AccountingQA Latest Questions

Astha
AsthaLeader
In: >

CreditDebitOpening Balance
  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Let us begin with a short explanation of what opening balance is: The opening balance is the amount of funds that are bought forward from the end of one accounting period to the beginning of a new accounting period. In a firm’s account, the first entry done is of the opening balance. It can either hRead more

    Let us begin with a short explanation of what opening balance is:

    The opening balance is the amount of funds that are bought forward from the end of one accounting period to the beginning of a new accounting period.

    In a firm’s account, the first entry done is of the opening balance. It can either have a debit balance or a credit balance depending upon whether the firm has a negative or positive balance.

    Opening balance of a ledger

    Opening balance is the first entry of the ledger account at the beginning of an accounting period.

    In the case of a newly started business, there will be no closing balances and as such there will be no balances to be carried forward. In such a case, the investment and capital of the business will be entered as an opening balance for the current accounting period.

    So the first and foremost part is to identify on which side of the ledger i.e. the debit side or the credit side the opening balance is to be entered.

    For Example, A trial balance is given which represents the debit and credit balances, accordingly, I will prepare different ledger accounts to make it simpler.

    The trial balance shows the opening balance of various accounts. Now posting them in ledger accounts.

    As the Furniture is an Asset account, the opening balance will be on the debit side of the ledger account.

    As Sundry creditor is a credit account,  we put the opening balance on the credit side.

    As the Capital is a credit account,  we put the opening balance on the credit side.

    As Wages is a debit account,  we put the opening balance on the debit side.

    As the Discount received is a credit account,  we put the opening balance on the credit side.

    Exception

    Drawing Account.

    Drawing account is an exception to this topic. It is considered a contra account to the owner’s capital account because it reduces the value of the owner’s equity. Drawings, therefore, have no opening balance.

    Contra Entry.

    Contra entry involves transactions of cash and bank. Any entry which involves both the cash and bank is contra entry.

    For example, we deposit cash 5000 into the bank.

    Accounting entry for this transaction would be

    In this case, the ledger entry would be

    As the bank account has a debit balance, the opening balance would come on the debit side.

    As the cash account has a credit balance, the opening balance would come on the credit side.

    Alternatively, If we withdraw cash 5000 from the bank.

    Accounting entry would be

    In this case, the ledger entry would be

    As the Cash account has a debit balance, the opening balance would come on the debit side.

    As the Bank account has a credit balance, the opening balance would come on the credit side.

    See less
    • 0
A_Team
A_Team
In: >

Depreciation is referred to as the reduction in the cost of a fixed asset in sequential order, due to wear and tear until the asset becomes obsolete. Following are some of ...

  2. Astha Leader Pursuing CA, BCom (Hons.)

    The main objective of depreciation is to calculate net profit. Depreciation is an expense allowed on the fixed assets of an entity to provide for the cost of benefit utilized by the entity in that particular year. Since the such assets are used for more than one financial year, profits for the furthRead more

    1. The main objective of depreciation is to calculate net profit.

    Depreciation is an expense allowed on the fixed assets of an entity to provide for the cost of benefit utilized by the entity in that particular year. Since the such assets are used for more than one financial year, profits for the further years would be misstated if such depreciation expense is not provided for.

    Further, depreciation in no way shows previous profits or satisfies the tax department and a reduction in tax is secondary since it will only be allowed if charged in the profit & loss account. Thus, B is the correct answer.

    2. Depreciation is generated due to wear and tear.

    Depreciation is provided for to compensate for the wear and tear of the asset while being used by the entity. Depreciation is not generated due to increase in the value of liability, decrease in capital or decrease in the value of assets. Rather the vice versa is true, that is an increase in liability, decrease in capital and decrease in asset is created due to depreciation.

    Thus, C is the correct answer.

    3. The purpose of making a provision for depreciation in the accounts is to charge the cost of fixed assets against profits.

    Fixed assets are long term assets with useful life of more than one accounting year and therefore the full cost of such assets are not provided for in the year of purchase rather a fixed portion is charged every year in the profit and loss account.

