership, the partners are considered as the owners of the firm.

    The use for them: To know how the business is doing financially, owners need to know the profit and loss reflected in the financial statements.

    • Management:

    Management is responsible for setting objectives, formulating plans, taking informed decisions, and ensuring that pre-planned objectives are met within the stipulated time period.

    The use for them: To achieve objectives, management needs accounting information to make decisions related to determining the selling price, budgeting, cost control and reduction, investing in new projects, trend analysis, forecasting, etc.

    • Employees/Workers:

    Employees and workers are the ones who implement the plans set by the management. Their well-being is dependent on the profitability of the business.

    The use for them: They are interested to check the financial statements so that they can get a better knowledge of the business. Some organizations also give their employees a share in their profits in the form of a bonus at the year-end. This also creates an interest in the employees to check the financial statements.

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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Introduction Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds. Explanation To undRead more

    Introduction

    Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds.

    Explanation

    To understand the concept of minority interest, we need to first understand the relationship between a holding company and its subsidiary company or companies.

    A holding company means a company that controls one or more companies by:

    • Holding more than fifty percent of the total voting rights or equity share capital.
    • having the power to appoint or remove the majority of the board members.

    A subsidiary company is a company that is controlled by another company.

     

    From the above, we can simply deduce that a holding company holds the majority of the equity in its subsidiary company or companies.

    So, the equity of the subsidiary company which does not belong to the holding company, but to the outsiders is known as the minority interest as it is, in fact, the minority in comparison to the majority stake of the holding company.

    Example

    For example, A Ltd holds 75% of the equity in B Ltd, then the rest 25% which belongs to the outsiders will be the Minority Interest.

    Minority Interest means the share of outsiders in the:

    • Paid-up share capital of the subsidiary
    • Reserve and Surplus

    For example, B Ltd has the following particulars under Shareholders’ Funds.

    Equity Share Capital Rs. 10,00,000
    Revaluation Reserve Rs. 4,00,000
    Balance of Profit and Loss A/c Rs. 1,00,000
    General Reserves Rs. 5,00,000

     

    B Ltd is a subsidiary company of the A Ltd. A Ltd holds 75% of B Ltd.

    It means minority interest in B Ltd is 25% (100% – 75%)

    Therefore, in the consolidated balance sheet of A Ltd and its subsidiary, the minority interest will be as follows:

    Minority Interest in B Ltd (25%)

    Equity Share Capital Rs. 2,50,000 (10,00,000 x 25%)
    Revaluation Reserve Rs. 1,00,000 (4,00,000 x 25%)
    Balance of Profit and Loss A/c Rs. 25,000 (1,00,000 x 25%)
    General Reserves Rs. 1,25,000 (5,00,000 x 25%)
    Total Rs. 5,00,000

     

     

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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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