AccountingQA Latest Questions

Astha
AsthaLeader
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  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    Provisional financial statements are prepared on the basis of past data i.e. for the period which is already over. For example, the bank requested for Q4 financial statement but there were still 15 days left for the quarter to get over. In this case, the business/company will prepare a provisional fRead more

    Provisional financial statements are prepared on the basis of past data i.e. for the period which is already over. For example, the bank requested for Q4 financial statement but there were still 15 days left for the quarter to get over. In this case, the business/company will prepare a provisional financial statement.

    Provisional financial statements can be requested by banks, investors, and large vendors while making decisions regarding business and want current financial statements which can be obtained easily.

    It is prepared with the help of past actual figures on a particular date or before the end of a financial statement. The main purpose of preparing is to show the company’s financial position on a particular date. Items of the provisional financial statement are assets, liabilities, and equity/capital.

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

    Discount received is the reduction in the price of the goods and services which is received by the buyer from the seller. It is an income for the buyer and is credited to the discount received account and credited to the seller/supplier’s account. Journal entry for discount received as per modern ruRead more

    Discount received is the reduction in the price of the goods and services which is received by the buyer from the seller. It is an income for the buyer and is credited to the discount received account and credited to the seller/supplier’s account.

    Journal entry for discount received as per modern rules:

    Creditor’s A/c Debit Decrease in liability
            To Cash A/c Credit Decrease in asset
            To Discount Received A/c Credit Increase in income
    (Being goods purchased and discount received)

    Discount allowed is the reduction in the price of the goods which is granted by the seller to the buyer on prompt payment of their account. It is an expense for the seller and is debited to the discount allowed account and credited to the buyer’s account.

    Journal entry for discount allowed as per modern rules:

    Cash A/c Debit Increase in asset
    Discount Allowed A/c Debit Increase in expense
        To Debtor’s A/c Credit Decrease in asset
    (Being goods sold and discount allowed)

    For example, A Ltd. offers a 10% discount to the customers who settle their debts within two weeks. Mr.B a customer purchased goods worth Rs.20,000.

    According to modern rules, A Ltd will record this sale as:

    Particulars Amt Amt
    Cash A/c                                    Dr. 8,000
    Discount Allowed A/c             Dr. 2,000
                To Mr.B’s A/c 10,000

     

    Mr.B will record this purchase as:

    Particulars Amt Amt
    A Ltd A/c                                    Dr. 10,000
       To Cash A/c 8,000
       To Discount Received A/c 2,000

    For a business, the discount received is an income, and the discount allowed is an expense. In the above example, A Ltd has granted a discount and B is the receiver of the discount. Hence, for A Ltd discount allowed is an expense and for B discount received is an income.

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

    Secondary books of accounts are most commonly known as subsidiary books of accounts or day books. They are prepared to record the same type of journals in an ordered manner in a special book. They are nothing, but special journals. Recording all the journals entries in a single journal and these posRead more

    Secondary books of accounts are most commonly known as subsidiary books of accounts or day books. They are prepared to record the same type of journals in an ordered manner in a special book. They are nothing, but special journals.

    Recording all the journals entries in a single journal and these posting them to different ledgers can be very difficult if the number of transactions is huge.

    So, recording the same type of transactions in a special journal proves to be useful in efficient book-keeping and also information retrieval.

    There are eight subsidiary books:

    1. Cashbook – It is three types. (a) Single column cash book – It records only cash receipts and cash payments. (b) Double column cash book – Apart from cash receipts and cash payments, it also records bank receipts and bank payments. (c) Triple column cash book – It additionally records the discount allowed and discount received.
    2. Purchase book – It records all the credit purchases except the purchase of assets.
    3. Sales book – It records all the credit sales except the sale of assets.
    4. Purchase return book – It records all the transactions related to the return of purchased goods.
    5. Sale return book – It records all the transactions related to the return of goods from customers.
    6. Bills receivable book – It records the particulars of all the bills drawn in favour of the business.
    7. Bills payable book – It records the particulars of all the bills drawn in the name of the business.
    8. Journal proper – It records those transactions which cannot be recorded in any of the above-mentioned books. For example, entry related to depreciation charged on assets.