    Thus, A is correct and others are incorrect.

    4. According to the straight line method of depreciation, the depreciation remains constant.

    In the straight line method of depreciation, depreciation is calculated on the historical or purchase cost of the asset and the same amount is charged every year till the useful value of the asset, thus depreciation remains constant.

    Also, depreciation decreases each year in case of written down value method but depreciation can never increase. Thus, A is the correct answer.

    5. Total amount of depreciation of an asset cannot exceed its depreciable value.

    The depreciable value is the purchase cost of the asset less the scrap value. The total amount of depreciation can never exceed the depreciable value since depreciation is allowed on an asset till its useful life at a certain percentage. Even when the value of the asset becomes nil, no further depreciation would be charged and total depreciation would be equal to depreciable value but obviously cannot be more.

    Thus, A is the correct answer and other are wrong.

    6. According to fixed installment method, the depreciation is calculated on original cost.

    In the fixed installment method, also known as the straight line method, depreciation is calculated on the basis of the original or purchase cost of the asset using the formula-

    Depreciation = (Original cost – Scrap value)/Useful life of asset

    Thus, B is the correct answer.

    7. Salvage value means estimated disposal value.

    Salvage value is the value of the asset that can be realized by the entity on its sale after the useful life of the asset has been exhausted and is now obsolete for the entity.

    Salvage value is not definite but an estimation. Salvage value can be positive or nil but not negative. Thus, D is the correct option.

    8. Depreciation is calculated under diminishing balance method, based on book value.

    Under the diminishing value method, the depreciation is calculated at a certain percentage of the book value of the asset which is calculated after providing for depreciation in the previous year.

    Depreciation cannot be calculated on scrap value since it is the disposable value of the asset and depreciation on original value is calculated under straight line method. Thus, B is the correct option.

    9. Depreciation amount charged on a machinery will be debited to depreciation account.

    Depreciation is an expense and depreciation account will be debited since depreciation is a nominal account, as per traditional method, and all expenses are debited. Also, as per modern rules of accounting, increase in expenses are debited.

    When depreciation is charged there is a decrease in the value of assets therefore machinery account will be credit also depreciation cannot be classified under repair account or cash account heads. Thus, C is the correct option.

    10. In accounting, becoming out of date or obsolete is known as obsolescence.

    Amortization means decrease in the value of intangible assets of an entity. Depletion means exhaustion  of existing wasting assets such as coal mines. Physical deterioration means fall in value of asset due to physical damage to the asset. Therefore, the correct answer is Obsolescence.

    See less
    • 0
Bonnie
BonnieCurious
In: >

  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Net credit sales can be defined as the total sales made by a business on credit over a given period of time less the sales returns and allowances and discounts such as trade discounts. Net Credit Sales = Gross Credit Sales – Returns – Discounts – Allowances. Credit sales can be calculated from the ARead more

    Net credit sales can be defined as the total sales made by a business on credit over a given period of time less the sales returns and allowances and discounts such as trade discounts.

    Net Credit Sales = Gross Credit Sales – Returns – Discounts – Allowances.

    Credit sales can be calculated from the Accounts receivable/ Bills Receivable/ Debtors figure in the Balance Sheet. It will be normally shown under the Current Assets head in the Balance Sheet.

    Credit sales = Closing debtors + Receipts – Opening debtors.

    Alternatively, you may observe the bills receivable ledger account to locate the figure of credit sales.

     

    Net Credit Sales and related terms

    Before we try to understand the concept of net credit sales with an example, let us discuss the term sales return. Sales return means the goods returned by the customer to the seller. It may be due to defects or any other reasons.

    Now let us take an example. John is a retail businessman. He sells smartphones. He buys 100 smartphones from Vivo on credit. The smartphones are worth ₹1.5 lahks. He then returns smartphones worth 20,000 rupees to Vivo. He also gets an allowance of rupees 5,000 from Vivo.

    In the above example, the credit sales of Vivo are of rupees 1.5 lakh. The net credit sales is of

    1.5 lakh – 20,000 – 5, 000 = 1.25 lakh rupees.

