AccountingCapital Latest Questions

Emin Radwan
  1. This answer was edited.

    Examples of Bank Reconciliation Statement Illustration 1, From the following particulars prepare a Bank Reconciliation Statement on 31st January XXXX Debit Balance as per Cash Book 48,000. Cheque of 37,000 was deposited and collected by the bank but not recorded in Cash Book. Purchased Furniture andRead more

    Examples of Bank Reconciliation Statement

    Illustration 1,

    From the following particulars prepare a Bank Reconciliation Statement on 31st January XXXX

    1. Debit Balance as per Cash Book 48,000.
    2. Cheque of 37,000 was deposited and collected by the bank but not recorded in Cash Book.
    3. Purchased Furniture and payment by the debit card 25,000, was not recorded in Cash Book.
    4. A cash deposit of 26,000 was recorded in the cash column of Cash Book.

     

    Solution:

    Bank Reconciliation from cash book to pass book

    Illustration 2,

    From the following particulars prepare a Bank Reconciliation Statement on 31st October XXXX

    1. Pass Book of Ms Jane shows an overdraft of 50,000.
    2. Cheques issued but not presented for payment to bank 40,000.
    3. Payment side, bank column of Cash Book was undercast by 500.
    4. Interest on overdraft charged by the bank was 1,500.

     

    Solution:

    Bank Reconciliation Statement

    Examples of Cash Book

    Illustration 1,

    Date Particulars Amount
    1st March XXXX Cash in Hand 2,500
    5th  March XXXX Cash paid to Mr Allen 1,000
    16th  March XXXX Cash Sales 1,500
    25th  March XXXX Paid Salary 500

     

    Solution:

    Adjustments in the cash book

    Illustration 2,

    Prepare a 2 column cash book

    Date Particulars Amount
    1st Oct XXXX Bank Balance 52,000
    1st Oct XXXX Cash Balance 15,000
    4th  Oct XXXX Purchased goods and payment made by cheque 15,000
    16th  Oct XXXX Sold goods for cash 8,000
    25th  Oct XXXX Paid rent by cheque 500
    26th  Oct XXXX Purchased goods for cash 10,000

     

    Solution:

    Cash Book with both cash and bank columns

     


    Aastha Mehta.

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Maneet Kaur
  1. This answer was edited.

    To begin with, let me help you understand the meaning of the term Contingent Assets. Meaning of Contingent Assets Contingent Assets are possible assets or potential economic benefits because they do not currently exist but may arise in the near future. The shift from possible assets to real assets fRead more

    To begin with, let me help you understand the meaning of the term Contingent Assets.

    Meaning of Contingent Assets

    Contingent Assets are possible assets or potential economic benefits because they do not currently exist but may arise in the near future. The shift from possible assets to real assets for the entity is dependent on the occurrence or non-occurrence of future events which are not under its control.

    A tabular depiction of the recognition/disclosure principles for contingent assets has been presented below:

    Inflow of economic benefits Treatment Recognition/Disclosure
    Virtually certain ( > 95% probability) Not treated as Contingent Asset Recognized as an “Asset” in the Balance Sheet
    Probable ( > 50% – 95% probability) Treated as Contingent Asset Disclosure is made in the-
    a. Financial Statements (Notes to Accounts); orb. Report of the approving authority (eg. Board of Directors),

    as applicable.

    Not Probable ( < 50% of probability) Not treated as Contingent Asset Disclosure not permitted

    Examples of Contingent Assets

    Example 1.

    ABC Ltd filed a legal suit against its supplier XYZ Ltd for compensation against damages on non-supply of contracted goods. There is a possibility of ABC Ltd winning the case, as it has concrete evidences of contract violation by XYZ Ltd. The lawsuit has not been settled till the accounting year-end.

    –In this case, it is probable ( > 50% – 95% probability) that there would be an inflow of economic benefits (compensation for damages) to ABC Ltd in the near future. So, it will be disclosed as a contingent asset in the notes to accounts or board report (as applicable).

    Example 2.

    Suppose in the above example, the court orders XYZ Ltd to pay 100,000/- as compensation for damages. ABC Ltd has not yet received the money until the accounting year-end. Can it recognize this as a contingent asset?

    –The court has ordered the payment for damages. Although ABC Ltd has not received the payment till the accounting year-end, it is virtually certain ( > 95% of probability) that it will receive the compensation amount in the near future.

    ABC Ltd will now recognize the compensation amount as an asset in the financial statements and not disclose it as a contingent asset, as it is virtually certain.

    Example 3.

