The journal entry for the dividend collected by the bank is as follows: Bank A/c Dr. Amt To Dividend Received A/c Amt Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below. The logRead more
The journal entry for the dividend collected by the bank is as follows:
Bank A/c Dr.
Amt
To Dividend Received A/c
Amt
Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below.
The logic behind the journal entry
This can be explained through the following rules of accounting:
Golden rules of accounting
Modern rules of accounting
Golden rules of accounting
A bank account is a real account and the golden rule of accounting for the real account is, “Debit what comes in and credit what goes out”
Hence, the bank account is debited as the money is coming into the bank.
Dividend is an income hence dividend received is a nominal account. The golden rule of accounting for a nominal account is “Debit all expenses and losses and credit all income and gains”
Hence, the dividend received account is credited as income.
Modern rules of accounting
As per modern rules of accounting, a bank account is an asset account.
The asset account is debited when increased and credited when decreased.
Hence, the Bank account is debited here as it is increased.
A dividend received account is an income account.
The income account is credited when increase and debited when decreased.
Hence, the dividend received account is credited here as it is increased.
Treatment in the financial statements
Since the dividend received is an income; it is shown on the credit side of the Statement of profit and loss.
The bank account is an asset so it will be shown on the balance sheet.
Introduction Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings. The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation aRead more
Introduction
Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings.
The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation as shown in the example below:
It is shown as a negative figure under both assets and capital heading. I will be explaining why it is so.
Accounting Equation
The accounting equation represents the relationship between assets, liabilities, and capital of an entity whether profit oriented or not, according to which, the total assets of a business equals to the sum of its total capital and total liabilities.
Assets = Liabilities + Capital
This equation holds good in every monetary transaction or event like the event given in the question.
Cash withdrawn for personal use
We know every transaction affects two accounts. In this case, too, the ‘cash withdrawn for personal use’ affects two accounts. Cash withdrawn for personal use is known as drawings.
Let’s see the journal entry for drawings of cash from business:
Here the drawing account is debited because it is a contra-equity account i.e. it is a mirror image of the capital account or opposite of the capital account. Here the cash account is an asset account; hence it is credited as it is reduced.
As drawings represent the outflow of capital from the business, it is written off from the Capital account in the balance sheet.
Hence, in the accounting equation, the drawing amount is deducted from the Asset side and from the capital side, indicating a balance.
It does not appear in the statement of profit or loss despite having a debit balance because it is not an expense account.
Introduction Furniture is treated as a fixed asset of an enterprise unless it deals in the manufacturing or the trade of furniture. As stock in trade, it will be treated as current assets. In both cases, they are real accounts. Hence, the golden rule of accounting will be the same. But, when it coRead more
Introduction
Furniture is treated as a fixed asset of an enterprise unless it deals in the manufacturing or the trade of furniture. As stock in trade, it will be treated as current assets.
In both cases, they are real accounts. Hence, the golden rule of accounting will be the same.
But, when it comes to journal entries, Furniture A/c will appear only when it is treated as a fixed asset.
No journal entries are passed in the stock-in-trade account except for some balance transferring entries.
Journal Entries on taking Furniture as a fixed asset
Taking furniture as a fixed asset, we can pass various entries related to it. Since furniture is an asset, any increase is debited and the decrease is credited.
Also, furniture is a real account which means the golden rule of accounting applicable is, “Debit what comes in and credit what goes out”.
Following are the basic entries related to furniture.
Purchase of furniture
The most common entry related to furniture is the purchase of furniture:
Furniture A/c Dr.
Amt
To Cash / Bank A/c
Amt
Here Furniture A/c is increased, hence debited.
Cash or Bank being reduced is credited.
Sale of furniture
Cash / Bank A/c Dr.
Amt
Profit and Loss A/c * Dr.
Amt
To Furniture A/c
Amt
To Profit and Loss A/c **
Amt
*In case of loss
**In case of profit
On the sale of furniture, its balance gets reduced, hence credited.
Cash or Bank is debited as cash comes in hand or into the bank.
Also, profit or loss may arise due to the difference in sale value and the carrying amount of the furniture A/c.
The difference is debited to Profit and Loss A/c in case of loss and credited in case of profit.
Depreciation on Furniture
Depreciation A/c Dr.
Amt
To Furniture A/c
Amt
Here, furniture is credited as it is decreased by the amount of depreciation.
Depreciation being a non-cash expense, is debited.
Journal Entries on taking Furniture as stock in trade
When furniture is stock of trade of a business, the journal entries will be like normal purchase and sales entries as below:
Introduction First, we should know what Earnings per share is. Earnings per share or EPS is the earnings available to each equity share of a company. The general formula of Earning per share is as follows: Earnings per share indicate the profit-generating capability of an enterprise and potential inRead more
Introduction
First, we should know what Earnings per share is.
Earnings per share or EPS is the earnings available to each equity share of a company. The general formula of Earning per share is as follows:
Earnings per share indicate the profit-generating capability of an enterprise and potential investors often compare the EPS of different companies to choose the best investment alternative.
It is shown at the bottom of the Statement of profit and loss of a company.
Basic Earnings per share
As per AS-20, there are two types of EPS.
Basic EPS
Diluted EPS
Basic Earnings per share has the same meaning as given above. But the formula of basic earnings per share as per AS-20 is as follows:
The formula of basic earnings per share is slightly different from the general formula of EPS. Here the numerator is the same as discussed above. But the denominator is different.
