0:02 Hello everybody, my name is Shepra Singh
0:04 and I welcome all of you to another
0:05 video on basic accounting interview
0:09 questions and answers from careerite. In
0:11 part one of the video in this series, we
0:12 covered commonly asked questions on
0:14 important topics like bookkeeping,
0:17 journal, ledger, subsidiary books, bank
0:19 reconciliation statement, rectification
0:22 of errors and the balance sheet. In part
0:24 two, we discussed basic but essential
0:26 questions related to nonprofit
0:28 organizations and
0:31 partnership. In addition to these, we
0:33 have also shared detailed videos on
0:35 accounts payable and accounts
0:38 receivable. So, make sure to check them
0:40 out also. Today let's move a step
0:43 forward and see some important interview
0:45 questions on basic topics like uh
0:48 trading account, cashbook, cash flow
0:51 statement, depreciation and its methods,
0:54 provisions and reserves, asset disposal
0:56 account and a very important topic the
0:58 fund flow statement. If you're really
1:00 serious about cracking any accounting
1:02 interview, the questions covered in
1:05 these videos are a must know. Make sure
1:07 you watch this video till the end
1:10 without skipping any part of it. And
1:12 once you are done with this video, don't
1:14 forget to check out other videos also.
1:16 The links are provided in the
1:19 description box below. Ready? Fantastic.
1:22 Let's start. Question number one. Can
1:24 you name the final accounts we prepare
1:25 in case of sle
1:28 proprietorship? Quite simple and easy.
1:30 The final accounts that we prepare in
1:32 case of proprietorship are trading
1:36 account, P&L account and balance sheet.
1:38 Trading account and P&L account are
1:41 together known as income statement and
1:43 three of them together are known as
1:46 final accounts. Going a little deeper,
1:48 your question number two can be why is
1:52 income statement created? Now see income
1:54 statement means trading account plus P&L
1:57 account we just saw. So the question
2:00 basically is why are these two created?
2:02 To answer the question, let's go to our
2:04 basics. Trading account helps to
2:07 determine gross profit and loss and P&L
2:09 account help to determine net profit and
2:11 loss which you are interested in finding
2:14 out as a business. The figures you get
2:17 from here allow you to compare with the
2:20 previous year's profits. This gives you
2:22 an idea about the direction in which the
2:25 business is going. The details of your
2:27 income and expenses are very very
2:30 important because these allow you to
2:32 control them better. You are able to
2:35 find a clear picture about the reserves
2:38 the business has just in case you need some
2:39 some
2:42 uncertainties and then you are able to
2:44 calculate the ratios like gross profit
2:47 ratio, net profit ratio etc with the
2:51 help of these documents. So you see both
2:54 of these documents allow you to get a
2:56 deeper look into your business based on
2:58 which you can make your decisions and
3:00 that is why it is very important for a
3:04 business to prepare them. Now the next
3:05 two questions that I'm going to bring
3:07 before you can be the follow-up
3:10 questions to this question number two
3:12 and the questions can be tell us a bit
3:16 about trading account. So see trading
3:18 account is a financial statement that
3:19 shows the result of buying and selling
3:23 of goods and services in a given period.
3:25 It helps determine the gross profit or
3:28 gross loss of the business. On the debit
3:30 side, it records things like opening
3:33 stock or inventory, net purchase and
3:37 direct expense. These purchases only
3:38 include the goods and material bought
3:41 with an intention to resale. They do not
3:44 include any assets bought by the company
3:47 like land or machinery
3:50 etc. Now the important thing to pay
3:53 attention to here is direct expenses are
3:55 the expenses you incur in the process of
3:58 production. Example your wages, power,
4:01 fuel, factory rent, royalties, duties on
4:06 purchase, carriage that is freight etc.
4:08 On the credit side, you have sales,
4:11 services rendered, closing stock of the
4:13 inventory. The difference between the
4:15 two side tells you if it is a gross
4:19 profit or loss for the business. If the
4:21 total of credit side is greater than the
4:24 total of debit side, you make a profit
4:27 and vice versa. The gross profit or loss
4:30 is transferred to the P&L account. Your
4:32 question number four can be tell us
4:35 something about P&L account. Now P&L
4:37 account is the second step in the
4:39 preparation of final accounts and shows
4:41 the financial performance of an
4:43 enterprise. It pertains to a particular
4:46 accounting period and follows acral
4:49 basis of accounting. Items like gross
4:51 profit, indirect income are recorded on
4:54 the credit side of the statement.
