AccountingQA Latest Questions

Rahul_Jose
Rahul_Jose
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  2. Pooja_Parikh Aspiring Chartered Accountant

    Any person, company, or organization that owes us money is a debtor. The amount that is owed to us is called debt. When you are unsure if a debtor is going to pay back the amount owed to you, then a provision for doubtful debts is created. Here, the debtor may or may not pay back the amount owed. WhRead more

    Any person, company, or organization that owes us money is a debtor. The amount that is owed to us is called debt. When you are unsure if a debtor is going to pay back the amount owed to you, then a provision for doubtful debts is created. Here, the debtor may or may not pay back the amount owed. When the debts owed to us is irrecoverable, it is termed as bad debts.

    Provision for doubtful debts may become a bad debt at some point. Usually, companies keep a small portion of their debtors as a provision for doubtful debts in accordance with the prudence concept that tells us to account for all possible losses. Provision for doubtful debts is a liability whereas bad debts are recorded as an expense.

    Journal entries for Doubtful debts and bad debts are as follows:

    EXAMPLE

    If the balance in the debtors’ account shows an amount of Rs 20,000 and 5% of debtors are treated as doubtful, then Rs 1,000 is recorded as a provision for doubtful debts. This amount is deducted from debtors in the balance sheet.

    Now if Rs 400 was recorded as actual bad debts, then it is deducted from the provision for doubtful debts instead of debtors. Further another 400 is added back to provision for doubtful debts to maintain the percentage.

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Rahul_Jose
Rahul_Jose
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  2. Pooja_Parikh Aspiring Chartered Accountant

    Financial Reporting is a common practice in accounting where the financial statements of the company are disclosed to present its financial information and performance over a particular period. It is important to know where a company’s money comes from and where it goes. Types of Financial StatementRead more

    Financial Reporting is a common practice in accounting where the financial statements of the company are disclosed to present its financial information and performance over a particular period. It is important to know where a company’s money comes from and where it goes.

    Types of Financial Statements

    There are 4 important types of financial statements such as:

    • Income Statement: This statement summarises a company’s revenue, expenses and profits. It is prepared to calculate the net profit of the company.
    • Balance Sheet: It portrays the company’s assets and liabilities in a statement. This is used to understand the financial position of the company.
    • Statement of Retained Earnings: This statement reveals a company’s changes in equity during an accounting period.
    • Cash Flow Statement: It shows the amount of cash flowing in and out of the business. It is helpful in understanding the liquidity position of the business.

    Importance of Financial Reporting

    • Understanding these financial statements is helpful in making financial decisions. One can identify certain trends and hurdles while analyzing financial statements.
    • It helps the top order management to keep a check on its outstanding debt and how to manage them effectively.
    • Financial reports are also required to be prepared by law for tax purposes. Therefore these statements have to be prepared to calculate taxable income. It also ensures that the companies are compliant with the required laws and regulations.
    • True and accurate financial reporting is also important for potential investors who need to understand the financial performance and position to come to a decision.

     

     

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Rahul_Jose
Rahul_Jose
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  2. Radhika
    This answer was edited.

    An asset is a resource in the name of the company or controlled by the company that holds economic value and will provide it future benefits. A company invests in various kinds of assets for manufacturing purposes and investment purposes as well. Some examples of assets are: Plant and Machinery InveRead more

    An asset is a resource in the name of the company or controlled by the company that holds economic value and will provide it future benefits.

    A company invests in various kinds of assets for manufacturing purposes and investment purposes as well. Some examples of assets are:

    • Plant and Machinery
    • Investments
    • Inventory
    • Cash and Cash Equivalents, etc.

    Assets can be broadly divided into two categories based on their physical existence:

    • Tangible Assets
    • Intangible Assets

    Tangible Assets can be further divided into two categories based on their life and role in the operating cycle:

    • Non-Current Assets
    • Current Assets

    Since the company derives benefit from the asset, an asset account is debit in nature. If an asset account has a credit balance, it would fundamentally make it a liability. However, there are certain exceptions to it.

