AccountingQA Latest Questions

A_Team
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  2. Bonnie Curious MBA (Finance)
    This answer was edited.

    As per the Golden Rules As per the golden rules of accounting, a trading account is a nominal account. To ensure that financial statements accurately reflect a business's financial position and performance, the golden rules of accounting guide the preparation of financial statements. The point to noRead more

    As per the Golden Rules

    As per the golden rules of accounting, a trading account is a nominal account. To ensure that financial statements accurately reflect a business’s financial position and performance, the golden rules of accounting guide the preparation of financial statements.

    The point to note is that it is almost impossible to apply the rules of debit and credit with certain accounts such as Trading A/c, Profit & Loss A/c, etc.

     

    As per the Modern Rules

    The purpose of a trading account is to record transactions related to the purchase and sale of goods for a business. In other words, it serves as a recording and reporting mechanism for business income and expenses.

    An accounting period, like a month, quarter, or year, is the time when a trading account is prepared. It is used to calculate the business’s net profit or loss. Other financial statements, such as the balance sheet, are prepared using the information in a trading account.

    In summary, a trading account is a type of income statement account that is used to track and report on the income and expenses from a business’s buying and selling activities

     

    Rules of Debit and Credit

    There are three main types of accounts according to the legacy rules of debit and credit: personal accounts, real accounts, and nominal accounts. A personal account is one that is related to an individual or entity owing the business money (e.g. a customer), or owing the business money (e.g. a supplier).

    A real account is one that relates to assets such as cash, inventory, and property.

    Nominal accounts are accounts that relate to income and expenses, such as a “trading account”.

    To summarize, a trading account is a nominal account used to record and report the business’s income and expenses resulting from its buying and selling activities.

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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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Jayesh Gupta
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company. By entity, it means a shareholder may be: An individual Any other company Any other incorporatRead more

    Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company.

    By entity, it means a shareholder may be:

    • An individual
    • Any other company
    • Any other incorporated entity
    • Cooperative society
    • BOI( Body of Individuals)
    • AOP(Association of Persons)
    • Artificial Juridical Person

    The rights of shareholders depend on the type of shareholder one is.

    Types of shareholders

    1.   Equity Shareholders: By the term ‘shareholders’ we usually mean equity shareholders. They are permanent in nature i.e. they are not repaid the money they have invested into the company until the company is liquidated or wound up. Equity shareholders have the following rights:

    • Right to have a share in profits made by the company. The profit made by a company, when distributed to its equity shareholders is known as a dividend.
    • Right to vote on all resolutions to be passed in the Annual General Meeting of a company.
    • Right to get repaid in event of winding up of the company. However, they are paid after meeting the obligations of outsiders and of preference shareholders.
    • Right to transfer ownership of the shares. A shareholder may sell its shares to some willing buyer and cease to be a shareholder of a company.

     

    2. Preference Shareholders: They are shareholders who are given preference regarding:

    • Dividend
    • Repayment at time of winding up

    Unlike equity shareholders, they are not of permanent nature. Preference shares are redeemable i.e. they are to be repaid after a period which cannot be more than 20 years from the date of allotment of such shares (as the Companies Act, 2013). Also, a company cannot issue irredeemable preference shares. The rights of preference shareholders are as follows:-

    • By preference as to dividend, it means preference shareholders have the right to receive a fixed dividend as a certain percentage on the nominal value of the share and that too before equity shareholders are paid.
    • Right to get repaid at the date of redemption.
    • If the company get liquidated before redemption of the preference shareholder, then they have the right to get repaid before equity shareholders.

     

    3.  Differential Voting Rights Shareholders: These shareholders hold equity shares but with differential, right as to voting i.e. they may either have less voting rights or more voting right as compared to ordinary equity shares. Generally, DVR shares carry less voting power.

    For example, a DVR shareholder gets 1 vote for 10 shares whereas an ordinary equity shareholder gets 10 votes for 10 shares i.e. one vote for every share. DVR shares issued to raise not only permanent capital but also prevent dilution of voting rights.

    The rest of the right remains the same as the equity shareholders.

