AccountingQA Latest Questions

Aadil
AadilCurious
In: >

A. For a certain given period B. At a particular point of time C. After a fixed date D. None of the above

  2. Ayushi Curious Pursuing CA

    The correct option is Option (b) at a particular point of time. A balance sheet discloses the financial position of an entity at a particular point of time. The particular point of time is generally the last date of an accounting year. Most of the business concerns follow an accounting year ending oRead more

    The correct option is Option (b) at a particular point of time.

    A balance sheet discloses the financial position of an entity at a particular point of time. The particular point of time is generally the last date of an accounting year. Most of the business concerns follow an accounting year ending on 31st March and prepare their balance sheet as at 31st March.

    By financial position, it means the value of assets and liabilities of the entity. As an entity may enter into monetary transactions every day, the values of the assets and liabilities may also vary every day. Hence, to prepare the balance sheet of an entity, a particular point of time is to be chosen which is generally the last date of an accounting year

    Option (a) for a given period of time is incorrect.

    It is because the values of assets and liabilities of concern may differ daily, a balance sheet cannot be prepared to disclose the financial position of an entity for a given period of time.

    The statement of profit or loss is prepared for a given period of time as it discloses the overall performance of an entity for a given period of time.

    Option (c) after a fixed date is also incorrect.

    The phrase, “after a fixed date” does not indicate a particular point of time. It may mean any day after a fixed date. For example, if there is an instruction to prepare a balance sheet that discloses the financial position of a concern after 30th March, it may mean 31st March, 1st April or any day thereafter.

    As we know that a balance can be prepared for a particular point of time, this option seems wrong.

    Option (d) None of these is incorrect too as Option (b) is the correct one.

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Radha
Radha
In: >

Interest on investmentTrial Balance
  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    Interest on Investment is to be shown on the Credit side of a Trial Balance. Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return onRead more

    Interest on Investment is to be shown on the Credit side of a Trial Balance.

    Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return on investment (ROI).

    Since interest on investment is an income, it is shown on the credit side of the Trial Balance. This is based on the accounting rule that all increase in incomes are credited and all increase in expenses are debited. A Trial Balance is a worksheet where the balances of all assets, expenses and drawings are shown on the debit side while the balances of all liabilities, incomes and capital are shown on the credit side.

    For example, if Jack bought Corporate Bonds of Amazon, worth $50,000 with a 10% interest on investment, then the accounting treatment for interest on investment would be

    Cash/Bank A/C Dr     5,000
    To Interest on Investment in Corporate Bonds (Amazon) 5,000

    As per the above entry, since interest on investment is credited, it will show a credit balance and hence be shown on the credit side of the Trial Balance. Interest on investment account is not to be confused with an Investment account. Investment is an asset whereas interest on investment is an income.

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Sandy
Sandy
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Depreciation
  2. Nistha Pursuing B.COM H (B&F) and CMA
    This answer was edited.

    Depreciation refers to that portion of the value of an asset that is written off over the useful life of the asset due to wear and tear. Now, when we talk about depreciation, there are multiple methods to calculate depreciation such as: Straight Line Depreciation Method Diminishing Balance Method OrRead more

    Depreciation refers to that portion of the value of an asset that is written off over the useful life of the asset due to wear and tear.

    Now, when we talk about depreciation, there are multiple methods to calculate depreciation such as:

    • Straight Line Depreciation Method
    • Diminishing Balance Method Or Written Down Value Method
    • Sum of Years’ Digits Method
    • Double Declining Balance Method
    • Sinking Fund Method
    • Annuity Method
    • Insurance Policy Method
    • Discounted Cash Flow Method
    • Use Based Methods
      • Output Method
      • Working Hours Method
      • Mileage Method
    • Other Methods
      • Depletion Method
      • Revaluation Method
      • Group or Composite Method

    The most commonly used methods are discussed below:

    1. Straight Line Depreciation Method: This is the simplest method for calculating depreciation where a fixed amount of depreciation is charged over the useful life of the asset.