Here it is ‘Weight average number of equity shares outstanding’ instead of ‘Total number of equity shares outstanding.
The two components of the formula are discussed below:
Meaning of earnings available to equity shareholders
The earnings or net profit which remains after deduction of interest payable, preference dividend, if any, and tax is known as earnings available to equity shareholders. It is calculated as shown below:
Weighted average number of equity shares outstanding
The weighted average will be calculated by applying the weight of the time period for which the numbers of shares were outstanding. Let’s see a simple case to understand the calculation of the weighted average number of equity shares outstanding:
Solution:
Alternative way:
The calculation of the weighted average number of equity shares is different in special cases like:
party paid-up shares
bonus shares and
right issue shares
Partly paid-up shares
Partly paid-up shares are not considered in the above calculation unless they are eligible to take part in dividends. In that case, such partly paid-up shares are included in the calculation as fractional shares.
For example, 300 equity shares of Rs. 10 each and Rs. 5 paid up will be considered as 150 shares. (300 x 5/10)
Bonus shares
We know bonus shares are issued at no cost to the shareholders. Issue of bonus shares leads to an increase in the number of equity shares without an increase in the resources.
AS-20 tells us to make adjustments to the number of shares outstanding before the issue of bonus shares as if the bonus shares were issued at the beginning of the earliest reported period. The effect will be retrospective.
Take the following example:
Here, number of bonus shares = 30,000 x 2 = 60,000
As the earliest report period is 2011, its EPS will also have to be adjusted. Bonus issue will be treated as if it had occurred at the beginning of the earliest reported period.
The right issue generally has an exercise price that is less than the fair value of the shares. Hence, we can say that the right issue has an element of bonus in them.
So, just like in the case of a bonus issue, we will have to adjust the number of shares outstanding before the right issue up to the earliest reported period by an adjustment factor.
The number of shares outstanding before the right issue is to be multiplied by the adjustment factor given below:
Theoretical ex-right value per share is calculated in the following way:
Let’s see an example:
Net profit for 2011 Rs. 11,00,000
Net profit for 2012 Rs. 15,00,000
No. of shares outstanding prior to rights issue 5,00,000 shares
Rights issue price Rs. 15
Last date to exercise rights 1st March 2012
The right issue is one new share for every 5 shares outstanding (i.e. 1,00,000 new shares)
The fair value of shares immediately prior to 1st March 2012 = Rs. 21
Introduction Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds. Explanation To undRead more
Introduction
Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds.
Explanation
To understand the concept of minority interest, we need to first understand the relationship between a holding company and its subsidiary company or companies.
A holding company means a company that controls one or more companies by:
Holding more than fifty percent of the total voting rights or equity share capital.
having the power to appoint or remove the majority of the board members.
A subsidiary company is a company that is controlled by another company.
From the above, we can simply deduce that a holding company holds the majority of the equity in its subsidiary company or companies.
So, the equity of the subsidiary company which does not belong to the holding company, but to the outsiders is known as the minority interest as it is, in fact, the minority in comparison to the majority stake of the holding company.
Example
For example, A Ltd holds 75% of the equity in B Ltd, then the rest 25% which belongs to the outsiders will be the Minority Interest.
Minority Interest means the share of outsiders in the:
Paid-up share capital of the subsidiary
Reserve and Surplus
For example, B Ltd has the following particulars under Shareholders’ Funds.
Equity Share Capital
Rs. 10,00,000
Revaluation Reserve
Rs. 4,00,000
Balance of Profit and Loss A/c
Rs. 1,00,000
General Reserves
Rs. 5,00,000
B Ltd is a subsidiary company of the A Ltd. A Ltd holds 75% of B Ltd.
It means minority interest in B Ltd is 25% (100% – 75%)
Therefore, in the consolidated balance sheet of A Ltd and its subsidiary, the minority interest will be as follows:
Introduction In GST, a supply is a taxable event. This means whenever there is a supply of goods or services or both, GST is charged. Supply includes the exchange of goods or services between supplier and recipient by way of sale, barter, lease etc for consideration and in the course or furtheranceRead more
Introduction
In GST, a supply is a taxable event. This means whenever there is a supply of goods or services or both, GST is charged. Supply includes the exchange of goods or services between supplier and recipient by way of sale, barter, lease etc for consideration and in the course or furtherance of business. The rate of GST on any supply depends on the type of good or service supplied.
Composite supply and mixed supply are two special types of supplies, in which two or more goods or services or both are offered together in a bundle. As two or more goods are supplied together, the question arises at which rate the GST is to be charged on such supplies as such goods or services may have different rates of GST applicable to them. Sections 8 of the CGST act, 2017 deals with the tax liability of such supplies.
Composite supply
A composite supply is a type of supply in which two or more goods or services or both are supplied together in the ordinary course of business. Such goods or services are natural bundles. By natural bundle, we mean the goods or services are complementary to each, they are naturally provided together and are to be used along with each other.
For example, mobile phones and chargers are supplied as a bundle. This concept of the natural bundle is the main determiner of a composite supply.
In such supplies, there is one main product which is called the principal supply. Like in the above example, the mobile phone is the principal supply. Other goods or services are dependent on the principal supply.
A composite supply will be taxable as the rate of GST applicable on the principal supply.
For example, suppose the rate of GST on mobile phones is 18% and that on the charger is 12%, then the whole supply will be taxable at the rate of 18%.
