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Discy Latest Questions

  1. This answer was edited.

    There are various operating and Non-operating expenses incurred by an organization in its ordinary course of business such as- Salaries, Legal expenses, Electricity charges etc., Therefore, it is the primary responsibility of an accountant to record all these expenses in the books of accounts for deRead more

    There are various operating and Non-operating expenses incurred by an organization in its ordinary course of business such as- Salaries, Legal expenses, Electricity charges etc., Therefore, it is the primary responsibility of an accountant to record all these expenses in the books of accounts for deriving genuine net profit at the end of the accounting year.

    Journal Entry for Electricity Bill paid

    1. Traditional Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Electricity Bill a/c XXX Nominal Debit- All expenses and Losses
     To Bank a/c  XXX Personal Credit- The Giver.

    (Being Electricity Bill paid).

    2. Modern Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Electricity Bill a/c XXX Expense Debit- The Increase in Expense.
     To Bank a/c  XXX Asset Credit- The Decrease in Asset.

    (Being paid electricity bill).

    Example

    On 12th March, Alex Ltd. paid electricity bill amounting to 8,000 through cheque. Journalise the following transaction in the books of Alex Ltd.
    In the Books of Alex Ltd.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    12th March Electricity Bill a/c 8,000 Expense Debit- The Increase in Expense
     To Bank a/c  8,000 Asset Credit- The Decrease in Asset.

    (Being paid electricity bill through cheque).

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  1. This answer was edited.

    Meaning of Core Business Operations In layman's language, the term "core business operations" refers to the organization's main or essential area of activity for which it was founded or came into existence. It does not only focuses on the mission and vision of organization but also on building betteRead more

    Meaning of Core Business Operations

    In layman’s language, the term “core business operations” refers to the organization’s main or essential area of activity for which it was founded or came into existence. It does not only focuses on the mission and vision of organization but also on building better business operations strategies by-

    • Controlling market forces and supply chain management
    • Improving the quality of technology
    • Expanding the business marketplace and acquiring new businesses
    • Increasing revenue generation
    • Better customer base acquisition and customer relationship management
    • Developing new areas of activities

     

    It means that the success of an organization does not only depends upon the functioning and performance of various departments but also the company’s coordination in managing and performing various departmental activities for conducting core business operation.

    Examples of Core business operations/models

    1. The core business model of Uber is to provide on-demand services to its users. It provides a virtual mobile platform that connects users with taxi or cab drivers. Although cab drivers use their cars while performing their services. Uber earns 20-30% of the total fare amount.

    2. The core business model of Amazon is to provide an end to end virtual or e-commerce shopping experience to its customers. It connects customers (users) with the products listed by various trusted sellers. Amazon earns money through subscriptions for prime services, retail services and web services. Amazon charges 6%-25% professional fees on every product sold by the sellers on its platform.

    3. The core business model of Walmart is to provide offline and online retail services such as health and fitness, grocery and general merchandise. Walmart charges only referral fees (based on the product category) and it does not impose any charges on maintaining seller accounts.

    Core vs Non-core business operations

    Example-

    1. Uber
    • Core business operations– The core business operations of uber are mentioned above in example (1).
    • Non-core business operations– Apart from the core business operations, uber performs few non-core business operations such as- Uber Eats which provides food delivery services to its users (customers)  is not the main/core business of Uber.

     

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  1. This answer was edited.

    Depreciation as an Operating Expense Yes, depreciation is an operating expense. To understand this you might want to check the illustrative case given below: You have an entity providing financial services to your clients. You had commenced it 4 years ago. At the time of commencement of the operatioRead more

    Depreciation as an Operating Expense

    Yes, depreciation is an operating expense.

    To understand this you might want to check the illustrative case given below:

    You have an entity providing financial services to your clients. You had commenced it 4 years ago. At the time of commencement of the operations you had 25 employees and laptops being the core assets of your business, were purchased by you for your team initially.

    After 4 years do you still believe that if you dispose these laptops or you decide to replace them you will get the same amount you had spent initially for purchasing them or could they have the same features and technology that a newly launched laptop currently has or uses?

    The answer to this is Obviously Not. The new laptop available in the market will have better features and might be faster. Also, these used laptops shall not possess the same value at the time of their replacement.

    I will have a quick run over the concept of “What is Depreciation?”

    Depreciation is nothing but a diminution in the value of an asset, due to natural wear and tear, exhaustion of subject matter, effluxion of time accident, obsolescence or similar causes.

    Assuming you have received an answer but you still don’t get the logic for treating it as an operating expense the below-given para may be of some help.

    An operating expense is an expense that a business incurs for carrying on its normal operations. Hence, since depreciation is charged on an asset that’s used for day to day business operations it is covered under operating expense even though its a non-cash expense.

