The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in: Contra accounts Contra entries The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corRead more
The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in:
Contra accounts
Contra entries
The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corresponds to.
Contra entries are entries of the debit and credit aspects related to the same parent account. Let’s discuss them in detail.
Contra accounts
Any account which is created with the purpose of reducing or offsetting the balance of another account is known as a contra account.
A contra account is just the opposite of the account to which it relates. The most common examples are the sales discount account and sales return account which is the contra account of the sales account. They are just the opposite of the sales accounts.
Contra Entries
Contra entries refer to the entries which show the movement of the amount within the same parent account. Here, the debit and credit entry is posted on the debit and credit side respectively of a single parent account. Mainly, contra entries are the entries involving cash and bank accounts.
The following transactions are recorded as contra entries:
Cash to Bank transactions: Deposit of cash into the bank account by the entity.
Bank to Cash transactions: Withdrawal of cash from the bank.
Cash to cash transactions: Transfer of cash to the petty cash account.
Bank to Bank transactions: Transfer of amounts from one bank account to other bank accounts of the same entity.
Contra entries are marked by the letter ‘C’ beside the postings in the ledger. Deposit of cash in to bank will be posted in cashbook as below:
Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition. Realization of revenue means when revenue to be earned from the sale of goods or rendering oRead more
Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition.
Realization of revenue means when revenue to be earned from the sale of goods or rendering of services or any other activity or source becomes absolute and certain. An item is to be shown as revenue in the books of accounts only after it is realized.
Realization in case of sale of goods
Realization occurs in the following situations:
i) When the goods are delivered to the customer for a certain price
ii) All significant risks and rewards of ownership have been transferred to the customer and the seller retains no effective control over the goods.
Let’s take an example. Mr Peter received an order of 500 units of goods from Mr Parker on 1st April. The goods were delivered to Mr Parker on 15Th April and payment for goods was received on 30Th April.
The realization of revenue from the sale of goods will be considered to have occurred on 15th April because the goods were delivered to the customer on that date. The entry of sale of goods will be entered on this day.
Realization is not considered to have occurred on 1st April i.e the date of order because the seller had effective control on goods on that date.
Realization in case of rendering of services
The realization of revenue from the rendering of services occurs as per the performance of service.
Now there arise two situations:
Multiple acts involved in the performance of service: Here, the revenue is realized proportionately on completion of each act.
A Single act involved in the performance of service: Here, revenue is realized only when the service is completely rendered or provided.
Realization of income from other sources:
Interest Income: It is realized on a time proportion basis as per the amount outstanding and rates applicable.
Dividends: It is realized when the shareholder’s right to receive is established and when it is declared.
Realization with regards to other sources of income is considered to have occurred only when there exist no significant uncertainty as to measurability or collectability.
Introduction Ind AS 110 stands for Indian Accounting Standard 110. It deals with principles of preparation and presentation of consolidated financial statements when an entity controls one or more other entities. It is often seen that an entity owns and controls one or more entities. Like a parent cRead more
Introduction
Ind AS 110 stands for Indian Accounting Standard 110. It deals with principles of preparation and presentation of consolidated financial statements when an entity controls one or more other entities.
It is often seen that an entity owns and controls one or more entities. Like a parent company have many subsidiaries. For example, Alphabet is the parent company of Google. The parent and its subsidiaries prepare their financial statements separately to present to the true and fair view of their business.
Consolidated financial statements are the financial statements of the whole group i.e. taking the parent and its subsidiaries together. It reports the assets, liabilities, equity, income and expenses of the whole group as a single economic entity.
It helps the stakeholders to know the overall performance and positions of assets and liabilities of the whole group.
When to prepare Consolidated Financial Statements(CFS)
The requirement for the preparation of CFS depends on the control model provided by Ind AS 110. As per this model, an investor controls an investee when:
the investor is exposed to or has rights to, variable returns from its involvement with the investee and
it has the ability to affect those returns through its power over the investee.
If both the conditions are fulfilled, then it can be said that the investor controls the investee and the investor has to prepare the consolidated financial statements with its investee. Every type of investor-investee relationship is judged as per Ind AS 110.
