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What are Intangible Assets? What are the recognition criteria for Intangible assets?
Intangible assets are those that do not have physical existence. Like fixed assets future economic benefits must flow from Intangible assets.
E.g. – Patents, Copyright, Goodwill
For recogniƟon of Intangible assets:
a. future economic benefits must flow and
b. cost of the asset can be reliably measured.
What are Fictitious Assets?
Fictitious assets are
a. not assets indeed,
b. these are simply debit balances shown in the asset side of the balance sheet.
c. these are losses and expenditures which are to written off in future years.
d. Examples – Debit balance of P&L account, pre-incorporation expenses, preliminary expenses etc.
What are Preliminary expenses? What is deferred revenue expenditure, give an example?
Preliminary expenses are expenditures incurred before incorporation of the business. These are incurred to bring
business into existence. They have to be written off over a period of not more than 5 years.
Deferred revenue expenditure is
a. revenue expenditure by nature
b. but the benefit of these will be derived in more than one accounting year.
c. It is thus written off in as many years or five years’ time.
What are Contingent Assets and liabilities?
Contingent Assets and liabilities are potential assets and liabilities however the timing and amount is uncertain.
a. It may or may not come into existence upon happening or non-happening of future event.
b. These are not recognized in financial statements but shown in the notes to financial statements. Example of contingent liability – outstanding lawsuit
What is subsidiary book, name them?
Subsidiary books are the books of original entry thus books where first time recording takes place from vouchers.
a. Ledger postings take place from subsidiary books.
b. These are – Purchase Book, Sales Books, Purchase Returns, Sales Return, Cash Book, Journal, Bills Receivable and Bills Payable.
What are Sub-ledgers?
a. A subsidiary ledger is a group of similar accounts that work as an itemization of posting to General Ledger.
b. Subsidiary ledgers facilitate recording of complete financial and other information related to the transaction.
c. The General ledger Account the summarizes a subsidiary ledgers account balances is called the Control account
e.g.- Accounts Payable, Receivable, Assets, Inventory.
What is a ledger?
a. A ledger is a principal book or book of final entry. It is where all the accounts (Assets/ Liabilities/ Expenses/ Income) It is a book of permanent record from where Trial balance can be drawn and financial statements are prepared.
b. are maintained and transactions are transferred from books of original entry.
What is the difference between P&L and Balance sheet?
a. P&L is an Account or Balance sheet is a statement.
b. P&L is prepared to analyze profitability of business from operating, non-operating activities. Balance sheet reflects statement of financial position of business.
c. P&L is made from Expense/ losses and Income/ Gain account. Balance sheet is made from asset, liability and capital account.
d. Accounts shown in P&L are not carried forward to next year. Accounts shown is balance sheet are carried forward to next year.
e. Net balance of P&L Account goes to Balance sheet in Reserves/ Surplus/ Capital/ P&L A/c.
What is the difference between accounting and bookkeeping?
a. Accounting is preparation of financial statements, Analyzing, Compliance with GAAP.
b. Bookkeeping is recording of Ledgers and Subledgers.
c. Accounting starts where bookkeeping ends.
d. Bookkeeping is clerical.
What is Balance sheet? Why is it prepared? Why does Balance sheet match?
a. Balance sheet is statement of financial position. Balance sheet summarizes & equates Assets against Liabilities and Shareholder’s equity on a specified date.
b. Balance sheet is essential since it gives snapshot of financial health for business. It shows Sources from where funds were raised (i.e. Liabilities+ Equity) in the business and Application of funds (i.e. Assets).
c. Balance sheet should always match since
i. All Accounting transactions are posted with Accounting Equation balanced i.e. Assets = Equity + Capital.
ii. All transactions posted follow dual aspect of accounting that is Debit = Credit.
What are Accruals? What are deferrals?
a. Accruals are Income Accrued i.e. Income earned but not received and Outstanding Expenses i.e. expenses incurred but not paid. When closing a month/ year these are required to be considered and posted correspondingly. E.g. Rent due but not paid.
b. Deferrals are Income received in advance/ Unearned Income and Prepaid Expenses. Thus, all amounts received in advance for an Income that has not been earned and all payments made in advance against an expense that has yet not been incurred are categorized as deferrals. These are accumulated in prepayment account and later charged/ carried to respective accounts as periods.
Define & Categorize these Accounts in Balance sheet both on Traditional and Modern approach?
a. Prepaid expense – Expenses paid but not yet incurred for.
e.g. – Insurance paid for 12 months in advance. Current Asset.
Personal.
b. Outstanding expenses A/c – Expenses incurred but not paid for.
e.g.– Rent for month of March paid in May.
Current Liabilities.
Personal.
c. Income Accrued – Income earned but not received.
Current Liabilities.
Personal.
d. Personal Unearned Income – Current liabilities. Personal.
e. Deferred revenue expenditure – non-current fictitious Asset. Personal.
What is a Suspense A/c?
A Suspense A/c is an account in which the amount of difference in Trial balance is posted till such some errors are
identified and rectification entries are posted.
A Suspense account is an outcome of accounting errors that affect trial balance. Normally a Suspense account should stand balanced after all errors have been rectified after before preparation of Balance sheet.
What are errors of commission?
Errors of commission that arise due to
a. Wrong recording, errors of posting- (these does not affect agreement of trial balance).
b. Wrong casting (subsidiary books), wrong carry forward, wrong balancing – (these affect T.B.).
What is accrual basis of accounting?
a. Income is recognized and recorded when they are earned.
b. Expenses are recognized and recorded when they are incurred.