    Formula:

    Suppose a company Bear Ltd purchases machinery costing 8,00,000 with useful life of 10 years and salvage value 1,00,000. Then depreciation charged to the machinery each year would be:

    Depreciation = (8,00,000 – 1,00,000)/10 = 7,00,000/10 = 7,000 p.a.

    2. Diminishing Balance Method Or Written Down Value Method: Under this method, a fixed rate of depreciation is charged every year on the opening balance of the asset which is the difference between the previous year’s opening balance and the previous year’s depreciation. Here the book value of asset reduces every year and so does the depreciation amount.

    Formula:

    Suppose a company Moon ltd purchases a building for 50,00,000 with a useful life of 5 years and decides to depreciate it @ 10% p.a. on Diminishing Balance Method. Then depreciation charged to the machinery would be:

    3. Sum of Years’ Digits Method: In this method, the life of asset is divided by the sum of years and multiplied by the cost of the asset to determine the depreciating expense. This method allocates higher depreciation expense in the early years of the life of the asset and lower depreciation expense in the latter years.

    Formula:

    Suppose a company Caps Ltd purchases machinery costing 9,00,000 having a useful life of 5 years. Then the depreciation cost would be:

    4. Double Declining Balance method: This method is a mixture of straight-line method and diminishing balance method. A fixed rate of depreciation is charged on the reduced value of the asset at the beginning of the year. This rate is double the rate charged under straight-line method.

    Formula:

    Suppose a company Paper Ltd purchases machinery for 1,00,000 with an estimated useful life of 8 years. Then the depreciation rate would be:

    Straight line = 100%/8 = 12.5%

    Double declining method = 2*12.5% = 25%

    5. Sinking Fund Method: Under this method, the amount of depreciation keeps on accumulating till the asset is completely worn out. Depreciation is the same every year. Profits equal to the amount of depreciation is invested each year outside the company. At the time of replacement of the asset the investments and sold and the proceeds thereof are used to purchase the new asset.

    6. Annuity Method: This method calculates depreciation by calculating its internal rate of return (IRR). Depreciation is calculated by multiplying the IRR with an initial book value of the asset, and the result is subtracted from the cash flow for the period.

    7. Use Based Methods: Depreciation, under these methods, is based on the total estimated machine hours or total estimated units produced during the life of the machine. It is calculated by dividing the cost of the machine by the estimated total machine hours or estimated lifetime production in units and multiplying by the units produced or machine hours worked.

    Formula:

    Suppose a company Box Ltd purchases machinery for 25,000 (estimated life 5 years) whose estimated life production is 5,000 units. If it produces 700 units in the first year of operation then depreciation cost would be:

    Depreciation = 25,000/5,000*700 = 3,500

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Simerpreet
SimerpreetHelpful
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AmortizationDifference BetweenImpairment
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    Let us first understand the concepts of Amortization and Impairment. Amortization refers to the expense recorded on the decline of the value of intangible assets of a company. Intangible assets include goodwill, patents, copyrights, etc. It reflects the reduction in the value of Intangible assets ovRead more

    Let us first understand the concepts of Amortization and Impairment.

    Amortization refers to the expense recorded on the decline of the value of intangible assets of a company. Intangible assets include goodwill, patents, copyrights, etc. It reflects the reduction in the value of Intangible assets over its life span.

    Amortization is similar to Depreciation, however, while depreciation is over tangible assets amortization is over Intangible assets of the company.

    For example, Cipla Ltd. acquired a patent over a new drug for a period of 10 years. The cost of creating the new drug was 80,000 and the company must record its patent at 80,000. However, the company must amortize this cost by dividing the cost over the patent’s life, i.e., the amortization cost would be 8,000 (80,000/10) p.a. for the next 10 years.

    Impairment means a decline in the value of fixed assets due to unforeseen circumstances. Assets are impaired when the carrying value of assets increases its market value or “realizable value” and such increase is recorded as an impairment loss.

    Now suppose, Cipla Ltd. had existing machinery which suffered physical damage and is recorded at 50,000 in the books but the realizable value of the asset would only be 20,000. Hence, the asset would be written down to 20,000 and an impairment loss of 30,000 will be recorded.

