AccountingQA Latest Questions

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

    Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition. Realization of revenue means when revenue to be earned from the sale of goods or rendering oRead more

    Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition.

    Realization of revenue means when revenue to be earned from the sale of goods or rendering of services or any other activity or source becomes absolute and certain. An item is to be shown as revenue in the books of accounts only after it is realized.

    Realization in case of sale of goods

    Realization occurs in the following situations:

    i) When the goods are delivered to the customer for a certain price

    ii) All significant risks and rewards of ownership have been transferred to the customer and the seller retains no effective control over the goods.

    Let’s take an example. Mr Peter received an order of 500 units of goods from Mr Parker on 1st April. The goods were delivered to Mr Parker on 15Th April and payment for goods was received on 30Th April.

    The realization of revenue from the sale of goods will be considered to have occurred on 15th April because the goods were delivered to the customer on that date. The entry of sale of goods will be entered on this day.

    Realization is not considered to have occurred on 1st April i.e the date of order because the seller had effective control on goods on that date.

    Realization in case of rendering of services

    The realization of revenue from the rendering of services occurs as per the performance of service.

    Now there arise two situations:

    • Multiple acts involved in the performance of service: Here, the revenue is realized proportionately on completion of each act.
    • A Single act involved in the performance of service: Here, revenue is realized only when the service is completely rendered or provided.

    Realization of income from other sources:

    • Interest Income: It is realized on a time proportion basis as per the amount outstanding and rates applicable.
    • Dividends: It is realized when the shareholder’s right to receive is established and when it is declared.

    Realization with regards to other sources of income is considered to have occurred only when there exist no significant uncertainty as to measurability or collectability.

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Jasmeet_Sethi
Jasmeet_SethiCurious
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  2. AishwaryaMunot

    Meaning of Working Capital Firstly, let’s understand the meaning of the working capital. Working capital is the factor which demonstrates the liquidity position of the business to carry out day to day operations. It majorly includes cash & bank balances and liquid assets. Managing working capitaRead more

    Meaning of Working Capital

    Firstly, let’s understand the meaning of the working capital. Working capital is the factor which demonstrates the liquidity position of the business to carry out day to day operations. It majorly includes cash & bank balances and liquid assets.

    Managing working capital is a crucial process to maintain short term liquidity and so ultimately resulting into achieving long term objectives efficiently. Working capital can be calculated by deducting business’s current liabilities from current assets.

    To achieve the ideal working capital requirement for any business, it is important to understand various types of working capital and various ways to manage it.

    Coming to Permanent Working Capital, also called as Fixed Working Capital, it is the minimum working capital required or maintained by businesses. Such type of working capital is maintained to take care of regular financial obligations like creditors, inventory, salaries etc.

    Irrespective of scale of operations carried out in business, Permanent Capital is maintained by businesses which can be in form of Net Working Capital.

    There is no specific formula for calculating Fixed Working Capital, it completely depends upon the business’s assets and liabilities. So accordingly, it can be estimated through the balance sheet of the business.

    For calculating Permanent Working Capital, you can follow below steps:

    1. Calculate Net Working Capital for each day for a whole month
    2. Find the smallest value among them
    3. That will be Permanent Working Capital for the month
    4. Follow the above steps for every month
    5. There you have the annual figure for Permanent Working Capital

    The requirement of Permanent Working Capital changes as the business expands. It is crucial to make sure that the working capital level does not fall below the Permanent Working Capital requirement.

    Types of Permanent Working Capital:

    Permanent working capital is further divided into two types:

    1. Regular working capital – This refers to capital required to maintain healthy cashflow for purchases of raw materials, payment of wages etc.
    2. Reserve working capital – This refers to amount which is more than regular working capital to take care of unexpected business expenses due to contingent events.
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Bonnie
BonnieCurious
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  2. GautamSaxena Curious .

