AccountingQA Latest Questions

Aadil
AadilCurious
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  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Receipts and payment account is a summary of cash transactions prepared at the end of the accounting period from the cash book where the transactions are recorded in chronological order. It is an Asset/ Real Account that records both revenue and capital receipts and payments. It is mainly prepared fRead more

    Receipts and payment account is a summary of cash transactions prepared at the end of the accounting period from the cash book where the transactions are recorded in chronological order. It is an Asset/ Real Account that records both revenue and capital receipts and payments. It is mainly prepared for non-profit organizations and helps in the preparation of final accounts.

    Proforma

    Income and Expenditure Account is an account prepared by not-for-profit organizations to see whether the income of a particular period is sufficient to cover the expenses of that period. If the revenue is more than the expenses, it is known as “Surplus” or “Excess of Income over Expenditure” and if the expenses are more than Income, it is known as “Deficit” or “Excess of Expenditure over Income”. The account is prepared on the accrual basis of accounting i.e. all revenue incomes whether received or not and all revenue expenditures of the period whether paid or not are taken into account. However, in case of surplus, the money is not distributed among the members. Similarly, if there is a deficit it is not borne by the members.

    Proforma

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Bonnie
BonnieCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Fictitious assets On seeing or hearing ‘fictitious’, the words which come to our mind are ‘not true, ‘fake’ or ‘fantasy’. So, fictitious assets are those items that appear on the assets side of the balance sheet but are actually not assets. In substance, fictitious assets are the expenses and lossesRead more

    Fictitious assets

    On seeing or hearing ‘fictitious’, the words which come to our mind are ‘not true, ‘fake’ or ‘fantasy’. So, fictitious assets are those items that appear on the assets side of the balance sheet but are actually not assets.

    In substance, fictitious assets are the expenses and losses that are not completely written off in a financial year and are required to be carried forward to the next financial year.

    The examples of fictitious assets are as follows:

    1. Deferred Advertisement expense
    2. Loss on the issue of debentures.
    3. Debit balance of Profit and Loss account ( Net loss )*
    4. Preliminary expenses.

    Fictitious assets appear on the asset side of the balance sheet as expenses and losses have a debit balance.

    *when the balance sheet is prepared as per Schedule III of Companies Act, the Net loss is shown as a negative figure under the head Reserve and Surplus.

    Intangible Assets

    Intangible assets mean the assets which don’t have any physical existence. They cannot be seen or touched but are assets because they do provide future economic benefits to the business. Like tangible assets (like machinery and building), they can be also created, purchased or sold.

    Like tangible assets are depreciated, intangible assets are gradually written over by amortization over their useful lifespan to account for the economic benefits provided by them.

    Following are the examples of intangible assets:

    1. Goodwill
    2. Brand name
    3. Trademark
    4. Patents
    5. Copyrights

    Intangible assets which are created by the business-like goodwill or brand recognition do not appear in the balance sheet.

    Only acquired intangible assets can be shown in the balance sheet. Like purchased goodwill, patents, trademarks etc.

    Intangible assets also face impairment if their fair value is less than their carrying value after deducting amortization expense. The difference between carrying value and fair value is shown in the Profit and loss A/c as impairment charge and the asset is valued at fair value in the balance sheet.

     

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Radha
Radha
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Interest on investmentTrial Balance
  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    Interest on Investment is to be shown on the Credit side of a Trial Balance. Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return onRead more

    Interest on Investment is to be shown on the Credit side of a Trial Balance.

    Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return on investment (ROI).

    Since interest on investment is an income, it is shown on the credit side of the Trial Balance. This is based on the accounting rule that all increase in incomes are credited and all increase in expenses are debited. A Trial Balance is a worksheet where the balances of all assets, expenses and drawings are shown on the debit side while the balances of all liabilities, incomes and capital are shown on the credit side.

    For example, if Jack bought Corporate Bonds of Amazon, worth $50,000 with a 10% interest on investment, then the accounting treatment for interest on investment would be

    Cash/Bank A/C Dr     5,000
    To Interest on Investment in Corporate Bonds (Amazon) 5,000

    As per the above entry, since interest on investment is credited, it will show a credit balance and hence be shown on the credit side of the Trial Balance. Interest on investment account is not to be confused with an Investment account. Investment is an asset whereas interest on investment is an income.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company. By entity, it means a shareholder may be: An individual Any other company Any other incorporatRead more

    Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company.