    Based on the above para you would agree that all the operating expenses are presented on the debit side of profit and loss or an income statement. And since depreciation is related to an asset used for manufacturing or providing service or aiding business for that matter it is an operating expense and so it shall also be presented on the debit side of an income statement.

    You can check the profit and loss statement added below for a better understanding of the treatment of depreciation in the income statement.

    Depreciation in an income statement

    The depreciation can be treated as a non-operating expense only in the specific circumstances where the assets are not used for the main operations of the business. When such an asset is used for an incidental operation then we treat depreciation as a non-operating expense.


    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.

    Sales Return When the goods or commodities are sold by the dealer or a manufacturer to the customer and customer returns these goods or part thereof then such return made by the customer is called as sales return for the seller or the dealer.  It's a contra revenue account. It is reduced from the toRead more

    Sales Return

    When the goods or commodities are sold by the dealer or a manufacturer to the customer and customer returns these goods or part thereof then such return made by the customer is called as sales return for the seller or the dealer.  It’s a contra revenue account. It is reduced from the total sales amount. Generally, it is recorded in “Sales Return and Allowance Account”.

    Accounting Treatment of Sales Return in Books of Accounts:

    When initially the goods are sold on credit and later on a part of them are returned the journal entry shall be-

    Sales Returns and Allowance A/c Debit Debit the decrease in income.
    To Sundry Debtor A/c Credit Credit the decrease in an asset.

    When goods are sold initially for cash and later on a part of them are returned –

    Sales Returns and Allowance A/c Debit Debit the decrease in income.
    To Cash A/c Credit Credit the decrease in an asset.

    For Example,

    You have a stationery store and a customer placed an order to buy 4 packs of blue gel pen but by mistakenly you delivered 3 packs of blue and 1 pack of black pen. Each pack is sold for an amount of 100.

    Initially, you must have recorded sales in your book as –

    Sundry debtor A/c Debit 400 Debit the increase in an asset.
    To Sales A/c Credit 400 Credit the increase in income.

    Now, the customer placed an order for 4 packs of blue gel pens and you sent 3 packs of blue gel and 1 pack of black gel pen hence, customer returns a pack of black gel pen.

    Now, you will record this return in your books as-

    Sales Returns and Allowance A/c Debit 100 Debit the decrease in income.
    To Sundry Debtor A/c Credit 100 Credit the decrease in an asset.

    Sales Allowance

    When the goods are sold by the seller or the dealer and few of them are defective or damaged or not as per the specification for that matter than to maintain the relationship with the customer the seller sometimes grants allowances. Such allowances granted are called as sales allowance. It is a contra revenue account. And hence, it’s reduced from the total sales.

    Accounting Treatment:

    When initially the goods are sold on credit and later on it was discovered that a part of them are defective the seller extends some allowance. The journal entry for this transaction shall be-

    Sales Returns and Allowance A/c Debit Debit the decrease in income
    To Sundry Debtor A/c Credit Credit the decrease in an asset.

    When initially the goods are sold on a cash basis and later on it was discovered that a part of them are defective the seller extends some allowance. The journal entry for this transaction shall be-

    Sales Returns and Allowance A/c Debit Debit the decrease in an income
    To Cash A/c Credit Credit the decrease in an asset.

    For Example,

    Mr Alex has a business of dealing in shirts. He sold 10 shirts to Mr Allen. The price of each shirt was 100 and so Mr Allen immediately paid 1000 cash.

    At the time of initial recognition of sales, Mr Alex recorded it in his books as-

    Cash  A/c Debit 1000 Debit the increase in an asset.
    To Sales A/c Credit 1000 Credit the increase in income.

    Later on, Mr Allen found that one of the shirts was defective and hence, he gave an intimation of the same to Mr Alex. Mr Alex agreed to give him an allowance and thus gave him a 50% discount on that shirt. The journal entry for the same shall be –

    Sales Returns and Allowance A/c Debit 50 Debit the decrease in an income
    To Cash A/c Credit 50 Credit the decrease in an asset.

    The sales are recorded as a net of all the returns and allowances made by the seller during the accounting period.

    It can be presented with the help of below-given formula-

    Formula for sales return and allowances


    Aastha.

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  1. This answer was edited.

    Cash Withdrawn from Bank for Office Use the cash withdrawn from bank for office use shall be recorded in the books as: Journal Entry: (Using modern rules of accounting) Why is cash account debited? When we withdraw an amount from the bank we receive cash i.e the entity's cash in hand balance increasRead more

    Cash Withdrawn from Bank for Office Use

    the cash withdrawn from bank for office use shall be recorded in the books as:

    Journal Entry: (Using modern rules of accounting)

    cash withdrawn from bank for office use

    Why is cash account debited?

