AccountingQA Latest Questions

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

    Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. Gross profit and net profit are gross profit estimates of the profitability of a company. WhRead more

    Definition

    Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.

    Gross profit and net profit are gross profit estimates of the profitability of a company.

    When the result of this computation is negative it is referred to as gross loss

    Formula :

    Total Revenues – Cost Of Goods Sold

    Net profit is defined as the excess of revenues over expenses during a particular period.
    Net profit is to show the performance of the company.

    When the result of this computation is negative it is called a net loss.

    Net profit may be shown before or after tax.

    Formula :

    Total Revenues – Expenses
    Or
    Total Revenues – Total Cost ( Implicit And Explicit Cost )

    Examples

    Now let me explain to you by taking an example which is as follows :

    In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
    Then,

    COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.

    = Rs ( 73000 + 10000+ 7000- 5000)
    = Rs 85000

    GROSS PROFIT = REVENUE – COST OF GOODS SOLD

    = Rs ( 100000 – 85000 )
    = Rs 15000

    Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
    Then,

    NET PROFIT = GROSS PROFIT – INDIRECT EXPENSES + OTHER INCOMES

    = Rs ( 15000 – 2000 + 1000)
    = Rs 14000

    Treatment

    Treatment of gross profit and net profit is given as follows :

    Gross profit

    • Gross profit appears on the credit side of the trading account.
    • Gross profit is located in the upper portion beneath revenue and cost of goods sold.

    Net profit

    • Net profit appears on the credit side of the profit and loss account.
    • It is treated directly in the balance sheet by adding or subtracting from the capital.

    Here is an extract of the trading and profit/loss account and balance sheet showing GROSS PROFIT & NET PROFIT :

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Mehak
Mehak
In: >

  2. Aditi

    Biological Assets comes under International Accounting Standard IAS 41 Agriculture. IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity. Agricultural Activity- It is the management of biological transformatRead more

    Biological Assets comes under International Accounting Standard IAS 41 Agriculture.

    IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity.

    • Agricultural Activity- It is the management of biological transformation by an entity and measuring the change in the quality and quantity of biological assets.
    • Biological Transformation- It comprises the process of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset
    • Biological Asset – They are living plants or animals owned by an entity
    • Agricultural Produce- It is the harvested / detached product of the entity’s biological asset.

    IAS 41 does not apply to

    • Agricultural land
    • Intangible assets related to agricultural activity
    • Products that are the result of processing after the point of harvest, for example, yarn, carpet, rubber, wine, etc
    • The land on which the biological assets grow, regenerate, degenerate.

     

     

    Biological Assets

    Definition

    Biological assets are living plants or animals that go through biological transformation, owned by an entity to prepare agricultural produce for the purpose of agricultural activities only.

    Living plants include plants that are consumable within 1 year and are harvested. It also includes plants that are used for lumbering and wood-cutting activities.

    Examples

    Examples of biological assets are:

    Sheep, pigs, poultry, beef cattle, fish, dairy cows, plants for harvest etc

    Importance

    • Farming: They are key to agriculture and food production.
    • Income: They generate substantial income for businesses in industries such as vineyards, livestock, silviculture, etc.
    • Sustainability: Properly managing them helps the environment.

     

    Accounting & Presentation

    Recognition

    Under IAS 41 biological assets are recognised when

    • The business must have ownership over them from a past event.
    • The future economic benefits are expected to flow to the business from their ownership.
    • The cost or fair value of the asset can be measured reliably.

    Agricultural produce is recognised

    • It is recognised at the point of harvest or detachment.

    Agricultural produce is derecognised when

    • They enter the trading.
    • Enters the production process.

    Measurement

    • Biological assets are measured on initial recognition and at each balance sheet date at their fair value less costs to sell.
    • Costs to sell are incremental costs incurred in selling the asset.
    • Agricultural produce is measured at the point of harvest, at fair value less costs to sell at the point of harvest.
    • Agricultural produce after the point of harvest/ detachment is transferred and treated under the IAS 2 Inventory

    Gains & Losses

    • Gains and losses arising from the initial recognition of biological assets are reported in the statement of profit and loss.
    • The change in fair value less costs to sell of a biological asset between balance sheet dates is reported as gain or loss in the statement of profit and loss.
    • A gain or loss arising on initial recognition of agricultural produce at fair value less selling costs is included in profit or loss for the period in which it arises.