    By entity, it means a shareholder may be:

    • An individual
    • Any other company
    • Any other incorporated entity
    • Cooperative society
    • BOI( Body of Individuals)
    • AOP(Association of Persons)
    • Artificial Juridical Person

    The rights of shareholders depend on the type of shareholder one is.

    Types of shareholders

    1.   Equity Shareholders: By the term ‘shareholders’ we usually mean equity shareholders. They are permanent in nature i.e. they are not repaid the money they have invested into the company until the company is liquidated or wound up. Equity shareholders have the following rights:

    • Right to have a share in profits made by the company. The profit made by a company, when distributed to its equity shareholders is known as a dividend.
    • Right to vote on all resolutions to be passed in the Annual General Meeting of a company.
    • Right to get repaid in event of winding up of the company. However, they are paid after meeting the obligations of outsiders and of preference shareholders.
    • Right to transfer ownership of the shares. A shareholder may sell its shares to some willing buyer and cease to be a shareholder of a company.

     

    2. Preference Shareholders: They are shareholders who are given preference regarding:

    • Dividend
    • Repayment at time of winding up

    Unlike equity shareholders, they are not of permanent nature. Preference shares are redeemable i.e. they are to be repaid after a period which cannot be more than 20 years from the date of allotment of such shares (as the Companies Act, 2013). Also, a company cannot issue irredeemable preference shares. The rights of preference shareholders are as follows:-

    • By preference as to dividend, it means preference shareholders have the right to receive a fixed dividend as a certain percentage on the nominal value of the share and that too before equity shareholders are paid.
    • Right to get repaid at the date of redemption.
    • If the company get liquidated before redemption of the preference shareholder, then they have the right to get repaid before equity shareholders.

     

    3.  Differential Voting Rights Shareholders: These shareholders hold equity shares but with differential, right as to voting i.e. they may either have less voting rights or more voting right as compared to ordinary equity shares. Generally, DVR shares carry less voting power.

    For example, a DVR shareholder gets 1 vote for 10 shares whereas an ordinary equity shareholder gets 10 votes for 10 shares i.e. one vote for every share. DVR shares issued to raise not only permanent capital but also prevent dilution of voting rights.

    The rest of the right remains the same as the equity shareholders.

     

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

    Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs arRead more

    Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs are recorded as capital work in progress.

    Depreciation is the systematic allocation of the cost of an asset over its useful life. Depreciation is charged on an asset from the date it is ready to use. Since Capital Work in Progress is not yet ready to use, depreciation cannot be charged on it.

    Example

    If a company owns a Machinery worth Rs. 45,000 out of which Rs. 15,000 is part of capital work in progress, then depreciation on such machinery would be calculated only on the part of machinery that is ready to use that is Rs. 30,000 (45,000-15,000).

    When an asset is undergoing construction, the journal entry for each expense would be recorded as

    Further, when all construction of the above asset is completed, it is transferred to fixed asset account. This would be recorded as

    After transfer to Fixed Asset account, depreciation can be calculated and shown as below

    If the construction of an asset is complete but has not been put to use till now, depreciation is still calculated as it is ready for use. It can be done through various methods like straight-line method, written down value method etc.

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Aadil
AadilCurious
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  2. Rahul_Jose Aspiring CA currently doing Bcom

    When a firm grants an extra amount of reward to its employees based on their performance, it is termed a bonus. An accrued bonus is contingent on performance. Bonus accruals are recorded in the books so that inaccuracies can be avoided in the financial statements. Such bonuses may be given as a singRead more

    When a firm grants an extra amount of reward to its employees based on their performance, it is termed a bonus. An accrued bonus is contingent on performance. Bonus accruals are recorded in the books so that inaccuracies can be avoided in the financial statements.

    Such bonuses may be given as a single flare amount or as a percentage of their salaries. These bonuses can be given quarterly or annually or in any manner in which the firm decides.

    If the bonus is accrued to its employees at 5% of their salary of Rs 30,000, then the accrual bonus can be shown in the journal as follows:

    The bonus expense account is debited because according to the modern rule of accounting “Increase in expense is debited”. Accrued bonus liability is credited because according to the rule of accounting, “Increase in liability is credited”.

    When it is time to pay such bonus amounts to its employees, then they can be journalised as:

    In this case, the accrued bonus liability is eliminated and hence debited because according to the rule of accounting, “ Decrease in liability is debited” whereas cash account is credited since “the decrease in the asset is credited.”:

    Failing to accrue these bonuses will lead to an overstatement of revenues in the financial statements and hence result in inaccurate data. If employees do not meet the required performance targets, then a bonus will not be given and hence the entries will be reversed.

