AccountingQA Latest Questions

Radha
Radha
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  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.

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Aadil
AadilCurious
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    The term ‘contra’ means  'opposite'. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance. The purpose of the contra revenue account is to ascertain the actuaRead more

    The term ‘contra’ means  ‘opposite’. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance.

    The purpose of the contra revenue account is to ascertain the actual amount of sales and record the items which have reduced the sales.

    These are the contra revenue accounts commonly seen in businesses:

    • Sales return account: This account records the amount of goods sold returned by customers. The journal entry for recording sale return is as follow:

    The total sales return is deducted from the sales in the balance sheet. Though being opposite of the sales account, the sale return account is not an expense account. It is considered an indirect loss as it reduces sales.

    • Sale Discount account: This account records the amount of discount allowed to customers. The journal entry for recording sale discounts is as follows:

    Sales discount is an expense hence it is debited to the profit and loss account.

    Sales returns and sales discounts are shown in the trading and profit and loss account in the following manner:

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Aadil
AadilCurious
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  2. Pooja_Parikh Aspiring Chartered Accountant

    A contra account is a general ledger account that is used to reduce the value of the account related to it. Basically, a contra account is the opposite of its associated account. If the associated account has a debit balance, then the contra account would have a credit balance. They are used to mainRead more

    A contra account is a general ledger account that is used to reduce the value of the account related to it. Basically, a contra account is the opposite of its associated account. If the associated account has a debit balance, then the contra account would have a credit balance. They are used to maintain the historical value of the main account while all the deductions are recorded in the contra account, which when clubbed together show the net book value.

    For example

    if the cost of machinery was Rs. 50,000 and the company wants to preserve its original cost, then the accumulated depreciation of such machinery is recorded separately. Let’s say Rs 10,000 was the accumulated depreciation. Then such amount is recorded in the contra account named accumulated depreciation account. This makes the net value of the machinery Rs 40,000.

    Types

    There are various types of contra accounts such as contra asset, contra equity, contra revenue, and contra liability.

    • Contra asset: these accounts have credit balances and are used to reduce the balance of an asset. Eg, Accumulated depreciation.
    • Contra Liability: These accounts have debit balances and are used to reduce the balance of liabilities. Eg, discount on notes.
    • Contra equity: These accounts have a credit balance and are used to reduce the number of shares outstanding which in turn reduces equity. Eg treasury stock.
    • Contra revenue: These accounts have a debit balance. They reduce gross revenue which results in net revenue. Eg sales return.

    Accountants make use of contra accounts instead of reducing the value of the actual account to keep the financial statements clean.

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Aadil
AadilCurious
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  2. Radhika
    This answer was edited.

    A Capital Account is an account that shows the owner's equity in the firm and a Partner's Capital Account is an account that shows the partner's equity in a partnership firm. Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are: CapitalRead more

    A Capital Account is an account that shows the owner’s equity in the firm and a Partner’s Capital Account is an account that shows the partner’s equity in a partnership firm.

    Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are:

    • Capital introduced in the firm
    • Capital withdrawn
    • Interest on Capital
    • Interest on Drawings
    • Profit or loss in the financial year, etc.

    When partners are given interest on their capital contribution in the firm, it is called on Interest on Capital.

    In case the partnership firm does not have a Partnership Deed, the Partnership Act does not include a provision for Interest on Capital. However, if the partners want they can mutually decide the rate of Interest on Capital.

    Interest on Capital is calculated on the opening capital of the partners and is only allowed when the firm makes a profit, that is, in case a firm incurs losses, it cannot allow Interest on Capital to its partners.

    Example:

    In a partnership firm, there are two partners A and B, and their capital contribution is Rs 10,000 and 20,000 respectively. Interest on capital is @ 10% p.a. The Interest on Capital for both the partners is:

    Partner A- 10,000 * 10/100 = 1,000

    Partner B- 20,000 * 10/100 = 2,000

    The journal entry for Interest on Capital is an adjusting entry and is shown as:

    Interest on Capital A/c                                                          Dr. 3,000
                                         To A’s Capital a/c 1,000
                                         To B’s Capital A/c 2,000
    • Partner’s Capital Account is credited because it is credit in nature and interest on capital is an addition to the account.
    • Interest on Capital Account is debited because it is an expense account.