     

    Also, there are a few more things to know:-

    1. Subsidiary books may look like ledger accounts but they are not ledgers. Ledgers are books of final entry and subsidiary books can be said to be the book of intermediate entry and are not but special journals.
    2. Once transactions are recorded in the subsidiary books, they are then posted to the ledgers.
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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Radhika
    This answer was edited.

    Capital maintenance is a principle that states profit should not be recorded until its cost or capital has been maintained. In other words, profit should not be recognized unless net assets have been maintained. Capital maintenance states that profit recognized is the increase in the value of net asRead more

    Capital maintenance is a principle that states profit should not be recorded until its cost or capital has been maintained. In other words, profit should not be recognized unless net assets have been maintained.

    Capital maintenance states that profit recognized is the increase in the value of net assets. However, there are two exceptions to it:

    • Cash increased because of sale of stock to shareholders
    • Cash decreased because of dividend payout to its shareholders

    It is important because:

    • It protects the interest of shareholders
    • It protects the interest of creditors
    • Accurately analyzing the performance of the company

    Capital maintenance is of two types:

    • Financial Capital Maintenance

    It is measured by the value of assets at the beginning and end of the financial year.

    • Physical Capital Maintenance

    It is measured by the production capacity at the beginning and end of the financial year.

    Capital maintenance is concerned with keeping proper account balances of assets and not the physical assets.

    Inflation is the increase in the economic value of goods due to the lower purchasing power and not an actual increase in the value of assets. So, if the value of an asset is increased due to inflation it does not depict the right picture for the company.

    Hence, if the value of assets increases due to inflation, companies need to adjust the value of assets to assess if capital maintenance has occurred. 

     

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Aadil
AadilCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition. Realization of revenue means when revenue to be earned from the sale of goods or rendering oRead more

    Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition.

    Realization of revenue means when revenue to be earned from the sale of goods or rendering of services or any other activity or source becomes absolute and certain. An item is to be shown as revenue in the books of accounts only after it is realized.

    Realization in case of sale of goods

    Realization occurs in the following situations:

    i) When the goods are delivered to the customer for a certain price

    ii) All significant risks and rewards of ownership have been transferred to the customer and the seller retains no effective control over the goods.

    Let’s take an example. Mr Peter received an order of 500 units of goods from Mr Parker on 1st April. The goods were delivered to Mr Parker on 15Th April and payment for goods was received on 30Th April.

    The realization of revenue from the sale of goods will be considered to have occurred on 15th April because the goods were delivered to the customer on that date. The entry of sale of goods will be entered on this day.

    Realization is not considered to have occurred on 1st April i.e the date of order because the seller had effective control on goods on that date.

    Realization in case of rendering of services

    The realization of revenue from the rendering of services occurs as per the performance of service.

    Now there arise two situations:

    • Multiple acts involved in the performance of service: Here, the revenue is realized proportionately on completion of each act.
    • A Single act involved in the performance of service: Here, revenue is realized only when the service is completely rendered or provided.

    Realization of income from other sources:

    • Interest Income: It is realized on a time proportion basis as per the amount outstanding and rates applicable.
    • Dividends: It is realized when the shareholder’s right to receive is established and when it is declared.

    Realization with regards to other sources of income is considered to have occurred only when there exist no significant uncertainty as to measurability or collectability.

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Bonnie
BonnieCurious
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  2. GautamSaxena Curious .
    This answer was edited.

    Bills Payable Book Bills payable book, also known as a B/P book is a subsidiary or secondary book of account in which transactions relating to bills of exchange are recorded. It includes the recording of bills that are payable by a business. In a business where the number of bills exchanging hands iRead more

    Bills Payable Book

    Bills payable book, also known as a B/P book is a subsidiary or secondary book of account in which transactions relating to bills of exchange are recorded. It includes the recording of bills that are payable by a business.

    In a business where the number of bills exchanging hands is large in number, it is very useful, as it is tough to journalize all the bills drawn. A bills payable account generally has a credit balance as it is supposed to be paid at maturity and be a liability.

    Format for B/P book

    • The person, who draws the bill of exchange, is called a “drawer”.
    • The customer, on whom it is drawn, is called a “drawee” or an “acceptor”.

     

    Bills Payable A/c

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Aadil
AadilCurious
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  2. ShreyaSharma none
    This answer was edited.

