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Discy Latest Questions

Sahil

Related MaterialWhere to find equity in accounting?Is rent received in advance included in taxable income?

  1. This answer was edited.

    We will first quickly run through the concept of equity - Equity is the capital raised by a company for the purpose of purchase of assets or for making an investment in a specific project or for the smooth functioning of operations. It's important as it represents the value of an investor's stake inRead more

    We will first quickly run through the concept of equity –

    Equity is the capital raised by a company for the purpose of purchase of assets or for making an investment in a specific project or for the smooth functioning of operations. It’s important as it represents the value of an investor’s stake in a company.

    It can also be aid that its the sum of money that the company is required to pay at the time of its liquidation to its shareholders after realising all of its assets and paying off all of its debts. Equity is presented in the financial statement as a component of a Balance Sheet.

    The formula for calculating the company’s equity –

    Shareholder’s Equity = Total Assets – Total Liabilities

    Inclusive list of items under the head” Equity”

    Particulars
    Equity Share Capital
    Reserves and surplus 
    1. Securities Premium Reserve
    2. General Reserves
    3. Capital Redemption Reserve
    4. Revaluation Reserve
    5. Debenture Redemption Reserve
    6. Share Option Outstanding Account
    7. Others- (Specify the Nature and Purpose of such reserve)
    8. Retained Earnings
    Other Comprehensive Income
    1.  Foreign Currency Translation Reserve
    2.  Cash Flow Hedge Reserve
    Vesting and Exercise of Warrants
    Issuance of Non-Controlling Interest
    Repurchase of Stock option
    Issuance of Common Stock
    Stock-Based Compensation
    Exercise of Stock Options
    Additional Paid-in Capital
    The Cumulative Effect of Changes in Accounting Principles related to Revenue Recognition, Income Taxes and Financial Instruments

    It is generally presented under two subheads – Equity and Other Equity.

    The extract shown below indicates the position of Equity in a Balance Sheet –

    Equity in Balance Sheet

     

     

     

     

     

     

     

     

     

    I hope this answers your question.

     


    Aastha

     

     

     

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  1. This answer was edited.

    Meaning of Non-Current Liabilities Non-current liabilities are obligations of an entity which becomes due at a future date and such future date falls beyond 12 months. Whereas current liabilities are those obligations wherein an entity is liable to honour such obligations within 12 months. Meaning oRead more

    Meaning of Non-Current Liabilities

    Non-current liabilities are obligations of an entity which becomes due at a future date and such future date falls beyond 12 months. Whereas current liabilities are those obligations wherein an entity is liable to honour such obligations within 12 months.

    Meaning of Debt

    Debt is any sum of money borrowed by an entity or a person from another entity or a person. Debt is borrowed generally when such an entity has a cash crunch or liquidity crunch or if it has an urgency of making a payment or any other purpose. It can be a long term or a short term debt.

    The amount borrowed can be said to be a debt only if such a contract specifies the intention to repay at a future date the amount so borrowed. The borrower might have to pay interest if it’s agreed earlier in the agreement.

    Is Non-Current Liability a Debt?

    The answer to the above question is that it depends. When we take a bank loan it’s a debt but in case of a deferred tax liability or a long term provision even though it’s a part of non-current liability but it can not be called as a debt.

    I will give you an example of when it shall be called a debt-

    You have a business of manufacturing bottles and there is a huge demand for such bottles in the market recently so you decide to increase the production but your plant has a limited capacity hence you decide to purchase a new plant with higher capacity but your entity is facing a shortage of funds hence you apply to the bank for a loan of such amount.

    The bank sanctions such loan and transfers the amount so required. Now, The agreement states that the amount borrowed is repayable by you after 5 years.

    The loan mentioned in the above case qualifies to be a non-current liability since the obligation to repay arises after 5 years i.e > 12 months. And it’s also an amount borrowed by a person or an entity from another person or an entity. Hence, it’s a perfect example of debt.

    You will be able to understand from the below balance sheet that even though deferred tax liability is included under the head of non-current liabilities it does not signify to be a debt. And a bank loan having obligation to pay after a year is covered under long term debt.