4:56 Indirect income includes things like
4:58 rent received, discount received,
5:00 commission earned, interest received,
5:04 etc. So you see this indirect income is
5:06 the income you receive from sources
5:08 other than selling your product or
5:10 service. Now what do you record on the
5:13 debit side? So debit side records items
5:17 like gross loss and indirect expenses.
5:19 These indirect expenses can include
5:22 things like salaries, rent, stationary
5:24 charges, advertisement cost, any legal
5:26 charges you have paid, telephone
5:30 charges, depreciation, interest, etc.
5:32 The important thing to mention here is
5:35 the net profit or loss that you get from
5:38 here impacts the capital of the
5:40 organization. It either makes the
5:43 organization stronger or weaker. Now our
5:45 next question is a tricky one that's
5:47 usually asked here. Pay attention. The
5:50 question is can we say that trading
5:53 account is a part of P&L account? So
5:55 yes, we can say that trading account is
5:58 a part of P&LN account because the gross
6:00 profit or loss you post to the P&L
6:02 account is assertained from trading
6:05 account only. This is simple but many
6:08 candidates get confused here. Make sure
6:10 that you don't coming to another
6:13 important question. Tell us a bit about
6:16 the balance sheet. Okay. So balance
6:18 sheet is a statement that shows the
6:20 financial position of a business on a
6:23 given date. It records all the assets
6:26 and liabilities of a company on a given
6:29 date. It is prepared from real and
6:32 personal accounts. Excess of assets over
6:34 the outside liabilities is the capital
6:37 and demonstrates the financial soundness
6:40 of the company. And since everything is
6:42 recorded in in an organized manner, it
6:44 shows the amount of assets a company
6:48 owns under a particular head also. At
6:50 the same time, it also shows the amount
6:53 of liabilities it owes to the outsiders
6:55 and the
6:57 proprietors. It provides a base for the
7:00 opening entry for the next accounting
7:02 year and helps you understand the
7:05 solvency status of the company. With the
7:07 next question, the interviewer might go
7:11 a little deeper and the question can be
7:13 which items are recorded on the assets
7:16 and liabilities side of a balance sheet.
7:18 So see liabilities represent the
7:20 obligations or debt of the debts of the
7:22 business. These may be external
7:24 liabilities that is payable to the
7:27 outsiders or the internal liabilities
7:31 that is owner's funds. Common items that
7:33 are included here are sunundry
7:35 creditors, bills payable, bank
7:38 overdraft, EPF, loan and advance taken
7:40 that is the credit balance of it,
7:43 reserve or reserve fund, capital of
7:45 partners etc.
7:47 And the assets represent what the
7:50 business owns both current and
7:52 non-current. They can include items like
7:55 cash in hand or bank. Then your bills
7:58 receivable, sunry debtors, loans and
8:01 advances given uh that is the debit
8:03 balance of it. Closing stock,
8:05 investments, furniture and fittings,
8:08 plant and machinery, loose tools. Then
8:10 your land and building, building
8:12 premises and then your patents and
8:15 trademarks, goodwill, all of these are
8:18 included under the assets part of the
8:20 business. Okay, let's move on to a very
8:21 tricky question with this. What do you
8:24 know about the terms grouping and
8:26 marshalling? Now see, if you're not
8:29 prepared, this question is going to come
8:31 as a big surprise to you. So pay
8:33 attention. Both of these terms grouping
8:35 and marshalling are actually related to
8:37 the presentation of balance sheet.
8:40 When you list all the items of similar
8:42 nature under a specific accounting head,
8:45 it is called as grouping. For example,
8:47 your current assets is a group which
8:49 includes things like cash at hand, cash
8:52 at bank, inventory, debtors, etc.
8:55 Similarly, sunundry creditors, bills
8:57 payable, outstanding expenses, all of
8:59 these are grouped under current liabilities.
9:01 liabilities.
9:03 Marshalling is an arrangement of assets
9:06 and liabilities in a particular order in
9:08 the balance sheet. It deals with the
9:09 order in which these assets and
9:12 liabilities are presented in the balance
9:15 sheet. The two most commonly used
9:17 methods of this arrangement are the
9:20 first one is in the order of liquidity
9:22 that is the assets are listed from most
9:25 liquid to least liquid and the second
9:28 one is in the order of permanence. In
9:30 this case, the assets are listed from
9:34 most permanent to mo least permanent.
