AccountingQA Latest Questions

Ishika Pandey
Ishika PandeyCurious
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Yes, a creditor is a liability. Creditors are treated as current liability. A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest. Creditors may be secureRead more

    Yes, a creditor is a liability. Creditors are treated as current liability.

    A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.

    Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.

    In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.

    Why are Creditors treated as a liability?

    An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc

    A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.

    As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.

    Treatment and Importance of Creditors

    Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.

    The significance/importance of creditors is as follows:

    • The amount due to creditors affects the current and acid test ratio of a company significantly.
    • It affects the short-term cash requirements of a company.
    • It affects the credit policy of the company. A company can extend longer credit periods to customers if it can avail longer credit periods from its suppliers.
    • Having too many creditors or a large amount due to creditors can affect investor sentiment negatively regarding the business.

    We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.

    Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.

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

    Definition A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions. Or in other words, we can say a group of accounts with different characteristics. It is also called the Principal Book of accounts. For example:- salary account, aRead more

    Definition

    A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions.

    Or in other words, we can say a group of accounts with different characteristics.

    It is also called the Principal Book of accounts.

    For example:– salary account, and debtor account.

    Sub- ledger it is defined as a group of accounts with common characteristics. And is a part of ledger accounts.

    For example:- customer account, vendor account, etc.

    The difference between a ledger and a sub-ledger is that ledger accounts control sub-ledger accounts whereas a sub-ledger is a part of the ledger account.

    Features Of Ledger

    • Ledger is prepared from the journal.
    • Ledger is a master record of all the accounts of the business.
    • The Ledger account shows the current balances of all accounts.
    • Ledger accounts summarize the effect of transactions upon assets, liabilities, capital, incomes, and expenditures.

    Features Of Sub-Ledger

    • Sub-ledger in accounting provides up-to-date information about the daily activities of the business.
    • It keeps individual track of all balances.
    • Help locate errors in individual accounts.
    • A sub-ledger is a collection of different ledgers used in an account.

     

    Utilities of ledger

    The main utilities of a ledger are summarized as follows :

    • Provides complete information about a particular account: Complete information relating to a particular account is available in one place in the ledger.

    • Information on income and expenses: In the ledger, a separate account is maintained for each income and expense. The amount of total income and total expenses are known from the ledger accounts.

    • Preparation of trial balance: Ledger helps in preparing trial balances which ensure arithmetical accuracy of the transaction recorded in the books of account.

    • Helps in preparing final accounts: After preparing the trial balance, final accounts are prepared to know the profitability and financial position of the business.

    Utilities of sub-ledger

    The utilities of the sub-ledger are as follows :

    • Track customer information: If a client has an outstanding credit debt or needs money refunded, a company can use a sub-ledger to verify the information quickly.

    • Protect financial information: A sub-ledger allows a financial supervisor to isolate certain records so that employees can view only parts of the company’s financial information. This added level of security is important for large corporations.

    • Create separate databases: Large companies usually process large amounts of financial data that may be too big for one database. Software programs organize this data into isolated files to calculate financial information in the general ledger of a business.

    Conclusion

    So here I conclude that a ledger is compulsory in the recording process whereas a sub-ledger is optional.

    The ledger is used for preparing trial balance but the sub-ledger is not used for the same.
    Sub ledger is controlled by the ledger.

    The sub-ledger supports the transaction of each specific account indicated on the ledger.

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

    The difference between a ledger & a trial balance is as follows: Basis Ledger Trial Balance Meaning Ledger is a book/register in which all the accounts are put together. A Trial Balance is a statement showing the debit and credit balance of all the accounts to ascertain the arithmetical accuracyRead more

    The difference between a ledger & a trial balance is as follows:

    Basis Ledger Trial Balance
    Meaning Ledger is a book/register in which all the accounts are put together. A Trial Balance is a statement showing the debit and credit balance of all the accounts to ascertain the arithmetical accuracy of the books of accounts.
    Basis of preparation Journal is the basis for recording transactions in the ledger. The closing balances of different accounts in the ledger are the basis for preparing the trial balance.
    Objective It is prepared to see the net effect of various transactions affecting a particular account. It is prepared to check the arithmetical accuracy of the books of accounts.
    Format A ledger has four identical columns on the debit and credit sides: 1. Date, 2. Particulars, 3. Journal Folio, 4. Amount. A Trial Balance has five columns: 1. S.No, 2. Name of Accounts, 3. Ledger Folio, 4. Debit Balance, 5. Credit Balance.
    Stage of Recording A ledger is prepared after recording the transactions in the journal. A trial balance is prepared after posting the transactions in the ledger.
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Astha
AsthaLeader
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Contingent Assets
  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    To begin with, let me first give you a small explanation of what Contingent assets are A contingent asset is a potential asset or economic benefit that does not exist currently but may arise in the near future. Such an asset arises from an uncertain and unpredictable event. To make it clear with anRead more

    To begin with, let me first give you a small explanation of what Contingent assets are

    A contingent asset is a potential asset or economic benefit that does not exist currently but may arise in the near future. Such an asset arises from an uncertain and unpredictable event.