    Jute Ltd entered into a sale contract of 500,000 for the supply of jute during 20×2-20×3 with Textiles Ltd. During the transit, the truck carrying the jute for delivery met with an accident which destroyed the entire jute. The jute destroyed was covered under an insurance policy. The cost of the jute destroyed was 400,000. The policy prescribed acceptance of the amount of claim, amounting to 80% of the goods destroyed ie. 320,000 (80% * 400,000).

    Before the end of the accounting year, Jute Ltd received informal information from the insurance company that their claim has been processed and the payment has been dispatched for the claim amount.

    –In this scenario, there exist a possible asset (claim amount). Also, the inflow of economic benefits is probable ( > 50% – 95% probability) because Jute Ltd has received an informal information from the insurance company about the processing of the claim.  Therefore, Jute Ltd can treat and disclose this as a contingent asset in the notes to accounts or board report (as applicable).

    Example 4.

    A Road & Highway Developer enters into a contract with the Road & Highway Authority of India for completing a highway project. The agreed cost of total project was 10 million but the actual cost turned out to be 15 million. As per the terms of the contract, the Authority was mandatorily required to handover the land within a specific time period. But the Authority failed to do so. On account of delay in handing over of land, an excess cost of 5 million was incurred by the Developer.

    To recover the incremental cost incurred, the Developer filed litigation against the Authority for reimbursement of 5 million. The court has not yet given its final verdict. However, the Developer is sure that he will win the case.

    –In this example, the Developer will disclose 5 million as a contingent asset in the notes to accounts or board report (as applicable) till the court does not give its final verdict. This is because there is a probability of Developer winning the case as there has been a violation of terms by the Authority.

    Once the litigation is announced in favor of the Developer by the court, this will be recognized as an asset in the balance sheet of the Developer.

    Hope these examples have made your understanding of contingent assets very clear.

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Nancy Chawla
  1. This answer was edited.

    Before I give you the examples of deferred revenue I would first like to explain what deferred revenue means. Meaning of Deferred Revenue Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services. ExRead more

    Before I give you the examples of deferred revenue I would first like to explain what deferred revenue means.

    Meaning of Deferred Revenue

    Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services.

    Examples of Deferred Revenue

    1. Yearly Subscription to a Magazine: An entity engaged in publishing magazines generally charges a yearly subscription for sending the magazines at a predetermined time intervals to the subscribers. Such an entity charges a yearly subscription the amount received is a perfect example of deferred revenue. The Accounting Treatment for the Same is
      The entity will first record deferred revenue as

      Cash  A/c Debit Debit the Increase in an Asset.
      Deferred Revenue A/c Credit Credit the Increase in a Liability.

      At the time of actual accrual of revenue i.e at the time of recording earned revenue-

      Deferred Revenue A/c Debit Debit the Decrease in a Liability.
      Subscription Revenue A/c Credit Credit the Increase in an Income.
    2. Other Subscriptions: another example is the subscription charged by Amazon, Netflix, Hotstar etc. for getting access rights to download or watch the content on the website or such app. The charges are generally on a yearly or quarterly or monthly basis and thus in case if the customer buys a quarterly or a yearly plan such revenue is a deferred revenue since the services are not yet availed by the users.The company shall account such receipts and revenue as:
      when it receives such subscription amount-

      Cash  A/c Debit Debit the Increase in an Asset.
      Deferred Revenue A/c Credit Credit the Increase in a Liability.

      and when such revenue is accrued i.e customer has availed such service-

      Deferred Revenue A/c Debit Debit the Decrease in a Liability.
      Subscription Charges Earned A/c Credit Credit the Increase in an Income.
    3. Software license Fees: A software company generally charges the software license fees for using the entity’s software on the yearly or semi-annually or quarterly basis. Such fees are charged even before giving access rights. Hence, the company defers revenue. Accounting Treatment in the books of software company shall be:
      At the time of receipt of the license fee

      Cash  A/c Debit Debit the Increase in an Asset.
      Deferred Revenue A/c Credit Credit the Increase in a Liability.

      At the time of recognising revenue which may be monthly or quarterly or such other basis as per the entity’s policy-

      Deferred Revenue A/c Debit Debit the Decrease in a Liability.
      Software License Fees Earned A/c Credit Credit the Increase in an Income.
    4. Educational Institute: Coaching centres or the universities for higher education generally charge the course fee before commencement of each term. Thus the amount is received by such institute even before the services of imparting education has been rendered, This is a perfect example of deferred revenue. Such Educational Institute shall account this transaction as:
      At the time of receipt of such fee-

      Cash  A/c Debit Debit the Increase in an Asset.
      Deferred Revenue A/c Credit Credit the Increase in a Liability.

      and at the time of revenue recognition-

      Deferred Revenue A/c Debit Debit the Decrease in a Liability.
      Tuition Fees Earned A/c Credit Credit the Increase in an Income.

