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Discy Latest Questions

  1. This answer was edited.

    Return Outwards In the layman language, return outwards refers to the goods returned by the customer to the supplier (or) manufacturer due to various issues found in the goods (say- quality, defects or damages). Return outwards is also known as purchase returns. The amount of return outwards (or) puRead more

    Return Outwards

    In the layman language, return outwards refers to the goods returned by the customer to the supplier (or) manufacturer due to various issues found in the goods (say- quality, defects or damages). Return outwards is also known as purchase returns.

    The amount of return outwards (or) purchase returns is deducted from the total purchases of the firm. It is treated as a contra-expense transaction. Return outwards holds credit balance and is placed on the credit side of the trial balance.

    To make this concept easy and understandable, I would like to add an example and trial balance (tabular format) for the above explanation.

    Example-  Mr Alex (a dealer in the washing machines) purchases 10 washing machines for 1,00,000 from Amazon on a credit period of 30 days. On 20th April he returns all the washing machines to Amazon due to the serious defects in all of its models. Pass journal entries for the above transaction in the books of Mr Alex.

    In the books of Mr Alex (Modern Approach)

    a) Entry on the purchase of goods from Amazon

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st April Purchase a/c Dr 100,000 Expense Debit- The Increase in Expense
     To Amazon a/c  100,000 Liability Credit- The Increase in Liability

    (Being goods purchased on credit from Amazon)

    b) Entry on the return of goods purchased from Amazon.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    20th April Amazon a/c Dr 100,000 Liability Debit- The Decrease in Liability
     To Purchase returns a/c  100,000 Expense Credit- The Decrease in Expense

    (Being goods returned to Amazon due to serious defects)

    Placement in Trial Balance

    Return Outwards

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  1. The sale of services might be a new concept for you as we have commonly heard more about the sale of goods by the businesses. However, the treatment of the two is the same in the books of accounts. Like goods, the sale of services is made on cash as well as credit basis. There are plenty of servicesRead more

    The sale of services might be a new concept for you as we have commonly heard more about the sale of goods by the businesses. However, the treatment of the two is the same in the books of accounts. Like goods, the sale of services is made on cash as well as credit basis. There are plenty of services provided by companies such as financial, management, software, consulting, marketing services, etc. 

    Journal entry for the sale of services on credit

    The respective debtor account is debited while the sales account is credited.

    1. According to the golden rules of accounting:

    Debtors a/c Debit Debit  the receiver
    To Sales a/c Credit Credit all incomes and gains

    (being services sold on credit)

    2. According to the modern rules of accounting:

    Debtors a/c Debit Debit  the increase in asset
    To Sales a/c Credit Credit the increase in revenue

    (being services sold on credit)

    Example

    Mr. K availed the financial services of XYZ Ltd. in May amounting to 20,000 with an agreement to pay the same in the following month. The journal entry in the books of XYZ Ltd. for the month of May is as follows:

    Mr. K’s a/c Debit 20,000
    To Sales a/c Credit 20,000

    (being services sold on credit)

    Hope this helps.

     

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  1. This answer was edited.

    Salary due is the amount of salary payable for a particular period but the related services corresponding to the amount of salary payable have already been availed by the business entity. It is also known as salary outstanding. It is a liability for the business entity. Journal Entry for Salary DueRead more

    Salary due is the amount of salary payable for a particular period but the related services corresponding to the amount of salary payable have already been availed by the business entity. It is also known as salary outstanding. It is a liability for the business entity.

    Journal Entry for Salary Due

    Journal entry for salary due/payable can be recorded in the books of accounts using both the golden rule and the modern rule of accounting.

    1. According to the “Golden rules” of accounting

    a. Entry for salary due

    Salary A/c Debit Nominal account Debit all expenses and losses
     To Outstanding Salary A/c Credit Personal account (Representative) Credit the giver

    (Being salary due)

    b. Entry at the time of actual payment of the salary due

    Outstanding Salary A/c Debit Personal account (Representative) Debit the receiver
     To Cash/Bank A/c Credit Real account/Personal account Credit what goes out/Credit the giver

    (Being salary paid)

    2. According to the “Modern rules” of accounting

    a. Entry for salary due

    Salary A/c Debit Expense Debit the increase in expense
     To Outstanding Salary A/c Credit Liability Credit the increase in liability

    (Being salary due)

    b. Entry at the time of actual payment of the salary due

    Outstanding Salary A/c Debit Liability Debit the decrease in liability
     To Cash/Bank A/c Credit Asset Credit the decrease in asset

    Example

    ABC Ltd did not pay salary 100,000 for the month of March 20xx due on 31st March 20xx because of lack of funds. However, they paid the due salary on 25/04/20xx.