    Presentation of non current liabilities in balance sheet

    Conclusion

    All the non-current liabilities are not long term debts but all the long term debts are non-current liabilities.


    Aastha.

     

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  1. This answer was edited.

    Before answering the question you should first understand the meaning of debit and credit accounts. The images below might be of some help In the above equation, all the accounts covered on the left-hand side of the equation are classified as debit accounts and on the right-hand side are classifiedRead more

    Before answering the question you should first understand the meaning of debit and credit accounts.

    The images below might be of some helpUnderstanding of debit and credit account

    In the above equation, all the accounts covered on the left-hand side of the equation are classified as debit accounts and on the right-hand side are classified as credit accounts.

    Debit and Credit accounts

    Surplus, gains and revenue are credit accounts and expense, losses or deficits are credit accounts.

    Generally, All the debit accounts like plant and machinery, loan granted, sundry debtors, cash and the bank have a debit balance i.e they are most of the time positive.

    Similarly, all the credit accounts like the loan from a bank, sundry creditors, bills payable have a credit balance i.e they are most of the time negative as these accounts most of the time receive just credits.

    here we are simply analysing it based on numbers.

    Positive Debit Balance

    In simple terms, while balancing the ledger when the Debit side total > Credit side total the difference = Debit Balance. Most of the time, it maintains a “positive balance”.

    This is because when you add a debit to a debit it gives you a debit i.e when you add a positive number with another positive number you get a higher positive number and when you add a credit to debit it reduces the debit balance. But in most of the cases, it remains positive.

    We take up another example of a machinery account even though we credit the depreciation from that account the balance remains positive.

    Ledger Account

    Negative Credit Balance

    In simple terms, while balancing a ledger  Credit side total > Debit side total the difference = credit balance. All the credit accounts at most of the time maintain a credit balance i.e it has a “negative balance”. 

    This is because when you add a credit to another credit you get a higher balance of credit similarly when you debit the credit account it reduces the credit balance. But most of the time it still gives a credit balance i.e remains negative. But you do not put a negative sign while you account for it.

    The below-given ledger might be of some help to understand this better –

    Ledger having credit balance

    I hope you got your answer.


    Aastha Mehta.

     

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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  Particulars Amount
    1st Aug Received cash from head cashier 5,000
    4th Aug Paid Cartage expenses 300
    8th Aug Telephone charges paid 200
    10th Aug Paid Sundry expenses 500

      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.

    Individuals employed in an organization receive salary but salaried individuals do not maintain books of accounts. They are not required to pass any journal entry and prepare financial statements. So, it is assumed that the question asked is “journal entry for salary paid” and not for salary receiveRead more

    Individuals employed in an organization receive salary but salaried individuals do not maintain books of accounts. They are not required to pass any journal entry and prepare financial statements.

    So, it is assumed that the question asked is “journal entry for salary paid” and not for salary received. An employer paying salary to his employees will be required to pass the journal entry in his books of accounts for salary paid.

    Journal Entry for Salary Paid

    I will present the journal entry in the books of the employer for salary paid using both the golden rule and the modern rule of accounting.

    1. According to the “Golden rules” of accounting

    Salary A/c Debit Nominal account Debit all expenses and losses
     To Cash/Bank A/c Credit Real account/Personal account Credit what goes out/Credit the giver

    (Being salary paid by cash/cheque)

    2. According to the “Modern rules” of accounting

    Salary A/c Debit Expense Debit the increase in expense
     To Cash/Bank A/c Credit Asset Credit the decrease in asset

    (Being salary paid by cash/cheque)

    Example

    1. Textile Inc. paid salary amounting to 500,000 to its employees by cheque or through online modes for the month of March 20xx on 31/03/20xx.

    Journal entry in the books of Textile Inc. on 31/03/20xx will be as follows-

    Salary A/c Debit 500,000 Debit the increase in expense
     To Bank A/c Credit  500,000 Credit the decrease in asset

    (Being salary paid by cheque or through online modes for the month of March 20xx)

    2. Jute Inc. paid salary amounting to 75,000 to its employees in cash for the month of March 20xx on 31/03/20xx.

    Journal entry in the books of Jute Inc. on 31/03/20xx will be as follows-

    Salary A/c Debit 75,000 Debit the increase in expense
     To Cash A/c Credit  75,000 Credit the decrease in asset

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

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  1. This answer was edited.