9:35 For example, your land and building,
9:38 plant and machinery, stock, dattors,
9:41 cash. This is the order. Okay. If need
9:43 be, please feel free to replay this
9:45 question, but make sure that you have
9:47 understood it
9:49 properly. Great. Let's move on to
9:51 question number nine with this. Tell us
9:53 something about the cash flow statement.
9:57 Another important question. So see cash
9:58 flow statement is a tool that is used
10:01 for financial analysis. It shows how the
10:04 cash flows in and out of the
10:07 organization. And the best part is it
10:09 gives us the specific reasons for the
10:11 difference between the opening and
10:13 closing balance of the cash in the
10:16 organization. That is where did the cash
10:19 come from and where did it go. You get a
10:22 clear picture of this. Cash inflow
10:24 happens from activities like cash sales,
10:25 cash received against the trade
10:28 receivables, commission or royalty. Then
10:30 your insurance claim that you have
10:32 received. Cash from sale of investment,
10:34 sale of fixed assets, sale of
10:37 securities, loans and advance received.
10:39 Then proceeds from the issue of equity
10:42 shares, preference shares or debentures.
10:46 All of these are your sources of cash.
10:48 And cash may outflow for payments like
10:50 uh cash purchases, cash that you pay
10:53 against the trade payables, operating
10:56 expenses. Then if you uh buy any
10:59 investments, cash purchases of any fixed
11:02 assets, loans and advances that you give
11:04 or if you buy back any of your equity
11:07 shares for cash, that is a payment. Then
11:09 redemption of preference shares,
11:11 redemption of debentures, all of these
11:15 items are where the cash goes out. So
11:18 the cash flow statement actually gives a
11:20 very clear picture of the liquidity in
11:23 an organization and is extremely useful
11:25 for creditors, investments and
11:28 management to make informed decision
11:30 about that particular business. The
11:32 follow-up question to this can be what
11:34 are the advantages of preparing a cash
11:36 flow statement. So see cash flow
11:38 statement first of all helps with
11:40 short-term planning for the business
11:42 because now you precisely know your
11:45 sources and applications of fund. What
11:47 this does is it allows you to have a
11:49 better control over both of these
11:52 things. It also helps you assess the
11:54 liquidity and solveny of an
11:56 organization. That is your ability to
11:58 pay for your short-term and long-term
12:01 liabilities as an organization.
12:03 And now since you know if there's a
12:05 surplus or deficit of cash in the
12:07 organization, you're able to manage your
12:09 cash more
12:12 efficiently. And you're also able to
12:14 compare your actual cash flow statement
12:17 with what you budgeted for. So it
12:20 provides you a comparative study also.
12:22 what's going right, what's going wrong.
12:25 You get a clear picture of that and you
12:28 also get a clear uh understanding of the
12:31 actual reasons for the current status
12:34 where you are at and what corrective
12:36 actions are required if you want to
12:40 emerge out stronger from here. Okay. Now
12:41 we are moving to a little practical
12:44 question. Pay attention. The question is
12:46 suppose you deposit the cash you have in
12:49 hand into your bank account. Will this
12:52 be regarded as cash flow? So no, this
12:54 transaction cannot be regarded as cash
12:58 flow. Why? Because it is simply that the
13:01 cash is changing the place in this case.
13:03 There's no inflow or outflow of cash
13:06 happening here. Right? Similarly, if you
13:08 withdraw cash from your bank, it won't
13:10 be recorded in the it it won't be
13:12 recorded in the cash flow either because
13:14 what is happening here again is it is
13:17 changing the place. There's no inflow or
13:20 outflow of cash happening here. Question
13:22 number 12. Can you name some commonly
13:25 used subsidiary books? Okay. So, first
13:27 of all, let's quickly see what are
13:29 subsidiary books. We know that all the
13:31 transactions in a business are to be
13:34 recorded and they're recorded in a
13:36 journal book. Now, just imagine that the
13:38 business is growing up and you keep
13:41 recording all the transactions, sales,
13:43 purchase, cash, everything in one
13:45 journal book. Will you be able to locate
13:48 a specific entry in the time of need? In
13:51 this case, it'll be difficult, right?
13:53 So, what do we do here? We record the
13:56 entries in separate dedicated books. For
13:59 example, record sales of goods in one
14:02 book, purchases in another, cash
14:05 transactions in another and so on. What
14:07 are these books? These books are called
14:10 as subsidiary books. There are six types
14:13 of subsidiary books that you have. cash
14:15 book, purchase book, sales book,
14:18 purchase return book, sales return book,
14:21 and journal proper. Okay, now pay
14:23 attention because the next question
14:25 tests your conceptual knowledge and is
14:28 one of examiner's absolute favorites.
