❓ Frequently Asked Questions (Accounting Accounts)

📂 Section: 📋 Specific account:

📁 Assets ▼

❓ What are assets? ▼

Assets are economic resources controlled by the entity from which future economic benefits are expected.

❓ How are assets classified? ▼

Assets are classified into current assets (converted to cash within one year) and non-current assets (serve the entity for more than one year).

❓ Can the asset balance be negative? ▼

No, the asset balance cannot be negative under normal circumstances. A negative balance indicates an accounting error.

📁 Current Assets ▼

❓ What are the criteria for classifying an asset as current? ▼

An asset is classified as current if: (1) expected to be realized, sold, or consumed within the normal operating cycle, (2) held for trading purposes, (3) expected to be realized within 12 months of the balance sheet date, (4) cash or cash equivalent not restricted.

❓ Can an asset be current even if its life is more than one year? ▼

Yes, if it is part of the normal operating cycle (e.g., inventory of a construction company may take more than a year to sell).

❓ How are current assets presented on the balance sheet? ▼

Usually in order of liquidity (most liquid first): cash, short-term investments, receivables, inventory, prepaid expenses.

📁 Cash and Cash Equivalents ▼

❓ Is cash an asset? ▼

Yes, cash is classified as a current asset.

❓ What is the normal balance of cash? ▼

Cash has a debit normal balance.

❓ What are the limits for cash that should be kept in hand? ▼

There is no fixed rule, but the cash balance should be sufficient only for minor daily expenses. It is preferable to keep the minimum possible amount and transfer any excess to the bank for safety and to earn returns. Limits vary by company size and business nature.

❓ What is the difference between Cash and Cash Equivalents? ▼

Cash includes currency, coins, and demand deposits. Cash equivalents are short-term investments (maturity of 3 months or less) that are highly liquid, convertible to known cash amounts, and have low risk, such as treasury bills and short-term certificates of deposit.

❓ How are Cash and Cash Equivalents presented on the Statement of Cash Flows? ▼

Cash and cash equivalents are presented at the beginning and end of the period on the Statement of Cash Flows. Any change in the cash balance during the period represents net cash flows from operating, investing, and financing activities. Any restricted cash must be disclosed separately.

❓ What is the difference between cash and cash equivalents and restricted cash? ▼

Cash and cash equivalents are available for immediate use in operating activities. Restricted cash is not available for immediate use due to legal or contractual restrictions (e.g., security deposits, bank guarantees).

❓ Is bank overdraft presented within cash and cash equivalents? ▼

Under IFRS, it may be offset against cash if it is repayable on demand and part of daily cash management. Under GAAP, it is usually presented as a liability (current liability).

📁 Cash in Hand ▼

❓ What is the difference between Cash in Hand and Bank Account? ▼

Cash in Hand represents physical currency held in the company\'s safe (notes and coins), while Bank Account represents cash balances deposited with banks. Cash in Hand is more susceptible to error and theft, so it should be counted daily, while the bank account is reconciled with the bank statement monthly.

❓ How do you record a cash deposit from Cash in Hand to the Bank? ▼

The entry is: Dr. Bank Account, Cr. Cash in Hand. This entry decreases the Cash in Hand balance and increases the Bank Account balance by the same amount.

❓ Is it possible for Cash in Hand to have a negative balance? ▼

No, Cash in Hand should never have a negative balance. A negative balance means the company paid out more cash than it had, which is physically impossible. A negative balance indicates an accounting error or irregularity.

❓ What is a cash shortage and how is it treated accounting-wise? ▼

A cash shortage is the difference between the book balance and the actual balance during a count (book balance is higher). It is treated as: Dr. Cash Shortage (Expense), Cr. Cash in Hand. If a responsible employee is identified, it is charged to them: Dr. Employee Receivables, Cr. Cash Shortage.

❓ What is a cash overage and how is it treated accounting-wise? ▼

A cash overage is the difference between the actual balance and the book balance during a count (actual balance is higher). It is treated as: Dr. Cash in Hand, Cr. Cash Overage (Other Income). If the reason is not identified, it remains as other income.

📁 Bank Account ▼

❓ How is a bank reconciliation performed? ▼

Bank reconciliation is the process of matching the company\'s book balance for the bank with the balance on the bank statement. It involves adding deposits in transit, deducting outstanding checks, adding bank income, deducting bank charges, and correcting any errors. The goal is to arrive at a single, agreed-upon balance.

❓ What are outstanding checks? ▼

Outstanding checks are checks that have been issued and recorded in the company\'s books but have not yet been presented to the bank for payment, so they do not yet appear on the bank statement. They are deducted from the book balance during reconciliation.

❓ What are deposits in transit? ▼

Deposits in transit are cash or checks that have been deposited and recorded in the company\'s books but have not yet appeared on the bank statement because the bank has not yet processed them. They are added to the bank statement balance during reconciliation.

❓ How are bank charges recorded in the company\'s books? ▼

Bank charges such as account fees, transfer fees, and check issuance fees are often not known to the company until the bank statement is received. They are recorded with the entry: Dr. Bank Charges Expense, Cr. Bank Account.

❓ What is the difference between a bank overdraft and a bank loan? ▼

A bank overdraft is a short-term credit facility that allows a company to withdraw more than its current account balance. It is usually repayable on demand and has a higher interest rate. A bank loan is a specific amount borrowed, repaid in installments over a set period with a lower interest rate.

📁 Restricted Cash ▼

❓ What is Restricted Cash? ▼

Restricted cash is cash that is not available for immediate use in the company's operations due to legal or contractual restrictions. It includes security deposits, guarantee letters, escrow accounts, and statutory deposits for banks.

❓ How is restricted cash presented on the Statement of Financial Position? ▼

Restricted cash is presented as a separate line item within current assets (if restricted for less than one year) or within non-current assets (if restricted for more than one year). It is not combined with cash and cash equivalents because it is not available for immediate use.

❓ How is restricted cash treated on the Statement of Cash Flows? ▼

Under IFRS, restricted cash that does not meet the definition of cash (e.g., term deposits as security) is not included in the cash and cash equivalents line on the cash flow statement. Under US GAAP, restricted cash is presented with unrestricted cash on the cash flow statement with separate disclosure.

❓ What is the difference between restricted cash and security deposits? ▼

Restricted cash is a broader concept that includes security deposits as well as other types of trapped cash. Security deposits are a specific type of restricted cash paid as collateral for a lease or service contract.

❓ When should restricted cash be disclosed in the notes? ▼

Restricted cash should be disclosed in the notes to the financial statements if the amount is material, with an explanation of the reasons for restriction, expected restriction period, and the beneficiary party.

📁 Cash Security Deposits ▼

❓ Are cash security deposits refundable? ▼

Yes, they are refundable upon contract termination or guarantee cancellation, provided no defaults or outstanding obligations exist.

📁 Cash Collateral for Guarantees ▼

❓ Is cash collateral for a bank guarantee considered restricted cash? ▼

Yes, because the deposited cash cannot be used in operating activities while the bank guarantee is outstanding.

📁 Escrow Accounts ▼

❓ Who owns the funds in an escrow account? ▼

The company owns the funds, but their use is restricted until the condition agreed in the escrow agreement is met.

📁 Statutory Bank Deposits ▼

❓ Is a statutory bank deposit considered cash and cash equivalent? ▼

No, because it is a mandatory deposit not available for immediate use, thus classified as restricted cash under current or non-current assets depending on the period.

📁 Legally Restricted Cash ▼

❓ How is legally restricted cash disclosed? ▼

Disclosed in the financial statement notes, including nature of restriction, amount, and expected duration, which may impact the company's liquidity.

📁 Contractually Restricted Cash ▼

❓ What is the difference between contractually restricted cash and legally restricted cash? ▼

Contractually restricted cash arises from an agreement between parties (e.g., loan covenants), while legally restricted cash arises from a legal provision or court order.

📁 Short-term Investments ▼

❓ What is the difference between short-term investments and cash equivalents? ▼

Cash equivalents include investments with maturities of 3 months or less. Short-term investments have maturities exceeding 3 months but not exceeding one year.

❓ What are types of short-term investments? ▼

Include: Treasury Bills, Certificates of Deposit, Commercial Paper, Money Market Funds, and time deposits with maturities exceeding 3 months but not exceeding one year.

❓ How are short-term investments measured? ▼

Classified by business model: (1) Amortized Cost, (2) Fair Value through Other Comprehensive Income (FVOCI), (3) Fair Value through Profit or Loss (FVTPL).

❓ When is an investment classified as current vs non-current? ▼

If intended to be sold within one year or part of a trading portfolio, classified as current. If intended to be held for more than one year, classified as non-current.

📁 Accounts Receivable ▼

❓ What is Accounts Receivable? ▼

It represents amounts owed to the company by customers for goods or services sold on credit. It is a current asset.

❓ What is the journal entry for credit sales? ▼

Dr. Accounts Receivable, Cr. Sales Revenue (and Cr. Output VAT if applicable).

❓ How is the customers account reconciled with customers? ▼

Periodic statements are sent to customers and their balances are matched with the company’s records, preparing an accounts receivable reconciliation.

📁 Local Customers ▼

❓ What are Accounts Receivable? ▼

Accounts Receivable are amounts owed to a company by its customers for goods or services sold on credit. These amounts represent a current asset on the balance sheet and are expected to be collected within one year.

❓ How is a credit sale recorded? ▼

When a credit sale is made, the following entry is recorded: Dr. Accounts Receivable (for the full invoice amount including tax), Cr. Sales Revenue (for the sales amount excluding tax), Cr. Output VAT (for the tax amount).

❓ What is the Allowance for Doubtful Accounts? ▼

The Allowance for Doubtful Accounts is an estimate of the portion of accounts receivable that may not be collected in the future. It is created with the entry: Dr. Bad Debt Expense, Cr. Allowance for Doubtful Accounts. The allowance appears as a deduction from accounts receivable on the balance sheet.

❓ How is a bad debt written off? ▼

When a specific debt is determined to be uncollectible, it is written off with the entry: Dr. Allowance for Doubtful Accounts, Cr. Accounts Receivable (specific customer). This entry does not affect the income statement because the expense was already estimated when the allowance was created.

❓ What is the difference between Accounts Receivable and Service Revenue? ▼

Accounts Receivable is a balance sheet asset representing amounts owed by customers, while Service Revenue is an income statement account representing the value of services provided. When a service is provided on credit, Service Revenue is credited and Accounts Receivable is debited.

📁 Foreign Customers ▼

❓ What is the foreign customers account? ▼

Used to record receivables from customers dealing in foreign currencies or residing outside the country, subject to exchange differences.

❓ How are foreign customer balances revalued at period end? ▼

Revalued at the exchange rate prevailing at the balance sheet date, and the difference (exchange gain or loss) is recognized in the income statement.

📁 Allowance for Doubtful Accounts ▼

❓ How is the allowance for doubtful accounts estimated? ▼

Estimation is based on aging analysis of receivables, historical collection experience, current economic conditions, and percentage applied to different aging categories.

❓ How does the allowance for doubtful accounts affect net income? ▼

When the allowance is created or increased, bad debt expense is charged on the income statement, reducing net income.

❓ Can the allowance balance exceed total receivables? ▼

Rare, but if the estimate indicates expected credit losses exceed total receivables, it is better to write off uncollectible receivables first.

❓ What is the difference between percentage of sales and aging methods? ▼

Percentage of sales: based on a fixed percentage of credit sales. Aging analysis: based on classifying receivables into aging categories with different percentages (more accurate).

📁 Inventory ▼

❓ What is Inventory? ▼

Inventory is goods or materials held by a company for sale in the ordinary course of business, raw materials used in production, work-in-process, or finished goods ready for sale. Inventory is a current asset on the balance sheet.

❓ How is inventory valued on the financial statements? ▼

Inventory is valued on the balance sheet at the lower of cost or net realizable value (LCNRV). Net realizable value is the estimated selling price less estimated costs of completion and costs necessary to make the sale.

❓ What are inventory costing methods? ▼

Permitted methods under IFRS are: FIFO (First-In, First-Out) and Weighted Average Cost. The LIFO (Last-In, First-Out) method is prohibited under IFRS but permitted under US GAAP with specific disclosures.

❓ How is inventory counted at year-end? ▼

Inventory is counted either periodically (physical count at period end) or perpetually (balances updated continuously with each sale and purchase). Book balances are reconciled with physical counts and any differences are recorded.

❓ What is an inventory write-down? ▼

An inventory write-down means the carrying value of inventory exceeds its net realizable value. Inventory is written down to net realizable value, and the difference is charged as an expense (inventory impairment loss) on the income statement.

📁 Raw Materials Inventory ▼

❓ What is the difference between Raw Materials Inventory and Finished Goods Inventory? ▼

Raw Materials Inventory consists of materials that go into the manufacturing process (e.g., steel, plastic, wood), while Finished Goods Inventory consists of completed products ready for sale to customers.

❓ What is the FIFO inventory valuation method? ▼

FIFO (First-In, First-Out) is an inventory valuation method that assumes the oldest units in inventory (those acquired first) are the first to be sold. Consequently, the ending inventory consists of the most recently purchased units. This method is permitted under both IFRS and GAAP.

❓ What is the LIFO method and is it permitted? ▼

LIFO (Last-In, First-Out) is a method that assumes the most recently acquired units are the first to be sold. This method is **prohibited under IFRS** but is **permitted under US GAAP** with specific disclosures (LIFO Reserve).

❓ How is inventory valued on the financial statements? ▼

Inventory is valued on the balance sheet at the lower of cost or net realizable value (LCNRV). This means inventory is valued at either its cost or its net realizable value, whichever is lower, to avoid overstating asset value.

📁 Finished Goods Inventory ▼

❓ What is finished goods inventory? ▼

Products that have been fully manufactured and are ready for sale to customers.

❓ How is finished goods cost transferred to cost of goods sold? ▼

When the product is sold, its value is transferred from finished goods inventory to cost of goods sold.

📁 Work in Progress (WIP) ▼

❓ What is work in progress (WIP)? ▼

Value of products that have started the manufacturing process but have not yet been completed. Includes raw materials, direct labor, and manufacturing overhead.

❓ How is work in progress valued? ▼

Valued at the lower of cost or net realizable value, and updated at the end of each accounting period.

📁 Allowance for Slow-moving Inventory ▼

❓ When is a slow-moving inventory allowance created? ▼

It is created when indicators show that goods will not move within the normal period (e.g., outdated model, change in market demand).

❓ What is the difference between slow-moving and obsolete/damaged allowance? ▼

Slow-moving allowance for goods that move slowly (may sell at a large discount). Obsolete/damaged allowance for damaged or completely unsalable goods.

❓ How is slow-moving allowance estimated? ▼

Based on inventory turnover analysis, expiry dates, changes in market demand, and expected future sales percentage.

📁 Allowance for Obsolete/Damaged Inventory ▼

❓ Can an obsolete inventory allowance be reversed if the goods' condition improves? ▼

Under IFRS, the allowance can be reversed if net realizable value increases. Under GAAP, the allowance cannot be reversed.

❓ Can obsolete allowance be reversed if goods condition improves? ▼

Under IFRS, the allowance can be reversed if net realizable value increases. Under GAAP, it cannot be reversed.

