AccountingQA Latest Questions

SidharthBadlani
SidharthBadlani
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  2. Ishika Pandey Curious ca aspirant
    This answer was edited.

    Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more

    Definition

    Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.

    However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.

    For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.

    Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.

    For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.

    Meaning as per AS – 29

    Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-

    • Contingent asset

    A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
    Not wholly within the control of the enterprise.

    It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.

    • Contingent liability

    A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
    Not wholly within the control of the enterprise.

    A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
    A reliable estimate of the amount of obligation cannot be made.

    Recognition In Financial Statements

    Contingent assets and liabilities are recognized as follows:-

    • Contingent Assets

    As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.

    It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.

    However, when the realization of income is virtually certain, the related asset no longer remains contingent.

    • Contingent liability

    As per the rules, it is not recognized by an enterprise.

    When recognized?

    Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.

    The assets and the related income are recognized in the financial statements of the period in which the change occurs.

    Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.

    And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.

    A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.

    Disclosure

    Now we will see how contingent assets and liability are disclosed which is mentioned below:-

    • Contingent asset

    These contingent assets are not disclosed in financial statements.
    A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.

    • Contingent Assets

    A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.

     

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Simerpreet
SimerpreetHelpful
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  2. Karishma

    Realisation account  A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more

    Realisation account 

    A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.

    All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.

    If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.

     

    Credit side of realisation account

    • Liabilities: All the liabilities including sundry creditors, outstanding expenses, bills payable, loans and advances, bank overdrafts and cash credit are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred.
      • Accounting entry for this is as follows:

    Liabilities A/c Dr…..

    To Realisation A/c …..

    (All the liabilities transferred to realisation account)

    • Provisions: All the provisions including provision for doubtful debts and provision for taxation are transferred to the credit side of the realisation account.
      • Accounting entry for this is as follows:

    Provision A/c Dr…..

    To Realisation A/c …..

    (All the provisions transferred to the realisation account)

    • Cash and bank A/c: Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.
      • Accounting entry for this is as follows:

    Bank A/c Dr…..

    To Realisation A/c …..

    (Asset sold for cash)

    • Loss on realisation: If the debit side of the realisation account exceeds the credit side, it results in loss then the capital account is debited.
      • Accounting entry for this is as follows:

    Capital A/c Dr…..

    To Realisation A/c …..

    (Being loss transferred to the capital account)

     

    The debit side of the realisation account

    All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.

     

    Format for realisation Account is as under:

    Realisation A/c
    Particulars Amount Particulars Amount
    To Land & Building By Provision for Doubtful Debts A/c
    To Plant & Machinery By Sundry Creditors A/c
    To Furniture By Bills Payable A/c
    To Debtors By Outstanding Expenses A/c
    To Goodwill A/c By Bank Loan, Overdraft, Cash Credit A/c
    To Investment A/c By Bank/ Cash A/c (Assets realized):
    To Bank/ Cash A/c (Liabilities Paid): Land and Building
    Sundry Creditors Plant and Machinery
    Bill Payable Furniture
    Outstanding Expenses Stock
    Bank Loan, Debtors
    Overdraft, Bad Debts recovered
    Cash Credit Investment
    To Bank/ Cash A/c By Partner’s Capital A/cs
    (Realisation Expenses) (assets taken over)
    To Partner’s Capital A/c By Partner’s Capital A/cs
    (Realisation Expenses) (Loss on Realisation)
    To Partner’s Capital A/cs
    (Profit on Realisation)
    Total Total

     

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Nistha
Nistha
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Journal EntrySubscriptionSubscription Received in Advance
  2. Sandy CMA Final
    This answer was edited.

    To start with let me give you a brief explanation of what a subscription is After joining a not-for-profit organization, a member is required to pay a certain amount of money every year at periodical intervals in order to keep his membership activated, such an amount of money is the subscription. FoRead more

    To start with let me give you a brief explanation of what a subscription is

    After joining a not-for-profit organization, a member is required to pay a certain amount of money every year at periodical intervals in order to keep his membership activated, such an amount of money is the subscription.

    For accounting purposes, subscription is always taken on an accrual basis which means the amount which is received during the current year is only taken into consideration.

    Now, Subscription received in advance means the amount of money that has been received during the current year but which relates to the year that is yet to come. In other words, we can say it is the unearned income by the organization.

    It is recurring in nature and liability for the organization as it does not relate to the current year.

    Journal Entry for Subscription received in advance

    Here, the Subscription received in advance is credited to the Subscription account for the current year.