    1. Journal entry for salary due on 31/03/20xx

    Salary A/c Debit 100,000 Debit the increase in expense
     To Outstanding Salary A/c Credit  100,000 Credit the increase in liability

    (Being salary due for the month of March 20xx)

    2. Journal entry at the time of payment on 25/04/20xx

    Outstanding Salary A/c Debit 100,000 Debit the decrease in liability
     To Cash/Bank A/c Credit  100,000 Credit the decrease in asset

    (Being salary paid for the month of March 20xx)

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  1. This answer was edited.

    Zero Working Capital Before diving into the concept of Zero Working Capital, let me help you understand the meaning of Working Capital. Working Capital is the term used to demonstrate whether the company possesses adequate current assets to discharge off its current liabilities. It is calculated asRead more

    Zero Working Capital

    Before diving into the concept of Zero Working Capital, let me help you understand the meaning of Working Capital.

    Working Capital is the term used to demonstrate whether the company possesses adequate current assets to discharge off its current liabilities. It is calculated as follows:

    Working Capital = Total Current Assets – Total Current Liabilities

    Now, taking this forward let us interpret the theory of Zero Working Capital.

    The Working Capital of a company can be positive or negative, ie. the total current assets may exceed the total current liabilities or vice-versa. However, there can be a situation when the total current assets are equivalent to the total current liabilities of the company. Such a situation is referred to as Zero Working Capital. Zero Working Capital is when,

    Total Current Assets = Total Current Liabilities, or

    Total Current Assets – Total Current Liabilities = Zero

    Example

    Zero Working Capital

    Using the data given in the balance sheet above, let us calculate the zero working capital.

    1. Total Current Assets = Cash in hand/bank + Sundry Debtors + Bills Receivable + Inventory
    = 15,000 + 1,80,000 + 1,00,000 + 55,000
    = 3,50,000

    2. Total Current Liabilities = Sundry Creditors + Bills Payable + Outstanding Expenses
    = 1,95,000 + 85,000 + 70,000
    = 3,50,000

    As there is no excess of Total Current Assets over the Total Current Liabilities, this situation is referred to as Zero Working Capital.

    Benefits and Approach of Zero Working Capital

    Zero Working Capital is one of the latest techniques in working capital management. Let us now understand the benefits and approach of zero working capital in real-life scenario.

    1. Reduction in the level of investments in working capital

    Zero Working Capital is a strategy to reduce the level of investment in the working capital and thereby increase the investments in the long term assets. Following this strategy, companies avoid excess investments in current assets and prefer paying off their current liabilities using the existing current assets only.

    2. Savings in Opportunity Cost of Funds

    Working Capital earns a very low rate of return as compared to long term investments. Also, maintaining zero working capital will help save the opportunity cost of funds as the company can now use the excess funds to exploit various other opportunities.  So, owing to its benefits, the management would certainly prefer zero working capital.

    3. Just-in-Time Methodology

    Zero Working Capital approach will be possible only if the Just-in-Time methodology is adopted by the company. Following the demand-based production and distribution system is advised. Very low or zero inventory is emphasized. Everything should be produced and supplied as and when the demand for the same arises.

    To keep in pace with the Just-in-Time practice, the receivable and payable terms should also be modified. Payable time granted by the supplier should be extended and the credit terms granted to the debtors should be cutback. This will ensure that you have the cash required to fund the supplier’s payment.

    Conclusion

    Zero Working Capital eventually helps in better management of the current assets and current liabilities but still considered to be a difficult scenario to be implemented in practical business life.

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  1. This answer was edited.

    Charging Depreciation  in the Year of the Sale The answer to your question is that yes, one can charge depreciation in the year of sale. I guess reading the below para you will be able to interpret as to why it can be charged in the year of sale. First of all, what does depreciation mean? It is a meRead more

    Charging Depreciation  in the Year of the Sale

    The answer to your question is that yes, one can charge depreciation in the year of sale.

    I guess reading the below para you will be able to interpret as to why it can be charged in the year of sale.

    First of all, what does depreciation mean?

    It is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.

    It is allocated to charge a fair proportion of depreciable amount in each accounting period during the expected useful life of an asset.

    Thus, even in the year of the sale, the asset shall continue to wear and tear and so it shall be apt to charge the depreciation from the beginning of the accounting period till the date of its sale i.e for the period it has been used in the year of sale.

    I guess the below example will be of great help for you –

    The book value of an asset as on 01 /01/ XXXX is 70,000 depreciation is charged on an asset @ 10%. on 01/07/xxxx the asset is sold for an amount of 35,000.