📁 Prepaid Expenses ▼

❓ What are Prepaid Expenses? ▼

Prepaid expenses are cash amounts paid in advance for services or benefits to be received in future periods (e.g., prepaid rent, prepaid insurance, annual subscriptions). They are considered a current asset on the balance sheet.

❓ How are prepaid expenses amortized? ▼

Prepaid expenses are amortized over the period benefited. A monthly or periodic entry is recorded: Dr. Relevant Expense Account, Cr. Prepaid Expenses. The portion benefiting the period is charged as an expense on the income statement.

❓ What is the difference between prepaid expenses and accrued expenses? ▼

Prepaid expenses are an asset (paid before receiving the service), while accrued expenses are a liability (received the service but not yet paid). Both arise from the accrual basis of accounting.

❓ Is it acceptable to expense prepaid expenses directly? ▼

If the amount is immaterial (e.g., a pen or notebook) or the benefit period is less than a month, it can be expensed directly to avoid complexity. But for large amounts or long periods, they must be recorded as an asset and amortized.

❓ How are prepaid expenses presented on the balance sheet? ▼

Prepaid expenses are presented within current assets if they will be consumed within one year. If the remaining portion will be consumed after more than one year, they are presented within non-current assets.

📁 Prepaid Rent ▼

❓ How is prepaid rent amortized? ▼

A portion is charged as rent expense each month/period with the entry: Dr. Rent Expense, Cr. Prepaid Rent.

📁 Prepaid Insurance ▼

❓ Can prepaid insurance be refunded if the policy is canceled? ▼

Usually yes, the company receives a refund for the unexpired period (minus administrative fees). The refund is recorded as income or expense reduction.

📁 Prepaid Subscriptions ▼

❓ When are prepaid subscriptions transferred to expense? ▼

Transferred monthly or annually according to the subscription period, with the entry: Dr. Subscription Expense, Cr. Prepaid Subscriptions.

📁 Prepaid Maintenance ▼

❓ What is prepaid maintenance? ▼

Amounts paid in advance for future maintenance contracts (e.g., elevator, HVAC, equipment maintenance), considered an asset amortized over the contract period.

📁 Other Receivables ▼

❓ What are Other Receivables? ▼

Other Receivables is a grouping account for amounts owed to the company from parties other than regular customers, such as: employee receivables, insurance claims, tax refunds, security deposits, and accrued revenues.

❓ What is the difference between Other Receivables and Accounts Receivable? ▼

Accounts Receivable is dedicated to receivables arising from the main operating activity (credit sales of goods or services). Other Receivables includes all other receivables not arising from the main activity.

❓ Is an allowance for doubtful accounts created for Other Receivables? ▼

Yes, if some Other Receivables (such as employee receivables or security deposits) are at risk of non-collection, an allowance for doubtful accounts should be created for them using the same method as for customers, in accordance with the prudence principle.

📁 Employee Travel Advances ▼

❓ What is employee travel advance? ▼

A cash advance given to an employee to cover travel and transportation expenses (tickets, accommodation, transport), settled upon return by submitting invoices.

📁 Employee Cash Advances ▼

❓ What are employee cash advances? ▼

Cash advances given to employees for daily business purposes (purchasing supplies, petty cash), settled upon submitting documents.

📁 Employee Advances ▼

❓ What are Employee Advances? ▼

Employee Advances are cash amounts given to employees to cover future business expenses such as travel, purchasing supplies, or petty cash. They are considered a current asset (receivable) on the balance sheet until settled with actual expenses or returned.

❓ How is an employee advance recorded? ▼

An employee advance is recorded with the entry: Dr. Employee Advances, Cr. Cash in Hand or Bank Account. When the employee submits actual expenses, the entry is: Dr. Relevant Expense Account, Cr. Employee Advances (to settle the advance).

❓ What happens if an employee does not settle the advance? ▼

If the employee does not settle the advance (submit invoices or return the amount), the balance is treated as a regular receivable. The amount can be deducted from the employee\'s salary or pursued legally. If recovery is hopeless, it is written off as a bad debt expense.

❓ What is the difference between an employee advance and a petty cash fund? ▼

Advance: a fixed amount given to an employee for recurring expenses (e.g., petty cash) and settled periodically. Petty cash: a revolving fund for small expenses.

❓ How are employee advances inventoried at period end? ▼

The book balance of the advance is matched with (remaining cash + value of invoices and documents). Any shortage or surplus is recorded in the inventory differences account.

❓ How is an employee advance settled? ▼

By the employee providing invoices and documents covering the expenses, then the entry: Dr. Various Expense Accounts, Cr. Employee Advances.

❓ What happens if an employee leaves the service with an unsettled advance? ▼

The amount is deducted from his final entitlements (last month's salary, end-of-service benefit). If insufficient, it is pursued legally or written off as a bad debt expense.

📁 Tax Refund Receivable ▼

❓ What is tax refund receivable? ▼

Tax amounts receivable by the company from government authorities, such as overpaid income tax or recoverable VAT.

📁 Recoverable Input VAT ▼

❓ What is recoverable input VAT? ▼

VAT paid on purchases that the company is entitled to recover from the tax authority.

📁 Security Deposits ▼

❓ What are Security Deposits? ▼

Security deposits are cash amounts paid by a company as collateral for future obligations, such as a lease guarantee, letter of guarantee, or service contract guarantee. They are considered an asset (receivable) on the balance sheet until recovered.

❓ Are security deposits considered Restricted Cash? ▼

Yes, if security deposits are deposited in a separate bank account that the company cannot use in its operations, they are considered restricted cash and appear as a separate line item within current or non-current assets depending on the restriction period.

❓ How is the refund of a security deposit recorded? ▼

When a security deposit is refunded, the entry is: Dr. Bank Account or Cash in Hand (for the refunded amount), Cr. Security Deposits (for the refunded amount). If any amount is deducted (e.g., penalty or damages), the difference is recorded as an expense.

❓ How are security deposits classified on the balance sheet by term? ▼

If the security deposit is expected to be recovered within one year, it is classified as a current asset. If recovery is expected after more than one year (e.g., long-term lease guarantee), it is classified as a non-current asset.

❓ What happens if a security deposit is not recovered? ▼

If the company determines that a security deposit cannot be recovered (e.g., bankruptcy of the other party or legal dispute), it is written off as an expense with the entry: Dr. Loss on Security Deposits Expense, Cr. Security Deposits.

📁 Accrued Revenues ▼

❓ What are Accrued Revenues? ▼

Accrued revenues are revenues that have been recognized on the income statement (under the accrual basis) but cash has not been received nor an invoice issued yet. They are considered an asset (receivable) on the balance sheet.

❓ How are accrued revenues recorded? ▼

At period end, an adjusting entry is recorded: Dr. Accrued Revenues (asset), Cr. Relevant Revenue Account (revenue). When cash is received or an invoice is issued, the entry is reversed or the balance is transferred to the customer account.

❓ What is the difference between accrued revenues and deferred revenues? ▼

Accrued revenues are revenue recognized but cash not yet received (asset). Deferred revenues are cash received but revenue not yet recognized (liability). Both arise from the difference between recognition timing and cash collection timing.

❓ What are common examples of accrued revenues? ▼

Common examples include: bank interest not yet appearing on the bank statement, rent due from a tenant not yet collected, services provided but not yet invoiced, and declared investment dividends not yet received.

❓ How are accrued revenues presented on the balance sheet? ▼

Accrued revenues are presented within current assets under "Other Receivables" or "Accrued Revenues" as a separate line item, depending on materiality.

📁 Insurance Claims ▼

❓ What are insurance claims? ▼

Amounts receivable by the company from insurance companies for losses covered by insurance policies.

❓ How is a claim recorded when a loss occurs? ▼

Dr. Insurance Claims, Cr. Asset or Expense account depending on the type of loss (e.g., inventory, buildings, expenses).

📁 Advances to Suppliers ▼

❓ What are Advances to Suppliers? ▼

Advances to Suppliers are cash amounts paid by a company to a supplier before receiving goods or services. These payments are considered a current asset (prepayment) on the balance sheet until the goods or services are received.

❓ How is an advance payment to a supplier recorded? ▼

An advance payment to a supplier is recorded with the entry: Dr. Advances to Suppliers, Cr. Bank Account or Cash in Hand. When the goods are received, the advance is settled with the entry: Dr. Purchases, Cr. Advances to Suppliers.

❓ Can an advance to a supplier be refunded? ▼

Yes, if the supplier fails to deliver the goods or services as agreed, the company has the right to a refund of the advance. The refund is recorded with the reverse entry: Dr. Bank Account or Cash in Hand, Cr. Advances to Suppliers.

❓ What is the difference between Advances to Suppliers and Accounts Payable? ▼

Advances to Suppliers is an asset (the company paid in advance), while Accounts Payable is a liability (the company owes the supplier). The two accounts should not be netted until the goods are received and the advance is settled.

📁 Notes Receivable ▼

❓ What is the difference between notes receivable and accounts receivable? ▼

Accounts receivable are open balances (without a written debt instrument), while notes receivable are formal debt instruments (e.g., promissory note) specifying the amount and payment date.

❓ How is interest on notes receivable calculated? ▼

Interest = Principal × Interest Rate × Time (days or months). Interest is recognized as revenue over time.

❓ What happens if a note is not paid at maturity? ▼

The amount due (principal + interest) is transferred to Accounts Receivable (or other receivables), and an allowance for doubtful accounts may be created if collection is uncertain.

❓ What is the difference between notes receivable and promissory note? ▼

Notes receivable is a broader term that includes promissory notes, bills receivable, and drafts. A promissory note is a written unconditional promise to pay.

📁 Deferred Tax Asset ▼

❓ When is a deferred tax asset recognized? ▼

Recognized when there are deductible temporary differences (e.g., allowances not recognized for tax) or tax loss carryforwards, and it is probable that future taxable profit will be available to utilize them.

❓ What is the valuation allowance for deferred tax assets? ▼

A reduction in the deferred tax asset when it is more likely than not that the tax benefit will not be realized. The allowance is reversed when benefit realization becomes likely.

❓ How is a deferred tax asset presented on the balance sheet? ▼

Classified as a non-current asset (even if settlement is expected within one year), and cannot be offset against deferred tax liabilities unless due to the same tax authority.

📁 Contracts in Progress - Asset ▼

❓ What is a contract asset? ▼

The company's right to consideration for services transferred to the customer but not yet invoiced. Typically arises when using percentage of completion.

❓ When does a contract asset become a receivable? ▼

When the company's right to payment becomes unconditional (i.e., only the passage of time), such as issuing an invoice to the customer.

❓ How is a contract asset measured? ▼

Measured at the amount of consideration allocated to satisfied performance obligations, based on allocated transaction price.

📁 Non Current Assets ▼

❓ What is the difference between current and non-current assets? ▼

Current assets convert to cash within one year (e.g., cash, receivables, inventory). Non-current assets serve the company for more than one year (e.g., land, buildings, machinery).

❓ Are all non-current assets depreciated? ▼

No, only land is not depreciated because it has an indefinite life. Buildings, machinery, vehicles, and furniture are depreciated.

❓ How are non-current assets presented on the balance sheet? ▼

They appear under "Non-current assets" after deducting accumulated depreciation and allowances.

📁 Fixed Assets ▼

❓ When are costs related to fixed assets capitalized? ▼

Costs that increase efficiency or extend useful life (e.g., improvements, expansions) are capitalized. Ordinary costs (maintenance, repairs) are expensed immediately.

❓ What depreciation methods are allowed under standards? ▼

Straight-line, declining balance, and units of production. Under IFRS, revaluation model is allowed; under GAAP, only cost model is permitted.

❓ How is the sale of a fixed asset before its useful life recorded? ▼

The asset is derecognized at its cost and accumulated depreciation, then the gain or loss on sale is recorded.

📁 Land ▼

❓ Is the Land account depreciated? ▼

No, the Land account is not depreciated because land has an indefinite useful life (it does not wear out or get consumed with use). Unlike buildings, which have a limited useful life and are depreciated.

❓ How is a land purchase for cash recorded? ▼

A land purchase for cash is recorded with the following entry: Dr. Land (for the purchase price), Cr. Cash in Hand or Bank Account (for the same amount). The land is added to fixed assets on the balance sheet.

❓ Can land be revalued? ▼

Yes, under IFRS, land can be revalued to its fair value. The increase is recognized in Other Comprehensive Income (OCI) as a Revaluation Surplus within equity.

❓ What is the difference between Land and Investment Property? ▼

Land is used by the company in its operations (e.g., factory site or headquarters). Investment Property is land owned to earn returns (rental income) or capital appreciation, not for operational use.

📁 Buildings ▼

❓ What is the useful life of buildings? ▼

The useful life of buildings typically ranges from 20 to 50 years, depending on construction quality, materials used, and regular maintenance. The useful life is determined by management estimate and company policy.

❓ How is building depreciation recorded? ▼

Building depreciation is recorded with a monthly or annual entry: Dr. Depreciation Expense (Income Statement), Cr. Accumulated Depreciation - Buildings (A contra-asset account shown as a deduction from buildings on the balance sheet).

❓ What is the straight-line method for building depreciation? ▼

The straight-line method is the most common method for depreciating buildings. It is calculated by dividing (Cost of the asset - Salvage Value) by the Useful Life. It gives the same depreciation expense each year.

❓ How are building improvements recorded? ▼

Building improvements such as adding an elevator, expansion, or major renovation are capitalized (added to the building\'s value) if they extend the useful life or increase efficiency. These improvements are depreciated over their own useful life.

📁 Machinery and Equipment ▼

❓ What is the difference between machinery depreciation and machinery maintenance? ▼

Depreciation is a systematic allocation of the machine\'s cost over its useful life and does not represent an actual cash outflow. Maintenance is an actual expense paid to keep the machine in good working condition and is recorded as an expense in the period it occurs.

❓ How is the purchase of new machinery recorded? ▼

The purchase of new machinery is recorded with the entry: Dr. Machinery and Equipment (for the purchase cost including transportation, installation, and customs duties), Cr. Bank Account or Accounts Payable (for the same amount).

❓ What is the useful life of machinery and equipment? ▼

The useful life of machinery varies by type and intensity of use, but typically ranges from 5 to 15 years. The useful life is determined by management estimate, manufacturer specifications, and the maintenance policy followed.

❓ What is the accounting entry for selling old machinery at a gain? ▼

When selling old machinery at a gain, the following entry is recorded: Dr. Bank Account (for the sale proceeds), Dr. Accumulated Depreciation - Machinery (for total accumulated depreciation), Cr. Machinery and Equipment (for the original cost), Cr. Gain on Sale of Assets (for the difference).

📁 Vehicles ▼

❓ How is vehicle depreciation calculated? ▼

Vehicle depreciation is calculated using various methods, the most common being the straight-line method: (Vehicle Cost - Expected Salvage Value) ÷ Expected Useful Life (typically 3-5 years for cars).

❓ Are spare car parts depreciated? ▼

Spare parts purchased for normal use and maintenance are expensed when purchased or consumed. Large spare parts stored for replacement of major car components (e.g., a spare engine) may be capitalized as a fixed asset and depreciated.

❓ What is the difference between fuel expense and vehicle depreciation? ▼

Fuel expense is an actual cash expense paid when refueling the vehicle and depends on the amount of use. Vehicle depreciation is an allocation of the vehicle\'s cost over its useful life and is a non-cash expense (does not require cash payment when recorded).

