AccountingQA Latest Questions

A_Team
A_Team
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  2. Mitika

    Non-current assets are long-term investments that are not easily converted into cash within an accounting year. They are required for the long term in the business. They have a useful life of more than an accounting year. Non-current assets can be fixed assets and intangible assets. Fixed assets areRead more

    Non-current assets are long-term investments that are not easily converted into cash within an accounting year. They are required for the long term in the business. They have a useful life of more than an accounting year.

    Non-current assets can be fixed assets and intangible assets. Fixed assets are tangible assets that can be seen and touched. Whereas, intangible assets are those assets that can not be seen and touched.

     

    You can correlate examples of  Non-Current Assets with tangible and intangible assets as mentioned below:

    Land and building – They are fixed assets that will give long-term benefits and will be classified as noncurrent assets.

    Plant and Machinery ­– They are tangible assets will give future benefits and are thus mentioned under noncurrent assets.

    Office Equipment – They are tangible assets that will give future economic benefits to the company, and comes under noncurrent assets.

    Vehicles – They are tangible assets that will give long-term benefits, and will be classified as noncurrent assets.

    Furniture – They are also tangible assets that will give future benefits and are classified as non-current assets.

    Trademarks – These are intangible assets that will not be easily converted into cash and will be classified as noncurrent assets.

    Goodwill – They are intangible assets that can’t be easily converted into cash, and are classified as non-current assets.

    Patents – They are intangible assets that will not be converted into cash within an accounting period, and are classified as non-current assets.

    Copyrights – They are intangible assets that will not be converted into cash within an accounting period, and are classified as non-current assets.

    Long-term Investments – They are long-term investments that will not be easily converted into cash within an accounting period and are classified as non-current assets.

     

     

    Non-current Assets = Total Liabilities – Current Assets

     

    Current Assets are the assets that will be converted into cash within an accounting year. They include cash, bank, debtors, etc.

     

    BALANCE SHEET

    		  
    LIABILITIES ASSETS
    Capital xxx Fixed Assets  
    Reserves and Surplus xxx Land and Building xxx
        Vehicle xxx
    Current Liabilities   Furniture xxx
    Accounts Payable xxx    
    Bank Overdraft xxx Intangible Assets  
    Outstanding Expenses xxx Goodwill xxx
      Trademarks xxx
         
      Long-term Investments xxx
           
      Current Assets  
      Cash xxx
      Debtors xxx
      Others xxx
      xxx   xxx

     

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Aadil
AadilCurious
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  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity.  General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves. General reserve forms a part of the Profit & Loss ApprRead more

    General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity.  General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves.

    General reserve forms a part of the Profit & Loss Appropriation account and is created to strengthen the financial position of the entity and serves as a sources of internal financing. It is upon the discretion of the management as to how much of a reserve is to be created. No reserve is created when the entity incurs losses.

    General reserve is shown in the Reserves & Surplus head on the liability side of the balance sheet of the entity and carries a credit balance.

    Suppose, an entity, ABC Ltd engaged in the business of electronics earns a profit of 85000 in the current financial year and has an existing general reserve amounting to 100000. The management decides to keep aside 20% of its profits as general reserve.

    Then the amount to be transferred to general reserve will be = 85000*20% = 17000.

    In the financial statements it will be shown as follows-

    Now, in the next financial year, the entity incurs losses amounting to 45000. In this case, no amount shall be transferred to the general reserve of the entity and will be shown in the financial statement as follows-

    The creation of general reserve can sometimes be deceiving since it does not show the clear picture of the entity and absorbs losses incurred.

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Atreya
AtreyaCurious
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  2. Ishika Pandey Curious ca aspirant

    Definition Not-for-profit organizations are also known as non-profit organizations set up to further cultural, educational, religious, professional, or public service objectives. Its  aim is not to earn profit Accounting done by non-profit organizations is fund based.   Type of accounting Non-pRead more

    Definition

    Not-for-profit organizations are also known as non-profit organizations set up to further cultural, educational, religious, professional, or public service objectives. Its  aim is not to earn profit

    Accounting done by non-profit organizations is fund based.

     

    Type of accounting

    Non-profit organizations do Fund Based Accounting.

    Donations received or funds set aside for specific purposes are credited to a separate fund account and are shown on the liabilities side of the balance sheet.

    The income from or donations for these funds are credited to the respective fund account. On the other hand, expenses or payments out of these funds are debited.

    Accounting when done on this basis is known as Fund Based Accounting.

