AccountingQA Latest Questions

AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use. Computation of effective capital is given in Explanation I to Schedule II of the CoRead more

    Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use.

    Computation of effective capital is given in Explanation I to Schedule II of the Companies Act. Schedule II deals with remuneration payable to managers in case of no profit or inadequate profit in the following manner:

    Computation of effective capital is done in the following manner:

    Numerical example:

    ABC Ltd reports its balance sheet as given below:

    We will compute its effective capital for both an investment company and a non-investment company.

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Anushka Lalwani
Anushka Lalwani
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    In a partnership firm, the partners may withdraw certain amounts from the firm for their personal use. Such amounts withdrawn by the partners are called drawings. This amount is usually deducted from their capital. The partners are required to pay an amount as interest, based on the time period forRead more

    In a partnership firm, the partners may withdraw certain amounts from the firm for their personal use. Such amounts withdrawn by the partners are called drawings. This amount is usually deducted from their capital. The partners are required to pay an amount as interest, based on the time period for which the money was withdrawn. This amount is called Interest on Drawings.

    The journal entry for interest on drawings is as follows:

    Since interest on drawings is an income to the firm, it is credited based on the rule that “increase in incomes are credited”. Since the partner has to bear the interest amount, his capital account is debited as a “ decrease in capital is debited”.

     

    FORMULAS

    The basic formula for interest on drawings is:
    Interest on drawings = Amount of Drawings x Rate/100 x No. of months/12

    1. When equal amounts of drawings are withdrawn at the beginning of every month, then
      Interest on Drawings = Total Drawings x Rate/100 x (12+1)/2
    2. When equal amounts of drawings are withdrawn at the end of every month, then the Interest on Drawings = Total Drawings x Rate/100 x (12-1)/2
    3. When the date of the drawing is not specified, it is assumed to be withdrawn evenly. Hence Interest on Drawings = Total Drawings x Rate/100 x 6/12

    The calculations in 1,2 and 3 are done so that drawings can be calculated for the average period.

     

    EXAMPLE

    Jack is a partner who withdrew $20,000 on 1st April 2020. Interest on drawings is charged at 10% per annum. If we have to calculate interest on drawings as of 31st December, then

    Interest on Drawings = 20,000 x 10/100 x 9/12 = $1,500
    (Here, interest on drawings is outstanding for 9 months, that is from April to December)

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Jayesh Gupta
Jayesh GuptaCurious
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  2. GautamSaxena Curious .
    This answer was edited.

    Errors revealed by Trial Balance Trial balance, as we know, is a statement prepared after the ledger, followed by a journal. It has a list of all the general ledger accounts contained in the ledger of a business. Each nominal ledger account either holds a debit balance or credit. It is primarily useRead more

    Errors revealed by Trial Balance

    Trial balance, as we know, is a statement prepared after the ledger, followed by a journal. It has a list of all the general ledger accounts contained in the ledger of a business. Each nominal ledger account either holds a debit balance or credit.

    It is primarily used to identify the balance of debits and credits entries from the transactions recorded in the general ledger in a certain accounting period. The debit and credit sides total are equal in a trial balance.

    Classification of errors in the trial balance

    • Errors of Commission: Errors arising due to wrong posting of a journal entry, a ledger account, wrong totaling of a subsidiary book, or even wrong recording of accounts. Therefore, resulting in trial balance error. E.g business receives an amount on goods sold on credit but it is instead posted to additional capital a/c.
    • Errors of Omission: This occurs when some transactions are fully or partially omitted from books of accounts. A complete omission is a case when the transaction is completely omitted but a partial omission is seen when the transaction is entered in the journal but not posted to the ledger. E.g a cheque worth $4,100 was received from ABC Ltd. but completely omitted. Then the rectification entry shall be passed later on.
    • Compensating Errors: It occurs when the errors are equal in amount and opposite to each other so and so that they cancel each other which further creates no difference in the Trial Balance. E.g Harry’s account is debited to $300 wrongly instead of $400. On the other hand, Liam’s account is credited by $700 instead of $800.
    • Errors of Principles: These are the errors occurring when the entries that are posted are incorrect, violating the accounting policy. E.g when receiving money from debtor then debiting debtor and crediting the amount of money received.

