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Mehak
Mehak
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  2. Mehak

    Everyone must have heard about the term “cooking the books”. This term is generally associated with Creative accounting. In simple words, Creative accounting is a method of accounting in which the management tries to show a better picture of the business than the reality. Let us now understand thisRead more

    Everyone must have heard about the term “cooking the books”. This term is generally associated with Creative accounting. In simple words, Creative accounting is a method of accounting in which the management tries to show a better picture of the business than the reality. Let us now understand this concept in detail.

    What is Creative accounting?

    Creative accounting is a method of accounting in which the management manipulates the books of accounts by finding loopholes to showcase a better image of the business.

    It is a practice of using accounting loopholes to make a company’s financial position look better than it really is. It is not exactly illegal but it is more of a gray area.

    For example, a business may delay reporting expenses to increase the profits to present a better short-term position.

    The goal of creative accounting is to impress the shareholders, investors, get loans or boost stock prices.

    However, this can also be very risky and have serious consequences. It can reduce the trust of the investors and customers. In some cases, like Enron and WorldCom the world has seen how creative accounting lead to legal consequences.

    Common Techniques of Creative Accounting

    Some of the common techniques used by the business to manipulate the financial position are as follows:

    1. Revenue Recognition: Techniques such as recognizing revenue before it is actually earned is a method of creative accounting.
    2. Expense manipulation: Delaying the recognition of expenses to show a better position of the business in a short-term.
    3. Undervaluing liabilities: Undervaluing the liabilities of the business by not recognizing any future costs such as insurance or warranty etc.
    4. Asset Valuation: Overstating the value of asses or high amount of depreciation can be some ways of manipulating the value of assets.
    5. Tax avoidance: This is a way of reducing the tax liability by manipulating the financial statements to lower the profits.
    6. Cookie jar accounting: This is a method in which profits in the good years are saved in excess to use in the years of difficulty.

    Ethical implications of Creative Accounting

    There are several ethical implications with respect to creative accounting. Some of these are discussed below:

    1. Misleading Stakeholders: Creative accounting is a method to mislead the stakeholders including the investors, creditors, government, etc. This can lead to loss of trust.
    2. Loss of trust: The shareholders will lose trust over the company if the manipulation is discovered. Creative accounting breaches the fundamental of honesty.
    3. Non – compliance: Creative accounting leads to the non-compliance of the rules and regulations of the country which requires the businesses to follow certain accounting and reporting standards.
    4. Unfair competition: Creative accounting can make a company look more profitable and stable than it actually is, misleading investors and customers. This can leave honest businesses, who follow the rules, at a disadvantage.
    5. Moral responsibility: Management and business has the moral responsibility of working in the best interest of the society and the stakeholders.

    Conclusion

    The key takeaways from the above discussion are as follows:

    1. Creative accounting is the practice of using accounting loopholes to make a company’s financial position look better than it really is.
    2. The goal of creative accounting is to impress the shareholders, and investors, get loans, or boost stock prices.
    3. Revenue recognition, expense manipulation, and asset valuation are some of the common techniques of Creative accounting.
    4. The ethical implications of creative accounting include misleading stakeholders, eroding trust, compromising regulatory compliance, promoting unfair competition, neglecting moral responsibility, etc.

     

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Bonnie
BonnieCurious
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  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    There are two types of ledger accounts in the accounting system – temporary and permanent. Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are traRead more

    There are two types of ledger accounts in the accounting system – temporary and permanent.

    Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are transferred to the profit and loss account and therefore are not balanced.

    Permanent accounts are those whose balances are carried forward to the next accounting year in form of opening balances. These accounts are balanced and such balances are transferred to the balance sheet. Examples are assets, liability and capital accounts or personal and real accounts.

    Balancing an account means equaling both the debit and the credit side of the account. Generally, there is a difference between the accounts recorded as a carry down balance in the case of permanent accounts and as a transfer balance in the case of temporary accounts.

    Balancing serves as a check to the double-entry rule of accounting.

    Balanced accounts

    As discussed above, the balanced accounts are shown in the balance sheet and the balancing figure for such accounts are carried forward to the next accounting period.

    Unbalanced accounts

    As per the above discussion, the balancing figures of unbalanced accounts are transferred to the profit and loss account and no balances are carried forward to the next accounting period.

    Suppose a company Shine Ltd. has machinery costing 5,00,000 at the beginning of the accounting period and charges depreciation of 10% on the asset. The company also has creditors amounting to 50,000 at the beginning of the period and purchases goods amounting to 30,000 on credit. It has a cash balance of 95,000 at the beginning of the period and earns interest amounting to 10,000.