📁 Office Furniture ▼

❓ What is the difference between office furniture/equipment and office supplies? ▼

Office furniture and equipment are fixed assets (desks, chairs, cabinets, computers) that are capitalized and depreciated over their useful life. Office supplies (such as paper, pens, ink) are periodic expenses that are fully expensed when purchased or consumed.

❓ What is the useful life of office furniture? ▼

The useful life of office furniture typically ranges from 5 to 10 years depending on build quality and intensity of use. Electronic equipment (e.g., computers) may have a shorter useful life (3-5 years).

❓ How is office furniture depreciation recorded? ▼

Office furniture depreciation is recorded with the entry: Dr. Depreciation Expense, Cr. Accumulated Depreciation - Office Furniture. Accumulated depreciation appears as a deduction from the furniture account on the balance sheet.

📁 Construction in Progress (CIP) ▼

❓ What is construction in progress (CIP)? ▼

An account that accumulates capitalized costs for fixed assets still under construction and not yet operational, such as a factory being built.

❓ When is CIP transferred to the final fixed asset? ▼

Upon project completion and readiness for use, the balance is transferred to the appropriate fixed asset account (buildings, machinery, etc.).

📁 Electronic Devices & Equipment ▼

❓ What are electronic devices and equipment? ▼

Includes computers, printers, scanners, servers, networking equipment, and other electronic devices used in administrative and operational processes.

❓ How are these devices depreciated? ▼

Usually using the straight-line method over a useful life of 3 to 5 years, often with no residual value.

📁 Depreciation Accumulations ▼

❓ What is the difference between accumulated depreciation and depreciation expense? ▼

Depreciation expense appears on the income statement and represents current period depreciation. Accumulated depreciation appears on the balance sheet as a contra-asset deducted from asset cost and represents total depreciation accumulated since acquisition.

❓ How is accumulated depreciation calculated upon asset sale? ▼

The accumulated depreciation balance for the asset is closed (written off) against the asset account, and the difference (gain or loss) appears on the income statement.

📁 Accumulated Depreciation Buildings ▼

❓ What is accumulated depreciation - buildings? ▼

A contra-asset account shown as a deduction from building cost on the balance sheet, representing total accumulated depreciation on buildings.

📁 Accumulated Depreciation Machinery ▼

❓ What is accumulated depreciation - machinery? ▼

A contra-asset account shown as a deduction from machinery and equipment cost, representing total accumulated depreciation.

📁 Accumulated Depreciation Vehicles ▼

❓ What is accumulated depreciation - vehicles? ▼

A contra-asset account shown as a deduction from vehicle cost, representing total accumulated depreciation on vehicles.

📁 Accumulated Depreciation Office Furniture ▼

❓ What is accumulated depreciation - office furniture? ▼

A contra-asset account shown as a deduction from office furniture and equipment cost, representing total accumulated depreciation.

📁 Accumulated Depreciation - Electronic Devices ▼

❓ What is accumulated depreciation - electronic devices? ▼

A contra-asset account shown as a deduction from electronic devices cost, representing total accumulated depreciation.

📁 Intangible Assets ▼

❓ What are the recognition criteria for an intangible asset? ▼

Must be identifiable (separable or arising from contractual rights), controlled by the entity, future economic benefits must flow, and cost must be reliably measurable.

❓ Are all intangible assets amortized? ▼

Assets with finite lives (e.g., patents, licenses) are amortized. Assets with indefinite lives (e.g., some trademarks) are not amortized but are tested for impairment annually.

❓ How are intangible assets measured after initial recognition? ▼

Two options: (1) Cost model (cost - accumulated amortization - impairment losses), (2) Revaluation model (fair value - subsequent amortization) provided an active market exists.

📁 Patents ▼

❓ How is a patent amortized? ▼

Amortized over its legal or economic life, whichever is shorter (usually up to 20 years), using the straight-line method.

❓ Can patent defense costs be capitalized? ▼

If the lawsuit is successful and enhances the economic benefits of the patent, costs are capitalized and amortized over the remaining life. If unsuccessful, costs are expensed.

📁 Software ▼

❓ How are internally developed software costs treated? ▼

Research phase expensed immediately. Development phase capitalized if specific criteria are met (e.g., technical feasibility, resource availability, ability to measure costs).

❓ What is the accounting difference between purchasing a ready-made software and developing it internally? ▼

Purchased software is fully capitalized (purchase price + installation and customization costs). Internally developed software expenses research costs and capitalizes development costs.

📁 Trademarks ▼

❓ Are trademarks amortized? ▼

If they have a finite life (e.g., a 10-year usage contract), they are amortized. If they have an indefinite life (e.g., a strong renewable trademark), they are not amortized but tested for impairment annually.

❓ Can internally developed trademarks be capitalized? ▼

No, internally generated brands, customer lists, and similar items cannot be capitalized because their cost cannot be distinguished from the cost of developing the entity as a whole.

📁 Goodwill ▼

❓ When does goodwill arise? ▼

It arises only upon acquisition of another company (business combination) and represents the excess of purchase price over the fair value of identifiable net assets.

❓ Is goodwill amortized? ▼

Under IFRS, goodwill is not amortized but tested for impairment annually. Under GAAP, non-public companies may elect to amortize it over 10 years.

❓ How is goodwill impairment tested? ▼

By comparing the carrying amount of the Cash Generating Unit (CGU) to which the goodwill belongs with its recoverable amount (higher of fair value less costs to sell and value in use).

📁 Licenses ▼

❓ How are licenses amortized? ▼

Amortized over their legal term (e.g., a 5-year operating license) using the straight-line method, with no residual value.

❓ Does the treatment of a multi-year prepaid license differ from an annual license? ▼

A multi-year license is recorded as an intangible asset and amortized annually. An annual license is expensed in the year of payment (if the term is only one year).

📁 Impairment of Intangible Assets ▼

❓ What is impairment of intangible assets? ▼

A contra-asset account shown as a deduction from intangible assets, representing losses from a decline in their value below carrying amount.

❓ Can this allowance be reversed? ▼

Under IFRS, it can be reversed if conditions improve. Under GAAP, it cannot be reversed.

📁 Accumulated Amortization ▼

❓ What is accumulated amortization? ▼

A contra-asset account shown as a deduction from intangible asset cost (patents, software, trademarks, licenses), representing total accumulated amortization.

❓ How are intangible assets amortized? ▼

Usually using the straight-line method over the expected useful life (e.g., 5-20 years depending on the asset type).

📁 Investments ▼

❓ What are Investments in the Chart of Accounts? ▼

Investments are financial assets owned by the company to generate future returns (dividends, interest, or capital appreciation), not for use in operating activities. They include stocks, bonds, mutual funds, and investments in associates or subsidiaries.

❓ How are investments classified by term? ▼

Investments are classified as: short-term investments (current) if the intention is to sell within one year, and long-term investments (non-current) if the intention is to hold for more than one year. This classification affects their presentation on the balance sheet.

❓ What is the difference between investments in stocks and bonds? ▼

Stocks represent partial ownership in a company, and their return is dividends (not guaranteed) and capital appreciation. Bonds represent debt issued by an entity (government or company), and their return is fixed and guaranteed interest paid at maturity.

❓ What is the difference between short-term and long-term investments? ▼

Short-term: held for sale within one year, classified as current assets. Long-term: held for more than one year, classified as non-current assets.

❓ How are investments in stocks and bonds measured? ▼

Stocks: at fair value through profit or loss (FVTPL) or OCI (FVOCI). Bonds: at amortized cost, FVOCI, or FVTPL based on business model.

❓ When is dividend income recognized? ▼

Recognized when the investee company declares dividends, provided the investor has a right to receive them.

📁 Government Bonds ▼

❓ What are government bonds? ▼

Debt securities issued by the government, considered low-risk investments, yielding periodic interest.

📁 Mutual Funds ▼

❓ What are mutual funds? ▼

Units in mutual funds managed by financial institutions, investing in a diversified portfolio of securities.

📁 Shares in Companies ▼

❓ What are shares in companies? ▼

Represent ownership in other companies for investment purposes (not control), measured at fair value.

❓ How are dividends from these shares recorded? ▼

When dividends are declared, the entry is: Dr. Dividends Receivable, Cr. Dividend Income.

📁 Equity Method Investments ▼

❓ What are investments in associates? ▼

Investments in companies where the investor has significant influence (usually 20-50% voting rights), accounted for using the equity method.

❓ How is the equity method applied? ▼

The investment is increased or decreased by the investor's share of the associate's profits or losses, and reduced by dividends received.

📁 Investment in Subsidiaries ▼

❓ What are investments in subsidiaries? ▼

Investments in companies controlled by the parent (more than 50% voting rights), with consolidated financial statements.

❓ Are investments in subsidiaries measured at fair value in separate financial statements? ▼

They may be measured at cost, fair value, or using the equity method in separate financial statements.

📁 Investment Property ▼

❓ What is investment property? ▼

Property (land or buildings) held by the company to earn rentals or for capital appreciation, not for use in operations.

❓ Is investment property depreciated? ▼

Under the cost model: yes, buildings only are depreciated. Under the fair value model: no depreciation.

❓ How is rental income from investment property recorded? ▼

Dr. Bank or Receivables, Cr. Rental Income - Investment Property.

📁 Investment Property - Building ▼

❓ What are investment property buildings? ▼

Buildings owned by the company to earn rental income or capital appreciation, not for operational use.

📁 Investment Property - Land ▼

❓ Is investment land depreciated? ▼

No, land is not depreciated whether investment or operational.

📁 Accumulated Depreciation - Investment Property ▼

❓ What is accumulated depreciation - investment property? ▼

A contra-asset account shown as a deduction from investment buildings (under the cost model), representing accumulated depreciation.

📁 Liabilities ▼

❓
Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 332
▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Current Liabilities ▼

❓ What are the criteria for classifying a liability as current? ▼

A liability is classified as current if: (1) expected to be settled within the normal operating cycle, (2) held for trading purposes, (3) due to be settled within 12 months of the balance sheet date, (4) the entity does not have an unconditional right to defer settlement for more than 12 months.

❓ How is the current portion of a long-term loan reclassified? ▼

The amount due within the next year is transferred from non-current liabilities to current liabilities at the end of the financial period.

📁 Accounts Payable ▼

❓ What is Accounts Payable? ▼

Accounts Payable is a liability on the balance sheet representing amounts owed by the company to its suppliers for goods or services purchased on credit. These amounts are expected to be paid within one year.

❓ How is a credit purchase from a supplier recorded? ▼

A credit purchase from a supplier is recorded with the entry: Dr. Purchases (for the goods value excluding tax), Dr. Input VAT (for the tax amount), Cr. Accounts Payable (for the total amount).

❓ What is the difference between Local and Foreign Suppliers? ▼

Local Suppliers are suppliers within the same country, transactions are usually in local currency and subject to local VAT. Foreign Suppliers are suppliers from outside the country, transactions are usually in foreign currencies and may be subject to customs duties and import VAT.

❓ When is a supplier liability recorded? ▼

The supplier liability is recorded when the goods or services are received, not when cash is paid. This is in accordance with the accrual basis of accounting. The invoice becomes payable upon receipt of goods or services, not upon invoice issuance.

❓ How is a cash discount (early payment discount) from a supplier recorded? ▼

When paying within the discount period, the entry is: Dr. Accounts Payable (full invoice amount), Cr. Bank Account (amount paid after discount), and Cr. Purchase Discounts (for the difference).

❓ What is the difference between accounts payable and subcontractors? ▼

Suppliers provide materials or goods. Subcontractors perform work or services (e.g., installation or construction) within construction contracts.

📁 Local Suppliers ▼

❓ What is the difference between local and foreign suppliers? ▼

Local suppliers are within the same country, transactions in local currency subject to local tax. Foreign suppliers are outside the country, transactions often in foreign currencies and may be subject to customs duties.

📁 Foreign Suppliers ▼

❓ How are exchange differences from foreign suppliers recorded? ▼

The liability is revalued at the period-end closing rate, and the difference (gain or loss) is recognized in the income statement.

📁 Accrued Expenses ▼

❓ What are Accrued Expenses? ▼

Accrued expenses are expenses that have been incurred in the current period but have not yet been paid or invoiced (e.g., accrued salaries, accrued interest, accrued rent). They are considered a liability on the balance sheet.

❓ How are accrued expenses recorded at period end? ▼

At period end, an adjusting entry is recorded: Dr. Relevant Expense Account (Income Statement), Cr. Accrued Expenses (Current Liabilities). When the amount is paid in the following period, the entry is reversed.

❓ What is the difference between accrued expenses and provisions? ▼

Accrued expenses are liabilities with relatively certain amount and timing (e.g., accrued salaries). Provisions are liabilities with uncertain amount or timing (e.g., legal claims provision, maintenance provision).

❓ What is the difference between accrued expenses and prepaid expenses? ▼

Accrued expenses are a liability (received the service but not yet paid), while prepaid expenses are an asset (paid before receiving the service). Both arise from the accrual basis of accounting.

❓ How is an accrued expense entry reversed in the following period? ▼

When the amount is paid, the entry is reversed: Dr. Accrued Expenses, Cr. Bank Account (or Cash). The income statement is not adjusted again because the expense was already recognized.

❓ What are common examples of accrued expenses? ▼

Common examples include: salaries payable to employees at month-end, accrued loan interest, rent payable not yet paid, utility bills not yet received, and accrued end-of-service benefits.

❓ How are accrued expenses presented on the balance sheet? ▼

Accrued expenses are presented within current liabilities under "Accrued Expenses" or are detailed by type (accrued salaries, accrued interest, accrued rent) if material.

📁 Accrued Salaries ▼

❓ How are accrued salaries recorded at month-end? ▼

Dr. Salaries Expense, Cr. Accrued Salaries. Upon payment: Dr. Accrued Salaries, Cr. Bank.

📁 Accrued Rent ▼

❓ When is accrued rent recorded? ▼

When the building is used during the period and rent has not yet been paid, an accrual is recorded: Dr. Rent Expense, Cr. Accrued Rent.

📁 Accrued Utilities ▼

❓ How are accrued utilities estimated if the bill has not arrived? ▼

Based on average monthly consumption or the last available bill, then adjusted when the actual bill is received.

📁 Accrued Interest ▼

❓ What are accrued interests? ▼

Interest on loans or deposits that has accrued over time but has not yet been paid or received.

📁 Accrued Interest on Loans ▼

❓ How are accrued loan interests calculated? ▼

Principal × Interest Rate × (Days/360) or (Months/12).

📁 Employee Payables ▼

❓ What are Employee Payables? ▼

Employee Payables are liabilities owed by the company to its employees, such as: accrued salaries and wages, bonuses, travel allowances, housing allowances, and end-of-service benefits. These payables are recorded at the end of the accounting period if the service has been rendered but cash has not yet been paid.

❓ What is the difference between Salaries Payable and End-of-Service Benefits? ▼

Salaries Payable is a short-term liability (paid within a month). End-of-Service Benefits is a long-term provision (paid upon employee termination) and is calculated monthly or annually based on labor law (e.g., 15 days per year of service for employees who have completed one year or more).