Mixed supply
A mixed supply is a type of supply in which two or more goods or services or both are supplied together but they do not complement each other and are not a natural bundle. They are not supplied in the ordinary course of business, For example, a combo of bottled honey and face cream.
In mixed supply, the good or service which attracts the highest rate of GST is considered the rate of supply for the whole supply.
For example, suppose bottled honey attracts 5% GST and face cream 18% GST, then the whole supply will be charged 18% GST.
Introduction As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection. In simple words, sampling in auditing refers to the practice deriving aRead more
Introduction
As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection.
In simple words, sampling in auditing refers to the practice deriving a conclusion by the auditor about a population of data by evaluation of only a part or sample of the whole data. Population means a set of data.
Concept of sampling
We know, an audit involves inspection of financial information of an entity by an auditor to form an opinion on its financial statements. Now the financial information of a firm usually contains large volumes of data. For example, a firm may have entered into 50,000 purchase transactions in a year.
Now, checking each and every purchase transaction will cost both time and money. Also, nowadays, almost every enterprise have internal controls and automated accounting systems that are established to ensure accuracy and prevention of errors. Hence, a full-fledged inspection of each and every transaction is not worth the time and effort.
Instead, a wise thing to do is to take a sample from the whole volume of transactions or accounts and apply the auditing procedures to the sample. The results derived from the sample are then projected upon the whole volume of data. Samples are often taken using statistical methods to ensure that sample is taken randomly and represents the whole population of data in a true and unbiased manner.
Consideration regarding the population before audit sampling:
The population is appropriate for the specific audit objective of the auditor
It is from a reliable source to ensure sample reliability
It is complete in terms of coverage of all relevant items throughout the period.
Irrespective of the method of sampling, the sample must represent the whole population closely.
Approaches to sampling
There are two approaches to sampling:
Statistical Approach: It is a scientific way of ensuring that the sample is chosen randomly from data and represents the data in a true and unbiased way. It employs mathematical and statistical tools like the theory of probability and also considers sampling risk characteristics.
Non-Statistical Approach: Under this approach, the auditor employs his personal experience to collect sample from the population. No mathematical tools are used but the personal judgement of the auditor regarding sampling. Sometimes, this approach may give satisfactory results depending upon the capability of the auditor. But in most cases, reliability is less compared to the statistical approach.
Introduction Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed incoRead more
Introduction
Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed income if payable.
The year in which the income is earned is called the Previous Year and the following year in which the previous year’s income is assessed is known as the Assessment Year
Steps involved in the computation of Income-tax of a person:
Determination of residential status of the person
Classification and computation of income under the five heads of income
Clubbing of income of spouse, minor child etc
Set-off or carry forward of losses
Computation of Gross Total Income
Deductions from Gross Total Income to arrive at Total Income
Application of the rates of taxes on total income
Advance tax and tax deducted at source
Arrival at Tax payable/ Tax refundable
Determination of residential status of the person
Determination of residential status of the person
The residential status of a person is of great significance for ascertaining the taxability of a person’s income as per the Income-tax act, 1961. As per the act, a person can fall into one of the following criteria:-
Resident and Ordinarily Resident in India
Resident but Not Ordinarily Resident in India
Non-Resident
Classification and computation of income under the five heads of income
Now, a person’s income can be from various sources. As per section 14 of the Income-tax act, there are five main heads of income for computation of income tax:
Income from Salary
Income from House Property
Profits and Gains from Business or Profession
Capital Gains
Income from other sources
Income under each head is to be computed as per provisions of the Income-tax Act, 1961.
Clubbing of income of spouse, minor child etc
Some individual taxpayers divert some portion of their income to their spouses and minor child in order to reduce their tax liability as the slab rate of income tax for individuals is progressive.
Such diverted income is to be clubbed with the income of the assessee as per the provisions of the Income-tax act.
Set-off and carry forward of losses
Losses suffered under the heads of the income like ‘Profit and Gains from Business and Profession’, ‘Income from House property’ can be set off against the income earned under other heads as per provision of the act.
If set off is not possible in the current assessment year then the loss can be carried forward to the next assessment year.
Computation of Gross Total Income
Gross Total Income is arrived at by computing the total of income under all five heads of income after giving necessary deductions as applicable under each head of income.
Deductions from Gross Total Income to arrive at Total Income
Income tax act, 1961 allows specific deduction from the Gross Total Income under sections 80C to 80U. These deductions are provided to encourage certain kinds of investments like life insurance premiums etc and provide relief on certain spending like medical expenses, interest expenses on home loans etc which leads to the overall welfare of the people.
After allowing the deductions from Gross Total Income, we arrive at Total Income.
Application of the rates of taxes on total income
Tax is calculated at a rate on the total income. The rate and calculation of income tax depend on the type of assessees.
Individuals and HUFs
For individuals who are below the age of 60 years and HUFs:
For individuals over 60 years and 80 years of age, the basic exemption limit is ₹3,00,000 and ₹5,00,000 respectively.
Also, as per section 115BAC, individuals and HUFs have the option to choose an alternative slab rate of tax as per which the income tax is charged at concessional rates. But, the various exemptions and deductions like housing rent allowance, leave travel concession, standard deduction on salary income cannot be availed. This slab rate system was introduced recently to reduce the complexity of filling IT returns by small taxpayers.
Rates of tax related to other types of assessees is not provided for sake of simplicity.
Advance tax and tax deducted at source
After calculating the tax on total income as per specified rates, the income tax amount is to be reduced by the advance tax and tax deducted at the source.