Exposure or right to variable returns
Variable returns mean no fixed returns and can vary as per the performance of the investee. Such returns can be both positive and negative. These returns include not only return on investment but also the benefits or expenses to which the investor is entitled to or has to bear respectively. Such returns are:
Dividends
Changes in the value of the investee.
Fee for servicing investee’s assets and liabilities
Tax benefits
Access to proprietary knowledge
Sourcing scare products
Goodwill generation
It is not required by Ind AS 110 for an investor to be exposed or have the right to all such variable returns, but there should be significant exposure or right.
Power to affect the variable returns from investee
An investor has power over an investee if it has existing rights that give it direct ability to affect the relevant activities of the investee
An investor generally has many rights over the investee. These rights are of two types:
Protective Rights: These are the rights to protect the self-interest of the investor from any risk arising from investment in the investee. Such right only protects the investor but it does not give him power over the investee. Hence, with protective rights, an investor cannot control the investee.
Substantive Rights: These are rights with which an investor can have power over the investee. Such rights are generally the voting rights that are derived from the holding equity shares. Also having potential voting rights which are significant enough to control the investee qualify as substantive rights.
However, the investor may other substantive rights like power to appoint or remove the board of directors etc.
These rights should not only exist with investors but the investor should also have the ability to exercise such rights.
Scope of Ind AS 110
The investee can be any type of entity, the structure of the investee does not matter whether it is a partnership firm, LLP, company or any Special Purpose Entity (SPE).
If any investor control one or more other entities it will be called parent entity and it will present the consolidated financial statements.
Exemptions
If any parent entity fulfils any of these conditions, then the presentation of consolidated financial statements is not necessary:
It is an investment entity.
Its debt or equity securities are not listed on any recognized stock exchange or any other public market.
It is a wholly-owned or partially owned subsidiary of another entity and all of its owners have been informed about and do not have any objections to the parent not preparing the consolidated financial statements.
Its ultimate or any intermediate parent entity has prepared consolidated financial statements for the whole group.
It did not file or is in process of filing its financial statement with the concerned securities commission or any other regulatory body for issuing its securities in the public market.
Interest on capital is the interest provided on the capital invested in the business. It is calculated as a percentage on the capital invested. Interest on capital is provided if there is any rule established by the owner of the capital. Otherwise, it is not provided. We generally encounter ‘InteresRead more
Interest on capital is the interest provided on the capital invested in the business. It is calculated as a percentage on the capital invested. Interest on capital is provided if there is any rule established by the owner of the capital. Otherwise, it is not provided.
We generally encounter ‘Interest on capital’ in partnership accounting but a sole proprietorship can also provide interest on capital.
Interest on capital is charged or appropriated from the profits of the firm. Hence, it appears on the debit side of the profit and loss account.
The journal entry is as follows:
The partners, in case the firm makes profit, are provided interest on their capital balance apart from their share of profit if provision of interest on capital is mentioned in the partnership deed.
Hence, interest on capital is an appropriation of profit in partnership accounting. The journal in case of partnership account is as follows:
The Interest on capital is credited to the capital/ partners’ capital account thereby increasing the capital balance. The journal is as follows:
In the balance sheet it is shown as an addition to the capital account.
Numerical example
P, Q and R are partners. Their firm reported a net profit of ₹ 20,000. Their capitals are ₹30,000, ₹45,000 and ₹60,000. It is in their partnership deed to provide the partners 4% interest on capital and a salary of ₹5,000 per annum for Q. Calculate the interest on capital.
Solution:
Interest on capital to be provided to the partners:
P – ₹30,000 x 6% = ₹1,800
Q – ₹45,000 x 6% = ₹2,700
R – ₹60,000 x 6% = ₹3,600
This interest will be credited to the partners’ capital. The journals are as follows:
The correct option is (A) Original. Journal entry is the book of the original entry. It is because every event or transaction which is of monetary nature is first recorded in the journal. The transactions recorded in the journal are known as journal entries. Journal follows the double-entry system oRead more
The correct option is (A) Original. Journal entry is the book of the original entry. It is because every event or transaction which is of monetary nature is first recorded in the journal. The transactions recorded in the journal are known as journal entries.