    This is the adjustment entry made during the current year.

    Treatment of Subscription in Financial Statements

    • Receipts and payment account.
    • Income and expenditure account.
    • Balance sheet.

    Receipts and Payment account: In the receipts and payment account, the entire amount of subscription is written on the receipts side. That is to say, subscription amount relating to the previous year, current year, and the year to come (outstanding subscription, current year subscription, advance subscription).

    Income and Expenditure account: In the Income and Expenditure Account, the subscription comes on the Income side. It is shown as

    Here, a subscription received in advance in the current year is deducted to find the actual amount because although the money is received in advance the benefits related to it are yet to be provided by the organization.

    Balance sheet: In the balance sheet, a subscription received in advance comes in the liability side under current liabilities as the benefits related to it are yet to be derived.

    For Example, Lionel club received subscription from its members for the year 2020 as follows-

    • Subscription of 2020 was received in 2019 – 2,000
    • Subscription of 2021 was received in 2020 – 3,000

    The total subscription was received during the year – 10,000

    Here,

    Subscription of 2020 was received in 2019- It is an Outstanding Subscription.

    Subscription of 2021 was received in 2020- It is an advance Subscription.

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Radha
Radha
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Installation
  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    The installation expenses for a new machinery will be debited to the "Machinery A/c". Installation expenses are the expense incurred to bring an asset to a working condition where it can be used. For example, installation charges are incurred on machinery to make it operational. Installation chargesRead more

    The installation expenses for a new machinery will be debited to the “Machinery A/c“. Installation expenses are the expense incurred to bring an asset to a working condition where it can be used. For example, installation charges are incurred on machinery to make it operational.

    Installation charges will be capitalized along with the cost of machinery. It is so because this expense is concerning the machinery and any expense directly related to an asset should be capitalized, as an asset will be with the business for a longer period of time.

    This charge will be incurred only once as a part of bringing the machinery to its working condition, and hence it should be capitalized and should be added to the cost of the machine. The whole amount will be shown in the balance sheet on the asset side as a Fixed Asset.

    This charge will not be shown in Profit and Loss A/c as it reflects all the revenue expenditure incurred in the period.

    Example:

    Starbucks purchased a coffee blending machine for the business purpose for $1,00,000. The installation expense incurred on it to make it operational was $20,000. How will Starbucks record this in the Balance Sheet on 31 December?

    In the Balance Sheet, Starbucks will add the installation expense incurred on the machine to the cost of the machine as it is the cost incurred to make the machine operational for further business use. Hence, the cost of $20,000 will be shown along with the cost of the coffee blending machine ($1,00,000+$20,000=$1,20,000)

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Simerpreet
SimerpreetHelpful
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  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    Let me explain to you in short what is unrecorded assets in the partnership. Basically, these are the assets that are not recorded in the books of accounts but are still present in the business in physical form. These assets are directly credited to the realization account at the time of dissolutionRead more

    Let me explain to you in short what is unrecorded assets in the partnership. Basically, these are the assets that are not recorded in the books of accounts but are still present in the business in physical form. These assets are directly credited to the realization account at the time of dissolution of the partnership firm

    Unrecorded assets are treated in two ways:

    1. Either they can be sold for cash.
    2. Taken over by any of the partners.

    The journal entry for the unrecorded assets sold in cash is as follows:

    Bank A/c                                                                           ……..Dr xxx
                To Realization A/c xxx
    (Being unrecorded assets sold for cash)

    To make the entries more simple for you let me give you a small example

    A partnership firm has decided to dissolve its business. The firm had old furniture which was completely written off. They decide to sell the furniture for Rs 3,000. Here we can see that the firm has decided to realize its furniture by selling them in cash. Therefore the journal entry would be

    Bank A/c                                                                    ……..Dr 3,000
                To Realisation A/c 3,000
    (Being old furniture sold for cash)

    And the journal entry for unrecorded assets taken over by the partner is as follows:

    Partner’s capital A/c                                                      ……..Dr xxx
                To Realization A/c xxx
    (Being unrecorded taken over by the partner)

    For example:

    A partnership firm has decided to dissolve its business. The firm had old furniture which was completely written off. One of the pieces of furniture was taken over by one of the partners for Rs 3,000. Here we can see that the firm has decided to realize its furniture by taking over the partner. Therefore the journal entry would be

    Bank A/c                                                                    ……..Dr 3,000
                To Partnership A/c 3,000
    (Being old furniture taken by partner)

    As realization is a nominal account it debits all expenses and losses while credit all incomes and gains. Therefore when a business treats unrecorded assets either by selling them or is taken over by the partner’s, it brings a certain amount of cash into the business hence Bank A/c and Partner’s capital account is debited in the journal entry and appear on the credit side of the realization account.

