AccountingQA Latest Questions

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

    Tally ERP does not have a voucher for recording closing stock journal entries. It automatically calculates closing stock and reports it in the Profit and Loss account and Balance sheet. However, Tally do have vouchers through which you can adjust the closing stock to be shown at the end of the year.Read more

    Tally ERP does not have a voucher for recording closing stock journal entries. It automatically calculates closing stock and reports it in the Profit and Loss account and Balance sheet.

    However, Tally do have vouchers through which you can adjust the closing stock to be shown at the end of the year.

    Explanation

    Tally, as we know is an ERP which can automate many aspects of accounting like calculation of ledger balance, creation of trial balance, financial statements and other reports. Only the data entry in vouchers is done manually.

    Tally also calculates closing stock automatically because it already has the required data to do so.

    Closing stock = Opening stock + Purchase – Cost of goods sold.

    Using the above formula, Tally automatically calculates the closing stock.

    But it may happen that the closing stock as per Tally and closing stock as per physical verification of stock do not match.

    This may be due to damaged caused to some items of inventory or even theft of inventory items which is usually discovered when stock is physically checked and counted at the end of the financial year.

    In that case, we can use the Physical Stock voucher to correct our closing stock in Tally.

    Physical Stock Voucher

    A physical Stock voucher is an inventory voucher which is used to adjust the amount of closing stock as per the physical stock verified at the end of the year.

    Suppose, if the closing stock for Bricks is 500pcs. Like in my stock summary, the item ‘Bricks’ is shown in the image below:

    But after physical verification, it was found that there around there are only 450pcs of whole bricks are there. The rest of the bricks were broken.

    To rectify this, we will open a Physical Stock voucher.

    The steps to open a Physical stock voucher are as follows:

    In Tally ERP 9 : Gateway of Tally → Accounting Vouchers → Press Alt + F10 

    In the physical stock voucher, we will select the stock item and enter the correct quantity, which is 450pcs. 

    After entering the details above, accept the voucher and open the stock summary again from Gateway of Tally. It will show the Bricks at 450pcs.

    Hence, this is how we can adjust our closing stock in Tally.

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Ayushi
AyushiCurious
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  2. ShreyaSharma none
    This answer was edited.

    Journal entries in the ledger What is a Journal Entry? Journal entry is a form of bookkeeping. All the economic or non-economic transactions in the business are recorded in the journal entries showing a company's debit or credit balances. It is a double-entry accounting method and requires at leastRead more

    Journal entries in the ledger

    What is a Journal Entry?

    Journal entry is a form of bookkeeping. All the economic or non-economic transactions in the business are recorded in the journal entries showing a company’s debit or credit balances. It is a double-entry accounting method and requires at least two accounts or more in a transaction.

    The journal entry helps to identify the transactions. We use journals to get a running list of business transactions. Each journal entry provides this specific information about a transaction:

    • Date of the transaction.
    • Accounts involved in it.
    • Payer, payee, receiver, etc.
    • Account name.
    • Debit and credit of money.

     

    General Ledger 

    After the transactions are recorded in the journal, they are posted in the principal book called ‘Ledger’. A ledger account contains information about a specific account. It contains the opening balance as well as the closing balances of an account. It summarizes the business transactions.

    Transferring the entries from journals to respective ledger accounts is called ledger posting or posting to the ledger accounts. Balancing of ledgers is carried out to find differences at the year’s end, it means finding the difference between the debit and credit amounts of a particular account.

     

    For instance,

    Suppose goods were bought for cash. While passing the journal entry, we’ll be debiting the purchases a/c and crediting the cash a/c by stating it as, ‘To Cash A/c’.

    Now, this entry will be affecting both the purchases account and the cash account. In the cash account, we’ll be debiting purchases. Whereas in the purchases account, we’ll be crediting the cash. That’s how it works in the double-entry bookkeeping system of accounting.

     

    Example

    Mr. Tony Stark started the business with cash of $100,000. He bought furniture for business for $15,000. He further purchased goods for $75,000. He hired an employee and paid him a salary of $5,000.

    Now, we’ll be journalizing the transactions and posting them into the ledger accounts.

    Journal Entries

    Recording into Ledger Account

    Cash A/c

    Capital A/c

    Furniture A/c

    Purchases A/c

    Salary A/c

    Note: The balance b/d is not applicable as this is the business’ commencement year.