Journal follows the double-entry system of accounting. It means a journal entry affects at least two accounts. It is from the journal entries, the ledger accounts are prepared. For example, the transaction, ‘sale of goods for Rs 1000 for cash’ affects two accounts. The journal entry is:
There are many special journals that record some special set of transactions which are called subsidiary journals or daybooks. Such special journals are not considered the books of original entry.
Option (B) Duplicate is wrong. It is because the journal is the book where monetary events and transactions are recorded. It cannot be the book of duplicate entries. There is no such thing as ‘book of duplicate entry.’
Option (C) Personal is wrong. Personal is a type of account under the golden rules of accounting. A personal account is a type of account that represents a person. But, the journal is not an account, it is a book. Also, there is no such thing as book of personal entry.
Option (D) Nominal is wrong. Nominal is also a type of account under the golden rules of accounting. The nominal account is a type of account that represents an income, expense, gain or loss. Journal is a type of account but a book.
Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook. BRS is usuallRead more
Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook.
BRS is usually prepared by the accountant of an entity to find out the causes of the difference between the bank balance as per cashbook and the bank balance as reported in the passbook. The frequency of preparation of BRS is usually monthly. Nowadays, many enterprises have computerised accounting systems which help in automatic bank reconciliation.
Sometimes, BRS is also prepared by auditors during the audit of financial statements.
The balance of the bank account column of the cashbook does not match the bank balance as per the passbook. This is due to many transactions like the following that go unnoticed by the accountant:
The credit of bank interest,
Auto-debit of bank charges,
Delay in the clearing of cheques deposited, for which debit is already given by the accountant.
Late presentment of cheque issued by enterprise, for credit is already given by the account.
Differences also occur due to accounting errors like posting wrong amounts in the cashbook.
To prepare the BRS, we have to start either with the bank balance as per cashbook, then add or subtract amounts to arrive at the bank balance as per passbook. Or we can do the vice verse. Here, the amounts we add or subtract are the amounts of items that are causes for the difference between the two balances.
Meaning Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets. Examples of capital assets are plant, machineryRead more
Meaning
Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets.
Examples of capital assets are plant, machinery, land, building, vehicles etc.
To expense the capital assets for the economic benefits they provide, they are depreciated over their useful life on some equitable basis.
When capital assets are sold, the gain on sale is credited to the capital reserve account. On loss, it is simply debited to the profit and loss account. Capital assets are shown under the heading ‘Plant, Property and Equipment’ under the asset head of the balance sheet.
Assets that do not qualify as capital assets
The assets which provide economic benefits for less than a year do not qualify as capital assets. Such as inventories, accounts receivables etc. are not capital assets.
Also, those assets which are not intended to be held for more than 1 year are not capital assets even if such assets are capable of providing economic benefits for more than 1 year. Such assets will be considered current assets.
For example, if a plot of land is purchased by a business but the intention is to sell it after 2 months then such land will not be considered a capital asset.
Brief Introduction The stock of finished goods left unsold at the end of the year is known as closing stock. As closing stock represent an asset i.e. the unsold finished goods, it has a debit balance. Closing stock appears on the credit side of the trading account and on the asset side of the balanRead more
Brief Introduction
The stock of finished goods left unsold at the end of the year is known as closing stock. As closing stock represent an asset i.e. the unsold finished goods, it has a debit balance.
Closing stock appears on the credit side of the trading account and on the asset side of the balance sheet. But, if closing stock is adjusted against purchase i.e. deducted from purchase account balance, then it doesn’t appear in the trading account.
It is always shown on the asset of the balance irrespective of its treatment as discussed above because it is an asset.
Though no ledger is maintained for closing stock in financial accounts of a business, the journal entry for the closing stock is passed and is as below:
Closing stock A/c Dr Amt
To Trading A/c Amt
(When the closing stock appears in trading a/c)
OR
Closing stock A/c Dr Amt
To Purchase A/c Amt
(When closing stock is adjusted against purchase A/c and not shown in trading a/c)
Generally, the closing stock is shown separately in the trial balance because it is already part of the purchase account balance.
