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Discy Latest Questions

  1. Accumulated Depreciation Depreciation is a wear and tear of an asset due to efflux of time and various other factors. It's basically an allocation of the cost of a tangible asset over its useful life. Accumulated depreciation is the total depreciation charged on an asset until a specified date. ItsRead more

    Accumulated Depreciation

    Depreciation is a wear and tear of an asset due to efflux of time and various other factors. It’s basically an allocation of the cost of a tangible asset over its useful life.

    Accumulated depreciation is the total depreciation charged on an asset until a specified date. Its a contra asset account. And since its a contra asset account it reduces the balance of an asset i.e reduces debit balance and therefore has a credit balance.

    Accumulated Depreciation is an Asset or a Liability?

    Well if you ask me I would say that its neither an asset nor a liability.

    Reasons to justify the above statement:

    Why is it not an asset?

    Assets are the resources held by an entity so that it could provide some economic value for the entity. But, in the case of accumulated depreciation, it does not generate any economic benefit for an entity rather it indicated that a certain sum of economic benefit has already been availed.

    Why is it not a liability?

    A liability is an obligation of an entity for making payment at a specified future date to a third party. Here, accumulated depreciation does not represent an obligation of an entity rather it is maintained just for the purpose of record-keeping.

    Conclusion

    According to the reasons mentioned above it can neither be called as an asset nor a liability. This would be the correct answer to this question.

    But still, if you have to compulsorily classify the same as an asset or a liability I would definitely not classify as a liability as it would not ensure fair representation of the financial statements since then it would be considered an obligation made to a third party which is not the case here.

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  1. This answer was edited.

    Balance of Petty Cash Book- The balance of petty cash book is an asset and not income. The logic behind the answer is that petty cash book is one of the types of cash book and petty cash book records expenses and incomes which is similar to cash book. Since cash account is considered as an Asset, peRead more

    Balance of Petty Cash Book-

    The balance of petty cash book is an asset and not income. The logic behind the answer is that petty cash book is one of the types of cash book and petty cash book records expenses and incomes which is similar to cash book. Since cash account is considered as an Asset, petty cash book which is a part of cash book is also an asset.

    The balance of petty cash book is never closed and their balances are carried forward to the next accounting period which is considered as one of the most significant qualities of an asset whereas Income doesn’t have any opening balance and their balances get closed at the end of every accounting year.

    Petty cash book is placed under the head current asset in the balance sheet. The Closing Balance of petty cash book is computed by deducting Total expenditure from Total cash receipt (as received from the head cashier).

    To make the above explanation and logic easy. I would like to add a practical example for clear understanding.

    Example Problem

    Prepare Petty Cash Book of Alex & Max Co. from the following information as provided below

    Date ParticularsAmount
    1st AugReceived cash from head cashier5,000
    4th AugPaid Cartage expenses300
    8th AugTelephone charges paid200
    10th AugPaid Sundry expenses500

      Petty Cash Book of Alex & Max Co.

    Petty Cash Book

    Conclusion

    I would like to conclude my answer by stating that the balance of petty cash book is an asset and not income.

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  1. This answer was edited.

    Sure, NK Designer, I would like to share the important key differences between Assets and Inventory. I hope this will help you in understanding and analyzing the concept better. Difference between Assets and Inventory- S.No. Basis of Difference Assets Inventory 1. Meaning Asset refers to the economiRead more

    Sure, NK Designer, I would like to share the important key differences between Assets and Inventory. I hope this will help you in understanding and analyzing the concept better.

    Difference between Assets and Inventory-

    S.No.Basis of DifferenceAssetsInventory
    1.MeaningAsset refers to the economic resources that are owned or controlled by an entity or business for deriving short-term and long-term future benefit.Inventory refers to the set of finished goods (or) raw materials used for manufacturing goods to sell them in the market.
    2.TypesAssets are classified into two types namely- Fixed and Current assets. Fixed Assets are further classified into Tangible and Intangible Assets.Inventory is classified into 3 types namely- Raw Materials, Work In Progress and Finished Goods.
    3.Period/DurationFixed Assets are kept in the business for a longer period whereas Current Assets are kept in business for a short period but they are not meant for immediate sale.Inventory is not kept in the business for a longer period. They are meant for immediate sale to generate revenue.
    4.ScopeAssets have a broad scope because they remain in the business for both long-term (Fixed Assets) and short-term (Current Assets).Inventory has a narrow scope because they are quickly converted into revenue by selling them.
    5.Key featuresi) Price (or) value.

    ii) Generates revenue for a longer period.

    iii) Maintenance cost.

    iv) Highly Durable.

    v) Subject to Depreciation.

    i) High liquidity

    ii) Readily accessible to end-users.

    iii) Contributes to working capital management.

    iv) Creates seasonal demand.

    v) Economies of scale.