Tax payable/ Tax refundable
After performing all the steps above, we arrive at Income tax payable or tax refundable.
Introduction Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed incoRead more
Introduction
Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed income if payable.
The year in which the income is earned is called the Previous Year and the following year in which the previous year’s income is assessed is known as the Assessment Year
Steps involved in the computation of Income-tax of a person:
Determination of residential status of the person
Classification and computation of income under the five heads of income
Clubbing of income of spouse, minor child etc
Set-off or carry forward of losses
Computation of Gross Total Income
Deductions from Gross Total Income to arrive at Total Income
Application of the rates of taxes on total income
Advance tax and tax deducted at source
Arrival at Tax payable/ Tax refundable
Determination of residential status of the person
The residential status of a person is of great significance for ascertaining the taxability of a person’s income as per the Income-tax act, 1961. As per the act, a person can fall into one of the following criteria:-
Determination of residential status of the person
Resident and Ordinarily Resident in India
Resident but Not Ordinarily Resident in India
Non-Resident
Classification and computation of income under the five heads of income
Now, a person’s income can be from various sources. As per section 14 of the Income-tax act, there are five main heads of income for computation of income tax:
Income from Salary
Income from House Property
Profits and Gains from Business or Profession
Capital Gains
Income from other sources
Income under each head is to be computed as per provisions of the Income-tax Act, 1961.
Clubbing of income of spouse, minor child etc
Some individual taxpayers divert some portion of their income to their spouses and minor child in order to reduce their tax liability as the slab rate of income tax for individuals is progressive.
Such diverted income is to be clubbed with the income of the assessee as per the provisions of the Income-tax act.
Set-off and carry forward of losses
Losses suffered under the heads of the income like ‘Profit and Gains from Business and Profession’, ‘Income from House property’ can be set off against the income earned under other heads as per provision of the act.
If set off is not possible in the current assessment year then the loss can be carried forward to the next assessment year.
Computation of Gross Total Income
Gross Total Income is arrived at by computing the total of income under all five heads of income after giving necessary deductions as applicable under each head of income.
Deductions from Gross Total Income to arrive at Total Income
Income tax act, 1961 allows specific deduction from the Gross Total Income under sections 80C to 80U. These deductions are provided to encourage certain kinds of investments like life insurance premiums etc and provide relief on certain spending like medical expenses, interest expenses on home loans etc which leads to the overall welfare of the people.
After allowing the deductions from Gross Total Income, we arrive at Total Income.
Application of the rates of taxes on total income
Tax is calculated at a rate on the total income. The rate and calculation of income tax depend on the type of assessees.
Individuals and HUFs
For individuals who are below the age of 60 years and HUFs:
For individuals over 60 years and 80 years of age, the basic exemption limit is ₹3,00,000 and ₹5,00,000 respectively.
Also, as per section 115BAC, individuals and HUFs have the option to choose an alternative slab rate of tax as per which the income tax is charged at concessional rates. But, the various exemptions and deduction like housing rent allowance, leave travel concession, standard deduction on salary income cannot be availed. This slab rate system was introduced recently to reduce the complexity of filling IT returns by small taxpayers.
Rates of tax related to other types of assessees are not provided for sake of simplicity.
Advance tax and tax deducted at source
After calculating the tax on total income as per specified rates, the income tax amount is to be reduced by the advance tax and tax deducted at the source.
Tax payable/ Tax refundable
After performing all the steps above, we arrive at Income tax payable or tax refundable.
A balance sheet is a financial statement that reports the position or value of assets, liabilities and equity at a particular date, which is usually the closing date of a financial year. Formats of balance sheet A balance sheet may be presented in two formats: T-form or Horizontal format This formatRead more
A balance sheet is a financial statement that reports the position or value of assets, liabilities and equity at a particular date, which is usually the closing date of a financial year.
Formats of balance sheet
A balance sheet may be presented in two formats:
T-form or Horizontal format
This format is the same as the format of ledger accounts. There are two columns with the headings ‘Liabilities’ for the left column and ‘Assets’ for the right column and columns adjacent to both columns for amounts. The liabilities and equity (capital) are shown on the liabilities side because they both have credit balance and assets are shown on the asset side. Most of the non-corporates prepare their balance as per this format. The T-form balance sheet looks as given below:
Vertical format
The vertical format of the balance sheet is mostly prepared by corporate entities. Here, the liabilities and assets are shown in the same column as compared to two separate columns in the horizontal format. This results in having a longer shape. Hence, it is called a ‘vertical’ balance sheet. Generally, companies prepare their balance sheet as per this format.
Also, many times, there are two columns for the amount in this format presenting the amount of both the current year and the previous year. This format looks like as given below:
Grouping and marshalling
Beside the structure of the balance sheet i.e. horizontal and vertical, the grouping and marshalling of the items inside the balance sheet are also very important.
Grouping refers to the presenting of similar items under a heading or group. This is done in order to present the balance sheet in a concise manner. This is very important to do. For example, a business can have numerous creditors, but they are all presented under one ‘Creditors’ heading or two or more heading specifying different types of creditors.
The assets of a business are grouped under the heading such as Plant, Property and equipment, Current assets, Non-current investments etc.