    Capitalize in Accounting The term 'capitalized' in accounting means to record an expenditure as an asset on the balance sheet. Capitalization takes place when a business buys an asset that has a useful life. The cost of the relevant asset is then allocated to expense over its useful life i.e charginRead more

    Capitalize in Accounting

    The term ‘capitalized’ in accounting means to record an expenditure as an asset on the balance sheet. Capitalization takes place when a business buys an asset that has a useful life. The cost of the relevant asset is then allocated to expense over its useful life i.e charging depreciation, etc. This means that the relevant expenditure will appear on the balance sheet instead of the income statement. The capitalizing of the expenses is a benefit for the company as the assets bought by them for the long-term are subjected to depreciation and capitalizing expenses can amortize or depreciate the costs. This process is called capitalization.

    In order to capitalize any expense, we’ll have to make sure it meets the criteria stated below.

    The assets exceeding the capitalization limit

    The companies set a capitalization limit, below which the expenses are considered too immaterial to be capitalized. Therefore, the limit is supposed to be followed and considered as it controls the capitalization of the expenses. Generally, the capitalization limit is $1,000.

    The assets have a useful life 

    The companies also seek to generate revenues for a long period of time. Thus, the asset should have a long and useful life at least a year or more. Thereby, the business can record it as an asset and depreciate it over its valuable life.

    Most of the important principles of capitalization in accounting are from the matching principle.

     

    Matching Principle

    The matching principle states that the expenses in the accounting should be recorded when they are incurred and not when the payment is made. This helps the business identify the amounts spent to generate revenue.

    For e.g, the company bought machinery for manufacturing goods with more efficiency. It is supposed to have a useful life for a period of over 10 years. Instead of expensing the entire cost of the machinery, the company will write off (depreciated) the cost of the asset over its useful life i.e 10 years. Therefore, the asset will be written off as it is used and these types of assets are automatically used as capitalized assets.

     

    Benefits of Capitalization

    Capitalization is of course recording expenses as an asset but this indeed has benefits.

    • This reduces the fluctuation of income over time as the fixed assets (long-term) are costly. For the small business owners or the small firms, it’s even greater.
    • The capitalization of expenditures increases the company’s asset balance, without changing the company’s liability balance. This improves the financial ratios like the current ratio.
    •  Small businesses have a provision for tax benefits related to the depreciation of capitalized assets. Section 179 of depreciation allows those business owners to depreciate certain assets quicker than others are allowed.

     

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Bonnie
BonnieCurious
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  2. A_Team (MBA - Finance Student) ISB College
    This answer was edited.

    Here are 10 examples of accounting entries: A company purchases $500 worth of office supplies on credit from a supplier. Office supplies expense account would be debited Accounts payable would be credited   A firm receives $1,000 in cash from a customer for services rendered. In this case, CashRead more

    Here are 10 examples of accounting entries:

    • A company purchases $500 worth of office supplies on credit from a supplier.
      • Office supplies expense account would be debited
      • Accounts payable would be credited

     

    • A firm receives $1,000 in cash from a customer for services rendered. In this case,
      • Cash account would be debited
      • Service revenue account would be credited

     

    • A business pays $250 in salaries to its employees.
      • A debit would be made to the salaries expense account
      • A credit would be made to the cash account

     

    • A business borrows $5,000 from a bank and receives the funds as a loan. The entry would be,
      • A debit to the bank account
      • A credit to the loan payable account

     

    • A company sells $800 worth of inventory to a customer for cash.
      • The entry would be a debit to the cash account
      • A credit to the sales revenue account

     

    • A firm purchases $3,000 worth of equipment on credit from a supplier.
      • The entry would be a debit to the equipment account
      • A credit to the supplier’s account

     

    • A company incurs $500 in advertising expenses for a new marketing campaign (cash).
      • The entry would be a debit to the advertising expense account
      • A credit to the cash account

     

    • A firm collects $1,200 from a customer. The entry would be,
      • A debit to the cash account
      • A credit to the customer’s account

     

    • A business pays $700 in rent for its office space. The entry would be,
      • A debit to the rent expense account
      • A credit to the cash account

     

    • An organization pays off a $2,000 loan to the bank. The entry would be,
      • A debit to the loan payable account
      • A credit the cash account

     

    I also found a long list of example journal entries and a free PDF to download here.

