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Discy Latest Questions

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    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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    Before I answer this question of your's it would be beneficial for you to have clarity over the concept of Deferred Revenue. Meaning of a 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 renderingRead more

    Before I answer this question of your’s it would be beneficial for you to have clarity over the concept of Deferred Revenue.

    Meaning of a 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.

    The concept of deferred revenue applies only if an entity follows the Accrual System of Accounting. If the entity follows the cash system of accounting it’s of no relevance as the entire amount received becomes income in the year of receipt.

    Whether the Deferred Revenue is a Liability?

    The answer to this question is  “Yes” it is a liability. Even though you got the answer that it is a liability but I believe a part of the question remains unanswered i.e why is it a liability?

    The logic for the same is- Since the entity has already received the amount even before rendering services or delivering goods the entity or a company has a sort of an obligation to deliver the goods or render such services at the predetermined future date. Failing which it may be liable to face legal proceedings or legal actions. Hence, it becomes a liability on a part of the entity to honour such a transaction.

    When the entity receives the amount before delivering goods or rendering services that amount is recorded as a “Liability” and once the goods are delivered or services are rendered the liability is reduced and the entity records it as a “Revenue”.

    For Example,

    In the case of an Educational Institutes like the Universities, Coaching Institutes etc. it charges fees even before the term commences. In such a case the entity has not yet rendered service of imparting education hence, the tuition fees so received shall become a deferred revenue and shall be recorded as a liability at the time of the receipt and at as and when it’s accrued it shall be recorded as revenue.

    Journal Entry for the same shall be:

    At the time of receipt of Tuition Fees-

    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 recording revenue on monthly basis every month-

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

    Deferred Revenue is Presented in the Balance Sheet as –

    Deferred Revenue in Balance Sheet

    Conclusion

    Deferred revenue at the time of early receipt of the amount is recorded as a liability and at the time of actual income recorded as revenue in the income statement.


    Aastha Mehta.

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    First, let me help you interpret the difference between Receipts & Income along with the help of an example. Difference between Income & Receipts  Income Receipts Income refers to the amount received by an entity from its core business operations and day to day functioning. Any cash inflow rRead more

    First, let me help you interpret the difference between Receipts & Income along with the help of an example.

    Difference between Income & Receipts 

    Income Receipts
    Income refers to the amount received by an entity from its core business operations and day to day functioning. Any cash inflow received by an entity can be termed as receipts.
    All incomes affect the statement of profit & loss. But all receipts do not affect profit & loss statement.
    Income includes only revenue receipts.

     

    Receipts include both capital receipts & revenue receipts.
    It can be cash or non-cash in nature. For eg. non-cash items such as an unrealized gain from investments, profit on revaluation of fixed assets are also considered as income. It is only cash in nature.

    Examples of Receipts & Income

    For instance, XYZ Inc. receives the following amount in the month of January 20×1. Let us differentiate the following transactions as receipts or income.

    1. Borrowed 50,000 from a bank for establishing a new unit.
    2. Amount of 10,000 received from the disposal of an old machine.
    3. Amount of 600,000 received from the issue of new shares & debentures of XYZ Inc.
    4. 500,000 received as consideration for the sale of goods or services.
    5. Rent received 60,000 from the tenant.
    6. Interest & Dividend received 15,000 from investments in Amazon Inc.

    All the above examples can be termed as receipts but all of them cannot be termed as income. Only examples 4, 5, & 6 can be referred to as income for XYZ Inc.

    Eg. 1, 2, & 3 are capital receipts and will not affect the statement of profit & loss of XYZ Inc. Therefore they are termed only as receipts & not income.

    Whereas eg. 4, 5, & 6 are revenue receipts and will affect the profit & loss statement. Therefore, they can be referred to as income for XYZ Inc.

    Now moving forward, let me help you understand the difference between payments & expenditure, with the help of an example.

    Difference between Payments & Expenditure

    Expenditure Payments
    Expenditure refers to the amount incurred by an entity for operating the business and for earning income. Any cash outflow incurred by an entity can be termed as payments.
    All expenses affect the statement of profit & loss. But all payments do not affect profit & loss statement.
    Expenditure includes only revenue expenditure.

     

    Payments include both capital expenditure & revenue expenditure.
    It can be cash or non-cash in nature. For eg. non-cash items such as depreciation, amortization, bad debts are also considered expenses. It is only cash in nature.

    Examples of Payments & Expenditure

    For instance, ABC Inc. incurs the following payments in the month of January 20×1. Let us differentiate these transactions as payments or expenditures.

    1. Paid 40,000 for the acquisition of new machinery.
    2. Paid 200,000 for the redemption of shares and debentures issued by ABC Inc.
    3. Repaid 45,000 amount of loan taken from the financial institution.
    4. Salary & Wages paid 100,000.
    5. Purchase of Raw materials 30,000.
    6. Professional fees paid 15,000.

    All the above examples can be referred to as payments by ABC Inc. but all of them cannot be termed as expenditures. Only examples 4, 5, & 6 can be referred to as expenditures for ABC Inc.

    Eg. 1, 2, & 3 are capital expenditures and will not affect the statement of profit & loss of ABC Inc. Therefore they are termed only as payments and not expenditures.

    Whereas eg. 4, 5, & 6 are revenue expenditures and will affect the profit & loss statement. Therefore, they can be referred to as expenditure for ABC Inc.

    Conclusion

    1. All cash incomes are receipts. But all cash receipts are not income.
    2. All cash expenditures are payments. But all cash payments are not expenditure.

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    In the business world, the terms "Debt" and "Liability" are used interchangeably and are understood to be the same. But in reality, they differ. Debt Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date. For Example, Term loans acceptedRead more

    In the business world, the terms “Debt” and “Liability” are used interchangeably and are understood to be the same. But in reality, they differ.

    Debt

    Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date.

    For Example,

    • Term loans accepted from a bank or financial institutions for business expansion
    • Car loan, Home loan, Education loan

    Liability

    Liability is an obligation to render goods or services or an economic obligation to be discharged off at a future date.

    For Example,

    • Outstanding payment to suppliers of raw materials
    • Outstanding Expenses – accrued rent, outstanding professional fees, outstanding electricity expenses, unpaid salary, etc
    • Income received in advance – rent received in advance, commission received in advance, etc
    • Bills payable
    • Debts accepted by an entity

    Key differences between Debt and Liability

    Now, let me help you understand the differences between the two terms discussed above, debt and liability.

    Particulars

    Debt

    Liability

    1. Narrow/Broad aspect Debt is an integral part of liability. It is a type of liability. Liability is a broader term and it includes debt and other payables.
    2. Repayment mode Debt can be repaid back only in cash. Liabilities other than debt can be settled by rendering goods or services or by paying cash.
    3. Occurrence Debt does not arise on a daily basis. It results only when an entity borrows money from another party. Other liabilities arise during the course of the day to day operations of the business.
    4. Formal agreement Debt involves a formal agreement between the borrower and the lender. Liabilities apart from debt may not involve such a formal agreement between the parties.
    5. Utilization Debt helps entities for business expansion and diversification. Liabilities help entities conduct their daily business functions and processes.
    6. Interest payment The repayment of debt involves payment of interest along with the principal amount. Discharge of other liabilities may not involve payment of interest along with the actual amount of liability.
    7. Option of installments Debt repayment usually provides an option of payment in installments. Liabilities settlement may not provide such an option to the borrower.

    Conclusion

    All debts are liabilities, but not all liabilities are debts.

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    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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