Closing stock is ascertained at the end of the financial year and it has great importance as it directly affects the gross profit or loss of a business. Closing stock at end of a year becomes the opening stock of the next financial year.
Numerical Example
ABC trading reported the following particulars at the end of the financial year 20X2-20X3:
We will draw the trading and P/L account and balance sheet of ABC Trading using the above information.
As the closing stock is not given, we will calculate the closing stock as a balancing figure.
Brief Introduction Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law. Alternate Minimum Tax is levied to impose higherRead more
Brief Introduction
Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law.
Alternate Minimum Tax is levied to impose higher tax liability on non-corporate assessees who have claimed various profit-link deductions or investment-linked deductions in the relevant previous year.
My answer is based on the Indian Income law i.e. Income Tax Act, 1961.
The concept behind Alternate Minimum Tax
Let’s start our discussion with MAT i.e. Minimum Alternative Tax. It applies to corporate entities or companies.
Before MAT, it was seen that companies used to declare huge dividends to their shareholders. But when it came to filing income tax returns, they used to claim various profit linked and investment-linked deductions to report very low profits and even losses to arrive at negligible tax or nil tax whereas their financial statements would report huge profits.
It is true that the government provides such profit linked or investment linked deductions to encourage business and investments, but it also needs a sufficient and regular flow of revenue in the form of tax to fund its expenditure.
Hence, to prevent misuse of deductions to evade taxes by corporates, government introduce Minimum Alternate Tax to charge such assessees a minimum rate of tax.
Alternate Minimum Tax is the same as Minimum Alternate Tax in terms of concept. The provisions related to AMT are given under section 115JC of the Income Tax Act, 1961.
Scope of AMT as per section 115JC
Alternate Minimum Tax applies to all non-corporate assessees who claimed have claimed
Deduction claimed if any under Chapter VI-A from section 80H to 80RRB except section 80P
Exemption under section 10AA
Deduction under section 35AD (Investment-linked deduction)
However, there is a threshold limit for certain non-corporates.
By non-corporate assessees we mean:
Individual
Hindu Undivided Family (HUF)
Firms (partnership firms)
Co-operative societies
Association of Persons (AOP)
Body of Individuals (BOI)
Artificial Juridical Person (AJP)
Limited Liability Partnership (LLP)
AMT is applicable to all except
Individuals
HUF
AOP
BOP
Artificial Juridical Person
If their total adjusted income does not exceed Rs 20,00,000 in the previous year.
Therefore, AMT is applicable to all other non-corporate assessees like LLP, firms and cooperative societies irrespective of their total adjusted income.
Calculation of Alternate Minimum Tax
The rate of AMT is 18.5% of the adjusted total income. This adjusted total income and the AMT on it is calculated in the following manner:
The higher of the following becomes the tax liability of the assessee:
Alternate Minimum Tax calculated on adjustment income plus surcharges u/s 87A (4% Health and education cess)
Income Tax calculated on taxable income (as per normal provisions)
Numerical example
Mr X is a businessman who has earned the following income and expenditure in P.Y 2020-2021: (Amount in Rupees)
Income from manufacturing business 25,00,000
Interest on saving bank account 8,000
Dividend from ABC ltd 10,000
Insurance premium paid 1,00,000
Capital expenditure made as per section 35AD 5,00,000
Mr X is eligible to claim a profit linked deduction of Rs 6,00,000.
Also, the depreciation allowed (other than under 35AD) as per Income-tax Act,1961 amounts to Rs. 3,00,000.
Following is his computation of both AMT and Income tax liability as per normal provisions.
Accumulated profit is the amount of profit left after the payment of dividends to the shareholders. It is also known as retained earnings. It is the profit that is not distributed as dividends to shareholders, hence called retained earnings. This accumulated profit is an important source of internalRead more
Accumulated profit is the amount of profit left after the payment of dividends to the shareholders. It is also known as retained earnings. It is the profit that is not distributed as dividends to shareholders, hence called retained earnings. This accumulated profit is an important source of internal finance for a company. Accumulated profit or retained earnings can be ascertained using the following formula:
Accumulated profit = Opening balance of accumulated profit + Net Profit/Loss (loss being in the negative figure) – Dividend paid
Accumulated profit can be put to the following uses:
To reinvest into the business in form of capital assets or working capital.