     

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. Unlike a balance sheet that provides information about the company on a particular date, a cash flow statement proviRead more

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. Unlike a balance sheet that provides information about the company on a particular date, a cash flow statement provides information about the flow of cash over a period of time.

    OBJECTIVE

    Information obtained through cash flow statements is aimed to assess the ability of a business to generate cash and at the same time, maintain liquidity. Therefore, important economic decisions can be made by evaluating these cash flow statements.

    Cash Flow statements are categorized into

    • Operating Activities: These activities refer to the main activities of the business during an accounting period. They involve revenue-generating activities. As per the indirect method, profit before tax is taken as the starting point and all non-cash expenses are added while non-cash incomes are deducted. Whereas in direct method, cash receipts and cash expenses are added and subtracted respectively. Eg: sale of goods.
    • Investing Activities: These activities involve the sale and purchase of non-current assets and investments. Eg: cash payment for machinery.
    • Financing Activities: These activities result in a change in capital or borrowings. Eg: cash proceeds from the issue of equity shares.

    Importance of Cash Flow

    A cash flow statement gives us knowledge about the liquidity and solvency of the company. These are necessary for the survival and expansion of the company. It also helps in predicting future cash flows by using information from previous cash flows. It also helps in comparison between companies which shows the actual cash profits.

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Bonnie
BonnieCurious
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    No, capital account is not a real account. Capital account represents the amount of money invested by the owner/owners of the business along with the retained earnings net of drawings or dividends. Capital account has a natural credit balance because it is an internal liability of the business. CapiRead more

    No, capital account is not a real account.

    Capital account represents the amount of money invested by the owner/owners of the business along with the retained earnings net of drawings or dividends. Capital account has a natural credit balance because it is an internal liability of the business.

    Capital account is a personal account because, as discussed above, it represents the investment of the owner or owners. Personal account represents person or persons.

    Whereas a real account represents the material assets of a business. Example:-  Cash A/c, Fixed assets A/c etc. That’s why the capital account is not a real account.

    Being a personal account, the following golden rule of accounting applies to capital account:-

    “Debit the receiver and credit the giver”

    Here, as the owner gives an amount as an investment into the business (owner and the business are separate entities), the capital account has a credit balance.

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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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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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A_Team
A_Team
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company. Workmen Compensation Reserve Account is generally given effect in case of admiRead more

    Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company.

    Workmen Compensation Reserve Account is generally given effect in case of admission, retirement of partners or dissolution of firm.

    If there is a change in the estimated value of reserve it is given effect during the revaluation of assets and liabilities.

    Journal entry if the existing reserve is less than the new estimated amount:

    Revaluation A/c (Dr)

    To Workmen Compensation Reserve A/c

    The reserve is credited because we need to create more than the existing reserve, since the new estimated liability is more than the existing.

    Journal entry if the existing reserve is more than the new estimated amount:

    Workmen Compensation Reserve A/c (Dr)

    To Revaluation A/c

    The reserve is debited because we need to decrease the existing reserve, since the new estimated liability is less than the existing.

    If a worker claims compensation, it is said to be a liability against the reserve. In case of dissolution, any such liability against workmen compensation reserve takes priority to be paid off according to the law.

    Journal entry in case of claim against reserve is:

    Workmen Compensation Reserve A/c (Dr)

    To Workmen Compensation Claim

    The amount is transferred from the reserve to a new liability, hence the reserve is debited and the claim is credited.

    If there are not sufficient funds in the firm to pay the liability, partners will have to bring funds from their personal assets to pay the workers.

    Journal entry when partner’s have to bring funds:

    Partner’s Capital Account (Dr)

    To Workmen Compensation Reserve A/c

    Partner’s need to bring funds to fulfill the liability, hence there account is debited and since the reserve is increased, hence it is credited.

    If there is no liability against the Workmen Compensation Reserve then it is distributed amongst the partners in their existing profit-sharing ratio.

    Journal entry for distribution of reserve is:

    Workmen Compensation Reserve A/c (Dr)

    To Partner’s Capital Account

    Since, reserve is more than required it is distributed among partners, hence their account is credited and as the reserve decreases, it is debited.

