AccountingQA Latest Questions

AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. GautamSaxena Curious .
    This answer was edited.

    The land is a fixed asset and is treated as a long-term asset account.  Explanation The land is a fixed asset which is also referred to as a long-term asset. The fixed assets are those assets that are not expected to be cashed, consumed, last, sold, or written off within one accounting year and areRead more

    The land is a fixed asset and is treated as a long-term asset account. 

    Explanation

    The land is a fixed asset which is also referred to as a long-term asset.

    The fixed assets are those assets that are not expected to be cashed, consumed, last, sold, or written off within one accounting year and are purchased for long-term use. The fixed assets are also called non-current assets and the reason behind it is that current assets are easily converted into cash within one year and they are not.

    Fixed assets are planned by the company to be used for the long term in order to generate income.

    Example- Land, building, furniture, plants & equipment, etc.

     

    Why is land an asset?

    Although the land is not depreciated, it is still considered to be an asset because just like other assets the business spends its own money to acquire it.

    It can also be used by the business for different operations and it doesn’t create any liability for the business. Instead, reselling the land after a few years can help the company earn a huge margin of profit.

     

    Land in the balance sheet

    On the asset side of the balance sheet, the land is stated under the heading long-term assets.

    Balance Sheet (for the year…)

     

    Therefore, the land is a fixed asset and is treated as a long-term asset account.

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    The word, “deferred” means delayed or postponed and “revenue” in layman’s terms means income. Therefore deferred revenue means the revenue which is yet to be recognised as income. It is actually unearned income. In accrual accounting, income is recognised only when it is accrued or earned. DeferredRead more

    The word, “deferred” means delayed or postponed and “revenue” in layman’s terms means income. Therefore deferred revenue means the revenue which is yet to be recognised as income. It is actually unearned income.

    In accrual accounting, income is recognised only when it is accrued or earned. Deferred revenue is the income received before the performance of the economic activity to earn it.

    Example:  A shoe shop owner gives an order to a shoe manufacturer of 1000 pair of shoes which is to be delivered after 4 months. He also gives him a cheque of ₹15,000 in advance, the rest ₹5000 is to be given at the time of delivery.

    So, in this case, the ₹15,000 is actually is unearned revenue i.e. deferred revenue. It will be recognised as revenue when the shoe manufacture completes the order and deliver it.

    Till then, the deferred revenue is reported as a liability in the balance sheet. Like this:

    After recognition as revenue, it will be reported in the statement of profit or loss:

    Hence, to summarise, deferred revenue is:

    • Unearned revenue
    • Recognised as income till it is earned
    • Till then it is recognised and reported as a liability in the balance sheet.

    Some examples of deferred revenue are as follows:

    • Advance rent received
    • Advance payment for goods to be delivered.
    • Advanced payment for services to be provided.

    Now the question arises why deferred revenue is recognised as a liability. It is due to the fact that the business may not be able to perform the economic activity successfully to earn that revenue.

    Taking the above example, suppose the shoe manufacturer is not able to honour its commitment and the shoe shop owner can wait no more, then the advanced money of ₹ 15,000 is to be refunded. That’s why deferred revenue is recognised as a liability because it is a liability if we consider the principle of conservatism (GAAP).

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A_Team
A_Team
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period.  For example, insurance is often paid for annually on tRead more

    Prepaid expense means a service to be rendered in the future period for which the business has already paid the remuneration. Prepaid expenses are classified as assets. The benefits of this payment will accrue to the business at a later period. 

    For example, insurance is often paid for annually on the basis of the calendar year. A business may pay insurance every year on 1st January for that entire year. While preparing the financial statements on 31st March, it will recognize the insurance premium for the period 1st April to 31st December of the next financial year as a prepaid insurance expense. 

    Why are prepaid expenses classified as assets? 

    First of all, let us understand what an asset is. An asset is anything over which the business has ownership rights and which it can sell for money. The benefits of this asset should accrue to the business. 

    In light of this definition, let us analyze prepaid expenses as an asset. As the business has already paid for these goods or services, it becomes a legal right of the business to receive the relevant goods or services at a later date. As the benefit of this expense would accrue to the business only at a later date, the prepaid expenses are classified as an asset. 

    Some examples of prepaid expenses are prepaid insurance, prepaid rent etc

    Treatment of Prepaid Expenses

    Prepaid expenses are recorded in the balance sheet under the heading “Current Assets” and sub-heading “Other Current Assets”

    As per the Generally Accepted Accounting Principles or GAAP, expenses must be recognized in the accounting period to which they relate or in which the benefit due to them is likely to arise. Thus, we cannot recognize the prepaid expenses in the accounting period in which they are incurred. 