    A ledger account consists of the financial transactions of a business. It is generally used by the accountants to record the summarized monetary transactions. It is also known as the principal book of accounts and books of final entry. As per my understanding, the 'Debit and Credit format' refers toRead more

    A ledger account consists of the financial transactions of a business. It is generally used by the accountants to record the summarized monetary transactions. It is also known as the principal book of accounts and books of final entry.

    As per my understanding, the ‘Debit and Credit format’ refers to a ‘Ledger account format’ which is as follows:

    (Image to be inserted here)

    Note:

    • The ledger account consists of two sides namely, debit and credit. The left-hand side represents the debit balance and the right-hand side represents the credit balance.
    • The posting into a ledger account is done from the journal entries of the company or the various subsidiary books.
    • Each Journal entry is moved into a separate ledger account.

    Example

    Considering the journal entries of ABC Ltd., post the same into ledger accounts.

    Cash a/c

    DATE PARTICULARS J.F AMOUNT DATE PARTICULARS J.F AMOUNT
     Jan1 To Capital a/c 75,000 Jan1 By Purchases a/c 40,000
     Jan3 To Sales a/c 60,000 Jan2 By Machinery a/c 25,000
     Jan4 To Commission a/c 5,000 Jan6 By Wages a/c 10,000
    Jan6 By Balance c/d 65,000
    1,40,000 1,40,000

    (The cash a/c has a debit balance as it is an asset.)

    Machinery a/c

    DATE PARTICULARS J.F AMOUNT DATE PARTICULARS J.F AMOUNT
    To cash a/c 25,0000 By Balance c/d 25,000
    25,000 25,000

    (The machinery a/c has a debit balance as it is an asset.)

    Hope this helps.

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    It is believed that every organization requires goods for running its business. Goods can be purchased in two different ways- on cash and credit. Most of the companies prefer credit purchase of goods over cash. I would like to explain to you the meaning of credit purchases followed by journal entryRead more

    It is believed that every organization requires goods for running its business. Goods can be purchased in two different ways- on cash and credit. Most of the companies prefer credit purchase of goods over cash. I would like to explain to you the meaning of credit purchases followed by journal entry and simple practical example.

    Purchased Goods on Credit

    In simple terms, when an organization (or) customer purchases the goods from the seller (or) supplier and agrees to pay the consideration (value or price) of the goods on some future date then it is called as credit purchases. Whenever credit purchase takes place accounts payable account/sundry creditor is created.

    Accounts payable increases when the organization keeps on purchasing goods on credit. It is considered as a short-term debt that an organization owes to another organization during the ordinary (or) normal course of business.

    Journal Entry for goods purchased on credit

    • Modern Accounting Approach-
    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st March Purchases a/c 25,000 Expense Debit The Increase in Expense
     To Accounts Payable/Supplier a/c  25,000 Liability Credit– The Increase in Liability.
    • Traditional Accounting Approach
    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st March Purchases a/c 25,000 Nominal Debit All expenses and losses.
     To Accounts Payable/Supplier a/c  25,000 Personal Credit The giver.

     Practical Example

    On 1st June, Alex Co. purchases goods from Max Co. for 2,00,000 on credit period of 30 days. Pass Journal entry for credit purchases in the books of Alex Co.
                                                                In the Books of Alex Co.

    1. When Credit Purchase of goods takes place-

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st June Purchases a/c 2,00,000 Expense Debit- The Increase in Expense.
     To Accounts Payable/Max Co. a/c  2,00,000 Liability Credit- The Increase in Liability.

    (Being goods purchased from Max Co. on credit).

    2. When consideration (value or price) of the goods is being duly paid-

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st July Accounts Payable/Max Co. a/c 2,00,000 Liability Debit- The Decrease in Liability.
     To Cash/Bank a/c  2,00,000 Asset Credit- The Decrease in Asset.

    (Being consideration paid for the goods purchased on credit).

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  1. This answer was edited.