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Simerpreet
SimerpreetHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Introduction The term 'gain ratio' is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners. There is a method of calculating this gain ratio. The method alongRead more

    Introduction

    The term ‘gain ratio’ is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners.

    There is a method of calculating this gain ratio. The method along with the concept behind gain ration is discussed below.

    Concept behind gain ratio

    A partnership firm is a form of business organisation which is conducted and carried on by members known as partners. It requires at least two partners to start a firm and the maximum limit is 50.

    The partners share the profit and loss of a business in a ratio known as Profit and loss sharing ratio.

    For example, Amanda, Bill and Chang are partners, having a P/L sharing ratio of 3:2:1 i.e. Amanda is getting 3/6, Bill is getting  2/6 of the same and Chang is getting ⅓ of the profit and loss

    If the profit is $6,000 , then Amanda will get $3,000 (3/6 of $6,000) and Bill will get $2,000 (2/6 of $6,000) and Chang will get $1,000 (1/6 of $6,000).

     

    Now if Amanda retires from the firm, then naturally, Bill and Chang’s share of profit will increase.

    The profit and loss sharing ratio will now be 2:1 (earlier it was 3:2:1) and the share of profit of Bill will be $4,000 and of Chang will be $2,000.

     

     

    Calculation of gain ratio

    The formula for calculating gain ratio = New ratio – Old Ratio

    As per the  above case:

    • Gain ratio of Bill = 2/3 – 2/6 = 2/6
    • Gain ratio of Chang = 1/3 – 1/6 = 1/6

     

    Therefore the gain ratio in which Bill and Chang gained the share of profit of Amanda is 2/6 : 1/6 or simply 2:1

    This is how we can calculate the gain ratio. But one thing to notice is that the gain ratio is equal to the P/L sharing ratio of the partnership between Bill and Chang.

    Hence, whenever a partner retires and the existing partner keep the P/L sharing ratio unchanged among themselves then, the gain ratio will be equal to their P/L sharing ratio. In that case, there is no need to calculate the gain ratio from the formula given above.

    But, when the remaining partners change the P/L sharing ratio among themselves after a partner retires, then the gain ratio is to be calculated using the formula given above.

    Suppose, upon retirement of Amanda, Bill and Chang change the P/L sharing between them to from 2:1 to 3:2

     In that case,

    • The gain ratio of Bill = 3/5 – 2/6 = 8/30
    • The gain ratio of Chang = 2/5 – 1/6 = 7/30

     

     Therefore the gain ratio in which Bill and Chang will gain the share of profit of Amanda is 8/30 : 7/30 or simply 8:7

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A_Team
A_Team
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  2. Vishnu_K Nil
    This answer was edited.

    Shareholder's Equity Meaning - Shareholder's Equity is the amount invested into the Company. It represents the Net worth of the Company. It is also where the owners have the claim on the Assets after the Debts are settled. It Calculation of Shareholder's Equity Method 1 Shareholder's Equity = TotalRead more

    Shareholder’s Equity

    Meaning – Shareholder’s Equity is the amount invested into the Company. It represents the Net worth of the Company. It is also where the owners have the claim on the Assets after the Debts are settled. It

    Calculation of Shareholder’s Equity

    Method 1

    Shareholder’s Equity = Total Assets – Total Liabilities

    Method 2

    Shareholder’s Equity = Share Capital + Retained Earnings – Treasury Stock/Treasury Shares

    Components of the Shareholder’s Equity

    From the above Method 1,  it can be understood that shareholder’s equity comprises of

    Net Assets = Current Assets + Non-current Assets, reduced by

    Net liabilities = Current liabilities + Long-term liabilities

    where Long-term liabilities = Long-term debts + Deferred long-term liabilities + Other liabilities

     

    Also from the method 2,

    Share Capital = Outstanding shares + Additional Paid-up share capital

    Retained Earnings are the sum of the company’s earnings after paying the dividends

    Treasury stocks = Shares repurchased by the company

    Example of Shareholder’s Equity

     

    The shareholder’s Equity is represented in the Balance Sheet as below;

     

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

    Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. When the result of this computation is negative it is referred to as gross loss Formula : ToRead more

    Definition

    Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.

    When the result of this computation is negative it is referred to as gross loss

    Formula :

    Total Revenues – Cost Of Goods Sold

    Net profit is defined as the excess of revenues over expenses during a particular period.

    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 )

    The basic difference between gross profit and net profit is that gross profit estimates the profitability of a company whereas net profit is to show the performance of the company.