14:30 The question is, do you pass the journal
14:31 entry for the transactions that you have
14:35 recorded in the subsidiary books? So no,
14:36 the journal entry for the transactions
14:38 that you have recorded in subsidiary
14:41 books is not passed. The total of the
14:43 subsidiary books is directly posted to
14:46 the ledger. For example, if you have a
14:48 purchase book, you would directly pass
14:52 on the total to the ledger. Why? Because
14:54 you have already entered everything. You
14:56 have already passed on the entries in
15:00 the subsidiary box. Okay. Now let's move
15:02 on to a question on depreciation which
15:04 is another important
15:07 topic. The question is what is
15:09 depreciation? So first of all
15:11 depreciation means fall in the book
15:12 value of tangible
15:16 assets. This fall is permanent, gradual
15:19 and continuing in nature. Which means
15:21 that the value of these tangible assets
15:26 falls slowly, continuously and cannot be
15:28 reversed. It is actually an expense that
15:31 doesn't involve cash. And since it is an
15:34 expense, it is debited to the PNN
15:37 account. Now the important thing to
15:40 notice here is depreciation reduces the
15:42 book value of the goods but the market
15:46 value may not necessarily fall. While
15:47 your books may say that the value of
15:50 your furniture is 10,000 rupees after
15:52 depreciation, you may still manage to
15:54 find a buyer who buys it for 15,000
15:57 rupees which is the market value of your
16:00 asset. And a very important thing to
16:03 remember here is depreciation accounting
16:05 is actually the process of allocation
16:07 and not
16:09 valuation. Now for those of you who
16:11 don't know what allocation means here
16:14 when you distribute the cost minus
16:16 salvage value that is the scrap value of
16:19 an asset over its useful life it is
16:22 called as allocation. Now this question
16:24 is asked so many times in the interview
16:26 and a lot of candidates get confused
16:29 here. So make sure that you are clear
16:32 with it. Pay attention and if you need
16:34 please replay this much part of the
16:36 video that is this question so that you
16:38 can catch it better. Now the followup
16:41 question to this can be is depreciation
16:44 charged on all fixed assets? So yes
16:47 depreciation is charged on all fixed
16:50 assets except land. Why not land? This
16:53 is because land has an infinite economic
16:56 life. Another important thing to know
16:59 and remember for the interviews pay
17:01 attention. Moving on to question number
17:03 16 with this. What is the difference
17:06 between depreciation, amortization and
17:08 depletion? So see fall in the value of
17:11 tangible assets due to use, passage of
17:13 time, obsolescence or accident is called
17:16 as depreciation.
17:19 Amortization is also fallen value but it
17:21 applies to intangible assets that is
17:24 your patents, copyrights, uh the
17:28 goodwill etc. and depletion it is used
17:31 in con uh context of exhaustion of
17:35 vasting assets like your query mine etc.
17:38 So when you keep mining coal the coal
17:42 reserves deplete in that sense. Question
17:44 number 17. What would happen if you do
17:45 not charge
17:47 depreciation? Okay, so we know that
17:50 depreciation is an expense. Now just
17:52 imagine if you do not consider an
17:54 expense altogether, what would happen to
17:57 your financial accounts? Would your P&L
17:59 statement show the correct financial
18:01 position of your business? Could it not
18:03 show unnecessarily exaggerated value of your
18:04 your
18:07 assets? The value of your asset would
18:09 reduce with time and use. But if you do
18:12 not charge depreciation, the books would
18:15 show unnecessarily extorted value of
18:17 these assets which will be misleading
18:19 for you as a business
18:22 owner. Depreciation is considered while
18:24 calculating the cost of production also.
18:27 If you don't consider it, your cost of
18:29 production will show up lower than what
18:31 it actually is and you would not be able
18:33 to price your items or products properly.
18:35 properly.
18:36 Then if you charge depreciation and
18:38 retain it in the business, it provides
18:41 you the funds to replace the asset that
18:44 is under consideration. Otherwise, if
18:46 you do not charge this this
18:48 depreciation, you won't be able to
18:52 provide for this. And lastly, for legal
18:54 compliance, it is very important to charge
18:56 charge
18:58 depreciation. Now, see this question is
19:01 again very very important. Please feel
19:03 free to replay it if you have not got it
19:06 completely. But make sure that you have
19:08 understood it well and you are prepared
19:11 to answer it in the interviews. Moving
19:14 on to another important one. Name the
19:16 factors you consider for providing
19:18 depreciation. Now see the three
19:20 important factors you consider while
19:23 providing depreciation are number one
19:25 the historical cost of your asset.
