AccountingQA Latest Questions

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

    The word, “deferred” means delayed or postponed and “revenue” in layman’s terms means income. Therefore deferred revenue means the revenue which is yet to be recognised as income. It is actually unearned income. In accrual accounting, income is recognised only when it is accrued or earned. DeferredRead more

    The word, “deferred” means delayed or postponed and “revenue” in layman’s terms means income. Therefore deferred revenue means the revenue which is yet to be recognised as income. It is actually unearned income.

    In accrual accounting, income is recognised only when it is accrued or earned. Deferred revenue is the income received before the performance of the economic activity to earn it.

    Example:  A shoe shop owner gives an order to a shoe manufacturer of 1000 pair of shoes which is to be delivered after 4 months. He also gives him a cheque of ₹15,000 in advance, the rest ₹5000 is to be given at the time of delivery.

    So, in this case, the ₹15,000 is actually is unearned revenue i.e. deferred revenue. It will be recognised as revenue when the shoe manufacture completes the order and deliver it.

    Till then, the deferred revenue is reported as a liability in the balance sheet. Like this:

    After recognition as revenue, it will be reported in the statement of profit or loss:

    Hence, to summarise, deferred revenue is:

    • Unearned revenue
    • Recognised as income till it is earned
    • Till then it is recognised and reported as a liability in the balance sheet.

    Some examples of deferred revenue are as follows:

    • Advance rent received
    • Advance payment for goods to be delivered.
    • Advanced payment for services to be provided.

    Now the question arises why deferred revenue is recognised as a liability. It is due to the fact that the business may not be able to perform the economic activity successfully to earn that revenue.

    Taking the above example, suppose the shoe manufacturer is not able to honour its commitment and the shoe shop owner can wait no more, then the advanced money of ₹ 15,000 is to be refunded. That’s why deferred revenue is recognised as a liability because it is a liability if we consider the principle of conservatism (GAAP).

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Jayesh Gupta
Jayesh GuptaCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares. Now let’s understand the reason behRead more

    Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares.

    Now let’s understand the reason behind it.

    We know preference shares are those shares that carry some preferential rights:

    • Dividend at a fixed rate
    • Right to get repaid before equity shareholders in event of winding up of the company
    • Other rights as specified in the Articles of Associations.

    Also, unlike equity shares, preference shares are redeemable i.e. repaid after a period of time (which cannot be more than 20 years).

    Generally, the creditors of a company have the right to be repaid first. So, in event of redemption of preference shares, the preference shareholders are repaid before creditors and the total capital of the company will but the total debt of the company is unaffected.

    The gap between the debt and equity of the company will further widen and this will also increase the debt-equity ratio of the company. It will be perceived to be a risky scenario by the creditors and lenders of the company because the

    So to protect the creditor and lender, Section 55 of the Companies Act comes to rescue.

    Section 55 of the Companies Act ensure that the creditors and lenders of a company do not find themselves in a riskier situation when the company decides to redeem its preference shares by making it mandatory for a company to either

    • issue new shares to fund the redemption of preference shares

    OR

    • create a capital redemption reserve if it uses profits for redemption

    OR

    • a combination of both

    This will fill up the void created by the redemption of preference shares and the debt-equity ratio will remain unaffected. Keeping an amount aside in Capital Redemption Reserve ensures that such amount will not be used for dividend distribution and capital will be restored because it can be only used to issue bonus shares.

    In this way the debt-equity ratio remains the same, the interest of the creditors and lenders secured.

    Bonus shares are fully paid shares that are issued to existing shareholders at no cost.

    Let’s take a numerical example for further understanding:

    ABC Ltd wants to redeem its 1,000 9% Preference shares at a face value of Rs 100 per share. It has decided to issue 8,000 equity shares @Rs 10 per share and use the profit and reserves to fund the deficit.

    The journal entries will be as follows:

    Working note:                                                                            Rs

    9% preference shares due for redemption (1,000 x 10) – 1,00,000

    Less: Amount of new shares issued (8,000 x 10)           –      80,000

    Amount to be transferred to CRR                                              20,000

    Hence, the reduction of total capital by Rs 1,00,000 due to the redemption of preference shares is reversed by issuing equity shares of Rs 80,000 and creating a Capital Redemption Reserve of Rs 20,000.

