AccountingQA Latest Questions

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

    The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in: Contra accounts Contra entries The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corRead more

    The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in:

    • Contra accounts
    • Contra entries

    The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corresponds to.

    Contra entries are entries of the debit and credit aspects related to the same parent account.  Let’s discuss them in detail.

    Contra accounts

    Any account which is created with the purpose of reducing or offsetting the balance of another account is known as a contra account.

    A contra account is just the opposite of the account to which it relates. The most common examples are the sales discount account and sales return account which is the contra account of the sales account.  They are just the opposite of the sales accounts.

    Contra Entries

    Contra entries refer to the entries which show the movement of the amount within the same parent account. Here, the debit and credit entry is posted on the debit and credit side respectively of a single parent account.  Mainly, contra entries are the entries involving cash and bank accounts.

    The following transactions are recorded as contra entries:

    • Cash to Bank transactions: Deposit of cash into the bank account by the entity.
    • Bank to Cash transactions: Withdrawal of cash from the bank.
    • Cash to cash transactions: Transfer of cash to the petty cash account.
    • Bank to Bank transactions: Transfer of amounts from one bank account to other bank accounts of the same entity.

    Contra entries are marked by the letter ‘C’ beside the postings in the ledger. Deposit of cash in to bank will be posted in cashbook as below:

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

    The journal entry for the dividend collected by the bank is as follows: Bank A/c                                                                Dr. Amt To Dividend Received A/c Amt Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below. The logRead more

    The journal entry for the dividend collected by the bank is as follows:

    Bank A/c                                                                Dr. Amt
    To Dividend Received A/c Amt

    Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below.

    The logic behind the journal entry

    This can be explained through the following rules of accounting:

    • Golden rules of accounting
    • Modern rules of accounting

    Golden rules of accounting

    A bank account is a real account and the golden rule of accounting for the real account is, “Debit what comes in and credit what goes out”

    Hence, the bank account is debited as the money is coming into the bank.

    Dividend is an income hence dividend received is a nominal account. The golden rule of accounting for a nominal account is “Debit all expenses and losses and credit all income and gains”

    Hence, the dividend received account is credited as income.

    Modern rules of accounting

    As per modern rules of accounting, a bank account is an asset account.

    The asset account is debited when increased and credited when decreased.

    Hence, the Bank account is debited here as it is increased.

    A dividend received account is an income account.

    The income account is credited when increase and debited when decreased.

    Hence, the dividend received account is credited here as it is increased.

    Treatment in the financial statements

    Since the dividend received is an income; it is shown on the credit side of the Statement of profit and loss.

    The bank account is an asset so it will be shown on the balance sheet.

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Aadil
AadilCurious
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  2. ShreyaSharma none
    This answer was edited.

    Drawings of goods The drawings of the goods, in a business, take place when the owner/partner of a business withdraws goods for their personal use. It's hence called drawings as it reduces the capital invested by the owner(s). It's also called the withdrawal account. The drawings are generally madeRead more

    Drawings of goods

    The drawings of the goods, in a business, take place when the owner/partner of a business withdraws goods for their personal use. It’s hence called drawings as it reduces the capital invested by the owner(s). It’s also called the withdrawal account.

    The drawings are generally made for cash or stock by the owner/partner and the relevant account is thus reduced causing the adjustment done on the owner/partner’s capital at the cost price.

     

    Journal entry

    The journal entry for the goods withdrawn for personal use will be as follows:

     

    Explanation via rules

    The drawings account is debited because it decreases the balance of the capital account. Whereas, the purchases account is credited as it causes a reduction in the purchases account.

    As per the modern rules of accounting, we credit the decrease in assets, thus, the purchases account is credited. Whereas, the withdrawal account when increased is debited. Therefore, the drawing account is debited here.

    As per the golden rules of accounting, “debit what comes in and credit what goes out.” Hence, the purchase account is credited. And, “if any expense or loss is incurred for the business, the expense or loss account shall be debited“. Thus, the drawing account is debited.

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Simerpreet
SimerpreetHelpful
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them. For example, X Ltd took an insurance policy on 30th September 20XX. The premium is to be paid annually on 30th SeptemRead more

    Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them.

    For example,

    • X Ltd took an insurance policy on 30th September 20XX. The premium is to be paid annually on 30th September every year for the next 20 years.
    • While preparing the financial statements for the year 20XX – 20XX+1, the business will recognize insurance premiums for the period 30th September, 20XX to 31st March 20XX+1 as an accrued expense. The premium would be actually paid on September 20XX+1.
    • As we can see, the company has already incurred the insurance premium for the period 30th September, 20XX to 31st March 20XX+1.
    • Thus, it has to recognize the same as an expense of that period only even though it will be actually paid in the next accounting period.