To repay the debt of the company.
To pay dividends in future.
To set off the net loss made by the company.
Accumulated profit and reserves are often considered the same. But in substance, they are not. The reserves are actually part of the accumulated profit, but the converse is not true. They are created by transferring amounts from the accumulated profit. While reserves are created for purpose of strengthening the financial foundation of a firm, the accumulated profit’s main purpose is to make reinvest in the business to increase its growth.
The amount of accumulated profits depends upon the retention ratio and dividend payout ratio of a company. The retention ratio is the opposite of the dividend payout ratio.
The formula of dividend pay-out ratio = Dividend payable/Net Income
And retention ratio = 1 – (Dividend payable/Net Income)
If the retention ratio is more than the dividend payout ratio, the accumulated profit remains positive.
What is the meaning of “Contra” in accounting?
The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in: Contra accounts Contra entries The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corRead more
The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in:
The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corresponds to.
Contra entries are entries of the debit and credit aspects related to the same parent account. Let’s discuss them in detail.
Contra accounts
Any account which is created with the purpose of reducing or offsetting the balance of another account is known as a contra account.
A contra account is just the opposite of the account to which it relates. The most common examples are the sales discount account and sales return account which is the contra account of the sales account. They are just the opposite of the sales accounts.
Contra Entries
Contra entries refer to the entries which show the movement of the amount within the same parent account. Here, the debit and credit entry is posted on the debit and credit side respectively of a single parent account. Mainly, contra entries are the entries involving cash and bank accounts.
The following transactions are recorded as contra entries:
Contra entries are marked by the letter ‘C’ beside the postings in the ledger. Deposit of cash in to bank will be posted in cashbook as below:
See lessWhat is the meaning of “realization” in accounting?
Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition. Realization of revenue means when revenue to be earned from the sale of goods or rendering oRead more
Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition.
Realization of revenue means when revenue to be earned from the sale of goods or rendering of services or any other activity or source becomes absolute and certain. An item is to be shown as revenue in the books of accounts only after it is realized.
Realization in case of sale of goods
Realization occurs in the following situations:
i) When the goods are delivered to the customer for a certain price
ii) All significant risks and rewards of ownership have been transferred to the customer and the seller retains no effective control over the goods.
Let’s take an example. Mr Peter received an order of 500 units of goods from Mr Parker on 1st April. The goods were delivered to Mr Parker on 15Th April and payment for goods was received on 30Th April.
The realization of revenue from the sale of goods will be considered to have occurred on 15th April because the goods were delivered to the customer on that date. The entry of sale of goods will be entered on this day.
Realization is not considered to have occurred on 1st April i.e the date of order because the seller had effective control on goods on that date.
Realization in case of rendering of services
The realization of revenue from the rendering of services occurs as per the performance of service.
Now there arise two situations:
Realization of income from other sources:
Realization with regards to other sources of income is considered to have occurred only when there exist no significant uncertainty as to measurability or collectability.
See lessWhat is Ind as 110?
Introduction Ind AS 110 stands for Indian Accounting Standard 110. It deals with principles of preparation and presentation of consolidated financial statements when an entity controls one or more other entities. It is often seen that an entity owns and controls one or more entities. Like a parent cRead more
Introduction
Ind AS 110 stands for Indian Accounting Standard 110. It deals with principles of preparation and presentation of consolidated financial statements when an entity controls one or more other entities.
It is often seen that an entity owns and controls one or more entities. Like a parent company have many subsidiaries. For example, Alphabet is the parent company of Google. The parent and its subsidiaries prepare their financial statements separately to present to the true and fair view of their business.
Consolidated financial statements are the financial statements of the whole group i.e. taking the parent and its subsidiaries together. It reports the assets, liabilities, equity, income and expenses of the whole group as a single economic entity.
It helps the stakeholders to know the overall performance and positions of assets and liabilities of the whole group.
