AccountingQA Latest Questions

Simerpreet
SimerpreetHelpful
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  2. Karishma
    This answer was edited.

    A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period.  It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more

    A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period.  It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.

    When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.

    The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.

    Accounting entry for loss transferred is as follows :

    Capital A/c   …Dr.

    To Profit & Loss A/c

    (being net loss transferred to capital account)

     

    Example

    A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.

    Extract of a Profit and loss a/c showing net loss is as under:

    Profit and loss A/c for the year ended …..

    Particulars Amount (Dr.) Particulars Amount (Cr.)
    To gross loss b/d xxx By gross profit b/d xxx
    To salaries xxx By bank interest xxx
    To office rent xxx By commission received xxx
    To printing and stationery xxx By rent received xxx
    To insurance xxx By dividend xxx
    To audit fees xxx By profit on sale of asset xxx
    To electricity chares xxx By Net Loss xxx
    To depreciation xxx
    To bad debts xxx
    To bank charges xxx
    To miscellaneous expenditure xxx
    To interest on loans xxx
    Total xxx

    The debit balance for a non-corporate entity is shown as a reduction from the capital account

    Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :

    Balance Sheet as on…

    Liabilities Amount
    Equity and liabilities
    Capital

    Less: Profit & Loss A/c

    While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.

    Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :

    Balance Sheet as on..

    Liabilities Amount
    Equity and liabilities
    Reserves And Surplus

    Less: Profit & Loss A/c

    Conclusion:  Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.

    The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.

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Nistha
Nistha
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Accounting PoliciesAccounting PrinciplesDifference Between
  2. Sandy CMA Final
    This answer was edited.

    To begin with, let me give you a brief explanation of both the terms i.e. Accounting policies and accounting principles- In order to maintain the financial statements, the company’s management adopts various Accounting Policies of its own. This generally includes the rules, the directions as to howRead more

    To begin with, let me give you a brief explanation of both the terms i.e. Accounting policies and accounting principles-

    In order to maintain the financial statements, the company’s management adopts various Accounting Policies of its own. This generally includes the rules, the directions as to how the financial statements will be prepared or how the valuation of depreciation would be done, and so on. These are flexible in nature and vary from company to company.

    For Example 1, Johnson Co. uses FIFO (first in first out) method to value the inventory. That is to say that, while selling its product, it sells those goods or products which it has acquired or produced first.

    It does not consider the LIFO or weighted average cost. The other company may adopt the other method as per its wish.

    Example 2, Johnson Co. uses the straight-line method of depreciating an asset, whereas the other company can opt for a written down value method depending upon the need of the company.

    So what I am trying to explain from this is that the accounting policies are flexible and can be adopted as per the needs of the company.

    Accounting Principles are the rules which the accountants adopt universally for recording and reporting the financial data. It brings uniformity in accounting throughout the practice of accounting. These are generally less flexible in nature.

    For Example, “Cost” is a principle. According to this accounting principle, an asset is recorded in the books at the price paid to acquire it and this cost will be the basis for all the subsequent accounting for the asset.  However, asset market value may change over time, but for the accounting purpose, it continues to be shown at its book value i.e. at which it is acquired.

    Some more examples would be of Matching principle, Consistency principle, Money measurement principle, etc.

    Differences

    Conclusion

    The point is Accounting Principles are the broad direction to reach a goal and to reach that goal helps the accounting policies.

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Jasmeet_Sethi
Jasmeet_SethiCurious
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  2. prashant06 B.com, CMA pursuing
    This answer was edited.

    Let me brief you about the nature of computers, their parts, laptops according to the companies act 2013. Basically, these are treated as non-current tangible fixed assets. This is because these types of equipment are used in business to generate revenue over its useful life for more than a year. AsRead more

    Let me brief you about the nature of computers, their parts, laptops according to the companies act 2013. Basically, these are treated as non-current tangible fixed assets. This is because these types of equipment are used in business to generate revenue over its useful life for more than a year. As per the companies act 2013, the following extract of the depreciation rate chart is given for computers.

