AccountingQA Latest Questions

Aadil
AadilCurious
In: >

  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Firstly, let’s understand the meaning of both terms. Revenue receipts:  The term 'revenue' suggests these are the amounts received by a business due to its operating activities. These receipts arise in a recurring manner in a business. Such receipts don’t affect the balance sheet. They are shown inRead more

    Firstly, let’s understand the meaning of both terms.

    Revenue receipts:  The term ‘revenue‘ suggests these are the amounts received by a business due to its operating activities. These receipts arise in a recurring manner in a business. Such receipts don’t affect the balance sheet. They are shown in the statement of profit or loss. Such receipts are essential for the survival of the business.

    Examples of revenue receipts are as follows:

    • Proceeds from the sale of goods.
    • Proceeds from the provision of services
    • Rent received
    • Interest received from deposits in banks or financial institutions
    • Discount received from creditors (shown in the debit side of P/L A/c)

    Capital receipts: The term ‘capital’ that such receipts are do not arise due to operating activities, hence not shown in the Profit and loss statement.  These are the money received by a business when they sell any asset or undertake any liability. These receipts do not arise in a  recurring manner in a business.  They don’t affect the profit or loss of the business. They are not essential for the survival of the business.

    Examples of capital receipts are as follows:

    • Loan from a bank or financial institution. (Increase in liabilities)
    • Proceeds from the sale of an asset. (decrease in assets)
    • Proceeds from sale of  investments. (decrease in assets)
    • Proceeds from the issue of equity shares. (Increase in liabilities)
    • Proceeds from issue of debentures. (Increase in liabilities)

    I have given a table below for more understanding:

    See less
    • 0
Ayushi
AyushiCurious
In: >

  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.

     

    See less
    • 0
A_Team
A_Team
In: >

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

    The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well. Amount tRead more

    The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well.

    Amount to any specific reserve is generally transferred from the Profit and Loss Appropriation Account.

    Various specific reserves are:

    • Debenture Redemption Reserve

    Debentures are debt instruments of a company and they have to be redeemed, that is, paid back after the expiry of the specified period. According to Accounting Standards, companies are required to set aside a specific amount in Debenture Redemption Reserve, when they are due for redemption.

    • Securities Premium Reserve

    When shares or debentures are issued at a price higher than its book value/face value, the difference between the market value and book value is called Securities Premium. The amount of Securities Premium is transferred to Securities Premium Account. This amount is utilized to issue fully paid bonus shares, write off preliminary expenses, write off commission discounts, etc., to provide a premium on redemption of debentures.

    • Investment Fluctuation Reserve

    The investments made by a company are subject to fluctuations in its market value. Company Law and Accounting Standards require companies to provide for such fluctuations by creating a reserve called Investment Fluctuation Reserve.

    • Dividend Equalisation Reserve

    Companies are required to pay a dividend to their shareholders. It is often difficult for a company to maintain a consistent rate of dividend as the dividend paid is equivalent to the profit made by a company during the financial year which is not consistent. So, Dividend Equalisation Reserve is created to maintain a consistent rate of dividend on shares over time, in the event of both high and low profits.

     

    See less
    • 0
Ishika Pandey
Ishika PandeyCurious
In: >

  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Yes, a creditor is a liability. Creditors are treated as current liability. A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest. Creditors may be secureRead more

    Yes, a creditor is a liability. Creditors are treated as current liability.

    A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.

    Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.

    In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.

    Why are Creditors treated as a liability?

    An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc

    A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.

    As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.

    Treatment and Importance of Creditors

    Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.

    The significance/importance of creditors is as follows:

    • The amount due to creditors affects the current and acid test ratio of a company significantly.
    • It affects the short-term cash requirements of a company.
    • It affects the credit policy of the company. A company can extend longer credit periods to customers if it can avail longer credit periods from its suppliers.
    • Having too many creditors or a large amount due to creditors can affect investor sentiment negatively regarding the business.

    We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.

    Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.

    See less
    • 0
A_Team
A_Team
In: >

  2. Vijay Curious M.Com
    This answer was edited.

    Fictitious assets are not actually assets. They are expenses/losses not written off in the year in which they are incurred. They do not have any physical presence. Their expense is spread over more than one accounting period. A part of the expense is amortized/written off every year against the compRead more

    Fictitious assets are not actually assets. They are expenses/losses not written off in the year in which they are incurred. They do not have any physical presence. Their expense is spread over more than one accounting period.

    A part of the expense is amortized/written off every year against the company’s earnings. The remaining part (which is yet to be written off) is shown as an asset in the balance sheet. They are shown as assets because these expenses are expected to give returns to the company over a period of time.

    Here are some examples of fictitious assets:

    • Preliminary expenses.
    • Promotional expenses.
    • Loss incurred on the issue of debentures.
    • Underwriting commission.
    • Discount on issue of shares.