     

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Ayushi
AyushiCurious
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  2. ShreyaSharma none
    This answer was edited.

    No, the building is not a current asset. Explanation Current assets are those in a business that is reasonably expected to be sold, consumed, cashed, or exhausted within one year of accounting through normal day-to-day business operations. Examples: Cash and cash equivalent, stock, liquid assets, etRead more

    No, the building is not a current asset.

    Explanation

    Current assets are those in a business that is reasonably expected to be sold, consumed, cashed, or exhausted within one year of accounting through normal day-to-day business operations.

    Examples: Cash and cash equivalent, stock, liquid assets, etc.

    The building is expected to have a valuable life for more than a year and is bought for a longer term by a company. The building is a fixed asset/non-current asset, those assets which are bought by the company for a long term and aren’t supposed to be consumed within just one accounting year.

    In order to understand it more clearly, let’s see the two types of assets in the classification of the assets on the basis of convertibility:

    In the classification of the assets on the basis of their convertibility, they are classified either as current assets or fixed assets. Also referred to as current assets/ non-current assets or short-term/ long-term assets.

    • Current Assets – As explained above, those assets in a business that is reasonably expected to be sold, consumed, cashed, or exhausted within one year of accounting.
    • Fixed Assets – Those assets which are not likely to be converted into cash quickly and are bought by the business for a long term.

    Building in the balance sheet

    Let us take a look at the balance sheet’s asset side and see where building and current assets are shown

    Balance Sheet (for the year ending…)

     

    As we can see, the building is shown on the long-term assets side and not in the current assets.

    Therefore, the building is not a current asset.

     

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

    Introduction First, we should know what Earnings per share is. Earnings per share or EPS is the earnings available to each equity share of a company. The general formula of Earning per share is as follows: Earnings per share indicate the profit-generating capability of an enterprise and potential inRead more

    Introduction

    First, we should know what Earnings per share is.

    Earnings per share or EPS is the earnings available to each equity share of a company. The general formula of Earning per share is as follows:

    Earnings per share indicate the profit-generating capability of an enterprise and potential investors often compare the EPS of different companies to choose the best investment alternative.

    It is shown at the bottom of the Statement of profit and loss of a company.

    Basic Earnings per share

    As per AS-20, there are two types of EPS.

    • Basic EPS
    • Diluted EPS

    Basic Earnings per share has the same meaning as given above. But the formula of basic earnings per share as per AS-20 is as follows:

    The formula of basic earnings per share is slightly different from the general formula of EPS. Here the numerator is the same as discussed above. But the denominator is different.

    Here it is ‘Weight average number of equity shares outstanding’ instead of ‘Total number of equity shares outstanding.

    The two components of the formula are discussed below:

    Meaning of earnings available to equity shareholders

    The earnings or net profit which remains after deduction of interest payable, preference dividend, if any, and tax is known as earnings available to equity shareholders. It is calculated as shown below:

    Weighted average number of equity shares outstanding

    The weighted average will be calculated by applying the weight of the time period for which the numbers of shares were outstanding. Let’s see a simple case to understand the calculation of the weighted average number of equity shares outstanding:

    Solution:

    Alternative way:

    The calculation of the weighted average number of equity shares is different in special cases like:

    • party paid-up shares
    • bonus shares and
    • right issue shares

    Partly paid-up shares

    Partly paid-up shares are not considered in the above calculation unless they are eligible to take part in dividends. In that case, such partly paid-up shares are included in the calculation as fractional shares.

    For example, 300 equity shares of Rs. 10 each and Rs. 5 paid up will be considered as 150 shares. (300 x 5/10)

    Bonus shares

    We know bonus shares are issued at no cost to the shareholders. Issue of bonus shares leads to an increase in the number of equity shares without an increase in the resources.

    AS-20 tells us to make adjustments to the number of shares outstanding before the issue of bonus shares as if the bonus shares were issued at the beginning of the earliest reported period. The effect will be retrospective.

    Take the following example:

    Here, number of bonus shares = 30,000 x 2 = 60,000

    Therefore, EPS for 2012 = 60,00,000 /(30,000 + 60,000)= Rs.  6.67

    As the earliest report period is 2011, its EPS will also have to be adjusted. Bonus issue will be treated as if it had occurred at the beginning of the earliest reported period.

    Adjusted EPS for 2011= 18,00,000 / (30,000 + 60,000) = Rs.  20

    Right issue

    The right issue generally has an exercise price that is less than the fair value of the shares. Hence, we can say that the right issue has an element of bonus in them.

