AccountingQA Latest Questions

Pooja_Parikh
Pooja_Parikh
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  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    Depreciation is an accounting method that is used to write off the cost of an asset. The company must record depreciation in the profit and loss account. It is done so that the cost of an asset can be realised over the years rather than one single year. Furniture is an important asset for a businessRead more

    Depreciation is an accounting method that is used to write off the cost of an asset. The company must record depreciation in the profit and loss account. It is done so that the cost of an asset can be realised over the years rather than one single year.

    Furniture is an important asset for a business. As per the Income Tax Act, the rate of depreciation for furniture and fittings is 10%. However, for accounting purposes, the company is free to set its own rate.

    JOURNAL ENTRY

    Journal entry for depreciation of furniture is:

    Here, depreciation is debited since it is an expense and as per the rules of accounting, “increase in expenses are debited”. Furniture is credited because a “ decrease in assets is credited”, and the value of furniture is reducing.

    TYPES OF DEPRECIATION

    Furniture can be depreciated in any of the following ways:

    • Straight-Line Method – It is calculated by finding the difference between the cost of the asset and its expected salvage value, and the result is divided by the number of years the asset is expected to be used.
    • Diminishing Value Method – It is calculated by charging a fixed percentage on the book value of the asset. Since the book value keeps on reducing, it is called the diminishing value method.
    • Units of Production

    For accounting purposes, the two many methods used for depreciating furniture is the straight-line method and the diminishing value method. However, for tax purposes, they are combined into a block of furniture, where the purchase of new furniture is added and the sale of furniture is subtracted and the resulting amount is depreciated by 10% based on the written downvalue method.

    EXAMPLE

    If a company buys furniture worth Rs 30,000 and charges depreciation of 10%, then by straight-line method, Rs 3,000 would be depreciated every year for 10 years.

    Now if the company decided to use the diminishing value method (or written down value method), then Rs 3,000 (30,000 x 10%) would be depreciated in the first year, and in the second year, the book value of the furniture would be Rs 27,000 (30,000-3,000). Hence depreciation for the second year would be Rs 2,700 (27,000 x 10%) and so on.

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Anushka Lalwani
Anushka Lalwani
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  2. GautamSaxena Curious .
    This answer was edited.

    Interest on drawings Drawings refer to the money withdrawn by owners/partners for personal use from the business. The drawings, in accounting terms, can be of any type. It can be cash withdrawn from business or furniture or car etc. Drawings are money or assets that are withdrawn from a company by iRead more

    Interest on drawings

    Drawings refer to the money withdrawn by owners/partners for personal use from the business. The drawings, in accounting terms, can be of any type. It can be cash withdrawn from business or furniture or car etc. Drawings are money or assets that are withdrawn from a company by its owners for personal use and must be recorded as a reduction of assets. It’s paid back to the business with some interest.

    Interest on drawings is an income for the business and reduces the capital of the owner. Interest on drawings is the amount of interest paid by the partners, calculated concerning the period for which the money was withdrawn.

    • It’s an income for the business. Hence, credited to P&L Appropriation A/c.
    • It’s an expense for the owner/partner. Therefore, debited to owner’s/partner’s capital a/c
    • Interest on drawings is charged to the partners only when there is an agreement made among the partners in this regard or if it is mentioned in the Partnership Deed.

    Formulae for Interest on drawings

    There are three formulae used for calculating the interest on drawings. They are:

    1. Simple Method: In this method, as the name suggests, the amount of interest on drawings is calculated simply for the time the amount has been utilized.

    Interest on Drawings = Amount of drawings × Rate/100 × No. of Months/12 

    2. Product Method: This method is used when-

    • Drawings are made of unequal amounts at irregular intervals of time. Then this formula is used-

    Interest on Drawings = Total of Products × Rate/100 × 1/12

    • When drawings are made of equal amounts at regular/equal intervals of time. Then interest on drawings can be calculated on the total of the amount drawn, for the average of the period applicable to the first and last installment.

    Interest on Drawings= Total amount of drawings × Rate/ 100 × Average Period/12

    Also, note-

    Average Period = (No. of months left after first drawings+ No. of months left after last drawings)/2

    Example:

    Harish withdrew equal amounts at the beginning of every month for 9 months. Total drawings amounted to ₹6,000. Calculate the interest on drawings charged if the rate was 6% p.a.