19:29 Basically how much did it cost in all to
19:31 get the asset to the factory and
19:34 functional. This could include your cost
19:36 of the asset, the freight that you might
19:38 have paid, installation charges, and any
19:41 other cost to get it operational. Then
19:45 your estimated residual or scrap value
19:47 that you can receive at the end of
19:49 useful life of this asset. And the
19:52 estimated useful economic life of the
19:55 asset is the third important thing, the
19:56 third important criteria that you need
19:58 to take into consideration while
20:00 calculating the depreciation. Because
20:03 every tangible asset would have an
20:07 estimated life but the exception here is
20:10 land as we just discussed a while back
20:12 because the land has got unlimited economic
20:14 economic
20:16 life. Now a natural follow-up question
20:18 to this can be what are the different
20:20 methods of charging the
20:22 depreciation. So see there are two prime
20:24 methods of charging the depreciation.
20:26 The first one is when depreciation is
20:29 charged to the asset account and the
20:31 second one is when provision for
20:33 accumulated depreciation account is
20:36 created. Simple till here. What's
20:38 important actually here is the entries
20:41 you pass to record these. Let's see
20:44 them. Let's see the entries according to
20:46 the first method. That is when the
20:48 depreciation is charged to the asset
20:51 account. In this method, we directly
20:53 reduce the value of the asset by
20:57 charging depreciation to it. This means
21:00 the asset now appears in the books at
21:02 its written down value. So the two
21:06 entries that you pass are these. This
21:09 entry reduces the value of the assets in
21:12 the books and this entry is passed at
21:14 the end of the accounting period to
21:17 close the depreciation account and
21:20 reflect it as an expense in the P&L
21:24 account. Pay attention again two very
21:26 important entries that are very very
21:28 important from the point of view of the
21:31 interview. Now the second method is when
21:32 you have a provision for the
21:35 depreciation account. This method is
21:37 used when we do not reduce the assets
21:40 value directly but instead we maintain a
21:42 separate account which is called as the
21:44 provision for depreciation or
21:47 accumulated depreciation account. How
21:49 would the entries look in this case? The
21:52 entries would look like this. In this
21:56 case the first entry here increases the
21:58 provision that is accumulated
22:00 depreciation without directly reducing
22:04 the asset in the asset account. And this
22:07 second entry if you look at it closely
22:09 this is the same closing entry as we saw
22:11 in the method one. It is used to
22:14 transfer depreciation expense to the
22:16 profit and loss account at the end of
22:19 the accounting period. This is quite
22:21 easy but at the same time it is very
22:23 very important to know these entries
22:25 because interviewers especially love
22:27 such questions. Please feel free to
22:30 replay this question. Pause the video on
22:32 both the slides and take a good look at
22:34 the entries. They'll help you
22:36 tremendously during the interviews and
22:38 definitely make you stand out from other
22:40 candidates who are present there. Our
22:42 question number 20 is what are the
22:45 different methods to calculate
22:47 depreciation. Now there are two most
22:49 commonly used methods that are used for
22:52 calculating the depreciation. The first
22:54 one is straight line method which is
22:56 also called as fixed percentage on
22:59 original cost or fixed installment
23:02 method. What happens in this method is a
23:05 certain percentage of the assets cost is
23:07 written off every year as
23:10 depreciation. For example, 10%
23:12 depreciation on the original cost every
23:15 year. Now this means that the
23:18 depreciation every year is uniform and
23:21 hence the name is straight line method.
23:24 The second method that we use is return
23:26 down value method that is diminishing
23:29 balance, reducing installment method or
23:32 reducing balance method. It is also
23:36 called as by these names. In this case,
23:38 the depreciation is charged on the book
23:41 value of the asset which keeps reducing
23:43 every year because of the depreciation
23:45 that you have charged in the previous
23:48 years and that is how these two methods
23:51 are different from each other. Okay,
23:53 let's move on to question number 21. Now
23:56 what do you understand by provision? So
23:58 see provision is an amount that is
24:00 charged to the profit and loss account
24:03 to provide for a known liability.
