AccountingQA Latest Questions

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

    Definition Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable. Bad debts will be treated in the following ways : On the debit side of the profit and loss account. In the curreRead more

    Definition

    Bad debts are a debt owed to an enterprise that is considered to be irrecoverable or we can say that it is owed to the business that is written off because it is irrecoverable.

    Bad debts will be treated in the following ways :

    On the debit side of the profit and loss account.

    In the current assets side of the balance sheet, these are deducted from sundry debtors.

    For example loans from banks are declared as bad debt, sales made on credit and amounts not received from customers, etc.

    Now I will show you an extract of the profit and loss account and balance sheet   

    Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or the rendering of services in the ordinary course of business.

    For example,  debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.

     

    Current liabilities are defined as liabilities that are payable normally within 12 months from the end of the accounting period or in other words which fall due for payment in a relatively short period.

    For example bills payable, short-term loans, etc.

     

    Accounting treatment

    Now let me try to explain to you the accounting treatment for bad debts which is as follows :

    • Balance sheet
      • In the balance sheet either it can be shown on the asset side under head current assets by reducing from that specific assets.
      • For example, if credit sales are made to a customer who says it’s not recoverable or is partially recoverable then the amount is bad debt. It’s a loss for the business and credited to the personal account of debtors or we can say reduced from debtor those are current assets of the balance sheet.

     

    • Profit and loss account
      • Bad debts are treated as an expense and debited to the profit and loss account.
      • For example, as I have explained above, but before transferring to the balance sheet, bad debt will be debited to the profit and loss account as an expense.

     

    Reasons for bad debts

    There are several reasons why businesses may have bad debts some of them are as follows:-

    • Offered credit to customers who were unable to pay them back, or they may have been the victim of fraud.

     

    • When there is conflicts or dispute arise with respect to product size, color, quality, delivery, credit term, price, etc therefore debts becomes bad.

     

    • Debtors have poor financial management or they are not able to pay debts on time.

     

    • Debtors’ unwillingness to pay is also a reason for debts to become bad.

     

    • Or there can be more cases where debtors are unable to collect debts and debts turns out to be bad.

     

    Accounting methods

    There are two methods for accounting for bad debts which are mentioned below:-

    • First, is the direct written-off method which states that bad debts will be directly treated as expenses and expensed to the income statement, which is called the profit and loss account.

     

    • Second, is the allowance method which means we create provisions for doubtful debts accounts and the debtor’s account remains as it is since the debtor’s account and provision for doubtful debts account are two separate accounts.

     

      • Debts that are doubtful of recovery are provided estimating the debts that may not be recovered .amount debited to the profit and loss account reduces the current year’s profit and the amount of provision is carried forward to the next year.
      • Next year, when debts actually become bad debts and are written off, the amount of bad debts is transferred ( debited ) to the provision for doubtful debts account.
      • The amount of bad debts is not debited to the profit and loss account since it was already debited in earlier years.
      • Provision for doubtful debts is shown in the debit side of the profit and loss account as well as shown as a deduction from sundry debtors in the assets side of the balance sheet. 

     

    Related terms

    So there are a few related terms whose meanings you should know

    • Further bad debts :
      • It means the amount of sundry debtors in the trial balance is before the deduction of bad debts. in this situation, entry for further bad debts is also passed into the books of account.
      • That is bad debts are debited and the debtor’s account is credited. And the accounting treatment for them is the same as bad debts which I have shown you above.

     

    • Bad debts recovered :
      • It may happen that the amount written off as bad debts is recovered fully or partially.
      • In that case, the amount is not credited to the debtor’s (personal) account but is credited to the bad debts recovered account because the amount recovered had been earlier written off as a loss.
      • Thus amount recovered is a ‘gain’  and is credited to the profit and loss account.

     

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Kajal
    This answer was edited.

    Trading A/c is a Nominal A/c which follows the rule “Debit the expenses and losses, Credit the incomes and gains” So, the Credit side of Trading A/c shows income from the sale of goods. It includes Sales, Closing stock (if adjustment for it has not been made yet) and Gross Loss (if any).   TRADRead more

    Trading A/c is a Nominal A/c which follows the rule “Debit the expenses and losses, Credit the incomes and gains”

    So, the Credit side of Trading A/c shows income from the sale of goods. It includes Sales, Closing stock (if adjustment for it has not been made yet) and Gross Loss (if any).

     

    TRADING ACCOUNT

    Trading A/c is prepared for calculating the Gross Profit or Gross Loss arising from the trading activities of a business.

    Trading activities are mostly related to buying and selling of goods. However, in between buying and selling, a lot of activities are involved like transportation, warehousing, etc. So, all the expenses that are directly related to manufacturing or purchase of goods are also recorded in the Trading A/c.

     

    CREDIT SIDE OF TRADING ACCOUNT

    It includes,

    SALES – When goods are sold to earn a profit, it is called sales. It can be cash sales or credit sales.

