AccountingQA Latest Questions

Bonnie
BonnieCurious
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  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    There are two types of ledger accounts in the accounting system – temporary and permanent. Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are traRead more

    There are two types of ledger accounts in the accounting system – temporary and permanent.

    Temporary accounts are those whose balances zero out and we do not carry forward balances to the next year. Examples are revenue and expenses accounts or nominal accounts. The balances of such accounts are transferred to the profit and loss account and therefore are not balanced.

    Permanent accounts are those whose balances are carried forward to the next accounting year in form of opening balances. These accounts are balanced and such balances are transferred to the balance sheet. Examples are assets, liability and capital accounts or personal and real accounts.

    Balancing an account means equaling both the debit and the credit side of the account. Generally, there is a difference between the accounts recorded as a carry down balance in the case of permanent accounts and as a transfer balance in the case of temporary accounts.

    Balancing serves as a check to the double-entry rule of accounting.

    Balanced accounts

    As discussed above, the balanced accounts are shown in the balance sheet and the balancing figure for such accounts are carried forward to the next accounting period.

    Unbalanced accounts

    As per the above discussion, the balancing figures of unbalanced accounts are transferred to the profit and loss account and no balances are carried forward to the next accounting period.

    Suppose a company Shine Ltd. has machinery costing 5,00,000 at the beginning of the accounting period and charges depreciation of 10% on the asset. The company also has creditors amounting to 50,000 at the beginning of the period and purchases goods amounting to 30,000 on credit. It has a cash balance of 95,000 at the beginning of the period and earns interest amounting to 10,000.

    Following ledgers would be prepared to record the above entries:

    The above ledgers can be shown as follows:

    The balance of the machinery account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore depreciation account is an unbalanced account.

    The balance of creditors account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore purchases account is an unbalanced account.

    The balance of the cash account will be shown in the balance sheet and therefore it is a balanced account.

    The balance is transferred to the profit and loss account and therefore interest account is an unbalanced account.

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Atreya
AtreyaCurious
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  2. Ishika Pandey Curious ca aspirant

    Definition Goodwill is an intangible asset that places an enterprise in an advantageous position due to which the enterprise is able to earn higher profits without extra effort. For example, if the enterprise has rendered good services to its customers, it will be satisfied with the quality of its sRead more

    Definition

    Goodwill is an intangible asset that places an enterprise in an advantageous position due to which the enterprise is able to earn higher profits without extra effort.

    For example, if the enterprise has rendered good services to its customers, it will be satisfied with the quality of its services, which will bring them back to the enterprise.

    Features

    The value of goodwill is a subjective assessment of the valuer.
    • It helps in earning higher profits.
    • It is an intangible asset.
    • It is an attractive force that brings in customers to the business.
    • It has realizable value when the business is sold out.

    Need for goodwill valuation

    The need for the valuation of goodwill arises in the following circumstances :
    • When there is a change in profit sharing ratio.
    • When a new partner is admitted.
    • When partner retires or dies.
    • When a partnership firm is sold as a going concern.
    • When two or more firms amalgamate.

    Classification of goodwill

    Goodwill is classified into two categories:
    • Purchased goodwill
    • Self-generated goodwill

    Purchased goodwill :

    Is that goodwill acquired by the firm for consideration whether paid or kind?
    For example: when a business is purchased and purchase consideration is more than the value of net assets the difference amount is the value of purchase goodwill.

    Self-generated goodwill

    It is that goodwill that is not purchased for consideration but is earned by the management’s efforts.
    It is an internally generated goodwill that arises from a number of factors ( such as favorable location, efficient management, good quality of products, etc ) that a running business possesses due to which it is able to earn higher profits.

    Methods of valuation

    1. Average profit method
    2. Super profit method
    3. Capitalization method

    Average profit method: goodwill under the average profit method can be calculated either by :
    • Simple average profit method or
    • Weighted average profit method

     

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Sandy
Sandy
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Fictitious AssetsFinancial Statements
  2. Nistha Pursuing B.COM H (B&F) and CMA
    This answer was edited.

    Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expeRead more

    Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expenses are amortized over a period of time.

