AccountingQA Latest Questions

Simerpreet
SimerpreetHelpful
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  2. Radha M.Com, NET
    This answer was edited.

    The journal entry for the closing stock is passed at the year-end as closing stock is the inventory held by a business at the end of its accounting period. However, the entry for recording closing stock depends on how it is treated in the books of accounts. The two types of the accounting treatmentRead more

    The journal entry for the closing stock is passed at the year-end as closing stock is the inventory held by a business at the end of its accounting period. However, the entry for recording closing stock depends on how it is treated in the books of accounts.

    The two types of the accounting treatment of closing stock are as follows:

    • Closing stock is not shown in the Trial Balance.
    • Closing stock is shown in the Trial Balance.

     

    Closing stock is not shown in the Trial Balance:

    As per this treatment, the closing stock is not shown in the Trial Balance because it is already a part of the purchases of the business. Showing it in the Trial Balance would lead to a double effect. This will not give us accurate profit/loss at the end of the year.

    The closing stock is transferred to Trading A/c by passing a closing entry.

    Closing stock is an asset. It is debited because there is an increase in the assets. Trading A/c is credited because of the Matching concept as the value of the closing stock is adjusted against the cost of goods sold.

    At the end of the year, it is shown on the Asset side of the Balance Sheet, under the head Current Assets and sub-head Inventory.

    For example,

    ABC Ltd. at the beginning of the year had an opening inventory of 20,000. During the year, purchases worth 5,000 were made and goods worth 10,000 were sold. At the end of the year, the value of the closing stock will be 15,000 (20,000 + 5,000 – 10,000).

    Now the closing stock worth 15,000 will be recorded through this journal entry:

    Closing Stock A/c  15,000
       To Trading A/c  15,000
    (Being closing stock worth 15,000 transferred to Trading A/c)

    Closing stock is shown in the Trial Balance:

    This scenario is possible only when the closing stock is adjusted against purchases. By adjusting against purchases, the double effect of showing both purchases and closing stock in Trial Balance is eliminated.

    The following entry is recorded to adjust closing stock against purchases.

    Closing Stock is debited as there is an increase in the asset. Purchase A/c is credited because of the Matching concept.

    After recording the adjustment entry, the closing stock is shown on the debit column of the Trial Balance. It is not shown in the Trading A/c as it is already adjusted against purchases. In the Balance Sheet, it is shown as a Current Asset.

     

     

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

    Fictitious assets are the expenses and losses which are yet to be written off, so they appear in the Asset side of the balance sheet of the relevant financial year because expenses and losses have a debit balance. They are not assets in substance. Examples: Business loss ( debit balance of Profit anRead more

    Fictitious assets are the expenses and losses which are yet to be written off, so they appear in the Asset side of the balance sheet of the relevant financial year because expenses and losses have a debit balance. They are not assets in substance.

    Examples:

    1. Business loss ( debit balance of Profit and loss A/c )*
    2. Prepaid expenses
    3. Discount on the issue of debentures.
    4. Huge promotional expenditure.

    *business loss is shown as a negative figure under the head Reserve and Surplus, when the balance sheet is prepared as per Schedule III of The Companies Act, 2013.

    Deferred revenue expenditures are the expenses incurred for which the benefits are expected to flow to the enterprise beyond the current year. Such expenses are huge and are not written off completely in a financial year. The part of the expenditure which is not written off is shown on the assets side of the balance sheet.

    Examples:

    1. Huge advertisement expense.

    As you can see, there is some similarity between the two. Deferred revenue expenditure can be called a type of fictitious asset as it is shown in the asset side of the balance sheet but it isn’t an asset.

     

    The term ‘fictitious asset’ has a broader meaning than deferred revenue expenditure and also includes the losses such as discounts on the issue of debenture and business loss.

    The difference between fictitious assets and deferred revenue expenditure are as follows:

    Fictitious Assets Deferred Revenue Expenditure
    1 These are no real assets but expenses and losses that are not completely written off in an F.Y. These are expenses incurred from which benefits are expected to flow for more than one accounting period.
    2 It has a broader meaning. It has a narrower meaning.
    3 Examples:- business loss, discount on issue of debentures, prepaid expenses etc. Examples:- huge promotional expenditure etc.
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Radha
Radha
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Sacrificing Ratio
  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the nRead more

    When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the new partner. The partners can choose to forego their shares equally or in an agreed proportion.