     

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Aadil
AadilCurious
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    The term ‘contra’ means  'opposite'. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance. The purpose of the contra revenue account is to ascertain the actuaRead more

    The term ‘contra’ means  ‘opposite’. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance.

    The purpose of the contra revenue account is to ascertain the actual amount of sales and record the items which have reduced the sales.

    These are the contra revenue accounts commonly seen in businesses:

    • Sales return account: This account records the amount of goods sold returned by customers. The journal entry for recording sale return is as follow:

    The total sales return is deducted from the sales in the balance sheet. Though being opposite of the sales account, the sale return account is not an expense account. It is considered an indirect loss as it reduces sales.

    • Sale Discount account: This account records the amount of discount allowed to customers. The journal entry for recording sale discounts is as follows:

    Sales discount is an expense hence it is debited to the profit and loss account.

    Sales returns and sales discounts are shown in the trading and profit and loss account in the following manner:

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Aadil
AadilCurious
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Meaning We know that an account in ledger format has two amount columns i.e. debit and credit amount columns. Now, most of the time, the total of debit and credit sides do not match.  The difference between their totals is called the balance of the account and it is posted on the shorter side. ThisRead more

    Meaning

    We know that an account in ledger format has two amount columns i.e. debit and credit amount columns. Now, most of the time, the total of debit and credit sides do not match.  The difference between their totals is called the balance of the account and it is posted on the shorter side. This result in equalling the total of both sides, hence this act is called ‘balancing an account.

    Types of balances

    Balancing an account is a very usual practice so that the balance of an account can be known. An account can have two types of balances:

    • Debit balance, where the debit side total is more than the credit side total.
    • Credit balance, where the credit side is more than the debit side total.

    The balance of an account is posted on the shorter side. It means:

    • The debit balance will be shown on the credit side as the credit side total is shorter. (posted as ‘By Balance c/d’)
    • The credit balance will be shown on the debit side as the debit side total is shorter (posted as ‘To Balance c/d’)

    Example

    The following is a cash account that is not balanced:

     

    We can see the debit side is ₹800 more than the credit side. It means there is a debit balance. It will be posted on the credit side as ‘By balance c/d’ to balance the account.

    Exceptions

    Balance of the income and the expense accounts (nominal accounts)are not computed. Instead, they are closed to trading account or profit and loss account to balance their amount totals. For example, the salaries account and sales accounts

    Only the balance of the following types of accounts are computed and carried forwarded to successive accounting years:

    • Assets
    • Liabilities
    • Capital

    The balance of these accounts is shown on the trial balance and balance sheet as well.

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Anushka Lalwani
Anushka Lalwani
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Meaning The term ‘Sundry creditors’ consist of two words:  ‘Sundry’ and ‘creditors’.  The word ‘sundry’ means the items which are not significant enough to be named separately. It also refers to a collection of miscellaneous items. Creditors are the person from whom money is borrowed or goods are puRead more

    Meaning

    The term ‘Sundry creditors’ consist of two words:  ‘Sundry’ and ‘creditors’. 

    The word ‘sundry’ means the items which are not significant enough to be named separately. It also refers to a collection of miscellaneous items.

    Creditors are the person from whom money is borrowed or goods are purchased on credit by a business or a non-business entity. They have to be repaid after a period of time which is usually less than or up to one year.

    By combining the meaning of both words, ’sundry’ and ‘creditor’, the term ‘sundry creditor’ will refer to the collection of insignificant creditors of an entity.

    Back in the days when accounting records were maintained on paper, only the records of those creditors were maintained separately, from whom goods are purchased regularly and in large amounts. 

    But there used to be numerous other creditors with whom the transactions were occasional and insignificant. To reduce the paperwork, records of all such creditors were maintained on a single page or book under the head ‘Sundry Creditors’

    Nowadays, as accounting records are maintained digitally, hence maintaining records of each and every creditor is not a problem. 

    Hence, every creditor whether small or big, is grouped under the head ‘Sundry creditor’ or ‘Trade Creditor’.