    So, just like in the case of a bonus issue, we will have to adjust the number of shares outstanding before the right issue up to the earliest reported period by an adjustment factor.

    The number of shares outstanding before the right issue is to be multiplied by the adjustment factor given below:

    Theoretical ex-right value per share is calculated in the following way:

    Let’s see an example:

    Net profit for 2011     Rs. 11,00,000
    Net profit for 2012     Rs. 15,00,000
    No. of shares outstanding prior to rights issue   5,00,000 shares
    Rights issue price                                                       Rs. 15
    Last date to exercise rights                                    1st March 2012

    The right issue is one new share for every 5 shares outstanding (i.e. 1,00,000 new shares)

    The fair value of shares immediately prior to 1st March 2012 = Rs. 21

    Solution:

     

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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Introduction Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds. Explanation To undRead more

    Introduction

    Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds.

    Explanation

    To understand the concept of minority interest, we need to first understand the relationship between a holding company and its subsidiary company or companies.

    A holding company means a company that controls one or more companies by:

    • Holding more than fifty percent of the total voting rights or equity share capital.
    • having the power to appoint or remove the majority of the board members.

    A subsidiary company is a company that is controlled by another company.

     

    From the above, we can simply deduce that a holding company holds the majority of the equity in its subsidiary company or companies.

    So, the equity of the subsidiary company which does not belong to the holding company, but to the outsiders is known as the minority interest as it is, in fact, the minority in comparison to the majority stake of the holding company.

    Example

    For example, A Ltd holds 75% of the equity in B Ltd, then the rest 25% which belongs to the outsiders will be the Minority Interest.

    Minority Interest means the share of outsiders in the:

    • Paid-up share capital of the subsidiary
    • Reserve and Surplus

    For example, B Ltd has the following particulars under Shareholders’ Funds.

    Equity Share Capital Rs. 10,00,000
    Revaluation Reserve Rs. 4,00,000
    Balance of Profit and Loss A/c Rs. 1,00,000
    General Reserves Rs. 5,00,000

     

    B Ltd is a subsidiary company of the A Ltd. A Ltd holds 75% of B Ltd.

    It means minority interest in B Ltd is 25% (100% – 75%)

    Therefore, in the consolidated balance sheet of A Ltd and its subsidiary, the minority interest will be as follows:

    Minority Interest in B Ltd (25%)

    Equity Share Capital Rs. 2,50,000 (10,00,000 x 25%)
    Revaluation Reserve Rs. 1,00,000 (4,00,000 x 25%)
    Balance of Profit and Loss A/c Rs. 25,000 (1,00,000 x 25%)
    General Reserves Rs. 1,25,000 (5,00,000 x 25%)
    Total Rs. 5,00,000

     

     

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

    Introduction In GST, a supply is a taxable event. This means whenever there is a supply of goods or services or both, GST is charged. Supply includes the exchange of goods or services between supplier and recipient by way of sale, barter, lease etc for consideration and in the course or furtheranceRead more

    Introduction

    In GST, a supply is a taxable event. This means whenever there is a supply of goods or services or both, GST is charged. Supply includes the exchange of goods or services between supplier and recipient by way of sale, barter, lease etc for consideration and in the course or furtherance of business. The rate of GST on any supply depends on the type of good or service supplied.

    Composite supply and mixed supply are two special types of supplies, in which two or more goods or services or both are offered together in a bundle. As two or more goods are supplied together, the question arises at which rate the GST is to be charged on such supplies as such goods or services may have different rates of GST applicable to them. Sections 8 of the CGST act, 2017 deals with the tax liability of such supplies.

    Composite supply

    A composite supply is a type of supply in which two or more goods or services or both are supplied together in the ordinary course of business. Such goods or services are natural bundles. By natural bundle, we mean the goods or services are complementary to each, they are naturally provided together and are to be used along with each other.

    For example, mobile phones and chargers are supplied as a bundle. This concept of the natural bundle is the main determiner of a composite supply.

    In such supplies, there is one main product which is called the principal supply. Like in the above example, the mobile phone is the principal supply. Other goods or services are dependent on the principal supply.

    A composite supply will be taxable as the rate of GST applicable on the principal supply.

    For example, suppose the rate of GST on mobile phones is 18% and that on the charger is 12%, then the whole supply will be taxable at the rate of 18%.