    Prepaid assets are classified as assets and carried forward in the balance sheet to be debited in the income statement of the accounting period to which they relate. 

    Adjusting Entries

    Adjusting entries are those entries that are used to recognize prepaid expenses in the income statement of the period to which they relate. These entries are not used to record new transactions. They ensure compliance with GAAP by recognizing the expenses in the period to which they relate. 

    Conclusion

    The GAAP and basic definition of an asset govern the treatment of prepaid expenses as an asset. The business incurs them in an accounting period different from the accounting period in which their benefit would accrue to the business. The business has a legal right to receive those goods or services. 

    The business carries them as a current asset on the balance sheet. In the relevant accounting period, they are recognized in the income statement. 

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Anushka Lalwani
Anushka Lalwani
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  2. GautamSaxena Curious .
    This answer was edited.

    Interest on drawings Drawings refer to the money withdrawn by owners/partners for personal use from the business. The drawings, in accounting terms, can be of any type. It can be cash withdrawn from business or furniture or car etc. Drawings are money or assets that are withdrawn from a company by iRead more

    Interest on drawings

    Drawings refer to the money withdrawn by owners/partners for personal use from the business. The drawings, in accounting terms, can be of any type. It can be cash withdrawn from business or furniture or car etc. Drawings are money or assets that are withdrawn from a company by its owners for personal use and must be recorded as a reduction of assets. It’s paid back to the business with some interest.

    Interest on drawings is an income for the business and reduces the capital of the owner. Interest on drawings is the amount of interest paid by the partners, calculated concerning the period for which the money was withdrawn.

    • It’s an income for the business. Hence, credited to P&L Appropriation A/c.
    • It’s an expense for the owner/partner. Therefore, debited to owner’s/partner’s capital a/c
    • Interest on drawings is charged to the partners only when there is an agreement made among the partners in this regard or if it is mentioned in the Partnership Deed.

    Formulae for Interest on drawings

    There are three formulae used for calculating the interest on drawings. They are:

    1. Simple Method: In this method, as the name suggests, the amount of interest on drawings is calculated simply for the time the amount has been utilized.

    Interest on Drawings = Amount of drawings × Rate/100 × No. of Months/12 

    2. Product Method: This method is used when-

    • Drawings are made of unequal amounts at irregular intervals of time. Then this formula is used-

    Interest on Drawings = Total of Products × Rate/100 × 1/12

    • When drawings are made of equal amounts at regular/equal intervals of time. Then interest on drawings can be calculated on the total of the amount drawn, for the average of the period applicable to the first and last installment.

    Interest on Drawings= Total amount of drawings × Rate/ 100 × Average Period/12

    Also, note-

    Average Period = (No. of months left after first drawings+ No. of months left after last drawings)/2

    Example:

    Harish withdrew equal amounts at the beginning of every month for 9 months. Total drawings amounted to ₹6,000. Calculate the interest on drawings charged if the rate was 6% p.a.

    Solution:

    Average period = (No. of months left after first drawings+ No. of months left after last drawings)/2 = (9+1)/2 = 5 months 

    Interest on Drawings = Total of drawings × Rate/100 × 5/12

                                            = ₹ 6,000 × 6/100 × 5/12
                                            = ₹ 150.

    Journal entry for interest on drawings: 

    Interest transferred to Profit & Loss A/c:

     

     

     

     

     

     

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Bonnie
BonnieCurious
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Debited to P&L A/C Credited to P&L A/C Debited to Capital A/C None

  2. GautamSaxena Curious .
    This answer was edited.

    Interest on Drawings  Interest on drawings is debited to the capital account. As Interest on drawings is charged on the drawings made by partners/proprietors from their respective capital accounts in a partnership firm or proprietary concern. Drawings refer to the amount withdrawn by an owner or parRead more

    Interest on Drawings 

    Interest on drawings is debited to the capital account.

    As Interest on drawings is charged on the drawings made by partners/proprietors from their respective capital accounts in a partnership firm or proprietary concern.

    Drawings refer to the amount withdrawn by an owner or partner for his personal use. Thereby, interest on drawings is an income of a firm payable by the owner hence, it’s deducted/debited.

    The Profit and Loss Account, on the other hand, shows the income and expenses of a business incurred over an accounting period. Accounts like interest on drawings and capital are not shown in the P&L a/c because they are internal transactions and P&L a/c focuses only on the financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.

     

    Partners’ Capital A/c

     

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Radha
Radha
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Meaning Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets. Examples of capital assets are plant, machineryRead more

    Meaning

    Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets.