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Aadil
AadilCurious
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  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:

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Aadil
AadilCurious
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  2. Rahul_Jose Aspiring CA currently doing Bcom

    A statutory reserve is any reserve that has to be maintained by an Act or law. When it comes to insurance, a statutory reserve is a reserve that an insurance company is legally bound to maintain to ensure that the company is able to meet its policy obligations. In India, as per the Banking RegulatioRead more

    A statutory reserve is any reserve that has to be maintained by an Act or law. When it comes to insurance, a statutory reserve is a reserve that an insurance company is legally bound to maintain to ensure that the company is able to meet its policy obligations. In India, as per the Banking Regulations Act, every banking company has to maintain at least 25% of its net profits as statutory reserves.

    The companies are required to maintain such reserves to guarantee the availability of cash when it is required by the customer. Common examples of statutory reserves are Cash reserve ratio (CSR), Statutory Liquidity Ratio (SLR).

    Treatment

    • Statutory reserves are shown in the Profit and Loss account under the head “appropriations”.
    • It is also shown under the head Reserves and Surplus (Schedule 2) in the Balance Sheet.

    Method

    Rule-Based Approach – The company calculates the amount required by using standard formulas. However, since they are pre-determined formulas, it does not cover all risk determining factors.

    Principle-based approach – This method is used to protect customers and ensure that the company stays solvent. They hold a higher amount of reserves than required after predicting all possible risks.

    Statutory reserves are different from general reserves as general reserves are maintained voluntarily by the company. A company that does not follow statutory requirements will face financial penalties. These reserves are mostly maintained in the form of cash.

    Maintenance of reserves gives confidence to investors that their money is secure. However, funds from these reserves can be used only for specific purposes. They should also maintain such reserves whether or not they earn profits.

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

    Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more

    Negative working capital means the excess of current liabilities over current assets in an enterprise.

    Let’s understand what working capital is to get more clarity about negative working capital.

    Meaning of Working Capital

    Working Capital refers to the difference between current assets and current liabilities of a business.

    Working Capital = Current Assets – Current Liabilities

    It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.

    Items under Current Assets and Current Liabilities

    It is important to know about the items under current assets and current liabilities to understand the significance of working capital.

    Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.

    Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.

    Types of working capital

    Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:

    • Positive (Current assets > Current liabilities)
    • Zero  (Current assets = Current liabilities)
    • Negative (Current assets < Current liabilities)

    Hence, negative working capital exists when current liabilities are more than current assets.

    Implications of having negative working capital

    Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.

    An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.

    The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.

    Current Assets  = 2(Current Liabilities)

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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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Simerpreet
SimerpreetHelpful
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  2. GautamSaxena Curious .
    This answer was edited.

    Ledger posting The process of entering all transactions from journal to ledger is called ledger posting. Each ledger account contains an individual asset, person, revenue, or expense. As we're aware the journal records all the transactions of the business. Posting to the ledger account not only helpRead more

    Ledger posting

    The process of entering all transactions from journal to ledger is called ledger posting. Each ledger account contains an individual asset, person, revenue, or expense. As we’re aware the journal records all the transactions of the business.

    Posting to the ledger account not only helps the proper maintenance of the ledger book but also helps in reflecting a permanent summary of all the journal accounts. In the end, all the accounts that are entered and operated in the ledger are closed, totaled, and balanced.

    Balancing the ledger means finding the difference between the debit and credit amounts of a particular account, it’s done on the day of closing of the accounting year. Sometimes journal entries are made and maintained monthly. Therefore, the balancing of the ledger’s date depends on the business’ closing date and the way a business maintains its books of accounts.

    Example

    Mr. Jack Sparrow decided to start a new clothing business. On 1st April 2021, He started the business with a total sum of $100,000 cash. He purchased furniture, including desks and shelves for $25,000. Mr. Sparrow then decided to start with women’s clothing and purchased a complete range of clothes from the wholesale market for $50,000. On the next day, he sold all the stock for $75,000. He also hired a worker for $5,000.

    We need to journalize these transactions and post them into the ledger account.

     

    Journal Entries

     

    Ledger Accounts

    Cash A/c

     

    Capital A/c

     

    Purchases A/c

     

    Sales A/c

     

    Salary A/c

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