      I have tried giving as many examples as I could relate. I hope this answers your question.


      Aastha Mehta

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Sahil
  1. This answer was edited.

    Yes. But first, let me familiarize you with the meaning of Chart of Accounts. Meaning of Chart of Accounts Chart of Accounts is a numbered listing (account codes) of the various accounts that form part of the accounting records of an entity. The codes used help to group similar accounts together. FoRead more

    Yes. But first, let me familiarize you with the meaning of Chart of Accounts.

    Meaning of Chart of Accounts

    Chart of Accounts is a numbered listing (account codes) of the various accounts that form part of the accounting records of an entity. The codes used help to group similar accounts together. For eg. if you want to see only the operating expenses incurred. In this case, you need to enter only the range code assigned to operating expenses & you will get all the operating expenses transactions together at one place.

    Chart of Accounts varies from one entity to another depending on the size of the entity.

    Example of Chart of Accounts

    In the example given below, 1st digit of the numeric codes signifies different account types. “1” represents assets, “2” represents liabilities, “3” represents equity, “4” represents revenues, & “5” represents expenses.

    Sr No. Numeric range Account type Financial Statements
    1 1000-1999 Assets Balance Sheet
    1000-1499 Non-Current Assets
    1500-1899 Current Assets
    1900-1999 Contra Assets
    2 2000-2999 Liabilities Balance Sheet
    2000-2499 Non-Current Liabilities
    2500-2999 Current Liabilities
    3 3000-3999 Equity Balance Sheet
    4 4000-4999 Revenues Profit & Loss A/c
    4000-4499 Operating Income
    4500-4999 Non-Operating Income
    5 5000-5999 Expenses Profit & Loss A/c
    5000-5499 Operating Expenses
    5500-5999 Non-Operating Expenses
    1000-1499 Non-Current Assets 2000-2499 Non-Current Liabilities
    1000 Property, Plant & Equipment 2000 Long term debts
    1010 Buildings 2010 Loan from Financial Institutions
    1020 Land 2020 Loan from Others
    1030 Plant & Machinery
    1040 Furniture & Fixtures 2500-2999 Current Liabilities
    1050 Computer & Peripherals 2500 Accounts Payables
    1060 Leasehold Premises
    1070 Vehicles 2600 Short term debts
    2610 Loan from Financial Institutions
    1100 Intangible Assets 2620 Loan from Others
    1110 Goodwill
    1120 Patent 2700 Other Current Liabilities
    1130 Copyrights 2710 Pre-received Income
    1140 Trademarks 2720 Outstanding Expenses
    1150 Design
    1160 Software 3000-3999 Equity
    3100 Capital Contribution
    1200 Long term Investments 3200 Retained Earnings
    1210 Investment in shares
    1220 Investment in bonds 4000-4499 Operating Income
    1230 Investment in govt securities 4100 Sale of Goods
    4200 Sale of Services
    1300 Long term Loans & Advances
    4500-4999 Non-Operating Income
    1500-1899 Current Assets 4600 Interest from Investments
    1500 Accounts Receivables 4700 Dividend from Investments
    4800 Profit from Sale of Fixed Assets
    1600 Cash & Cash Equivalent 4900 Profit from Sale of Investments
    1610 Bank-Current A/c
    1620 Bank-OD A/c 5000-5499 Operating Expenses
    1630 Petty Cash 5000 Purchase of Raw Materials
    5050 Employee Benefit Expenses
    1700 Inventories 5100 Rental/Lease Expenses
    1710 Work-in-Progress 5150 Depreciation
    1720 Finished Goods 5200 Amortization
    1730 Raw Materials 5250 Professional Fees
    5300 Legal Expenses
    1800 Other Current Assets 5350 Electricity Expenses
    1810 Prepaid Expenses 5400 Repairs & Maintenance
    1820 Accrued Income 5450 Advertising Expenses
    1900-1999 Contra Assets 5500-5999 Non-Operating Expenses
    1910 Accumulated Depreciation 5500 Loss from Sale of Fixed Assets
    1920 Accumulated Amortization 5600 Loss from Sale of Investments

    A downloadable excel sheet has been attached for your reference.

    Example of Chart of Accounts

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