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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Anushka Lalwani
Anushka Lalwani
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Meaning of Workmen's Compensation Reserve Workmen compensation reserve is a reserve created to compensate the labourers and employees of a firm in case of an uncertain future event in the line with their work. For example, if a labourer or group of labourers get injured seriously while working on thRead more

    Meaning of Workmen’s Compensation Reserve

    Workmen compensation reserve is a reserve created to compensate the labourers and employees of a firm in case of an uncertain future event in the line with their work. For example, if a labourer or group of labourers get injured seriously while working on the premises of the firm, then they will be compensated from the money kept aside in the workmen’s compensation reserve.

    Workmen’s compensation reserve is created using the profits of a business. The journal entry for the creation of workmen compensation reserve is as follows:

    When a claim arises, the claim amount is transferred to Provision for workmen compensation claim A/c

    Treatment of workmen compensation reserve in revaluation account

    At the time of admission, retirement or death of partner or change in profit sharing ratio, the reserve is distributed among the old or existing partners or kept intact.

    Workmen’s compensation reserve is also distributed among the old or existing partners subject to the claim arising on the reserve.

    Here are the three situations:

     

    The revaluation account comes into the picture only when the claim is more than the amount available in the reserve. For example, the claim is Rs. 20,000 but the amount in the reserve is only Rs. 15,000.

    In such a case, the excess claim will be met by debiting the revaluation account.

    The journal will as  given below:

    Since the revaluation account is debited, it is a loss and this loss will be written from old or existing partners’ capital in the old profit sharing ratio. The journal entry is given below:

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A_Team
A_Team
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Depreciation is referred to as the reduction in the cost of a fixed asset in sequential order, due to wear and tear until the asset becomes obsolete. Following are some of ...

  2. Astha Leader Pursuing CA, BCom (Hons.)

    The main objective of depreciation is to calculate net profit. Depreciation is an expense allowed on the fixed assets of an entity to provide for the cost of benefit utilized by the entity in that particular year. Since the such assets are used for more than one financial year, profits for the furthRead more

    1. The main objective of depreciation is to calculate net profit.

    Depreciation is an expense allowed on the fixed assets of an entity to provide for the cost of benefit utilized by the entity in that particular year. Since the such assets are used for more than one financial year, profits for the further years would be misstated if such depreciation expense is not provided for.

    Further, depreciation in no way shows previous profits or satisfies the tax department and a reduction in tax is secondary since it will only be allowed if charged in the profit & loss account. Thus, B is the correct answer.

    2. Depreciation is generated due to wear and tear.

    Depreciation is provided for to compensate for the wear and tear of the asset while being used by the entity. Depreciation is not generated due to increase in the value of liability, decrease in capital or decrease in the value of assets. Rather the vice versa is true, that is an increase in liability, decrease in capital and decrease in asset is created due to depreciation.

    Thus, C is the correct answer.

    3. The purpose of making a provision for depreciation in the accounts is to charge the cost of fixed assets against profits.

    Fixed assets are long term assets with useful life of more than one accounting year and therefore the full cost of such assets are not provided for in the year of purchase rather a fixed portion is charged every year in the profit and loss account.

    Thus, A is correct and others are incorrect.

    4. According to the straight line method of depreciation, the depreciation remains constant.

    In the straight line method of depreciation, depreciation is calculated on the historical or purchase cost of the asset and the same amount is charged every year till the useful value of the asset, thus depreciation remains constant.

    Also, depreciation decreases each year in case of written down value method but depreciation can never increase. Thus, A is the correct answer.

    5. Total amount of depreciation of an asset cannot exceed its depreciable value.

    The depreciable value is the purchase cost of the asset less the scrap value. The total amount of depreciation can never exceed the depreciable value since depreciation is allowed on an asset till its useful life at a certain percentage. Even when the value of the asset becomes nil, no further depreciation would be charged and total depreciation would be equal to depreciable value but obviously cannot be more.

    Thus, A is the correct answer and other are wrong.

    6. According to fixed installment method, the depreciation is calculated on original cost.

    In the fixed installment method, also known as the straight line method, depreciation is calculated on the basis of the original or purchase cost of the asset using the formula-

    Depreciation = (Original cost – Scrap value)/Useful life of asset

    Thus, B is the correct answer.

    7. Salvage value means estimated disposal value.

    Salvage value is the value of the asset that can be realized by the entity on its sale after the useful life of the asset has been exhausted and is now obsolete for the entity.