    These assets do not have any realizable value except for the cash outflow. These are created to delay the recognition of the expense and defer it to future periods.

    Fictitious assets actually qualify as an expense but are treated as assets only for the fact that they are expected to give returns over a course of more than one year. Examples are Advertisement expenses, preliminary expense, etc.

    Treatment

    Fictitious assets are shown on the assets side of the balance sheet under the head miscellaneous expenditure. A part of these expenses are shown in the profit and loss statement and the remaining amount is carried forward to the following years.

    For example, a company Timber Ltd. incurs expenses relating to advertisement of its products worth 8,000,000 and this advertisement campaign can earn revenue for the company for around 10 years. Hence, such expense of 8,000,000 would be amortized over a period of 10 years.

    For the first year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 7,200,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet.

    For the second year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 6,400,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet. And so on.

    We can say that fictitious assets are deferred revenue expenditures as well as intangible assets. But goodwill, etc are not fictitious assets. Hence, all fictitious assets are intangible assets but all intangible assets are not fictitious assets.

    Common fictitious assets that could generally be seen are:

    • Advertisement expenses
    • Preliminary expenses
    • Discount allowed on the issue of shares
    • Loss incurred on issue of debentures
    • Underwriting Commission
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Manvi
Manvi
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External Users
  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    External users are people outside the business or entity who use accounting information. They do not have a direct link with the organization but can influence or can be influenced by the organization's activities. For example - Tax Authorities, Banks, Customers, Trade Unions, Government, Investors,Read more

    External users are people outside the business or entity who use accounting information. They do not have a direct link with the organization but can influence or can be influenced by the organization’s activities.

    For example – Tax Authorities, Banks, Customers, Trade Unions, Government, Investors, or Creditors.

    External Users:

    • Investors – Investors are interested in the past performance and future earnings of the business. They want to track the performance of their business whether it is giving them any benefit or not. A business’s past information helps investors in assessing their investments.
    • Creditors or Suppliers – Some suppliers provide goods and services on credit, and before providing any credit they check the company’s ability to pay. Creditors are interested in the company’s liquidity i.e to see if a company can fulfill short-term obligations.
    • Customers – Customers are more interested in a company’s financial statement as they rely on them for goods and services. They check the ability of the company whether it is providing them good quality goods and will continue to provide them in future.
    • Banks – Banks are most likely interested in the liquidity and profitability of the company. They keep track of whether the company can pay the debt when it is due along with interest.
    • Government – The company’s activities are central to the economy and must be met by them. The government controls a company’s actions if they break a law or damage the environment.
    • Environmental agencies – They keep an eye on organizations whether their activities are harming the environment or not.
    • Trade unions – They take an active part in the decision-making process. They want to see the financial statements of the company and want to decide the compensation of the employees they represent.
    • Tax authorities – They determine whether the business has declared the correct amount of tax in its tax returns. They conduct audits of the tax returns to verify them with the accounting records disclosed.

    Here is a summary of external users

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

    Yes, Capital Work in Progress is Tangible Asset. To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets. Capital work in progress is the cost incurred on fixed aRead more

    Yes, Capital Work in Progress is Tangible Asset.

    To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets.

    Capital work in progress is the cost incurred on fixed assets that are under construction as on the balance sheet date. Since the asset cannot be used for operation it cannot be classified as a Fixed Asset.

    For example:

    If an asset takes 1.5 years to be constructed as on 1.4.2020 then on the balance sheet date 31.3.2021, the cost incurred on the asset will be classified as Capital Work in Progress.

    Common examples of Capital Work in Progress include immovable assets like Plant and Machinery, Buildings.

    It is shown under the head Non-Current Assets in the balance sheet. Examples of cost included in Capital Work in Progress can be:

    • Advance payment to the contractor
    • Material used/purchased
    • Cost of labor incurred, etc.

    Since the assets under the head Capital Work in Progress are in the process of completion and not completed, hence they are not depreciable until completed. Once the asset is completed it is moved under the head Fixed Assets.