     

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Aadil
AadilCurious
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  2. Manvi Pursuing ACCA
    This answer was edited.

    The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable. Interest on capital is the aRead more

    The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable.

    Interest on capital is the amount paid by the entity/business to the owners. It is an expense to the business and income for the proprietor, and interest is adjusted in the owner’s capital account. It is calculated on an agreed percentage and for a certain period. It is paid before calculating net profit.

    If there is a loss, no interest will be paid on capital.

    Journal Entry for Interest on Capital in Sole Proprietorship:

    1. Interest on capital entry
    Interest on Capital A/c Debit Debit the increase in expense.
        To Owner’s Capital A/c Credit Credit the increase in income.

     

    2. Closing interest on capital account

    Profit and Loss A/c Debit Debit the increase in expense.
        To Interest on Capital A/c Credit Credit the increase in income.

    In sole proprietor’s Profit and Loss A/c interest will be recorded as an expense on the debit side and will be added to the owner’s capital in the Balance Sheet is considered as an adjustment to the capital account.

    For example, A invested Rs 1,00,000 in a business. He wants to adjust 5% interest on his capital, then the entry will be:

    1. Interest on capital entry
    Interest on Capital A/c 5,000
        To Owner’s Capital A/c 5,000

     

    2. Closing interest on capital account

    Profit and Loss A/c 5,000
        To Interest on Capital A/c 5,000

    In the case of a partnership, the treatment is the same as done in a sole proprietorship. The interest rate is agreed upon by the partners and is mentioned in the partnership deed. No interest is provided on the capitals of the partners if not mentioned in the deed.

    If in a particular period, the partnership firm incurs a loss, then no interest will be provided to the partners.

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Aadil
AadilCurious
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  2. Karan B.com and Pursuing ACCA

    In accounting, sales returns are the goods returned by the customer to the seller. This can be due to goods delivered is damaged or defective. A return can also be due to late delivery, or the wrong items being sent to the buyer. Sales return is a subsidiary book in which all the details are recordeRead more

    In accounting, sales returns are the goods returned by the customer to the seller. This can be due to goods delivered is damaged or defective. A return can also be due to late delivery, or the wrong items being sent to the buyer.

    Sales return is a subsidiary book in which all the details are recorded for the goods returned which were sold on credit. It is also known as return inwards.

    Accounting for Sales Return

    Whenever there is a sale return, the seller will debit the sales return account and credit the debtor’s account. The total amount of sales returns is deducted from the gross sales for the period giving the figure for net sales. Debtor’s account is credited because the amount receivable from debtors will reduce.

    The sales return is a contra account to the sales.

    Format of sales return book:

    In the above format, a credit note is a statement prepared by the seller and sent to the buyer. In this statement, all the details are mentioned in respect of the goods sent by the buyer and are an indication that the buyer’s account is credited in respect of the goods received.

    For example, Mr. A sold goods to Mr. B costing Rs 50,000 on 1 December. On 5 December, goods amounting to Rs 15,000 were found defective and were returned immediately to Mr. A.

    Mr. A will account for this in the following way:

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

    When a loan is taken from a person by a business, there is an asset and liability being created. Cash is being brought into the business which increases the asset whereas the financial obligation of the company rises when a loan is taken and hence a liability increases. For example, Mark Ltd. has taRead more

    When a loan is taken from a person by a business, there is an asset and liability being created. Cash is being brought into the business which increases the asset whereas the financial obligation of the company rises when a loan is taken and hence a liability increases.

    For example, Mark Ltd. has taken a loan from John for $5,000. Therefore the journal entry can be shown as:

    According to the modern rules of accounting, increase in assets is Debit and increase in liability is credit. The company may have taken the loan to finance its business or for some emergency. When it is time for the business to pay off the loan, they can either pay it off completely or in instalments. They must pay off the principal amount along with interest.

    Now for our above example, if Mark Ltd paid off the entire loan after one year at 10% interest, then the journal entry would be:

    Here, the interest on loan account is debited since an increase in expense is debited. Loan account will be debited because the obligation is now reduced and hence liability decreases. Finally, we credit cash since cash is leaving the business which implies a decrease in assets.

    If the entire loan is not paid off in that year, then the balance of the loan amount will be shown in the balance sheet under the head liabilities.

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