When to prepare Consolidated Financial Statements(CFS)
The requirement for the preparation of CFS depends on the control model provided by Ind AS 110. As per this model, an investor controls an investee when:
If both the conditions are fulfilled, then it can be said that the investor controls the investee and the investor has to prepare the consolidated financial statements with its investee. Every type of investor-investee relationship is judged as per Ind AS 110.
Exposure or right to variable returns
Variable returns mean no fixed returns and can vary as per the performance of the investee. Such returns can be both positive and negative. These returns include not only return on investment but also the benefits or expenses to which the investor is entitled to or has to bear respectively. Such returns are:
It is not required by Ind AS 110 for an investor to be exposed or have the right to all such variable returns, but there should be significant exposure or right.
Power to affect the variable returns from investee
An investor has power over an investee if it has existing rights that give it direct ability to affect the relevant activities of the investee
An investor generally has many rights over the investee. These rights are of two types:
However, the investor may other substantive rights like power to appoint or remove the board of directors etc.
These rights should not only exist with investors but the investor should also have the ability to exercise such rights.
Scope of Ind AS 110
The investee can be any type of entity, the structure of the investee does not matter whether it is a partnership firm, LLP, company or any Special Purpose Entity (SPE).
If any investor control one or more other entities it will be called parent entity and it will present the consolidated financial statements.
Exemptions
If any parent entity fulfils any of these conditions, then the presentation of consolidated financial statements is not necessary:
- It is an investment entity.
- Its debt or equity securities are not listed on any recognized stock exchange or any other public market.
- It is a wholly-owned or partially owned subsidiary of another entity and all of its owners have been informed about and do not have any objections to the parent not preparing the consolidated financial statements.
- Its ultimate or any intermediate parent entity has prepared consolidated financial statements for the whole group.
- It did not file or is in process of filing its financial statement with the concerned securities commission or any other regulatory body for issuing its securities in the public market.
See lessHow to show interest on capital in profit and loss account?
Interest on capital is the interest provided on the capital invested in the business. It is calculated as a percentage on the capital invested. Interest on capital is provided if there is any rule established by the owner of the capital. Otherwise, it is not provided. We generally encounter ‘InteresRead more
Interest on capital is the interest provided on the capital invested in the business. It is calculated as a percentage on the capital invested. Interest on capital is provided if there is any rule established by the owner of the capital. Otherwise, it is not provided.
We generally encounter ‘Interest on capital’ in partnership accounting but a sole proprietorship can also provide interest on capital.
Interest on capital is charged or appropriated from the profits of the firm. Hence, it appears on the debit side of the profit and loss account.
The journal entry is as follows:
The partners, in case the firm makes profit, are provided interest on their capital balance apart from their share of profit if provision of interest on capital is mentioned in the partnership deed.
Hence, interest on capital is an appropriation of profit in partnership accounting. The journal in case of partnership account is as follows:
The Interest on capital is credited to the capital/ partners’ capital account thereby increasing the capital balance. The journal is as follows:
In the balance sheet it is shown as an addition to the capital account.
Numerical example
P, Q and R are partners. Their firm reported a net profit of ₹ 20,000. Their capitals are ₹30,000, ₹45,000 and ₹60,000. It is in their partnership deed to provide the partners 4% interest on capital and a salary of ₹5,000 per annum for Q. Calculate the interest on capital.
Solution:
Interest on capital to be provided to the partners:
P – ₹30,000 x 6% = ₹1,800
Q – ₹45,000 x 6% = ₹2,700
R – ₹60,000 x 6% = ₹3,600
This interest will be credited to the partners’ capital. The journals are as follows:
See lessJournal is a book of which entry?
The correct option is (A) Original. Journal entry is the book of the original entry. It is because every event or transaction which is of monetary nature is first recorded in the journal. The transactions recorded in the journal are known as journal entries. Journal follows the double-entry system oRead more
The correct option is (A) Original. Journal entry is the book of the original entry. It is because every event or transaction which is of monetary nature is first recorded in the journal. The transactions recorded in the journal are known as journal entries.
Journal follows the double-entry system of accounting. It means a journal entry affects at least two accounts. It is from the journal entries, the ledger accounts are prepared. For example, the transaction, ‘sale of goods for Rs 1000 for cash’ affects two accounts. The journal entry is:
There are many special journals that record some special set of transactions which are called subsidiary journals or daybooks. Such special journals are not considered the books of original entry.
