AccountingQA Latest Questions

AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    The word, “deferred” means delayed or postponed and “revenue” in layman’s terms means income. Therefore deferred revenue means the revenue which is yet to be recognised as income. It is actually unearned income. In accrual accounting, income is recognised only when it is accrued or earned. DeferredRead more

    The word, “deferred” means delayed or postponed and “revenue” in layman’s terms means income. Therefore deferred revenue means the revenue which is yet to be recognised as income. It is actually unearned income.

    In accrual accounting, income is recognised only when it is accrued or earned. Deferred revenue is the income received before the performance of the economic activity to earn it.

    Example:  A shoe shop owner gives an order to a shoe manufacturer of 1000 pair of shoes which is to be delivered after 4 months. He also gives him a cheque of ₹15,000 in advance, the rest ₹5000 is to be given at the time of delivery.

    So, in this case, the ₹15,000 is actually is unearned revenue i.e. deferred revenue. It will be recognised as revenue when the shoe manufacture completes the order and deliver it.

    Till then, the deferred revenue is reported as a liability in the balance sheet. Like this:

    After recognition as revenue, it will be reported in the statement of profit or loss:

    Hence, to summarise, deferred revenue is:

    • Unearned revenue
    • Recognised as income till it is earned
    • Till then it is recognised and reported as a liability in the balance sheet.

    Some examples of deferred revenue are as follows:

    • Advance rent received
    • Advance payment for goods to be delivered.
    • Advanced payment for services to be provided.

    Now the question arises why deferred revenue is recognised as a liability. It is due to the fact that the business may not be able to perform the economic activity successfully to earn that revenue.

    Taking the above example, suppose the shoe manufacturer is not able to honour its commitment and the shoe shop owner can wait no more, then the advanced money of ₹ 15,000 is to be refunded. That’s why deferred revenue is recognised as a liability because it is a liability if we consider the principle of conservatism (GAAP).

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Anushka Lalwani
Anushka Lalwani
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ReservesRevenue Reserve
  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    A revenue reserve is a type of reserve where a portion of the net profit is set aside for future requirements. It serves as a great source of internal finance for the company to meet its short term requirements. The funds put into this reserve are earned from the daily operations of a company. RevenRead more

    A revenue reserve is a type of reserve where a portion of the net profit is set aside for future requirements. It serves as a great source of internal finance for the company to meet its short term requirements. The funds put into this reserve are earned from the daily operations of a company. Revenue reserves are shown on the liabilities side of a balance sheet under reserves and surplus. Some examples of revenue reserve are :

    • General Reserve: This reserve is used for no specific purpose, but the general financial growth of the company. It is a free reserve which means the company is not compelled to make one. It helps to curb future losses which may arise in the future.
    • Specific Reserve: These are those reserves that can only be used for specific purposes. This money cannot be used for any other requirement. It is not a free reserve. A reserve created to redeem debentures would be called a debenture redemption reserve.
    • Secret Reserve: This is a type of reserve whose existence is not disclosed in the balance sheet. This type of reserve cannot be created by joint-stock companies. However, banks and financial institutions are allowed to create such secret reserves.

    Retained Earnings is that part of the net profit which is left after the distribution of dividends to shareholders. This amount can be invested in the company to gain profits. It is not technically a reserve as it is held after distribution of dividends but it can still be used as one.

    On the other hand, a capital reserve is not a part of the revenue reserve. It is created from capital profits to finance long term projects of a company. It is used for specific purposes only.

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Manvi
Manvi
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  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is aRead more

    The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is a contra asset account which means an account with a credit balance.

    When a business first sets up a provision for doubtful debts, the full amount of the provision should be debited to bad debts expense as follows.

    Bad Debts A/c Debit Debit the increase in expense.
          To Provision for Doubtful Debts A/c Credit Credit the increase in liability.

    In subsequent years, when provision is increased the account is credited, and when provision is decreased the account is debited. This is so because provision for doubtful debts is a contra account to debtors and has a credit balance, and is treated as a liability.