    Suppose you are in the business of manufacturing and trading shirts. You sold shirts worth $ 20,000 during the year. This $20,000 is your sales.

    SALES RETURN – When the goods sold by you are returned by the customer, it is known as sales return. Sales return is deducted from the sales.

    Continuing with the above example, the customers returned shirts of $1,000 because they didn’t like them. This return is known as sales return or return inward (as goods are coming back i.e. in)

    CLOSING STOCK – Stock is nothing but goods that are either obtained for resale or manufactured for sale and are yet unsold on any particular date.

    The value of stock at the beginning of an accounting year is called Opening stock while the value of the stock at the end of an accounting year is called Closing stock.

    Closing stock is valued at cost price or market price whichever is less.

    It includes,

    1. Closing stock of raw materials
    2. Closing stock of semi-finished goods
    3. Closing stock of finished goods

    For example – On 31st March 2023, there was unused raw material worth $1,000 and shirts worth $5,000 remained unsold.

    So, we have Closing Stock of Raw material – $1,000

    Closing Stock of Finished Goods – $5,000

    Normally, the closing stock is given outside the Trial Balance because its valuation is made after accounts have been closed. It is incorporated in the books by transferring it to the Trading A/c. So, it is shown on the credit side of Trading A/c as well as on the assets side of the Balance sheet.

    However, if the closing stock is given inside the Trail Balance, it means that the closing stock must have already been deducted from the Purchases account. So, closing stock will only be shown on the assets side of the Balance sheet.

    GROSS LOSS – If purchases and direct expenses exceed sales, then it is a Gross loss. In other words, when Debit side > credit side.

     

    DEBIT SIDE OF TRADING ACCOUNT

    It includes

    OPENING STOCK – The value of the stock at the beginning of an accounting year is called Opening stock.

    The closing stock of the last year becomes the opening stock of the current year.

    PURCHASES – Goods that have been bought for resale or raw materials purchased for the manufacturing of the product are terms as Purchases. These goods must be related to the business you are doing. It includes cash as well as credit Purchases.

    PURCHASES RETURN – When goods bought are returned to the suppliers due to any reason. This is known as Purchase return. Purchase return is deducted from the Purchases.

    WAGES – Wages are paid to the workers who are directly engaged in the loading, unloading and production of goods.

    CARRIAGE or CARRIAGE INWARDS or FREIGHT – It refers to the cost of transporting goods from the supplier.

    MANUFACTURING EXPENSES – All expenses incurred in the manufacture of goods such as Coal, Gas, Fuel, Water, Power, Factory rent, Factory lighting etc.

    DOCK CHARGES – These are charged by port authorities when unloading goods at a dock or wharf. Such charges paid in connection with goods purchased are considered direct expenses and are debited to Trading a/c.

    IMPORT DUTY or CUSTOM DUTY – It is a tax collected on imports and specific exports by a country’s customs authorities.

    If import duty is paid on the import of goods, then they are shown on the Dr. side of the Trading A/c.

    ROYALTY – Royalty refers to the amount paid for the use of assets belonging to another person. It includes royalty for the use of intangible assets, such as copyrights, trademarks, or franchisee agreements. It is also paid for the use of natural resources, such as mining leases.

    Royalty is charged to the Trading A/c as it increases the cost of production.

    GROSS PROFIT – When sales exceed the amount of purchases and the expenses directly connected with such purchases i.e. when Credit side> Debit side.

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Astha
AsthaLeader
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Revaluation
  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Revaluation of Assets is an adjustment made in the carrying value of the fixed asset in case the company finds there is a difference between the current price and the market value of the asset. Generally, the value of the asset decreases due to depreciation but in some cases like inflation in the ecRead more

    Revaluation of Assets is an adjustment made in the carrying value of the fixed asset in case the company finds there is a difference between the current price and the market value of the asset. Generally, the value of the asset decreases due to depreciation but in some cases like inflation in the economy, it may increase. so, in order to know the correct value of the asset Revaluation is to be done.

    Accounting standard allows two models.

    • Cost model
    • Revaluation model

    Under the cost model, the carrying value of fixed assets equals their historical cost less accumulated depreciation and accumulated impairment losses.

    For Example, Amazon ltd purchased a Plant for 5,00,000 on January 1, 2010, with a useful life of 10 years, and uses straight-line depreciation.

    Here, the journal entry would be passed as

    As the useful life of the asset is 20 years, so the yearly depreciation would be

    5,00,000/10 i.e. 50,000.

    So the accumulated depreciation at the end of December 31, 2012, would be 50,000×2= 1,00,000 and

    the carrying amount would be 5,00,000-1,00,000= 4,00,000.

    Under the Revaluation method, the assets are revalued at their current market value. If there is an increase in the value of an asset, the difference between the asset’s market value and current book value is recorded as a revaluation surplus.

    For Example, Amazon ltd purchased an asset two years ago at a cost of 2,00,000. Depreciation @ 10% under straight-line method.