    Importance of Net Credit Sales

    • Net Credit Sales figure together with the accounts receivable figure acts as an indicator of the credit policy of the company.
    • It offers insights into the ability of the company to meet short-term cash obligations.
    • The credit policy also affects the total current assets that the company has in the manifestation of Accounts Receivable

    Advantages and Disadvantages of Credit Sales.

    Advantages 

    • Increased Sales – The credit Policy facilitates increased sales for the company. The company can attract more customers with a liberal credit policy. For example, Apple got more customers when it started to sell its products on an EMI basis.
    • Customer Loyalty / Retention- Regular customers can be retained and made to feel honored by offering them more liberal credit terms.

    Disadvantages 

    • Delay in Cash Collection – Credit Sales imply that the company would get cash on a delayed basis. This money could have otherwise been put to use for some other profitable venture or could have borne interest for the company
    • Collection Expenses– The company had to incur additional expenditures for collecting money from debtors.
    • Risk of Bad Debts – With credit sales, there is always the risk that the buyer may become bankrupt and may not be able to pay the money due to the seller.
    See less
    • 0
A_Team
A_Team
In: >

  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    When a company issues shares to shareholders at a price over the face value (at a premium), that amount is termed as securities premium. This amount is transferred to what we call the securities premium reserve. The company is required to maintain a separate reserve for securities premium. UtilizatiRead more

    When a company issues shares to shareholders at a price over the face value (at a premium), that amount is termed as securities premium. This amount is transferred to what we call the securities premium reserve. The company is required to maintain a separate reserve for securities premium.

    Utilization

    Securities premium reserve can be used for the following reasons:

    • Issue of fully paid Bonus share capital.
    • To cover preliminary expenses of a company.
    • For funding the buy-back of securities.

    Since it is not a free reserve, it can only be used for a few specific purposes. The amount received as securities premium cannot be used to transfer dividends to shareholders

    Treatment

    When a company issues shares at a premium, the securities premium reserve account is credited along with share capital as an increase in capital is credited according to the modern rule of accounting.

    For example,
    Sonly Ltd. issues 1,000 shares of $10 face value at $15. Here, the amount of premium would be $5 (15 – 10) per share. Therefore, the journal entry would show:

    Bank a/c (15 x 1,000)        Dr                                                15,000
    To Share Capital (10 x 10,000)                                                             10,000
    To Securities Premium Reserve a/c (5 x 10,000)                                   5,000

    From the above example, we can see that the company receives $15,000, but transfers $10,000 to share capital and the excess $5,000 to securities premium reserve.
    In the balance sheet, this securities premium reserve is shown under the title “Equity and Liabilities” under the head ‘‘Reserves and Surplus”.

    See less
    • 0
Radha
Radha
In: >

  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs arRead more

    Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs are recorded as capital work in progress.

    Depreciation is the systematic allocation of the cost of an asset over its useful life. Depreciation is charged on an asset from the date it is ready to use. Since Capital Work in Progress is not yet ready to use, depreciation cannot be charged on it.

    Example

    If a company owns a Machinery worth Rs. 45,000 out of which Rs. 15,000 is part of capital work in progress, then depreciation on such machinery would be calculated only on the part of machinery that is ready to use that is Rs. 30,000 (45,000-15,000).

    When an asset is undergoing construction, the journal entry for each expense would be recorded as

    Further, when all construction of the above asset is completed, it is transferred to fixed asset account. This would be recorded as

    After transfer to Fixed Asset account, depreciation can be calculated and shown as below

    If the construction of an asset is complete but has not been put to use till now, depreciation is still calculated as it is ready for use. It can be done through various methods like straight-line method, written down value method etc.

    See less
    • 0
prashant06
prashant06
In: >

DrawingsIncome Statement
  2. Radha M.Com, NET
    This answer was edited.