    To make it clear with an example: String Co. filed a lawsuit against a competitor company Weave Tech Co. for infringing on company ABC’s patent. Even if it is probable (but not certain) that Strings Co. will win the lawsuit, it is a contingent asset.

    As such, it will not be recorded in Strings Co. general ledger accounts until the lawsuit is settled.

    At most the Strings Co. can do is, prepare a note disclosing the fact that it has filed the lawsuit the outcome of which is uncertain.

    Disclosing Contingent Assets

    • The probability of occurrence is virtually certain or probable: It will be disclosed as an asset in the balance sheet.

    For Example, The court orders for reimbursement to Strings Co. say 1,00,000 for the damages, but it has not yet received the money. Although it is virtually certain that the company will receive the money in the near future, it will be treated as an asset and can be disclosed in the balance sheet on the assets side.

    • The probability of occurrence is probable: It will be disclosed as notes to accounts below the balance sheet.

    For Example, Strings Co. filed a lawsuit against a competitor company Weave Tech for infringing on Strings Co. patent. Even if it is probable (but not certain) that Strings Co. will win the lawsuit, it is a contingent asset.

    As such, it will not be recorded in Strings company’s general ledger until the lawsuit is settled.

    At most the Strings Co. can do is, prepare a note disclosing the fact that it has filed the lawsuit the outcome of which is uncertain. 

    • The probability of occurrence is remote or not probable:  It will not be treated as a contingent asset.

    In this case, the disclosure of it is not permitted.

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

    Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. Sometimes debtors are unable to pay the amount due either partially or fully. the amount that is not receivableRead more

    Definition

    Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.

    Sometimes debtors are unable to pay the amount due either partially or fully. the amount that is not receivable is a loss and is called bad debt.

    Bad debts are neither assets nor liabilities they are expenses that are debited to the profit and loss account and reduced from debtors in the balance sheet.

    For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.

     

    Related terms

    So there are a few related terms whose meanings you should know

    • Further bad debts :
      • It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
      • That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.

     

    • Bad debts recovered :
      • It may happen that the amount written off as bad debts are recovered fully or partially.
      • In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
      • Thus amount recovered is a ‘gain’  and is credited to the profit and loss account.

     

    Accounting methods

    There are two methods for accounting for bad debts which are mentioned below:-

    • First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement, which is called the profit and loss account.

     

    • Second, is the allowance method which means we create provisions for doubtful debts accounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.

     

      • Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
      • Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
      • The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
      • Provision for doubtful debts is shown in the debit side of the profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet. 

     

    Accounting treatment

    Now let me try to explain to you the accounting treatment for bad debts which is as follows :

    • Balance sheet

     

      • In the balance sheet either it can be shown on the asset side under the head, current assets by reducing from that specific assets.
      • For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.

     

    • Profit and loss account

     

      • Bad debts are treated as expenses and debited to the profit and loss account.
      • For example, as I have explained above, before transferring to the balance sheet, bad debt will be debited to the profit and loss account as an expense.

    Now let me show you the extract of the profit and loss account and balance sheet showing bad debts and bad debts recovered which are as follows:-

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prashant06
prashant06
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  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    Prepaid expenses are those expenses that have not been expired yet but their payment has already made in advance. There are many examples of prepaid expenses such as rent paid in advance, interest paid in advance, unexpired insurance You might be wondering what kind of account it is? As the name sugRead more

    Prepaid expenses are those expenses that have not been expired yet but their payment has already made in advance. There are many examples of prepaid expenses such as rent paid in advance, interest paid in advance, unexpired insurance

    You might be wondering what kind of account it is? As the name suggests it should be an expense but actually it’s an asset. When we initially record prepaid expenses we consider them as current assets and show them in the balance sheet. It turns out to be an expense when we use the service/item for what we have paid for in advance.

    The entry for the above explanation is as follows:

    From the modern rule, we know Assets and expenses increased are debits while decrease in assets and expenses are credit.

    As this is asset, increase in asset therefore we debit prepaid expense and on the other hand we pay cash/ bank on behalf of that asset in advance hence there is decrease in assets hence credited. The entry will be as follows:

    Prepaid Expense A/c                                                  …….Dr XXX
               To Cash/ Bank XXX

    when this prepaid expense actually becomes expense we pass the adjusting entry. The entry will be as follows:

    Expense A/c                                                               …….Dr XXX
               To Prepaid expense XXX

    Let me give you simple example of the above entry.