    Effects of Provision for Doubtful Debts in financial statements:

    1. Trading A/c: No effect.
    2. Profit and Loss A/c: Debited to P&L A/c and charged as an expense.
    3. Balance Sheet: Deducted from Debtors.

    For example, ABC Ltd had debtors amounting to Rs 50,000. It creates a provision of 5% on debtors.

    Provision for Doubtful Debts = 50,000*5%

    = 2,500

    Journal entry for provision will be:

    Bad Debts A/c 2,500
          To Provision for Doubtful Debts A/c 2,500

    Effect on financial statements will be:

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Radhika
Radhika
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Plant and Machinery are the equipment attached to the earth that supports the manufacturing of the company or its operations. These are tangible non-current assets to the company and as a result, have a debit balance. Depreciation is the decrease in the value of an asset that is spread over the expeRead more

    Plant and Machinery are the equipment attached to the earth that supports the manufacturing of the company or its operations. These are tangible non-current assets to the company and as a result, have a debit balance.

    Depreciation is the decrease in the value of an asset that is spread over the expected life of the asset. Not depreciating an asset presents a false image of the company as the asset is recorded at a higher value and profit is overstated as depreciation expense is not provided for.

    There are two ways that a company provide depreciation:

    • By reducing the balance of an asset in the Asset Account by passing a journal entry.
    • By maintaining a separate account for depreciation called Accumulated Depreciation A/c. The nature of this account is naturally credit since it is created to reduce the value of an asset.

    For most of the depreciation methods, we need a rate to provide for depreciation every year. Now, for accounting purposes, the management can use a rate they think is suitable depending on the use and expected life of the machinery.

    Depreciation is calculated on the basis of the Companies act, 2013 for the purpose of book-keeping. According to Schedule 2 of the Companies Act, depreciation on plant and machinery is calculated on the basis of either SLM or WDV.

    Plant and machinery for those special rates are not assigned useful life is considered to be 15 years and depreciation is calculated @ 18.10% on WDV and @6.33% on SLM.

    According to the Income Tax Act, 15% depreciation is provided every year on Plant and Machinery and, an additional 20% depreciation is provided in the first year of installation of machinery.

    Depreciation on Machinery is charged on the basis of usage of such machinery. if it is used for 180 days or more then full depreciation is allowed and if it is used for less than 180 days then only 50% depreciation is allowed.

     

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Bonnie
BonnieCurious
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Debited to P&L A/C Credited to P&L A/C Debited to Capital A/C None

  2. GautamSaxena Curious .
    This answer was edited.

    Interest on Drawings  Interest on drawings is debited to the capital account. As Interest on drawings is charged on the drawings made by partners/proprietors from their respective capital accounts in a partnership firm or proprietary concern. Drawings refer to the amount withdrawn by an owner or parRead more

    Interest on Drawings 

    Interest on drawings is debited to the capital account.

    As Interest on drawings is charged on the drawings made by partners/proprietors from their respective capital accounts in a partnership firm or proprietary concern.

    Drawings refer to the amount withdrawn by an owner or partner for his personal use. Thereby, interest on drawings is an income of a firm payable by the owner hence, it’s deducted/debited.

    The Profit and Loss Account, on the other hand, shows the income and expenses of a business incurred over an accounting period. Accounts like interest on drawings and capital are not shown in the P&L a/c because they are internal transactions and P&L a/c focuses only on the financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.

     

    Partners’ Capital A/c

     

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Anushka Lalwani
Anushka Lalwani
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  2. GautamSaxena Curious .
    This answer was edited.

    Sundry debtor refers to either a person or an entity that owes money to the business. If someone buys some goods/services from the business and the payment is yet to be received, a group of such individuals or entities is called sundry debtors. Sundry debtors are also referred to as trade receivableRead more

    Sundry debtor refers to either a person or an entity that owes money to the business. If someone buys some goods/services from the business and the payment is yet to be received, a group of such individuals or entities is called sundry debtors. Sundry debtors are also referred to as trade receivables or account receivables.