    6.Methods of Valuationi) Cost Method.

    ii) Base Stock Method.

    iii) Fair value Method.

    iv) Standard Cost Method.

    i) FIFO Method.

    ii) LIFO Method.

    iii) Simple Average Method.

    iv) Weighted Average Method.

    7.Examplesi) Plant and Machinery.

    ii) Furniture.

    iii) Bills Receivables.

    iv) Sundry Debtors.

    v) Patents and Trademarks.

    i) Aluminium and steel for manufacture of utensils.

    ii) Flour for bakery production.

    iii) Crude oil for refineries.

    iv) Cotton for cloth production

    8.PresentationAll Assets are shown in the balance sheet on the assets side as a non-current and current asset.Inventory is shown on the credit side of the trading account and under the head current assets in the balance sheet.

     

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  1. This answer was edited.

    Yes, investments are assets. First, let me familiarize you with the meaning of the term investments in order to understand its nature. Meaning of Investments Investments are assets or resources owned and controlled by entities. They provide future economic value to entities. They are held with an inRead more

    Yes, investments are assets.

    First, let me familiarize you with the meaning of the term investments in order to understand its nature.

    Meaning of Investments

    Investments are assets or resources owned and controlled by entities. They provide future economic value to entities. They are held with an intention to generate additional income or to benefit from the appreciation in value over time. 

    Examples of investments
    1. Investment in Mutual funds
    2. Investment in Government securities
    3. Investment in Debentures & Bonds
    4. Acquiring Shares of companies
    5. Acquisition of Land & Building to earn rentals or for capital appreciation
    6. Investment in Subsidiaries, Associates, and Joint Venture

    Analyzing the meaning of investments itself, we can conclude that investments are assets for entities acquiring them.

    Presentation of Investments in Financial Statements

    1. Long-term Investments

    Investments that are held for more than a period of 1 year are termed as Long-term Investments.

    Examples

    a. Investment in Real Estate to earn rentals or for capital appreciation
    b. Purchase of Debentures or Corporate/Government Bonds having a maturity period of more than a year
    c. Investment in Subsidiaries, Associates or Joint Venture

    Treatment in Financial Statements

    Financial StatementTreatment
    Balance SheetPresented as Long-term Investments in the balance sheet under the head “Non-Current Assets”

    2. Short-term Investments

    Investments that are held with an intention to dispose off within a period of 1 year are referred to as Short-term Investments. They are held primarily for the purpose of trading. They are also known as Marketable Securities.

    Examples

    a. Investment in Mutual Funds
    b. Acquisition of Shares of companies

    Treatment in Financial Statements

    Financial StatementTreatment
    Balance SheetPresented as Short-term Investments in the balance sheet under the head “Current Assets”

    An extract of the balance sheet has been attached for a better understanding of the presentation of investment.

    Investments in Balance Sheet

     

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  1. This answer was edited.

    Accounts receivable as an asset I think before getting onto this question you should have a clear idea about what does an account receivable mean. An account receivable refers to an amount due to be received by the company for the sale of goods or services rendered. It's the value of goods that theRead more

    Accounts receivable as an asset

    I think before getting onto this question you should have a clear idea about what does an account receivable mean.

    An account receivable refers to an amount due to be received by the company for the sale of goods or services rendered. It’s the value of goods that the customer has not yet paid even though he has received the title of goods or enjoyed services.

    In simple words, any sum of money owed by a person for purchase made on a credit basis refers to an account receivable.

    For Example,

    Uber Inc. purchases 2000 units of smartphones from Apple Inc. for gifting them to its employees it purchases it on a 45 days credit and the amount remains due on a reporting date hence such an amount due becomes an account receivable for Apple Inc.

    Moving ahead, the answer to your question is that ” account receivable is an asset”.

    Why is it an asset?

    As explained earlier accounts receivable is the money owed by the client to the company. Hence, it can be said that the company has a right to receive the money since it has already delivered a product or rendered service. Because of this, the customer must pay to the company within a specific time frame.

    And so it’s an Asset since it ensures the future economic benefit for the company.

    The accounting treatment of such a transaction at the time of making a credit sale:

    Accounts Receivable a/cDebitIncrease in Asset
    To Sales a/cCreditIncrease in Revenue

    And at the time of actual receipt of cash :

    Cash A/cDebitIncrease in Asset
    To Accounts Receivable A/cCreditDecrease in Asset

    It shall be presented in the balance sheet under the head of the current asset if the amount is receivable within a year and beyond that, it’s recorded under the head of non-current assets
    In case you are unable to understand the position of such item in a balance sheet the below example would be of great help

    Presentation of Account receivable in an extract of balancesheet

    Why is it not a revenue?

    Revenue is the income generated by an entity. A major part of such revenue comes from sales or if an entity renders services from such services. It covers only that part of it pertaining to the current reporting period.