    Mixed supply

    A mixed supply is a type of supply in which two or more goods or services or both are supplied together but they do not complement each other and are not a natural bundle. They are not supplied in the ordinary course of business, For example, a combo of bottled honey and face cream.

    In mixed supply, the good or service which attracts the highest rate of GST is considered the rate of supply for the whole supply.

    For example, suppose bottled honey attracts 5% GST and face cream 18% GST, then the whole supply will be charged 18% GST.

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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Introduction As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection. In simple words, sampling in auditing refers to the practice deriving aRead more

    Introduction

    As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection.

    In simple words, sampling in auditing refers to the practice deriving a conclusion by the auditor about a population of data by evaluation of only a part or sample of the whole data. Population means a set of data.

    Concept of sampling

    We know, an audit involves inspection of financial information of an entity by an auditor to form an opinion on its financial statements. Now the financial information of a firm usually contains large volumes of data. For example, a firm may have entered into 50,000 purchase transactions in a year.

    Now, checking each and every purchase transaction will cost both time and money. Also, nowadays, almost every enterprise have internal controls and automated accounting systems that are established to ensure accuracy and prevention of errors. Hence, a  full-fledged inspection of each and every transaction is not worth the time and effort.

    Instead, a wise thing to do is to take a sample from the whole volume of transactions or accounts and apply the auditing procedures to the sample. The results derived from the sample are then projected upon the whole volume of data. Samples are often taken using statistical methods to ensure that sample is taken randomly and represents the whole population of data in a true and unbiased manner.

    Consideration regarding the population before audit sampling:

    1. The population is appropriate for the specific audit objective of the auditor
    2. It is from a reliable source to ensure sample reliability
    3. It is complete in terms of coverage of all relevant items throughout the period.

    Irrespective of the method of sampling, the sample must represent the whole population closely.

    Approaches to sampling

    There are two approaches to sampling:

    1. Statistical Approach: It is a scientific way of ensuring that the sample is chosen randomly from data and represents the data in a true and unbiased way. It employs mathematical and statistical tools like the theory of probability and also considers sampling risk characteristics.
    2. Non-Statistical Approach: Under this approach, the auditor employs his personal experience to collect sample from the population. No mathematical tools are used but the personal judgement of the auditor regarding sampling. Sometimes, this approach may give satisfactory results depending upon the capability of the auditor. But in most cases, reliability is less compared to the statistical approach.
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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Introduction Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed incoRead more

    Introduction

    Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed income if payable.

    The year in which the income is earned is called the Previous Year and the following year in which the previous year’s income is assessed is known as the Assessment Year

    Steps involved in the computation of Income-tax of a person:

    1. Determination of residential status of the person
    2. Classification and computation of income under the five heads of income
    3. Clubbing of income of spouse, minor child etc
    4. Set-off or carry forward of losses
    5. Computation of Gross Total Income
    6. Deductions from Gross Total Income to arrive at Total Income
    7. Application of the rates of taxes on total income
    8.  Advance tax and tax deducted at source
    9. Arrival  at Tax payable/ Tax refundable
    10. Determination of residential status of the person

    Determination of residential status of the person

    The residential status of a person is of great significance for ascertaining the taxability of a person’s income as per the Income-tax act, 1961. As per the act, a person can fall into one of the following criteria:-

    1. Resident and Ordinarily Resident in India
    2. Resident but Not Ordinarily Resident in India
    3. Non-Resident

    Classification and computation of income under the five heads of income

    Now, a person’s income can be from various sources. As per section 14 of the Income-tax act, there are five main heads of income for computation of income tax:

    1. Income from Salary
    2. Income from House Property
    3. Profits and Gains from Business or Profession
    4. Capital Gains
    5. Income from other sources

    Income under each head is to be computed as per provisions of the Income-tax Act, 1961.

    Clubbing of income of spouse, minor child etc

    Some individual taxpayers divert some portion of their income to their spouses and minor child in order to reduce their tax liability as the slab rate of income tax for individuals is progressive.

    Such diverted income is to be clubbed with the income of the assessee as per the provisions of the Income-tax act.

    Set-off and carry forward of losses

    Losses suffered under the heads of the income like ‘Profit and Gains from Business and Profession’, ‘Income from House property’ can be set off against the income earned under other heads as per provision of the act.

    If set off is not possible in the current assessment year then the loss can be carried forward to the next assessment year.

