AccountingQA Latest Questions

Jasmeet_Sethi
Jasmeet_SethiCurious
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CreditorsDebtorsDifference BetweenGainProfit
  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    Debtors and Creditors Points of Distinction Debtors Creditors Meaning A debtor is a person or entity that owes money to the other party (the other party is also known as the creditor). A creditor is a person or entity to whom money is owed or who lends money. Nature The debtors will have a debit balRead more

    Debtors and Creditors

    Points of Distinction Debtors Creditors
    Meaning A debtor is a person or entity that owes money to the other party (the other party is also known as the creditor). A creditor is a person or entity to whom money is owed or who lends money.
    Nature The debtors will have a debit balance. The creditors will have a credit balance.
    Receipt of payment The payment or amount owed is received from the debtor. The payment of the amount owed is made to the creditors.
    Nature of account Debtors are account receivables. Creditors are accounts payable.
    Status They are shown under assets in the balance sheet under the head current assets. They are shown as an asset because the amount is receivable from them. They are shown under liabilities in the balance sheet under the head current liabilities. They are shown as a liability because the amount is payable to them.
    Credit / Loan period Debtors are the one who takes a loan or purchase goods on credit and has to pay the money in the agreed time period, with or without interest. Creditors are the ones who provide loans or extend the duration of the credit period.
    Discounts They are the ones who receive discounts. They can offer discounts to debtors.
    Provision for doubtful debts Provision for doubtful debts is created for debtors. No such provision is created for creditors.

     Example:

    Mr. A purchases raw materials from its supplier Mr. D on credit.

    Here for Mr. D, Mr. A will be a debtor because the amount is receivable from him.

    Similarly, for Mr. A, Mr. D will be his creditor because the amount is payable to him.

    Profit and Gain

    Points of Distinction Profit Gain
    Meaning The excess of revenue of a period over its expenses is termed as profit.

    Profit = Total Income-Total Expenses

    		 Gain means profit that arises from incidental events and transactions, such as capital gain.
    Generation It is generated within the operations of a business. It is generated outside the business operation.
    Nature of account Profit calculated will appear in the Profit and Loss A/c. The gain will appear in the income statement.
    Types Gross profit

    Net profit

    Operating profit

    		  

    Capital gain

    Long term capital gain

    Short term capital gain

     

    Example: A company’s sales for the period are $60,000 and expenses incurred are $40,000. Here the profit calculated will be $20,000 because revenue exceeds expenses.

    Profit = Total Income-Total Expenses

    = 60,000 – 40,000

    = $20,000

    Mr. X owned land worth $10,00,000 and after 10 years he sold it at a current market value of $14,00,000. So the gain he earned is $4,00,000. This gain of $4,00,000 will be termed as a capital gain since land is a capital asset.

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Manvi
Manvi
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  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Sales Return is shown on the debit side of the Trial Balance. Sales Return is also called Return Inward. Sales Return refers to those goods which are returned by the customer to the seller of the goods. The goods can be returned due to various reasons. For example, due to defects, quality differenceRead more

    Sales Return is shown on the debit side of the Trial Balance.

    Sales Return is also called Return Inward.

    Sales Return refers to those goods which are returned by the customer to the seller of the goods. The goods can be returned due to various reasons. For example, due to defects, quality differences, damaged products, and so on.

    In a business, sales is a form of income as it generates revenue. So, when the customer sends back those goods sold earlier, it reduces the income generated from sales and hence goes on the debit side of the trial balance as per the modern rule of accounting Debit the increases and Credit the decreases.

    For Example, Mr. Sam sold goods to Mr. John for Rs 500. Mr. John found the goods damaged and returned those goods to Mr. Sam.

    So, here Sam is the seller and John is the customer.

    The journal entry for sales return in the books of Mr. Sam will be

    Particulars Amt Amt
    Sales Return A/c 500
         To Mr John 500

    Treatment in Trial Balance

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

    Personal Accounts: The accounts of persons, firms, companies, etc. are personal accounts. There is a further classification to personal accounts- Accounts of Natural Persons: The transactions relating to individual human beings fall under this category. For Example, accounts of Joseph, Richard, MorrRead more

    Personal Accounts: The accounts of persons, firms, companies, etc. are personal accounts. There is a further classification to personal accounts-

    • Accounts of Natural Persons: The transactions relating to individual human beings fall under this category. For Example, accounts of Joseph, Richard, Morris, etc.
    • Accounts of Artificial Persons: The transactions relating to firms, organizations, companies, institutions, associations, etc. fall under this category. For Example, Oil India Ltd, Symbiosis college, Assam Tea company, etc.
    • Representative Personal Accounts: The transactions relating to certain person or a group of persons, although the name of the concerned person or persons are not mentioned in the account head, such types of accounts come under this head. Such type of accounts generally include outstanding accounts or prepaid accounts. For Example, accounts like wages outstanding, outstanding salary, commission received in advance, salary prepaid, etc.