    Salvage value is not definite but an estimation. Salvage value can be positive or nil but not negative. Thus, D is the correct option.

    8. Depreciation is calculated under diminishing balance method, based on book value.

    Under the diminishing value method, the depreciation is calculated at a certain percentage of the book value of the asset which is calculated after providing for depreciation in the previous year.

    Depreciation cannot be calculated on scrap value since it is the disposable value of the asset and depreciation on original value is calculated under straight line method. Thus, B is the correct option.

    9. Depreciation amount charged on a machinery will be debited to depreciation account.

    Depreciation is an expense and depreciation account will be debited since depreciation is a nominal account, as per traditional method, and all expenses are debited. Also, as per modern rules of accounting, increase in expenses are debited.

    When depreciation is charged there is a decrease in the value of assets therefore machinery account will be credit also depreciation cannot be classified under repair account or cash account heads. Thus, C is the correct option.

    10. In accounting, becoming out of date or obsolete is known as obsolescence.

    Amortization means decrease in the value of intangible assets of an entity. Depletion means exhaustion  of existing wasting assets such as coal mines. Physical deterioration means fall in value of asset due to physical damage to the asset. Therefore, the correct answer is Obsolescence.

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A_Team
A_Team
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  2. GautamSaxena Curious .
    This answer was edited.

    There are three types of businesses that can be commenced, they are sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting. In companiRead more

    There are three types of businesses that can be commenced, they are sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting.

    In companies, commencement is a declaration issued by the company’s directors with the registrar stating that the subscribers of the company have paid the amount agreed. In a sole proprietorship, the business can be commenced with the introduction of any asset such as cash, stock, furniture, etc.

    Journal entry

    In the journal entry, “Started business with Cash”

    As per the golden rules of accounting, the cash a/c is debited because we bring in cash to the business, and as the rule says “debit what comes in, credit what goes out.” Whereas the capital a/c is credited because “debit all expenses and losses, credit all incomes and gains”

    As per modern rules of accounting, cash a/c is debited as cash is a current asset, and assets are debited when they increase. Whereas, on the increment on liabilities, they are credited, therefore, capital a/c is credited.

    Therefore, the entry we’ll be passing is-

     

     

     

     

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Astha
AsthaLeader
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CreditDebitOpening Balance
  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Let us begin with a short explanation of what opening balance is: The opening balance is the amount of funds that are bought forward from the end of one accounting period to the beginning of a new accounting period. In a firm’s account, the first entry done is of the opening balance. It can either hRead more

    Let us begin with a short explanation of what opening balance is:

    The opening balance is the amount of funds that are bought forward from the end of one accounting period to the beginning of a new accounting period.

    In a firm’s account, the first entry done is of the opening balance. It can either have a debit balance or a credit balance depending upon whether the firm has a negative or positive balance.

    Opening balance of a ledger

    Opening balance is the first entry of the ledger account at the beginning of an accounting period.

    In the case of a newly started business, there will be no closing balances and as such there will be no balances to be carried forward. In such a case, the investment and capital of the business will be entered as an opening balance for the current accounting period.

    So the first and foremost part is to identify on which side of the ledger i.e. the debit side or the credit side the opening balance is to be entered.

    For Example, A trial balance is given which represents the debit and credit balances, accordingly, I will prepare different ledger accounts to make it simpler.

    The trial balance shows the opening balance of various accounts. Now posting them in ledger accounts.

    As the Furniture is an Asset account, the opening balance will be on the debit side of the ledger account.

    As Sundry creditor is a credit account,  we put the opening balance on the credit side.

    As the Capital is a credit account,  we put the opening balance on the credit side.

    As Wages is a debit account,  we put the opening balance on the debit side.

    As the Discount received is a credit account,  we put the opening balance on the credit side.

    Exception

    Drawing Account.

    Drawing account is an exception to this topic. It is considered a contra account to the owner’s capital account because it reduces the value of the owner’s equity. Drawings, therefore, have no opening balance.

    Contra Entry.

    Contra entry involves transactions of cash and bank. Any entry which involves both the cash and bank is contra entry.

    For example, we deposit cash 5000 into the bank.

    Accounting entry for this transaction would be

    In this case, the ledger entry would be

    As the bank account has a debit balance, the opening balance would come on the debit side.

    As the cash account has a credit balance, the opening balance would come on the credit side.

    Alternatively, If we withdraw cash 5000 from the bank.