    Solution:

    Average period = (No. of months left after first drawings+ No. of months left after last drawings)/2 = (9+1)/2 = 5 months 

    Interest on Drawings = Total of drawings × Rate/100 × 5/12

                                            = ₹ 6,000 × 6/100 × 5/12
                                            = ₹ 150.

    Journal entry for interest on drawings: 

    Interest transferred to Profit & Loss A/c:

     

     

     

     

     

     

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ShreyaSharma
ShreyaSharma
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  2. GautamSaxena Curious .
    This answer was edited.

    Subsidiary Books Introduction & Definition In large business organizations, it is practically impossible to keep a record of every single business affair, while neglecting them and not recording them wouldn't be an ideal choice, this is where subsidiary books come into the role. As we were introRead more

    Subsidiary Books

    Introduction & Definition

    In large business organizations, it is practically impossible to keep a record of every single business affair, while neglecting them and not recording them wouldn’t be an ideal choice, this is where subsidiary books come into the role. As we were introduced to the basics of accounting in the 11th standard, we learned about different elements like journals, ledgers, trial balances, etc. It is practically impossible for a business to keep track of every single affair just through only those elements. Thus, the Subsidiary book is the next step here.

    Subsidiary books are the books of original entry. They are a dedicated form of books that maintains an analysis of a specific account. It records financial transactions of a similar nature. They are sub-division of a journal.

    In big business organizations, it’s very hard for a bookkeeper or accountant to record all the transactions in one journal and post them into various accounts.  This is where special purpose books or subsidiary books may be required for more efficient bookkeeping. They are a subdivision of journals and for every type of transaction, there is a separate book.

     

    Types of Subsidiary Books

    There are eight types of subsidiary books that are required for recording transactions. The list of various subsidiary books is as follows:

    1. Cash Book
    2. Purchase Book
    3. Sales Book
    4. Purchase Return Book
    5. Sales Return Book
    6. Journal Proper
    7. Bills Receivable Book
    8. Bills Payable Book

     

    Types of Subsidiary Books

    Now, we’ll be taking a closer look at each and every subsidiary book.

     

    Cash Book

     The cash book is the most important subsidiary book, it’s a book of a prime entry recording all the cash spent or received by the business, either in cash form or from the bank. In simple words, recording all the transactions made by the business.

    It is of three types i.e single-column cash book, double-column cash book, and triple-column cash book. As the name indicates, the column of cash, bank, and discount increases/decreases as per the column of the cash book stated.

    Format 

     

    Note: this is a triple-column cash book format, for the double-column cash book format, we remove the discount column from both sides, and for the single column, we may remove the bank column as well.

    Purchase Book

    A purchase book is a subsidiary book that records all the transactions related to the credit purchase in a business. Thereby, the normal purchasing of assets is never recorded in the purchase book.

    The credit purchases are directly recorded in the purchase book from the journals or the source documents. The source document indicates bills payable, invoices, etc.

    Format

     

    Sales Book

    A sales book, similar to a purchase book, is a special book where all the credit sales are recorded. The sales book doesn’t record the transactions related to the normal sale of assets and hence, is a special type of book, just like the purchase book.

    Format

     

    Purchase Return Book

    The purchase return book, also known as the return outwards book, is that book that records the goods that were returned by us to the supplier. Thereby, called purchase return book.

    When the goods are returned, a debit note is issued against every return and hence, recorded in the purchase return book.

    Format

     

     

    Sales Return Book

    The sales return book, also known as the return inwards book, refers to that subsidiary book that records the goods which were returned to us by the customer.

    For every good returned to us, a credit note is issued to the customer. And thus, it is recorded in the sales return book.

    Format

     

     

    Journal Proper

    Just like we recently learned in class 11th about what a journal entry is and how it is made, it’s a little different from the journal proper. Journal proper is a subsidiary book that records all the transactions which are not recorded in other subsidiary books.

    A journal is an original book of entries that records all the business transactions, while a journal proper is a subsidiary book in which all types of miscellaneous credit business transactions are recorded that do not fit anywhere in the other subsidiary books. Its format is the same as the journal entries’ format. Therefore, it’s also known as a miscellaneous journal.

    Format

     

     

     Bills Receivable Book

    The bills receivable book is the book that draws the bills favorable to the business i.e when the goods or services are provided to any customer on credit, they become a debtor, and bills receivable is a written note received from the customer indicating that they formally agree to pay the sum of money owed.