    Whenever the proprietor/owner of a business withdraws cash or goods from the business for his/her personal use, we call it drawings. For example, Alex, proprietor of a soap manufacturing company, takes 50 pack of soaps costing 30 each for his personal use. So, 1,500 (50*30) will be considered as draRead more

    Whenever the proprietor/owner of a business withdraws cash or goods from the business for his/her personal use, we call it drawings. For example, Alex, proprietor of a soap manufacturing company, takes 50 pack of soaps costing 30 each for his personal use. So, 1,500 (50*30) will be considered as drawings of Alex. One important thing to note here is whenever goods are withdrawn for personal use they are valued at cost.

    Drawings are not an asset/liability/expense/income to the business. The drawings account is a contra-equity account. A contra-equity account is a capital account with a negative balance i.e. debit balance. It reduces the owner’s equity/capital.

    Drawings being a contra-equity account has a debit balance, reducing the owner’s capital in the business. This is because withdrawals for personal use represent a reduction of the owner’s equity in the business.

    Drawings are not shown in the Income Statement as they are neither an expense nor an income for the business. However, the following journal entries are passed to record drawings for the year:

    Drawings A/c is debited because it reduces the owner’s capital. Cash/Purchases A/c is debited as a withdrawal reduces the assets of the business.

    At the end of the year, drawings A/c are closed by transferring it to the owner’s capital A/c. We post the following entry to close the drawings A/c at the end of the year:

    In the balance sheet, drawings are shown by deducting it from the owner’s capital A/c.

    Let us take our earlier example of Alex. He withdrew soaps worth 1,500. At the end of the year, his capital was worth 5,500. The journal entry for recording the drawings is as follows:

    In the balance sheet, drawings worth 1,500 are shown as follows:

    See less
    • 0
Nistha
Nistha
In: >

Journal EntryRentRent Received in Advance
  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Before starting with the main discussion, let me give you a brief explanation of what rent received is When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received. Rent can be monthly, quRead more

    Before starting with the main discussion, let me give you a brief explanation of what rent received is

    When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received.

    Rent can be monthly, quarterly, half-yearly, or yearly rent depending upon the organization’s agreement.

    The journal entry for rent received will be

    Here, Cash account is debited due to the increase in assets or because of a real account. Rent account is credited due to the increase in income or because of the nominal account.

    However, Rent received in advance means the amount of rent that is not yet due but is received in advance. It is treated as a current liability because the benefit related is yet to be provided to the tenant.

    The Journal entry for Rent received in advance will be-

    Here, rent is debited due to a decrease in income.

    Rent received in Advance is credited due to an increase in liability.

    For Example, Johnson company rented out a part of its building that was not used to earn some extra income from it. The monthly rent was fixed as 20000. Johnson company follows calendar year as their accounting year. The tenant, therefore, paid 4 months advance rent to Johnson company i.e. the tenant in January gave his advance rent for February, March, April, and May.

    While receiving the rent in the month of January. The journal entry would be

    Now, the adjustment entry of rent received in advance would be

    The rent received in advance will also be posted individually in each month of February, March, April, and May as

    Furthermore, Rent received in advance is deducted from the amount of rent in the income and expenditure account and thereafter the amount received in advance is posted on the liability side of the Balance sheet.

    See less
    • 0
Jasmeet_Sethi
Jasmeet_SethiCurious
In: >

  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.

    See less
    • 0
Simerpreet
SimerpreetHelpful
In: >

Working Capital
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    Let us first understand what working capital is. Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern. It also represents the exceRead more

    Let us first understand what working capital is.

    Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern.

    It also represents the excess of current assets, such as cash, accounts receivable and inventories, over current liabilities, such as accounts payable and bank overdraft.

    working capital formula

    Sources of Working Capital

    Any transaction that increases the amount of working capital for a company is a source of working capital.

    Suppose, Amazon sells its goods for $1,000 when the cost is only $700. Then, the difference of $300 is the source of working capital as the increase in cash is greater than the decrease in inventory.