    The accounting treatment for the same shall be:

    Charging depreciation of an amount of 3,500 (70,000 x 10% x 6/12) for 6 months i.e for the period in use (from 01/01 to 30/06):

    Depreciation A/c Debit 3,500 Debit the increase in expenses.
    To Asset A/c Credit 3,500 Credit the decrease in an asset.

    Now at the time of sale, the entity shall record a loss of 31,500 which is nothing but the difference between the written down value and the value of sale proceeds as shown below:

    Loss on Sale of Asset A/c Debit 31,500 Debit the decrease in revenue.
    Cash A/c Debit 35,000 Debit the increase in an asset.
    To Asset A/c Credit 66,500 Credit the decrease in an asset.

    I believe now you understand as to why we should charge depreciation in the year of sale as well and also the above example will help you understand the accounting treatment for the same as well.


    Aastha Mehta

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  1. This answer was edited.

    No, Goodwill is not a fictitious asset. What is Good Will? Goodwill of an entity is an intangible asset. It can be said that it's the excess amount an entity is liable to pay when it purchases all the assets at a price higher than its fair market value of another entity. The purchasing entity is wilRead more

    No, Goodwill is not a fictitious asset.

    What is Good Will?

    Goodwill of an entity is an intangible asset. It can be said that it’s the excess amount an entity is liable to pay when it purchases all the assets at a price higher than its fair market value of another entity. The purchasing entity is willing to pay the higher amount reasons such as brand image, modernised technology, high-grade employee relationships etc.

    The goodwill is valued at the time of the merger of two or more entities or acquisition of one by another entity.

    It is generally noticed that better the organisation’s reputation higher is the value of goodwill.

    What is a Fictitious Asset?

    Fictitious means “Bogus” or “Untrue” and asset means anything beneficial for the organisation.
    Thus fictitious assets are not an asset but just the expenses or losses which can not be accounted for in the current reporting period rather are to be written off in the future reporting period.

    For Example,

    • Preliminary Expenses
    • Miscellaneous Expenses
    • Loss on Issue of Debentures
    • Discount on Share Issue.

     

    Why is goodwill not a fictitious asset?

    Goodwill is an intangible asset and not a fictitious asset. A fictitious asset does not have a realizable value as it is merely an expenditure incurred by the company. It does not have a tangible existence either. Whereas goodwill has a monetary value i.e it has a realizable value even though it has no tangible existence.  Hence, it’s an intangible asset.

    Goodwill is presented in a balance sheet as –

    Goodwill as an Intangible Asset


    Aastha.

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  1. This answer was edited.

    The differences between cost centre and cost unit are as follows: PARTICULARS COST CENTRE COST UNIT MEANING A cost centre refers to the costs incurred about any part of the organisation such as activities, different functions, service or production location, etc. These departments or functions do noRead more

    The differences between cost centre and cost unit are as follows:

    PARTICULARS COST CENTRE COST UNIT
    MEANING A cost centre refers to the costs incurred about any part of the organisation such as activities, different functions, service or production location, etc. These departments or functions do not affect the profit of the organization directly however, monetary costs are incurred to operate the same. Cost unit refers to the cost incurred on a measurable unit of product or service of the organization.
    FUNCTION The main function of a cost centre is to classify costs as well as track expenses. It functions as a standard of measure for making comparisons with other costs.
    COST MEASURE The overall costs in a cost centre are gathered by the cost units. The unit of cost absorbs all the overhead costs. The overall costs are measured in terms of direct and indirect costs of tangible units.
     

    ASCERTAINMENT

    It is determined through the efficiency of operations, services provided to the customers, organizational structure, size, technique of production etc. It is determined as per the final products and trade practices. However, it is strictly not restricted to the same.
    RANGE Even if a single product or service is provided there are a lot of cost centres. Every individual product or service has a different cost unit.

     

     

     

    EXAMPLES

    A company’s IT, accounting, Research and development department, manufacturing activities, customer services, etc.  Automobile industry – no. of vehicles, gas – cubic metre, education – student year, etc.

     

    Hope this helps.

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  1. I think you should first understand what does the provision for doubtful debt mean and then understand the calculations of the same. Provision for Bad and Doubtful Debt Provision for bad and doubtful debt is a contra asset i.e it reduces the balance of an asset specifically the receivables. When anRead more

    I think you should first understand what does the provision for doubtful debt mean and then understand the calculations of the same.

    Provision for Bad and Doubtful Debt

    Provision for bad and doubtful debt is a contra asset i.e it reduces the balance of an asset specifically the receivables.

    When an entity executes transaction of sales on a credit basis it creates and adds on to the amount due from sundry debtors.  These sundry debtors as per the agreed terms are liable to make a payment for such goods purchased before the end of the credit term.