    Note: When any Prefix or Suffix is used before/ after any nominal account head, such account is classified as Representative personal account under traditional approach.

    For Example, Salary A/c is a nominal account whereas salary outstanding A/c is a personal account as the word outstanding is being used as a prefix to Salary A/c.

    The Accounting rule for Personal Account is –

    Debit the Receiver of the benefit.

    Credit the Giver of the benefit.

    Real Account: The transactions relating to tangible things i.e. the things that can be seen, touched and physically exchanged and the intangible things that cannot be seen, touched but the presence can be felt comes under this category. For Example, tangible things like Cash, goods, building, machinery, etc. and intangible things like goodwill, patent, trademarks, etc.

    The Accounting rule for Real Account is –

    Debit what comes in.

    Credit what goes out.

    Nominal Accounts: The transactions relating to losses, expenses, incomes and gains comes under this category. For Example, Rent paid, wages paid, commission received, interest paid/ received, etc.

    The Accounting rule for Nominal Account is –

    Debit Expenses and Losses.

    Credit Gains and Incomes.

    Some Common Examples under the three heads are

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A_Team
A_Team
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  2. Ayushi Curious Pursuing CA

    The partnership act 1932 does not mention the types of partners specifically. It does have mentions of ‘partner who is minor’ in section 30 and ‘partner by holding out in section 28. But we do come across many types of partners in partnership firms. Following is the list of the types of partners weRead more

    The partnership act 1932 does not mention the types of partners specifically. It does have mentions of ‘partner who is minor’ in section 30 and ‘partner by holding out in section 28.

    But we do come across many types of partners in partnership firms. Following is the list of the types of partners we generally see:-

    1. Active partner: – It is the partner who provides the capital and is also actively involved in the management and daily activities of the firm. Such a type of partner is of utmost importance to the firm. Apart from a share in profit and loss, he is also eligible to draw remuneration from the firm.

     

    1. Sleeping/ Dormant partner: – This type of partner does not participate in the daily workings of the firm nor actively participates in the management of the firm. Such a type of partner has a large sum of capital invested in the firm and shares the profits as well as losses of the firm.

     

    1. Partner by holding out:- If any partner, who by his words or by his conduct, represents himself as a partner of a firm, then he is called a partner by holding out. Such a partner is actually not a partner of the firm and doesn’t receive any share of profit as he has contributed no capital.

    As per section 28, such a partner is liable to any person who has given credit to the firm on             the belief that he is a partner of the firm.

     

    1. Minor partner: – If any person who is less than 18 years of age is admitted into the firm, such partner is known as a minor partner. Such a partner is entitled to the profits of the firm based on his capital but is immune from losses suffered by the firm.

     

    1. Secret partner: – It is a partner of a firm whose membership is kept hidden from the outsiders such as creditors and other third parties. But he is equally liable as other partners for the outside liabilities.

     

    1. Outgoing partner: – A partner who voluntarily leaves the partnership without dissolving the firm is called an outgoing partner or retiring partner. Such a partner is liable to all liabilities incurred before his retirement. But he can be held liable to outside liabilities if he fails to give public notice of his retirement.

     

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Karan
Karan
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Difference BetweenDissolution of FirmDissolution of Partnership
  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be: Admission of a partner Death of a partner Retirement of a partner Dissolution of firm In the event of the above cases, the existing partnership is dRead more

    Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be:

    • Admission of a partner
    • Death of a partner
    • Retirement of a partner
    • Dissolution of firm

    In the event of the above cases, the existing partnership is dissolved and a new partnership is created with the new partners without affecting the firm.

    A new partnership deed is created, in case there is a partnership deed agreed among partners and new profit-sharing ratios among the partners are decided, while the assets and liabilities of the firm remain the same.

    Dissolution of a firm means the firm no longer exists. Various reasons for the dissolution of a partnership firm could be:

    • Mutual decision of partners
    • By the court of law

    A partnership firm is dissolved by a court of law when there has been a non-compliance of law, the firm is engaged in illegal practices, or that the court’s opinion is that it is in the public interest for the firm to be dissolved.

    The partnership is also dissolved with the dissolution of the firm but the converse need not be true.

    When a firm is dissolved, there is a sequence that is followed to pay creditors and partners.

    • First, outside creditors like banks, third party creditors are paid firstly with the cash available with the firm and then by selling the assets.
    • Second, partners who have lent money in the form of a loan to the firm are paid.
    • Lastly, if there is any surplus, partners are paid with the amount of their capital. In case of loss, partners are required to pay from their personal assets.