    Why does the concept of accrued expenses arise in accounting?

    The concept of accrued expenses arises in accounting because accounting records transactions on an accrual and not cash basis.

    Accounting on an accrual basis implies recording transactions as and when they are incurred while recording transactions on a cash basis means recording them as and when cash is actually paid for receiving those services.

    For example,

    • X Ltd ordered 5 televisions from LG. It received the delivery of all 5 televisions on 1st March, 20XX. However, it received the invoice for those televisions on 31st April, 20XX.
    • Now, the question arises as to whether while preparing the financial statements on 31st March, 20XX, X Ltd will recognize the cost of those 5 televisions as a purchase expenditure.
    • If X Ltd were recording transactions on a cash basis, they would not have recognized the cost of those 5 televisions as a purchase expenditure in the financial statements prepared on 31st March 20XX as the payment had been made in the next financial year.
    • Thus, in that case, that purchase would be recorded in the financial statements of the next year.
    • However, accounting is done on an accrual basis. As per accrual basis, as the event of purchase has occurred during the financial year ending 31st March 20XX, it must be recorded in financial statements for that period only.
    • Thus, due to the accrual basis, X Ltd will record that expenditure in the financial statements prepared on 31st March 20XX even though cash has been paid in the next financial year.

    Treatment of Accrued Expenses

    Accrued expenses are classified as current liabilities. That is because the business has a short-term obligation to pay these expenses. The other party has a legal right to receive the amount due. In other words, accrued expenses become payable in the near term.

    As current liabilities, accrued expenses are carried in the balance sheet on the liabilities side. They are also recognized in the income statement as an expense as per the concept of accrual basis of accounting.

    Conclusion

    Accrued expenses are the expenses for which the business has already received the benefit of goods or services but which are payable in an accounting period other than the one in which such benefit is received.

    As per the accrual basis of accounting, they are recognized in the year in which the expense is incurred. The expense is carried forward as a current liability until the period in which it is actually paid.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Karishma

    Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more

    Debit Balance

    A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.

    Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.

    Credit Balance

    A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.

    The credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.

     

    Credit Balance in the Passbook

    A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. “Credit balance in the passbook is also called bank balance”.

    The bank balance is the amount available for withdrawal. A bank balance is an asset to the individual or an enterprise which can be used for the purchase of another asset or payment of liability or expenses.

    All the transactions either debit or credit are recorded in the passbook. When the total amount of all credit entries in a passbook is more than the total of debit entries, it results in a credit balance. It means that the bank owes to an individual or enterprise.

    The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s credit balance is a positive or favourable balance while the passbook’s debit balance is a negative balance or unfavourable balance.

    For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $30,000. So here, the passbook will show a bank balance of $20,000 i.e. the credit balance of the passbook. It signifies the positive cash flow of the individual and that the bank owes $20,000 to the individual.

     

    Debit balance in Pass Book

    When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. Debit balance in the passbook is also called “Overdraft”. It means that an individual or enterprise owes to the bank.

     

    Reconciliation

    It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.

     

    Debit Balance Reconciliation

    The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.

     

    Credit Balance Reconciliation

    The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.

     

    Conclusion

    The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A credit balance signifies more deposits than withdrawals resulting in a positive bank balance.

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Astha
AsthaLeader
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CapexCapital ExpenditureOperating ExpenditureOpex
  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Let me first explain the meaning of both the terms CapEx and OpEx Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or imRead more

    Let me first explain the meaning of both the terms CapEx and OpEx

    Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or improve an existing one or maintain the asset in use.

    Capital expenditure is commonly found in the Cash flow statement under Investing activities as Investment in plant, machinery, equipment, etc.

    Operating Expenditure (in short OpEx) are day-to-day expenses incurred by a firm in order to carry its normal business.

    Expenses such as rent, advertisement, inventory costs, etc.

    Operating Expenses are shown in the income statement of the company as expenses incurred during the period.

    For Example: If a company purchases a printer, the printer would be a capital expenditure and the papers used for the printer would be operating expenditure.

    Difference between CapEx and OpEx

    Example 1: A company wants to lease machinery instead of buying it, in this case buying machinery would be capital expenditure, and leasing the machinery would be an Operating expense.

    Example 2: Buying machinery would cost a company for 50000 and leasing the same would cost 35000. So in this case leasing will be more preferred by a company which means operating expenditure would be preferred instead of a capital expenditure.

    From the point of view of tax treatment operating expenditure is more preferred over Capital expenditure because the expenses incurred during the year are deducted during the same year which reduces the tax levied on net income.

    Some real Examples from the Company Amazon

    This is the cash flow statement of Amazon, where the investing activities shows the capital expenditure incurred by the company during the years.

    This is the income statement of Amazon, it shows the operating expenditure incurred by the company during the year.

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