    Treatment

    • The sale of agricultural produce is treated as revenue in the statement of profit and loss.
    • Agricultural produce to be harvested for more than 12 months, livestock to be held for more than 12 months and trees cultivated for lumber are recorded as Biological assets under the Non-current assets head in the balance sheet.
    • Agricultural produce to be harvested within 12 months, livestock to be slaughtered within 12 months and annual crops like wheat, and maize are recorded as Biological assets under the head Current assets in the balance sheet.
    • Inventories produced from agricultural produce are presented as Inventory under the head Current assets in the balance sheet.

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A_Team
A_Team
In: >

Final AccountsLoose Tools
  2. Vijay Curious M.Com
    This answer was edited.

    Let me begin by giving a small explanation of what loose tools are before we dive into their accounting treatment. Loose tools are assets that are used in various steps of the production process and therefore are vital for the conversion of raw materials into finished goods. They are considered as cRead more

    Let me begin by giving a small explanation of what loose tools are before we dive into their accounting treatment.

    Loose tools are assets that are used in various steps of the production process and therefore are vital for the conversion of raw materials into finished goods. They are considered as current assets of the business as their useful life is limited. They have a small monetary value (cost-efficient) and high turnover. Examples of loose tools include screwdrivers, hammers, etc.

    One may say loose tools like screwdrivers and hammers can be used for more than one year and therefore should be classified as non-current assets. But unlike fixed assets, these loose tools have a high probability of being misplaced or lost. Hence they are classified as current assets.

    Since loose tools are treated as an asset for the business, they are shown as a debit balance in the trial balance.

    The cost of loose tools consumed for the year will be shown on the debit side of the Profit & Loss A/c as an expense. In the balance sheet, loose tools are shown on the Assets side under the head Current Assets and sub-head Inventories. Since they aid the production process, loose tools are shown as a part of the inventory of the business.

    Let us take an example,

    XYZ Ltd. at the beginning of the year had loose tools worth 5,000. During the year they purchased loose tools worth 500. At the end of the year, the company valued its loose tools at 4,500.

    Now let us find the cost of loose tools consumed. The formula for finding the cost of loose tools consumed is as follows:

    Cost of loose tools consumed  = Opening inventory of loose tools + Purchases of loose tools – Closing inventory of loose tools

    Cost of loose tools consumed = 5,000 + 500 – 4,500 = 1,000

    So, the cost of loose tools consumed (1000) will be shown on the debit side of the P&L A/c as follows:

    The closing inventory of loose tools worth 4,500 will be shown on the assets side of the balance sheet under the head current assets and sub-head inventory in the following manner:

    One thing to remember here is there is an exception to loose tools. While calculating liquidity ratios like the Current ratio, Quick ratio, etc. loose tools are excluded from current assets. The reason for this is loose tools cannot be easily converted into cash i.e. they are less liquid. The purpose of calculating the current ratio is to check the liquidity of a company. Including loose tools (which cannot be easily converted into cash) in current assets defeats the purpose of calculating the ratio.

     

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prashant06
prashant06
In: >

  2. Manvi Pursuing ACCA
    This answer was edited.

    Return inwards are the goods returned by the customer to the seller. The goods are returned for reasons like defects, excess delivery, and low quality. Return inwards are also known as Sales Returns. Sales returns are a contra account to sales revenue. The amount of sales returns is deducted from thRead more

    Return inwards are the goods returned by the customer to the seller. The goods are returned for reasons like defects, excess delivery, and low quality. Return inwards are also known as Sales Returns.

    Sales returns are a contra account to sales revenue. The amount of sales returns is deducted from the total sales in the Trading section of the Trading and Profit & Loss Account.

    In subsidiary books, return inwards are recorded only for those goods which are sold on credit to the customer.

    For example, On 1 August E Electronics sold 50 units of television to Hill Hotels on credit for Rs.25,000 each. Out of which 5 units were found to be defective and were returned back to E Electronics. In that accounting period, E Electronics made a total sales of Rs.20,00,000 (including the item sold to Hill Hotels).

    E Electronics in its Trading section of Trading and P&L A/c will account for a sales return of Rs.1,25,000 (Rs.25,000*5) and this amount will be deducted from the total sales. The same will be recorded in the subsidiary books as it accounts for sales made on credit.