    Some of the common errors

    Some more (commonly seen) errors while preparation of the trial balance:

    Errors of Commission

    1. Addition or totaling mistakes in the trial balance, debit, and credit side.
    2. Wrong totaling of subsidiary books.
    3. Error in the sum total of subsidiary book.
    4. Posting in the wrong account.
    5. Recording a transaction incorrectly in a journal.
    6. Balance wrote on the wrong side of the trial balance.
    7. Error in posting a journal to a ledger.
    8. Posting on the wrong side of the account.

    Errors of Omission

    1. Goods purchased and returned to the supplier may be entered in the purchase returns book but not posted in the debit of the supplier account.
    2. Cash paid to creditors was completely omitted from the recording.

    Compensating Errors

    • Wrong posting of the same amount in another account, which may not be affecting the equalizing of trial balance.

    Errors of Principles

    1. Posting twice to a ledger account.
    2. Balance c/d or balance b/d is written on the wrong side of the ledger account.
    3. Reversal of a journal entry by mistake like, crediting cash and debiting debtor’s a/c.

     

     

     

     

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

    Definition Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business. Or in other words, we can say that the expected realization period is less than the operating cRead more

    Definition

    Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.

    Or in other words, we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.

    For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.

     

    List of current assets

    The list of current assets is as follows:-

    • Cash in hand
    • Cash equivalents
    • Bills receivables
    • Sundry debtors
    • Prepaid expenses
    • Accrued income
    • Closing stock
    • Short-term investments ( marketable securities )
    • Other liquid assets

     

    Now here are a few definitions for the above list of current assets which are as follows:-

    • Cash in hand

    Cash comprises cash on hand and demand deposits with banks.

     

    • Cash equivalents

    Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

     

    • Bills receivables

    It means a bill of exchange accepted by the debtor, the amount of which will be received on the specific date.

     

    • Sundry debtors

    A debtor is a person or entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.

     

    • Prepaid expenses

    Expense that has been paid in advance and benefit of which will be available in the following years or year.

     

    • Accrued income

    Income that has been earned in the accounting period but in respect of which no enforceable claim has become due in that period by the enterprise.

     

    • Closing stock

    Stock or inventory at the end of the accounting period which is shown in the balance sheet and which is valued on the basis of the “ cost or net realizable value, whichever is lower “ principle is called closing stock.

     

    • Short term investment

    Investments that are also known as marketable securities and are held for a temporary period of time i.e, for less than 12 months, and can be easily converted into cash are called short-term investments.

     

    Criteria for classification

    Now let us see the classification of assets in the case of companies as per Schedule III of the Companies act 2013.

    An asset is a current asset if it satisfies any one of the following criteria which are as follows:-

    • It is held primarily for the purpose of being traded.

     

    • It is expected to be realized in or is intended for sale or consumption in the company’s normal operating cycle.

     

    • It is expected to be realized within 12 months from the reporting date.

     

    • It is cash and cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting date.

     

    Here is an extract of the balance sheet showing current assets 

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Simerpreet
SimerpreetHelpful
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  2. Karishma
    This answer was edited.

    Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more

    Debit Balance

    A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.

    Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.

    Credit Balance

    A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.

    Credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.

     

    Debit Balance in the Passbook

    A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. Debit balance in the passbook is also called “Overdraft”.

    All the transactions either debit or credit are recorded in the passbook. When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. It means that an individual or enterprise owes to the bank.

    The overdraft facility given by the bank has a limit i.e. only a certain amount can be withdrawn in excess of the amount deposited and if one avails overdraft facility, interest is also charged by the bank.

    The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s debit balance is a negative balance or unfavourable balance while the passbook’s credit balance is a positive or favourable balance.

    For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $60,000. So here, the passbook will show an overdraft of $10,000 i.e. the debit balance of the passbook. It signifies negative cash flow of the individual and that individual owes $10,000 to the bank.

     

    Credit balance in Pass Book

    On the other hand, when the total amount of all the debit entries in a passbook is less than the total amount of credit entries, it results in a credit balance. It means the amount deposited by a customer is more than the amount withdrawn indicating the positive cashflow in the account.

     

    Reconciliation

    It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.

    Debit Balance Reconciliation

    The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.

    Credit Balance Reconciliation

    The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.

    Conclusion

    The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A debit balance signifies more withdrawals than receipts resulting in an overdraft.

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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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