    Therefore, the accumulated depreciation for two years would be 40,000,

    i.e. 20,000 for a year.

    Carrying cost of the asset = 1,60,000

    Assuming, the company revalues its assets and finds that the worth of assets is 1,85,000.

    Under this method, the company needs to record 25,000 as a surplus.

    Accounting entry for the above will be

    Depreciation calculated during the third year would be based on the new carrying value of 1,60,000.

    Therefore, Depreciation for the 3rd year= 1,60,000/3

    = 53,333.33

    Accounting entry:

    Alternatively, the incremental depreciation due to the revaluation i.e. 13,333.33 can be charged to the revaluation surplus account.

    In case, if there is a revaluation loss, the entries would be interchanged.

    In case of admission of a partner, the new partner may not agree with the value of assets as stated in the balance sheet, with time the values may have arisen or may have fallen, so in order to bring them to their correct values revaluation is done so that the new partner doesn’t suffer.

    Where the assets and liabilities are to be shown in the books at the revised (new) values after the admission of the new partner.

    The accounting entries are

    1. For Increase in the value of an asset

    2. For a decrease in the value of an asset

    3. For transfer of profit on revaluation i.e. if the total of credit side exceeds the debit side.

    4. For transfer of loss on revaluation i.e. if the total of debit side exceeds the credit side.

    Note: If the total of both sides is equal it signifies that there is no profit or loss on the revaluation of assets. Hence no entry is to be passed.

    After preparing for the journal entry, a revaluation ledger account is also prepared wherein the accounts carrying a debit balance are transferred to the debit side and the accounts carrying a credit balance are transferred to the credit side.

    In the case of retirement of a partner, the same journal entries are to be passed as in the case of Admission of a partner for revaluation of assets.

    Generally, the value of an asset decreases with time but it may increase in certain circumstances especially in inflationary economies.

    Conclusion

    An entity should do the revaluation of its assets because revaluation provides the present value of assets owned by an entity and upward revaluation is beneficial for the entity and hence the company can charge more depreciation on upward revaluation and can get tax benefits.

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Simerpreet
SimerpreetHelpful
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Bill of Exchange
  2. Sandy CMA Final
    This answer was edited.

    Specimen of Bill of Exchange Important points of Bill of Exchange: Date: When a bill of exchange is drawn, the drawer has to specify the date in the top right corner. The date is important for the purpose of calculating the due date of the bill. Generally, the drawee is given three days as a grace pRead more

    Specimen of Bill of Exchange

    Important points of Bill of Exchange:

    Date: When a bill of exchange is drawn, the drawer has to specify the date in the top right corner. The date is important for the purpose of calculating the due date of the bill. Generally, the drawee is given three days as a grace period over and above the due date of maturity.

    In the above specimen, the date mentioned is 25th July 2021, so the due date will be three months + 3 days( grace period) i.e. to say  28th October 2021.

    Term: In the above, the term as agreed by the drawer and drawee is 3 months. So the maturity date will be after 3 months.

    Stamp: The Stamp is affixed in the left corner in every bill of exchange, the value of which depends upon the amount specified in the bill.

    Parties involved in Bill of Exchange:

    1. Drawer: The one who makes the bill, i.e. the creditor.
    2. Drawee: The one on whom the bill is drawn, i.e. the debtor.
    3. Payee: The one to whom the amount is to be paid is the payee.

    Sometimes, the drawer and the payee are the same people.

    For Example,

    i) A bill of exchange for Rs 10,000 is drawn by Sandy on Karan which is due after three months. Karan accepted the bill which is met at maturity and hence becomes the acceptor of the bill by putting his signature.

    Here, Sandy is the drawer and Karan is the drawee. As the payment on maturity is received by Sandy so the payee will be Sandy.

    ii) A bill of exchange for Rs 10,000 is drawn by Sandy on Karan which is due after three months. Karan accepted the bill. Thereafter Sandy endorsed the bill in favor of his creditor, Vikash. The bill is met at maturity.

    So in this case, Sandy is the drawer, Karan is the drawee and Vikash is the payee as he received the amount at maturity.

    Acceptance: Acceptance by the drawee is given on the face of the bill as-

    Meaning of BOE:

    In a business, in the case of credit sales, the payment is received after a certain period of time. In such a case the seller i.e. the creditor makes a credit note and the purchaser i.e. the debtor accepts the same by giving his acceptance by signing the instrument, to pay the amount of money mentioned to a certain person or the bearer of the instrument.

    It is generally a negotiable instrument i.e. can be transferred from one person to another.

    Features of Bill of Exchange.

    1. It is a written document.
    2. It is an unconditional order to pay.
    3. It must be signed by the maker of the bill i.e. the drawer.
    4. It must be properly stamped.
    5. The amount is payable either to a specified person or to his order or to the bearer.
    6. It contains an order to pay the amount mentioned in the instrument both in figures and words.
    7. The amount is to be paid either on the expiry of a fixed period from the date of the bill or on-demand.

     

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