❓ How are accrued salaries recorded at month-end? ▼

At month-end, an accrual entry is recorded: Dr. Salaries Expense (for the gross salary amount), Cr. Salaries Payable (for the net salary after deductions), Cr. Employee Deductions (for deductions such as social insurance and taxes).

📁 Salaries Payable ▼

❓ What is the difference between salaries payable and prepaid salaries? ▼

Salaries payable: service rendered but not yet paid (liability). Prepaid salaries: paid before due (asset).

📁 End of Service Benefits ▼

❓ How is end of service benefit calculated monthly? ▼

By (Monthly salary × Years of service × 15 days ÷ 360) or equivalent as per labor law.

📁 Employee Deductions ▼

❓ What are employee deductions? ▼

Amounts deducted from employee salaries such as social insurance, taxes, employee advances, and absences.

📁 Accrued Vacation Pay ▼

❓ What is accrued vacation pay? ▼

A liability for annual leave earned by employees but not yet taken. Calculated as (usually 30 days per year) times daily salary.

❓ When is accrued vacation pay paid? ▼

When the employee becomes entitled to leave and requests it, or upon employee termination (unused vacation is paid out).

📁 Payroll Liabilities ▼

❓ What are Payroll Liabilities? ▼

Payroll Liabilities are obligations related to the payroll process that the company must remit to third parties, such as: withheld payroll taxes (remitted to tax authorities), the employee\'s share of social insurance (remitted to the social insurance authority), and the employer\'s share of social insurance.

❓ What is the difference between the employee\'s share and the employer\'s share of social insurance? ▼

The employee\'s share is deducted from the employee\'s salary and recorded as a liability for the company to remit to the social insurance authority. The employer\'s share is charged to the company as an additional expense (not deducted from the employee\'s salary) and is also recorded as a liability for remittance to the social insurance authority.

❓ How is a payroll entry with liabilities recorded? ▼

When preparing the payroll, the following entry is recorded: Dr. Salaries Expense (gross salaries), Cr. Bank Account (net salaries after deductions), Cr. Payroll Tax (withheld tax), Cr. Social Insurance - Employee Share (deduction for insurance). Then a separate entry is recorded for the employer\'s share: Dr. Social Insurance Expense, Cr. Social Insurance - Employer Share.

📁 Payroll Tax ▼

❓ What is payroll tax? ▼

A tax imposed on employee salaries, withheld by the company and remitted to tax authorities.

📁 Other Accrued Allowances ▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Retention Payable ▼

❓ What are Retention Payable? ▼

Retention Payable are amounts withheld by a customer from a contractor\'s or supplier\'s invoices as a guarantee for proper contract performance. These amounts are released (paid) after the end of the agreed warranty period, which may be one year or more after project completion.

❓ How are retention payables recorded in the books? ▼

When issuing an invoice to the customer, the entry is: Dr. Accounts Receivable (for the full invoice amount), Cr. Contract Revenue (for the non-retained portion), Cr. Retention Payable (for the retained portion). When the retention is released, the entry is: Dr. Bank Account, Cr. Accounts Receivable.

❓ Are retention payables considered a liability or an asset? ▼

Retention Payable is considered a liability in the contractor\'s or supplier\'s books because it represents amounts to be received from the customer in the future after the warranty period ends. In the customer\'s books, retention is considered an asset (receivable).

📁 Retention from Customers ▼

❓ What are retentions from customers? ▼

Amounts withheld by the customer from the contractor's dues as a performance guarantee, becoming payable after the warranty period.

📁 Retention at Suppliers ▼

❓ What are retentions at suppliers? ▼

Amounts withheld by the company from its suppliers' (subcontractors) dues as a guarantee, considered an asset (receivable) until released.

📁 Subcontractors Payable ▼

❓ What is the Subcontractors account? ▼

The Subcontractors account is a liability representing amounts owed to subcontractors who perform specific parts of construction contracts (e.g., electrical, plumbing, HVAC, painting work).

❓ How is a subcontractor invoice recorded? ▼

A subcontractor invoice is recorded with the entry: Dr. Project Costs - Subcontractors (Expense), Dr. Input VAT (if applicable), Cr. Subcontractors (Liability).

❓ How is a subcontractor invoice with retention recorded? ▼

Dr. Project Costs (invoice amount), Cr. Subcontractors Payable (total). Then withhold percentage: Dr. Subcontractors Payable, Cr. Subcontractor Retention.

❓ Is a percentage withheld from subcontractor payments? ▼

Yes, in construction contracts, a percentage (e.g., 5-10%) is typically withheld from subcontractor payments as a performance guarantee (Retention). This amount is released after the agreed warranty period.

❓ When is the retention amount released to the subcontractor? ▼

After the warranty period agreed in the contract (usually one year from completion), and after ensuring no defects.

❓ When is a subcontractor liability recorded? ▼

The subcontractor liability is recorded when the service is received or work is completed, not when cash is paid, in accordance with the accrual basis of accounting.

❓ How are subcontractor claims (e.g., extra work) treated? ▼

If approved, added to project cost and recorded as an additional invoice. If not approved, remains rejected or subject to negotiation.

❓ How is subcontractor payment recorded? ▼

Subcontractor payment is recorded with the entry: Dr. Subcontractors, Cr. Bank Account (for the amount paid), and Cr. Subcontractor Retention (for any withheld amount).

📁 Subcontractor Invoices ▼

❓ How is a subcontractor invoice recorded with retention? ▼

Dr. Project Costs, Cr. Subcontractor Invoices (total), then withhold percentage: Dr. Subcontractor Invoices, Cr. Subcontractor Retention.

📁 Subcontractor Retention ▼

❓ When are subcontractor retentions released? ▼

After the warranty period agreed in the contract, and after verifying work quality.

📁 Other Payables ▼

❓ What are other payables? ▼

Liabilities not classified under main supplier accounts, such as security deposits received, deferred revenue, and other creditors.

❓ What is the difference between other payables and accounts payable? ▼

Accounts payable is specific to trade suppliers, while other payables include various other obligations.

📁 Deferred Revenue ▼

❓ What is Deferred Revenue? ▼

Deferred revenue is cash amounts received by a company from customers in advance for services or goods to be delivered in the future. It is considered a liability on the balance sheet until the service or goods are delivered, at which point it is recognized as revenue.

❓ How is receiving an advance payment from a customer recorded? ▼

Receiving an advance payment from a customer is recorded with the entry: Dr. Bank Account or Cash in Hand, Cr. Deferred Revenue (liability). When the service is provided or goods are delivered, it is recognized as revenue with the entry: Dr. Deferred Revenue, Cr. Service Revenue or Sales.

❓ What is the difference between deferred revenue and accrued revenue? ▼

Deferred revenue is a liability (cash received but service not yet provided). Accrued revenue is an asset (service provided but cash not yet received). Both arise from the difference between recognition timing and cash collection timing.

❓ How is deferred revenue disclosed in financial statements? ▼

Deferred revenue is disclosed within current liabilities under "Deferred Revenue" or "Customer Advances Received". The nature of the obligation and the expected period for its satisfaction should be disclosed in the notes to the financial statements.

❓ What are common examples of deferred revenue? ▼

Common examples include: annual subscriptions received in advance, advance payments on long-term service contracts, pre-sold airline or event tickets, and security deposits received from customers.

📁 Security Deposits Received ▼

❓ What are Security Deposits Received? ▼

Security deposits received are cash amounts received by a company from its customers or tenants as collateral for future obligations (e.g., lease guarantee, service contract guarantee). They are considered a liability on the balance sheet until refunded.

❓ Are security deposits received considered revenue? ▼

No, security deposits received are not considered revenue. They are held in trust by the company and must be returned to the customer upon contract termination (if no violations occur). They are only recognized as revenue if deducted as a penalty or compensation for damages.

❓ How is the refund of a security deposit received recorded? ▼

When refunding a security deposit received, the entry is: Dr. Security Deposits Received, Cr. Bank Account or Cash in Hand (for the refunded amount). If any portion is deducted (e.g., compensation for damages), the deducted amount is transferred to revenue.

❓ How are security deposits received classified on the balance sheet? ▼

If the security deposit is expected to be refunded within one year, it is classified as a current liability. If refund is expected after more than one year (e.g., long-term lease guarantee), it is classified as a long-term liability.

❓ What happens if the customer does not request a refund of the security deposit? ▼

If the contractual relationship ends and the customer does not request a refund of the security deposit within a reasonable period (determined by state laws or company policy), the amount is transferred to other income with the entry: Dr. Security Deposits Received, Cr. Other Income.

📁 Other Creditors ▼

❓ What are other creditors? ▼

Liabilities to various parties not classified under main supplier accounts, such as amounts due to occasional creditors.

📁 Dividends Payable ▼

❓ How are dividends payable recorded? ▼

When dividends are declared: Dr. Retained Earnings, Cr. Dividends Payable. Upon payment: Dr. Dividends Payable, Cr. Bank.

📁 Current Portion of Lease Liability ▼

❓ What is the current portion of lease liability? ▼

The portion of a finance lease liability due for payment within the next year, classified as a current liability.

❓ How is this portion reclassified? ▼

At the end of each financial period, the amount due within one year is transferred from the long-term lease liability to this account.

📁 Tax Payable ▼

❓ What are Tax Payable? ▼

Tax Payable are liabilities owed by the company to various government authorities, including: Income Tax Payable (on company profits), VAT Payable (the difference between output and input VAT), and Withholding Tax Payable (tax withheld by the company from its payments to other parties and remitted to tax authorities).

❓ How is Income Tax Payable calculated? ▼

Income Tax Payable is calculated by multiplying the taxable net profit (after adjustments) by the applicable tax rate in the country (e.g., 20% or 25%). Tax rates vary by country laws and company profit levels. Tax exemptions and allowable deductions must also be considered.

❓ What is the difference between Income Tax Payable and Deferred Tax? ▼

Income Tax Payable is the actual tax due on current year profits, payable to the tax authority. Deferred Tax is tax arising from temporary differences between accounting treatment and tax treatment of items (e.g., depreciation), recorded as an asset or liability on the balance sheet.

❓ What types of taxes may appear in this account? ▼

Income tax payable, VAT payable (net amount due to tax authority), withholding tax, and other taxes (e.g., commercial profit tax).

❓ How is VAT payable recorded? ▼

At period end, after offsetting output and input VAT, if output VAT is greater, the entry is: Dr. VAT on Sales, Cr. VAT on Purchases, Cr. VAT Payable.

📁 Income Tax Payable ▼

❓ How is income tax payable calculated? ▼

Taxable net profit × Applicable tax rate (considering exemptions and allowable deductions).

📁 Withholding Tax Payable ▼

❓ What is withholding tax? ▼

Tax withheld by the company from its payments to other parties (e.g., contractors, suppliers) and remitted to the tax authority.

📁 Provisions for Legal Claims ▼

❓ What is the provisions for legal claims? ▼

A potential liability recognized when there is a lawsuit or claim against the company, it is probable to lose, and the amount can be estimated.

❓ How is the legal claims provision measured? ▼

At the best estimate of the amount required to settle the obligation, considering legal advisors' opinions and financial estimates.

📁 Social Security Payable ▼

❓ What are Social Security Payable? ▼

Social Security Payable are liabilities owed by the company to the social insurance authority (e.g., GOSI in Saudi Arabia). They include the employee\'s share (deducted from salary) and the employer\'s share (an additional expense on the company). These amounts must be remitted to the authority monthly.

❓ What are the percentages for employee and employer social insurance contributions? ▼

Percentages vary by country laws. In Saudi Arabia (GOSI), the total contribution rate is 22% (9% employee share, 12% employer share, 1% unemployment tax). These rates may differ for private vs. public sector and for Saudi vs. non-Saudi employees.

❓ What happens if social insurance contributions are not paid on time? ▼

If social insurance contributions are not paid on time, the authority imposes late payment penalties on the unpaid amounts. These penalties may reach 1% per month of delay or more depending on each country\'s laws. Prolonged delay may lead to legal action.

❓ What is the penalty for late payment of social insurance? ▼

The social insurance authority imposes late penalties up to 1% per month of delay or more depending on country laws, and may lead to seizure of company assets.

❓ Does the contribution percentage differ between Saudi and non-Saudi employees? ▼

In Saudi Arabia, the system differs: Saudi employees are subject to GOSI at 22% (9% employee + 12% employer + 1% unemployment). Non-Saudi employees are not subject to social insurance (except in some special cases).

📁 GOSI Employee Share ▼

❓ What is the employee's share of social insurance? ▼

A percentage of the employee's salary (e.g., 9% in Saudi Arabia) deducted from salary and remitted to the insurance authority.

📁 GOSI Employer Share ▼

❓ What is the employer's share of social insurance? ▼

An additional percentage borne by the employer (e.g., 12% in Saudi Arabia) not deducted from the employee's salary, remitted to the insurance authority.

📁 Provision for Contract Warranty/Maintenance ▼

❓ What is the provision for contract warranty/maintenance? ▼

A provision covering expected future costs of maintenance or warranty for projects after delivery to the customer, recognized upon project completion.

❓ How is the maintenance provision created? ▼

A percentage of contract revenue (e.g., 1-5%) is estimated based on past experience, then the entry: Dr. Warranty Provision Expense, Cr. Provision for Contract Warranty/Maintenance.

📁 VAT Payable ▼

❓ What is VAT payable? ▼

The Value Added Tax that the company must remit to the tax authority after offsetting input VAT from output VAT.

❓ How is VAT payable calculated? ▼

Net payable = Output VAT (on sales) - Input VAT (on purchases). If positive, recorded as a liability.

❓ When is VAT payable due? ▼

Usually within the month following the transaction month, according to each country's filing deadlines.

📁 VAT on Sales ▼

❓ When must a tax invoice be issued? ▼

Must be issued upon supply of goods or services (or upon receipt of advance payment, whichever is earlier). The invoice must contain specific data (tax number, tax amount separately, etc.).

❓ How is an incorrect tax invoice treated? ▼

An adjustment note (Debit/Credit Note) must be issued to correct the error, and the output VAT entry is adjusted in the current period.

📁 VAT on Purchases ▼

❓ Is all input VAT recoverable? ▼

No, exceptions include: personal cars (not business-related), personal expenses, non-promotional gifts, and services not related to the activity (depending on each country's laws).

❓ How is input VAT on fixed assets treated? ▼

Recorded in a separate Input VAT on Fixed Assets account (separate from ordinary purchase VAT), and is usually recovered in installments over the asset's useful life (in some countries).

📁 VAT Settlement ▼

❓ What is the VAT Settlement account? ▼

An internal intermediary account used at period end to offset Output VAT (sales) with Input VAT (purchases) and show the net payable or recoverable.

❓ How often is VAT settled? ▼

Depending on each country's laws: monthly, quarterly, or annually. Large companies usually file monthly returns, small businesses quarterly.

❓ How is net VAT payable to tax authority calculated? ▼

Net payable = Output VAT - Input VAT. If positive, it is payable by the company. If negative, it is recoverable by the company.

❓ How is net VAT payable paid? ▼

The amount due is transferred to the tax authority's account (tax department) through the electronic system, and the entry is recorded: Dr. VAT Settlement, Cr. Bank Account.

❓ How is the settlement entry recorded? ▼

Dr. VAT on Sales (for its balance), Cr. VAT on Purchases (for its balance), and Cr. VAT Settlement (for the difference).

