AccountingQA Latest Questions

Jayesh Gupta
Jayesh GuptaCurious
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A. Trading Account B. Trial Balance C. Profit and Loss Statements D. Balance Sheet  

  2. Ayushi Curious Pursuing CA
    This answer was edited.

    The correct answer is Option C. The Profit and loss statement is also referred to as the statement of revenues and expenses. It is because the Profit and Loss statement reports all types of revenue that have been earned and all types of expenses that have been incurred during a particular period ofRead more

    The correct answer is Option C.

    The Profit and loss statement is also referred to as the statement of revenues and expenses. It is because the Profit and Loss statement reports all types of revenue that have been earned and all types of expenses that have been incurred during a particular period of time.

    Option A Trading Account reports only the operating revenues and operating expenses.

    Option B Trial Balance shows the balances of all the ledgers of a business and is prepared to check the arithmetical accuracy of the books of accounts.

    Option D Balance sheet reports the balances of assets and liabilities of a business as at a particular date.

    People often confuse the trading and the profit and loss statement to be the same. But they are different.

    Trading Account is prepared with aim of arriving at operating profit or gross profit whereas the profit and loss statement is prepared to arrive at the net profit of a business and reports every revenue and expense whether operating or non operating in nature.

    Operating revenue and operating expense are earned or incurred respectively are related to the chief business activities of a business.

    Features of profit and loss statement:

    1. It is prepared to measure the net profit of a business hence its profitability.
    2. It is usually prepared for a period of one year but many companies do prepare quarterly statements to better judge their performance.
    3. It helps the management in decision making and the other stakeholders like shareholders, creditors to make informed decisions.
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A_Team
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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Radha
Radha
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Brief Introduction The stock of finished goods left unsold at the end of the year is known as closing stock. As closing stock represent an asset i.e. the unsold finished goods,  it has a debit balance. Closing stock appears on the credit side of the trading account and on the asset side of the balanRead more

    Brief Introduction

    The stock of finished goods left unsold at the end of the year is known as closing stock. As closing stock represent an asset i.e. the unsold finished goods,  it has a debit balance.

    Closing stock appears on the credit side of the trading account and on the asset side of the balance sheet. But, if closing stock is adjusted against purchase i.e. deducted from purchase account balance, then it doesn’t appear in the trading account.

    It is always shown on the asset of the balance irrespective of its treatment as discussed above because it is an asset.

    Though no ledger is maintained for closing stock in financial accounts of a business, the journal entry for the closing stock is passed and is as below:

    Closing stock A/c     Dr    Amt

      To Trading A/c                    Amt

    (When the closing stock appears in trading a/c)

    OR

    Closing stock A/c     Dr       Amt

      To Purchase A/c                   Amt

    (When closing stock is adjusted against purchase A/c and not shown in trading a/c)

    Generally, the closing stock is shown separately in the trial balance because it is already part of the purchase account balance.

    Closing stock is ascertained at the end of the financial year and it has great importance as it directly affects the gross profit or loss of a business. Closing stock at end of a year becomes the opening stock of the next financial year.

    Numerical Example

    ABC trading reported the following particulars at the end of the financial year 20X2-20X3:

    We will draw the trading and P/L account and balance sheet of ABC Trading using the above information.

    As the closing stock is not given, we will calculate the closing stock as a balancing figure.

    It can be also calculated using this formula:

    Closing stock = Opening stock + Purchase + Gross Profit – Sales

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Aadil
AadilCurious
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  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity.  General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves. General reserve forms a part of the Profit & Loss ApprRead more

    General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity.  General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves.

    General reserve forms a part of the Profit & Loss Appropriation account and is created to strengthen the financial position of the entity and serves as a sources of internal financing. It is upon the discretion of the management as to how much of a reserve is to be created. No reserve is created when the entity incurs losses.

    General reserve is shown in the Reserves & Surplus head on the liability side of the balance sheet of the entity and carries a credit balance.

    Suppose, an entity, ABC Ltd engaged in the business of electronics earns a profit of 85000 in the current financial year and has an existing general reserve amounting to 100000. The management decides to keep aside 20% of its profits as general reserve.