24:05 The amount of which can be can't be
24:07 determined with certainty but it can be estimated
24:08 estimated
24:11 reasonably. Since it is charged on
24:13 profit, it reduces the net profit for
24:15 the year. For example, it could be the
24:18 provision for depreciation, doubtful uh
24:22 debts, then repairs, taxes, etc. When
24:24 you don't know the exact amount you
24:25 would need to pay for something,
24:28 provisions are created. So you see it is
24:31 like a temporary retention of profit for
24:34 a specific future obligation. It helps
24:37 the business stay prepared for expected
24:40 but uncertain
24:42 expenses. Great. Let's move on to
24:44 question number 22 with this. What are
24:47 reserves? So see reserves is the amount
24:50 that you set aside from profit to meet
24:53 known or unknown future contingencies
24:56 that may arise. the uh they are not
24:58 created to meet any specific liability
25:00 but the basic purpose to create these
25:02 reserves is to strengthen the overall
25:04 financial position of the
25:06 organization. Reserves represent
25:09 appropriation of profit. For example,
25:11 you may create a general reserve,
25:13 reserves for expansion, reserves for
25:15 increased cost of replacement
25:18 etc. Now most of the candidates would
25:21 stop their answer here itself. But if
25:23 you want to stand out, try adding some
25:26 more details. For example, some of the
25:28 important things about reserves that you
25:30 can talk about are reserves belong to
25:33 the proprietor. They appear on the
25:34 liabilities side of the balance sheet
25:37 because they represent profits that have
25:39 been retained in the business which are
25:42 owed to the owners. Actually when
25:43 reserve is invested in outside
25:46 securities, it is called as reserve
25:48 fund. So these are the additional
25:51 details that actually add weight to your
25:53 answer. Also you can go on to say that
25:55 reserves are debited to the profit and
25:58 loss appropriation account not to the
26:01 P&L account as it is. That's why they do
26:03 not affect the net
26:06 profit. They created after the profit is
26:08 already determined. Now you can see
26:10 yourself a new question is getting
26:13 created here which may be asked just as a
26:14 a
26:16 oneliner for those of you who do not
26:18 know what appropriation is.
26:20 Appropriation means distribution or
26:22 allocation of net profit after all the
26:25 expenses taxes and adjustments have
26:28 already been made. So if you see in
26:31 simple words once the profit is
26:33 finalized a part of it is set aside or
26:36 distributed this is called appropriation
26:40 of profit. simple. If need be, I highly
26:42 recommend that you replay this question
26:44 and try to get a hang of it because this
26:47 is a very important question that is
26:49 usually asked in the interviews.
26:51 Question number 23. What are the various
26:54 types of reserves? Now see there are two
26:56 types of reserves. The first one is
26:58 revenue reserve. This is created out of
27:00 revenue profits. That is the revenue
27:02 that you have earned from your main
27:04 business. And the second one is capital
27:07 reserve. This revenue reserve can be
27:10 further classified into general reserve
27:12 that is it is the amount that is set
27:14 aside from for general purpose not any
27:17 specific purpose. They strengthen the
27:19 financial position of the company. And
27:22 the second one is specific reserve. You
27:25 set aside a specific reserve and this
27:28 can be used for that specific purpose
27:30 only. So you see this is for a
27:33 particular purpose. for example, workman
27:35 compensation reserve, debenture re
27:38 redemption reserve, etc. Now let's come
27:40 to capital reserves. Capital reserves
27:42 are set aside from capital profits that
27:44 you make. For example, you may set uh
27:47 sell a land or something like that and
27:50 you may reserve some amount that is
27:52 capital reserve and these capital
27:54 reserves are not available for
27:56 distribution of dividend in normal
27:59 cases. Capital profit can arise from
28:01 selling your fixed assets, redemption of
28:04 debentures, then selling of shares,
28:06 premium issue of shares or debentures
28:09 etc. So this extra information is to
28:11 give you an insight into what capital
28:14 profit may consist of. Okay, let's move
28:17 on to question number 24 with this.
28:19 Okay, now question number 24 is very
28:21 interesting. Have you ever heard of
28:25 secret reserve? So yes, secret reserve
28:27 it is also called as hidden reserve. It
28:30 is a reserve whose existence is not
28:33 explicitly shown in the balance sheet as
28:36 the word itself suggests
28:38 secret. It is created deliberately to
28:40 strengthen the financial position of the
28:43 company without disclosing it openly.