📁 Customer Advances ▼

❓ What are Customer Advances? ▼

Customer Advances are cash amounts received by a company from its customers before providing a service or delivering goods. These payments are considered a liability on the balance sheet until the service is provided or goods are delivered, at which point they are recognized as revenue.

❓ How is receiving a customer advance recorded? ▼

Receiving a customer advance is recorded with the entry: Dr. Bank Account or Cash in Hand, Cr. Customer Advances. When the service is provided, it is transferred to revenue with the entry: Dr. Customer Advances, Cr. Service Revenue.

❓ Is the Customer Advances account reconciled? ▼

Yes, the Customer Advances account should be reconciled at the end of each financial period to ensure that all amounts received have been recognized as revenue for services already provided. The remaining balance represents services not yet provided and remains a liability.

❓ How is a customer advance treated if the service is not provided? ▼

If the contract is canceled, the advance must be refunded to the customer (unless the contract states otherwise). The reverse entry is recorded: Dr. Customer Advances, Cr. Bank Account or Cash.

❓ Are customer advances subject to VAT? ▼

Usually yes, upon receiving the advance, a tax invoice (or tax receipt) must be issued and output VAT recorded in the same period, even if the service has not yet been provided.

📁 Customer Advances Local ▼

❓ How is an advance from a local customer recorded? ▼

Dr. Bank, Cr. Customer Advances Local (liability). When service is provided, it is transferred to revenue.

📁 Customer Advances Foreign ▼

❓ Are advances from foreign customers subject to VAT? ▼

Varies by country law, but in many countries, advances from foreign customers (exports) are exempt or zero-rated.

📁 Contract Billings ▼

❓ What are contract billings? ▼

Amounts billed to customers under project contracts based on percentage of completion, considered a contract liability until revenue is recognized.

📁 Short-term Bank Facilities ▼

❓ What are short-term bank facilities? ▼

Credit facilities from banks due within one year, such as short-term loans, overdrafts, and current lease liability installments.

❓ How are these facilities measured? ▼

Measured at amortized cost using the effective interest rate method.

📁 Bank Overdraft ▼

❓ What is a bank overdraft? ▼

A credit facility allowing the company to withdraw more than its current account balance, usually repayable on demand with a higher interest rate than loans.

❓ How is a bank overdraft presented on the balance sheet? ▼

Under IFRS, it may be offset against cash if part of daily cash management. Under GAAP, it usually appears as a current liability.

📁 Car Loans ▼

❓ What are car loans? ▼

Loans specifically for purchasing company vehicles, classified as short-term (current portion) or long-term depending on the loan term.

❓ Are car loan interest expenses tax-deductible? ▼

In most countries, yes, interest on loans related to the company's activity is deductible.

📁 Other Bank Facilities ▼

❓ What are other bank facilities? ▼

Include credit lines, agreed overdrafts, and any short-term bank facilities not classified under ordinary loans.

📁 Contracts in Progress - Liability ▼

❓ What is a contract liability? ▼

The company's obligation to transfer services to a customer after receiving an advance payment or issuing an advance invoice.

❓ When is a contract liability recognized as revenue? ▼

When the related performance obligation is satisfied, i.e., upon providing the service or delivering the goods.

❓ What is the difference between a contract liability and deferred revenue? ▼

Deferred revenue is a type of contract liability, but contract liability is broader and includes cases where cash has not yet been received (e.g., advance invoice).

📁 Long Term Liabilities ▼

❓ What is the current portion of long-term debt? ▼

It is the portion due for repayment within the next year, reclassified as a current liability on the balance sheet.

❓ How is interest on long-term loans calculated? ▼

Using the effective interest rate method, which spreads borrowing costs over the loan's life.

❓ What is the difference between a long-term loan and a bond? ▼

A loan comes from a single party (bank) with installment payments. A bond is issued to the public, traded, and usually repaid as a lump sum at maturity.

📁 Long Term Loans ▼

❓ What are Long Term Loans? ▼

Long term loans are financial obligations of the company that are due for repayment after more than one year from the balance sheet date. They include long-term bank loans, bonds, and long-term shareholder loans.

❓ How are long term loans measured in the books? ▼

Long term loans are measured at amortized cost using the effective interest rate method. Initial measurement includes the amount borrowed less any issuance costs or discounts.

❓ What is the difference between the current and non-current portion of a loan? ▼

The current portion of a loan is the portion due for repayment within one year from the balance sheet date and is classified as a current liability. The non-current portion is the remainder due after one year and is classified as a long-term liability.

❓ How is a loan recorded upon receipt? ▼

A loan is recorded upon receipt with the entry: Dr. Bank Account (for the net amount received), Dr. Loan Discount (if any), Cr. Long Term Loans (for the face value of the loan).

❓ How is a loan repaid in installments? ▼

When an installment is paid, the entry is: Dr. Long Term Loans (principal portion), Dr. Interest Expense (accrued interest), Cr. Bank Account (total installment paid).

📁 Long Term Bank Loans ▼

❓ How are long-term bank loans measured? ▼

At the present value of future cash flows (amortized cost) using the effective interest rate method.

📁 Finance Lease Liabilities ▼

❓ What are finance lease liabilities? ▼

Obligations under long-term finance leases that effectively transfer ownership to the lessee, measured at the present value of lease payments.

📁 Bonds Payable ▼

❓ What are bonds payable? ▼

Debt securities issued by the company to the public, due for repayment at a future date, with periodic interest payments.

📁 Shareholders Loans ▼

❓ What are shareholders' loans? ▼

Loans provided by shareholders to the company, may be short or long-term, often at lower interest or interest-free.

📁 Finance Lease Liabilities ▼

❓ What are Finance Leases? ▼

Finance leases are long-term lease contracts that effectively transfer all risks and rewards of asset ownership from the lessor to the lessee. A Right-of-Use Asset and a Lease Liability are recognized on the balance sheet under IFRS 16.

❓ How is the finance lease liability measured? ▼

The finance lease liability is measured at the present value of future lease payments (principal) using the interest rate implicit in the lease or the lessee's incremental borrowing rate. Interest (financing cost) is added periodically.

❓ How is the Right-of-Use Asset depreciated? ▼

The Right-of-Use Asset is depreciated over the useful life of the asset or the lease term, whichever is shorter, using the straight-line method. Depreciation is recorded with the entry: Dr. Depreciation Expense - ROU Asset, Cr. Accumulated Depreciation - ROU Asset.

❓ What is the difference between finance lease and operating lease under IFRS 16? ▼

Under IFRS 16, the accounting distinction for lessees between finance and operating leases has been eliminated. All leases (except short-term and low-value) are recognized on the balance sheet as a Right-of-Use Asset and a Lease Liability. The difference appears only in the income statement presentation.

❓ How is a finance lease installment recorded? ▼

A finance lease installment is recorded with the entry: Dr. Lease Liability (principal portion), Dr. Interest Expense (accrued interest), Cr. Bank Account (total installment paid).

📁 Lease Liability Non-Current ▼

❓ What is the non-current lease liability? ▼

The non-current portion of the finance lease liability (due after more than one year).

❓ How is interest on this liability calculated? ▼

Interest is calculated on the remaining liability balance using the effective interest rate, added to the liability each period.

📁 End of Service Benefits Provision ▼

❓ What is the end of service benefits provision? ▼

A long-term liability representing the amount to be paid to employees upon termination of service as per labor laws.

❓ How is end of service benefit calculated monthly? ▼

Calculated at a rate (usually 15 days' salary per year of service for employees who have completed one year or more) and charged as monthly expense.

❓ How is the end of service provision entry recorded? ▼

Dr. End of Service Expense, Cr. End of Service Provision.

📁 Equity ▼

❓ What are the main components of equity? ▼

Paid-up capital, retained earnings, other comprehensive income, reserves, and treasury shares (negative).

❓ How do profits and losses affect equity? ▼

Profits increase equity (through retained earnings), and losses decrease it.

❓ What is the difference between retained earnings and reserves? ▼

Retained earnings are accumulated undistributed profits. Reserves are a portion of retained earnings allocated for a specific purpose (legal or voluntary).

📁 Capital ▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Paid-up Capital ▼

❓ What is Paid-up Capital? ▼

Paid-up capital is the actual amount paid by shareholders or owners to the company for issued shares. This account represents part of shareholders' equity on the balance sheet and reflects the owners' investment in the company.

❓ What is the difference between Paid-up Capital and Authorized Capital? ▼

Authorized Capital is the maximum number of shares that the company's articles of association permit it to issue. Paid-up Capital is the portion actually issued and paid for by shareholders.

❓ How is a capital increase recorded? ▼

When capital is increased, the entry is: Dr. Bank Account (for the cash increase), Cr. Paid-up Capital (for the increase amount). If issued at a premium, the Share Premium account is added on the credit side.

❓ Can Paid-up Capital be reduced? ▼

Yes, Paid-up Capital can be reduced by an extraordinary general assembly resolution for reasons such as: covering accumulated losses, returning excess capital to shareholders, or canceling treasury shares. Laws and regulations governing capital reduction must be followed.

❓ How is Paid-up Capital presented in the Statement of Changes in Equity? ▼

Paid-up Capital is presented as a separate line item in the Statement of Changes in Equity, showing the beginning balance, increases (new issuances), decreases, the effect of any other changes, and the ending balance.

📁 Uncalled Capital ▼

❓ What is uncalled capital? ▼

The portion of authorized capital that has not yet been called for payment from shareholders. It appears as a negative number (deduction) from paid-up capital in equity.

❓ Does uncalled capital affect liquidity? ▼

Not directly, but it represents a future obligation on shareholders that may become cash when called.

📁 Shareholders Equity ▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Ordinary Shares ▼

❓ What are ordinary shares? ▼

Represent ownership in the company, granting holders voting rights in general assemblies and a share in profits (dividends).

❓ How is the issuance of ordinary shares at par value recorded? ▼

Dr. Bank Account (issue price), Cr. Ordinary Shares (par value), and Cr. Share Premium (if any excess).

📁 Preferred Shares ▼

❓ What are preferred shares? ▼

Shares that give holders priority in dividends and upon liquidation, but often without voting rights.

❓ Are preferred dividends considered an expense or a distribution? ▼

Usually considered a dividend distribution (reducing retained earnings), unless mandatorily redeemable, then treated as debt.

📁 Share Premium ▼

❓ What is share premium? ▼

The difference between the issue price and the par value of a share when issued at a price higher than par value.

❓ Can share premium be distributed as dividends? ▼

No, share premium cannot be distributed as dividends; it is used for specific purposes such as covering losses or issuing bonus shares.

📁 Treasury Shares ▼

❓ What are treasury shares? ▼

Shares repurchased by the company from shareholders, appearing as a negative number (deduction) from equity.

❓ Are gains or losses from treasury share sales recognized in the income statement? ▼

No, any gain or loss from treasury share sales appears in equity (share premium) and does not affect the income statement.

📁 Retained Earnings ▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Prior Years Retained Earnings ▼

❓ What are prior years retained earnings? ▼

The net profits of prior financial years after deducting distributions and reserves.

❓ How is current year net profit closed to this account? ▼

At year end, the current year profit account is closed to prior years retained earnings.

📁 Current Year Profit ▼

❓ What is the current year profit account? ▼

A temporary account used at period end to aggregate revenues and expenses and show net profit or loss before closing to retained earnings.

❓ How is this account closed? ▼

At year end, its balance (net profit) is closed to prior years retained earnings, or net loss is closed to retained earnings.

📁 Other Comprehensive Income ▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Items not reclassified to P&L ▼

❓ What are OCI items not reclassified to P&L? ▼

Include revaluation surplus, actuarial gains/losses on defined benefit plans, and certain equity investments.

📁 Revaluation Surplus ▼

❓ What is revaluation surplus? ▼

The increase in the value of fixed assets (buildings, machinery, land) resulting from revaluation under IAS 16, presented in OCI and not distributable as dividends.

❓ How is revaluation surplus transferred to retained earnings? ▼

When the asset is sold or depreciated, the realized surplus can be transferred to retained earnings (not to the income statement).

📁 Actuarial Gains/Losses ▼

❓ What are actuarial gains and losses? ▼

Results of remeasuring employee benefit obligations (e.g., retirement plans) based on changes in actuarial assumptions, presented in OCI.

📁 FVOCI Equity Investments ▼

❓ What are FVOCI equity gains/losses? ▼

Fair value changes of equity investments classified as FVOCI, presented in OCI and not reclassified to P&L on sale.

📁 Items may be reclassified to P&L ▼

❓ What are OCI items that may be reclassified to P&L? ▼

Include foreign currency translation differences, cash flow hedge gains/losses, and certain debt investments.

📁 Foreign Exchange Differences ▼

❓ What are foreign exchange translation differences? ▼

Differences arising from translating foreign operations' financial statements from functional currency to presentation currency, presented in OCI.

📁 Cash Flow Hedges ▼

❓ What are cash flow hedge gains/losses? ▼

The effective portion of gains or losses on hedging instruments used to hedge forecasted cash flows, presented in OCI.

📁 FVOCI Debt Investments ▼

❓ What are FVOCI debt gains/losses? ▼

Fair value changes of debt investments (bonds, treasury bills) classified as FVOCI, presented in OCI and reclassified to P&L on sale.

📁 Share of OCI of Associates ▼

❓ What is the entity's share of associates' OCI? ▼

The entity's share of other comprehensive income items of associates accounted for using the equity method.

📁 Current Accounts ▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Partner Current Account ▼

❓ What is the partner current account? ▼

Records amounts a partner adds to the entity (additional investments) or withdraws (drawings or withdrawn profits). Its balance may be debit or credit.

📁 Owner Current Account ▼

❓ What is the owner current account? ▼

Used in sole proprietorships as an alternative to the partner current account, recording owner additions and withdrawals.

❓ How is an owner withdrawal recorded? ▼

Dr. Owner Current Account, Cr. Bank or Cash.

📁 Profit Distributions ▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Distributed Profits ▼

❓ What are distributed profits? ▼

Represent cash or in-kind dividends declared and distributed to shareholders.

📁 Interim Cash Dividends ▼

❓ What are interim cash dividends? ▼

Cash dividends distributed during the financial year before the final accounts are approved, declared by the board of directors.

❓ What is the difference between interim and final cash dividends? ▼

Interim: declared during the financial year before final accounts are approved. Final: declared after approval of final accounts by the general assembly.

📁 Final Cash Dividends ▼

❓ What are final cash dividends? ▼

Cash dividends distributed after the annual financial accounts are approved by the general assembly.

📁 Liquidating Dividends ▼

❓ What are liquidating dividends? ▼

Exceptional distributions made when liquidating part of the capital, returning part of shareholders' investments (reduces paid-up capital).

📁 Proposed Dividends ▼

❓ Are proposed dividends recognized as a liability on the balance sheet? ▼

No, not recognized until approved by the general assembly, only disclosed in the notes.

📁 Stock Dividends ▼

❓ What are stock dividends? ▼

Dividends distributed to shareholders as additional shares instead of cash, transferring value from retained earnings to capital.

📁 Owner Drawings ▼

❓ What are owner drawings? ▼

Amounts withdrawn by the owner for personal use, appearing as a negative number (deduction) from equity.