     

    To make it simple I’ll explain the accounting treatment of preliminary expenses with an example.

    The promoters of KL Ltd. paid 50,000 as consultation fees for incorporating the company. The consultation fee is a preliminary expense as they are incurred for the formation of the company. The company agreed to write off this expense over a period of 5 years.

    At the end of every year, the company will write off 10,000 (50,000/5) as an expense in the Profit & Loss A/c.

    The remaining portion i.e. 40,000 (50,000 – 10,000) will be shown on the Assets side of the Balance Sheet under the head Non – Current Assets and sub-head Other Non – Current Assets. 

    Here are the financial statements of KL Ltd.,

    Note: As per AS 26 preliminary expenses are fully written off in the year they are incurred. This is because such expenses do not meet the definition of assets and must be written off in the year of incurring.

    Source: Some fictitious assets examples are from Accountingcapital.com & others from Wikipedia.

     

    See less
    • 0
Rahul_Jose
Rahul_Jose
In: >

  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.

    See less
    • 0
Anushka Lalwani
Anushka Lalwani
In: >

  2. Kajal
    This answer was edited.

    Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods)   ACCOUNTS PAYABLE Accounts payable refers to all short-term liaRead more

    Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods)

     

    ACCOUNTS PAYABLE

    Accounts payable refers to all short-term liabilities of the business that are to be paid. These are usually paid within a duration of  90 days. It includes both Trade payable (goods and services purchased on credit) as well as expenses payable (used but payment not made yet) like rent payable, electricity bill, etc.

    Businesses cannot make every payment on the spot. There can be cases when the business is facing a shortage of funds, can have funds but doesn’t have enough cash (or liquid funds) to make payment or simply doesn’t want to make payment on the spot to reduce its capital requirement.

    So, like us businessmen also purchase goods on credit or use services for which payment is to be made soon. All these are liabilities for the business.

    However, they must be related to the business to be considered as accounts payable.

     

    DEBIT BALANCE OF ACCOUNTS PAYABLE 

    Debit balance of accounts payable means money owed by others. There is Debit balance when

    OVERPAYMENT is made to the creditors or the supplier. It happens when the wrong amount is paid or payment is made twice for the same transaction.

    Suppose you need to pay $10,000 as rent within 30 days. After 25 days you mistakenly made a payment of $12,000.

    In this case,

    • Firstly, you will record the transaction by crediting Accounts payable (as liability increased) by $10,000
    • When payment is made after 25 days, Accounts Payable is debited by $12,000 (as liability decreased)
    • So, there will be a debit balance of $2,000 (which means the creditor owes you) till the creditor returns the excess amount.

     

    PURCHASE RETURN of already paid goods also result in debit balance of Accounts Payable.

    Suppose you bought goods worth $50,000 from Mr A on credit and paid for the same. Later, you returned all the goods because they were defective. Now, there will be Debit balance of Accounts Payable till there is a full refund of $50,000 by Mr A.

     

    How is Accounts Payable Treated Normally?

    Accounts Payable are the current liabilities of the firm and are shown under the head Current Liabilities in the Balance Sheet. Its liability, thus has a credit balance which represents the amount owed by the firm to others. It is credited when increases and debited when decreases.

    For example – Suppose you purchased goods worth $30,000 and agreed to pay after 30 days. So, Accounts payable will be credited by $30,000 and purchases will be debited by $30,000.

    Purchases A/c – $30,000 (debit)

    To Accounts Payable A/c – $30,000

    After 30 days payment is made in cash, which means the liability decreased. So, Accounts Payable A/c will be debited.

    Accounts Payable A/c – $30,00

    To Cash – $30,000

    See less
    • 0
AbhishekBatabyal
AbhishekBatabyalHelpful
In: >

  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).

    See less
    • 0
AbhishekBatabyal
AbhishekBatabyalHelpful
In: >

  2. GautamSaxena Curious .
    This answer was edited.

    The land is a fixed asset and is treated as a long-term asset account.  Explanation The land is a fixed asset which is also referred to as a long-term asset. The fixed assets are those assets that are not expected to be cashed, consumed, last, sold, or written off within one accounting year and areRead more

    The land is a fixed asset and is treated as a long-term asset account. 

    Explanation

    The land is a fixed asset which is also referred to as a long-term asset.

    The fixed assets are those assets that are not expected to be cashed, consumed, last, sold, or written off within one accounting year and are purchased for long-term use. The fixed assets are also called non-current assets and the reason behind it is that current assets are easily converted into cash within one year and they are not.

    Fixed assets are planned by the company to be used for the long term in order to generate income.

    Example- Land, building, furniture, plants & equipment, etc.