    When we withdraw an amount from the bank we receive cash i.e the entity’s cash in hand balance increases. As per the modern rules of accounting, we debit the increase in an asset. And so in the above entry cash account is debited.

    Why is bank account credited?

    When an amount is withdrawn from the bank the entity receives cash while the balance in his bank account reduces. Thus as per the modern rules of accounting, we credit the decrease in an asset. The bank account of an entity is shown under the head of current assets and so it’s credited since the withdrawals lead to a reduction in the balance with the bank. Hence, in the above entry bank account is credited.

    Journal Entry: (Using golden rules of accounting)

    Cash withdrawn for office use

    Why is the cash account debited?

    As per the golden rule of accounting, cash account is classified as a real account. As per the rule for a real account, we debit what comes in and credit what goes out. Hence, when the cash is withdrawn for the office use we receive cash hence, cash account is debited.

    Why is the bank account credited?

    As per the golden rule of accounting, the bank account is classified as a personal account. As per the rule for a personal account, we debit the receiver and credit the giver. Here, Bank balance reduces i.e bank is the giver hence, its credited.


    Aastha Mehta.

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  1. This answer was edited.

    LIST OF FIXED AND CURRENT ASSETS FIXED ASSETS CURRENT ASSETS 1. PLANT & MACHINERY 1. CASH 2. LAND 2. CASH EQUIVALENTS 3. EQUIPMENTS 3. SHORT- TERM DEPOSITS 4. FURNITURE & FIXTURES 4. INVENTORY 5. VEHICLES 5.MARKETABLE SECURITIES 6. LEASEHOLD IMPROVEMENTS 6.OFFICE SUPPLIES 7. COMPUTER SOFTWARRead more

    LIST OF FIXED AND CURRENT ASSETS

    FIXED ASSETS CURRENT ASSETS
    1. PLANT & MACHINERY 1. CASH
    2. LAND 2. CASH EQUIVALENTS
    3. EQUIPMENTS 3. SHORT- TERM DEPOSITS
    4. FURNITURE & FIXTURES 4. INVENTORY
    5. VEHICLES 5.MARKETABLE SECURITIES
    6. LEASEHOLD IMPROVEMENTS 6.OFFICE SUPPLIES
    7. COMPUTER SOFTWARE 7.TRADE RECEIVABLES
    8.BUILDINGS 8. SHORT TERM BORROWINGS
    9. PATENTS 9. ACCOUNTS RECEIVABLES
    10. TRADEMARKS 10. PREPAID EXPENSES

    Presentation in the balance sheet

    Balance sheet of ABC Ltd. is as follows:

    balance sheet

    Hope this helps.

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  1. This answer was edited.

    Meaning of Net Current Assets In simple terms, Net Current Assets refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can also be referred to as Net Working Capital. The Net Current Assets can have a positive or a negative value, wherein tRead more

    Meaning of Net Current Assets

    In simple terms, Net Current Assets refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can also be referred to as Net Working Capital.

    The Net Current Assets can have a positive or a negative value, wherein the two are an indicator of the well-being of a business. In case the current assets are greater than the current liabilities, the company possesses sufficient assets to pay off its indebtedness and is operating efficiently. However, a company is said to be facing financial difficulty and is not in a position to pay off its debts, when the value of net current assets is negative.

    The formula is as follows:

    Formula

    Difference between Net Current Assets and Current Assets

    Net Current Assets refers to the difference between the total amount of current assets and the total amount of current liabilities whereas Current Assets are a subpart of Net Current Assets and refer to those assets that are expected to be utilized, depreciated or traded through the operations of a business within the same financial year.

    For example, cash and cash equivalents, inventory, accounts receivable, etc are Current Assets whereas the summation of the same minus the total of current liabilities is termed as Net Current Assets which is further explained through an example given below.

    Numerical Example

    Calculate the Net Current Assets of ABC Ltd.

    (Extract of Balance Sheet)

    PARTICULARS AMOUNT
    CURRENT ASSETS
    Cash and Cash Equivalents 2,00,000
    Accounts Receivables 40,000
    Stock Inventory 15,000
    Marketable Securities 35,000
    Prepaid Expenses 6,000
    TOTAL CURRENT ASSETS 2,96,000
    CURRENT LIABILITIES
    Accounts Payable 15,000
    Accrued Expense 2,000
    Unearned Revenue 20,000
    Taxes Payable 40,000
    Short-term Debt 10,000
    Interest Payable 6,000
    TOTAL CURRENT LIABILITIES 93,000

    Solution:

    Total current assets = 2,96,000

    Total current liabilities= 93,000

    Net Current Assets = Total Current Assets – Total Current Liabilities

    = 2,96,000- 93,000  = 2,03,000

    Key Takeaways

    • Net Current Assets are also known as Net Working Capital.
    • Net Current Assets is the difference between the total current assets and total current liabilities.
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  1. This answer was edited.