    Computation of Gross Total Income

    Gross Total Income is arrived at by computing the total of income under all five heads of income after giving necessary deductions as applicable under each head of income.

    Deductions from Gross Total Income to arrive at Total Income

    Income tax act, 1961 allows specific deduction from the Gross Total Income under sections 80C to 80U. These deductions are provided to encourage certain kinds of investments like life insurance premiums etc and provide relief on certain spending like medical expenses, interest expenses on home loans etc which leads to the overall welfare of the people.

    After allowing the deductions from Gross Total Income, we arrive at Total Income.

    Application of the rates of taxes on total income

    Tax is calculated at a rate on the total income. The rate and calculation of income tax depend on the type of assessees.

    Individuals and HUFs

    For individuals who are below the age of 60 years and HUFs:

    For individuals over 60 years and 80 years of age, the basic exemption limit is ₹3,00,000 and ₹5,00,000 respectively.

    Also, as per section 115BAC, individuals and HUFs have the option to choose an alternative slab rate of tax as per which the income tax is charged at concessional rates. But, the various exemptions and deductions like housing rent allowance, leave travel concession, standard deduction on salary income cannot be availed. This slab rate system was introduced recently to reduce the complexity of filling IT returns by small taxpayers.

    Rates of tax related to other types of assessees is not provided for sake of simplicity.

    Advance tax and tax deducted at source

    After calculating the tax on total income as per specified rates, the income tax amount is to be reduced by the advance tax and tax deducted at the source.

    Tax payable/ Tax refundable

    After performing all the steps above, we arrive at Income tax payable or tax refundable.

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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook. BRS is usuallRead more

    Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook.

    BRS is usually prepared by the accountant of an entity to find out the causes of the difference between the bank balance as per cashbook and the bank balance as reported in the passbook. The frequency of preparation of BRS is usually monthly. Nowadays, many enterprises have computerised accounting systems which help in automatic bank reconciliation.

    Sometimes, BRS is also prepared by auditors during the audit of financial statements.

    The balance of the bank account column of the cashbook does not match the bank balance as per the passbook. This is due to many transactions like the following that go unnoticed by the accountant:

    • The credit of bank interest,
    • Auto-debit of bank charges,
    • Delay in the clearing of cheques deposited, for which debit is already given by the accountant.
    • Late presentment of cheque issued by enterprise, for credit is already given by the account.

    Differences also occur due to accounting errors like posting wrong amounts in the cashbook.

    To prepare the BRS, we have to start either with the bank balance as per cashbook, then add or subtract amounts to arrive at the bank balance as per passbook. Or we can do the vice verse. Here, the amounts we add or subtract are the amounts of items that are causes for the difference between the two balances.

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Ayushi
AyushiCurious
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    The major affairs of the company are handled by the manager and hence he is entitled to receive some compensation for his efforts. This is termed Managerial Remuneration. The manager has to bring out the maximum potential of the employees while ensuring that the interests of the shareholders and othRead more

    The major affairs of the company are handled by the manager and hence he is entitled to receive some compensation for his efforts. This is termed Managerial Remuneration. The manager has to bring out the maximum potential of the employees while ensuring that the interests of the shareholders and other stakeholders are secured.

    MAXIMUM REMUNERATION

    As per section 197 of the Companies Act, the Company has certain limits on paying maximum remuneration, depending on whether he is working full-time or part-time. If the company has only one whole-time manager, he is entitled to a maximum remuneration of 5% of net profits. If there is more than one whole time manager, then the percentage increases to 10%.

    For part-time directors, the remuneration allowed is 1% of net profits (if there is a whole-time director present) and if no whole-time manager is present, then remuneration for a part-time director is 3%.

    Therefore, a company can only pay a maximum remuneration of 11% of net profits.

    A public company is allowed to pay remuneration in excess of 11% by :

    • Passing a special resolution approved by the shareholders
    • Subject to compliance with Schedule V conditions

    Remuneration can be paid to such managers who do not have any direct interest in the company and also possesses special knowledge and expertise along with a graduate-level qualification.

    PENALTY

    Any person who fails to comply with the provisions of managerial remuneration shall be punishable with a fine that can vary from Rs. 1 Lakh to a maximum of Rs. 5 Lakhs.

    However, Sec 197 applies to only public companies and hence private companies are free to pay managerial remuneration with no upper limit.

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