     

    Why is land an asset?

    Although the land is not depreciated, it is still considered to be an asset because just like other assets the business spends its own money to acquire it.

    It can also be used by the business for different operations and it doesn’t create any liability for the business. Instead, reselling the land after a few years can help the company earn a huge margin of profit.

     

    Land in the balance sheet

    On the asset side of the balance sheet, the land is stated under the heading long-term assets.

    Balance Sheet (for the year…)

     

    Therefore, the land is a fixed asset and is treated as a long-term asset account.

    See less
    • 0
Bonnie
BonnieCurious
In: >

  2. Ayushi Curious Pursuing CA

    ‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘sRead more

    ‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘surplus’ generally means the surplus amount in the profit and loss A/c or the operating surplus in case of a non-profit organisation, reserves are of many types:

    1. Revenue reserve
    2. Specific reserves
    • Reserves created from shareholder’s contribution
    1. Capital reserve
    2. Secret reserves

    Let’s discuss each of the above:

    1. Revenue reserves:

    Revenue reserve has two different definitions.

    First – Revenue reserves are the reserves that are created out of the profit made by an enterprise in the ordinary course of business. As per this definition, the examples of revenue reserves are:

    • General reserve: There is no restriction on the purpose for which this reserve can be used. It is a free reserve. Generally, this reserve is used to pay dividends.
    • Debenture Redemption Reserve: This reserve is mandatory to be created by law. The purpose is to ensure the timely redemption of debentures.
    • Dividend Equalisation Reserve: This reserve is created to maintain a steady rate of dividend every year even if the enterprise reports loss in any financial year.
    • Capital Redemption Reserve: This reserve can be solely used to issue bonus shares to fill the void created in total capital by redemption of preference shares.
    • Workmen Compensation Reserve: This reserve is created to pay for uncertain compensation that an enterprise may be liable to pay to its employees.
    • Investment Fluctuation Reserve: This reserve is created out of the profit of

     

       Second: Revenue reserve is a reserve from which can be used to any use. It can be the payment of dividends, creation of other reserves or reinvestment in the business. It is another name for general reserve.

    1. Specific reserves

    These are the reserves that are restricted to specific purposes only. These reserves are not free reserves i.e. dividends cannot be declared out of these reserves. However, if in case such reserve is not a statutory reserve, an enterprise can very well use such reserves for other purposes too. Specific reserves can be further classified into two types:

    • Statutory specific reserves: These are reserves that are mandatory to be created to comply with legal provisions applicable to an enterprise. Use of such reserves is restricted to some specific purposes.

    If such reserves are not created whenever applicable or if the amount in such reserves is used for a purpose other than the purpose for which it is created, the enterprise can invite face legal consequences. The examples of statutory reserves are as follows:

    • Capital Redemption Reserve
    • Debenture Redemption Reserve
    • Securities Premium Reserve
    • Non – Statutory specific reserves: It is not mandatory to create such reserves. They are created to meet with specific uncertainties of the future.
    • Workmen Compensation Reserve
    • Investment Fluctuation Reserve

    Important Note: Statutory reserve in the context of insurance companies means the minimum amount of cash and marketable securities to be set aside to comply with legal requirements.

    • Reserves created from shareholder’s contribution

    This is a reserve that is created out of a shareholder’s contribution. Securities premium reserve is the only such reserve that is created out of such shareholder’s contribution.

     

    Securities Premium Reserve: It is a reserve that is created when securities of a company such as shares or debentures are issued at a premium. The share or debenture premium money is created for this reserve. The purposes of which this reserve may be used as per section 52 of the Companies Act, 2013 are as follows:

    • For the issue of fully paid bonus shares.
    • For meeting preliminary expenses incurred by the company
    • For meeting the expense, commission or discount allowed on the issue of securities of the company.
    • In providing premium payable on the redemption of preference shares.
    • For the purchase of its own shares or other securities under section 68.
    1. Capital Reserve:

    Capital reserve is a reserve that is created out of the profit made by an enterprise from its non-operating activities like

    • selling of capital assets(fixed assets) at a profit
    • buying a business at profit (where net assets acquired is more than the purchase consideration)

    This reserve is used to finance long term projects of a company like buying or construction of fixed assets, writing off capital losses( selling of fixed assets at loss).

    1. Secret Reserve:

    A secret reserve is a reserve that exists but its existence is not shown in the balance sheet of an enterprise. An enterprise creates such reserves to hide from its competitor that it is in a better financial position than it appears in its balance sheet. Although the creation of secret reserves is prohibited by law, there are provisions for banking companies to create such reserves.

    See less
    • 0

Most Helping Users

Astha

Astha

Leader
Simerpreet

Simerpreet

Helpful
AbhishekBatabyal

AbhishekBatabyal

Helpful