AccountingQA Latest Questions

Bonnie
BonnieCurious
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  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    To start with let me first explain the difference between receipts and income & payment and expenditure. Although Receipts and Income may look similar terms, there are some differences. Receipts have their relation with both cash and cheques received on account of various items of the organizatiRead more

    To start with let me first explain the difference between receipts and income & payment and expenditure.

    Although Receipts and Income may look similar terms, there are some differences.

    Receipts have their relation with both cash and cheques received on account of various items of the organization. Whereas, income is considered as a revenue item for finding surplus or deficit of the organization. All the receipts collected during the year may not be considered as income.

    For Example, if an organization sale of its assets that is of a capital nature, it would not be considered as an item of income and hence would be treated in the balance sheet.

    Similarly, Payment and Expenditure are two different terms. Payments are those that have their relation with cash and cheques given for various activities of the organization. Whereas, Expenditure is considered as revenue expenditure for ascertainment of surplus or deficit in the case of a not-for-profit organization. All payments made during the year may not be considered as expenditures.

    Differences

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Jayesh Gupta
Jayesh GuptaCurious
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  2. prashant06 B.com, CMA pursuing
    This answer was edited.

    Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft. Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the lRead more

    Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft.

    Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the loan taken from the bank. When there is an overdraft balance the treatment is just the opposite of that of favorable balance.

    Generally for business overdraft occurs when there is immediate or emergency funding for the short term. This can be seen for small and medium-sized businesses. This is considered to be convenient for these businesses because there is no requirement to pay interest on the lump-sum loan, only have to pay interest on the fund you use. Generally linked to an existing transaction account.

    To reconcile this we need to prepare a Bank reconciliation statement. The procedure of preparing BRS under unfavorable conditions is as follows

    • If we start from the cash book balance then “ADD” all the transactions resulting in an increase in the passbook. “DEDUCT” all the transactions that resulted in a decrease in the balance of the passbook. Then the net overdraft balance should be the same as in the passbook.
    • If we start from the balance as per the passbook then “ADD” all the transactions resulting in an increase in the balance of the cashbook and “DEDUCT” all the transactions related to a decrease in the balance of the cash book. The net overdraft balance as per the passbook should reconcile with the cash book.

     

    Let us take one example considering one of the above conditions.

    The cash book of M/s Alfa ltd shows a credit balance of Rs 6,500.

    • A Cheque of Rs 3,500 was deposited but not collected by the bank.
    • The firm issued a cheque of Rs 1,000 but was not presented for payment.
    • There was a debit balance in the passbook of Rs 200 and Rs 400 for interest and bank charges.

     

    Bank Reconciliation Statement

    Particulars Add Deduct
    1. Balance as per cash book 6,500
    2. Cheque issued but not yet presented 1,000
    3. cheque deposited but not yet credited by the bank 3,500
    4. bank and interest charges 600
    Balance as per passbook (overdraft) 9,600
    10,600 10,600
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Karan
Karan
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Let’s understand what a cashbook is: A petty cash book is a cash book maintained to record petty expenses. By petty expenses, we mean small or minute expenses for which the payment is made in coins or a few notes like tea or coffee expense, bus or taxi fare, stationery expense etc. Such expenses areRead more

    Let’s understand what a cashbook is:

    • A petty cash book is a cash book maintained to record petty expenses.
    • By petty expenses, we mean small or minute expenses for which the payment is made in coins or a few notes like tea or coffee expense, bus or taxi fare, stationery expense etc.
    • Such expenses are numerous in a day for a business and to account for such small expenses along with major bank and cash transactions may create an extra hassle for the chief cashier of a business.
    • So, the cash is allocated for petty expenses and a petty cashier is appointed and the task of recording the petty expenses in the petty cashbook is delegated to him.

    The manner in which entries are made

    When cash is given to the petty cashier, entry is made on the debit side and in the petty cashbook and credit entry in the general cashbook.

    Entries for all the expenses are made on the credit side.

    Generally, the petty cashbook is prepared as per the Imprest system. As per the Imprest system, the petty expenses for a period (month or week) are estimated and a fixed amount is given to the petty cashier to spend for that period.