    Giving you a short example, suppose M/s spy Ltd purchased 20 computers worth Rs 30000 each. As per the companies act 2013, the computer’s useful life is taken to be 3 years, and the rate of depreciation rate is 63.16%. Applying the WDV method we can calculate depreciation as follows:

     Depreciation as per WDV = (Cost of an asset – salvage value)* Depreciation rate

    So for the first year, the depreciation amount will be

    Cost of computers = Rs 6,00,000 (20*30000)

    Salvage value = NIL

    Rate of depreciation as per the Act = 63.16%

    Therefore depreciation = (6,00,000 – NIL)* 63.16%

    = Rs 3,78,960

    this amount of depreciation will be shown in the profit & loss account as depreciation charged to computers and the same will be adjusted in the balance sheet. The extract of Profit & Loss and corresponding year Balance sheet is shown below.

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Aadil
AadilCurious
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  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    The journal entry for Cash Sales is- Particulars Amount Amount Cash A/c                                                      Dr $$$      To Sales A/c $$$ Sales Account is a Revenue Account and Cash Account is an Asset Account for the business. So, According to the modern approach for Sales account:Read more

    The journal entry for Cash Sales is-

    Particulars Amount Amount
    Cash A/c                                                      Dr $$$
         To Sales A/c $$$

    Sales Account is a Revenue Account and Cash Account is an Asset Account for the business.

    So, According to the modern approach for Sales account:

    • When there is an increase in the Revenue, it is ‘Credited’.
    • When there is a decrease in the Revenue, it is ‘Debited’.

     

    According to the Modern approach for Cash  account:

    • When there is an increase in the Asset, it is ‘Debited’.
    • When there is a decrease in the Asset, it is ‘Credited’.

     

    So, the journal entry here is about cash sales and since there is an increase in Revenue on account of goods being sold, the sales account will be credited as per the modern rule and due to the increase in cash on account of sales, cash account will be debited.

    For Example, Polard sold goods for cash worth Rs 2,000 for his business.

    I will try to explain it with the help of steps.

    Step 1: To identify the account heads.

    In this transaction, two accounts are involved, i.e. Cash A/c and Sales A/c.

    Step 2: To Classify the account heads.

    According to the modern approach: Sales A/c is a Revenue account and Cash A/c is an Asset account.

    Step 3: Application of Rules for Debit and Credit:

    According to the modern approach: As Sales increases, because goods have been sold, ‘Sales A/c’ will be credited. (Rule – increase in Revenue is credited).

    Cash account is an Asset account. As cash has been received on account of goods sold, there is an increase in assets and hence Cash account will be debited (Rule – increase in Asset is debited).

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

    Particulars Amount Amount
    Cash A/c                                                      Dr 2,000
         To Sales A/c 2,000

     

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Ayushi
AyushiCurious
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  2. Spriha Sparsh
    This answer was edited.

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

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

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

    The formula of CAPEX can be given as –

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

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

    List of some capital expenses –

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

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

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

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

    Examples for revenue expenditures are as follows –

    • Direct expenses

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

    • Indirect expenses

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

     

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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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Aadil
AadilCurious
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  2. Pooja_Parikh Aspiring Chartered Accountant

    A contra account is a general ledger account that is used to reduce the value of the account related to it. Basically, a contra account is the opposite of its associated account. If the associated account has a debit balance, then the contra account would have a credit balance. They are used to mainRead more

    A contra account is a general ledger account that is used to reduce the value of the account related to it. Basically, a contra account is the opposite of its associated account. If the associated account has a debit balance, then the contra account would have a credit balance. They are used to maintain the historical value of the main account while all the deductions are recorded in the contra account, which when clubbed together show the net book value.

    For example

    if the cost of machinery was Rs. 50,000 and the company wants to preserve its original cost, then the accumulated depreciation of such machinery is recorded separately. Let’s say Rs 10,000 was the accumulated depreciation. Then such amount is recorded in the contra account named accumulated depreciation account. This makes the net value of the machinery Rs 40,000.

    Types

    There are various types of contra accounts such as contra asset, contra equity, contra revenue, and contra liability.

    • Contra asset: these accounts have credit balances and are used to reduce the balance of an asset. Eg, Accumulated depreciation.
    • Contra Liability: These accounts have debit balances and are used to reduce the balance of liabilities. Eg, discount on notes.
    • Contra equity: These accounts have a credit balance and are used to reduce the number of shares outstanding which in turn reduces equity. Eg treasury stock.
    • Contra revenue: These accounts have a debit balance. They reduce gross revenue which results in net revenue. Eg sales return.