❓ How is the owner drawings account closed? ▼

At year end, it is closed to retained earnings or directly to capital.

📁 Reserves ▼

❓ What are reserves? ▼

Amounts appropriated from retained earnings for specific purposes under the law or the company's articles of association.

📁 Legal Reserve ▼

❓ What is the legal reserve? ▼

A mandatory reserve formed at a specified percentage (usually 10%) of annual net profit and cannot be distributed to shareholders.

📁 General Reserve ▼

❓ What is the general reserve? ▼

A voluntary reserve formed by a general assembly resolution to meet emergencies or finance future expansions.

📁 Revaluation Reserve ▼

❓ What is the revaluation reserve? ▼

The fixed asset revaluation surplus, a non-distributable reserve that can be transferred to retained earnings when the asset is sold or depreciated.

📁 Revenue ▼

❓ What is the difference between revenues and gains? ▼

Revenues come from main activities (e.g., sale of goods, services). Gains come from secondary or non-recurring activities (e.g., gain on sale of fixed assets, foreign exchange gains).

❓ How are revenues presented on the income statement? ▼

They appear as a separate line item, and may be detailed by type (sales, services, contracts, rentals, interest, etc.) or by segment.

📁 Operating Revenue ▼

❓ What is the difference between operating revenue and other revenue? ▼

Operating revenue comes from the main activity (sales, services, contracts). Other (non-operating) revenue comes from secondary activities (interest, investment gains, gains on asset sales).

📁 Commercial Revenue ▼

❓ How is commercial revenue recognized under IFRS 15? ▼

Under IFRS 15, commercial revenue is recognized when control of the goods is transferred to the customer, through a 5-step model: 1) Identify the contract, 2) Identify performance obligations, 3) Determine the transaction price, 4) Allocate the price to performance obligations, 5) Recognize revenue when each performance obligation is satisfied.

❓ What is the difference between commercial revenue and service revenue? ▼

Commercial revenue comes from the sale of goods (physical products) and is typically recognized at the point of delivery (a specific point in time). Service revenue comes from providing services (non-physical) and is typically recognized over a period of time (e.g., a 6-month consulting contract).

❓ How are sales discounts and returns treated? ▼

Discounts allowed (e.g., early payment discount) and sales returns (goods returned by the customer) are deducted from gross sales to arrive at net revenue. These items appear as contra-revenue accounts on the income statement or are deducted directly from gross sales.

📁 Product Sales ▼

❓ How is a cash sale of a product recorded? ▼

Dr. Cash or Bank, Cr. Product Sales, and Cr. Output VAT if applicable.

📁 Export Sales ▼

❓ Are export sales subject to VAT? ▼

In most countries, export sales are exempt or zero-rated, provided export documentation is submitted.

📁 Discounts Allowed ▼

❓ What are discounts allowed? ▼

Discounts granted to customers such as early payment discount (cash discount) or quantity discount, appearing as a contra-revenue account.

📁 Sales Returns ▼

❓ How are sales returns recorded? ▼

Dr. Sales Returns (contra-revenue), and Dr. Output VAT (if applicable), Cr. Customers or Cash.

📁 Service Revenue ▼

❓ When is service revenue recognized? ▼

Service revenue is typically recognized over time under IFRS 15 because the customer receives and consumes the benefit of the service at the same time as the company provides it. It can be recognized using the percentage of completion method (e.g., based on labor hours or percentage of cost incurred).

❓ What is the difference between service revenue and construction contract revenue? ▼

Service revenue relates to non-construction services such as consulting, maintenance, or education. Construction contract revenue relates to construction, building, and engineering contracts, which are typically longer in duration and more complex, and are also recognized under IFRS 15 but with additional disclosure requirements.

📁 Consulting Revenue ▼

❓ When is consulting revenue recognized? ▼

Usually over the contract period (Over Time) using percentage of completion, as the customer consumes the benefit simultaneously with service delivery.

📁 Maintenance Revenue ▼

❓ How is revenue from long-term maintenance contracts recognized? ▼

Recognized over the contract period (usually monthly on a straight-line basis), under IFRS 15.

📁 Construction Revenue ▼

❓ How is construction revenue recognized when costs cannot be reliably estimated? ▼

Revenue is recognized only to the extent of costs incurred that are probable of being recovered (recoverable costs method), and no profit is recognized until costs can be reliably estimated.

❓ What is the difference between construction revenue and long-term service contract revenue? ▼

From an accounting perspective (under IFRS 15), both are treated the same way (percentage of completion). However, construction contracts often require additional disclosures (e.g., stages of completion, performance obligations, contract assets).

📁 Project Revenue ▼

❓ What is project revenue? ▼

Revenue from construction and contracting contracts, recognized based on percentage of completion or upon contract completion.

📁 Maintenance & Operation Contracts Revenue ▼

❓ How are maintenance and operation contract revenues recognized? ▼

Over the contract period, usually using the straight-line method or percentage of completion.

📁 Engineering Consulting Revenue ▼

❓ What is engineering consulting revenue? ▼

Revenue from engineering services such as design, supervision, feasibility studies, and technical consulting.

📁 Equipment Rental Revenue ▼

❓ How is equipment rental revenue recorded? ▼

Dr. Bank or Receivables, Cr. Equipment Rental Revenue, usually recognized on a straight-line basis over the rental period.

📁 Manufacturing Revenue ▼

❓ When is manufacturing revenue recognized? ▼

Recognized upon delivery of the product to the customer and transfer of control (a point in time), not upon completion of production.

❓ How are product sales contracts that include future maintenance treated? ▼

The contract price is allocated between the product (recognized upon delivery) and the maintenance service (recognized over the contract period).

📁 Finished Goods Sales ▼

❓ How is a credit sale of finished goods recorded? ▼

Dr. Accounts Receivable, Cr. Finished Goods Sales, and Cr. Output VAT.

📁 Semi-finished Goods Sales ▼

❓ What are semi-finished goods sales? ▼

Sale of incomplete products (work in progress) to other companies for further processing, recognized upon transfer of control.

📁 After-sales Services Revenue ▼

❓ What are after-sales services revenue? ▼

Revenue from maintenance, warranty, spare parts, and technical support for manufactured products after sale, treated as separate service revenue.

📁 Other Revenue ▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Interest Income ▼

❓ What is Interest Income? ▼

Interest income is revenue generated from investing company funds in debt instruments such as bank deposits, bonds, treasury bills, or loans granted to other parties. It is recognized on the income statement as other (non-operating) revenue.

❓ How is Interest Income calculated? ▼

Interest income is calculated by multiplying the principal amount invested (loan or deposit principal) by the annual interest rate, then multiplying by the time period (in days or months) the amount was invested. The effective interest rate method is used for long-term loans.

❓ How is accrued interest income recorded? ▼

At period end, an adjusting entry is recorded for interest accrued but not yet received: Dr. Accrued Interest (asset), Cr. Interest Income (revenue). When interest is received, the entry is reversed: Dr. Bank Account, Cr. Accrued Interest.

❓ Is Interest Income taxable? ▼

Yes, in most countries, interest income is subject to tax (income tax) at the same rate as operating profits. Exceptions may exist for certain types of government bonds (exempt or special tax treatment). A tax advisor should be consulted.

❓ What is the difference between Interest Income and Dividends? ▼

Interest income is a fixed return on debt instruments (e.g., deposits and bonds), regardless of the issuer's profitability. Dividends are a variable return on equity shares, depending on the company's profitability and board decisions.

📁 Bank Interest Income ▼

❓ How are bank interest earnings recorded when accrued? ▼

Dr. Accrued Interest, Cr. Bank Interest Income. Upon receipt: Dr. Bank, Cr. Accrued Interest.

📁 Interest on Loans Given ▼

❓ What is interest on loans given? ▼

Interest earned by the company on loans granted to other parties (e.g., employees, associates), considered other revenue.

📁 Foreign Exchange Gain ▼

❓ What is the difference between realized and unrealized foreign exchange gains? ▼

Realized: result from actual currency conversion (e.g., selling dollars for cash). Unrealized: result from revaluing foreign currency monetary balances at period end.

📁 Realized Exchange Gain ▼

❓ Are foreign exchange gains taxable? ▼

In most countries, yes, they are considered part of taxable income. However, tax treatment may differ depending on whether the gain is realized or unrealized.

📁 Unrealized Exchange Gain ▼

❓ What are unrealized foreign exchange gains? ▼

Gains from revaluing foreign currency cash or monetary balances at period end without actual conversion, appearing on the income statement.

❓ Are unrealized foreign exchange gains taxable? ▼

Varies by country law. In some countries they are taxable, in others not until realized.

📁 Gain on Asset Disposal ▼

❓ What is gain on asset disposal? ▼

The positive difference between the selling price of a fixed asset and its net book value (cost - accumulated depreciation).

📁 Gain on Fixed Assets Sale ▼

❓ How is gain on sale of fixed asset calculated? ▼

Sale price - (Historical cost - Accumulated depreciation). If positive, it is a gain.

📁 Gain on Investments Sale ▼

❓ How is gain on sale of investments recorded? ▼

Dr. Bank (sale proceeds), Cr. Investment (carrying amount), Cr. Gain on Investments Sale (difference).

📁 Rental Income ▼

❓ What is rental income? ▼

Income from renting out company-owned properties or equipment, classified as other revenue.

📁 Dividend Income ▼

❓ What is dividend income? ▼

Cash or in-kind dividends received from investments in shares of other companies.

📁 Commission Income ▼

❓ What is commission income? ▼

Commissions received as an intermediary or commercial agent for services rendered.

📁 Expenses ▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Operating Expenses ▼

❓ What is the difference between operating and non-operating expenses? ▼

Operating: related to main activity (e.g., cost of sales, salaries, rent, marketing). Non-operating: related to secondary or financing activities (e.g., interest expense, loss on asset sale, foreign exchange losses).

❓ Can operating expenses be presented by function or nature? ▼

Yes, by function (e.g., cost of sales, selling expenses, administrative expenses) or by nature (e.g., materials, labor, depreciation, advertising). Standards allow both methods with additional disclosure.

📁 Commercial Cost ▼

❓ What is Cost of Goods Sold (COGS)? ▼

Cost of Goods Sold (COGS) is the direct costs associated with the goods that have been sold during the period, including: purchase cost of goods, freight-in, customs duties, and is reduced by purchase returns and purchase discounts. It is matched with revenue to determine gross profit.

❓ How is Gross Profit calculated? ▼

Gross Profit = Net Revenue - Cost of Goods Sold. Net Revenue = Gross Sales - Discounts Allowed - Sales Returns. Gross Profit represents profit before deducting operating, administrative, financing expenses, and taxes.

❓ What is the difference between Cost of Goods Sold and Purchases? ▼

Purchases is the total value of goods bought during the period, while Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory. The difference represents the change in inventory. If inventory increases, COGS is less than purchases, and vice versa.

❓ How is Cost of Goods Sold calculated in a trading company? ▼

In a trading company, Cost of Goods Sold = Beginning Inventory + Net Purchases - Ending Inventory. Net Purchases = Purchases + Freight-In + Customs Duties - Purchase Returns - Purchase Discounts.

❓ What elements are included in cost of goods sold? ▼

Beginning inventory + Net purchases (purchases + freight-in - returns - discounts) - Ending inventory. Does not include administrative or selling expenses.

❓ How does inventory valuation method (FIFO or average) affect cost of sales? ▼

In periods of rising prices, FIFO gives lower cost of sales (higher profit) than weighted average. In periods of falling prices, the opposite is true.

📁 Purchases ▼

❓ What are purchases? ▼

Cost of buying goods or materials for resale or production use, recorded at purchase price after deducting trade discounts.

📁 Freight In ▼

❓ How is freight-in recorded? ▼

Added to purchase cost with the entry: Dr. Freight In, Cr. Bank or Accounts Payable.

📁 Customs Duties ▼

❓ How are customs duties on purchases recorded? ▼

Added to purchase cost with the entry: Dr. Customs Duties, Cr. Bank.

📁 Purchase Returns ▼

❓ How are purchase returns recorded? ▼

Dr. Accounts Payable, Cr. Purchase Returns (contra-purchase), and Cr. Input VAT (if applicable).

📁 Purchase Discounts ▼

❓ What are purchase discounts? ▼

Discounts obtained by the buyer from the supplier for early payment or bulk purchases, appearing as a contra-purchase account.

📁 Slow-moving Inventory Expense ▼

❓ When is slow-moving inventory expense recognized? ▼

When indicators show that goods will not move within the normal period (e.g., outdated model, change in market demand).

📁 Obsolete/Damaged Inventory Expense ▼

❓ How is obsolete/damaged inventory expense recorded? ▼

Dr. Obsolete/Damaged Inventory Expense, Cr. Allowance for Obsolete Inventory (or directly to inventory if immaterial).

📁 Inventory Shortage Expense ▼

❓ How is inventory shortage recorded after counting? ▼

Dr. Inventory Shortage Expense, Cr. Inventory (shortage quantity × average cost).

📁 Direct Expenses ▼

❓ What are Direct Expenses? ▼

Direct Expenses are costs that can be directly traced to a specific product or service unit, such as: direct raw materials, direct labor, and direct manufacturing overhead (factory electricity, factory rent, machine maintenance). They are charged to production or service cost.

❓ What is the difference between direct and indirect expenses? ▼

Direct expenses can be directly traced to a product unit (e.g., wood used to make a chair). Indirect expenses cannot be directly traced and are allocated to products based on a certain ratio (e.g., production supervisor salaries, factory depreciation, administrative expenses).

📁 Production Wages ▼

❓ What are production wages? ▼

Wages of workers directly involved in the production process (assembly line workers, machine operators), considered direct cost allocated to work in progress.

📁 Factory Utilities ▼

❓ How are factory utilities (electricity, water) recorded? ▼

Charged as manufacturing overhead: Dr. Factory Utilities, Cr. Bank or Accounts Payable.

📁 Factory Maintenance ▼

❓ How is factory maintenance recorded? ▼

If routine: Dr. Factory Maintenance (expense). If improvements extend life: capitalized.

📁 Operating Assets Depreciation ▼

❓ What is operating assets depreciation? ▼

Depreciation expense for machinery, equipment, and operating assets used in production or operations, such as factory machines, production lines, operating equipment.

📁 Construction Cost ▼

❓ What is Construction Cost? ▼

Construction Cost is the main account that accumulates all direct and indirect costs related to executing construction and contracting contracts. These costs include direct materials, direct labor, subcontractors, equipment rental, and indirect overheads.

❓ How are construction costs transferred to Contracts in Progress? ▼

At the end of the accounting period, total construction costs are transferred to the "Contracts in Progress - Asset" account to calculate each project's profitability. Entry: Dr. Contracts in Progress - Asset, Cr. Construction Cost (by appropriate project).

❓ How is profitability determined for each project? ▼

Project profitability is determined using the Percentage of Completion method under IFRS 15: (Total actual project costs ÷ Total estimated project costs) × Total contract revenue. Revenue and cost are recognized at the same percentage.

❓ How are indirect costs (overheads) treated in construction? ▼

Indirect costs (e.g., salaries of engineers supervising multiple projects, shared equipment rental, security expenses) are allocated to projects using a reasonable method (e.g., ratio of direct costs per project or labor hours).

