AccountingQA Latest Questions

A_Team
A_Team
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Cash Stock in trade Furniture Advance Payment

  2. GautamSaxena Curious .
    This answer was edited.

    The correct option is 3.) The term current assets do not include furniture. Explanation A current asset is any asset that can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within one accounting year. Thus, current assets don't have life for morRead more

    The correct option is 3.)

    The term current assets do not include furniture.

    Explanation

    A current asset is any asset that can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within one accounting year. Thus, current assets don’t have life for more than a year.

    Example: Cash and cash equivalent, stock, liquid assets, etc.

    Furniture is expected to have a useful life for more than a year and they are bought for a long term by a company.

    Cash is a more liquid asset of a company making it a more “current” asset. It requires no conversion and is spendable as it is. Thus, making it a vital current asset.

    Stock in trade is a current asset because it can be converted into cash within one year and all the stock in trade of a company is expected to be sold within one accounting period and should not stick for a longer period.

    Advance payment, on the other hand, is an amount paid to an employee, essentially a short-term loan by the employer. It’s recorded on the asset side of the balance sheet and as these assets are used, they are expended and recorded on the income statement for the period in which they are incurred, making it a short-term asset ending within an accounting year.

    Thus, on the asset side of the balance sheet, we can clearly see which current assets are and which are not included in the current asset

    Balance Sheet (As at…..)

    Therefore, (3) Furniture, won’t be included in current assets.

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

    Overview And Definition Shareholder's equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity. For example – retainRead more

    Overview And Definition

    Shareholder’s equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity.

    For example – retained earnings, common stock, etc.

     

    Liabilities

    Liabilities are the obligation or something a company or a person owes to another party. normally it is in cash form but it can be in other forms also.

    And these liabilities need to be settled as per the terms agreed upon by the party.

    For example – taxes owned, trade payables, etc.

     

    Assets

    Assets are those which has ownership of a company and controlling power with the company. In other words, Or something which will generate profits today and in the future.

    For example – cash, building, etc.

     

    Conclusion

    Therefore I can conclude that stockholders’ equity refers to the assets remaining in a business once all liabilities have been settled, or I can say as it is not the same thing as the company’s assets. Assets are what the business owns.

     

    How to Calculate Shareholders’ Equity

    Shareholders’ equity is the owner’s claim when assets are liquidated, and debts are paid up. It can be calculated using the following two formulas:

    Formula 1:

    Shareholders’ Equity = Total Assets – Total Liabilities

     

    Formula 2:

    Shareholders’ Equity = Share Capital + Retained Earnings – Treasury Stock

    Let me now take the example of a small business owner who is into the business of chairs in India.

    As per the balance sheet of the proprietorship firm for the financial year ending on March 31, YYYY, the following information is available. Determine the shareholders’ equity of the firm.

    Given, Total Assets = Net property, plant & equipment + Warehouse premises + Accounts Receivable + Inventory
    = Rs (1000,000 + 300,000 + 500,000 + 800,000)

    Total Assets = Rs 2600,000

     

    Again, Total liabilities = Net debt+ Accounts payable + Other current liabilities

    = Rs (700,000 + 700,000 + 600,000)

     

    Total Liabilities = Rs 2,000,000

    Therefore, the shareholders’ equity of the firm as on March 31, YYYY, can be calculated as,

    = Rs (2600,000 – 2,000,000)

     

    Shareholders’ Equity = Rs 600,000

    Therefore, the shareholders’ equity, as of March 31, YYYY, stood at Rs 600,000.

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

    Definition Net profit is defined as the excess of revenues over expenses during a particular period. For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits. When the result of this computationRead more

    Definition

    Net profit is defined as the excess of revenues over expenses during a particular period.
    For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits.

    When the result of this computation is negative it is called a net loss.

    Net profit may be shown before or after tax.

    Formula :
    Total Revenues – Expenses
    Or
    Total Revenues – Total Cost ( Implicit And Explicit Cost )

    Liabilities

    It means the amount owed (payable) by the business. liability towards the owners ( proprietor or partners ) of the business is termed an internal liability.

    On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability. For example – taxes owned, trade payables, etc.
    For example creditors, bank overdrafts, etc.

    Assets

    An asset is a resource owned or controlled by a company and will benefit the business in current and future periods.
    In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.

    For example – cash, building, etc.

    Why debtors are treated as a liability?

    Now let me explain to you why net profits are treated as a liability and not as an asset because of the following characteristics :

    • Net Profit shows the credit balance of the Profit And Loss Account.

    • It is treated directly in the balance sheet by adding or subtracting from the capital.

    • Net Profit is a measure of the profitability of the company after taking into consideration all costs incurred during the accounting period.

    • Net profit is the last line in an income statement and is the figure that concerns most people who use such a statement.

    • Net income is reported on the income statement (profit and loss account) and forms a key indicator of a company’s performance.