    Let me explain to you with an example :

    The sports fund has a balance of Rs 100000 which is invested as a fixed deposit in a bank earning 8% interest. A further donation of Rs 10000 is received towards it. Expenses incurred towards prizes are Rs 7000; Rs 3000 towards trophies and Rs 4000 distribution of cash prizes. The accounts are shown as follows :

    Categories of funds

    In the case of non-profit organizations, funds may be classified under the following heads :

    Unrestricted fund :

    The unrestricted fund does not carry any restriction with respect to its use. In other words, management can use the amounts in the funds as it deems appropriate, but to carry out the purpose for which the organization exists.

    This is known as the general fund or the capital fund to which the surplus for the year is added and in case of deficit, deducted.

    Restricted fund :

    A restricted fund is a fund, the use of which is restricted either by the management or by the donor for a specific purpose.

    Examples of such funds are endowment funds, annuity funds, loan funds, prize funds, sports funds, etc.

    • Government grant: grant received from the government for a specific purpose is restricted to be used for the purpose it is granted. It is accounted for in the books following fund-based accounting.
      • For example, a grant received from the government for ‘the polio eradication program is credited to the polio eradication fund, and income earned relating to the fund is credited to the fund while expenses are debited.

     

    • Endowment fund: it’s a fund usually a non-profit organization, arising from a bequest or gift, the income of which is devoted to a specific purpose.

     

    • Annuity fund: an annuity fund is established when a non-profit organization receives assets from a donor with a condition to pay

     

    • Loan fund: loan fund is set up to grant loans for specific purposes say loans to pursue higher studies.

     

    • A fixed assets fund is a fund earmarked for investment in fixed assets or already invested in fixed assets.

     

    • Prize funds: it is a fund set up to use for distribution as prizes say for achievements or contributions to the welfare of society.
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Aadil
AadilCurious
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  2. Vijay Curious M.Com
    This answer was edited.

    As you know all transactions occurring in a business are recorded in the journal (book of original entry) in chronological order. After recording them in the journal, they are posted to their respective ledger accounts. Here I've explained the steps involved in posting a journal entry to the ledger.Read more

    As you know all transactions occurring in a business are recorded in the journal (book of original entry) in chronological order. After recording them in the journal, they are posted to their respective ledger accounts.

    Here I’ve explained the steps involved in posting a journal entry to the ledger.

    Posting of an account debited in the journal entry:

    Step 1: Identify the account which has to be debited in the ledger.

    Step 2: Write the date of the transaction under the ‘Date Column’ of the debit side of the ledger account.

    Step 3: Write the name of the account which has been credited in the journal entry in the ‘Particulars Column’ on the debit side of the account as “To (name of the account)”.

    Step 4: Write the page number of the journal where the entry exists in the ‘Journal Folio (JF) Column’.

    Step 5: Enter the amount in the ‘Amount Column’ on the debit side of the ledger account.

    Posting of an account credited in the journal entry:

    Step 1: Identify the account which has to be credited in the ledger.

    Step 2: Write the date of the transaction under the ‘Date Column’ of the credit side of the ledger account.

    Step 3: Write the name of the account which has been debited in the journal entry in the ‘Particulars Column’ on the credit side of the account as “By (name of the account)”.

    Step 4: Write the page number of the journal where the entry exists in the ‘Journal Folio (JF) Column’.

    Step 5: Enter the amount in the ‘Amount Column’ on the credit side of the ledger account.

    I’ll explain the process of preparing a ledger A/c with a simple transaction.

    On 1st May ABC Ltd. purchased machinery for 5,00,000. In the Journal the following entry will be made.

    Machinery A/c   5,00,000
       To Bank A/c   5,00,000
    (Being machinery purchased for 5,00,000)

    Let’s assume that this entry appears on page no. 32 of the journal. Now we will open Machinery A/c and Bank A/c in the Ledger.

    On the debit side of the Machinery A/c “To Bank A/c” will be written. In the Bank A/c “By Machinery A/c” will be written on the credit side.

    An extract of both the accounts are as follows:

    Machinery A/c

    Date Particulars J.F. Amt. Date Particulars J.F. Amt.
    May-01 To Bank A/c 32   5,00,000

     

    Bank A/c

    Date Particulars J.F. Amt. Date Particulars J.F. Amt.
    May-01 By Machinery A/c 32   5,00,000
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Spriha Sparsh
Spriha Sparsh
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company. Retained earnings are shown under shareholders’ equity in the balance sheet and are calculaRead more

    Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company.

    Retained earnings are shown under shareholders’ equity in the balance sheet and are calculated as follows:
    Retained earnings at the end of the year = Retained earnings at the beginning of the year + Net Income – Dividend

    From the above formula, Yes, it is possible for retained earnings to be negative. Negative earnings occur when the cumulative dividend payout is higher than the earnings made by a company during the year. This results in a negative balance as per the formula.