    Before admission of the new partner, the existing partners would be sharing their profits in the old ratio. Upon admission, the profit-sharing ratio would change to accommodate the new partner. This would give rise to the new ratio. Hence Sacrificing ratio can be calculated as:

    Sacrificing Ratio = Old Ratio – New Ratio

    For example, Tony and Steve are partners in a firm, sharing profits in the ratio of 3:2. They decide to admit Bruce into the partnership such that the new profit-sharing ratio is 2:1:2. Now, to calculate the sacrificing ratio of Tony and Steve, we subtract their new share from their old share.

    Tony’s Sacrifice = 3/5 – 2/5 = 1/5

    Steve’s Sacrifice = 2/5 – 1/5 = 1/5

    Therefore, the Sacrificing ratio of Tony and Steve is 1:1. This shows that Tony gave up 1/5th of his share while Steve also sacrificed 1/5th of his share.

    Calculation of sacrificing ratio is important in a partnership as it helps in measuring that portion of the share of existing partners that have to be sacrificed. This ensures a smooth reconstitution of the partnership. Since the old partners are foregoing a part of their share in profits, the new partner has to bring in some amount as goodwill to compensate for their loss.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. Unlike a balance sheet that provides information about the company on a particular date, a cash flow statement proviRead more

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. Unlike a balance sheet that provides information about the company on a particular date, a cash flow statement provides information about the flow of cash over a period of time.

    OBJECTIVE

    Information obtained through cash flow statements is aimed to assess the ability of a business to generate cash and at the same time, maintain liquidity. Therefore, important economic decisions can be made by evaluating these cash flow statements.

    Cash Flow statements are categorized into

    • Operating Activities: These activities refer to the main activities of the business during an accounting period. They involve revenue-generating activities. As per the indirect method, profit before tax is taken as the starting point and all non-cash expenses are added while non-cash incomes are deducted. Whereas in direct method, cash receipts and cash expenses are added and subtracted respectively. Eg: sale of goods.
    • Investing Activities: These activities involve the sale and purchase of non-current assets and investments. Eg: cash payment for machinery.
    • Financing Activities: These activities result in a change in capital or borrowings. Eg: cash proceeds from the issue of equity shares.

    Importance of Cash Flow

    A cash flow statement gives us knowledge about the liquidity and solvency of the company. These are necessary for the survival and expansion of the company. It also helps in predicting future cash flows by using information from previous cash flows. It also helps in comparison between companies which shows the actual cash profits.

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Aadil
AadilCurious
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. The cash flow statement provides information about the flow of cash over a period of time. General reserve is a reseRead more

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. The cash flow statement provides information about the flow of cash over a period of time.

    General reserve is a reserve created by taking a portion of the profits for future requirements.

    TREATMENT OF GENERAL RESERVE

    As per the indirect method, Since there is no actual flow of cash, any addition to reserves is added back to net profit for calculation of net profit before tax and extraordinary items. This net profit before tax will appear under cash flow from operating activities. If there is a reduction in reserve, then they are subtracted from net profit.

    As per the Direct method, an increase or decrease in general reserve will not affect the cash flow statement since non-cash items are not recorded. Only cash receipts and payments that come under operating activities are recorded. So, net profit is not shown in the direct method and hence neither is general reserve.

    General reserve does not fall under the head investing activities as investing activities involve the acquisition or disposal of long-term assets or investments. They do not fit in financing activities either as financing activities relate to change in capital or borrowings of the company.

    EXAMPLE

    If the balance in general reserve for the period of March was Rs 4,000 and in April the balance was Rs 7,000, then its treatment in cash flow would be:

     

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Simerpreet
SimerpreetHelpful
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Introduction   Furniture is treated as a fixed asset of an enterprise unless it deals in the manufacturing or the trade of furniture. As stock in trade, it will be treated as current assets. In both cases, they are real accounts. Hence, the golden rule of accounting will be the same. But, when it coRead more

    Introduction

     

    Furniture is treated as a fixed asset of an enterprise unless it deals in the manufacturing or the trade of furniture. As stock in trade, it will be treated as current assets.

    In both cases, they are real accounts. Hence, the golden rule of accounting will be the same.

    But, when it comes to journal entries, Furniture A/c will appear only when it is treated as a fixed asset.

    No journal entries are passed in the stock-in-trade account except for some balance transferring entries.

    Journal Entries on taking Furniture as a fixed asset

    Taking furniture as a fixed asset, we can pass various entries related to it. Since furniture is an asset, any increase is debited and the decrease is credited.

    Also, furniture is a real account which means the golden rule of accounting  applicable is, “Debit what comes in and credit what goes out”.

    Following are the basic entries related to furniture.