    Dissolution of the firm can be done by the partners themselves and they could also appoint a third person to do so on the payment of fees, charges, the proportion of surplus, or any contract that has been agreed to.

    To summarize, we can a draw a difference table as follows:

    Dissolution of Partnership Dissolution of Partnership Firm
    The partnership ends but the firm still stands. A partnership firm no longer exists.
    A new partnership deed is created by the mutual agreement of partners. A new partnership firm is created if the partners decide.
    Reasons:

    ·        Admission

    ·        Retirement

    ·        Death

    		 Reasons:

    ·        By court

    ·        Mutual decision of partners
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Jayesh Gupta
Jayesh GuptaCurious
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    A Cash Flow Statement analyzes the effect of various activities in the company on cash and, that is, it shows the inflow and outflow of cash and cash equivalents. A Fund Flow Statement analyzes the financial position of a company by the inflow and outflow of funds. Both the statements are financialRead more

    A Cash Flow Statement analyzes the effect of various activities in the company on cash and, that is, it shows the inflow and outflow of cash and cash equivalents.

    A Fund Flow Statement analyzes the financial position of a company by the inflow and outflow of funds.

    Both the statements are financial statements and are used to analyze the financial performance of the company of two different reporting periods. Both the statements record the inflow and outflow of cash or funds, as the case may be.

    The primary objective of preparing a Cash Flow Statement is to gain an understanding of the changes in the net working capital of the company and to classify the activities in the company under three different heads which helps in better analysis of Financial Statements for management, outsiders, and investors.

    The primary objective of preparing a Fund Flow Statement is to track the movements of funds in the company, as the extent of use of long-term and short-term borrowings, frequency of their procurement, its application, etc.

    The components of the Cash Flow Statement are:

    • Cash Flow from Operating Activities- activities concerning the regular business operations and working capital are classified under this head.
    • Cash Flow from Investing Activities- investment in long-term assets or sale of such assets are considered under this head.
    • Cash Flow from Financing Activities- borrowings that a company makes to fund its operations, their interest payment, and repayment are covered under this head.

    The components of the Fund Flow Statement are:

    Sources of Funds:

    • Owners
    • Outsiders

    Application of Funds:

    • Funds deployed in Fixed Assets
    • Funds deployed in Current Assets

    A sample format of the Cash Flow Statement will be:

    Particulars Amount
    Cash Flow from Operating Activities XXX
    Cash Flow from Investing Activities XXX
    Cash Flow from Financing Activities XXX
    Net Increase (Decrease) in Cash and Cash Equivalents XXX
    Cash and Cash Equivalents at the beginning XXX
    Cash and Cash Equivalents at the end XXX

    A sample format of the Fund Flow Statement will be:

    Particulars Amount
    Sources of Funds XXX
    Funds from Operations XXX
    Sale of Fixed Assets XXX
    Issue of Shares XXX
    Issue of Debentures XXX
    Long Term Borrowings XXX
    Total (A) XXX
    Application of Funds XXX
    Loss from Operations XXX
    Payment of Tax XXX
    Repayment of Loan XXX
    Redemption of Debentures XXX
    Redemption of Preference Shares XXX
    Total (B) XXX
    Net Increase (Decrease) in Working Capital XXX

    To conclude the difference between Fund Flow and Cash Flow Statement will be:

    Cash Flow Statement Fund Flow Statement
    Record of inflow and outflow of cash. Record of sources and application of funds.
    Prepared to analyze cash used in various activities. Prepared to track the movement of funds and their applications.
    Components include:

    • Operating Activities
    • Investing Activities
    • Financing Activities
    		 Components include:

    ·       Sources of Funds

    ·       Application of Funds

     

     

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Aadil
AadilCurious
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  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity.  General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves. General reserve forms a part of the Profit & Loss ApprRead more

    General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity.  General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves.

    General reserve forms a part of the Profit & Loss Appropriation account and is created to strengthen the financial position of the entity and serves as a sources of internal financing. It is upon the discretion of the management as to how much of a reserve is to be created. No reserve is created when the entity incurs losses.

    General reserve is shown in the Reserves & Surplus head on the liability side of the balance sheet of the entity and carries a credit balance.

    Suppose, an entity, ABC Ltd engaged in the business of electronics earns a profit of 85000 in the current financial year and has an existing general reserve amounting to 100000. The management decides to keep aside 20% of its profits as general reserve.

    Then the amount to be transferred to general reserve will be = 85000*20% = 17000.

    In the financial statements it will be shown as follows-

    Now, in the next financial year, the entity incurs losses amounting to 45000. In this case, no amount shall be transferred to the general reserve of the entity and will be shown in the financial statement as follows-

    The creation of general reserve can sometimes be deceiving since it does not show the clear picture of the entity and absorbs losses incurred.