    Extract of Profit & Loss Account:

    For a business, sales returns will either have a decrease in the sales revenue or it will increase the sales returns and allowances which is a contra account to sales revenue. An increase in sales returns will decrease gross profit.

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Jasmeet_Sethi
Jasmeet_SethiCurious
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  2. Simerpreet Helpful CMA Inter qualified

    Sundry Debtors Sundry Debtors are those persons or firms to whom goods have been sold or services rendered on credit and the payment has not been received from them. In other words, Debtors are the persons or firms from whom the payment is to be received by the business. For Example, Ramen Sold goodRead more

    Sundry Debtors

    Sundry Debtors are those persons or firms to whom goods have been sold or services rendered on credit and the payment has not been received from them. In other words, Debtors are the persons or firms from whom the payment is to be received by the business.

    For Example, Ramen Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ramen because he owes the amount to Ramen.

    Another Example, If goods worth Rs 7000 have been sold to Sid on credit, he will continue to remain as debtor of the business so long as he does not make the full payment.

    Treatment:

    Sundry Debtor is considered as a current asset and hence it is shown on the assets side of the balance sheet under the Current Assets heading.

    Sundry Debtors are not considered as an item of profit and loss because it is not considered as an item of income or expense. However, the items associated with sundry debtors such as bad debts or provision for doubtful debts or bad debts recovered are shown in profit and loss accounts in the debit and credit sides respectively.

    Sundry Creditors

    Sundry creditors are those persons or firms from whom goods have been purchased or services rendered on credit and for which payment has not been made. In other words, Creditors are the person or firms to whom some money has to be paid by the business.

    For Example, Ramen purchased goods from Sam on credit, Ramen did not pay for the goods immediately, so here Ramen is the creditor for Sam because he owes money to Sam.

    Another Example, If Mr. Johnson purchased goods worth Rs 3000 from M/s. Rick & Co. on credit, Mr. Johnson will continue to remain as a creditor of M/s. Rick & Co. as long as the full payment is made by Mr. Johnson.

    Treatment:

    Sundry Creditor is shown in the liabilities side of the balance sheet under the heading Current Liabilities.

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Ayushi
AyushiCurious
In: >

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

    No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use. Drawings are actually shown in the balance sheet as a deduction from the capital account. Let’s take an example, Mr X runs a tradingRead more

    No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use.

    Drawings are actually shown in the balance sheet as a deduction from the capital account.

    Let’s take an example, Mr X runs a trading business. For meeting his personal expense we withdrew cash from his business cash of amount Rs. 15,000. It shall be reported like this:

    Journal Entries:

    Balance sheet:

    Profit and loss account reports only the nominal accounts i.e. incomes and expenses. That’s why drawings are not shown in the statement of profit or loss because it is neither an expense nor an income.

    It represents the owner’s withdrawal of capital from business for personal use. Hence, the drawings account is a personal account. Drawings lead to a simultaneous reduction in capital and cash or stock of a business which has nothing to do with Profit and loss A/c.

    Therefore it is reported in the balance sheet only.

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Spriha Sparsh
Spriha Sparsh
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company. Retained earnings are shown under shareholders’ equity in the balance sheet and are calculaRead more

    Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company.

    Retained earnings are shown under shareholders’ equity in the balance sheet and are calculated as follows:
    Retained earnings at the end of the year = Retained earnings at the beginning of the year + Net Income – Dividend

    From the above formula, Yes, it is possible for retained earnings to be negative. Negative earnings occur when the cumulative dividend payout is higher than the earnings made by a company during the year. This results in a negative balance as per the formula.

    Negative Retained earnings indicate a number of concerning facts about a company:

    • That the company is experiencing Long term losses.
    • That there are chances for the company to go into bankruptcy.
    • That the company may be paying out dividends to the shareholders from borrowed finance.

     

    Positive Retained Earnings

    When a company is said to have positive retained earnings, the company has several advantages. The company has excess profit to hold on to. This helps in expansion and also acts as a safety net in case of unforeseen expenses. Hence if a company shows positive Retained earnings it can be interpreted that the company is profitable.

    However, higher retained earnings mean the distribution of lesser dividends to shareholders. This makes the company look less attractive to investors. Another reason for high retained earnings could be that the company has not found any profitable investment for its earnings.

    Therefore, there should be adequate retained earnings with the company but at the same time, keep a check that the amount of retained earnings does not exceed a limit.

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