Option (B) Duplicate is wrong. It is because the journal is the book where monetary events and transactions are recorded. It cannot be the book of duplicate entries. There is no such thing as ‘book of duplicate entry.’
Option (C) Personal is wrong. Personal is a type of account under the golden rules of accounting. A personal account is a type of account that represents a person. But, the journal is not an account, it is a book. Also, there is no such thing as book of personal entry.
Option (D) Nominal is wrong. Nominal is also a type of account under the golden rules of accounting. The nominal account is a type of account that represents an income, expense, gain or loss. Journal is a type of account but a book.
See lessWho is bank reconciliation statement prepared by?
Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook. BRS is usuallRead more
Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook.
BRS is usually prepared by the accountant of an entity to find out the causes of the difference between the bank balance as per cashbook and the bank balance as reported in the passbook. The frequency of preparation of BRS is usually monthly. Nowadays, many enterprises have computerised accounting systems which help in automatic bank reconciliation.
Sometimes, BRS is also prepared by auditors during the audit of financial statements.
The balance of the bank account column of the cashbook does not match the bank balance as per the passbook. This is due to many transactions like the following that go unnoticed by the accountant:
Differences also occur due to accounting errors like posting wrong amounts in the cashbook.
To prepare the BRS, we have to start either with the bank balance as per cashbook, then add or subtract amounts to arrive at the bank balance as per passbook. Or we can do the vice verse. Here, the amounts we add or subtract are the amounts of items that are causes for the difference between the two balances.
See lessWhat is a capital asset?
Meaning Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets. Examples of capital assets are plant, machineryRead more
Meaning
Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets.
Examples of capital assets are plant, machinery, land, building, vehicles etc.
To expense the capital assets for the economic benefits they provide, they are depreciated over their useful life on some equitable basis.
When capital assets are sold, the gain on sale is credited to the capital reserve account. On loss, it is simply debited to the profit and loss account. Capital assets are shown under the heading ‘Plant, Property and Equipment’ under the asset head of the balance sheet.
Assets that do not qualify as capital assets
The assets which provide economic benefits for less than a year do not qualify as capital assets. Such as inventories, accounts receivables etc. are not capital assets.
Also, those assets which are not intended to be held for more than 1 year are not capital assets even if such assets are capable of providing economic benefits for more than 1 year. Such assets will be considered current assets.
For example, if a plot of land is purchased by a business but the intention is to sell it after 2 months then such land will not be considered a capital asset.
See lessWhat is the journal entry for stock left unsold at the end of the year?
Brief Introduction The stock of finished goods left unsold at the end of the year is known as closing stock. As closing stock represent an asset i.e. the unsold finished goods, it has a debit balance. Closing stock appears on the credit side of the trading account and on the asset side of the balanRead more
Brief Introduction
The stock of finished goods left unsold at the end of the year is known as closing stock. As closing stock represent an asset i.e. the unsold finished goods, it has a debit balance.
Closing stock appears on the credit side of the trading account and on the asset side of the balance sheet. But, if closing stock is adjusted against purchase i.e. deducted from purchase account balance, then it doesn’t appear in the trading account.
It is always shown on the asset of the balance irrespective of its treatment as discussed above because it is an asset.
Though no ledger is maintained for closing stock in financial accounts of a business, the journal entry for the closing stock is passed and is as below:
Closing stock A/c Dr Amt
To Trading A/c Amt
(When the closing stock appears in trading a/c)
OR
Closing stock A/c Dr Amt
To Purchase A/c Amt
(When closing stock is adjusted against purchase A/c and not shown in trading a/c)
Generally, the closing stock is shown separately in the trial balance because it is already part of the purchase account balance.
Closing stock is ascertained at the end of the financial year and it has great importance as it directly affects the gross profit or loss of a business. Closing stock at end of a year becomes the opening stock of the next financial year.
Numerical Example
ABC trading reported the following particulars at the end of the financial year 20X2-20X3:
We will draw the trading and P/L account and balance sheet of ABC Trading using the above information.