Marshalling means the arranging of items as per a particular order. We know that a balance sheet consists of many items and to make the statement more useful and easy to comprehend, the items are arranged in one of the following orders:
Order of Liquidity: The items which are more liquid i.e which can be easily converted into cash are kept at the top. Like in assets, cash is the most liquid asset and requires no conversion. Then items like current investment, inventories (in case of fast-moving goods) are placed under and so on. At the near bottom, items that require a long time of conversion into cash are placed such as land, plant and machinery.
In case of liabilities, the items which are due for repayment soon are kept at the top, like bank overdraft etc. The items which are due for repayment after a long time or at the time of winding capital are kept at the bottom, like long term loans and capital funds. Given below is a format of horizontal balance sheet in which the items are marshalled in order of liquidity:
Order of permanence: This type of arrangement is just the opposite of the order of liquidity. Here the items which are least liquid are placed at the top and the more liquid items are placed at the bottom. Like in the case of assets, cash appears at the bottom and non-current assets at the top. On the liabilities side, equity and non-current liabilities are at the top while current liabilities are at the bottom. Mostly all balance sheets are marshalled in order of permanence.
What is the journal entry for dividend collected by bank?
The journal entry for the dividend collected by the bank is as follows: Bank A/c Dr. Amt To Dividend Received A/c Amt Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below. The logRead more
The journal entry for the dividend collected by the bank is as follows:
Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below.
The logic behind the journal entry
This can be explained through the following rules of accounting:
Golden rules of accounting
A bank account is a real account and the golden rule of accounting for the real account is, “Debit what comes in and credit what goes out”
Hence, the bank account is debited as the money is coming into the bank.
Dividend is an income hence dividend received is a nominal account. The golden rule of accounting for a nominal account is “Debit all expenses and losses and credit all income and gains”
Hence, the dividend received account is credited as income.
Modern rules of accounting
As per modern rules of accounting, a bank account is an asset account.
The asset account is debited when increased and credited when decreased.
Hence, the Bank account is debited here as it is increased.
A dividend received account is an income account.
The income account is credited when increase and debited when decreased.
Hence, the dividend received account is credited here as it is increased.
Treatment in the financial statements
Since the dividend received is an income; it is shown on the credit side of the Statement of profit and loss.
The bank account is an asset so it will be shown on the balance sheet.
See lessWhat is cash withdrawn for personal use accounting equation?
Introduction Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings. The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation aRead more
Introduction
Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings.
The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation as shown in the example below:
It is shown as a negative figure under both assets and capital heading. I will be explaining why it is so.
Accounting Equation
The accounting equation represents the relationship between assets, liabilities, and capital of an entity whether profit oriented or not, according to which, the total assets of a business equals to the sum of its total capital and total liabilities.
Assets = Liabilities + Capital
This equation holds good in every monetary transaction or event like the event given in the question.
Cash withdrawn for personal use
We know every transaction affects two accounts. In this case, too, the ‘cash withdrawn for personal use’ affects two accounts. Cash withdrawn for personal use is known as drawings.
Let’s see the journal entry for drawings of cash from business:
Here the drawing account is debited because it is a contra-equity account i.e. it is a mirror image of the capital account or opposite of the capital account. Here the cash account is an asset account; hence it is credited as it is reduced.
As drawings represent the outflow of capital from the business, it is written off from the Capital account in the balance sheet.
Hence, in the accounting equation, the drawing amount is deducted from the Asset side and from the capital side, indicating a balance.
It does not appear in the statement of profit or loss despite having a debit balance because it is not an expense account.
See lessWhat is furniture journal entry?
Introduction Furniture is treated as a fixed asset of an enterprise unless it deals in the manufacturing or the trade of furniture. As stock in trade, it will be treated as current assets. In both cases, they are real accounts. Hence, the golden rule of accounting will be the same. But, when it coRead more
Introduction
Furniture is treated as a fixed asset of an enterprise unless it deals in the manufacturing or the trade of furniture. As stock in trade, it will be treated as current assets.
In both cases, they are real accounts. Hence, the golden rule of accounting will be the same.
But, when it comes to journal entries, Furniture A/c will appear only when it is treated as a fixed asset.
No journal entries are passed in the stock-in-trade account except for some balance transferring entries.
Journal Entries on taking Furniture as a fixed asset
Taking furniture as a fixed asset, we can pass various entries related to it. Since furniture is an asset, any increase is debited and the decrease is credited.
Also, furniture is a real account which means the golden rule of accounting applicable is, “Debit what comes in and credit what goes out”.
Following are the basic entries related to furniture.
Purchase of furniture
The most common entry related to furniture is the purchase of furniture:
Here Furniture A/c is increased, hence debited.
Cash or Bank being reduced is credited.
Sale of furniture
*In case of loss
**In case of profit
On the sale of furniture, its balance gets reduced, hence credited.
Cash or Bank is debited as cash comes in hand or into the bank.
Also, profit or loss may arise due to the difference in sale value and the carrying amount of the furniture A/c.
The difference is debited to Profit and Loss A/c in case of loss and credited in case of profit.
Depreciation on Furniture
Here, furniture is credited as it is decreased by the amount of depreciation.
Depreciation being a non-cash expense, is debited.
Journal Entries on taking Furniture as stock in trade
When furniture is stock of trade of a business, the journal entries will be like normal purchase and sales entries as below:
There will be no furniture account.
See lessWhat is ‘basic earnings per share’ as per AS-20?
Introduction First, we should know what Earnings per share is. Earnings per share or EPS is the earnings available to each equity share of a company. The general formula of Earning per share is as follows: Earnings per share indicate the profit-generating capability of an enterprise and potential inRead more
Introduction
First, we should know what Earnings per share is.