    Accountants make use of contra accounts instead of reducing the value of the actual account to keep the financial statements clean.

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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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A_Team
A_Team
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  2. GautamSaxena Curious .
    This answer was edited.

    Starting of the business The starting of the business, in accounting terms, is called the commencement of the business. There are three types of businesses that can be commenced, they are, sole proprietorship, partnership, and joint-stock company. In order to start the business, in companies, commenRead more

    Starting of the business

    The starting of the business, in accounting terms, is called the commencement of the business. There are three types of businesses that can be commenced, they are, sole proprietorship, partnership, and joint-stock company.

    In order to start the business, in companies, commencement is a declaration issued by the company’s directors with the registrar stating that the subscribers of the company have paid the amount agreed. In a sole proprietorship, the business can be commenced with the introduction of any asset such as cash, stock, furniture, etc.

    Journal entry

    In this entry, “Started business with cash $60,000”

    As per the golden rules of accounting, the cash a/c is debited because we bring in cash to the business, and as the rule says “debit what comes in, credit what goes out.” Whereas the capital a/c is credited because “debit all expenses and losses, credit all incomes and gains”

    As per modern rules of accounting, cash a/c is debited as cash is a current asset, and assets are debited when they increase. Whereas, on the increment on liabilities, they are credited, therefore, capital a/c is credited.

     

     

     

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Simerpreet
SimerpreetHelpful
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  2. Mitika

    Straight Line Depreciation Journal Entry Straight-line depreciation refers to the diminishing value of assets over the life of the asset. In other words, the cost of the asset spreads evenly over the useful life of the assets. The salvage value or Residual value of an asset means the estimated valueRead more

    Straight Line Depreciation Journal Entry

    Straight-line depreciation refers to the diminishing value of assets over the life of the asset. In other words, the cost of the asset spreads evenly over the useful life of the assets.

    The salvage value or Residual value of an asset means the estimated value of the asset at the end of its useful life.

    The depreciation can also be charged with another method like Written Down Value (WDV) Method.

     

    Formula

    Depreciation per annum = ( Cost of asset – Salvage Value) / Useful Life

     

    The journal entry for the depreciation is:

    JOURNAL ENTRIES

    		  
    Depreciation on Asset A/C                               DR.
                                To Asset A/C
    (Being depreciation charged on asset)

     

    Now let us understand this with an example, suppose XYZ Ltd. has an asset of value 90,000 with a useful life of 3 years. The company uses the straight-line method of depreciation to depreciate the asset in its book.

     

    So, the depreciation per annum would be calculated as:-

    = 90,000/3

    = 30,000

     

    In Year 1, the depreciation will be charged as 30,000 for this year. It will be debited to the  depreciation account and credited to the asset account. Thus, the value of the asset at the end of year 1 will be 60,000 (90,000-30,000).

    JOURNAL ENTRIES

    		  
      DR CR
    Depreciation on Asset A/C                                                   30,000
              To Asset A/C                                                                                                              30,000
    (being depreciation charged on asset)

     

    In Year 2, the depreciation will be charged as  30,000. The entry would be the same as the previous year. The value of the asset at the end of year 2 will be 30,000 (60,000-30,000).

    JOURNAL ENTRIES  
      DR CR
    Depreciation on Asset A/C                                                   30,000
              To Asset A/C                                                                                                                  30,000
    (being depreciation charged on asset)

     

    At last in Year 3, the depreciation will be charged 30,000. The entry would be the same. The value of the asset at the end of year 3 will be Nil (30,000- 30,000).

    JOURNAL ENTRIES

    		  
      DR

    CR
    Depreciation on Asset A/C                                                30,000
              To Asset A/C                                                                                                            30,000
    (being depreciation charged on asset)

     

    The depreciation will be charged to the profit and loss account for the year as it is an expense for the company.

     

    The entries will be posted into depreciation account as mentioned:

    DEPRECIATION A/C  
    Date Particulars Amount Date Particulars Amount
    Year 1 To Asset A/C 30,000   By Profit and Loss A/C 30,000
        30,000     30,000
               
    Year 2 To Asset A/C 30,000   By Profit and Loss A/C 30,000
        30,000     30,000
               
    Year 3 To Asset A/C 30,000   By Profit and Loss A/C 30,000
        30,000     30,000
               

     

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