    At the end of the period, the petty cashier sends the details to the chief cashier and he is reimbursed the amount spent. In this way, the debit balance of the petty cashbook always remains the same.

    Format and items which appear in the petty cashbook

    The format of the petty cashbook depends upon the type of petty cash book is prepared and the items appearing in it are nothing but petty expenses. Let’s see an example:-

    A business incurred the following petty expenses for the month of April:-

    1. Stamp – Rs. 10
    2. Postage – Rs. 50
    3. Cartage- Rs. 100
    4. Telephone expense – Rs. 500
    5. Refreshments – Rs. 250

    Now we will prepare two types of cashbooks:

    • Ordinary Petty Cashbook:

    Here, the Petty cash book is of the same format as the general cash book.

    The cash allocated for petty expenses is recorded on the debit side of the petty cash book and on the credit side of the general cash book.

    • Analytical Petty Cashbook

    Here, there are separate amount columns for each type of expense. As the name suggests, this type of petty cashbook helps to analyse the petty cash spending on basis of the type of expense.

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use. Computation of effective capital is given in Explanation I to Schedule II of the CoRead more

    Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use.

    Computation of effective capital is given in Explanation I to Schedule II of the Companies Act. Schedule II deals with remuneration payable to managers in case of no profit or inadequate profit in the following manner:

    Computation of effective capital is done in the following manner:

    Numerical example:

    ABC Ltd reports its balance sheet as given below:

    We will compute its effective capital for both an investment company and a non-investment company.

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Rahul_Jose
Rahul_Jose
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  2. Pooja_Parikh Aspiring Chartered Accountant

    Any person, company, or organization that owes us money is a debtor. The amount that is owed to us is called debt. When you are unsure if a debtor is going to pay back the amount owed to you, then a provision for doubtful debts is created. Here, the debtor may or may not pay back the amount owed. WhRead more

    Any person, company, or organization that owes us money is a debtor. The amount that is owed to us is called debt. When you are unsure if a debtor is going to pay back the amount owed to you, then a provision for doubtful debts is created. Here, the debtor may or may not pay back the amount owed. When the debts owed to us is irrecoverable, it is termed as bad debts.

    Provision for doubtful debts may become a bad debt at some point. Usually, companies keep a small portion of their debtors as a provision for doubtful debts in accordance with the prudence concept that tells us to account for all possible losses. Provision for doubtful debts is a liability whereas bad debts are recorded as an expense.

    Journal entries for Doubtful debts and bad debts are as follows:

    EXAMPLE

    If the balance in the debtors’ account shows an amount of Rs 20,000 and 5% of debtors are treated as doubtful, then Rs 1,000 is recorded as a provision for doubtful debts. This amount is deducted from debtors in the balance sheet.

    Now if Rs 400 was recorded as actual bad debts, then it is deducted from the provision for doubtful debts instead of debtors. Further another 400 is added back to provision for doubtful debts to maintain the percentage.

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

    Introduction Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings. The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation aRead more

    Introduction

    Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings.

    The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation as shown in the example below:

    It is shown as a negative figure under both assets and capital heading. I will be explaining why it is so.

    Accounting Equation

    The accounting equation represents the relationship between assets, liabilities, and capital of an entity whether profit oriented or not, according to which, the total assets of a business equals to the sum of its total capital and total liabilities.

    Assets = Liabilities + Capital

    This equation holds good in every monetary transaction or event like the event given in the question.

    Cash withdrawn for personal use

    We know every transaction affects two accounts. In this case, too, the ‘cash withdrawn for personal use’ affects two accounts. Cash withdrawn for personal use is known as drawings.

    Let’s see the journal entry for drawings of cash from business:


    Here the drawing account is debited because it is a contra-equity account i.e. it is a mirror image of the capital account or opposite of the capital account. Here the cash account is an asset account; hence it is credited as it is reduced.

    As drawings represent the outflow of capital from the business, it is written off from the Capital account in the balance sheet.

    Hence, in the accounting equation, the drawing amount is deducted from the Asset side and from the capital side, indicating a balance.

    It does not appear in the statement of profit or loss despite having a debit balance because it is not an expense account.