    Importance Of Net Profit

    Now I will let you know the importance of net profit which is as follows :

    Owners
    Net profit allows owners to calculate the tax to be paid and how much earnings need to be distributed to the business owners.

    Investors
    Investors need to see net profit as they need to access the risk before investing they basically judge the revenue-generating capacity of a firm based on net profit.

    Competitors
    For making the comparison competitors tend to look at the net profit of the company to know how are they performing in the industry so that they can build themselves strong.

    Creditors
    Creditors look at the net profit for the purpose of obtaining business loans or we can say that determines a prospective debtor’s capacity to pay future debts.

    Conclusion

    Now after the above explanation, we can say that,
    Net Profit is shown on the liability side as it belongs to shareholders so the company has to give it to shareholders so we are showing it under the liability side.

    Net Profit with respect to the company is a liability as it has to pay it to shareholders.

    Net Profit with respect to shareholders is an asset.

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Aadil
AadilCurious
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  2. Aditi
    This answer was edited.

    Deferred Tax Liability A deferred tax liability represents an obligation to pay taxes in the future. These taxes are owed by a company but are not due to be paid until a future date. Companies that incur such an obligation prepare and maintain two financial reports every year: a tax statement and anRead more

    Deferred Tax Liability

    A deferred tax liability represents an obligation to pay taxes in the future. These taxes are owed by a company but are not due to be paid until a future date.

    Companies that incur such an obligation prepare and maintain two financial reports every year: a tax statement and an income statement.

    This is because companies maintain their books as per book accounting rules (GAAP/IFRS), but they have to pay taxes according to tax accounting rules, and they each have to follow their own guidelines.

    For example, a tax statement follows the cash basis of accounting, and an income statement follows the accrual basis of accounting.

    Companies calculate their profit as per the accounting rules as well as tax laws known as accounting income and taxable income, respectively. Some differences arise due to the application of different provisions of law.

    These temporary differences are accounted for, recognized, and carried forward in the books of accounts and create deferred tax.

     

    Example

    Here is an example of deferred tax liability.

    In the given example, tax as per income statement is 70,000, whereas as per tax statement it is 56,000. This temporary difference is termed as deferred tax liability of 14,000.

    When accounting income is more than taxable income, it creates Deferred Tax Liability. It will be adjusted in the books of accounts during one or more subsequent year(s).

     

     

    How Does it Arise?

    There are several instances under which a company creates a deferred tax liability. Some other instances are:

    Depreciation Methods

    • One of the most common reasons for deferred tax liability is when a company uses different depreciation methods in the Income and Tax Statement.
    • Assets are depreciated by calculating the straight-line method in the Income Statement, while the written-down value method is used in the Tax Statement.
    • Since the straight-line value method produces lower depreciation when compared to the WDV method, accounting income is temporarily higher than taxable income.
    • The company recognises deferred tax liability as this difference between accounting income and taxable income.

    Treatment of Revenue & Expenses

    • Deferred tax liability can also arise when there is a difference in the way revenue and expenses are treated in books of accounts.
    • As mentioned earlier, accounting rules follow the accrual basis of accounting while tax laws follow the cash basis of accounting.
    • Meaning in the tax statement, income and expenses are recorded when they are received or paid, not when they are incurred or realised.
    • This difference in the treatment of revenue and expenses creates deferred tax liability.

     

     

    Impact on Financial Statements

    Recognising deferred tax liability and its subsequent effect on the company’s financial statement is important as it simplifies the process of auditing and analysing financial reports.

    Balance Sheet

    • Deferred tax liabilities are recorded on the liability side of the balance sheet under non-current liabilities.

    Cash Flow Statement

    • The deferred tax liability is added back to the net income in calculating cash flow from operating activities to show the actual cash flow.
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Bonnie
BonnieCurious
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Calls in AdvanceJournal Entry
  2. Manvi Pursuing ACCA
    This answer was edited.

    Journal Entry for Calls in Advance  Calls in advance mean excess money received by the company than what has been called up. Calls in advance are treated as Current Liability and shown in the Balance Sheet on the liability side. Journal Entry will be : Here we will "Debit" Bank A/c as it will increaRead more

    Journal Entry for Calls in Advance 

    Calls in advance mean excess money received by the company than what has been called up. Calls in advance are treated as Current Liability and shown in the Balance Sheet on the liability side.

    Journal Entry will be :

    Here we will “Debit” Bank A/c as it will increase assets of the company and “Credit” Calls in Advance A/c because it will increase the company’s current liabilties.

    For Example:

    Mr.Z shareholder of ABC Ltd was allotted 2,000 equity shares of Rs.10 each. He paid call money at the time of allotment.