Earnings per share or EPS is the earnings available to each equity share of a company. The general formula of Earning per share is as follows:
It is shown at the bottom of the Statement of profit and loss of a company.
Basic Earnings per share
As per AS-20, there are two types of EPS.
Basic Earnings per share has the same meaning as given above. But the formula of basic earnings per share as per AS-20 is as follows:
The formula of basic earnings per share is slightly different from the general formula of EPS. Here the numerator is the same as discussed above. But the denominator is different.
Here it is ‘Weight average number of equity shares outstanding’ instead of ‘Total number of equity shares outstanding.
The two components of the formula are discussed below:
Meaning of earnings available to equity shareholders
The earnings or net profit which remains after deduction of interest payable, preference dividend, if any, and tax is known as earnings available to equity shareholders. It is calculated as shown below:
Weighted average number of equity shares outstanding
The weighted average will be calculated by applying the weight of the time period for which the numbers of shares were outstanding. Let’s see a simple case to understand the calculation of the weighted average number of equity shares outstanding:
Solution:
Alternative way:
The calculation of the weighted average number of equity shares is different in special cases like:
Partly paid-up shares
Partly paid-up shares are not considered in the above calculation unless they are eligible to take part in dividends. In that case, such partly paid-up shares are included in the calculation as fractional shares.
For example, 300 equity shares of Rs. 10 each and Rs. 5 paid up will be considered as 150 shares. (300 x 5/10)
Bonus shares
We know bonus shares are issued at no cost to the shareholders. Issue of bonus shares leads to an increase in the number of equity shares without an increase in the resources.
AS-20 tells us to make adjustments to the number of shares outstanding before the issue of bonus shares as if the bonus shares were issued at the beginning of the earliest reported period. The effect will be retrospective.
Take the following example:
Here, number of bonus shares = 30,000 x 2 = 60,000
Therefore, EPS for 2012 = 60,00,000 /(30,000 + 60,000)= Rs. 6.67
As the earliest report period is 2011, its EPS will also have to be adjusted. Bonus issue will be treated as if it had occurred at the beginning of the earliest reported period.
Adjusted EPS for 2011= 18,00,000 / (30,000 + 60,000) = Rs. 20
Right issue
The right issue generally has an exercise price that is less than the fair value of the shares. Hence, we can say that the right issue has an element of bonus in them.
So, just like in the case of a bonus issue, we will have to adjust the number of shares outstanding before the right issue up to the earliest reported period by an adjustment factor.
The number of shares outstanding before the right issue is to be multiplied by the adjustment factor given below:
Theoretical ex-right value per share is calculated in the following way:
Let’s see an example:
Net profit for 2011 Rs. 11,00,000
Net profit for 2012 Rs. 15,00,000
No. of shares outstanding prior to rights issue 5,00,000 shares
Rights issue price Rs. 15
Last date to exercise rights 1st March 2012
The right issue is one new share for every 5 shares outstanding (i.e. 1,00,000 new shares)
The fair value of shares immediately prior to 1st March 2012 = Rs. 21
Solution:
See lessWhat is minority interest?
Introduction Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds. Explanation To undRead more
Introduction
Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds.
Explanation
To understand the concept of minority interest, we need to first understand the relationship between a holding company and its subsidiary company or companies.
A holding company means a company that controls one or more companies by:
A subsidiary company is a company that is controlled by another company.
From the above, we can simply deduce that a holding company holds the majority of the equity in its subsidiary company or companies.
So, the equity of the subsidiary company which does not belong to the holding company, but to the outsiders is known as the minority interest as it is, in fact, the minority in comparison to the majority stake of the holding company.
Example
For example, A Ltd holds 75% of the equity in B Ltd, then the rest 25% which belongs to the outsiders will be the Minority Interest.
Minority Interest means the share of outsiders in the:
For example, B Ltd has the following particulars under Shareholders’ Funds.
B Ltd is a subsidiary company of the A Ltd. A Ltd holds 75% of B Ltd.
It means minority interest in B Ltd is 25% (100% – 75%)
Therefore, in the consolidated balance sheet of A Ltd and its subsidiary, the minority interest will be as follows:
Minority Interest in B Ltd (25%)
See lessWhat is composite supply and mixed supply?
Introduction In GST, a supply is a taxable event. This means whenever there is a supply of goods or services or both, GST is charged. Supply includes the exchange of goods or services between supplier and recipient by way of sale, barter, lease etc for consideration and in the course or furtheranceRead more
Introduction
In GST, a supply is a taxable event. This means whenever there is a supply of goods or services or both, GST is charged. Supply includes the exchange of goods or services between supplier and recipient by way of sale, barter, lease etc for consideration and in the course or furtherance of business. The rate of GST on any supply depends on the type of good or service supplied.
Composite supply and mixed supply are two special types of supplies, in which two or more goods or services or both are offered together in a bundle. As two or more goods are supplied together, the question arises at which rate the GST is to be charged on such supplies as such goods or services may have different rates of GST applicable to them. Sections 8 of the CGST act, 2017 deals with the tax liability of such supplies.
Composite supply
A composite supply is a type of supply in which two or more goods or services or both are supplied together in the ordinary course of business. Such goods or services are natural bundles. By natural bundle, we mean the goods or services are complementary to each, they are naturally provided together and are to be used along with each other.