    Drawings of goods The drawings of the goods, in a business, take place when the owner/partner of a business withdraws goods for their personal use. It's hence called drawings as it reduces the capital invested by the owner(s). It's also called the withdrawal account. The drawings are generally madeRead more

    Drawings of goods

    The drawings of the goods, in a business, take place when the owner/partner of a business withdraws goods for their personal use. It’s hence called drawings as it reduces the capital invested by the owner(s). It’s also called the withdrawal account.

    The drawings are generally made for cash or stock by the owner/partner and the relevant account is thus reduced causing the adjustment done on the owner/partner’s capital at the cost price.

     

    Journal entry

    The journal entry for the goods withdrawn for personal use will be as follows:

     

    Explanation via rules

    The drawings account is debited because it decreases the balance of the capital account. Whereas, the purchases account is credited as it causes a reduction in the purchases account.

    As per the modern rules of accounting, we credit the decrease in assets, thus, the purchases account is credited. Whereas, the withdrawal account when increased is debited. Therefore, the drawing account is debited here.

    As per the golden rules of accounting, “debit what comes in and credit what goes out.” Hence, the purchase account is credited. And, “if any expense or loss is incurred for the business, the expense or loss account shall be debited“. Thus, the drawing account is debited.

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A_Team
A_Team
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  2. Saurav

    Accrual Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such amount has been paid. An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be furtRead more

    Accrual

    Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such amount has been paid.

    An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be further divided into two parts

     

    Accrual Expense-

    Accrual Expense means any transaction that takes place in a particular period but the amount for it will be paid on a later period.

    For example- If rent of 10,000 for the month of March was paid in April month then this rent will be accounted for in the books in March

    For example- Interest of 1,000 for the month of March of the loan amount of 10,000 paid in April then will be accounted for in the books in March

    These are the following accrued expense

    • Accrual Rent– Accrual rent means the amount for using the land of the landlord is paid at a later period than the period when it is put into use.
    • Accrual Insurance– Accrual insurance means the amount paid as a premium to the insurance company paid on a later period than the period when it is due
    • Accrual Expense- Acrrual expense means the amount for any expense paid on a later period than the period when it pertains to be paid
    • Accrual Wages- Accrual wages means the amount which is paid to employees on a later period than the period when the wages get due
    • Accrual Loan Interest– Loan Interest means the amount of interest on a loan which is paid on a later period than the period when it is due on

     

    Accrual Revenue-

    Accrual Revenue means any transaction that takes place in a particular period but the amount for it will be received in the later period.

    For example- If interest of 10,000 on bonds for the period of March is received in April months then this amount will be accounted for in March. These are the following accrued revenue

    For example- Rent of 10,000 for the month of March received in April month then this rent will be accounted for in the books in March

    • Accrual Income- Acrrual expense means the amount for any income received on a later period than the period when it pertains to be received
    • Accrual Rent– Accrual rent means the amount for using the land of the entity by the other party is received at a later period than the period when it is put into use.
    • Accrued Interest– Accrued interest means the amount of interest received on a later period than the period when it pertains to receive
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Simerpreet
SimerpreetHelpful
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Capital ExpenditureRevenue Expenditure
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    Capital Expense Capital expenses are incurred for acquiring assets including incidental expenses. Such expenses increase the revenue earning capacity of the business. These are incurred to acquire, upgrade and maintain long term assets such as buildings, machines, etc and are non-recurring in natureRead more

    Capital Expense

    Capital expenses are incurred for acquiring assets including incidental expenses. Such expenses increase the revenue earning capacity of the business. These are incurred to acquire, upgrade and maintain long term assets such as buildings, machines, etc and are non-recurring in nature.

    Revenue Expenses

    Revenue expenses are incurred to carry on operations of an entity during an accounting period. Such expenses help in maintaining the revenue earning capacity of the business and are recurring in nature.

    These include ordinary repair and maintenance costs necessary to keep an asset working without any substantial improvement that leads to an increase in the useful life of the asset.

    Suppose, company Takeaway ltd. purchases machinery for 50,000 and pays installation charges of 10,000. Salary of 15,000 is paid to the employees and existing machinery is painted costing 8,000. Here, the cost of machinery 50,000 and installation charges of 10,000 are treated as capital expenditure and the salary of 15,000 and painting cost of 8,000 is treated as revenue expenditure.