    Accounting entry would be

    In this case, the ledger entry would be

    As the Cash account has a debit balance, the opening balance would come on the debit side.

    As the Bank account has a credit balance, the opening balance would come on the credit side.

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Karan
Karan
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  2. Manvi Pursuing ACCA
    This answer was edited.

    The accounting equation represents the relationship between assets, capital, and liabilities of a business. It follows the concept of the double-entry bookkeeping system where every debit has an equal credit. The rules state that at any time a business’ assets should equal liabilities. This is alsoRead more

    The accounting equation represents the relationship between assets, capital, and liabilities of a business. It follows the concept of the double-entry bookkeeping system where every debit has an equal credit. The rules state that at any time a business’ assets should equal liabilities. This is also known as the statement of financial position equation.

    The accounting equation can be shown as follows:

      Assets = Capital + Liabilities

    For example, Liza starts a business by investing $3,000 as cash. In accounting terms, business and owner are separate and so business owes money to Liza as capital.

    In this example,

    Capital invested = $3,000

    Cash (Asset) = $3,000

    If Liza puts this into the accounting equation, it will be shown as:

    Assets = Capital + Liabilities
    $3,000 (Cash) = $3,000 + Liabilities

    Further, Liza purchases a market stall from Ben and the cost of the stall was $1,800. She purchases flowers from the wholesale market at a cost of $700. Now she is left with $500 cash out of the original $3,000.

    The state of her business has now changed and can be shown as follows:

    Assets = Capital + Liabilities
    Stall        $1,800 $3,000 + Liabilities
    Flowers     $700
    Cash         $500
                     $3,000 $3,000
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Jayesh Gupta
Jayesh GuptaCurious
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  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    A cheque that has been issued but yet not presented to the bank for payment is known as an unpresented cheque Generally what happens is when a cheque is issued to a party or say, creditor, the business immediately records them in the bank column of the cash book but the creditor might not present thRead more

    A cheque that has been issued but yet not presented to the bank for payment is known as an unpresented cheque

    Generally what happens is when a cheque is issued to a party or say, creditor, the business immediately records them in the bank column of the cash book but the creditor might not present them immediately to the bank for payment on the same date. The bank will only debit the account when it will be presented to it, therefore as long as the cheque remains unpresented there will be a difference in both the books i.e cash book and passbook.

    Let me give you a short example of the above treatment

    Suppose on 27th January, in the books of Mr. Shyam, the balance of the bank column as per the cash book is Rs 10,000. He received a cheque of Rs 5,000 from Mr. Hari, one of his debtors, which was sent to the bank for collection. The amount of the cheque was not collected by the bank until 31st January. Due to this, there arises a difference of Rs 5,000 in the cash book and pass book of Mr. Shyam.

    Following will be the entry in Mr. Shyam cash book and passbook

    In the books of Mr. Shaym

    Cash book (bank column only)

    Date Particulars Bank (Rs) Date Particulars Bank (Rs)
    27th Jan To balance b/d 10,000
    27th Jan To Hari 5,000
    31st Jan By balance c/d 15,000
    15000 15000

      Mr. Shyam

       Bank Statement

    Date Particulars Debit (Withdraw) Credit (Deposite) Debit or Credit Balance
    31st Jan To balance b/d credit 10,000

    How it is treated in the bank reconciliation statement?

    There lies a temporary difference in both the books as the represented cheques will eventually be presented. Therefore we will not alter the cash book. The bank statement shows the greater amount of Rs 5,000 as compared to the cashbook, therefore we will debit the amount of unpresented cheque which will eventually make it balance to the level of bank statement.

     

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Ayushi
AyushiCurious
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    No, they are not the same. They are both used to measure the short term liquidity of a business but their approach is different. Following are the differences between the two : Let’s take an example. Following is the balance sheet of X Ltd: Hence, as per the following information, Current Ratio = CuRead more

    No, they are not the same. They are both used to measure the short term liquidity of a business but their approach is different. Following are the differences between the two :

    Let’s take an example.