    Negative Retained earnings indicate a number of concerning facts about a company:

    • That the company is experiencing Long term losses.
    • That there are chances for the company to go into bankruptcy.
    • That the company may be paying out dividends to the shareholders from borrowed finance.

     

    Positive Retained Earnings

    When a company is said to have positive retained earnings, the company has several advantages. The company has excess profit to hold on to. This helps in expansion and also acts as a safety net in case of unforeseen expenses. Hence if a company shows positive Retained earnings it can be interpreted that the company is profitable.

    However, higher retained earnings mean the distribution of lesser dividends to shareholders. This makes the company look less attractive to investors. Another reason for high retained earnings could be that the company has not found any profitable investment for its earnings.

    Therefore, there should be adequate retained earnings with the company but at the same time, keep a check that the amount of retained earnings does not exceed a limit.

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Naina@123
Naina@123
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Bill of Exchange
  2. prashant06 B.com, CMA pursuing
    This answer was edited.

    Advantages of Bill of Exchange: Bill of Exchange is generally used as an instrument of credit as it offers many advantages to its users. The advantages are as follows: CONCLUSIVE EVIDENCE: It acts as a shred of conclusive evidence in case of any dispute between the parties like seller-buyer, drawer-Read more

    Advantages of Bill of Exchange:

    Bill of Exchange is generally used as an instrument of credit as it offers many advantages to its users. The advantages are as follows:

    • CONCLUSIVE EVIDENCE: It acts as a shred of conclusive evidence in case of any dispute between the parties like seller-buyer, drawer-drawee, debtors creditors, etc. Issuing the Bill of Exchange binds the party into a legal relationship. It acts as a legal document and proof in a court of law.

     

    • TERMS AND CONDITIONS: When a Bill of Exchange is issued, it mentions all the terms and conditions of payments. The terms and conditions can be like the amount of bill, date of payments, place of payment, interest amount if any, maturity period, etc.

     

    • ACT AS MEANS OF CREDIT: With the help of the Bill of Exchange, buyers can purchase goods on a credit basis and make payment after the credit period expires. If in case of emergency the drawer can also get such Bills discounted before the maturity period.

     

    • WIDER ACCEPTANCE: The Bills of Exchange carries a wide acceptance feature for the parties through which payments can be received and made without any difficulty.

     

    • RELATIONSHIP FRAMEWORK: The Bill of Exchange acts as an instrument that provides a framework enabling the smooth credit transaction between the parties as per the agreement.

     

    • MUTUAL ACCOMMODATION: Sometimes bills are mutually accommodated for the benefit of the parties. The Bill is drawn and accepted by drawer and drawee. Then the same bill is discounted by the drawer and the agreed sum is remitted to the drawee. This is basically done mutually to provide financial help to each other.
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SidharthBadlani
SidharthBadlani
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  2. Ishika Pandey Curious ca aspirant
    This answer was edited.

    Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more

    Definition

    Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.

    However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.

    For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.

    Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.

    For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.

    Meaning as per AS – 29

    Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-

    • Contingent asset

    A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
    Not wholly within the control of the enterprise.

    It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.

    • Contingent liability

    A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
    Not wholly within the control of the enterprise.

    A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
    A reliable estimate of the amount of obligation cannot be made.

    Recognition In Financial Statements

    Contingent assets and liabilities are recognized as follows:-

    • Contingent Assets

    As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.

    It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.

    However, when the realization of income is virtually certain, the related asset no longer remains contingent.

    • Contingent liability

    As per the rules, it is not recognized by an enterprise.

    When recognized?

    Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.

    The assets and the related income are recognized in the financial statements of the period in which the change occurs.

    Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.

    And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.

    A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.

    Disclosure

    Now we will see how contingent assets and liability are disclosed which is mentioned below:-

    • Contingent asset

    These contingent assets are not disclosed in financial statements.
    A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.

    • Contingent Assets

    A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.

     

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

    Expenses are of two types, are Direct Expenses Indirect Expenses   Direct Expenses Direct expenses are those expenses are which are directly related to the manufacturing or production of the final goods. These expenses are also known as Manufacturing expenses. Manufacturing or production of gooRead more

    Expenses are of two types, are

    1. Direct Expenses
    2. Indirect Expenses

     

    Direct Expenses

    Direct expenses are those expenses are which are directly related to the manufacturing or production of the final goods. These expenses are also known as Manufacturing expenses.

    Manufacturing or production of goods indicates the conversion of Raw material into finished goods. the expenses incurred in the stage of conversion are treated as Direct expenses or Manufacturing expenses.

    Direct expenses are shown on the Debit side of the Trading Account.

     

    Indirect Expenses

    Indirect expenses are those expenses that are incurred to run a business day-to-day and maintenance of the company.  In other words, they are not directly related to making a product or service or buying a wholesale product to resell.