    Then the amount to be transferred to general reserve will be = 85000*20% = 17000.

    In the financial statements it will be shown as follows-

    Now, in the next financial year, the entity incurs losses amounting to 45000. In this case, no amount shall be transferred to the general reserve of the entity and will be shown in the financial statement as follows-

    The creation of general reserve can sometimes be deceiving since it does not show the clear picture of the entity and absorbs losses incurred.

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Aadil
AadilCurious
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  2. Ayushi Curious Pursuing CA

    When it is said that furniture is purchased for office use, it means it is an asset for the business and the journal entry for this event will be the following: Furniture A/c Dr. Amt To Cash/Bank / Vendor A/c Cr. Amt (Being furniture purchased for office use) Explanation of the journal as per the goRead more

    When it is said that furniture is purchased for office use, it means it is an asset for the business and the journal entry for this event will be the following:

    Furniture A/c Dr. Amt
    To Cash/Bank / Vendor A/c Cr. Amt
    (Being furniture purchased for office use)

    Explanation of the journal as per the golden rules of accounting

    The furniture account is a real account because it represents a material asset and the golden rule for real accounts is “Debit what comes in, credit what goes out”. Hence, the furniture account is debited as it is increased. The cash and bank are also real accounts and they are debited because there is an outflow from cash or bank.

    If the furniture is purchased on credit then the vendor account is credited. A vendor account represents a person and the golden rule for personal accounts is, “Debit the receiver, credit the giver”. It is credited as the furniture is given by the vendor.

    Explanation of journal as per modern rules of accounting

    The furniture account is an asset account hence it is debited as asset accounts are debited on increase. Cash and bank accounts are also assets accounts and they are credited as they are decreased on the purchase of furniture.

    A vendor account is a liability account as there is an obligation to pay the vendor. It is credited as it is increased. Liability accounts are credited on the increase and vice versa.

    When furniture is purchased for personal use

    If the furniture is purchased for personal use and the payment is made or is to be made out of business, then the asset will not be recognised as an asset for the business and it will be recorded as a drawing. It will be deducted out of capital. The journal entry will be the following:

    Capital  A/c Dr. Amt
    To Drawings A/c Cr. Amt
    (Being furniture purchased for personal use)

     

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Aadil
AadilCurious
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  2. Ayushi Curious Pursuing CA

    The accounting equation for a non-profit organisation is almost the same as in the case of the profit-oriented organisation. Let's first briefly understand what accounting equation and non-profit organisation are: Accounting Equation Accounting equation is an equation that depicts the relationship bRead more

    The accounting equation for a non-profit organisation is almost the same as in the case of the profit-oriented organisation. Let’s first briefly understand what accounting equation and non-profit organisation are:

    Accounting Equation

    Accounting equation is an equation that depicts the relationship between assets, liabilities and capital of an entity.

    Assets = Liabilities + Capital

    As per this equation, the total assets of an entity are equal to the sum of its total liabilities and total capital. This equation holds good in every situation.

    Non-Profit Organisation

    A Non-Profit Organisation is an entity which exists for purposes other than for profit. Such organizations exist and operate for charitable purposes, promotion of culture and sports and welfare of society. The accounting for Non-profit organisation is slightly different from For-profit organisations. In the case of a non-profit organisation, the capital account is known as the capital fund.

    Accounting Equation for non-profit organisations

    The Accounting equation for a non-profit organisation is as follows:

    Assets = Liabilities + Capital fund.

    The difference is only in name. In the case of non-profit organizations, the capital is known as a capital fund. Rest everything is the same. The accounting equation will be prepared as normally prepared for business concerns.

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

    Subsidiary Books Introduction & Definition In large business organizations, it is practically impossible to keep a record of every single business affair, while neglecting them and not recording them wouldn't be an ideal choice, this is where subsidiary books come into the role. As we were introRead more

    Subsidiary Books

    Introduction & Definition

    In large business organizations, it is practically impossible to keep a record of every single business affair, while neglecting them and not recording them wouldn’t be an ideal choice, this is where subsidiary books come into the role. As we were introduced to the basics of accounting in the 11th standard, we learned about different elements like journals, ledgers, trial balances, etc. It is practically impossible for a business to keep track of every single affair just through only those elements. Thus, the Subsidiary book is the next step here.

