AccountingQA Latest Questions

Ishika Pandey
Ishika PandeyCurious
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Yes, a creditor is a liability. Creditors are treated as current liability. A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest. Creditors may be secureRead more

    Yes, a creditor is a liability. Creditors are treated as current liability.

    A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.

    Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.

    In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.

    Why are Creditors treated as a liability?

    An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc

    A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.

    As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.

    Treatment and Importance of Creditors

    Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.

    The significance/importance of creditors is as follows:

    • The amount due to creditors affects the current and acid test ratio of a company significantly.
    • It affects the short-term cash requirements of a company.
    • It affects the credit policy of the company. A company can extend longer credit periods to customers if it can avail longer credit periods from its suppliers.
    • Having too many creditors or a large amount due to creditors can affect investor sentiment negatively regarding the business.

    We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.

    Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.

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A_Team
A_Team
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  2. Kajal
    This answer was edited.

    Yes, Goodwill is a fixed asset because it adds to the value of the business over a long period. Goodwill can never be calculated for a short period.   GOODWILL Basically, goodwill is a premium or you can say an additional price you are paying because of the reputation of a firm or a person. YouRead more

    Yes, Goodwill is a fixed asset because it adds to the value of the business over a long period. Goodwill can never be calculated for a short period.

     

    GOODWILL

    Basically, goodwill is a premium or you can say an additional price you are paying because of the reputation of a firm or a person.

    You may have seen some famous shop in your locality which usually charges a higher price as compared to the other local shops selling the same product.

    You may have also noticed that bigger brands like Bata, Titan, Zara, etc. charge higher prices for their products as compared to the same products available in the local market and people are even willing to pay for them. Ever wondered why?

    This is because of the goodwill created by them over the years by providing quality products and services, good employee relationships, a strong customer base, social service, a brand name and so on. Customers trust them and for this trust, they are even willing to pay higher prices.

    Goodwill is the quantitative value (i.e. in monetary terms) of the reputation of the firm in the market.

     

    FIXED ASSETS

    An asset is any possession or property of the business that enables the firm to get cash or any benefit in the future.

    Fixed Assets are assets which are purchased for long-term use. They are for continued use in the business for producing goods or services and are not meant for resale. For example- Plant, machinery, building, goodwill, patents etc.

    Fixed assets can be tangible or intangible.

    Tangible assets are those assets which can be seen and touched and have physical existence like Plant and machinery, building, stock, furniture etc.

    Intangible assets are those assets which cannot be seen or touched i.e. they don’t have any physical existence like goodwill, patent, trademark, prepaid expenses etc. Even though they can’t be seen or touched by they have value and are not fictitious assets.

     

    Goodwill as a Fixed Asset

    Goodwill is an intangible asset as it cannot be seen or touched but has value and adds value to the business over a long period. Thus, goodwill is a fixed asset.

    It is shown in the balance sheet as a Fixed asset under the head Intangible asset.

    Goodwill can be

    • Self-generated (Non-Purchased goodwill)
    • Purchased goodwill

    Self-generated goodwill is created over a period due to the good reputation of the business. It is the difference between the value of the firm and the fair value of the net tangible assets of the firm.

    Goodwill = Value of the firm – Fair value of net tangible assets

    Here, F.V of net tangible assets = Fair value of tangible assets- Fair value of tangible liabilities

    Purchased goodwill arises when one business purchases another business. It is the difference between the price paid for the purchased firm and the sum of the fair market value of the assets received and liabilities to be paid by them on behalf of the purchased firm.

    Goodwill = Purchase price – (F.V of assets received + F.V of liabilities to be paid)

    Only purchased goodwill is recorded in the books of accounts because it is difficult to correctly calculate the value of self-generated goodwill as the future is uncertain, also its valuation depends on the judgement of the person calculating it, which defers from person to person. Since there is no fixed standard to calculate self-generated goodwill only purchased goodwill is recorded as the price paid for it at the time of acquiring another business.

    Suppose Firm A acquired Firm B.

    Purchase price= $100,000

    Assets received=$60,000

    Liabilities (to be paid by Firm A on behalf of Firm B) = $10,000

    Goodwill = $100,000 – ($60,000 + $10,000) = $30,000

    This, goodwill of $30,000 will be recorded under the head Fixed Asset, subhead Intangible Assets in the balance sheet of Firm A (that is in the balance sheet of the acquiring firm)

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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
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  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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