    The term ‘Sundry’ means various or several, referring to a collection of miscellaneous items combined under one head. Sundry debtors typically arise from core business activities such as sales of goods or services. The business treats them as an asset.

     

    Example

    Suppose you run a business, ABC Ltd. Mr. Y bought goods from you on credit. Therefore, Mr. Y will be recorded as Debtor (current asset) in your books of accounts. Similarly, a collection of such debtors is viewed as sundry debtors from the business’ point of view.

    Journal Entry

    Rules

    As per the golden rules of accounting, we ‘debit the receiver and credit the receiver’. That’s how in this journal entry we’ll be debiting the sundry debtor’s account. Also, ‘debit what comes in and credit what goes out.’ That’s why sales a/c is credited and cash a/c is debited.

    As per the modern rules of accounting, ‘debit the increase in asset and credit the decrease in asset’. That’s why we debit sundry debtors and cash a/c. And credit sales a/c when goods are sold and inventory decreases.

     

    Why debtor is an asset?

    As we know, a debtor refers to a person or entity who owes money to the business which means, the money is to be received by them in the future, making them an asset. On the other hand, creditors are a liability to the firm as we owe them money and it is to be paid by us in the near future, making it an obligation for the firm.

     

    Sundry Debtors in Balance Sheet

    Sundry debtors are shown under the current asset heading on the balance sheet. They are often referred to as account receivables.

     

    Balance Sheet (for the year ending….)

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A_Team
A_Team
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  2. Mitika

    Non-current assets are long-term investments that are not easily converted into cash within an accounting year. They are required for the long term in the business. They have a useful life of more than an accounting year. Non-current assets can be fixed assets and intangible assets. Fixed assets areRead more

    Non-current assets are long-term investments that are not easily converted into cash within an accounting year. They are required for the long term in the business. They have a useful life of more than an accounting year.

    Non-current assets can be fixed assets and intangible assets. Fixed assets are tangible assets that can be seen and touched. Whereas, intangible assets are those assets that can not be seen and touched.

     

    You can correlate examples of  Non-Current Assets with tangible and intangible assets as mentioned below:

    Land and building – They are fixed assets that will give long-term benefits and will be classified as noncurrent assets.

    Plant and Machinery ­– They are tangible assets will give future benefits and are thus mentioned under noncurrent assets.

    Office Equipment – They are tangible assets that will give future economic benefits to the company, and comes under noncurrent assets.

    Vehicles – They are tangible assets that will give long-term benefits, and will be classified as noncurrent assets.

    Furniture – They are also tangible assets that will give future benefits and are classified as non-current assets.

    Trademarks – These are intangible assets that will not be easily converted into cash and will be classified as noncurrent assets.

    Goodwill – They are intangible assets that can’t be easily converted into cash, and are classified as non-current assets.

    Patents – They are intangible assets that will not be converted into cash within an accounting period, and are classified as non-current assets.

    Copyrights – They are intangible assets that will not be converted into cash within an accounting period, and are classified as non-current assets.

    Long-term Investments – They are long-term investments that will not be easily converted into cash within an accounting period and are classified as non-current assets.

     

     

    Non-current Assets = Total Liabilities – Current Assets

     

    Current Assets are the assets that will be converted into cash within an accounting year. They include cash, bank, debtors, etc.

     

    BALANCE SHEET

    		  
    LIABILITIES ASSETS
    Capital xxx Fixed Assets  
    Reserves and Surplus xxx Land and Building xxx
        Vehicle xxx
    Current Liabilities   Furniture xxx
    Accounts Payable xxx    
    Bank Overdraft xxx Intangible Assets  
    Outstanding Expenses xxx Goodwill xxx
      Trademarks xxx
         
      Long-term Investments xxx
           
      Current Assets  
      Cash xxx
      Debtors xxx
      Others xxx
      xxx   xxx

     

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