    If such debtor continuously makes a default such debtor shall be considered as a bad debt for the organization. When an entity remains doubtful regarding the recovery of its revenue i.e it has a reason to believe that such an amount due to be received may not be realised. Thus the entity shall create a reserve or a provision for doubtful debts.

    The provision is created based on the entity’s past experience in the business and various other factors.

    How is it calculated?

    The table given below will help you to understand step by step calculations to compute provision for doubtful debts

    Particulars Amount
    Old Bad Debts (It shall be given in the Trial Balance on the Dr side) XXXXX
    Add New Bad Debts (It shall be given in the adjustment) XXXXX
    Add New Bad Debt Reserve (Debtors x %/100) (It shall be given in the adjustment) i.e (% of Debtors – New Bad Debts) XXXXX
      XXXXX
    Less Old Provision for Bad Debts (It shall be given in the trial balance on the credit side) (XXXXX)
    New Provision/Reserve for Bad Debts XXXXX

     

    For Example,

    Trial balance

    Particulars Dr Amount        Cr Amount
    Bad Debts 400  
    Reserve for Bad Debts   1500
    Sundry Debtors 16,000  

     

    Adjustment: Provide 2% reserve for bad and doubtful debts on the debtors. And it was realized that our debtor worth 1000 proved to be bad has been written off.

    Particulars Amount
    Old Bad Debts (Given in Trial Balance) 400
    Add New Bad Debts (posted from  adjustment) 1,000
    Add New Bad Debt Reserve (Debtors x %/100) (It shall be given in the adjustment) i.e (% of Debtors – New Bad Debts) = (16,000 – 1,000) X 2 %  300
      1,700
    Less Old Provision for Bad Debts (Giving effect to an adjustment) (1500)
    New Provision/Reserve for Bad Debts  200

     

    I have tried to put up both explanation and numerical example for you to understand how to compute Bad Debt Reserve hoping that it would be helpful for you.


    Aastha Mehta.

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  1. This answer was edited.

    Yes, Arjun I will provide you with an exclusive list of all the liabilities in accounting and further classify them under short-term and long-term liabilities. The major reason behind this classification is only to develop a better understanding of liabilities. I hope this list will help you and fulRead more

    Yes, Arjun I will provide you with an exclusive list of all the liabilities in accounting and further classify them under short-term and long-term liabilities. The major reason behind this classification is only to develop a better understanding of liabilities. I hope this list will help you and fulfil your requirements.

    Short-Term Liabilities

    Meaning

    The term short-term liabilities refers to the short- term financial obligations of companies, firms or enterprises to make the payments to these loans within one accounting period(i.e., within a year). These loans are generally taken to meet day to day working capital requirements of an organization such as the purchase of raw materials. Short-term liabilities are also known as current liabilities.

    Exclusive List of Items

    1. Bills payable/Trade payable
    2. Sundry creditors
    3. Accrued liabilities
    4. Term debt
    5. Advances and deposits received
    6. Short-term obligations
    7. Unearned revenue
    8. Salaries and wages payables
    9. Sales tax payable
    10. Bank loan
    11. Outstanding expenses
    12. Merchandise accounts payable
    13. Deferred revenue
    14. Commercial paper
    15. Credit-card debt
    16. Bank overdraft
    17. Dividends payable
    18. Customer deposits
    19. Current portion of long-term debt
    20. Short-term provisions and reserves
    21. Accrued payroll
    22. Notes payable to banks
    23. Short-term loans and advances
    24. Rent payable
    25. Other short-term debts

     

    Long-Term Liabilities

    Meaning

    The term long-term liabilities refers to the long-term financial obligations of the firms, companies or enterprise which remains due for more than one accounting period. Generally, such loans are either taken to acquire fixed assets or to make payment to a long-term debt such as payments to debenture holders. Long-term liabilities are also known as long-term debt or non-current liabilities.

    Exclusive List of Items

    1. Long-term borrowings/debts
    2. Specific loans for purchasing fixed assets
    3. Deferred tax liabilities
    4. Derivative liabilities
    5. Pension obligations
    6. Capital leasing
    7. Car payments
    8. Convertible debt
    9. Long-term provisions and contingencies
    10. Bonds payable
    11. Pension liabilities
    12. Debentures
    13. Mortgages payable
    14. Public deposits
    15. Long-term warrants
    16. Long-term notes payable
    17. Loans from shareholders
    18. Lease contracts
    19. Post-retirement benefits reserve
    20. Deferred long-term liability charges
    21. Deferred compensation
    22. Other non-current liabilities

     

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