    Key points of Gross Profit

    Some of the key points of as for gross profits follows :

    • Stage of calculation: Gross Profit is calculated in the first stage of the Final Account.

    • Purpose of calculation: It is calculated to know the total profit earned during the particular accounting

    • Type of balance: Gross Profit shows the credit balance of the Trading Account.

    • Dimension: It is a narrow concept as it is a part of Net Profit.

    • Treatment: It is not treated directly in the balance sheet. It is transferred to the Profit And Loss Account.

    Key points of Net Profit

    Some of the key points of as for gross profits follows :

    • Stage of calculation: Net Profit is calculated in the second stage of the Final Account.

    • Purpose of calculation: It is calculated to know the net profit earned during the particular accounting

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

    • Dimension: It is a wider concept as it includes Gross Profit.

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

    Examples

    Now let me explain to you by taking an example which is as follows :

    In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
    Then,
    COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.
    = Rs ( 73000 + 10000+ 7000- 5000)
    = Rs 85000

    GROSS PROFIT = REVENUE – COST OF GOODS SOLD
    = Rs ( 100000 – 85000 )
    = Rs 15000

    Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
    Then,

    NET PROFIT = GROSS PROFIT – INDIRECT EXPENSES + OTHER INCOMES
    = Rs ( 15000 – 2000 + 1000)
    = Rs 14000

    Conclusion

    So here I conclude that gross profit is the difference between revenues from sales and/or services rendered and its direct cost.

    Whereas net profit is after the deduction of total expenses from the total revenues of the enterprise.

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Aadil
AadilCurious
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  2. Mehak
    This answer was edited.

    To understand why we do not record self-generated goodwill in accounting, let us first understand what goodwill is and its accounting treatment. What is Goodwill? Goodwill is an intangible asset of a business.  It represents the reputation and brand value of a business built over time. It is a valueRead more

    To understand why we do not record self-generated goodwill in accounting, let us first understand what goodwill is and its accounting treatment.

    What is Goodwill?

    Goodwill is an intangible asset of a business.  It represents the reputation and brand value of a business built over time. It is a value over and above the tangible assets of the business.

    Goodwill often arises when a business purchases another business and pays a premium, which means a price higher than the fair value of the business.

    Characteristics of Goodwill

    Goodwill has the following characteristics:

    1. It is an Intangible asset, meaning it has no physical existence and cannot be seen or touched.
    2. It is generally recognized during transactions in mergers and acquisitions.
    3. It is the value attributed to the brand value and reputation of the business.
    4. It adds value to a business beyond its tangible assets.

    Example of Goodwill

    Let us take an example to understand the concept of goodwill better.

    Suppose there is a company ABC Ltd. It is planning to acquire XYZ Ltd. The fair value of the assets of XYZ is calculated to be 600,000. However, ABC has agreed to pay a sum of 650,000 to acquire the company. This difference of 50,000 is goodwill.

    Impact on Financial Statements

    Goodwill is shown under the assets side of the Balance Sheet.

    What is self-generated goodwill?

    Self-generated goodwill in simple words means the positive reputation or trust that a business earns over time through their own hard work and decisions. It’s not something bought or inherited but something built from scratch internally, like a brand’s reputation, loyal customers, strong relationships, or unique ideas.

    For example, a small business that goes the extra mile to offer great customer service or always delivers high-quality products over the years will naturally build goodwill.

    It is also known as internally generated goodwill.

    Why do we not record sef-generated goodwill?

    Self-generated goodwill is not recorded in the financial statements because of the following reasons:

    1. Measurement may not be reliable: The measurement of self-generated goodwill is majorly based on the judgment of the managers. It is based on the value creation because of a good reputation or consumer base of the business, which might not be measured accurately.
    2. Conservatism principle: As per the conservatism principle, a business shall not overstate its assets or liabilities. However, self-generated goodwill might be overstated.
    3. Lack of market transaction: There is a lack of a market transaction that ensures verification of the value of goodwill as in the case of purchased goodwill.
    4. Manipulation: There are higher chances of manipulation of financial statements through self-generated goodwill.

    Conclusion

    On a concluding note, self-generated goodwill is something that adds real value to a business, but it’s not something that can easily be measured or captured in financial statements. Accounting is all about providing clear, reliable information, and including goodwill would make things murky and open to manipulation. Even though it doesn’t show up on the books, you can still see its effects in a company’s reputation and success. Maybe in the future, businesses will find a way to highlight it better, but for now, leaving it out helps keep financial reports honest and straightforward.

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