AccountingQA Latest Questions

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

    Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use. Computation of effective capital is given in Explanation I to Schedule II of the CoRead more

    Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use.

    Computation of effective capital is given in Explanation I to Schedule II of the Companies Act. Schedule II deals with remuneration payable to managers in case of no profit or inadequate profit in the following manner:

    Computation of effective capital is done in the following manner:

    Numerical example:

    ABC Ltd reports its balance sheet as given below:

    We will compute its effective capital for both an investment company and a non-investment company.

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  2. PriyanshiGupta Graduated, B.Com
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    Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income. According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultuRead more

    Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income.

    According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultural income is above Rs 5,000.

    Following are the sources to be considered for agricultural income according to the conditions mentioned in Section 2 (1A) of the Income Tax Act:

    • Revenue generated through rent or lease of land in India that is used for agricultural purposes.
    • Revenue generated through the commercial sale of produce gained from agricultural land.
    • Revenue generated through the renting or leasing of buildings in and around the agricultural land subject to the following conditions:
    • The cultivator or farmer should have occupied the building, either through rent or revenue.
    • The building is used as a residential place, storeroom, or outhouse.
    • The agricultural land or the land where the building is located, is being assessed for land revenue or subject to a local rate assessed.

    If the land does not fall under the provisions stated above, the Income Tax Act requires a separate evaluation to calculate tax.

    The Income-tax Act has laid down a method to indirectly tax such income.
    This method or concept is called the partial integration of agricultural income with non-agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.

    Partial integration of agricultural income with non-agricultural income involves the following steps:

    1.  For example, the base income of the individual is Rs. 20,000 and agricultural income is Rs 10,000, then we first have to calculate tax on Rs 30,000. For convenience, we can call this tax T(30,000)
    2. Assuming that the income falls under tax slab A, this tax slab A has to be added to the agricultural income and tax has to be calculated on it as well and it is called T(S+10,000).
    3. The final tax on the individual’s income will be T(30,000)- T(A+10,000)

    The important step to keep in mind is to aggregate the agricultural income while calculating tax otherwise it can lead to double taxation, extra tax, or interest on tax.

     

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AbhishekBatabyal
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  2. PriyanshiGupta Graduated, B.Com
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    Activity-based costing (ABC) is a system used to find production costs. It breaks down overhead costs between production-related activities and other activities. The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABC is based on the principleRead more

    Activity-based costing (ABC) is a system used to find production costs.
    It breaks down overhead costs between production-related activities and other activities.

    The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABC is based on the principle that ‘prod­ucts consume activities.’

    Traditional cost systems allocate costs based on direct labor, material costs, revenue, or other simplistic methods. As a result, traditional systems tend to over-cost high volume products, services, and customers; and under-cost low volume.

    Hence, Activity Based Costing was developed for determining the cost. The basic feature of ABC is its focus on activities. It uses activities as the basis for determining the costs of products or services.

    Activity-Based Costing is mostly used in manufacturing industries, however, its application is not only limited to that. Various industries like, construction, health care, medical organizations also use this method of assigning costs. Industries where customized products are made also tend to use such methods as it is easier to charge appropriate overhead costs from the customer.

    Objectives of Activity-Based Costing:

    Companies adopt ABC to assign cost elements to the products, activities, or services so that it helps the management to decide:

    • which cost can be eliminated or cut back
    • which products are unprofitable
    • if a product is over-priced or under-priced
    • if any activity is ineffective
    • various processing of the same product to yield better results

    Advantages of Activity Based Costing are:

    • it takes into consideration both direct and overhead costs of creating a product.
    • it recognizes the fact that different products require different indirect expenses.
    • it sets prices more accurately.
    • it helps to see what overhead cost the company might be able to cut back on.
    • it helps to segregate fixed costs, variable cost, and overhead cost which helps to identify “cost drivers”.
    • it focuses on cost allocation in operational management.

    Before implementing ABC, a company should consider the following:

    • manually driven Activity Based Accounting cost derivers is an inefficient use of resources.
    • it is an expensive method and it is difficult to implement
    • for small gains, there are alternative costing methods available for a company to use.

    Formula=  Total Cost Pool / Cost Driver

    For example:

    For a company, the salary for workers is Rs 1,00,000 for a financial year, the number of labor hours worked is 50,00 hrs. The cost driver rate is calculated by dividing the workers’ salary by the labor hours worked, that is,

    Salary of the workers / Number of labor hours

    Rs 1,00,000 / 50,000 hrs = Rs 2 per labor hour.