    Impairment Vs Amortization

    Differences between the two can be shown as follows:

    Amortization Impairment
    Amortization is a reduction in the value of Intangible Assets over their useful life. Impairment is a reduction in the value of assets due to unforeseen circumstances.
    Amortization is a continuous process and the value of an asset reduces over time. Value of asset reduces drastically, creating a need to write down the value to its fair market value.
    Amortization is charged annually. Impairment is not an annual charge.
    Amortization is shown as an amortization expense. Impairment is shown as an impairment loss.
    Reasons for amortization includes consumption, obsolescence, etc. Reasons for impairment include damage to the asset, change in preferences, etc.
    Amortization is charged on Intangible assets Impairment is charged on fixed assets whether tangible or intangible.

    Suppose Unilever Ltd. has a patent over one of its products for a period of 5 years. The cost of the patent was 1,00,000. Then after 2 years one of its rivals, say ITC Ltd., launches a new product which is more preferred by the consumers over the one produced by Unilever Ltd. and the fair market value of the patent of Unilever Ltd. changes to 10,000.

    Now in this scenario, Unilever Ltd. would have amortized the patent (costing 1,00,000) at 20,000 (1,00,000/5) p.a. for 2 years and the book value at the end of the 2nd year is 60,000 (1,00,000 – 40,000). Now due to the new launch by ITC Ltd. the drastic change in the value of the asset from the book value of 60,000 to the realizable value of 10,000 will be recorded as an Impairment loss. Hence Impairment loss would be recorded at 50,000 (60,000 – 10,000).

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A_Team
A_Team
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Fictitious assets are the expenses and losses which are yet to be written off, so they appear in the Asset side of the balance sheet of the relevant financial year because expenses and losses have a debit balance. They are not assets in substance. Examples: Business loss ( debit balance of Profit anRead more

    Fictitious assets are the expenses and losses which are yet to be written off, so they appear in the Asset side of the balance sheet of the relevant financial year because expenses and losses have a debit balance. They are not assets in substance.

    Examples:

    1. Business loss ( debit balance of Profit and loss A/c )*
    2. Prepaid expenses
    3. Discount on the issue of debentures.
    4. Huge promotional expenditure.

    *business loss is shown as a negative figure under the head Reserve and Surplus, when the balance sheet is prepared as per Schedule III of The Companies Act, 2013.

    Deferred revenue expenditures are the expenses incurred for which the benefits are expected to flow to the enterprise beyond the current year. Such expenses are huge and are not written off completely in a financial year. The part of the expenditure which is not written off is shown on the assets side of the balance sheet.

    Examples:

    1. Huge advertisement expense.

    As you can see, there is some similarity between the two. Deferred revenue expenditure can be called a type of fictitious asset as it is shown in the asset side of the balance sheet but it isn’t an asset.

     

    The term ‘fictitious asset’ has a broader meaning than deferred revenue expenditure and also includes the losses such as discounts on the issue of debenture and business loss.

    The difference between fictitious assets and deferred revenue expenditure are as follows:

    Fictitious Assets Deferred Revenue Expenditure
    1 These are no real assets but expenses and losses that are not completely written off in an F.Y. These are expenses incurred from which benefits are expected to flow for more than one accounting period.
    2 It has a broader meaning. It has a narrower meaning.
    3 Examples:- business loss, discount on issue of debentures, prepaid expenses etc. Examples:- huge promotional expenditure etc.
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Simerpreet
SimerpreetHelpful
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A) No entries made at all in the general ledger for items paid by petty cash B) The same number of entries in the general ledger. C) Fewer entries made in the ...

  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    The correct option is D) Fewer entries in the general ledger To understand why option D is correct, we need to understand the concept. Petty cashbook is a special cashbook prepared for recording petty or small cash expenses. The benefit is that the chief cashier can focus on large cash and bank tranRead more

    The correct option is D) Fewer entries in the general ledger

    To understand why option D is correct, we need to understand the concept.