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Anushka Lalwani
Anushka Lalwani
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  2. Akash Kumar AK
    This answer was edited.

    Goodwill In Accounting Aspect, Goodwill refers to an Intangible asset that facilitates a company in making higher profits and is a result of a business’s consistent efforts over the past years which can be the business's prestige, reputation, good name, customer trust, quality service, etc. GoodwillRead more

    Goodwill

    In Accounting Aspect, Goodwill refers to an Intangible asset that facilitates a company in making higher profits and is a result of a business’s consistent efforts over the past years which can be the business’s prestige, reputation, good name, customer trust, quality service, etc.

    Goodwill has no separate existence although the concept of goodwill comes when a company acquires another company with a willingness to pay a higher price over the fair market value of the company’s net asset in simple words the goodwill can be only realized while at the time of sale of a business.

     

    The formula for Goodwill

     

    Types of Goodwill

    there are two types of goodwill.

     

    1. Inherent Goodwill/Self-generated goodwill

    Inherent goodwill is the internally generated goodwill that was created or generated by the business itself. it is generally generated from the good reputation of the business.

    Inherent Goodwill or Self-generated goodwill is generally not shown in the books or never recognized in the books of Accounts and no journal entry for the inherent goodwill is passed.

     

    2. Purchased Goodwill/Acquired Goodwill

    At the time of acquisition of a business by another business, any amount paid over and above the net assets simply refers to the amount of Purchased Goodwill or Acquired goodwill.

    A Journal entry is passed in the case of the Purchase of goodwill.

     

    Type of Account

    generally, Goodwill is considered and recorded as an Intangible asset(long-term asset) due to its physical absence like other long-term assets.

     

    Modern rule of accounting:

    as per the Modern rule of accounting, all Assets or all possessions of a business are comes under the head Asset accounts.

    as Goodwill is treated as an Intangible asset it is an Asset Account.

     

    Journal entry for purchase of goodwill as per Modern rule

    Goodwill A/c Dr. – Amt

    To Cash/Bank A/c – Amt

    (The modern approach of accounting for the Asset account is: “Debit the increase in asset and Credit the decrease in the asset“)

     

    The golden rule of accounting

    As per the golden rule of accounting, all assets or possessions of a business other than those which are related to any person (debtor’s account) are considered Real accounts.

    Such accounts don’t close by the year-end and are carried forward.

    As Goodwill is an Intangible asset it is treated as a Real account as per the golden rule of accounting.

     

    Journal entry for purchase of goodwill as per Golden rule

    Goodwill A/c Dr. – Amt

    To Cash/Bank A/c – Amt

    (The golden rule of accounting for the Real account is: “Debit what comes in and Credit what Goes out“)

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

    Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more

    Definition

    Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.

    However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.

    For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.

    Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.

    For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.

    Meaning as per AS – 29

    Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-

    • Contingent asset

    A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
    Not wholly within the control of the enterprise.

    It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.

    • Contingent liability

    A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
    Not wholly within the control of the enterprise.

    A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
    A reliable estimate of the amount of obligation cannot be made.

    Recognition In Financial Statements

    Contingent assets and liabilities are recognized as follows:-

    • Contingent Assets

    As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.

    It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.

    However, when the realization of income is virtually certain, the related asset no longer remains contingent.

    • Contingent liability

    As per the rules, it is not recognized by an enterprise.

    When recognized?

    Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.

    The assets and the related income are recognized in the financial statements of the period in which the change occurs.

    Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.

    And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.

    A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.

    Disclosure

    Now we will see how contingent assets and liability are disclosed which is mentioned below:-

    • Contingent asset

    These contingent assets are not disclosed in financial statements.
    A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.

    • Contingent Assets

    A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.

     

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Simerpreet
SimerpreetHelpful
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  2. Karishma

    Realisation account  A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more

    Realisation account 

    A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.

    All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.

    If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.

     

    Credit side of realisation account

    • Liabilities: All the liabilities including sundry creditors, outstanding expenses, bills payable, loans and advances, bank overdrafts and cash credit are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred.
      • Accounting entry for this is as follows:

    Liabilities A/c Dr…..