     

    Accounting Treatment 

    Sundry creditors are the persons to whom a business owes money. 

    Hence, as per golden rules of accounting, Sundry creditor is a personal account and the golden rule for personal account is, ‘Debit the receiver and credit the giver’ 

    We know sundry creditors are liabilities, hence, as per modern rule of accounting, sundry creditors are credited in case of increase and debited in case of decrease.

    Example, a business purchased goods for Rs. 10,000 from ABC & Co. The journal entry will as follows:

    Here, ABC & Co is the creditor. It is credited as it is a personal account and the creditor has given the goods to the business, hence the giver is credited.

    From point of view of modern rules of accounting, ABC & Co. is a creditor, a liability. On purchase of goods on credit, a liability is created. Hence, ABC & Co A/c is credited.

     

    Balance sheet

    Sundry creditor is a current liability, so it is shown on the liabilities side of a balance sheet. Trade payable and accounts payable mean sundry creditors only.

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A_Team
A_Team
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    The profit earned by an entity is determined through the profit and loss account. All the expenses are recorded on the debit side of the profit and loss account while all the incomes are recorded on the credit side. The profit is shown as the credit balance of profit and loss A/c. When the sum of itRead more

    The profit earned by an entity is determined through the profit and loss account. All the expenses are recorded on the debit side of the profit and loss account while all the incomes are recorded on the credit side.

    The profit is shown as the credit balance of profit and loss A/c. When the sum of items on the debit side of a profit and loss account is less than the sum of those on the credit side, it implies profit while when the sum of the items on the credit side is less than the sum of those on the debit side, it implies a loss for the entity.

    The Reason for Credit

    Profit is recorded as an increase in equity

    To understand the reason why profit is recorded as a credit balance, we must first understand the basic principle of debit and credit.

    The basic principle of debits and credits is that debits increase asset accounts and decrease liability and equity accounts while credits decrease asset accounts and increase liability and equity accounts.

    The revenue that a company earns is credited to the income account and increases equity.

    The expenses that a company incurs to earn that revenue are debited to the expense account and decrease equity.

    The difference between revenue and expenses is the profit, which is recorded as an increase in equity.

    Increase in equity due to revenue – decrease in equity due to expense = profit

    Gross Profit Vs Net Profit

    Revenue is the total income that a business or profession earns. Profit is the excess revenue that remains after reducing all expenses from it.

    Gross profit is the profit that a company earns after reducing the cost of goods sold from sales revenue while net profit is the profit that a business earns after reducing the total of all its direct and indirect expenses from its direct as well as indirect allowable business income.

     

    Conclusion

    The basic principle of debit and credit governs the classification of profit as a debit or credit. Since profit increases our equity, it is a credit.

    In the case of a company, it belongs to the shareholders. It is usually recorded in the retained earnings account. Profit can be reinvested in the business or can be distributed as a dividend. In the case of a sole proprietorship, the profit belongs to the owner and is recorded in the owner’s capital account.

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Atreya
AtreyaCurious
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  2. Ishika Pandey Curious ca aspirant

    Definition A limited liability partnership (LLP)is a business vehicle like a partnership that features the partners ‘ liability is limited. Thus, it has elements of partnership and company. Another important feature of LLP is that each partner is not responsible or liable for another partner’s miscoRead more

    Definition

    A limited liability partnership (LLP)is a business vehicle like a partnership that features the partners ‘ liability is limited. Thus, it has elements of partnership and company.

    Another important feature of LLP is that each partner is not responsible or liable for another partner’s misconduct or negligence.

    LLP as constituted in INDIA:

    The limited liability partnership act, 2008 came into effect on 31st march, 2009. LLP is different from a partnership as it operates like a partnership, but in an LLP each partner is protected from personal liability, except to the extent of his capital contribution in the LLP.

    • LLP is subject to income tax like any other partnership firm.

    • A partner is not liable for independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner‘s wrongful business decisions or misconduct.

    • LLP is a body corporate and legal entity separate from its partners. It has perpetual succession like a limited liability company.