    Following is the balance sheet of X Ltd:

    Hence, as per the following information,

    Current Ratio = Current Assets / Current Liabilities

      = Inventories + Trade debtors + Bills receivables + Cash  and bank + Prepaid Expenses / Trade Creditors + Bills Payables + Outstanding Salaries

    = ₹85,000 + ₹2,50,000+ ₹95,000 + ₹1,50,000 + ₹10,000/ ₹2,00,000 + ₹75,000 + ₹25,000

    = ₹6,00,000 / ₹3,00,000

    = 2/1 or 2:1

    Quick Ratio = Quick Assets / Current Liabilities

     = Trade debtors + Bills receivables + Cash and bank / Trade Creditors + Bills Payables + Outstanding Salaries

    = ₹2,50,000+ ₹95,000 + ₹1,50,000 / ₹2,00,000 + ₹75,000 + ₹25,000

    = ₹5,05,000/ ₹3,00,000

    = 41 / 25 or 1.68 : 1

    Let’s discuss both ratios in detail.

    1. Current ratio:

    The current ratio represents the relationship between current assets and current liabilities

    Current ratio =  Current Assets/Current Liabilities

    It measures the adequacy of the current assets to current liabilities. The main question this ratio tries to answer is: – “Does your business have enough current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets?”

    The generally acceptable current ratio is 2:1.  But it depends on the characteristics of the assets of a business to judge whether a specific ratio is satisfactory or not.

    2. Quick Ratio: Quick ratio is the ratio between quick assets and current liabilities. It is also known as the Acid Test Ratio. By quick assets, we mean cash or the assets that can be quickly converted into cash ( near cash assets)

    Quick Assets = Current Assets – Inventories – Prepaid assets

     Quick ratio =  Quick Assets/Current Liabilities

    Inventories are not considered near cash assets.

    The quick ratio is a more conservative approach than the current ratio to measure the short term liquidity of a firm.

    It answers the question, “If sales revenues disappear, could my business meet its current obligations with the readily convertible quick funds on hands?”

    1:1 is considered satisfactory unless the majority of the quick asset are accounts receivable and the receivables turnover ratio is low.

     

     

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Bonnie
BonnieCurious
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  2. SidharthBadlani CA Inter Student
    This answer was edited.

    Net credit sales can be defined as the total sales made by a business on credit over a given period of time less the sales returns and allowances and discounts such as trade discounts. Net Credit Sales = Gross Credit Sales – Returns – Discounts – Allowances. Credit sales can be calculated from the ARead more

    Net credit sales can be defined as the total sales made by a business on credit over a given period of time less the sales returns and allowances and discounts such as trade discounts.

    Net Credit Sales = Gross Credit Sales – Returns – Discounts – Allowances.

    Credit sales can be calculated from the Accounts receivable/ Bills Receivable/ Debtors figure in the Balance Sheet. It will be normally shown under the Current Assets head in the Balance Sheet.

    Credit sales = Closing debtors + Receipts – Opening debtors.

    Alternatively, you may observe the bills receivable ledger account to locate the figure of credit sales.

     

    Net Credit Sales and related terms

    Before we try to understand the concept of net credit sales with an example, let us discuss the term sales return. Sales return means the goods returned by the customer to the seller. It may be due to defects or any other reasons.

    Now let us take an example. John is a retail businessman. He sells smartphones. He buys 100 smartphones from Vivo on credit. The smartphones are worth ₹1.5 lahks. He then returns smartphones worth 20,000 rupees to Vivo. He also gets an allowance of rupees 5,000 from Vivo.

    In the above example, the credit sales of Vivo are of rupees 1.5 lakh. The net credit sales is of

    1.5 lakh – 20,000 – 5, 000 = 1.25 lakh rupees.

    Importance of Net Credit Sales

    • Net Credit Sales figure together with the accounts receivable figure acts as an indicator of the credit policy of the company.
    • It offers insights into the ability of the company to meet short-term cash obligations.
    • The credit policy also affects the total current assets that the company has in the manifestation of Accounts Receivable

    Advantages and Disadvantages of Credit Sales.

    Advantages 

    • Increased Sales – The credit Policy facilitates increased sales for the company. The company can attract more customers with a liberal credit policy. For example, Apple got more customers when it started to sell its products on an EMI basis.
    • Customer Loyalty / Retention- Regular customers can be retained and made to feel honored by offering them more liberal credit terms.

    Disadvantages 

    • Delay in Cash Collection – Credit Sales imply that the company would get cash on a delayed basis. This money could have otherwise been put to use for some other profitable venture or could have borne interest for the company
    • Collection Expenses– The company had to incur additional expenditures for collecting money from debtors.
    • Risk of Bad Debts – With credit sales, there is always the risk that the buyer may become bankrupt and may not be able to pay the money due to the seller.
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