    Yes, Nancy, there are few assets which show the credit balance. Those assets generally hold zero or unfavourable balance. Assets which have a credit balance In accounting perspective assets and expenses generally have a debit balance whereas liabilities, revenue and capital have a credit balance. YeRead more

    Yes, Nancy, there are few assets which show the credit balance. Those assets generally hold zero or unfavourable balance.

    Assets which have a credit balance

    In accounting perspective assets and expenses generally have a debit balance whereas liabilities, revenue and capital have a credit balance. Yet there exist a couple of assets which do have a credit balance those assets are known as contra assets.

    Contra Asset

    A contra asset is referred to an asset which generally has a zero or negative balance. Such an asset is used to offset or reduce the balance of the respective asset account with which it is paired to. Hence reducing or offsetting the amount of the respective asset account with the contra asset account gives us the net value of the respective asset.

    It acts as an asset holding credit balance. Contra assets are useful for the organization because it allows them to follow the matching principle by initially recording an expense in the contra asset account.

    Assets with a negative balance

     

    For Example- Max purchased an air conditioner from eBay for 4,00,000. The salvage value of air- conditioner is 30,000 and has an expected useful life of 10 years. On 31-12-yyyy, how much balance will be shown in the Accumulated Depreciation account.

    Calculation Part

    Annual Depreciation = (Value of Asset – Salvage value)/Estimated life of the asset.

    = (4,00,000 – 30,000)/10  => 37,000

     Dr                                       Accumulated Depreciation a/c                                     Cr

    Date Particulars Amount Date Particulars Amount
    31-12-yyyy By Dep. a/c 37,000
    31-12-yyyy By Dep. a/c 37,000
    31-12-yyyy By Dep. a/c 37,000
    31-12-yyyy By Dep. a/c 37,000
    Total 1,48,000

    Net Asset value = Total asset value – Accumulated Depreciation

    = 4,00,000 – 1,48,000  => 2,52,000

    Placement in the Balance Sheet

    Assets with Negative Balance

    Here in the balance sheet “Accumulated Depreciation” shows a negative balance which is a contra asset and it is deducted from the respective asset account. Hence providing us with the Net value of the asset.

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    Salary paid in advance - The term salary paid in advance is also known as prepaid salary. salary paid in advance is initially recorded as an asset because it provides some future economic benefit and is charged at the time when the actual benefit is realized in the succeeding accounting period. TheRead more

    Salary paid in advance –

    The term salary paid in advance is also known as prepaid salary. salary paid in advance is initially recorded as an asset because it provides some future economic benefit and is charged at the time when the actual benefit is realized in the succeeding accounting period.

    The amount of Prepaid salary is deducted from salary and shown on the debit side of profit and loss account. It is further shown under the head current asset in the balance sheet. Hence prepaid salary (or) salary paid in advance is treated as adjustment entry.

    Example- On 1st March, Company A Ltd paid 4 months prepaid salary amounting to 40,000 (10,000*4) to the employees of the company. Evaluate the treatment of the amount paid as prepaid salary by the company to the employees. Journalise the following transaction by recording payment and adjustment entry.

    • Traditional Accounting Approach-

     

                                      Journal Entry in the books of Company A 

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    March 1st Prepaid Salary a/c Dr 40,000 Representative Personal Debit– The receiver
     To Cash/Bank a/c  40,000 Real Credit– What goes out of the  business

    (Being the payment for prepaid salary made).

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    Aug 3rd Salary a/c              Dr 10,000 Nominal Debt– All Expenses and Losses
     To Prepaid Salary a/c  10,000   Representative Personal Credit– The Giver

    (Being the amount of prepaid salary adjusted to salary).

    • Modern Accounting Approach-

     

    We will record the same transaction by following the modern rules of accounting (widely recognized and followed all over the world).
                                           Journal Entry in the books of Company A

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    March 1st Prepaid Salary a/c  Dr 40,000 Asset Debit– The Increase in Asset
     To Cash/Bank a/c  40,000 Asset Credit– The Decrease in Asset

    (Being the payment for prepaid salary made).

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    Aug 3rd Salary a/c             Dr 10,000 Expense Debit– The Increase in Expense
     To Prepaid Salary a/c  10,000 Asset Credit– The Decrease in Asset

    (Being the amount of prepaid salary adjusted to salary).

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