    Subsidiary books are the books of original entry. They are a dedicated form of books that maintains an analysis of a specific account. It records financial transactions of a similar nature. They are sub-division of a journal.

    In big business organizations, it’s very hard for a bookkeeper or accountant to record all the transactions in one journal and post them into various accounts.  This is where special purpose books or subsidiary books may be required for more efficient bookkeeping. They are a subdivision of journals and for every type of transaction, there is a separate book.

     

    Types of Subsidiary Books

    There are eight types of subsidiary books that are required for recording transactions. The list of various subsidiary books is as follows:

    1. Cash Book
    2. Purchase Book
    3. Sales Book
    4. Purchase Return Book
    5. Sales Return Book
    6. Journal Proper
    7. Bills Receivable Book
    8. Bills Payable Book

     

    Types of Subsidiary Books

    Now, we’ll be taking a closer look at each and every subsidiary book.

     

    Cash Book

     The cash book is the most important subsidiary book, it’s a book of a prime entry recording all the cash spent or received by the business, either in cash form or from the bank. In simple words, recording all the transactions made by the business.

    It is of three types i.e single-column cash book, double-column cash book, and triple-column cash book. As the name indicates, the column of cash, bank, and discount increases/decreases as per the column of the cash book stated.

    Format 

     

    Note: this is a triple-column cash book format, for the double-column cash book format, we remove the discount column from both sides, and for the single column, we may remove the bank column as well.

    Purchase Book

    A purchase book is a subsidiary book that records all the transactions related to the credit purchase in a business. Thereby, the normal purchasing of assets is never recorded in the purchase book.

    The credit purchases are directly recorded in the purchase book from the journals or the source documents. The source document indicates bills payable, invoices, etc.

    Format

     

    Sales Book

    A sales book, similar to a purchase book, is a special book where all the credit sales are recorded. The sales book doesn’t record the transactions related to the normal sale of assets and hence, is a special type of book, just like the purchase book.

    Format

     

    Purchase Return Book

    The purchase return book, also known as the return outwards book, is that book that records the goods that were returned by us to the supplier. Thereby, called purchase return book.

    When the goods are returned, a debit note is issued against every return and hence, recorded in the purchase return book.

    Format

     

     

    Sales Return Book

    The sales return book, also known as the return inwards book, refers to that subsidiary book that records the goods which were returned to us by the customer.

    For every good returned to us, a credit note is issued to the customer. And thus, it is recorded in the sales return book.

    Format

     

     

    Journal Proper

    Just like we recently learned in class 11th about what a journal entry is and how it is made, it’s a little different from the journal proper. Journal proper is a subsidiary book that records all the transactions which are not recorded in other subsidiary books.

    A journal is an original book of entries that records all the business transactions, while a journal proper is a subsidiary book in which all types of miscellaneous credit business transactions are recorded that do not fit anywhere in the other subsidiary books. Its format is the same as the journal entries’ format. Therefore, it’s also known as a miscellaneous journal.

    Format

     

     

     Bills Receivable Book

    The bills receivable book is the book that draws the bills favorable to the business i.e when the goods or services are provided to any customer on credit, they become a debtor, and bills receivable is a written note received from the customer indicating that they formally agree to pay the sum of money owed.

    Therefore, it helps in recording these types of transactions. The sum total of the bills receivable book is posted to the bills receivable account.

    Format

     

     

    Bills Payable Book

    The bills payable book is the subsidiary book that records all the bills that are drawn on the company. The bills payable is drawn on the company when we buy a good/service on credit and agrees to pay the amount to the supplier by signing a written note with the date we agree to pay.

    It’s a liability of the business and the total of the bills payable book is posted on the credit side of the bills payable account.

    Format

     

     

     

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