    Capital Work in Progress is shown in the Balance Sheet as:

     

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Radha
Radha
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(a) Potential investors (b) The owners or managers of the concern (c) Creditors and Lenders (d) Government​

  2. Simerpreet Helpful CMA Inter qualified

    The correct option is (b) and (d) As the internal analysis is done for the internal assessment of the firm, only those persons can carry out the assessment who has access to the internal accounting records of a business firm. As the owners or managers are the members of the top-level management execRead more

    The correct option is (b) and (d)

    As the internal analysis is done for the internal assessment of the firm, only those persons can carry out the assessment who has access to the internal accounting records of a business firm. As the owners or managers are the members of the top-level management executives they can carry out the work of internal analysis. Also, the government agencies can carry out internal analysis as they have been given the statutory powers of doing such works.

    To make it clear, let me explain a little about internal analysis-

    To determine the profitability of various activities and operations or to know the performance of the business concern, the top-level executives along with the management accountant carry out an internal assessment of the financial statements within the concern, this process is known as internal analysis.

     

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Karan
Karan
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Difference BetweenFixed CapitalFluctuating Capital
  2. Radhika
    This answer was edited.

    Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business. Capital Accounts in a partnership firm can be ofRead more

    Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business.

    Capital Accounts in a partnership firm can be of two types:

    • Fixed Capital Account
    • Fluctuating Capital Account

    A fixed Capital Account is one where only non-recurring transactions related to capital accounts are recorded. For example:

    • Capital introduced
    • Capital withdrawn/ Drawings

    For transactions that are recurring in nature like interest on capital, the interest of drawings a separate account called Partner’s Current Account is created.

    Fluctuating Capital Accounts are the ones where there is a single account to record all types of transactions related to the partner’s capital account, whether recurring or nonrecurring.

    Fixed Capital Accounts are usually created in cases where there are numerous recurring transactions and partners want to keep a record of the fixed amount invested in the business by all the partners at any point in time.

    Fluctuating Capital Account is usually created in cases where the number of recurring transactions is not high or partners want to keep a record of the amount due to all the partners in business at any point in time.

    However, the decision to choose what kind of capital account should be implemented in the firm is complete with the partners. They may choose whatever they think is a more suitable fit.

    To summarise the difference between the two following table can be used:

    Fixed Capital Account Fluctuating Capital Account
       
    Non-recurring transactions are recorded. Recurring transactions are recorded.
    Created where the number of recurring transactions is high to maintain a separate record. Created where the number of recurring transactions is low.
    Examples:

    ·       Capital introduced

    ·       Capital withdrawn

    		 Examples:

    ·       Interest on capital

    ·       Interest in drawings

     

     

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Astha
AsthaLeader
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Consignment
  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    Consignment is "goods sent by its owners to his agent for the purpose of sale". In simple language, the word consignment means to send goods to another person for sale on his behalf without transfer of ownership. In accounting terms, consignment is the process where the owner (consignor) transfers tRead more

    Consignment is “goods sent by its owners to his agent for the purpose of sale”. In simple language, the word consignment means to send goods to another person for sale on his behalf without transfer of ownership.

    In accounting terms, consignment is the process where the owner (consignor) transfers the possession of the goods to the agent (consignee) to make a sale on his behalf while the ownership of goods remains with the owner until the sale is made by the agent. In return, the agent receives an agreed percentage of the sum in the form of commission. 

    Generally, there are two parties involved in consignment, those are as follows:

    1. CONSIGNOR: the person who is the owner and sender of goods.
    2. CONSIGNEE: the person who receives goods for sale/resale from the consignor in exchange for a percentage of the sale or on an agreed sum known as commission.

    The relationship between consignor and consignee is that of principal and agent.

    Let me give you a simple example of how consignment works.

    Mr. John (consignor) sends goods to Mr. Jeh (consignee) worth Rs 20,000 to sell these goods at a cost plus 10%. Mr. Jeh agrees to sell these goods on his behalf for a commission of 1% on the sale. Therefore Mr. Jeh sold these goods at the agreed amount i.e Rs 22,000 [20,000+ 10% of 20,000] and charges Rs 220 [1% of Rs 22,000] as commission made on such sale and remit the remaining balance to the owner Mr. John.

    There is a lot of confusion regarding “is consignment the same as the sale of goods?“. The answer is NO.