    Examples of capital assets are plant, machinery, land, building, vehicles etc.

    To expense the capital assets for the economic benefits they provide, they are depreciated over their useful life on some equitable basis.

    When capital assets are sold, the gain on sale is credited to the capital reserve account. On loss, it is simply debited to the profit and loss account. Capital assets are shown under the heading ‘Plant, Property and Equipment’ under the asset head of the balance sheet.

    Assets that do not qualify as capital assets

    The assets which provide economic benefits for less than a year do not qualify as capital assets. Such as inventories, accounts receivables etc. are not capital assets.

    Also, those assets which are not intended to be held for more than 1 year are not capital assets even if such assets are capable of providing economic benefits for more than 1 year. Such assets will be considered current assets.

    For example, if a plot of land is purchased by a business but the intention is to sell it after 2 months then such land will not be considered a capital asset.

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Simerpreet
SimerpreetHelpful
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  2. Poorvi_*
    This answer was edited.

    When the Accumulated depreciation account is not maintained, the journal entry for vehicle depreciation shall be                              Particulars     Debit   Credit Depreciation a/c                                              Dr.      (xxx)      To Vehicle a/c      (xxx) (Being DepreciationRead more

    When the Accumulated depreciation account is not maintained, the journal entry for vehicle depreciation shall be

                                 Particulars     Debit   Credit
    Depreciation a/c                                              Dr.      (xxx)
         To Vehicle a/c      (xxx)
    (Being Depreciation charge on Vehicle made)

    For example, let us assume that a vehicle (Bike) was purchased on 1st April 2019 with INR. 2,50,000, the rate of depreciation is 15% and also the Company follows the straight-line method of calculating depreciation.

    Then the journal entries shall be,

    The depreciation charge for the 1st Year 

            Date                                Particulars  Debit  Credit
    31-03-2020 Depreciation a/c Dr.  37,500
        To Vehicle a/c  37,500
    (Being Depreciation made on Vehicle)

    The depreciation charge for the 2nd Year 

            Date                                Particulars  Debit  Credit
    31-03-2021 Depreciation a/c Dr.  37,500
        To Vehicle a/c  37,500
    (Being Depreciation made on Vehicle)

    The depreciation charge for the 3rd Year

            Date                                Particulars  Debit  Credit
    31-03-2022 Depreciation a/c Dr.  37,500
        To Vehicle a/c  37,500
    (Being Depreciation made on Vehicle)

    The respective ledger accounts for all three years are given below:

    When the Accumulated depreciation account is maintained, the journal entry for vehicle depreciation shall be

                                 Particulars   Debit   Credit
    Depreciation a/c                                              Dr.    (xxx)
         To Accumulated depreciation a/c    (xxx)
    (Being Depreciation charge on Vehicle made)

    Taking the above said example,

    The depreciation charge for the 1st Year 

            Date                                Particulars  Debit  Credit
    31-03-2020 Depreciation a/c Dr.  37,500
        To accumulated depreciation a/c  37,500
    (Being Depreciation made on Vehicle)

    The depreciation charge for the 2nd Year 

            Date                                Particulars  Debit  Credit
    31-03-2021 Depreciation a/c Dr.  37,500
        To accumulated depreciation a/c  37,500
    (Being Depreciation made on Vehicle)

    The depreciation charge for the 3rd Year

            Date                                Particulars  Debit  Credit
    31-03-2021 Depreciation a/c Dr.  37,500
        To accumulated depreciation a/c  37,500
    (Being Depreciation made on Vehicle)

    The respective ledger accounts for all three years are given below:

     

     

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Simerpreet
SimerpreetHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Introduction  Working capital refers to the capital which is required by an enterprise to smoothly run its daily operations. It is the measure of the short-term liquidity of a business.  Working capital is the total of the current assets of a business, net of its current liabilities. Working capitalRead more

    Introduction 

    Working capital refers to the capital which is required by an enterprise to smoothly run its daily operations.

    It is the measure of the short-term liquidity of a business. 

    Working capital is the total of the current assets of a business, net of its current liabilities.

    Working capital = Current Assets – Current Liabilities 

    The working capital consists of cash, accounts receivable and inventory of raw materials and finished goods fewer accounts payable and other short-term liabilities.

    Without a proper level of working capital, a business cannot maintain regular production and pay its creditors and expenses.

    Hence, for proper management of working capital, it is divided into types:

    • Permanent working capital 
    • Temporary working capital 

    I have discussed them below:

    Permanent Working Capital 

    It is the fixed level or minimum level of working capital that an enterprise needs to maintain to ensure production at the normal capacity and pay for its daily expenses. It is independent of the level of production.