    In the above example, the salary of the workers is the total cost pool or the overhead cost for which we want to find the cost driver rate and labor hours is the cost driver, that is, on the basis of what we want to find the rate.

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

    Before answering the question let’s understand what a government grant is. Meaning of government grants Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawbacRead more

    Before answering the question let’s understand what a government grant is.

    Meaning of government grants

    Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawback, or assets provided at concessional rate or at no cost etc.

    These grants when provided have some rules and conditions attached to them. If such conditions are not fulfilled or rules are violated, the grant becomes refundable to the government.

    Treatment

    AS-12 ‘Government Grant’ provides two approaches  for the treatment of government grants in the books of accounts of an enterprise:

    • Income approach: Under this approach, the grant is treated as income and taken to profit and loss A/c in one or more accounting periods.

    For example, X Ltd purchase an asset for ₹ 10,00,000 and the government provided a grant of ₹2,00,000 to X Ltd. The useful life of the asset is 4 years and the residual value is nil.

    Now there are two methods to treat this grant as income.

    Method – 1:  The grant amount will be deducted from the asset’s value. This will result in a decreased amount of depreciation. This is an indirect way to recognize government grants as income.

    The journal entries are as follows: (Method-1)

    The journal entries for the 3rd and the 4th years will be the same as of 2nd year.

    In absence of a government grant, the annual depreciation would have been ₹2,50,000 (₹10,00,000 / 4). Hence, due to the grant, the profit will be 50,000 more for the 4 consecutive accounting years.

    Method – 2: The grant amount is credited to a special account called the ‘deferred government grant’ account. Over the useful life of the asset, the grant will be credited to the profit and loss account in equal instalments. This is a direct way to recognize government grants as income.

    The journal entries are as follows: (Method-2)

    The journal entries for the 3rd and the 4th years will be the same as of 2nd year.

    • Capital approach: Under this approach, the grant is treated as part of the shareholders’ funds (as capital reserve)

    When any grant is given is in nature of promoter’s contribution i.e. as a percentage of total investment to be done by an enterprise, and then such grant received from government will be treated as part of shareholder’s funds.

    The grant amount will be transferred to the capital reserve account and it will be treated neither as deferred income nor to be distributed as a dividend.

    Example: ABC Ltd has set up its business in a designated backward area which entitles the company to receive from the government a subsidy of 20% of total investment. ABC Ltd fulfilled all the conditions associated with the scheme and received ₹20 crores toward its total investment of ₹100 crores.

    This ₹20 crore will be transferred to the capital reserve account.

    Special case: If the grant is received in relation to a non-depreciable asset like land, then the entire amount of the grant will be recognized in the profit and loss account in the same year.

    Treatment of non-monetary government grant

    When a government grant is in the form of non-monetary assets like land or other resources at a concessional rate, then the assets are to be recognised at their acquisition cost.

    If the assets are acquired at no cost, then they are to be recorded at their nominal value.

    For example, if an enterprise receives land for free as a government grant, then it has to record the land at cost based on prevailing market rates.

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AbhishekBatabyal
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  2. Radhika
    This answer was edited.

    Capital maintenance is a principle that states profit should not be recorded until its cost or capital has been maintained. In other words, profit should not be recognized unless net assets have been maintained. Capital maintenance states that profit recognized is the increase in the value of net asRead more

    Capital maintenance is a principle that states profit should not be recorded until its cost or capital has been maintained. In other words, profit should not be recognized unless net assets have been maintained.

    Capital maintenance states that profit recognized is the increase in the value of net assets. However, there are two exceptions to it:

    • Cash increased because of sale of stock to shareholders
    • Cash decreased because of dividend payout to its shareholders

    It is important because:

    • It protects the interest of shareholders
    • It protects the interest of creditors
    • Accurately analyzing the performance of the company

    Capital maintenance is of two types:

    • Financial Capital Maintenance

    It is measured by the value of assets at the beginning and end of the financial year.

    • Physical Capital Maintenance

    It is measured by the production capacity at the beginning and end of the financial year.

    Capital maintenance is concerned with keeping proper account balances of assets and not the physical assets.

    Inflation is the increase in the economic value of goods due to the lower purchasing power and not an actual increase in the value of assets. So, if the value of an asset is increased due to inflation it does not depict the right picture for the company.

    Hence, if the value of assets increases due to inflation, companies need to adjust the value of assets to assess if capital maintenance has occurred. 