     

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

    Definition A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions. Or in other words, we can say a group of accounts with different characteristics. It is also called the Principal Book of accounts. For example:- salary account, aRead more

    Definition

    A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions.

    Or in other words, we can say a group of accounts with different characteristics.

    It is also called the Principal Book of accounts.

    For example:– salary account, and debtor account.

    Sub- ledger it is defined as a group of accounts with common characteristics. And is a part of ledger accounts.

    For example:- customer account, vendor account, etc.

    The difference between a ledger and a sub-ledger is that ledger accounts control sub-ledger accounts whereas a sub-ledger is a part of the ledger account.

    Features Of Ledger

    • Ledger is prepared from the journal.
    • Ledger is a master record of all the accounts of the business.
    • The Ledger account shows the current balances of all accounts.
    • Ledger accounts summarize the effect of transactions upon assets, liabilities, capital, incomes, and expenditures.

    Features Of Sub-Ledger

    • Sub-ledger in accounting provides up-to-date information about the daily activities of the business.
    • It keeps individual track of all balances.
    • Help locate errors in individual accounts.
    • A sub-ledger is a collection of different ledgers used in an account.

     

    Utilities of ledger

    The main utilities of a ledger are summarized as follows :

    • Provides complete information about a particular account: Complete information relating to a particular account is available in one place in the ledger.

    • Information on income and expenses: In the ledger, a separate account is maintained for each income and expense. The amount of total income and total expenses are known from the ledger accounts.

    • Preparation of trial balance: Ledger helps in preparing trial balances which ensure arithmetical accuracy of the transaction recorded in the books of account.

    • Helps in preparing final accounts: After preparing the trial balance, final accounts are prepared to know the profitability and financial position of the business.

    Utilities of sub-ledger

    The utilities of the sub-ledger are as follows :

    • Track customer information: If a client has an outstanding credit debt or needs money refunded, a company can use a sub-ledger to verify the information quickly.

    • Protect financial information: A sub-ledger allows a financial supervisor to isolate certain records so that employees can view only parts of the company’s financial information. This added level of security is important for large corporations.

    • Create separate databases: Large companies usually process large amounts of financial data that may be too big for one database. Software programs organize this data into isolated files to calculate financial information in the general ledger of a business.

    Conclusion

    So here I conclude that a ledger is compulsory in the recording process whereas a sub-ledger is optional.

    The ledger is used for preparing trial balance but the sub-ledger is not used for the same.
    Sub ledger is controlled by the ledger.

    The sub-ledger supports the transaction of each specific account indicated on the ledger.

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Aditi
Aditi
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  2. Mehak
    This answer was edited.

    To understand the accounting treatment of fixed assets under IFRS let us first understand what fixed assets are. What are Fixed Assets? Fixed assets are the assets that are purchased for long-term use by a business and not for resale. Some examples of fixed assets are land, buildings, machinery, furRead more

    To understand the accounting treatment of fixed assets under IFRS let us first understand what fixed assets are.

    What are Fixed Assets?

    Fixed assets are the assets that are purchased for long-term use by a business and not for resale. Some examples of fixed assets are land, buildings, machinery, furniture and fixtures, etc.

    Fixed assets are essential for the smooth operations of the business. It often shows the value of the business. The value of fixed assets usually decreases with time, obsolescence, damage, etc.

    As per IAS-16 Property, Plant and Equipment, an asset is identified as a fixed asset if it satisfies the following conditions:

    • the future economic benefits associated with the asset will probably flow to the entity, and
    • the cost of the asset can be measured reliably.

    What is IFRS?

    IFRS stands for International Financial Reporting Standards. It provides a set of standards to be followed globally by all companies to ensure transparency, comparability, and consistency.

    What is the accounting treatment of fixed assets under IFRS?

    Under IFRS, the first step is to measure the value of the fixed assets on cost. The cost of the fixed assets includes the following:

    1. purchase price
    2. any direct cost related to the asset (such as transportation, installation, etc.)
    3. duties/taxes

    After this step, the entity may choose any one of the following two primary methods:

    1. Cost Model: According to this model the value is first recognized on a cost basis. This includes the purchase price and direct costs attributable to the asset. Subsequently, depreciation is calculated on the cost of the asset. Depreciation spreads the cost of an asset over its useful life. Impairment checks are conducted to ensure the asset’s value on the books doesn’t exceed what it’s worth.