For example, mobile phones and chargers are supplied as a bundle. This concept of the natural bundle is the main determiner of a composite supply.
In such supplies, there is one main product which is called the principal supply. Like in the above example, the mobile phone is the principal supply. Other goods or services are dependent on the principal supply.
A composite supply will be taxable as the rate of GST applicable on the principal supply.
For example, suppose the rate of GST on mobile phones is 18% and that on the charger is 12%, then the whole supply will be taxable at the rate of 18%.
Mixed supply
A mixed supply is a type of supply in which two or more goods or services or both are supplied together but they do not complement each other and are not a natural bundle. They are not supplied in the ordinary course of business, For example, a combo of bottled honey and face cream.
In mixed supply, the good or service which attracts the highest rate of GST is considered the rate of supply for the whole supply.
For example, suppose bottled honey attracts 5% GST and face cream 18% GST, then the whole supply will be charged 18% GST.
See lessWhat is audit sampling?
Introduction As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection. In simple words, sampling in auditing refers to the practice deriving aRead more
Introduction
As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection.
In simple words, sampling in auditing refers to the practice deriving a conclusion by the auditor about a population of data by evaluation of only a part or sample of the whole data. Population means a set of data.
Concept of sampling
We know, an audit involves inspection of financial information of an entity by an auditor to form an opinion on its financial statements. Now the financial information of a firm usually contains large volumes of data. For example, a firm may have entered into 50,000 purchase transactions in a year.
Now, checking each and every purchase transaction will cost both time and money. Also, nowadays, almost every enterprise have internal controls and automated accounting systems that are established to ensure accuracy and prevention of errors. Hence, a full-fledged inspection of each and every transaction is not worth the time and effort.
Instead, a wise thing to do is to take a sample from the whole volume of transactions or accounts and apply the auditing procedures to the sample. The results derived from the sample are then projected upon the whole volume of data. Samples are often taken using statistical methods to ensure that sample is taken randomly and represents the whole population of data in a true and unbiased manner.
Consideration regarding the population before audit sampling:
Irrespective of the method of sampling, the sample must represent the whole population closely.
Approaches to sampling
There are two approaches to sampling:
- Statistical Approach: It is a scientific way of ensuring that the sample is chosen randomly from data and represents the data in a true and unbiased way. It employs mathematical and statistical tools like the theory of probability and also considers sampling risk characteristics.
- Non-Statistical Approach: Under this approach, the auditor employs his personal experience to collect sample from the population. No mathematical tools are used but the personal judgement of the auditor regarding sampling. Sometimes, this approach may give satisfactory results depending upon the capability of the auditor. But in most cases, reliability is less compared to the statistical approach.
See lessWhat are the steps involved in computation of income tax as per the Income tax act, 1961?
Introduction Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed incoRead more
Introduction
Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed income if payable.
The year in which the income is earned is called the Previous Year and the following year in which the previous year’s income is assessed is known as the Assessment Year
Steps involved in the computation of Income-tax of a person:
Determination of residential status of the person
The residential status of a person is of great significance for ascertaining the taxability of a person’s income as per the Income-tax act, 1961. As per the act, a person can fall into one of the following criteria:-
Classification and computation of income under the five heads of income
Now, a person’s income can be from various sources. As per section 14 of the Income-tax act, there are five main heads of income for computation of income tax:
Income under each head is to be computed as per provisions of the Income-tax Act, 1961.
Clubbing of income of spouse, minor child etc
Some individual taxpayers divert some portion of their income to their spouses and minor child in order to reduce their tax liability as the slab rate of income tax for individuals is progressive.
Such diverted income is to be clubbed with the income of the assessee as per the provisions of the Income-tax act.
Set-off and carry forward of losses
Losses suffered under the heads of the income like ‘Profit and Gains from Business and Profession’, ‘Income from House property’ can be set off against the income earned under other heads as per provision of the act.
If set off is not possible in the current assessment year then the loss can be carried forward to the next assessment year.
Computation of Gross Total Income
Gross Total Income is arrived at by computing the total of income under all five heads of income after giving necessary deductions as applicable under each head of income.
Deductions from Gross Total Income to arrive at Total Income
Income tax act, 1961 allows specific deduction from the Gross Total Income under sections 80C to 80U. These deductions are provided to encourage certain kinds of investments like life insurance premiums etc and provide relief on certain spending like medical expenses, interest expenses on home loans etc which leads to the overall welfare of the people.
After allowing the deductions from Gross Total Income, we arrive at Total Income.
Application of the rates of taxes on total income
Tax is calculated at a rate on the total income. The rate and calculation of income tax depend on the type of assessees.
Individuals and HUFs
For individuals who are below the age of 60 years and HUFs:
For individuals over 60 years and 80 years of age, the basic exemption limit is ₹3,00,000 and ₹5,00,000 respectively.
Also, as per section 115BAC, individuals and HUFs have the option to choose an alternative slab rate of tax as per which the income tax is charged at concessional rates. But, the various exemptions and deductions like housing rent allowance, leave travel concession, standard deduction on salary income cannot be availed. This slab rate system was introduced recently to reduce the complexity of filling IT returns by small taxpayers.
Rates of tax related to other types of assessees is not provided for sake of simplicity.
Advance tax and tax deducted at source
After calculating the tax on total income as per specified rates, the income tax amount is to be reduced by the advance tax and tax deducted at the source.
Tax payable/ Tax refundable
After performing all the steps above, we arrive at Income tax payable or tax refundable.