What is a matching concept?
According to this principle expenses incurred in an accounting period to earn a revenue should be recognized and matched with the revenue so earned is recognized in that period. E.g.- If revenue is recognized on all goods sold during the period, cost (COGS) of those goods sold should also be charged to that period.
Matching concept = Accrual concept + Revenue recognition concept.
What is the principle of prudence or conservatism?
According to this principle “Anticipate no profits and gains” however “provide for all possible losses”.
a. Do not overstate Assets and Profits/ Income.
b. Do not understate Liabilities and losses/ expenses
What is Revenue Recognition principle / AS-9?
Revenue from Sale of goods and services should only be recognized
a. If the transaction has actually taken place i.e. goods sold or service rendered.
b. The ownership and risk for the goods have been transferred to the buyer.
c. There is no uncertainty as to collectability of amount.
How do we make accruals/ provision at period end/ year end?
Accruals are made for
a. Accrued Income – Income earned but not received.
b. Outstanding expenses – Expenses incurred but not paid.
How do we make deferrals at period end/ year end?
Deferrals are made for
a. Unearned Income – Income received in advance i.e. not yet earned.
b. Prepayment of expenses- Expenses paid for but not yet incurred.
What are the source documents to record transactions in following books?
a. Purchase book – Invoice from Vendor
b. Sales book – Invoice issue to customer
c. Purchase returns – Debit note issued
d. Sales returns – Credit note sent out
Is it possible to debit –>Cash/ Bank and Credit -> Unearned Income/ Income received in advance A/c, In what conditions?
Yes, when at the time of receiving the payment, it known that Income is received in advance and amount is
ascertainable then Unearned Income A/c is credit instead of concerned Income A/c.
Is it possible to debit – prepaid expenses and credit Cash/ Bank A/c, In what conditions?
Yes, when at the time of making the payment, it known that expense is a pre-payment and the amount is
ascertainable then Prepaid account is debited instead of the concerned expense.
How do we account for Goods sent by HO to Branch, at both places?
In the books of Head Office –
Branch A/c – debit
To Goods sent to Branch A/c – credit
In the books of Branch –
Goods received from HO A/c – debit
To H.O. A/c – credit
How do we account for expenses incurred by HO on behalf of Branch, at both places?
In the books of Head Office –
Branch A/c – debit
To Cash – credit
In the books of Branch –
Expenses A/c – debit
To H.O. A/c – credit
Where does Closing stock show in Trial balance?
Normally closing stock shows outside the TB since stock valuation completes after preparation of TB. In that case Closing stock has two effects in financial statements – Credit to Trading A/c & shown as Current asset in Balance sheet.
If closing stock shows in T.B i.e. stock taking has been done before preparation of T.B. Then following adjustment entry has been passed.
Closing stock – debit
To Purchases A/c – credit
Thus, closing stock is debit balance in T.B. and purchases a/c in T.B. has been adjusted for closing stock. Closing stock in
this case has only one effect i.e. shown as Current asset in Balance sheet.
What are adjusted purchases?
Adjusted purchases are – Net Purchases (Purchases less: returns) + Opening stock – Closing stock
What is Window dressing in Balance sheet or books?
Act of falsification in accounting records so that it shows a position better than it actually exist.
E.g. Overcasting Assets and Income and Under casting – losses and liabilities.
What are Real / Personal / Nominal Accounts?
Real – these are all Tangible and Intangible Assets except debtors and banks
Personal – the amount due to or due from persons that can be Natural, Artificial and Representative Persons.
Nominal – are all A/cs that are Expenses/ losses and Income/ gains
What are the three Golden rules in accounting?
Real – Debit what comes in / Credit what goes out
Personal – Debit the receiver / Credit the giver
Nominal – Debit all expenses / losses Credit all Income/ Gains
What is the Accounting Equation?
The accounting equation is fundamental in accounting and represents the relationship between a company’s assets, liabilities, and owner’s equity.
Assets = Liabilities + Owner’s Equity
What all transactions come on debit side of Asset A/c?
a. Purchase.
b. Additions.
c. Upward revaluation.
d. Capitalization of expenses (installation etc.).
What transactions come on credit side of Asset A/c?
a. Depreciation.
b. Impairment.
c. Sale of assets.
d. Disposal of assets.
e. Transfer.
f. Downward revaluation.
What are different methods of accounting for Depreciation?
a. Directly charging depreciation to Asset A/c
b. Accumulation of depreciation Accumulated depreciation A/c (normally used in corporates)
c. Sinking fund method
In which method -depreciation is high in the beginning and declines later?
Written down value method
Which type of errors does not affect the trial balance?
Errors that do not affect the Trial balance.
a. Error of Complete omission
i. Omission in recording of a transaction in Subsidiary books
ii. Omission of posting in all related accounts of transactions.
b. Error of Commission
Related to subsidiary:
i. Error of recording a wrong amount in the correct book.
ii. Error in recording a correct amount in wrong book
Related to ledger book:
i. Posting of a correct amount on the correct side of wrong account.
c. Error of principle.
d. Compensatory errors
What is error of commission, give example?
If an amount is recorded on the wrong side or in wrong account or the totals are wrong or a wrong balance is struck, it will be a case of error of commission.
Which type of errors affect Trial Balance?
- Error of ParƟal Omission
- Error of Commission
Related to subsidiary:
a. Error of casting
b. Error in carrying forward
Related to ledger book:
a. Error of posting on the wrong side of a correct account
b. Error of posting of wrong amount
c. Wrong balancing/ totaling of an account
d. Error in carrying forward / totaling of an account