     

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AbhishekBatabyal
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  2. Ayushi Curious Pursuing CA

    By the name, it can be easily deduced that Advance tax means the tax paid in advance. Advance tax is the tax paid by an assessee in the Previous Year itself based on his estimated income. We know that Income tax liability is known in the Assessment Year based on the income of the Previous Year. But,Read more

    By the name, it can be easily deduced that Advance tax means the tax paid in advance.

    Advance tax is the tax paid by an assessee in the Previous Year itself based on his estimated income.

    We know that Income tax liability is known in the Assessment Year based on the income of the Previous Year. But, the government encourages the taxpayers to pay the tax in the Previous Year itself based on the estimated income.

    As per section 208 of the Income Tax 1961, if the total income liability on the estimated income comes up more than Rs. 10,000, then advance tax has to be paid.

    The advance tax has to be paid according to the following schedule for the individual and corporate assessees [Other than the assessee who computing profits on a presumptive basis under section 44AD(1) and 44ADA(1)]:

    Due date of Instalment Amount Payable
    On or before 15th June No less than 15% advance tax liability.
    On or before 15th September No less than 45% of tax liability, as reduced by any amount if any paid in the earlier instalment.
    On or before 15th December No less than 75% of tax liability, as reduced by any amount or amounts if any paid in the earlier instalments.
    On or before 15th March No less than 100% of tax liability, as reduced by any amount or amounts if any paid in the earlier instalments.

     

    Any amount paid by the way of advance tax on or before 15th March shall be treated as advance tax paid during each financial year on or before 15th March.

    Also as per section 219, the tax credit is given for the advance tax paid in the regular assessment of income tax.

    In case of non-payment or short payment of the advance tax,  interest is payable as per section 234B. Interest is also attracted in case of delayed payment of advance tax as per section 234C.

    That’s all, I would conclude my answer hoping that it was helpful in making the concept of advance tax easy to grasp.

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AbhishekBatabyal
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  2. Samar Sparsh

    The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months. The current ratio is calculated using two standard figures thatRead more

    The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months.

    The current ratio is calculated using two standard figures that are shown in the company’s balance sheet: current assets and current liabilities. The formula for the same goes as:

    Current ratio = Current Assets / Current Liabilities

    A current ratio of 2:1 is considered ideal. Generally, a ratio between 1.5 to 2 is considered beneficial for the business, which means that the company has more financial resources (Current Assets) to cover its short-term debt (Current Liabilities).

    A high current ratio may indicate that the business is having difficulties managing its capital efficiently to generate profits.

    On the other hand, a lower current ratio (especially lower than 1) would signify that the company’s current liabilities exceed its current assets and the business may have difficulty covering its short-term debt. Although the definition of a good current ratio may vary in the different industry groups.

    Example- Where,

    1) CR is 2:1, the company is in a good situation as it has double the Current Assets in order to cover the short-term debt.

    2) CR is 0.5:1, the company is not in a good situation as it has only half the Current Assets in order to cover the short-term debt.

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AbhishekBatabyal
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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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AbhishekBatabyal
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  2. Ayushi Curious Pursuing CA
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    The Income Tax 1961 does not provide any rate of depreciation specifically for cameras. But we can consider camera within the block of ‘Computer including software’ for which the rate of depreciation is 40% at WDV method. It is a general practice for non-corporates to charge depreciation at rates slRead more

    The Income Tax 1961 does not provide any rate of depreciation specifically for cameras. But we can consider camera within the block of ‘Computer including software’ for which the rate of depreciation is 40% at WDV method.

    It is a general practice for non-corporates to charge depreciation at rates slightly lower than the rate provided by the Income Tax Act, 1961. But one cannot charge depreciation more than it.

    In the case of corporate, the rates for charging depreciation are provided by the Companies Act 2013, which is

    • 20.58% WDV and 7.31% SLM for cameras to be used for the production of cinematography and motion pictures.
    • 25.89% WDV and 9.50% SLM for cameras which is part of electrical installations and equipment (CCTV cameras).

    Let’s take an example:

    Mr X is a jewellery shop owner and has installed CCTV cameras on 1st April 2021, costing ₹ 40,000 at various points in his shop to ensure safety and security. Keeping in mind the Income-tax rates, his accountant decided to charge depreciation @ 30% p.a. on the CCTV cameras.

    Following is the journal entry:

    The balance sheet will look like this:

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