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Bonnie
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  2. A_Team (MBA - Finance Student) ISB College

    Profitability ratios measure how profitable a company is and are used to assess its performance and efficiency. Based on the income statement and balance sheet of a company, these ratios are calculated. In terms of profitability ratios, there are several types, each providing a different viewpoint.Read more

    Profitability ratios measure how profitable a company is and are used to assess its performance and efficiency. Based on the income statement and balance sheet of a company, these ratios are calculated.

    In terms of profitability ratios, there are several types, each providing a different viewpoint.

    The following are some common profitability ratios:

    Gross profit margin: This ratio measures the percentage of revenue that remains after the cost of goods sold has been deducted. Producing and selling efficiently is indicated by this metric.

    Net profit margin: An organization’s net profit margin is the portion of revenue left after all expenses have been deducted. A company’s profitability is measured by this indicator.

    Return on assets (ROA): This ratio measures how profitable a company’s assets are. In other words, it indicates how effectively a company generates profits from its assets.

    Return on equity (ROE): This ratio measures the profitability of a company’s equity. It shows how effectively a company generates profits from its shareholders’ investments.

    Analysts and investors use profitability ratios to evaluate a company’s performance and profitability ability.

    An investor or analyst can evaluate a company’s relative strength and identify potential opportunities or risks by comparing its profitability ratios with its peers or its industry averages.

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Simerpreet
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  2. Karishma
    This answer was edited.

    Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more

    Debit Balance

    A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.

    Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.

    Credit Balance

    A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.

    Credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.

     

    Debit Balance in the Passbook

    A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. Debit balance in the passbook is also called “Overdraft”.

    All the transactions either debit or credit are recorded in the passbook. When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. It means that an individual or enterprise owes to the bank.

    The overdraft facility given by the bank has a limit i.e. only a certain amount can be withdrawn in excess of the amount deposited and if one avails overdraft facility, interest is also charged by the bank.

    The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s debit balance is a negative balance or unfavourable balance while the passbook’s credit balance is a positive or favourable balance.

    For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $60,000. So here, the passbook will show an overdraft of $10,000 i.e. the debit balance of the passbook. It signifies negative cash flow of the individual and that individual owes $10,000 to the bank.

     

    Credit balance in Pass Book

    On the other hand, when the total amount of all the debit entries in a passbook is less than the total amount of credit entries, it results in a credit balance. It means the amount deposited by a customer is more than the amount withdrawn indicating the positive cashflow in the account.

     

    Reconciliation

    It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.

    Debit Balance Reconciliation

    The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.

    Credit Balance Reconciliation

    The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.

    Conclusion

    The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A debit balance signifies more withdrawals than receipts resulting in an overdraft.

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Simerpreet
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Cash FlowDepreciation
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    Depreciation refers to that portion of the value of an asset that a company uses in an accounting year to generate revenue. Assets are written off in form of depreciation over time also called the useful life of the asset. It denotes the wear and tear of an asset over time. Suppose, a company namedRead more

    Depreciation refers to that portion of the value of an asset that a company uses in an accounting year to generate revenue. Assets are written off in form of depreciation over time also called the useful life of the asset. It denotes the wear and tear of an asset over time.

    Suppose, a company named Johnson ltd. purchases machinery for 50,000 that has a useful life of 5 years with nil salvage value. Then the yearly depreciation to be charged can be calculated as:

    Depreciation calculation with formula

    Is Depreciation a Cash Flow?

    Cash flows are inflows and outflows of cash and cash equivalents in an entity. The payments made by the entity denote the outflows whereas the revenues or incomes of the entity denote the inflows. Talking about cash flows, depreciation is a non-cash item of expense which means it neither results in inflow nor outflow of cash resources.