❓ How is Construction Cost presented on the income statement? ▼

Construction Cost is presented on the income statement deducted from Construction Revenue to determine gross profit (or loss) from construction activities. It appears as a major line item under operating expenses.

📁 Direct Materials - Projects ▼

❓ What are direct materials in construction projects? ▼

Direct materials are materials that directly form part of the project and can be easily traced to the project unit, such as: cement, steel, bricks, tiles, paints, wood, and pipes. They are the largest component of construction cost.

❓ How are direct materials issued to a project recorded? ▼

Direct materials issued to a project are recorded with the entry: Dr. Direct Materials - Projects (or Contracts in Progress - Asset), Cr. Materials Inventory (Raw Materials Inventory or Construction Materials Inventory).

❓ How is the quantity of direct materials needed for a project estimated? ▼

The quantity of direct materials needed for a project is estimated through: Bill of Quantities (BOQ) prepared by project management, engineering drawings, and contract technical specifications. Purchase orders are issued based on these estimates.

❓ How is material surplus in a project treated? ▼

Material surplus (purchased but unused materials) is either: (1) returned to the company's main inventory for use in other projects, (2) sold as surplus materials, or (3) stored at the project site for future projects. The accounting entry is adjusted based on the chosen option.

❓ How are direct materials issued to a project valued? ▼

Direct materials issued to a project are valued using one of the inventory valuation methods (FIFO, weighted average cost, or specific identification for high-value items). The valuation method must be consistent and uniformly applied across all projects.

📁 Direct Labor - Projects ▼

❓ What is direct labor in construction projects? ▼

Direct labor is wages of workers who work directly at the project site and whose hours can be tracked per project, such as: construction workers, carpenters, steel fixers, painters, tile workers, electricians, and plumbers.

❓ How are direct labor wages recorded? ▼

Direct labor wages are recorded with the entry: Dr. Direct Labor - Projects (or Contracts in Progress - Asset), Cr. Salaries Payable (or Bank Account if paid immediately).

❓ How are labor hours tracked per project? ▼

Labor hours per project are tracked using a Timesheet System where each worker records the number of hours worked on each project daily. These hours are compiled weekly or monthly to calculate cost.

❓ How are waiting time or paid leave for direct labor treated? ▼

Waiting time (without work) and paid leave for direct labor are allocated to projects as indirect expense (overhead), or charged to general expenses if fair allocation is difficult.

❓ What is the difference between direct and indirect labor in construction? ▼

Direct labor works at the project site and their hours can be tracked per project. Indirect labor (e.g., production supervisors, maintenance workers, shared equipment drivers) cannot be easily tracked per project, and their costs are allocated to projects as indirect overheads.

📁 Subcontractors - Projects ▼

❓ What are subcontractor costs in construction projects? ▼

Subcontractor costs are amounts paid or payable to external contractors (subcontractors) who perform specific parts of the project, such as: electrical work, HVAC, elevators, specialized painting, or specialized civil works.

❓ How is a subcontractor invoice for a project recorded? ▼

A subcontractor invoice for a project is recorded with the entry: Dr. Subcontractors - Projects, Dr. Input VAT (if applicable), Cr. Subcontractors Payable (liability) or Bank Account (if paid immediately).

❓ How is the quality of a subcontractor's work ensured? ▼

The quality of a subcontractor's work is ensured through: a contract specifying specifications and acceptance criteria, engineering supervision by the main company, approval of invoices after inspection, and withholding a percentage (retention) released after the warranty period.

❓ What are the risks of relying on subcontractors? ▼

Risks of relying on subcontractors include: schedule delays due to contractor negligence, non-conforming work quality, cost overruns, contractor bankruptcy during the project, and legal disputes over invoices or guarantees.

❓ How are subcontractor additional claims treated? ▼

Additional claims from subcontractors (e.g., extra work outside the contract scope) are reviewed by project management. If the claim is justified and approved, the amount is added to the project cost. If unjustified, it is rejected or a settlement is negotiated.

📁 Equipment Rental - Projects ▼

❓ What are equipment rental costs in construction projects? ▼

Equipment rental costs are amounts paid to rent heavy or light equipment for use on projects, such as: cranes, excavators, loaders, graders, mixers, compressors, and electrical generators.

❓ How is equipment rental for a project recorded? ▼

Equipment rental for a project is recorded with the entry: Dr. Equipment Rental - Projects, Cr. Bank Account or Accounts Payable (depending on payment method). If rental is specific to a project, it is charged directly. If equipment is shared, the cost is allocated.

❓ What is the difference between equipment rental and equipment ownership in construction? ▼

Equipment rental requires periodic payments (daily, weekly, monthly) and does not result in ownership of the equipment, nor is it recorded as a fixed asset on the balance sheet. Equipment ownership requires significant capital investment, and the equipment appears as a fixed asset depreciated over its useful life.

❓ How is the choice made between equipment rental and ownership? ▼

The choice is based on: (1) project duration (rent for short projects, own for long projects), (2) frequency of equipment use, (3) total cost (comparing rental value to purchase cost and depreciation), (4) capital availability, and (5) equipment availability in the market.

❓ How is the cost of shared equipment rental allocated among multiple projects? ▼

The cost of shared equipment rental is allocated among projects based on: hours each project used the equipment, days each project used the equipment, the ratio of direct costs per project, or any reasonable and consistent allocation basis.

📁 Indirect Overhead - Projects ▼

❓ What are indirect overheads in construction projects? ▼

Indirect overheads are costs that serve multiple projects and cannot be directly traced to a specific project unit, such as: salaries of engineers supervising multiple projects, project site rent, security expenses, project insurance, and travel and accommodation expenses for work teams.

❓ How are indirect overheads allocated to projects? ▼

Indirect overheads are allocated to projects at the end of the accounting period using a reasonable and consistent allocation basis, such as: ratio of direct costs per project to total direct costs, direct labor hours per project, or revenue ratio per project.

❓ What is the difference between indirect overheads and general administrative expenses? ▼

Indirect overheads directly serve projects and are allocated to project costs (appearing within Construction Cost). General administrative expenses serve the company as a whole and are not allocated to projects (appearing as administrative expenses on the income statement).

❓ How are indirect overheads estimated for future projects? ▼

Indirect overheads for future projects are estimated based on: average indirect overheads from similar past projects, a percentage of expected direct costs, or a detailed analysis of indirect activities required for each project (e.g., required supervision hours).

❓ How are indirect overheads presented on the income statement? ▼

Indirect overheads allocated to projects appear as part of Construction Cost on the income statement. They do not appear as a separate line item but are merged with direct costs (materials, labor, subcontractors, equipment rental) to form total Construction Cost.

📁 Other Operational Contract Costs ▼

❓ What are other operational contract costs? ▼

Includes indirect costs related to construction contracts such as licenses, engineering fees, permit costs, and other miscellaneous operational expenses.

📁 Depreciation of Construction Equipment ▼

❓ How is depreciation of construction equipment allocated to projects? ▼

Based on each project's equipment usage hours, days, or any reasonable and consistent allocation basis.

📁 Warranty/Maintenance Provision Expense ▼

❓ When is warranty provision expense recognized? ▼

When the provision is created or increased at period end, based on an estimate of future maintenance or warranty costs.

📁 Manufacturing Cost ▼

❓ What is Manufacturing Cost? ▼

Manufacturing Cost is the main account that accumulates all costs associated with the manufacturing process, including: direct raw materials, direct labor, and manufacturing overhead (e.g., machine depreciation, factory rent, factory electricity, machine maintenance).

❓ How are manufacturing costs transferred to inventory? ▼

Manufacturing costs are transferred through stages: (1) from raw materials to Work in Progress (WIP), (2) adding direct labor and manufacturing overhead to WIP, (3) transferring completed products from WIP to Finished Goods Inventory.

❓ What are the three main elements of manufacturing cost? ▼

The three main elements of manufacturing cost are: (1) Direct Raw Materials, (2) Direct Labor, and (3) Manufacturing Overhead, which includes all other costs associated with production.

❓ How is unit product cost calculated? ▼

Unit product cost is calculated by dividing total manufacturing costs (materials + labor + overhead) by the number of units produced during the period. This information is used for product pricing, inventory valuation, and profitability analysis.

❓ How is Manufacturing Cost presented on the income statement? ▼

Manufacturing Cost appears on the income statement as part of Cost of Goods Sold (COGS) for the manufacturing sector. It may appear as a main line item under "Manufacturing Cost" or "Industrial Cost of Sales," deducted from manufacturing revenue to determine gross profit.

📁 Direct Raw Materials ▼

❓ What are Direct Raw Materials? ▼

Direct raw materials are materials that directly form part of the finished product and can be easily traced to each unit produced, such as: steel used in car manufacturing, plastic used in appliance manufacturing, wood used in furniture manufacturing, and fabrics used in clothing manufacturing.

❓ How is the issuance of direct raw materials to production recorded? ▼

The issuance of direct raw materials to production is recorded with the entry: Dr. Direct Raw Materials (or Work in Progress - WIP), Cr. Raw Materials Inventory (asset). The cost is charged to products immediately upon issuance from the warehouse.

❓ How is the quantity of direct raw materials needed for production determined? ▼

The quantity of direct raw materials needed for production is determined using the Bill of Materials (BOM), which specifies the quantity of each raw material required per unit produced, multiplied by the planned number of units, considering the allowable waste percentage.

❓ How is waste or scrap in raw materials treated? ▼

Natural waste or scrap in raw materials (within allowable limits) is considered part of production cost and is charged to finished goods. Abnormal waste (due to poor storage or production errors) is charged as a separate loss expense.

❓ What is the difference between direct raw materials and indirect materials (supplies)? ▼

Direct raw materials directly form part of the product and can be traced per unit (e.g., steel). Indirect materials (supplies) are used in the manufacturing process but do not directly form part of the product or do so in insignificant proportions (e.g., oils, lubricants, cartridges, cleaning supplies), and are considered part of manufacturing overhead.

📁 Direct Manufacturing Labor ▼

❓ What is Direct Manufacturing Labor? ▼

Direct manufacturing labor is wages of workers who work directly on the production line to convert raw materials into finished goods, and whose hours can be tracked per product, such as: machine operators, assembly workers, welders, cutting and bending workers, and painting and dyeing workers.

❓ How are direct manufacturing labor wages recorded? ▼

Direct manufacturing labor wages are recorded with the entry: Dr. Direct Manufacturing Labor (or Work in Progress - WIP), Cr. Salaries Payable (or Bank Account if paid immediately). The cost is charged to products based on actual hours worked.

❓ How are direct labor hours tracked per product? ▼

Direct labor hours per product are tracked using: Job Cards or Time Tickets system, where each worker records hours spent on each job order or specific product. These hours are compiled to calculate cost.

❓ How is setup time for direct labor treated? ▼

Setup time (time spent preparing a machine to produce a specific product) is considered part of direct manufacturing labor and is charged to the relevant product if the setup is specific to it. If the setup is shared among multiple products, it is allocated to products on a reasonable basis.

❓ What is the difference between direct and indirect manufacturing labor? ▼

Direct manufacturing labor works directly on converting raw materials into products (machine operators, assembly workers). Indirect manufacturing labor supports the production process but does not work directly on the product (production supervisors, maintenance workers, factory cleaners, warehouse keepers).

📁 Manufacturing Overhead ▼

❓ What is Manufacturing Overhead? ▼

Manufacturing overhead includes all manufacturing costs that cannot be directly traced to a specific product unit. It includes: factory machinery depreciation, factory rent, factory electricity and water, machine maintenance, production supervisor salaries, indirect materials (oils, rags), and factory insurance.

❓ How is manufacturing overhead allocated to products? ▼

Manufacturing overhead is allocated to products using a predetermined overhead rate, calculated by dividing estimated total manufacturing overhead costs by an estimated allocation base (e.g., direct labor hours, machine hours, or direct material cost).

❓ What is the difference between actual and estimated manufacturing overhead? ▼

Actual manufacturing overhead is what is actually spent during the period. Estimated (standard) overhead is used for planning and control. The difference between actual and estimated (under-applied or over-applied overhead) is adjusted at period end, either charged to cost of goods sold or allocated between inventory and cost of sales.

❓ What are the bases for allocating manufacturing overhead? ▼

Bases for allocating manufacturing overhead include: (1) direct labor hours, (2) machine hours, (3) direct labor cost, (4) direct material cost, (5) number of units produced, or (6) any other basis that reflects the relationship between overhead cost and production.

❓ How is manufacturing overhead presented in the financial statements? ▼

Manufacturing overhead appears within Cost of Goods Sold (COGS) on the income statement after being allocated to products. On the balance sheet, it appears within inventory values (WIP and Finished Goods) as part of production cost. It does not appear as a separate line item but is merged with other production costs.

📁 Quality Control Costs ▼

❓ What are quality control costs? ▼

Costs of product inspection, quality tests, laboratories, consumables used in quality control, and salaries of quality control technicians, considered manufacturing overhead.

❓ Are quality control costs included in product cost? ▼

Yes, they are part of manufacturing overhead and are included in product cost (WIP and finished goods).

📁 Administrative Expenses ▼

❓ What are common examples of administrative expenses? ▼

Management salaries, administrative office rent, office utilities, office supplies, legal and audit fees, general insurance, training, travel.

❓ Can administrative expenses be capitalized within fixed assets or inventory? ▼

No, general administrative expenses are not included in the cost of fixed assets or inventory, as they are not directly related to the acquisition or production of the asset.

📁 Salaries ▼

❓ How are salaries and wages calculated? ▼

Salaries and wages are calculated by multiplying the actual hours worked or the agreed monthly salary in the employment contract. Allowances (housing, transportation, work nature) and bonuses are added, while absences, delays, and employee deductions (social insurance and taxes) are subtracted.

❓ What is the difference between basic salary, allowances, and bonuses? ▼

Basic salary is the fixed amount agreed in the contract. Allowances are additional amounts for specific conditions (housing allowance, transportation allowance, work nature allowance). Bonuses are exceptional amounts given to employees for excellent performance or company profits (e.g., year-end bonus or productivity bonus).

❓ How is the net salary payable to an employee recorded? ▼

The net salary payable to an employee (after deducting insurance and taxes) is recorded with the entry: Dr. Salaries Expense (for the gross salary), Cr. Bank Account (for the net salary), Cr. Employee Deductions (for deductions such as insurance and taxes to be remitted to the relevant authorities).

📁 Management Salaries ▼

❓ What are management salaries? ▼

Salaries of top management and administrative staff (general manager, financial manager, HR manager), considered an administrative expense.

📁 Workers Wages ▼

❓ What are workers' wages? ▼

Daily or hourly wages for workers not on monthly salary scheme (temporary workers, hourly workers).

📁 Housing Allowance ▼

❓ How is housing allowance recorded? ▼

Dr. Housing Allowance (within salaries expense), Cr. Salaries Payable or Bank.

📁 Miscellaneous Allowances ▼

❓ What are miscellaneous allowances? ▼

Includes transportation allowance, telephone allowance, and any other cash allowances not classified under specific allowances.

📁 Employer's Social Insurance Contribution ▼

❓ What is the employer's social insurance contribution? ▼

The employer's share of social insurance contributions (e.g., GOSI), considered an additional cost on salaries, presented in the income statement as part of salaries expense.