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

    Interest on capital Interest on capital is interest payable to the owner/partners for providing a firm with the required capital to commence the business. It's a fixed return that a business owner is eligible to receive. When the business firm faces a loss, the interest on capital will not be providRead more

    Interest on capital

    Interest on capital is interest payable to the owner/partners for providing a firm with the required capital to commence the business. It’s a fixed return that a business owner is eligible to receive.

    When the business firm faces a loss, the interest on capital will not be provided. It is permitted only when the business earns a profit. Such payment of interest is generally observed in partnership firms. It is provided before the division of profits among the partners in a partnership firm.

    If an owner or partner introduces additional capital to the business, it is also taken into account for providing interest on capital.

    Sample journal entry

    Interest on capital is an expense for business, thus, debited as per the golden rules of accounting, debit the increase in expense, and the owner/partner’s capital a/c is credited as per the rule, credit all incomes and gain.

    As per the modern rules of accounting, we debit the increase in expenditure and credit the increase in capital.

    As we know, as per the business entity concept, business and owner are two different entities and a business is a separate living entity. Therefore, the capital introduced by the owner/partners is the amount on which they’re eligible to receive a return.

    Example:

    Tom is the business owner of the firm XYZ Ltd. He has contributed ₹ 10,00,000 to the business with 10% interest provided to Tom at the end of the year.

    Solution:

    Here interest on capital will be calculated as,

    Interest on capital = Amount invested × Rate of interest × Number of Months/12

    = 10,00,000 × 10% × 12/12

    = ₹ 1,00,000

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Bonnie
BonnieCurious
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  2. Akash Kumar AK
    This answer was edited.

    Debts are of two types one is Good Debt, and another one is Bad debt. Bad Debts The amount which is not recoverable from the debtors is called Bad debt.  It is an uncollectable amount from the organization's customers due to the customer's inability to pay the amount of money taken on credit.  Read more

    Debts are of two types one is Good Debt, and another one is Bad debt.

    Bad Debts

    The amount which is not recoverable from the debtors is called Bad debt.  It is an uncollectable amount from the organization’s customers due to the customer’s inability to pay the amount of money taken on credit.

     

    Example 1

    Mr A borrowed $100 from Mr B for his college fee and agrees to pay in 2 months. After the time period is complete Mr A failed to repay the borrowed amount. This is a  Bad Debt for Mr B.

    Example 2

    XYZ Co. had made a credit sale of $50,000. A debtor who has to pay $1000 has been bankrupted. XYZ co. cannot recover the amount from the Debtor, so it records the irrecoverable amount as a bad debt.

     

    Journal Entry

    In this entry, “Bad debts are written off of Rs. 2000.”

    Bad debt is the amount not recoverable from debtors, which is a loss for the organization.

    Modern Rule

    The Modern rules of accounting for Expenses are “Debit the increase in expenses and Credit the decrease in expenses.”

     

    Golden Rule

    The Golden rules of accounting for expenses and losses are “Debit all expenses and losses, Credit all incomes and gains.”

    Bad Debts A/c Dr. 2,000

    To Debtor’s A/c 2000

     

    Bad debt is treated as a loss for the organization. As per the rule, this should be debited to the profit and loss account.

    Profit and Loss A/c Dr. – 2000

    To Bad Debts A/c – 2000

     

    Instead of passing two separate entries for writing off, we can combine the entries and pass one entry.

    Profit and Loss A/c Dr. 2000

    To Debtor’s A/c 2000

     

    Recovery of Bad debts

    Recovery of Bad debt is the amount received for a debt that was written off in the past. It was considered uncollectable.

    When we write off bad debt, it is recorded as a loss, but the recovery of bad debts is treated as an income for the business.

    It is treated as an income and the recovery of bad debt is shown on the credit side of the Income statement.

     

     

     

    Journal Entry for Recovery of Bad debts

    Bank/Cash A/c Dr. – Amount

    To Bad Debts Recovered A/c – Amount

    Rules applied in the Journal entry are as per the Golden rules of accounting,

    “Cash/Bank A/C” is a real account therefore debit what comes in and credit what goes out.

    “Bad Debts Recovered A/C” is a nominal account therefore debit all expenses and losses, and credit all incomes and gains.

     

    Treatment of “Bad Debt written off of Rs.2ooo.”

    In Trial Balance: No effect

    In Income Statement: It is shown on the debit side as Rs.2000 (loss)

    In Balance Sheet: Rs.2000 shall be deducted from the sundry debtor account.

     

     

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Ishika Pandey
Ishika PandeyCurious
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

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

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

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

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

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

    Why are Creditors treated as a liability?

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

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

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

    Treatment and Importance of Creditors

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

    The significance/importance of creditors is as follows:

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

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

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

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