    Purchase of furniture

    The most common entry related to furniture is the purchase of furniture:

    Furniture A/c                                            Dr. Amt
    To Cash / Bank A/c Amt

    Here Furniture A/c is increased, hence debited.
    Cash or Bank being reduced is credited.

    Sale of furniture

     

    Cash / Bank A/c                                       Dr. Amt
    Profit and Loss A/c *                               Dr. Amt
    To Furniture A/c Amt
    To Profit and Loss A/c  ** Amt

     *In case of loss

    **In case of profit

     On the sale of furniture, its balance gets reduced, hence credited.
    Cash or Bank is debited as cash comes in hand or into the bank.

    Also, profit or loss may arise due to the difference in sale value and the carrying amount of the furniture A/c.

    The difference is debited to Profit and Loss A/c in case of loss and credited in case of profit.

     

    Depreciation on Furniture

    Depreciation A/c                                         Dr. Amt
    To Furniture A/c Amt

    Here, furniture is credited as it is decreased by the amount of depreciation.

    Depreciation being a non-cash expense, is debited.

    Journal Entries on taking Furniture as stock in trade

    When furniture is stock of trade of a business, the journal entries will be like normal purchase and sales entries as below:

     

    Purchase A/c                                               Dr. Amt
    To Cash / Bank A/c Amt

     

     

    Cash / Bank A/c                                          Dr. Amt
    To Sales A/c Amt

    There will be no furniture account.

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Anushka Lalwani
Anushka Lalwani
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  2. ShreyaSharma none
    This answer was edited.

    Introduction & Definition Firstly, let's see what the term 'petty cash book' means. The word ‘petty’ means small. A petty cash book is identical to a cash book, maintained to record the small expenses of a business like stationery, postage, stamps, carriage, etc. The cash received by a petty casRead more

    Introduction & Definition

    Firstly, let’s see what the term ‘petty cash book’ means. The word ‘petty’ means small. A petty cash book is identical to a cash book, maintained to record the small expenses of a business like stationery, postage, stamps, carriage, etc. The cash received by a petty cashier is recorded on the debit/ receipt side whereas, the money he pays is recorded on the credit/ payment side. The difference between the sum of the debit and credit items represents the balance of the petty cash in hand.

    The reason the petty cash book is maintained is that it records small expenses that are inconvenient or too small to be registered in the cash book. This is also called a simple petty cash book. Just like a cash book is maintained by the accountant, the petty cash book is maintained by a petty cashier.

    When it comes to the format, there are two types of petty cash book formats. They are-

    1. Simple Petty Cash Book
    2. Analytical Petty Cash Book

    We have been discussing the simple petty cash book so far. Thus,

    Format of Simple Petty Cash Book

     

     

    Analytical Petty Cash Book

    The analytical petty cash book has numerous columns for the recording of monetary transactions. In the analytical petty cash book, there are pre-existing columns for the usual expenses that are recorded frequently in the business which makes it easier for a business that has daily expenses for food, stationery, postage, etc. They’ll be having individual columns. It has numerous columns in it for the recording of expenses in it.

    The key advantages of an analytical petty cash book are-

    • One of the major key advantages is that the analytical petty cash book due to its format and structure saves time.
    • The other advantage is that it helps the business in easy comparisons.
    • It requires lesser time in recording.

     

    Format of Analytical Petty Cash Book

     

     

     

     

     

     

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A_Team
A_Team
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Goodwill Patents Preliminary Expense A/c Claims Receivable

  2. Karishma
    This answer was edited.

    Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence. In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are theRead more

    Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence.

    In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are the expenses incurred before the incorporation of a business. The word ‘fictitious’ means fake, these are not actually the assets of a company even though they are represented in the assets of the balance sheet.

    Since the benefit of a fictitious asset is received over a period of time, the whole amount is not charged to the profit and loss account. The amount is amortized over several years. These expenses are non-recurring in nature. These expenses are shown as assets under the head miscellaneous expenditure. Also known as deferred revenue expenditure.

     

    For example: A company incurred $50,000 as promotion costs before the formation of the business. This promotion cost will be deferred over 5 years. In the first year, $10,000 will be charged to the profit and loss account and the remaining $40,000 will be shown as an asset under the heading miscellaneous expenditure. Subsequently, $10000 will be charged to profit and loss for the next 4 years. The amount of $50,000 will be deferred over a span of 5 years.