    The reason what makes it different from the sale is

    a) In sale the ownership gets transferred from seller to buyer but in case of consignment the ownership remains with the consignor until the sale is made by the agent.

    b) In sale the risk gets transferred with the transfer of goods, whereas in consignment the risk remains with the owner till the sale is made.

    c) Also goods once sold cannot be returned on damages /defaults, but in case of consignment goods that come to be faulty can be returned to the consignor.

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Jasmeet_Sethi
Jasmeet_SethiCurious
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  2. Simerpreet Helpful CMA Inter qualified

    Sundry Debtors Sundry Debtors are those persons or firms to whom goods have been sold or services rendered on credit and the payment has not been received from them. In other words, Debtors are the persons or firms from whom the payment is to be received by the business. For Example, Ramen Sold goodRead more

    Sundry Debtors

    Sundry Debtors are those persons or firms to whom goods have been sold or services rendered on credit and the payment has not been received from them. In other words, Debtors are the persons or firms from whom the payment is to be received by the business.

    For Example, Ramen Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ramen because he owes the amount to Ramen.

    Another Example, If goods worth Rs 7000 have been sold to Sid on credit, he will continue to remain as debtor of the business so long as he does not make the full payment.

    Treatment:

    Sundry Debtor is considered as a current asset and hence it is shown on the assets side of the balance sheet under the Current Assets heading.

    Sundry Debtors are not considered as an item of profit and loss because it is not considered as an item of income or expense. However, the items associated with sundry debtors such as bad debts or provision for doubtful debts or bad debts recovered are shown in profit and loss accounts in the debit and credit sides respectively.

    Sundry Creditors

    Sundry creditors are those persons or firms from whom goods have been purchased or services rendered on credit and for which payment has not been made. In other words, Creditors are the person or firms to whom some money has to be paid by the business.

    For Example, Ramen purchased goods from Sam on credit, Ramen did not pay for the goods immediately, so here Ramen is the creditor for Sam because he owes money to Sam.

    Another Example, If Mr. Johnson purchased goods worth Rs 3000 from M/s. Rick & Co. on credit, Mr. Johnson will continue to remain as a creditor of M/s. Rick & Co. as long as the full payment is made by Mr. Johnson.

    Treatment:

    Sundry Creditor is shown in the liabilities side of the balance sheet under the heading Current Liabilities.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. prashant06 B.com, CMA pursuing
    This answer was edited.

    Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft. Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the lRead more

    Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft.

    Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the loan taken from the bank. When there is an overdraft balance the treatment is just the opposite of that of favorable balance.

    Generally for business overdraft occurs when there is immediate or emergency funding for the short term. This can be seen for small and medium-sized businesses. This is considered to be convenient for these businesses because there is no requirement to pay interest on the lump-sum loan, only have to pay interest on the fund you use. Generally linked to an existing transaction account.

    To reconcile this we need to prepare a Bank reconciliation statement. The procedure of preparing BRS under unfavorable conditions is as follows

    • If we start from the cash book balance then “ADD” all the transactions resulting in an increase in the passbook. “DEDUCT” all the transactions that resulted in a decrease in the balance of the passbook. Then the net overdraft balance should be the same as in the passbook.
    • If we start from the balance as per the passbook then “ADD” all the transactions resulting in an increase in the balance of the cashbook and “DEDUCT” all the transactions related to a decrease in the balance of the cash book. The net overdraft balance as per the passbook should reconcile with the cash book.

     

    Let us take one example considering one of the above conditions.

    The cash book of M/s Alfa ltd shows a credit balance of Rs 6,500.

    • A Cheque of Rs 3,500 was deposited but not collected by the bank.
    • The firm issued a cheque of Rs 1,000 but was not presented for payment.
    • There was a debit balance in the passbook of Rs 200 and Rs 400 for interest and bank charges.

     

    Bank Reconciliation Statement

    Particulars Add Deduct
    1. Balance as per cash book 6,500
    2. Cheque issued but not yet presented 1,000
    3. cheque deposited but not yet credited by the bank 3,500
    4. bank and interest charges 600
    Balance as per passbook (overdraft) 9,600
    10,600 10,600
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