    Therefore, it helps in recording these types of transactions. The sum total of the bills receivable book is posted to the bills receivable account.

    Format

     

     

    Bills Payable Book

    The bills payable book is the subsidiary book that records all the bills that are drawn on the company. The bills payable is drawn on the company when we buy a good/service on credit and agrees to pay the amount to the supplier by signing a written note with the date we agree to pay.

    It’s a liability of the business and the total of the bills payable book is posted on the credit side of the bills payable account.

    Format

     

     

     

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Simerpreet
SimerpreetHelpful
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  2. Razeen_Nakhwa

    Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs vs. when payment is received or made.  The most common accrual accounting examples are sales on credit, purchases on credit, rent paid, electricity expense, depreciation, audit fees, and otherRead more

    Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs vs. when payment is received or made.  The most common accrual accounting examples are sales on credit, purchases on credit, rent paid, electricity expense, depreciation, audit fees, and other such things.

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Astha
AsthaLeader
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CapexCapital ExpenditureOperating ExpenditureOpex
  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Let me first explain the meaning of both the terms CapEx and OpEx Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or imRead more

    Let me first explain the meaning of both the terms CapEx and OpEx

    Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or improve an existing one or maintain the asset in use.

    Capital expenditure is commonly found in the Cash flow statement under Investing activities as Investment in plant, machinery, equipment, etc.

    Operating Expenditure (in short OpEx) are day-to-day expenses incurred by a firm in order to carry its normal business.

    Expenses such as rent, advertisement, inventory costs, etc.

    Operating Expenses are shown in the income statement of the company as expenses incurred during the period.

    For Example: If a company purchases a printer, the printer would be a capital expenditure and the papers used for the printer would be operating expenditure.

    Difference between CapEx and OpEx

    Example 1: A company wants to lease machinery instead of buying it, in this case buying machinery would be capital expenditure, and leasing the machinery would be an Operating expense.

    Example 2: Buying machinery would cost a company for 50000 and leasing the same would cost 35000. So in this case leasing will be more preferred by a company which means operating expenditure would be preferred instead of a capital expenditure.

    From the point of view of tax treatment operating expenditure is more preferred over Capital expenditure because the expenses incurred during the year are deducted during the same year which reduces the tax levied on net income.

    Some real Examples from the Company Amazon

    This is the cash flow statement of Amazon, where the investing activities shows the capital expenditure incurred by the company during the years.

    This is the income statement of Amazon, it shows the operating expenditure incurred by the company during the year.

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

    As per the companies act 2013, the rate of depreciation for cars/vehicles and their useful life is mentioned below  They are categorized by the companies act as follows: when these car/ motor vehicles are owned with no intention to sell within the accounting period and are generally used to generateRead more

    As per the companies act 2013, the rate of depreciation for cars/vehicles and their useful life is mentioned below

     They are categorized by the companies act as follows:

    1. when these car/ motor vehicles are owned with no intention to sell within the accounting period and are generally used to generate revenue. For example, giving cars/motor vehicles on lease or hire purpose.
    2. cars/motor vehicles when used for purposes other than the business of hire. For example, a car is owned for official use.

    Car/motor vehicles are considered as fixed tangible assets. Treatment of these cars/ motor vehicles is similar to those of other fixed assets. The depreciation will be shown as an expense in the profit and loss account and also the value of these assets will be adjusted in the balance sheet.

    Explaining with a simple example:  Mars.Ltd purchased a car for Rs 10,00,000, and use it for its official purpose. Its useful life as per act is taken as 6 years and the rate of depreciation as 31.23% as per the WDV method.

    Therefore depreciation as per WDV is calculated as follows

    Cost of car = Rs 10,00,000

    Residual value = NIL

    Rate of depreciation = 31.23%

    depreciation for first-year = Rs (10,00,000 – NIL)*31.23%

    = Rs 3,12,300

    Calculated depreciation on this car will be shown in the profit and loss account as an expense and the same will be treated under the balance sheet every year. Here is the extract of profit and loss and the balance sheet for the above example.

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Naina@123
Naina@123
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  2. prashant06 B.com, CMA pursuing
    This answer was edited.

    First, let us understand the meaning of a provision of depreciation. It is nothing but the total collection of all the depreciation over the years. This account is not like a normal account but a contra asset account. It is also called accumulated depreciation. Annual depreciation charged is an expeRead more

    First, let us understand the meaning of a provision of depreciation. It is nothing but the total collection of all the depreciation over the years. This account is not like a normal account but a contra asset account. It is also called accumulated depreciation.