    Following ledgers would be prepared to record the above entries:

    The above ledgers can be shown as follows:

    The balance of the machinery account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore depreciation account is an unbalanced account.

    The balance of creditors account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore purchases account is an unbalanced account.

    The balance of the cash account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore interest account is an unbalanced account.

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Radha
Radha
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  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    The journal entry for asset purchase is- Particulars Amount Amount Asset A/c                                                             Dr $$$      To  Bank A/c $$$ According to the Modern Approach for Assets Account: When there is an increase in the Asset, it is ‘Debited’. When there is a decreaseRead more

    The journal entry for asset purchase is-

    Particulars Amount Amount
    Asset A/c                                                             Dr $$$
         To  Bank A/c $$$

    According to the Modern Approach for Assets 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 the purchase of an asset and since there is an increase in Asset, the assets account will be debited as per the modern rule and due to the decrease of cash in the bank account, it will be credited.

    For Example, Richard purchased furniture worth Rs 6,000 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. Furniture A/c and Bank A/c as Richard has acquired the furniture paying a certain amount.

    Step 2: To Classify the account heads.

    According to the modern approach: Furniture A/c is an Asset account and Bank A/c is also an Asset account.

    According to the traditional approach: Furniture A/c is a Real account and Bank A/c is also a Real account.

    Step 3: Application of Rules for Debit and Credit:

    According to the modern approach: As asset increases because Furniture has been bought, ‘Furniture A/c’ will be debited. (Rule – increase in Asset is debited).

    Bank account is also an Asset account. As the asset is in the form of cash decreases because the amount has been paid by cash or cheque, Bank account will be credited. (Rule – decrease in Asset is credited).

    According to the traditional approach: Furniture A/c is a Real account and Bank is also a Real account, for which the rule to be applied is ‘Debit what comes in and Credit what goes out’. Furniture being asset comes in the business, so Furniture A/c will be debited and as cash goes out Bank A/c will be credited.

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

    Particulars Amount Amount
    Furniture A/c                                                      Dr 6,000
         To  Bank A/c 6,000

     

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

    AS-11: The effects of changes in foreign exchange rates deal with the issues in the translation of foreign currency transactions and foreign operations. Foreign operations of a reporting enterprise mean its subsidiary, associate, joint venture or branch which is based or conducted in a country otherRead more

    AS-11: The effects of changes in foreign exchange rates deal with the issues in the translation of foreign currency transactions and foreign operations.

    Foreign operations of a reporting enterprise mean its subsidiary, associate, joint venture or branch which is based or conducted in a country other than the country of the reporting entity

    For simple understanding let’s consider foreign operation as a branch of a business that is based in a foreign country.

    Foreign Integral operations

    So, integral foreign operations will be a dependent branch that works on the directions of the head office and it is like an extension of the business. The head office consigns goods to it and it sells them and remits cash and reports to the head office.

    It is dependent on head office for receiving goods to sell and to cover its expenses.

    Further, the difference in foreign exchange rate affects the present and future cash flows to the head office.

    Foreign Non-Integral operations

    A non-integral foreign operation will be like an independent branch that can operate without the aid of the head office. Apart from selling goods of the head office, it also buys goods from the local market and sells them.

    Also, it covers its expenses on its own. It doesn’t remit the cash from sales regularly like a dependent branch. It is like acts an investment of the main business.

    The difference in the foreign exchange rate has little or no effect on the present or future cash flows of the head office

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

    To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions; Condition A Stay in India for 182 days or more in the previous year, or Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 yeaRead more

    To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions;

    Condition A

    • Stay in India for 182 days or more in the previous year, or
    • Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 years immediately preceding the previous year.

    The second condition above is not applicable if he is an Indian citizen leaving India for the purpose of employment, or he is a member of the crew of an Indian ship, or he is only coming to India on a visit.

    If he fails to fulfil either of the two conditions, then he is termed as a non-resident.

    In India, a resident person can be classified into two:

    • Resident and ordinarily resident
    • Resident but not ordinarily resident

     

    Condition B

    A resident is a resident and ordinarily resident if (B):

    • He has been a resident in India for at least 2 out of the previous 10 years immediately preceding the relevant previous year, and
    • He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

    If a person satisfies any one condition of (A) but does not follow all conditions of (B), then he is termed as a resident but not ordinarily resident.

     

    EXAMPLE

    If Nithin is living in India for 190 days in the previous year and was a resident for the previous two years only staying for 400 days in the previous 7 years, then he fulfils condition (A) but not both conditions of (B) and hence he is a resident but not ordinarily resident.

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