    Suppose you pay advance rent of Rs 9,000 for six months for the space you haven’t used yet. So you need to record this as prepaid expense and show it on the asset side of the balance sheet under current assets. Since you paid for the same the entry would be as follows:

    Prepaid Rent A/c                                                  …….Dr 9,000
               To Cash/ Bank 9,000

    As each month passes we will adjust the rent with prepaid rent account. Since the rent was advanced for 6 months, therefore (9,000/6) Rs 1500 will be adjusted each month with the rent expense account. The adjustment entry will be:

    Rent A/c                                                               …….Dr 1,500
               To Prepaid rent 1,500

    The process is repeated until the rent is used and asset account becomes nil.

     

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Rahul_Jose
Rahul_Jose
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  2. Pooja_Parikh Aspiring Chartered Accountant

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

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

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

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

    FORMULA

    PURPOSE OF SLR

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

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

     

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Aadil
AadilCurious
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    The term ‘contra’ means  'opposite'. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance. The purpose of the contra revenue account is to ascertain the actuaRead more

    The term ‘contra’ means  ‘opposite’. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance.

    The purpose of the contra revenue account is to ascertain the actual amount of sales and record the items which have reduced the sales.

    These are the contra revenue accounts commonly seen in businesses:

    • Sales return account: This account records the amount of goods sold returned by customers. The journal entry for recording sale return is as follow:

    The total sales return is deducted from the sales in the balance sheet. Though being opposite of the sales account, the sale return account is not an expense account. It is considered an indirect loss as it reduces sales.

    • Sale Discount account: This account records the amount of discount allowed to customers. The journal entry for recording sale discounts is as follows:

    Sales discount is an expense hence it is debited to the profit and loss account.

    Sales returns and sales discounts are shown in the trading and profit and loss account in the following manner:

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Aadil
AadilCurious
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  2. Karan B.com and Pursuing ACCA

    In accounting, sales returns are the goods returned by the customer to the seller. This can be due to goods delivered is damaged or defective. A return can also be due to late delivery, or the wrong items being sent to the buyer. Sales return is a subsidiary book in which all the details are recordeRead more

    In accounting, sales returns are the goods returned by the customer to the seller. This can be due to goods delivered is damaged or defective. A return can also be due to late delivery, or the wrong items being sent to the buyer.

    Sales return is a subsidiary book in which all the details are recorded for the goods returned which were sold on credit. It is also known as return inwards.

    Accounting for Sales Return

    Whenever there is a sale return, the seller will debit the sales return account and credit the debtor’s account. The total amount of sales returns is deducted from the gross sales for the period giving the figure for net sales. Debtor’s account is credited because the amount receivable from debtors will reduce.

    The sales return is a contra account to the sales.

    Format of sales return book:

    In the above format, a credit note is a statement prepared by the seller and sent to the buyer. In this statement, all the details are mentioned in respect of the goods sent by the buyer and are an indication that the buyer’s account is credited in respect of the goods received.

    For example, Mr. A sold goods to Mr. B costing Rs 50,000 on 1 December. On 5 December, goods amounting to Rs 15,000 were found defective and were returned immediately to Mr. A.

    Mr. A will account for this in the following way:

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Aadil
AadilCurious
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  2. Radhika
    This answer was edited.

    A Capital Account is an account that shows the owner's equity in the firm and a Partner's Capital Account is an account that shows the partner's equity in a partnership firm. Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are: CapitalRead more

    A Capital Account is an account that shows the owner’s equity in the firm and a Partner’s Capital Account is an account that shows the partner’s equity in a partnership firm.

    Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are:

    • Capital introduced in the firm
    • Capital withdrawn
    • Interest on Capital
    • Interest on Drawings
    • Profit or loss in the financial year, etc.

    When partners are given interest on their capital contribution in the firm, it is called on Interest on Capital.

    In case the partnership firm does not have a Partnership Deed, the Partnership Act does not include a provision for Interest on Capital. However, if the partners want they can mutually decide the rate of Interest on Capital.

    Interest on Capital is calculated on the opening capital of the partners and is only allowed when the firm makes a profit, that is, in case a firm incurs losses, it cannot allow Interest on Capital to its partners.

    Example:

    In a partnership firm, there are two partners A and B, and their capital contribution is Rs 10,000 and 20,000 respectively. Interest on capital is @ 10% p.a. The Interest on Capital for both the partners is:

    Partner A- 10,000 * 10/100 = 1,000

    Partner B- 20,000 * 10/100 = 2,000

    The journal entry for Interest on Capital is an adjusting entry and is shown as:

    Interest on Capital A/c                                                          Dr. 3,000
                                         To A’s Capital a/c 1,000
                                         To B’s Capital A/c 2,000
    • Partner’s Capital Account is credited because it is credit in nature and interest on capital is an addition to the account.
    • Interest on Capital Account is debited because it is an expense account.

     

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