    Annual depreciation charged is an expense for the business and hence has a debit balance. Whereas provision for depreciation as a contra asset account has a credit balance.

    The journal entry for provision for depreciation is

    Depreciation A/c                                                      ……….Dr XXX
               To Provision for depreciation XXX

    Explaining the credit nature of this account. As we know that the depreciation is an expense for the business hence as per modern rules “Debit all the expenses and losses and credit all incomes and gains” therefore it is debited whereas the provision of depreciation is contra account it has a credit balance as it reduces the value of assets. So according to modern rule, we know a decrease in assets has a credit balance, hence shown in a negative balance on the balance sheet under long-term assets.

    With the preparation of this account, we do not credit depreciation in the asset account but transfer every year to the accumulated depreciation account, and when assets are disposed of or sold we credit the ‘total’ of the provision on depreciation to the credit of the asset account just to calculate the actual profit or loss on a sale of the asset.

     

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  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).

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Jayesh Gupta
Jayesh GuptaCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares. Now let’s understand the reason behRead more

    Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares.

    Now let’s understand the reason behind it.

    We know preference shares are those shares that carry some preferential rights:

    • Dividend at a fixed rate
    • Right to get repaid before equity shareholders in event of winding up of the company
    • Other rights as specified in the Articles of Associations.

    Also, unlike equity shares, preference shares are redeemable i.e. repaid after a period of time (which cannot be more than 20 years).

    Generally, the creditors of a company have the right to be repaid first. So, in event of redemption of preference shares, the preference shareholders are repaid before creditors and the total capital of the company will but the total debt of the company is unaffected.

    The gap between the debt and equity of the company will further widen and this will also increase the debt-equity ratio of the company. It will be perceived to be a risky scenario by the creditors and lenders of the company because the

    So to protect the creditor and lender, Section 55 of the Companies Act comes to rescue.

    Section 55 of the Companies Act ensure that the creditors and lenders of a company do not find themselves in a riskier situation when the company decides to redeem its preference shares by making it mandatory for a company to either

    • issue new shares to fund the redemption of preference shares

    OR

    • create a capital redemption reserve if it uses profits for redemption

    OR

    • a combination of both

    This will fill up the void created by the redemption of preference shares and the debt-equity ratio will remain unaffected. Keeping an amount aside in Capital Redemption Reserve ensures that such amount will not be used for dividend distribution and capital will be restored because it can be only used to issue bonus shares.

    In this way the debt-equity ratio remains the same, the interest of the creditors and lenders secured.

    Bonus shares are fully paid shares that are issued to existing shareholders at no cost.

    Let’s take a numerical example for further understanding:

    ABC Ltd wants to redeem its 1,000 9% Preference shares at a face value of Rs 100 per share. It has decided to issue 8,000 equity shares @Rs 10 per share and use the profit and reserves to fund the deficit.

    The journal entries will be as follows:

    Working note:                                                                            Rs

    9% preference shares due for redemption (1,000 x 10) – 1,00,000

    Less: Amount of new shares issued (8,000 x 10)           –      80,000

    Amount to be transferred to CRR                                              20,000

    Hence, the reduction of total capital by Rs 1,00,000 due to the redemption of preference shares is reversed by issuing equity shares of Rs 80,000 and creating a Capital Redemption Reserve of Rs 20,000.

     

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Aadil
AadilCurious
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    The term ‘contra’ means  'opposite'. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance. The purpose of the contra revenue account is to ascertain the actuaRead more

    The term ‘contra’ means  ‘opposite’. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance.

    The purpose of the contra revenue account is to ascertain the actual amount of sales and record the items which have reduced the sales.

    These are the contra revenue accounts commonly seen in businesses:

    • Sales return account: This account records the amount of goods sold returned by customers. The journal entry for recording sale return is as follow:

    The total sales return is deducted from the sales in the balance sheet. Though being opposite of the sales account, the sale return account is not an expense account. It is considered an indirect loss as it reduces sales.

    • Sale Discount account: This account records the amount of discount allowed to customers. The journal entry for recording sale discounts is as follows:

    Sales discount is an expense hence it is debited to the profit and loss account.

    Sales returns and sales discounts are shown in the trading and profit and loss account in the following manner:

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