    Indian partnership act 1932 is not applicable to LLPs and also the limit on the number of partners in an LLP is not applicable, unlike an ordinary partnership firm where the maximum number of partners cannot exceed the number specified under SEC 464 of Companies Act 2013, which at present is 50.

    The LLP Act, 2008 specifies that a least one of the partners in the LLP is a citizen of India and an Indian national.

    • The Registrar Of Companies ( ROC) is authorized to register and control LLPs.

     

    Characteristics

    • Separate legal entity :

    Like a company, LLP also has a separate legal entity. Therefore partners and LLP are distinct from each other, like a company where the company has a legal entity separate from its shareholders.

    • Minimum capital :

    LLP is not required to maintain minimum capital. Thus partners in LLP decide how much capital will be contributed by each partner.

    • The Minimum number of members :

    An LLP can be established with at least two members who shall also be the designated partners and shall have Director Identification Number (DIN).

    There is no limit on the maximum number of partners. Members other than designated partners are required to have DIN.

    • Audit is not mandatory :

    All companies, whether private or public, are required to get their accounts audited. However, an audit of LLP‘s books of accounts is not mandatory except :

    • If the contribution of the LLP exceeds Rs 25 lakhs: or
    • If the annual turnover of the LLP exceeds Rs 40 lakhs.

     

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Naina@123
Naina@123
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  2. prashant06 B.com, CMA pursuing
    This answer was edited.

    Revenue also called income is nothing but the income generated by individuals or businesses from the sale of goods or investing capital or assets. Some examples of revenue are as follows:- Sales revenue Dividend received Interest earned Rent received Commission    1. SALES REVENUE Sales revenueRead more

    Revenue also called income is nothing but the income generated by individuals or businesses from the sale of goods or investing capital or assets. Some examples of revenue are as follows:-

    1. Sales revenue
    2. Dividend received
    3. Interest earned
    4. Rent received
    5. Commission

     

     1. SALES REVENUE

    Sales revenue is the income received by the individual or business by selling its product or provision of services. the words “sale” and “revenue” are used interchangeably to mean the same thing. It is to be noted that revenue does not necessarily mean it has been received in cash, it can be partly in cash or partly on credit also.

    How to calculate sales revenue?

    SALES REVENUE = NO. OF UNITS SOLD * AVERAGE PRICE PER UNIT

    For example:- Amazon sold 4000 units of shirts @ 500 each. Therefore sales revenue for amazon is

    Sales revenue = 4000 * 500

    = 20,00,000

    Treatment of sales revenue in the financial statement, since sales are part of a trading account and appear on the credit side of the trading account.

    2. DIVIDEND RECEIVED

    Naina, this can be explained in simple terms. Suppose you own shares of a company which declares dividend so the dividend received is income for you. Since it does not reduce the assets of a company nor creates a liability it is shown as income and posted on the credit side of profit & loss A/c.

    Let me give you a short example of a dividend received, suppose you own 1000 shares of ABC.ltd. the company at the quarter-end calculate its earnings and decides to declare a dividend of Rs 5 per share. Therefore you would receive 1000* 5 i.e Rs 5000 as dividend income.

    3. INTEREST INCOME EARNED

    Interest income is the earnings the entity receives on any investments made. To be more precise it is money earned by an individual or business for lending their fund either by putting them as deposit in the bank. It is shown on the credit side of the profit & loss A/c.

    A very simple example for interest earned is when a business or an individual deposits money in the bank as savings and decided not to touch it for the coming years then such a depositor will gain interest on such savings by the bank. such type of income so received is treated as interest received and shown as income in the profit & loss A/c.

    3. RENT RECEIVED

    When money is received by the business for exchange of use of assets of the business by the other person, then it will be called rent received. Rent can be received by the business firm in respect of land, building, machinery, etc. As rent received is income for the business firm, it is shown on the credit side of profit & loss A/c.

    For example, X. ltd received Rs 20,000 via cash on one of its properties to Mr. Z. Then rent so received shall be treated as income in the books of ABC. ltd and same shall be treated as income and shown in the profit & loss statement.

    Summarised extract of profit & loss account is shown below for dividend received, Rent received and interest earned.

     

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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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