    For example, a company bought a piece of machinery for 60,000. 5,000 were spent on its installation. It has a useful life of 10 years. The machinery would be depreciated over its useful life of 10 years based on its cost which is 65,000.

    2. Revaluation model: As per this model, the fixed assets are valued on their fair value, as on the revaluation date. The amount of depreciation and impairment losses is subtracted from the fair value.

    If the value of an asset increases, the gain goes to equity (revaluation surplus) unless it can be set off with a past loss recorded in profit or loss.
    On the other hand, if the value decreases, the loss goes to profit or loss unless it offsets a past surplus in equity.

    For example, a building was purchased for 100,000. On the revaluation date, the fair value of this building was 150,000. Hence, there is a revaluation surplus of 50,000 which shall be credited to the revaluation surplus account.

    Impact on Financial Statements

    Fixed assets are shown on the Assets side of the Balance Sheet.

    Conclusion

    From the above discussion, it may be concluded that:

    • Fixed assets are the assets that are purchased for long-term use by a business and not for resale.
    • Some examples of fixed assets are land, buildings, machinery, furniture and fixtures, etc.
    • IFRS provides a set of standards to be followed globally by all companies to ensure transparency, comparability, and consistency.
    • Under IFRS, the first step is to measure the value of the fixed assets on cost.
    • After this step, the entity may choose any one of the two primary methods which are cost model and the revaluation model.
    • Fixed assets are shown on the Assets side of the Balance Sheet.

     

     

     

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

    Let us begin with a short explanation of what opening balance is: The opening balance is the amount of funds that are bought forward from the end of one accounting period to the beginning of a new accounting period. In a firm’s account, the first entry done is of the opening balance. It can either hRead more

    Let us begin with a short explanation of what opening balance is:

    The opening balance is the amount of funds that are bought forward from the end of one accounting period to the beginning of a new accounting period.

    In a firm’s account, the first entry done is of the opening balance. It can either have a debit balance or a credit balance depending upon whether the firm has a negative or positive balance.

    Opening balance of a ledger

    Opening balance is the first entry of the ledger account at the beginning of an accounting period.

    In the case of a newly started business, there will be no closing balances and as such there will be no balances to be carried forward. In such a case, the investment and capital of the business will be entered as an opening balance for the current accounting period.

    So the first and foremost part is to identify on which side of the ledger i.e. the debit side or the credit side the opening balance is to be entered.

    For Example, A trial balance is given which represents the debit and credit balances, accordingly, I will prepare different ledger accounts to make it simpler.

    The trial balance shows the opening balance of various accounts. Now posting them in ledger accounts.

    As the Furniture is an Asset account, the opening balance will be on the debit side of the ledger account.

    As Sundry creditor is a credit account,  we put the opening balance on the credit side.

    As the Capital is a credit account,  we put the opening balance on the credit side.

    As Wages is a debit account,  we put the opening balance on the debit side.

    As the Discount received is a credit account,  we put the opening balance on the credit side.

    Exception

    Drawing Account.

    Drawing account is an exception to this topic. It is considered a contra account to the owner’s capital account because it reduces the value of the owner’s equity. Drawings, therefore, have no opening balance.

    Contra Entry.

    Contra entry involves transactions of cash and bank. Any entry which involves both the cash and bank is contra entry.

    For example, we deposit cash 5000 into the bank.

    Accounting entry for this transaction would be

    In this case, the ledger entry would be

    As the bank account has a debit balance, the opening balance would come on the debit side.

    As the cash account has a credit balance, the opening balance would come on the credit side.

    Alternatively, If we withdraw cash 5000 from the bank.

    Accounting entry would be

    In this case, the ledger entry would be

    As the Cash account has a debit balance, the opening balance would come on the debit side.

    As the Bank account has a credit balance, the opening balance would come on the credit side.

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