    • Petty cashbook is a special cashbook prepared for recording petty or small cash expenses.
    • The benefit is that the chief cashier can focus on large cash and bank transactions and there are fewer transactions in the main cashbook.
    • The petty cashier is provided with a fixed amount for a month or week and is reimbursed the amount spent at the end of the period after he sends the details of expenses to the chief cashier.
    • There are entries for the transfer of cash to the petty cashier in the main cashbook only.

    Option A ‘No entries made at all in the general ledger for items paid by petty cash ‘ is wrong. It is not possible to omit entries of petty expense just because there is a petty cashbook. There will be entries related to:

    • The cash is given to the petty cashier in a fixed amount or the amount spent as petty expenses during the month or week.

    Petty cash A/c  Dr.        Amt

        To Cash A/c                   Amt

     Option (B) ‘The same number of entries in the general ledger is wrong because there can never be the same number of entries as all the petty expenses are recorded in the petty cashbook and only the entries for transfer of cash to the petty cashier is recorded in the main cash book.

    Option D ‘More entries made in the general ledger​’ is wrong because the number of entries actually reduce as only petty cash transfer entries are recorded in the main cashbook instead of numerous entries of petty cash transactions.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Spriha Sparsh
    This answer was edited.

    Liabilities are obligations which a business owes to external or internal parties.As per the accounting equation liabilities are equal to the difference between assets and capital. Total Outside Liabilities  in relation to the Borrower can be all secured and unsecured loans, including current liabilRead more

    Liabilities are obligations which a business owes to external or internal parties.As per the accounting equation liabilities are equal to the difference between assets and capital.

    Total Outside Liabilities  in relation to the Borrower can be all secured and unsecured loans, including current liabilities of the Borrower.

    External Liability or outside liability is an obligation which a business has to pay back to external parties i.e. lenders, vendors, government, etc. Payable to Sundry creditors for the supply of any goods for the business or payable to any contractors for receiving any services or payable to the Govt. or other departments for any statutory payments like taxes or other levies. All these liabilities are known as an external liability to the business and are shown on the liability side of the Balance sheet after charging into the profit & loss account of that period.

    Where, Internal Liability – All obligations which a business has to pay back to internal parties such as promoters, employees, etc. are termed as internal liabilities. Example – Capital, Salaries, Accumulated profits, etc.

    Example – Borrowings, Creditors, Taxes, etc.

    Where, 1) Person A takes a loan from person B (person not associated with the company), person B is an external liability to person A.
    2) Person A has a tax liability of Rs.1000, here the government is an external liability to whom A has to pay the liability amount.

    3) Person A got goods on credit from person C for 60 days, C is an external liability to A, which A has to pay within the time period.

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A_Team
A_Team
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  2. Ayushi Curious Pursuing CA

    In trial balance, the treatment of the general reserve is that it is presented on the credit side. A trial balance is a statement prepared to check the arithmetical accuracy of the books of accounts. It features the closing balances of all the assets, liabilities and equity of a business. General reRead more

    In trial balance, the treatment of the general reserve is that it is presented on the credit side.

    A trial balance is a statement prepared to check the arithmetical accuracy of the books of accounts. It features the closing balances of all the assets, liabilities and equity of a business.

    General reserve is a free reserve created out of revenue profits of a business to meet future needs and uncertainties. By free reserve, we mean dividends can be freely declared and distributed out of it.

    Since the general reserve is an internal liability i.e. liability to the owner or owners or the business, it has a credit balance and is hence shown on the credit side of the trial balance.

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Bonnie
BonnieCurious
In: >

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

    What is net credit sales? Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales. Formula  The formula for net credit sales is as follows: Net credit sales  = Sales on credit - Sales returns - SalRead more

    What is net credit sales?

    Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales.

    Formula

     The formula for net credit sales is as follows:

    Net credit sales  = Sales on credit – Sales returns – Sales allowances

    In the balance sheet, you can find credit sales in the “short-term assets “section. It can be calculated from account receivables, bills receivables, and debtors of the balance sheet.

