MGT101 FAQs by Syed Ali

WHAT DO YOU MEAN BY REVALUATION OF FIXED ASSETS?

Fixed assets are purchased to be used for longer period. In the subsequent years, the value of asset could be higher or lower than its present book value, due to inflationary condition of the economy. Assets are valued at Historical Cost in the books of accounts. Historical Cost is the original cost of the asset at which it was purchased plus additional costs incurred on the asset. Sometimes, the management of the business, if it thinks fit, revalues the asset to present it at current market value. Once the asset is revalued to its market value, then its value has to be constantly monitored to reflect the changes in the market value. If an asset is revalued at higher cost than its original cost, the excess amount will be treated as profit on revaluation of fixed assets and it is credited to Revaluation Reserve Account. On the other hand, if an asset is revalued at lower cost than its original cost, the balance amount will be treated as loss on revaluation of fixed assets and it is shown in the profit & loss account of that year in which asset was revalued.

What is Balance B/F and Balance B/D?

Balance B/F means balance brought forward and Balance B/D means balance brought down both represents the opening balance. This balance is actually the closing balance of previous period which is transferred to the current accounting period at the start of period.

What is Balance C/F and Balance C/D?

Balance C/F means balance carried forward and Balance C/D means balance carried down both represents the closing balance. This is the differential amount of debit and credit side amounts at the end of period.

What is debit balance?

If all amounts of debit side of an account > all amounts of credit side of an account then the differential amount is called debit balance.

What is credit balance?

If all amounts of debit side of an account < all amounts of credit side of an account then the differential amount is called credit balance. EXPLAIN DEFERRED EXPENSES? Deferred Expenses are revenue expenses that provide benefit for more than one year. These are initially shown in balance sheet. Subsequently, these are charged to profit and loss account over the period in which benefit is derived from them.

WHAT IS THE MAIN DIFFERENCE BETWEEN PROFIT & LOSS A/C AND BALANCE SHEET?

Profit and loss account is prepared to know the performance of the business for a particular period of time. At the end of accounting period, a business prepares profit and loss account to ascertain the profit or loss of the business. All ledger accounts of revenue nature are summarized in profit and loss account. Balance Sheet is prepared to know the financial position of a business at a particular point of time. It contained the assets, liabilities and capital

HOW CAN WE DEFINE JOURNAL?

The word " Journal "has been derived from the French word " Jour". Jour means day. So, Journal means daily. Transactions are recorded daily in Journal. As soon as a transaction takes place its debit and credit aspects are analyzed and first of all recorded chronologically in a book together with its short description. This book is known as Journal. The most important function of Journal is to show the relationship between the two accounts connected with the transaction. Journal is also called the " Book of Original Entry" or " Day Book" because it keeps day-to-day record of transactions.

WHAT IS THE DIFFERENCE BETWEEN MERCHANDISES AND ASSETS?

Merchandises are the goods/things which are purchased for the purpose of sale. The things which are sold out are considered as expenses as cost of goods sold while the things which are unsold during the accounting period are treated as current asset. Asset is the broader term means anything which is owned by the business which provide the economic benefit to the business like cash in hand, stock, furniture and machinery etc

WHAT IS THE DIFFERENCE BETWEEN LONG TERM ASSETS AND FIXED ASSETS?

Long Term Assets are those assets which provide benefit to the business for long time. For example, if we invest some money in any scheme (like saving scheme “saving certificates”) for three years, it will be our Long Term Asset. Fixed assets are those assets, which are subject to depreciation. These assets provide benefit for longer period of time but these assets are depreciated with the passage of time. For example furniture, machinery and building etc. WHY DO WE PREPARE PROFIT AND LOSS A/C? Profit and loss account is prepared to know the performance of the business. At the end of accounting period, a business prepares profit and loss account to ascertain the profit or loss of the business. All ledger accounts of revenue nature are summarized in profit and loss account.

DEFINE TRIAL BALANCE?

Every business concern prepares Final Accounts at the end of the year to ascertain the result of the activities of the whole year. To ensure correct result, the concern must be free from doubt that the books of accounts have been correctly recorded throughout the year. Trial balance is prepared to test the arithmetical accuracy of the books of accounts. Trial balance serves two main purposes: 1. To check the equality of debits and credits 2. To provide information for use in preparing Final Accounts Thus in the light of above discussion a Trial Balance may be defined as "an information or accounting schedule or statement that lists the ledger account balances at a point in time and compares the total of debit balances with the total of credit balances".

WHAT DO YOU MEAN BY ACCUMULATED DEPRECIATION?

Accumulated Depreciation is the depreciation that has taken place on a particular asset up to the present time. It is the sum of all periodic depreciation to the date of balance sheet. It is a contra asset account which is deducted from the cost of a particular asset for showing the book value of asset in balance sheet.

WHAT DO YOU UNDERSTAND BY “CAPITAL WORK IN PROGRESS”?

If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset up to the balance sheet date are transferred to an account called Capital Work in Progress Account. This account is shown separately in the balance sheet below the fixed asset. Capital work in progress account contains all expenses incurred on the asset until it is converted into working condition. All these expenses will become part of the cost of that asset. When an asset is completed and it is ready to work, all costs will transfer to the relevant asset account

WHAT DOES IT MEAN WHEN “SHARES ARE ISSUED AT PREMIUM”?

When a company has a good reputation and earns good profits, the demand of its shares increases in the market. In that case, the company is allowed by the Companies Ordinance 1984, to issue shares at a higher price than their face value. Such an issue is called “Shares Issued at Premium”. The amount received; in excess of the face value of the shares is transferred to an account called “Share Premium Account”. This account is used to