28:45 Now the question that arises here is how
28:48 is it actually created? So you create
28:51 this reserve by showing the assets at a
28:54 lower value and liabilities at a higher
28:57 value. Also you try to write off the
29:00 assets at a higher value. This reserve
29:03 basically shows a conservative picture
29:05 of the organization's financial position
29:07 and safeguards its interest in any
29:11 unforeseen losses. Right? Okay. Let's
29:14 move on to question number 25. Now
29:16 suppose I sell off an asset before its
29:18 book value becomes zero. How would you
29:20 charge a depreciation in this year of
29:23 sale in this case? Now you can pause the
29:25 video for a moment. Take a good look at the
29:26 the
29:29 question. Now if you try to simplify the
29:33 question it is basically asking you is
29:35 how much depreciation would you charge
29:38 in the year of sale of an
29:41 asset? Doesn't it? Now it becomes
29:44 easier. Fantastic. Let's see what
29:46 happens here. So we know that we charge
29:48 the depreciation for the whole year that
29:50 is 12 months of the financial year.
29:53 Suppose I sell the asset at the end of 6
29:55 months only in that year. So my
29:58 depreciation would be charged for these
30:00 6 months only. It won't be charged for
30:03 the whole 12 months. Right? Does that make
30:04 make
30:08 sense? Great. If need be, you can replay
30:10 this question again and gain the clarity
30:13 if you need to. The question is simple.
30:15 It is just asking you how much
30:17 depreciation would you charge if you
30:21 sell the good before the year
30:25 ends if some months are still remaining?
30:27 Okay, moving on to another interesting
30:30 question. Are the sales proceeds always
30:32 equal to the book value of the
30:36 asset? Now, it's simple but actually a
30:37 tricky one and definitely one of the
30:39 interviewers's favorites. That is why
30:42 I've got it here. So the book value of
30:45 an asset we know is its value after the
30:48 depreciation has been charged and sales
30:50 proceeds is the value you actually
30:53 managed to sell this asset at right and
30:56 all of us know that these values can be
30:59 absolutely different. For example, the
31:01 book value of your asset after charging
31:04 the depreciation might be 1 lak rupees.
31:07 But in the real life, you may actually
31:09 manage to sell it for rupees 1 lakh
31:12 20,000 or you might have to sell it for
31:15 80,000 rupees. If you manage to sell it
31:17 at a price higher than the book value,
31:22 it's profit and vice versa. Okay? So we
31:24 can see that the book value and the
31:27 actual value the sales proceeds do not
31:30 always have to be the same and actually
31:32 if you see they are rarely the
31:35 same. Great. Now we are moving to
31:37 another very important topic that is
31:38 fund flow
31:41 statement. So the first question from
31:43 fund flow statement could be are there
31:45 any other names used to refer to the
31:47 fund flow statement. This one is very
31:51 simple very basic still good to know. So
31:53 the fund flow statement can also be
31:56 called as statement of changes in
31:59 financial position. Then many a times it
32:00 is also referred to as statement of
32:03 sources and applications of funds. And a
32:06 more casual common one is where got and
32:10 where gone statement. Informal but often
32:12 used to explain in simple terms where
32:14 the funds came from and where they
32:15 actually were
32:18 used. Okay. Now our question number 28
32:21 is why do organizations prepare the
32:23 funds flow statement at all? So see
32:25 there are several important reasons for
32:27 the organizations to prepare a fund flow
32:30 statement. The most common ones are
32:32 number one to monitor and control the
32:35 working capital because this statement
32:37 shows whether the organization has a
32:39 surplus or deficit of the working
32:42 capital and whether the existing bucket
32:45 capital that you have has been used
32:48 sufficiently efficiently or not. That is
32:51 the first purpose and then this
32:53 statement also gives you the causes
32:55 behind the changes in the working capital.
32:57 capital.
32:59 And all of this helps the management
33:01 understand the exact reasons for any
33:03 increase or decrease in the working
33:06 capital during that particular
33:08 period. Then it also helps you with uh
33:11 better financial planning and budgeting
33:12 because by knowing where the funds are
33:14 actually coming from and where they are
33:17 being used, companies can plan their
33:19 future finances and budgets more effectively.
33:21 effectively.
33:24 And banks often require projected fund
33:25 flow statements before they sanction
33:28 your loans along with other financial
33:31 documents. So that is why also these uh
33:33 fundflow state this funflow statement is
33:35 very very important for any organization
33:38 because it plays a vital role in loan
33:41 approvals. So all of these are the most
33:43 important reasons why fund flow
33:46 statement is actually generated. Why is
33:50 it actually created? Okay. Now let's
33:51 move on to another practical question
33:53 and this one is also very popular with
33:56 the interviewers. So pay attention. The
33:58 question is how would you know if a
34:00 particular transaction would have the
34:03 impact on fund flow statement or not?