    Indirect expenses are classified into three types, which are

    1. Factory Expenses
    2. Administrative Expenses
    3. Selling & Distribution Expenses

    Indirect Expenses are shown on the Debit side of the Profit and Loss Account.

     

    Presentation of Direct Expenses in Trading Account

     

    Examples of Direct Expenses

    1. Gas, water, and Fuel: Gas, water, and fuel are the essentials to run a factory and are used in machinery to manufacture its final goods.
    2. Wages: Wages are the daily payments to the workers or Labours working in the factory premises on a daily or weekly payment basis.
    3. Freight and Carriage: Freight and Carriage are the expenses related to the importing of raw materials from the godown or from the outsiders to the Factory.
    4. Factory Rent: Rent paid for the factory area or any payment related to the place of the factory is known as factory rent.
    5. Factory Lighting: The expenses related to the uniform distribution of light over the working plane are obtained in the factory premises.
    6. Factory Insurance: The payment of insurance related to the factory will come under direct expenses.
    7. Manufacturing Expenses: Any other expenses related to the manufacturing process of finished goods are manufacturing expenses.
    8. Cargo Expenses: These are the expenses related to goods or freight being shipped or carried by the ocean, air, or land from one place to another.
    9. Upkeep and Maintenance: These are the expenses related to the maintenance of the factory for smooth running.
    10. Repairs on Machinery: The expenses related to any repair on machinery which is used in the production.
    11. Coal, Oil, and Grease: Coal, oil, and grease are the essentials to run machinery which results in the conversion of raw material to finished goods.
    12. Custom Charges: The expenses related to the payment of any Customs duty for the material imported.
    13. Clearing Charges: A clearing charge is a charge assessed on securities transactions by a clearing house for completing transactions using its own facilities.
    14. Depreciation on Machinery: Generally it is a nonmonetary expense but recorded in the trading account as a direct expense as per the accrual accounting.
    15. Import duty: any payment related to the importing of any machinery or any material from other countries is known as import duty.
    16. Octroi: this is the tax levied by a local political unit, normally the commune or municipal authority, on certain categories of goods as they enter the area.
    17. Shipping expenses: any expense related to the shipment charges of the raw material is known as shipping expenses.
    18. Motive power: Motive Power basically means any power, such as electricity or steam energy, etc, used to impart motion to any source of mechanical energy.
    19. Dock dues: a payment that a shipping company must pay for the use of a port.
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Ayushi
AyushiCurious
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  2. Spriha Sparsh
    This answer was edited.

    Based on duration, expenses can be categorized as capital expenditure and revenue expenditure. A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility inRead more

    Based on duration, expenses can be categorized as capital expenditure and revenue expenditure.

    A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility in the long-term i.e. more than one year.

    The formula of CAPEX can be given as –

    Capital expenditure = Net increase in PP & E + Depreciation Expense

    . It is showed in companies’ cash flow statement and in its Balance Sheet under the head of fixed assets. These capital expenditures are capitalized.

    List of some capital expenses –

    • Buildings (Including costs of purchase and other cost that extend the useful life of a building)
    • Computer equipment (Cost of purchase and installation cost)
    • Office equipment (Purchase cost)
    • Furniture and fixtures (Cost of purchase and installation cost)
    • Intangible assets (i.e. patent, trademark)
    • Land (Including the cost of purchasing and upgrading the land)
    • Machinery (Purchase cost and costs that bring the equipment to its location and for its intended use)
    • Software (Installation cost)
    • Vehicles

    Example- If an asset costs Rs10,000 when bought and installation cost is Rs2000. The total capital expenditure will be Rs12000 and is expected to be in use for five years, Rs2,500 may be charged to depreciation in each year over the next five years.

    B) Revenue expenditure or OPEX are those expenses that are incurred during its course of the operation. It can also be termed as  total expenses that are incurred by firms through their production activities. Such costs do not result in asset creation, and the benefits resulting from it are limited to one accounting year. These are for managing operational activities and revenue within a given accounting period.

    The accounting treatment for revenue expenditure for an accounting period is shown in a companies Income Statement, but it is not recorded in the firm’s Balance Sheet. OPEX is not capitalized and depreciation is not levied on such expenses.

    Examples for revenue expenditures are as follows –

    • Direct expenses

    These types of expenses are mostly incurred directly through the production process. Common direct expenses include – direct wages, freight charge, rent, material cost, legal expenses, and electricity cost.

    • Indirect expenses

    These expenses are indirectly related to production like during sale, distribution, and management of finished goods or services. They include expenses like selling salaries, repairs, interest, commission, depreciation, rent, and taxes, among others.

     

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