    It is also known as fixed working capital.

    By ‘permanent’,  it does not mean that it will forever remain at the same level or amount but it may change if the overall production capacity changes. But such changes in permanent working capital are not often.

    Temporary Working Capital 

    It is the level of working capital that depends upon the level of production of a business. It is the excess working capital over the permanent capital that is required to meet seasonal high demand.

    It is also known as fluctuating working capital because it tends to change often depending on the level of production.

    Temporary working capital is required when high production is required to meet seasonal demands. 

    For example, a bakery will need more working capital to meet the increased demand for cakes and pastry during Christmas season 

    Graph showing permanent and temporary working capital

    Here, the temporary working capital is fluctuating whereas the permanent working capital is gradually increasing with time.

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Jasmeet_Sethi
Jasmeet_SethiCurious
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  2. AishwaryaMunot

    Meaning of Working Capital Firstly, let’s understand the meaning of the working capital. Working capital is the factor which demonstrates the liquidity position of the business to carry out day to day operations. It majorly includes cash & bank balances and liquid assets. Managing working capitaRead more

    Meaning of Working Capital

    Firstly, let’s understand the meaning of the working capital. Working capital is the factor which demonstrates the liquidity position of the business to carry out day to day operations. It majorly includes cash & bank balances and liquid assets.

    Managing working capital is a crucial process to maintain short term liquidity and so ultimately resulting into achieving long term objectives efficiently. Working capital can be calculated by deducting business’s current liabilities from current assets.

    To achieve the ideal working capital requirement for any business, it is important to understand various types of working capital and various ways to manage it.

    Coming to Permanent Working Capital, also called as Fixed Working Capital, it is the minimum working capital required or maintained by businesses. Such type of working capital is maintained to take care of regular financial obligations like creditors, inventory, salaries etc.

    Irrespective of scale of operations carried out in business, Permanent Capital is maintained by businesses which can be in form of Net Working Capital.

    There is no specific formula for calculating Fixed Working Capital, it completely depends upon the business’s assets and liabilities. So accordingly, it can be estimated through the balance sheet of the business.

    For calculating Permanent Working Capital, you can follow below steps:

    1. Calculate Net Working Capital for each day for a whole month
    2. Find the smallest value among them
    3. That will be Permanent Working Capital for the month
    4. Follow the above steps for every month
    5. There you have the annual figure for Permanent Working Capital

    The requirement of Permanent Working Capital changes as the business expands. It is crucial to make sure that the working capital level does not fall below the Permanent Working Capital requirement.

    Types of Permanent Working Capital:

    Permanent working capital is further divided into two types:

    1. Regular working capital – This refers to capital required to maintain healthy cashflow for purchases of raw materials, payment of wages etc.
    2. Reserve working capital – This refers to amount which is more than regular working capital to take care of unexpected business expenses due to contingent events.
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Rahul_Jose
Rahul_Jose
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  2. Radhika
    This answer was edited.

    An asset is a resource in the name of the company or controlled by the company that holds economic value and will provide it future benefits. A company invests in various kinds of assets for manufacturing purposes and investment purposes as well. Some examples of assets are: Plant and Machinery InveRead more

    An asset is a resource in the name of the company or controlled by the company that holds economic value and will provide it future benefits.

    A company invests in various kinds of assets for manufacturing purposes and investment purposes as well. Some examples of assets are:

    • Plant and Machinery
    • Investments
    • Inventory
    • Cash and Cash Equivalents, etc.

    Assets can be broadly divided into two categories based on their physical existence:

    • Tangible Assets
    • Intangible Assets

    Tangible Assets can be further divided into two categories based on their life and role in the operating cycle:

    • Non-Current Assets
    • Current Assets

    Since the company derives benefit from the asset, an asset account is debit in nature. If an asset account has a credit balance, it would fundamentally make it a liability. However, there are certain exceptions to it.

    In the case of Bank Overdraft, which means a company withdraws more from the bank than it has deposited in its account, Bank Account can also be shown having a credit balance.

    Contra Assets Accounts are the accounts that are contrary to the basic nature of an assets account, that is it is contrary to the debit nature of the assets account and hence are credit in nature.

    Examples of Contra Assets Account are:

    Accumulated Depreciation Account which is essentially Plant Assets Account also has a credit balance as it is used to depreciate the asset, or in other words, reduce the value of the assets, hence it also has a credit balance.

    When there are balances in the Account Receivables Account that are not paid to the company or have a very low probability of being paid, they are recorded in a separate account called Bad Debts Account, which is also credit in nature.

     

     

     

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