    In the case of Bank Overdraft, which means a company withdraws more from the bank than it has deposited in its account, Bank Account can also be shown having a credit balance.

    Contra Assets Accounts are the accounts that are contrary to the basic nature of an assets account, that is it is contrary to the debit nature of the assets account and hence are credit in nature.

    Examples of Contra Assets Account are:

    Accumulated Depreciation Account which is essentially Plant Assets Account also has a credit balance as it is used to depreciate the asset, or in other words, reduce the value of the assets, hence it also has a credit balance.

    When there are balances in the Account Receivables Account that are not paid to the company or have a very low probability of being paid, they are recorded in a separate account called Bad Debts Account, which is also credit in nature.

     

     

     

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Rahul_Jose
Rahul_Jose
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  2. Pooja_Parikh Aspiring Chartered Accountant

    Statutory Liquidity ratio is the minimum percentage of reserves of liquid assets that the commercial bank should maintain. These liquid assets are in the form of gold, cash, and other securities. These reserves are kept with the bank itself and not with the Reserve Bank of India. The bank holds variRead more

    Statutory Liquidity ratio is the minimum percentage of reserves of liquid assets that the commercial bank should maintain. These liquid assets are in the form of gold, cash, and other securities. These reserves are kept with the bank itself and not with the Reserve Bank of India.

    The bank holds various demand and time deposits of the public, the total of which is called Net Demand and Time Liabilities (NDTL). This includes demand deposits that have to be paid on demand. Various other deposits like time deposits, fixed deposits, demand drafts, etc. are also included.

    Every bank must keep a portion of its NDTL in the form of cash, gold, or other liquid assets. Therefore, the Statutory Liquidity Ratio is the ratio of these liquid assets to the total demand and time liabilities. The authority to determine the ratio lies with the RBI, who can increase it to the extent of 40%.

    FORMULA

    PURPOSE OF SLR

    RBI controls the flow of cash in the economy by means of monetary policy measures through financial instruments like Statutory Liquidity Ratio. At the time of inflation, RBI increases SLR to reduce the flow of cash whereas, at the time of deflation, they reduce SLR to increase the flow of cash. Maintaining SLR also helps ensure the solvency of the commercial banks.

    If the banks do not maintain the necessary level of SLR, they would be liable to pay a penalty to RBI at 3% per annum above the bank rate, on the shortfall amount of that day.

     

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Rahul_Jose
Rahul_Jose
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  2. Radhika
    This answer was edited.

    The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio. The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI. CRR meansRead more

    The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio.

    The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI.

    CRR means that commercial banks cannot lend money in the market or make investments or earn any interest on the amount below what is required to be kept in CRR.

    RBI mandates Cash Reserve Ratio so that a percentage of the bank’s deposit is kept safe with the RBI, hence, in an uncertain event bank can still fulfill its obligation against its customers.

    CRR also helps RBI to control liquidity in the economy. When CRR is kept at a higher rate, the lower the liquidity in the economy, and similarly when CRR is kept at a lower rate, there is higher liquidity in the economy.

    The Reserve Bank of India also regulates inflation through the Cash Reserve Ratio:

    • During inflation, that is when RBI wants to apply contractionary monetary policy, it increases CRR so that the money left with banks to lend is reduced. Such measures reduce the money supply in the economy and therefore help combat inflation.
    • During deflation, that is when RBI wants to apply expansionary monetary policy, it reduces CRR, so that the money left with banks to lend is increased. Such measures increase the money supply in the economy and therefore help combat deflation.

    The formula for CRR is- 

    Reserves maintained with Central Banks / Bank Deposits * 100%

    For example:

    The current CRR is 3% which means that for every Rs 100 deposit in the commercial banks have to keep Rs 3 as a deposit with RBI.

     

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