    On Application Rs 5
    On Allotment Rs 2
    On First and final call Rs 3

     

    Journal Entry is as follows:

    Here, the company received an excess amount of Rs.6,000 (2,000*3) from a shareholder Mr.Z who paid the call money in advance. ABC Ltd will record this under Calls in Advance A/c. While passing journal entry ABC Ltd will debit its Bank A/c by Rs.6,000 and credit calls in advance account by Rs.6,000.

    When share calls are called up, calls received in advance are adjusted. The company will hold only the required amount which will make allotted shares fully paid.

    Once the amount is transferred to relevant call accounts, calls in advance account will be written off.

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Naina@123
Naina@123
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  2. Radha M.Com, NET
    This answer was edited.

    The rate of depreciation on a car as per the Income Tax Act depends upon the purpose for which it has been purchased and the year on which it was acquired. As per the Income Tax Act, cars come under the Plant and Machinery block of assets. The Act classifies cars into two categories, Group 1 - MotorRead more

    The rate of depreciation on a car as per the Income Tax Act depends upon the purpose for which it has been purchased and the year on which it was acquired.

    As per the Income Tax Act, cars come under the Plant and Machinery block of assets.

    The Act classifies cars into two categories,

    • Group 1 – Motor cars other than those used in the business of running them on hire.
    • Group 2 – Motor taxis used in the business of running them on hire.

     

    Group 1:

    1. If the motor car is acquired and put to use on or after 23rd August 2019 but before 1st April 2020, then the rate applicable is 30%.
    2. If the motor car is acquired and put to use on or after 1st April 1990, then the rate applicable is 15%. (All the cars which are not covered under the category (1) comes under this category.)

     

    Group 2:

    1. If the motor taxi is acquired and put to use on or after 23rd August 2019 but before 1st April 2020, then the rate applicable is 45%.
    2. The rate applicable for motor taxis not covered under category (1) is 30%.

     

    Here is a summarised version of the rates applicable to cars,

     

    The rates can also be found on the Income Tax India website.

     

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Manvi
Manvi
In: >

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

    Bad Debt is the amount that is irrecoverable from the debtors. It is the portion of the receivables. It includes two accounts “Bad Debts A/c” and “Debtors A/c or Accounts Receivable A/c”. The amount cannot be recovered by the debtor for reasons like the debtor is no longer in the position to pay offRead more

    Bad Debt is the amount that is irrecoverable from the debtors. It is the portion of the receivables. It includes two accounts “Bad Debts A/c” and “Debtors A/c or Accounts Receivable A/c”.

    The amount cannot be recovered by the debtor for reasons like the debtor is no longer in the position to pay off the debt or has become insolvent.

    There are two methods to write off bad debts:

    1. Direct Method
    2. Allowance for Doubtful Debts

     

    1. Direct Method: In this method, the amount of bad debts is directly deducted from the total receivables and the second effect is transferred to the debit side of Profit and Loss A/c as an expense.

    The journal entry for bad debts as per modern rules of accounting is as follows:

    Bad Debts A/c Debit Increase in expenses
          To Accounts Receivable A/c Credit Decrease in assets
    (Being bad debts written off )

     

    Journal entry for transferring bad debts to profit and loss account:

    Profit and Loss A/c Debit
          To Bad Debts A/c Credit
    (Being bad debts transferred to profit and loss a/c )

     

    For example, A Ltd had a total receivable of Rs.2,50,000 and bad debts for the period amounted to Rs.10,000.

    Here, the journal entries will be:

    Bad Debts A/c Debit 10,000
          To Accounts Receivable A/c Credit 10,000
    (Being bad debts written off )

     

    Profit and Loss A/c Debit 10,000
          To Bad Debts A/c Credit 10,000
    (Being bad debts transferred to profit and loss a/c )

     

     2. Allowance for Doubtful Debts:  In this method allowance is the estimation of the debts which is doubtful to be paid. The company creates a reserve for such debts which are uncollectible.

    Firstly, the company will create a reserve which will be based on the accounts receivable. The journal entry will be:

    Bad Debts A/c Debit
          To Allowance for Doubtful Debts A/c Credit
    (Being allowance for doubtful debts created)

     

    When a specific receivable is uncollectible it will be charged as an expense, and Allowance for Doubtful Debts will be “Debited” and Accounts Receivable will be “Credited”.

    Allowance for Doubtful Debts A/c Debit
                  To Accounts Receivable A/c Credit
    (Being bad debts written off)

    For example, Mr.B sold goods worth Rs.15,000 to Mr.D. He creates an allowance of Rs.15,000 in case Mr.D fails to pay the amount. At the end of the period, Mr.D defaults and does not pay the debt.

    In this case, Mr.B will first record the journal entry for allowance and then will write off Mr.D’s account.

    Bad Debts A/c 15,000
          To Allowance for Doubtful Debts A/c 15,000
    (Being allowance of Rs.10,000 created for doubtful debts)

     

    Allowance for Doubtful Debts A/c 15,000
                  To Mr.D’s A/c 15,000
    (Being Mr.D’s account written off)
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