    Identification

    Points to categorize an expenditure as Capital or Revenue are as follows:

    • An expenditure that neither creates assets nor reduces liability is categorized as revenue expenditure. If it creates an asset or reduces a liability, it is categorized as capital expenditure.

    For example, a company Motors ltd. purchases furniture for 65,000, repays loans amounting to 1,00,000 and pays salary of 25,000.

    Here the company creates an asset of 65,000 and reduces liability by 1,00,000 as shown below and therefore is considered as capital expenditure.

    However, payment of salaries neither creates assets nor reduces liability. It only reduces profits and therefore is considered as revenue expenditure.

    • Usually, the amount of capital expenditure is larger than that of revenue expenditure. But it is not necessary that if the amount is small it is revenue expenditure and if the amount is large, it is a capital expenditure.

    For example, a company Stars ltd purchases machinery for 1,20,000, furniture for 35,000 and has a rental expense of 80,000.

    Here, the purchase of machinery is capital expenditure since it results in higher expense. However, the purchase of furniture cannot be regarded as a revenue expense and payment of rent cannot be regarded as a capital expense only because the rental expense is higher than the amount expended for the purchase of furniture.

    • Usually, capital expenditure is not frequent and is made at a time, in lump sum. On the other hand, revenue expenditure is paid periodically. However, it is possible that capital expenditure is paid in installments.

    For example, a company Caps ltd. purchases land for 1,00,00,000 on an equal monthly installment basis. Then such payments cannot be considered as revenue expense only because the payments are recurring. Since the installments are paid in lieu of the purchase of land which is a long term asset, the payments will be considered as capital expenditure.

    • Mostly capital expenditures are met out of capital whereas revenue expenditures are met out of revenue receipts. However, payments can be made vice-versa.
    • If an expenditure is incurred by the payer as a capital expenditure, it will remain a capital expenditure even if the amount may be revenue receipt in the hands of the payee.

    For example, a company Marks Ltd. purchases machinery directly from the manufacturer for 50,000. For the manufacturer, the proceeds from the sale of machine are revenue in nature but the amount expended by Marks Ltd. will be categorized as capital expenditure.

    Following conclusion can be inferred from the above explanation:

    *Such transactions may or may not hold true as explained above.

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prashant06
prashant06
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A. Normal wear and tear B. Foreseen obsolescence C. Normal wear & tear & foreseen obsolescence D. Unforeseen obsolescence  

DepreciationFixed Assets
  2. Vijay Curious M.Com
    This answer was edited.

    Depreciation of fixed capital assets refers to C. Normal wear & tear & foreseen obsolescence. Normal wear & tear refers to the damage caused to an asset due to its continuous usage. Even when the asset is properly maintained, wear and tear occurs. Hence, it is considered to be inevitableRead more

    Depreciation of fixed capital assets refers to C. Normal wear & tear & foreseen obsolescence.

    Normal wear & tear refers to the damage caused to an asset due to its continuous usage. Even when the asset is properly maintained, wear and tear occurs. Hence, it is considered to be inevitable and natural.

    For example, Kumar has purchased a car for 25,00,000. After five years he wishes to sell his car. Now the market price of his used car is 12,00,000. This reduction in the value of the car from 25,00,000 to 12,00,000 is because of its usage. This fall in the value of the asset due to usage is known as normal wear & tear.

    In generic terms, obsolescence means something that has become outdated or is no longer being used. Foreseen obsolescence is nothing but obsolescence that is expected.

    In the context of business, whenever the value of an asset falls because it has become outdated or is replaced by a superior version, we call it obsolescence. The fall in the value of the asset due to obsolescence expected by the purchaser of the asset is known as foreseen obsolescence.

    When an asset becomes obsolete it doesn’t mean it is not in working condition. Even when an asset is in good working condition it can become obsolete due to the following reasons:

    • Technology advancement.
    • Change in demand (change in fashion, change in taste and preferences of the consumers, etc.)

     

    For example, before the invention of computers, people used typewriters for getting their paperwork done. With the invention of computers, laptops, etc. it is easier to type as well as save our documents, spreadsheets, etc. Thus typewriters became obsolete with the invention of computers. It has become a technology of the past.

    Here is a summarised version of wear & tear and obsolescence:

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