    Credit sales = closing debtors + receipts – opening debtors

    Steps to calculate net credit sales

    • Calculate total sales for the period
    • Subtract the Sales Returns
    • Subtract the Sales Allowances
    • Subtract the Cash Sales ( if any )

     

    Terms relevant to understand before calculation

    Sales return:  A sales return is when a customer or client returns or sends a product back to the seller. And this can happen due to various reasons, including:

    • Excess quantity ordered
    • Not upto Customer expectations
    • Shipping delays ( product arrived late )
    • Accidentally ordered an item and there can be more such reasons.

    Sales allowance: A sales allowance is a discount that a seller offers a buyer as an alternative to the buyer for returning the product.

    Because of a problem or issue with the buyer’s order or we can say that he is not satisfied with the product.

    Cash sales: Cash sales are sales in which the payment is done at once or I can say that buyer has obligation to make payment to the seller.

    Cash sales are considered to include bills, checks, credit cards, and money orders as forms of payment.

    Example

    Now after understanding the terms used in the formula let me explain to you with an example which is as follows:-

      • First, we will calculate the Total Sales for the Period:- In the month of May, Flipkart company had cash sales of Rs 80,000. The total amount in Accounts Receivables is Rs 150,000, with Rs 30,000 as the carryover from April’s receivables.
      • Since you only want to know about credit sales in the current period (September), you subtract Rs 30,000 from the total. This means that for the month of September, Flipcart Company had sales totaling Rs 200,000 (80,000 + 120,000).

     

      • Second, we will subtract the Sales Returns:- During the month of September, Flipcart Company issued Rs 20,000 in refunds, because several items were damaged during shipment, so the customer could not use them.
      • This amount would reduce the total number of cash sales if the accounts receivable balance was from a credit customer. This reduces the total sales to Rs 180,000 (Rs 200,000 in total sales – Rs 20,000 in returns).

     

      • Thirdly we will subtract the Sales Allowances:- Sales allowances are discounts offered to customers for not asking for full refunds.
      • For example, an item that had been shipped to a customer was the wrong size, but the customer told that he will agree to keep the item if the price could be adjusted. Flipcart Company issued Rs 10,000 in allowances in May.
      • After this deduction, the total sales for May are Rs 170,000 (Rs 180,000 – Rs 10,000).

     

      • Then at last there are any cash sales then subtract:- After figuring out the total number of sales for September and then subtracting the sales returns and allowances, the cash sales are deducted since you are focusing on net credit sales for the period.
      • After deducting the Rs 60,000 in cash sales, Flipcart Company has Rs 110,000 as net credit sales.

     

    Why do we need net credit sales?

    • Net Credit sales help to calculate the accounts receivable turnover ratio.

     

    • Net credit sales also indicate the amount of credit you offer to your customer.

     

    •  Net credit sale is also used to calculate other financial analysis items like days sales outstanding.
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Nistha
Nistha
In: >

Debit Balance
  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    A Profit and Loss (P&L) statement is a financial statement that records a summary of all expenses and incomes of a business during a period of time. It helps in determining the financial performance of the business. After recording all transactions in an account, if the debit side is greater thaRead more

    A Profit and Loss (P&L) statement is a financial statement that records a summary of all expenses and incomes of a business during a period of time. It helps in determining the financial performance of the business.

    After recording all transactions in an account, if the debit side is greater than the credit side, then the account is said to have a debit balance. Similarly, if the credit side is greater than the debit side, then the account has a credit balance.

    In a P&L account, when the expenses (debit) are greater than the incomes (credit), the business is said to be in a net loss. This loss is what we call the debit balance of a Profit and Loss account. A P&L account with a debit balance can be subtracted from Capital or be shown on the asset side of the Balance Sheet.

    As you can see above, the net loss is shown on the right side of the P&L account. This represents the debit balance of P&L. Once it is transferred to the balance sheet, it is either subtracted from capital or shown on the asset side as shown in the second image. However, they cannot be shown on both sides of the balance sheet at the same time.

    However, if the credit side is greater, that is if income is greater than expenses, then the P&L account shows a credit balance which is also known as net profit. This profit is added with Capital to show the final balance in the Balance Sheet.

    Debit balance of Profit & Loss account is not preferable for a business. Hence they should put in efforts to either reduce costs or increase their income to gain profits.

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