     

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A_Team
A_Team
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  2. Saurav

    Accruals are not the same as provisions both are totally different from each other. Accruals and provision both are vital parts of accounts but work differently   Accrual Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irreRead more

    Accruals are not the same as provisions both are totally different from each other. Accruals and provision both are vital parts of accounts but work differently

     

    Accrual

    Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such an amount has been paid.

    An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be further divided into two parts

     

    Accrual Expense

    Accrual Expense means any transaction that takes place in a particular period but the amount for it will be paid on a later period.

    For example- 10,000 for the month of March was paid in April month then this rent will be accounted for in the books in March

    These are the following accrued expense

    • Accrual Rent– Accrual rent means the amount for using the land of the landlord is paid at a later period than the period when it is put into use.
    • Insurance– Accrual insurance means the amount paid as a premium to the insurance company paid on a later period than the period when it is due
    • Expense- Acrrual expense means the amount for any expense paid on a later period then the period when it pertains to be paid
    • Wages- Accrual wages means the amount which is paid to employees on a later period than the period when the wages get due

     

    Accrual Revenue

    Accrual Revenue means any transaction that takes place in a particular period but the amount for it will be received on later period. For example- If interest of 10,000 on bonds for the period of March is received in April months then this amount will be accounted for in March. These are the following accrued revenue

    • Accrual Rent– Accrual rent means the amount for using the land of an entity by another party is received on a later period than the period when it was put into use.
    • Accrued Interest– Accrued interest means the amount of interest received on a later period than the period when it pertains to receive

     

    PROVISIONS

    Provision refers to making a provision/allowance against any probable future expense that the company might incur in the near future. This amount is uncertain and difficult to predict its surety.

    However, as per the prudence concept of accounting a company needs to anticipate the losses that will incur in the near future due to which provision is made.

    For example- A company has debtors of 10,000 but as per the company’s previous records company anticipates that 1% of debtors will become bad debts. So in this case company will make a provision of 1% that is 100 on it.

    There are various types of provisions which are-

    • Provision on Depreciation– Provision for Depreciation means a provision for future depletion of assets has been already created
    • Provision for Doubtful Debts– Provision for Doubtful Debts means a provision created against debtors that doesn’t seem to be recovered in the near future
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Astha
AsthaLeader
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  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Journal Entry for Interest on Drawings is- Particulars Amount Amount Drawings A/c                                                      Dr $$$      To Interest on Drawings A/c $$$ So as per the modern approach: From the point of view of business, Interest on Drawings is an Income. When there is an inRead more

    Journal Entry for Interest on Drawings is-

    Particulars Amount Amount
    Drawings A/c                                                      Dr $$$
         To Interest on Drawings A/c $$$

    So as per the modern approach: From the point of view of business, Interest on Drawings is an Income.

    • When there is an increase in the Income, it is credited.
    • When there is a decrease in the Income, it is debited.

     

    From the point of view of the proprietor, Interest on Drawings is a Liability.

    So as per the modern approach:

    • When there is an increase in the Liability, it is credited.
    • When there is a decrease in the Liability, it is debited.

     

    So as per the modern approach,  Interest on Drawings is credited because with Interest the income increases for the business. Whereas,  the amount of such interest is a loss from the point of view of the owner/ Proprietor, as such the amount of drawings is increased by the amount of interest and hence the Drawings account is debited.

    For Example, Harry charged interest on drawings on Rs 10,000 @ 12% for one year.

    Explanation:

    Step 1: To identify the account heads.

    In this transaction, two accounts are involved, i.e. Drawings A/c and Interest on Drawings A/c.

    Step 2: To Classify the account heads.

    According to the modern approach: From the point of view of business,  Interest on Drawings is a Revenue A/c and Drawings A/c is an Expense A/c.

    Step 3: Application of Rules for Debit and Credit:

    According to the modern approach: As Revenue increases because of interest on drawings received by the business, Interest on Drawings A/c will be Credited. (Rule – increase in Revenue is credited).

    Drawings A/c is an expense account for the business and as expense increases, Drawings A/c will be debited. (Rule – increase in the expenses is debited).

    So from the above explanation, the Journal Entry will be-

    Particulars Amount Amount
    Drawings A/c                                                      Dr 1,200
         To Interest on Drawings A/c 1,200

     

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