    To Realisation A/c …..

    (All the liabilities transferred to realisation account)

    • Provisions: All the provisions including provision for doubtful debts and provision for taxation are transferred to the credit side of the realisation account.
      • Accounting entry for this is as follows:

    Provision A/c Dr…..

    To Realisation A/c …..

    (All the provisions transferred to the realisation account)

    • Cash and bank A/c: Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.
      • Accounting entry for this is as follows:

    Bank A/c Dr…..

    To Realisation A/c …..

    (Asset sold for cash)

    • Loss on realisation: If the debit side of the realisation account exceeds the credit side, it results in loss then the capital account is debited.
      • Accounting entry for this is as follows:

    Capital A/c Dr…..

    To Realisation A/c …..

    (Being loss transferred to the capital account)

     

    The debit side of the realisation account

    All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.

     

    Format for realisation Account is as under:

    Realisation A/c
    Particulars Amount Particulars Amount
    To Land & Building By Provision for Doubtful Debts A/c
    To Plant & Machinery By Sundry Creditors A/c
    To Furniture By Bills Payable A/c
    To Debtors By Outstanding Expenses A/c
    To Goodwill A/c By Bank Loan, Overdraft, Cash Credit A/c
    To Investment A/c By Bank/ Cash A/c (Assets realized):
    To Bank/ Cash A/c (Liabilities Paid): Land and Building
    Sundry Creditors Plant and Machinery
    Bill Payable Furniture
    Outstanding Expenses Stock
    Bank Loan, Debtors
    Overdraft, Bad Debts recovered
    Cash Credit Investment
    To Bank/ Cash A/c By Partner’s Capital A/cs
    (Realisation Expenses) (assets taken over)
    To Partner’s Capital A/c By Partner’s Capital A/cs
    (Realisation Expenses) (Loss on Realisation)
    To Partner’s Capital A/cs
    (Profit on Realisation)
    Total Total

     

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Nistha
Nistha
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Journal EntrySubscriptionSubscription Received in Advance
  2. Sandy CMA Final
    This answer was edited.

    To start with let me give you a brief explanation of what a subscription is After joining a not-for-profit organization, a member is required to pay a certain amount of money every year at periodical intervals in order to keep his membership activated, such an amount of money is the subscription. FoRead more

    To start with let me give you a brief explanation of what a subscription is

    After joining a not-for-profit organization, a member is required to pay a certain amount of money every year at periodical intervals in order to keep his membership activated, such an amount of money is the subscription.

    For accounting purposes, subscription is always taken on an accrual basis which means the amount which is received during the current year is only taken into consideration.

    Now, Subscription received in advance means the amount of money that has been received during the current year but which relates to the year that is yet to come. In other words, we can say it is the unearned income by the organization.

    It is recurring in nature and liability for the organization as it does not relate to the current year.

    Journal Entry for Subscription received in advance

    Here, the Subscription received in advance is credited to the Subscription account for the current year.

    This is the adjustment entry made during the current year.

    Treatment of Subscription in Financial Statements

    • Receipts and payment account.
    • Income and expenditure account.
    • Balance sheet.

    Receipts and Payment account: In the receipts and payment account, the entire amount of subscription is written on the receipts side. That is to say, subscription amount relating to the previous year, current year, and the year to come (outstanding subscription, current year subscription, advance subscription).

    Income and Expenditure account: In the Income and Expenditure Account, the subscription comes on the Income side. It is shown as

    Here, a subscription received in advance in the current year is deducted to find the actual amount because although the money is received in advance the benefits related to it are yet to be provided by the organization.

    Balance sheet: In the balance sheet, a subscription received in advance comes in the liability side under current liabilities as the benefits related to it are yet to be derived.

    For Example, Lionel club received subscription from its members for the year 2020 as follows-

    • Subscription of 2020 was received in 2019 – 2,000
    • Subscription of 2021 was received in 2020 – 3,000

    The total subscription was received during the year – 10,000

    Here,

    Subscription of 2020 was received in 2019- It is an Outstanding Subscription.

    Subscription of 2021 was received in 2020- It is an advance Subscription.

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