See lessWhat are the steps involved in computation of income tax as per the Income tax act, 1961?
Introduction Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed incoRead more
Introduction
Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed income if payable.
The year in which the income is earned is called the Previous Year and the following year in which the previous year’s income is assessed is known as the Assessment Year
Steps involved in the computation of Income-tax of a person:
The residential status of a person is of great significance for ascertaining the taxability of a person’s income as per the Income-tax act, 1961. As per the act, a person can fall into one of the following criteria:-
Determination of residential status of the person
Classification and computation of income under the five heads of income
Now, a person’s income can be from various sources. As per section 14 of the Income-tax act, there are five main heads of income for computation of income tax:
Income under each head is to be computed as per provisions of the Income-tax Act, 1961.
Clubbing of income of spouse, minor child etc
Some individual taxpayers divert some portion of their income to their spouses and minor child in order to reduce their tax liability as the slab rate of income tax for individuals is progressive.
Such diverted income is to be clubbed with the income of the assessee as per the provisions of the Income-tax act.
Set-off and carry forward of losses
Losses suffered under the heads of the income like ‘Profit and Gains from Business and Profession’, ‘Income from House property’ can be set off against the income earned under other heads as per provision of the act.
If set off is not possible in the current assessment year then the loss can be carried forward to the next assessment year.
Computation of Gross Total Income
Gross Total Income is arrived at by computing the total of income under all five heads of income after giving necessary deductions as applicable under each head of income.
Deductions from Gross Total Income to arrive at Total Income
Income tax act, 1961 allows specific deduction from the Gross Total Income under sections 80C to 80U. These deductions are provided to encourage certain kinds of investments like life insurance premiums etc and provide relief on certain spending like medical expenses, interest expenses on home loans etc which leads to the overall welfare of the people.
After allowing the deductions from Gross Total Income, we arrive at Total Income.
Application of the rates of taxes on total income
Tax is calculated at a rate on the total income. The rate and calculation of income tax depend on the type of assessees.
Individuals and HUFs
For individuals who are below the age of 60 years and HUFs:
For individuals over 60 years and 80 years of age, the basic exemption limit is ₹3,00,000 and ₹5,00,000 respectively.
Also, as per section 115BAC, individuals and HUFs have the option to choose an alternative slab rate of tax as per which the income tax is charged at concessional rates. But, the various exemptions and deduction like housing rent allowance, leave travel concession, standard deduction on salary income cannot be availed. This slab rate system was introduced recently to reduce the complexity of filling IT returns by small taxpayers.
Rates of tax related to other types of assessees are not provided for sake of simplicity.
Advance tax and tax deducted at source
After calculating the tax on total income as per specified rates, the income tax amount is to be reduced by the advance tax and tax deducted at the source.
Tax payable/ Tax refundable
After performing all the steps above, we arrive at Income tax payable or tax refundable.
See lessCan you show a format of balance sheet?
A balance sheet is a financial statement that reports the position or value of assets, liabilities and equity at a particular date, which is usually the closing date of a financial year. Formats of balance sheet A balance sheet may be presented in two formats: T-form or Horizontal format This formatRead more
A balance sheet is a financial statement that reports the position or value of assets, liabilities and equity at a particular date, which is usually the closing date of a financial year.
Formats of balance sheet
A balance sheet may be presented in two formats:
T-form or Horizontal format
This format is the same as the format of ledger accounts. There are two columns with the headings ‘Liabilities’ for the left column and ‘Assets’ for the right column and columns adjacent to both columns for amounts. The liabilities and equity (capital) are shown on the liabilities side because they both have credit balance and assets are shown on the asset side. Most of the non-corporates prepare their balance as per this format. The T-form balance sheet looks as given below:
Vertical format
The vertical format of the balance sheet is mostly prepared by corporate entities. Here, the liabilities and assets are shown in the same column as compared to two separate columns in the horizontal format. This results in having a longer shape. Hence, it is called a ‘vertical’ balance sheet. Generally, companies prepare their balance sheet as per this format.
Also, many times, there are two columns for the amount in this format presenting the amount of both the current year and the previous year. This format looks like as given below:
Grouping and marshalling
Beside the structure of the balance sheet i.e. horizontal and vertical, the grouping and marshalling of the items inside the balance sheet are also very important.
Grouping refers to the presenting of similar items under a heading or group. This is done in order to present the balance sheet in a concise manner. This is very important to do. For example, a business can have numerous creditors, but they are all presented under one ‘Creditors’ heading or two or more heading specifying different types of creditors.
The assets of a business are grouped under the heading such as Plant, Property and equipment, Current assets, Non-current investments etc.
Marshalling means the arranging of items as per a particular order. We know that a balance sheet consists of many items and to make the statement more useful and easy to comprehend, the items are arranged in one of the following orders:
In case of liabilities, the items which are due for repayment soon are kept at the top, like bank overdraft etc. The items which are due for repayment after a long time or at the time of winding capital are kept at the bottom, like long term loans and capital funds. Given below is a format of horizontal balance sheet in which the items are marshalled in order of liquidity:
- Order of permanence: This type of arrangement is just the opposite of the order of liquidity. Here the items which are least liquid are placed at the top and the more liquid items are placed at the bottom. Like in the case of assets, cash appears at the bottom and non-current assets at the top. On the liabilities side, equity and non-current liabilities are at the top while current liabilities are at the bottom. Mostly all balance sheets are marshalled in order of permanence.
See less