    Importance of Financial Reporting The importance of financial reporting cannot be exaggerated. It is considered as a primary requirement of all the stakeholders for many reasons and purposes. Financial reporting discloses the position, liquidity and performance of the company. The following key poinRead more

    Importance of Financial Reporting

    The importance of financial reporting cannot be exaggerated. It is considered as a primary requirement of all the stakeholders for many reasons and purposes. Financial reporting discloses the position, liquidity and performance of the company. The following key points highlight why is financial reporting framework important-

    1. Financial Reporting is required by the law for performing statutory audits on the company financial statements and reports. These statements help the auditors to express their opinions on the fairness of the financial statements.

    2. Financial Reporting is considered as the best tool for formulating the internal decision of an organization by providing accurate and updated information on financial statements.

    For example- Lenovo Inc profit and loss account registered a sharp decrease in net profit due to the use of obsolete technology and poor battery life. Hence the company management should focus on improving overall performance and formulating new strategies to regain customer trust and improve business performance.

    3. Financial Reporting discloses financial statements that give an idea to the external users (say- creditors, third parties, banks and investors) on the financial creditworthiness, soundness, integrity and liquidity position of the company.

    For Example- Apple Inc registers a sharp increase in the profit every year and has a strong brand name, credibility and customer base across the world. Due to these reasons, the company has capacity procure funds from the banks and NBFCs. This helps the company to grow, prosper and generate huge loans.

    4. Financial Reporting software provides vital information which can be used by the company for making quick and informed business decisions. Such as opening a new business branch across the country.

    5. Financial Reporting acts as a backbone to financial planning, decision and policymaking, financial analysis and is responsible for maintaining company standards.

    6. Financial Reporting helps companies and organization to raise share capital by attracting domestic and foreign investments through marketing, promotions and providing high returns on investments in the form of share dividends.

    For Example- HSBC Bank pays off a higher percentage of dividend to its shareholder than compared to other banks. This helps to bank to attract new domestic and foreign investments thereby issuing shares to new shareholders. Financial reporting helps the bank in attracting shareholders by publishing financial statements in newspapers, magazines and prospectus.

    7. Financial Reporting helps the employees and workers to understand and analyze the position and performance of the ownership as well as management of a company or an organization based on the audited financial statements.

    For Example- Amazon has recorded a sharp spike in profits after deducting corporate taxes and other duties. The company management has decided to pay bonus and incentives over and above its basic pay to all its prospects employees. This motivates the employees to work even harder and deliver better services to its clients

    8. Financial Reporting furnishes financial information which helps the organization in bidding and negotiating a better business contract. It helps the government in framing suitable economic plans and policies by assessing financial statements and business performance.

    Conclusion

    We can conclude that financial reporting plays an important role in not only helping the organization to derive long-term profits but also creates an opportunity to expand and diversify the business by setting up long-term goals and better business strategies.

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  1. This answer was edited.

    Outstanding Salary Example- Company A Ltd pays their employees a monthly salary of 25,000. The company has a policy that it pays the previous month salary to its employees on 10th of next month. Salary for March is due and is duly to be paid by the 10th of April as per the company policy. JournaliseRead more

    Outstanding Salary

    Example- Company A Ltd pays their employees a monthly salary of 25,000. The company has a policy that it pays the previous month salary to its employees on 10th of next month. Salary for March is due and is duly to be paid by the 10th of April as per the company policy. Journalise the following transaction for salary due and paid in the books of ABC and Co.
    In the Books of ABC and Co.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    31st March Salary a/c       Dr 25,000 Nominal Debit- All Expense and Losses
     To Outstanding Salary a/c  25,000 Representative Personal Credit- The Giver

    (Being salary due for March)

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st April Outstanding Salary a/c       Dr 25,000 Representative Personal Debit- The Receiver
     To Cash/Bank a/c  25,000 Real Credit- What goes out of the business

    (Being salary paid)

    Accounting Treatment

    Outstanding salary is added to the salary and shown on the debit side of profit and loss account. It is further shown under the head current liabilities in the balance sheet. Outstanding salary is also known as Salary due (or) Salary payable.

    Modern Accounting Approach

    We will record the same transaction by following the modern rules of accounting
    In the Books of ABC and Co.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    31st March Salary a/c       Dr 25,000 Expense Debit- The Increase in Expense
     To Outstanding Salary a/c  25,000 Liability Credit- The Increase in Liability

    (Being salary due for March)

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st April Outstanding Salary a/c       Dr 25,000 Liability Debit- The Decrease in Liability
     To Cash/Bank a/c  25,000 Asset Credit- The Decrease in Asset

    (Being salary paid)

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