34:06 Now see this one looks difficult but is
34:08 actually very very
34:11 simple. Funds refer to working capital.
34:13 So if a transaction causes a change in
34:16 the working capital, it means it has an
34:18 impact on the fund flow. Otherwise it
34:19 has no
34:22 impact. Now what I'm going to give you
34:24 next is a very simple tip to identify
34:27 this. Pay attention. When you make the
34:29 journal entry for any transaction and
34:31 you see that one account getting
34:33 impacted is from the current category
34:35 while the other one is from the
34:38 non-current category. There would be a
34:40 change in the working capital in this
34:43 case and hence there would be a flow of
34:47 fund. If both the accounts belong to the
34:49 same category when you make these
34:51 journal entries that is current or
34:54 non-current whatever it may be there
34:55 won't be a change in the working
34:57 capital. Okay. So this was in theory.
35:00 Let me show it to you
35:03 practically. Suppose I purchase some
35:06 machinery and the cost is 50,000 rupees
35:08 that I pay in cash. How would the
35:10 journal entry look like in this case?
35:12 The journal entry would look like this
35:16 in this case. Right? So do you see that
35:17 these are two different types of
35:20 accounts one is non-current assets and
35:22 the other one is current assets. So one
35:24 is from non-current category and the
35:27 other one is from current category. So
35:29 there is going to be a change in the
35:32 working capital. There's a flow of fund
35:35 that is happening here. Now if I buy the
35:37 same machinery on credit let's say how
35:40 would the entry look like in this case?
35:42 The entry would look like this. So do
35:45 you see these are again two different
35:47 category of accounts. One is
35:50 non-current, the other one is current.
35:52 It implies that there is a change in the
35:54 working capital. If there's a change in
35:55 the working capital, it means there's a
35:56 flow of
36:00 fund. Right? Easy. Now, now let's see a
36:02 case where both the accounts are of the
36:05 same category. So that you can get a
36:08 good grip of it. Suppose I finish off a
36:10 current liability by paying cash to a
36:12 creditor. What would the journal entry
36:14 look like in this case? The entry would
36:18 be like this. Do you see both the
36:21 accounts here are from the current
36:24 category, current liabilities, current
36:26 assets, right? They are similar
36:29 category. It means there is no change in
36:31 the working capital. There is no flow of
36:33 the funds happening here. This is
36:36 actually very very important question.
36:38 If need be, you can replay this much
36:40 part of the video, but make sure that
36:42 you have absolute clarity on this
36:44 because there is a very high chance of
36:47 interviewers asking this question. Okay,
36:48 with this let's move on to the last
36:50 question of this video which again test
36:53 your conceptual knowledge. The question
36:55 is what are the different elements
36:57 considered under source and application
37:01 of funds in a fund flow statement? Now
37:03 in a fund flow statement the sources of
37:05 funds and application of funds refer to
37:08 the movements that actually either
37:10 increase or decrease the working
37:13 capital. So the sources of funds can
37:15 include things like uh funds from
37:18 operations that is your main business.
37:21 Then issue of shares, debentures, sale
37:23 of fixed assets or investments,
37:25 long-term loans that you may have uh
37:28 taken from the bank or somewhere. Then
37:30 your non-trading receipts that come from
37:33 business activities like donations, your
37:35 insurance claim that you may have
37:37 received or government grants, all of
37:40 these come under sources of funds. Now
37:43 applications of funds means things that
37:45 actually lead to the decrease in working
37:48 capital. It can include things like loss
37:50 of funds from operations, repayment of
37:52 uh long-term loans that you may have
37:54 taken in the past, purchase of fixed
37:56 assets, redemption of preference shares,
37:59 debentures, then your non-trading
38:00 payments. For example, if you have
38:02 proposed dividend provision for taxation
38:05 that you may uh have all of these are
38:09 your applications of funds. So friends,
38:10 with this we come to the end of this
38:12 video and I sincerely hope that whatever
38:14 we have discussed today is going to be
38:15 useful to you in cracking your next
38:17 interview. If you're someone who's
38:19 preparing for your accounting interview,
38:21 make sure that you watch the videos that
38:22 I'm currently showing you on the screen.
38:24 Also, you'll find the links in the
38:26 description box below. If you found
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