    Whereas the balance in the accounts receivable includes the unpaid dues from the customers for the current reporting period and earlier reporting period.

    Thus it can be said that the accounts receivable balance > amount reported in an income statement.

    Because of the reasons stated above, it can safely be concluded that accounts receivable is an asset.

    If the bad debts exist the company will have to reduce such balance from the total of accounts receivable and will have to debit it in its profit and loss statement.

    I have tried to answer it as simply as I can and I hope it helps.


    Aastha Mehta

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  1. This answer was edited.

    The simple meaning of capital, as known by many, is the sum of money invested in the business by the owner/shareholder/partners. It can be in the form of cash or assets. From the accounting perspective, capital is generally of three types, equity capital, debt capital, and working capital. Capital aRead more

    The simple meaning of capital, as known by many, is the sum of money invested in the business by the owner/shareholder/partners. It can be in the form of cash or assets. From the accounting perspective, capital is generally of three types, equity capital, debt capital, and working capital.

    Capital as a Liability

    A very common question that strikes us is that even though capital is invested by the owner in the form of cash or assets, why is it recorded on the liabilities side of the balance sheet? From the accounting perspective, Capital is a liability because the business is obliged to repay its owner.

    To make the point clear, I would like to introduce you to the two different accounting perspectives of the same.

    Internal Liability

    Firstly, in the case of equity capital, it refers to ownership and represents the owner’s fund. The company is obliged to repay the owners as it is an internal liability and interest on capital is also paid during the operations of a company. A company is considered as a separate legal entity from its owner. The proprietor/shareholder/partners have invested the amount with an aim and expectation of profits in return.

    However, the owners are repaid only if any amount is left after paying off all the obligations during the winding up of the company. It is not a mandatory liability like in the case of debt capital. It can also be represented as follows:

    Assets = Liabilities + Capital

    I have used the accounting equation to show the shareholder’s equity/capital as a difference and balancing figure between the company’s liabilities and assets. Since the capital invested is used to pay off all the debts, it has a credit balance and is recorded on the liabilities side of the balance sheet.

    External Liability

    Secondly, let us assume that company A has borrowed a certain sum of money from the company B, and holds onto the amount invested for realizing feasible profits in the future. The company is obliged to repay, irrespective of profits or loss.

    In simple words, I can conclude that capital is a liability.

    Capital as shown in the balance sheet

    Balance Sheet as at 31st March,yyyy

    LiabilitiesAmount AssetsAmount
    Capital2,40,000Cash in hand70,000
    (+) Net Profit70,000Accounts receivables50,000
    (-) Drawings(30,000)Patents10,000
    (-)Interest on capital(20,000)Equipment45,000
    Retained Earnings10,000Building90,000
    Sundry Creditors40,000Prepaid Expense35,000
    Outstanding Rent/Salary5,000Goodwill20,000
    General Reserve10,000Investments60,000
    Loan taken from Bank55,000Accrued Income10,000
    3,80,0003,80,000

    Hope this helps.

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  1. This answer was edited.

    Before directly diving into the question asked-Is income received in advance a liability or an asset? I will make you equipped with the meaning of the word “Income received in advance”. Meaning of "Income received in advance" Income received in advance refers to an income that has been received by tRead more

    Before directly diving into the question asked-Is income received in advance a liability or an asset? I will make you equipped with the meaning of the word “Income received in advance”.

    Meaning of “Income received in advance”

    Income received in advance refers to an income that has been received by the entity in the current accounting period but it actually relates to the future accounting period. The entity has just received the income but has not earned it yet. It is also known as Unearned Income.

    The entity receiving the income in advance still has an obligation to render the goods or services in the next accounting period, corresponding to the income received. Only after the entity renders the goods or service, the transaction will be considered as complete. So, because of this reason, income received in advance is certainly considered to be a liability.

    As per the accrual system of accounting and to present the true and fair financial position of the entity, income received is to be recorded in the books of accounts, irrespective of when the actual goods or services are provided. So, income received in advance is recorded as a liability in the current accounting period.

    Income received in advance includes

    • Rent received in advance
    • Commission received in advance
    • Professional fees received in advance
    • Premium received in advance, etc.


    From the meaning of the word “Income received in advance” itself, we can conclude that it is a liability and not an asset.

    Treatment in Financial Statements

    Income received in advance is shown in both the Balance Sheet and Profit and Loss account.

    Financial StatementTreatment
    Profit and Loss accountReduced from the respective income on the credit side of profit and loss account
    Balance SheetPresented as a liability in the balance sheet under the head “Current Liabilities”

    A snippet of the balance sheet has been attached to show the presentation of Income received in advance.

    Income received in advance presented in balance sheet

    Conclusion

    Income received in advance is a liability and not an asset.

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