    In the adjacent Profit and Loss statement, a cash payment of 7,000 for electricity implies outflow of cash however, depreciation of 10,000 is merely an imputed cost to write off an asset or we can say, a part of profits set aside each year so that there are sufficient funds available to procure a new asset after the currently available asset is discarded.

    showing depreciation in profit and loss account

    However, cash flow statements are affected by depreciation. Depreciation is added back to the net profits while calculating cash flows from operating expenses since it is a non-cash item and has been deducted while calculating net profits in the profit and loss statement.

    Depreciation shown in cash flow statement

    Depreciation does not directly impact the amount of cash generated or expended by a business but it is tax-deductible and will reduce the cash outflows related to income taxes. Thus, depreciation affects cash flow by reducing the amount of cash a business has to pay for income taxes.

    depreciation effect on cash flow indirectly

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A_Team
A_Team
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The balances as per cash column of cash book and passbook The balance as per bank column of cash book and passbook The balance as per Bank column of cash book and ...

Bank Reconciliation StatementDifference Between
  2. Radha M.Com, NET
    This answer was edited.

    A Bank Reconciliation Statement is prepared to know the causes for the difference between 2. the balance as per bank column of cash book and passbook. This is because transactions in Cash Book are recorded from the point of view of the business and the Bank Statement/Pass Book is prepared from the pRead more

    A Bank Reconciliation Statement is prepared to know the causes for the difference between 2. the balance as per bank column of cash book and passbook.

    This is because transactions in Cash Book are recorded from the point of view of the business and the Bank Statement/Pass Book is prepared from the point of view of the banker. Since both are prepared from a different point of view, differences are bound to occur.

    Bank Reconciliation is the process by which on a particular date the bank balance as per Cash Book is reconciled with the balance as per Pass Book/Bank Statement.

    Whenever bank reconciliation is done, we need to identify the reasons or transactions causing the differences between both balances. Then a statement highlighting the reasons or causes of differences is prepared. This statement is known as Bank Reconciliation Statement.

    A Bank Reconciliation Statement is prepared by starting with either the (a) bank balance as per Cash Book or the (b) balance as per Pass Book/Bank Statement. Only those entries which are recorded in the Cash Book but not in the Pass Book/Bank Statement or vice versa are considered while preparing the Bank Reconciliation Statement.

    The reasons for the differences between the two balances can be broadly classified into three categories:

    1. Differences due to timing.
    2. Transactions recorded by the Bank.
    3. Errors.

     

    For example, the debit bank balance as per the Cash Book of Mr. A on 31st March is 20,000. On the same date, his Bank Statement showed a credit balance of 30,000. When the Bank Reconciliation Statement is prepared on 31st March, he will find out the transactions causing the 10,000 (30,000 – 20,000) difference between both the balances. Once the transactions are identified he will reconcile the balance as per the Cash Book with the balance as per his Bank Statement.

     

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Bonnie
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  2. prashant06 B.com, CMA pursuing
    This answer was edited.

    The "Income and Expenditure" account lists all the income and expenses incurred by the entity throughout the year. This account is very identical to the profit and loss account and is generally prepared on an accrual basis irrespective of whether the amount is received or paid. Non-profit organizatiRead more

    The “Income and Expenditure” account lists all the income and expenses incurred by the entity throughout the year. This account is very identical to the profit and loss account and is generally prepared on an accrual basis irrespective of whether the amount is received or paid. Non-profit organizations (NPO) prepare this type of account to ascertain surplus earned or deficit incurred by them during the period.

    Talking about the format of income and expenditure accounts we generally see that all the expenses are recorded on the debit side while all incomes are recorded on the credit side. One important thing to note is that items so recorded are revenue items while capital nature items are generally ignored because only current period items are recorded in this statement.

    Since it is a Nominal account, we follow the golden rules to prepare this, stating “debit all expenses and losses and credit all incomes and gains”. The closing balance at the end shows the surplus or deficit for the year. If the balancing figure appears on the debit side it is surplus and if the balancing figure appears on the credit side it is a deficit for the entity.

    Following is the format of income and expenditure account

     

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