As the closing stock is not given, we will calculate the closing stock as a balancing figure.
It can be also calculated using this formula:
Closing stock = Opening stock + Purchase + Gross Profit – Sales
See lessWhat is Alternate Minimum Tax?
Brief Introduction Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law. Alternate Minimum Tax is levied to impose higherRead more
Brief Introduction
Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law.
Alternate Minimum Tax is levied to impose higher tax liability on non-corporate assessees who have claimed various profit-link deductions or investment-linked deductions in the relevant previous year.
My answer is based on the Indian Income law i.e. Income Tax Act, 1961.
The concept behind Alternate Minimum Tax
Let’s start our discussion with MAT i.e. Minimum Alternative Tax. It applies to corporate entities or companies.
Before MAT, it was seen that companies used to declare huge dividends to their shareholders. But when it came to filing income tax returns, they used to claim various profit linked and investment-linked deductions to report very low profits and even losses to arrive at negligible tax or nil tax whereas their financial statements would report huge profits.
It is true that the government provides such profit linked or investment linked deductions to encourage business and investments, but it also needs a sufficient and regular flow of revenue in the form of tax to fund its expenditure.
Hence, to prevent misuse of deductions to evade taxes by corporates, government introduce Minimum Alternate Tax to charge such assessees a minimum rate of tax.
Alternate Minimum Tax is the same as Minimum Alternate Tax in terms of concept. The provisions related to AMT are given under section 115JC of the Income Tax Act, 1961.
Scope of AMT as per section 115JC
Alternate Minimum Tax applies to all non-corporate assessees who claimed have claimed
However, there is a threshold limit for certain non-corporates.
By non-corporate assessees we mean:
AMT is applicable to all except
If their total adjusted income does not exceed Rs 20,00,000 in the previous year.
Therefore, AMT is applicable to all other non-corporate assessees like LLP, firms and cooperative societies irrespective of their total adjusted income.
Calculation of Alternate Minimum Tax
The rate of AMT is 18.5% of the adjusted total income. This adjusted total income and the AMT on it is calculated in the following manner:
The higher of the following becomes the tax liability of the assessee:
Numerical example
Mr X is a businessman who has earned the following income and expenditure in P.Y 2020-2021: (Amount in Rupees)
Income from manufacturing business 25,00,000
Interest on saving bank account 8,000
Dividend from ABC ltd 10,000
Insurance premium paid 1,00,000
Capital expenditure made as per section 35AD 5,00,000
Mr X is eligible to claim a profit linked deduction of Rs 6,00,000.
Also, the depreciation allowed (other than under 35AD) as per Income-tax Act,1961 amounts to Rs. 3,00,000.
Following is his computation of both AMT and Income tax liability as per normal provisions.
See lessWhat is accumulated profit meaning?
Accumulated profit is the amount of profit left after the payment of dividends to the shareholders. It is also known as retained earnings. It is the profit that is not distributed as dividends to shareholders, hence called retained earnings. This accumulated profit is an important source of internalRead more
Accumulated profit is the amount of profit left after the payment of dividends to the shareholders. It is also known as retained earnings. It is the profit that is not distributed as dividends to shareholders, hence called retained earnings. This accumulated profit is an important source of internal finance for a company. Accumulated profit or retained earnings can be ascertained using the following formula:
Accumulated profit = Opening balance of accumulated profit + Net Profit/Loss (loss being in the negative figure) – Dividend paid
Accumulated profit can be put to the following uses:
Accumulated profit and reserves are often considered the same. But in substance, they are not. The reserves are actually part of the accumulated profit, but the converse is not true. They are created by transferring amounts from the accumulated profit. While reserves are created for purpose of strengthening the financial foundation of a firm, the accumulated profit’s main purpose is to make reinvest in the business to increase its growth.
The amount of accumulated profits depends upon the retention ratio and dividend payout ratio of a company. The retention ratio is the opposite of the dividend payout ratio.
The formula of dividend pay-out ratio = Dividend payable/Net Income
And retention ratio = 1 – (Dividend payable/Net Income)
If the retention ratio is more than the dividend payout ratio, the accumulated profit remains positive.
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