    Some other examples of fictitious assets :

    • Promotional expenses: Expenses incurred for the promotion of business before the formation of the company such as advertising expenditures are amortized over many years.
    • Loss on the issue of shares or debentures: When a company issues shares or debentures at a discount, the discount is classified as a fictitious asset and is not treated as an expense or loss. It is amortized over several years.
    • Incorporation costs: Costs incurred during the formation of a business are incorporation costs. These include registration costs, licensing fees, legal fees and other costs incurred in setting up the business. These are fictitious assets and are amortized over several years.
    • Loss on Sale of Machinery: When a loss is incurred on the sale of machinery or equipment, that loss is also treated as a fictitious asset and is amortized over several years.

     

    Goodwill

    Goodwill is not a fictitious asset because goodwill has a realizable value and can be sold in the market. Goodwill is an intangible asset which does not have a physical existence but can be traded for monetary value. Goodwill has an indefinite life and is sold when the business is sold. Goodwill can be self-generated or purchased. Goodwill is shown as an intangible asset under the heading fixed asset in the financial statements.

     

    Patents

    Patents are intangible assets which do not have a physical existence but have realizable value and can be sold in the market. So, patents do not come under the category of fictitious assets. Patents are basically intellectual property. The purchase price of the patent is the initial purchase cost which is amortized over the useful life of the asset. Patents are shown as intangible assets under the heading fixed asset in the balance sheet of the company.

     

    Claim receivable

    Claim receivable is an asset if the claim has been authorized by the insurance company. Claim receivable has a monetary value, so does not come under the category of a fictitious asset. If the claim is not yet authorized by an insurance company, it will be shown as a footnote in the financial statements. Authorized claim receivable is shown as a current asset in the financial statement.

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Simerpreet
SimerpreetHelpful
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AmortizationDifference BetweenImpairment
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    Let us first understand the concepts of Amortization and Impairment. Amortization refers to the expense recorded on the decline of the value of intangible assets of a company. Intangible assets include goodwill, patents, copyrights, etc. It reflects the reduction in the value of Intangible assets ovRead more

    Let us first understand the concepts of Amortization and Impairment.

    Amortization refers to the expense recorded on the decline of the value of intangible assets of a company. Intangible assets include goodwill, patents, copyrights, etc. It reflects the reduction in the value of Intangible assets over its life span.

    Amortization is similar to Depreciation, however, while depreciation is over tangible assets amortization is over Intangible assets of the company.

    For example, Cipla Ltd. acquired a patent over a new drug for a period of 10 years. The cost of creating the new drug was 80,000 and the company must record its patent at 80,000. However, the company must amortize this cost by dividing the cost over the patent’s life, i.e., the amortization cost would be 8,000 (80,000/10) p.a. for the next 10 years.

    Impairment means a decline in the value of fixed assets due to unforeseen circumstances. Assets are impaired when the carrying value of assets increases its market value or “realizable value” and such increase is recorded as an impairment loss.

    Now suppose, Cipla Ltd. had existing machinery which suffered physical damage and is recorded at 50,000 in the books but the realizable value of the asset would only be 20,000. Hence, the asset would be written down to 20,000 and an impairment loss of 30,000 will be recorded.

    Impairment Vs Amortization

    Differences between the two can be shown as follows:

    Amortization Impairment
    Amortization is a reduction in the value of Intangible Assets over their useful life. Impairment is a reduction in the value of assets due to unforeseen circumstances.
    Amortization is a continuous process and the value of an asset reduces over time. Value of asset reduces drastically, creating a need to write down the value to its fair market value.
    Amortization is charged annually. Impairment is not an annual charge.
    Amortization is shown as an amortization expense. Impairment is shown as an impairment loss.
    Reasons for amortization includes consumption, obsolescence, etc. Reasons for impairment include damage to the asset, change in preferences, etc.
    Amortization is charged on Intangible assets Impairment is charged on fixed assets whether tangible or intangible.

    Suppose Unilever Ltd. has a patent over one of its products for a period of 5 years. The cost of the patent was 1,00,000. Then after 2 years one of its rivals, say ITC Ltd., launches a new product which is more preferred by the consumers over the one produced by Unilever Ltd. and the fair market value of the patent of Unilever Ltd. changes to 10,000.

    Now in this scenario, Unilever Ltd. would have amortized the patent (costing 1,00,000) at 20,000 (1,00,000/5) p.a. for 2 years and the book value at the end of the 2nd year is 60,000 (1,00,000 – 40,000). Now due to the new launch by ITC Ltd. the drastic change in the value of the asset from the book value of 60,000 to the realizable value of 10,000 will be recorded as an Impairment loss. Hence Impairment loss would be recorded at 50,000 (60,000 – 10,000).

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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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