    Sources of working capital can be classified as follows:

    short term and long term sources of working capital

    Short Term Sources

    • Trade credit: Credit given by one business firm to the other arising from credit sales. It is a spontaneous source of finance representing credit extended by the supplier of goods and services.
    • Bills/Note payable: The purchaser gives a written promise to pay the amount of bill or invoice either on-demand or at a fixed future date to the seller or the bearer of the note.
    • Accrued expenses: It refers to the services availed by the firm, but the payment for which is yet to be done. It represents an interest-free source of finance.
    • Tax/Dividend provisions: It is a provision made out of current profits to meet the tax/dividend obligation. The time gap between provision made and payment of actual payment serves as a source of short-term finance during the intermediate period.
    • Cash Credit/Overdraft: Under this arrangement, the bank specifies a pre-determined limit for borrowings. The borrower can withdraw as required up to the specified limits.
    • Public deposit: These are unsecured deposits invited by the company from the public for a period of six months to 3 years.
    • Bills discounting: It refers to an activity wherein a discounted amount is released by the bank to the seller on purchase of the bill drawn by the borrower on their customers.
    • Short term loans: These loans are granted for a period of less than a year to fulfil a short term liquidity crunch.
    • Inter-corporate loans/deposits: Organizations having surplus funds invest with other organizations for up to six months at rates higher than that of banks.
    • Commercial paper: These are short term unsecured promissory notes sold at discount and redeemed at face value. These are issued for periods ranging from 7 to 360 days.
    • Debt factoring: It is an arrangement between the firm (the client) and a financial institution (the factor) whereby the factor collects dues of his client for a certain fee. In other words, the factor purchases its client’s trade debts at a discount.

    Long Term Sources

    • Retained profits: These are profits earned by a business in a financial year and set aside for further usage and investments.
    • Share Capital: It is the money invested by the shareholders in the company via purchase of shares floated by the company in the market.
    • Long term loans: These loans are disbursed for a period greater than 1 year to the borrower in his account in cash. Interest is charged on the full amount irrespective of the amount in use. These shareholders receive annual dividends against the money invested.
    • Debentures: These are issued by companies to obtain funds from the public in form of debt. They are not backed by any collateral but carry a fixed rate of interest to be paid by the company to the debenture holders.

    Another point I would like to add is that, although depreciation is recorded in expense and fixed assets accounts and does not affect working capital, it still needs to be accounted for when calculating working capital.

    See less
    • 0
Aadil
AadilCurious
In: >

  2. Rahul_Jose Aspiring CA currently doing Bcom

    A statutory reserve is any reserve that has to be maintained by an Act or law. When it comes to insurance, a statutory reserve is a reserve that an insurance company is legally bound to maintain to ensure that the company is able to meet its policy obligations. In India, as per the Banking RegulatioRead more

    A statutory reserve is any reserve that has to be maintained by an Act or law. When it comes to insurance, a statutory reserve is a reserve that an insurance company is legally bound to maintain to ensure that the company is able to meet its policy obligations. In India, as per the Banking Regulations Act, every banking company has to maintain at least 25% of its net profits as statutory reserves.

    The companies are required to maintain such reserves to guarantee the availability of cash when it is required by the customer. Common examples of statutory reserves are Cash reserve ratio (CSR), Statutory Liquidity Ratio (SLR).

    Treatment

    • Statutory reserves are shown in the Profit and Loss account under the head “appropriations”.
    • It is also shown under the head Reserves and Surplus (Schedule 2) in the Balance Sheet.

    Method

    Rule-Based Approach – The company calculates the amount required by using standard formulas. However, since they are pre-determined formulas, it does not cover all risk determining factors.

    Principle-based approach – This method is used to protect customers and ensure that the company stays solvent. They hold a higher amount of reserves than required after predicting all possible risks.

    Statutory reserves are different from general reserves as general reserves are maintained voluntarily by the company. A company that does not follow statutory requirements will face financial penalties. These reserves are mostly maintained in the form of cash.

    Maintenance of reserves gives confidence to investors that their money is secure. However, funds from these reserves can be used only for specific purposes. They should also maintain such reserves whether or not they earn profits.

    See less
    • 0

Most Helping Users

Astha

Astha

Leader
Simerpreet

Simerpreet

Helpful
AbhishekBatabyal

AbhishekBatabyal

Helpful