📁 Bonuses & Incentives ▼

❓ How are bonuses and incentives recorded? ▼

When accrued: Dr. Bonuses & Incentives, Cr. Salaries Payable or Bank.

📁 Commissions ▼

❓ What are commissions? ▼

Commissions paid to sales or management staff for achieving specific targets (percentage of sales, production targets).

📁 Vacation Allowance ▼

❓ How is accrued vacation allowance calculated? ▼

Daily salary × number of unused vacation days. Accrued monthly as a percentage of salary.

📁 End of Service Benefits ▼

❓ What is the difference between end of service expense and provision? ▼

End of service expense appears on the income statement (the portion due for the year). The provision is the cumulative liability on the balance sheet.

📁 Rent ▼

❓ What is the difference between operating lease and finance lease? ▼

An operating lease is a short to medium-term lease, and the asset and liability are not recorded on the balance sheet (expense is recognized directly). A finance lease is a long-term lease that effectively transfers ownership of the asset to the lessee by the end of the contract, and a right-of-use asset and liability are recorded on the balance sheet under IFRS 16.

❓ How is prepaid rent recorded? ▼

When paying rent in advance for several months, the entry is: Dr. Prepaid Rent (asset), Cr. Bank Account. At the end of each month, a portion of the prepaid rent is transferred to expense with the entry: Dr. Rent Expense, Cr. Prepaid Rent.

❓ Is the right-of-use asset under lease contracts depreciated? ▼

Yes, under IFRS 16, the Right-of-Use Asset arising from lease contracts (both operating and finance) is depreciated over the lease term. Depreciation is recorded with the entry: Dr. Depreciation Expense - Right-of-Use Asset, Cr. Accumulated Depreciation - Right-of-Use Asset.

📁 Office Rent ▼

❓ How is monthly office rent recorded? ▼

Dr. Office Rent, Cr. Bank or Accounts Payable.

📁 Warehouse Rent ▼

❓ Is warehouse rent a direct or indirect cost? ▼

Depends on activity: if warehouse for raw materials or products, it is manufacturing overhead. If administrative warehouse, it is administrative expense.

📁 Utilities ▼

❓ What are electricity and water expenses (Utilities)? ▼

Electricity and water expenses are costs paid by the company for electricity and water consumption in its offices, factories, and warehouses. They are considered administrative operating expenses, except for the portion used in production, which is considered an indirect manufacturing expense and is included in manufacturing cost.

❓ How are electricity and water bills recorded? ▼

Electricity and water bills are recorded when received with the entry: Dr. Utilities Expense (for consumption value), Dr. Input VAT (if applicable), Cr. Bank Account or Accounts Payable (for the total amount). If the bill has not arrived by period-end, an accrual is recorded: Dr. Utilities Expense, Cr. Accrued Utilities.

❓ What is the difference between factory utilities and administrative utilities? ▼

Factory utilities are considered an indirect manufacturing overhead cost and are allocated to products as part of manufacturing cost. Administrative utilities are considered an administrative expense and appear on the income statement as part of administrative and general expenses.

📁 Electricity Expense ▼

❓ How is an electricity bill recorded? ▼

Dr. Electricity Expense, and Dr. Input VAT (if applicable), Cr. Bank or Accounts Payable.

📁 Water Expense ▼

❓ Is water expense allocated between administration and production? ▼

Yes, if there is a separate meter. If not, an estimated ratio (e.g., 70% production, 30% administration) is used.

📁 Internet Expense ▼

❓ How is internet expense recorded? ▼

Dr. Internet Expense, Cr. Bank or Accounts Payable.

📁 Telephone Expense ▼

❓ What is telephone expense? ▼

Landline telephone expense used in administrative and operational communications.

📁 Mobile Expense ▼

❓ How is mobile phone expense paid for employees treated? ▼

Recorded as an expense if used only for business purposes; otherwise, the personal portion is allocated (deducted from employee salary).

📁 Fuel Expense ▼

❓ What is fuel expense? ▼

Fuel expense for vehicles and equipment operation, allocated between production and administration based on usage.

📁 Selling & Marketing Expenses ▼

❓ What are Marketing Expenses? ▼

Marketing expenses are costs associated with promotional and advertising activities for products or services, aimed at increasing brand awareness and driving sales. They include: advertising (digital and print), marketing material design, trade show participation, and social media marketing.

❓ How are marketing expenses recorded? ▼

Marketing expenses are recorded when incurred (upon receiving the service or invoice) with the entry: Dr. Marketing Expenses, Cr. Bank Account or Accounts Payable (depending on the payment method).

❓ What is the difference between marketing expenses and selling expenses? ▼

Marketing expenses include activities that precede the sale (advertising, promotion, market research). Selling expenses include activities related to the sales process itself (sales commissions, packaging, freight-out, exhibitions).

❓ Can marketing expenses be capitalized? ▼

Generally, marketing expenses cannot be capitalized under accounting standards (IAS 38), as they do not meet the recognition criteria for intangible assets (control, future benefits). They are expensed in the period incurred.

❓ How are prepaid advertising costs (e.g., annual advertising contract) treated? ▼

Recorded as an asset (prepaid expenses) and amortized over the contract period (month by month).

❓ What is the difference between marketing expenses and advertising expenses? ▼

Advertising expenses are a subset of marketing expenses, including only paid advertising costs (e.g., TV ads, Google Ads, billboards). Marketing expenses are broader and also include market research costs, brand design, marketing materials, and public relations.

❓ How are marketing expenses presented on the income statement? ▼

Marketing expenses are presented within operating expenses under "Marketing Expenses" or "Selling Expenses" to determine net operating profit.

📁 Marketing Expense ▼

❓ What is the difference between marketing and advertising expenses? ▼

Marketing expense is broader and includes advertising, promotion, market research, marketing materials, and public relations.

📁 Promotion & Offers ▼

❓ What are promotion and offers expenses? ▼

Costs of promotional discounts, coupons, gifts, customer contests, and loyalty programs.

📁 Sales Commissions ▼

❓ How are sales commissions recorded? ▼

When accrued: Dr. Sales Commissions, Cr. Salaries Payable or Bank.

📁 Advertising Expense ▼

❓ How is advertising expense recorded? ▼

Dr. Advertising Expense, Cr. Bank or Accounts Payable. If prepaid, recorded as an asset and amortized.

📁 Free Samples ▼

❓ How is the cost of free samples recorded? ▼

Dr. Free Samples (marketing expense), Cr. Inventory or Purchases (at sample cost).

📁 Digital Marketing ▼

❓ What are digital marketing expenses? ▼

Costs of online advertising, SEO, email marketing, paid ads (PPC), and social media management.

📁 Other Selling & Marketing Expenses ▼

❓ How are other selling and marketing expenses treated? ▼

Aggregated in this account and disclosed in the notes if material.

📁 Miscellaneous Administrative & Operating Expenses ▼

❓ What are miscellaneous administrative and operating expenses? ▼

A grouping account for administrative and general expenses not classified under specific predetermined categories, such as professional subscriptions, membership fees, and various administrative expenses.

❓ Are the items in this account disclosed separately? ▼

Any material item must be disclosed separately in the notes, even if included in this account.

📁 Office Supplies ▼

❓ How are office supplies recorded? ▼

If immaterial, expensed immediately. If material, recorded as an asset (supplies inventory) and expensed upon consumption.

📁 Insurance Expense ▼

❓ How are annual insurance premiums recorded? ▼

Recorded as an asset (prepaid insurance) and amortized monthly: Dr. Insurance Expense, Cr. Prepaid Insurance.

📁 Training Expense ▼

❓ How is training expense recorded? ▼

Dr. Training Expense, Cr. Bank or Accounts Payable.

📁 Travel Expense ▼

❓ How is travel expense recorded? ▼

When employee submits invoices: Dr. Travel Expense, Cr. Employee Travel Advances (if advanced) or Bank.

📁 Government Fees ▼

❓ What are government fees? ▼

Fees, taxes, and penalties paid to government authorities, not directly related to sales or production (e.g., commercial registration renewal, municipality license, traffic fees, violation fines).

📁 Representation Expense ▼

❓ How is representation expense recorded? ▼

Dr. Representation Expense, Cr. Bank or Cash.

📁 Bad Debt Expense ▼

❓ How is bad debt expense estimated? ▼

Using a percentage of credit sales or aging analysis of receivables.

📁 Depreciation & Amortization - Administrative Assets ▼

❓ What is depreciation and amortization of administrative assets? ▼

A master account for accumulating depreciation, consumption, and amortization expenses of assets used in administration, such as furniture, devices, software, administrative vehicles, and admin buildings.

❓ Does this account include depreciation of production or project assets? ▼

No, this account is for administrative assets only. Production asset depreciation goes to manufacturing cost, and project asset depreciation goes to construction cost.

📁 Depreciation - Office Furniture & Equipment ▼

❓ How is office furniture depreciation calculated? ▼

(Furniture cost - Salvage value) ÷ Useful life (usually 5-10 years) using the straight-line method.

📁 Depreciation - IT Equipment ▼

❓ How is IT equipment depreciation calculated? ▼

Using the straight-line method over a useful life of 3-5 years, usually with no salvage value.

📁 Amortization - Software & Licenses ▼

❓ How are software and licenses amortized? ▼

Using the straight-line method over the expected useful life (usually 3-5 years for software, over the license term).

📁 Depreciation - Administrative Vehicles ▼

❓ How is depreciation of administrative vehicles calculated? ▼

Using straight-line or declining balance method over a useful life of 3-5 years.

📁 Depreciation - Administrative Buildings ▼

❓ How is depreciation of administrative buildings calculated? ▼

Using the straight-line method over a useful life of 20-50 years, with an expected salvage value.

📁 Cash Count Differences ▼

❓ How is a cash shortage recorded? ▼

Entry: Dr. Cash Count Differences (expense), Cr. Cash in Hand. If the responsible party is identified, charge them: Dr. Employee Receivables, Cr. Cash Count Differences.

❓ How is a cash surplus recorded? ▼

Entry: Dr. Cash in Hand, Cr. Cash Count Differences (other income). If the reason is not identified, it remains as other income.

📁 Fines & Penalties Expense ▼

❓ How are fines and penalties recorded? ▼

Dr. Fines & Penalties Expense, Cr. Bank. These expenses are not tax-deductible in most countries.

📁 Other Administrative Depreciation & Amortization ▼

❓ What are other administrative depreciation and amortization? ▼

Depreciation or amortization expenses for other administrative assets not classified above (e.g., administrative intangible assets, leasehold improvements).

📁 Professional Fees ▼

❓ What are professional fees? ▼

A master account for fees paid to lawyers, auditors, and consultants in management, finance, marketing, engineering, and other fields.

❓ How are annual audit fees recorded? ▼

Charged as an expense in the period benefited (usually the financial year), and recorded either as cash paid or as a liability.

📁 Legal Fees ▼

❓ How are legal fees recorded? ▼

Dr. Legal Fees, Cr. Bank or Accounts Payable.

📁 Audit Fees ▼

❓ How are annual audit fees recorded? ▼

Dr. Audit Fees, Cr. Accrued Expenses or Bank.

📁 Consulting Fees ▼

❓ How are consulting fees recorded? ▼

Dr. Consulting Fees, Cr. Bank or Accounts Payable.

📁 Financing Costs ▼

❓ What are types of financing costs? ▼

Interest on loans (bank and non-bank), bank commissions, bank guarantee fees, bond issuance costs, and dividends on preferred shares classified as debt.

❓ Can financing costs be capitalized within qualifying assets? ▼

Yes, under IAS 23, borrowing costs directly attributable to the acquisition or construction of a qualifying asset (e.g., a factory under construction) are capitalized.

📁 Bank Fees ▼

❓ How are bank fees recorded? ▼

When they appear on the bank statement: Dr. Bank Fees, Cr. Bank Account.

📁 Bank Interest Expense ▼

❓ How are bank interest expenses recorded? ▼

Dr. Bank Interest Expense, Cr. Bank or Accrued Interest on Loans.

📁 Other Expenses ▼

Deprecated: htmlspecialchars(): Passing null to parameter #1 ($string) of type string is deprecated in /home/f2awcom/domains/accaw.com/public_html/accounts_guide/fqs.php on line 336

📁 Foreign Exchange Loss ▼

❓ How are foreign exchange losses recognized? ▼

On the income statement within Other Expenses, appearing in the period they occur.

❓ When do foreign exchange losses arise? ▼

Arising when there are foreign currency monetary items (e.g., customers in USD, loans in EUR) and the exchange rate changes between the transaction date and the settlement or balance sheet date.

📁 Realized Exchange Loss ▼

❓ What is the difference between realized and unrealized foreign exchange losses? ▼

Realized: result from actual currency conversion (e.g., buying dollars at one rate and selling at a lower rate). Unrealized: result from revaluing foreign currency monetary balances at period end without conversion.

📁 Unrealized Exchange Loss ▼

❓ How are unrealized foreign exchange losses presented in the financial statements? ▼

They appear within other expenses on the income statement, and may be shown separately if material.

📁 Loss on Asset Disposal ▼

❓ How is a loss on sale of a fixed asset calculated? ▼

Loss on sale = (Historical cost - Accumulated depreciation) - Sale price. If the result is positive (carrying amount > sale price), it is a loss.

📁 Loss on Fixed Assets Sale ▼

❓ How is a loss on sale of a fixed asset recorded? ▼

Dr. Bank Account (sale proceeds), Dr. Accumulated Depreciation (total depreciation), Dr. Loss on Asset Sale (loss amount), Cr. Fixed Asset (historical cost).

📁 Loss on Investments Sale ▼

❓ What is the difference between loss on asset sale and loss on asset disposal? ▼

Loss on sale: when the asset is sold for less than its carrying amount. Loss on disposal: when the asset is retired without sale (e.g., destroyed or donated) and the loss equals the carrying amount.

📁 Impairment Loss on Equity Investments ▼

❓ What is impairment loss on equity investments? ▼

Non-operating losses arising from a non-temporary decline in the value of equity investments (e.g., shares in companies, investments in associates or subsidiaries).

❓ How is this loss measured? ▼

Measured as the difference between the investment's carrying amount and its fair value, and the investment is directly reduced on the balance sheet.

📁 Expected Credit Losses - Debt Investments ▼

❓ What is expected credit loss expense on debt investments? ▼

Expected credit losses on debt investments (e.g., government bonds, corporate bonds) under the Expected Credit Loss (ECL) model.

❓ How are these losses calculated? ▼

Based on analysis of probability of default, loss given default, and exposure amount, over the expected life of the bond.

📁 Impairment Loss on Intangible Assets ▼

❓ How is impairment of intangible assets tested? ▼

If the asset has a finite life, it is tested when impairment indicators exist. If it has an indefinite life (e.g., some trademarks), it is tested annually.

❓ Can an impairment loss on an intangible asset be reversed? ▼

Under IFRS, it can be reversed if the recoverable amount increases in subsequent periods (up to the amortized cost). Under GAAP, impairment loss cannot be reversed.

📁 Loss on Fixed Assets Write-off ▼

❓ How is a damaged fixed asset written off? ▼

Dr. Accumulated Depreciation (total depreciation to write-off date), Dr. Loss on Fixed Assets Write-off (remaining carrying amount), Cr. Fixed Asset (historical cost).