Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company. By entity, it means a shareholder may be: An individual Any other company Any other incorporatRead more
Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company.
By entity, it means a shareholder may be:
An individual
Any other company
Any other incorporated entity
Cooperative society
BOI( Body of Individuals)
AOP(Association of Persons)
Artificial Juridical Person
The rights of shareholders depend on the type of shareholder one is.
Types of shareholders
1. Equity Shareholders: By the term ‘shareholders’ we usually mean equity shareholders. They are permanent in nature i.e. they are not repaid the money they have invested into the company until the company is liquidated or wound up. Equity shareholders have the following rights:
Right to have a share in profits made by the company. The profit made by a company, when distributed to its equity shareholders is known as a dividend.
Right to vote on all resolutions to be passed in the Annual General Meeting of a company.
Right to get repaid in event of winding up of the company. However, they are paid after meeting the obligations of outsiders and of preference shareholders.
Right to transfer ownership of the shares. A shareholder may sell its shares to some willing buyer and cease to be a shareholder of a company.
2. Preference Shareholders: They are shareholders who are given preference regarding:
Dividend
Repayment at time of winding up
Unlike equity shareholders, they are not of permanent nature. Preference shares are redeemable i.e. they are to be repaid after a period which cannot be more than 20 years from the date of allotment of such shares (as the Companies Act, 2013). Also, a company cannot issue irredeemable preference shares. The rights of preference shareholders are as follows:-
By preference as to dividend, it means preference shareholders have the right to receive a fixed dividend as a certain percentage on the nominal value of the share and that too before equity shareholders are paid.
Right to get repaid at the date of redemption.
If the company get liquidated before redemption of the preference shareholder, then they have the right to get repaid before equity shareholders.
3. Differential Voting Rights Shareholders: These shareholders hold equity shares but with differential, right as to voting i.e. they may either have less voting rights or more voting right as compared to ordinary equity shares. Generally, DVR shares carry less voting power.
For example, a DVR shareholder gets 1 vote for 10 shares whereas an ordinary equity shareholder gets 10 votes for 10 shares i.e. one vote for every share. DVR shares issued to raise not only permanent capital but also prevent dilution of voting rights.
The rest of the right remains the same as the equity shareholders.
Yes, sure! But lets us first understand what a revaluation account is. A revaluation account is prepared to recognise the change in the book value of assets and liabilities of an entity. These changes happen when assets and liabilities are revalued to present their fair value. It is a nominal accounRead more
Yes, sure! But lets us first understand what a revaluation account is.
A revaluation account is prepared to recognise the change in the book value of assets and liabilities of an entity. These changes happen when assets and liabilities are revalued to present their fair value.
It is a nominal account because it represents gain or loss in value of assets and liabilities. However such gain or loss is unrealised because the assets and liabilities are not sold or discharged.
After revaluation of assets and liabilities, the balance of the revaluation account can be debit or credit. The debit balance means ‘loss on revaluation’ and credit balance means ‘gain on revaluation’.
The balance of revaluation is transferred to the capital account.
Journal Entries related to Revaluation Account
1. Increase in value of an asset upon revaluation:
Asset A/c
Dr.
Amt
To Revaluation A/c
Cr.
Amt
(Being asset value increased upon revaluation)
2. Decrease in value of an asset upon revaluation:
Revaluation A/c
Dr.
Amt
To Asset A/c
Cr.
Amt
(Being asset value decreased upon revaluation)
3. Increase in value of liabilities upon revaluation:
Revaluation A/c
Dr.
Amt
To Liabilities A/c
Cr.
Amt
(Being liabilities value increased upon revaluation)
4. Decrease in value of liabilities upon revaluation:
Liabilities A/c
Dr.
Amt
To Revaluation A/c
Cr.
Amt
(Being liabilities value decreased upon revaluation)
5. Transfer or distribution of the balance of revaluation account
Revaluation A/c
Dr.
Amt
To Capital/ Partners’ capital A/c
Cr.
Amt
(Being profit on revaluation transferred to capital account.
or
Capital/ Partners’ capital A/c
Dr.
Amt
To Revaluation A/c
Cr.
Amt
(Being loss on revaluation transferred to capital account.
Numerical example
P, Q and R are partners of the firm ‘PQR Trading’. They share profits and losses in the ratio 3:2:1. On 1st May 20X1, they decided to admit S for 1/6th share in profits and losses of the firm. Upon the revaluation:
Plant and machinery increased from Rs 1,20,000 to Rs. 1,30,000
The stock decreased by Rs 5000
Debtors and creditors both decreased by Rs 4,000 and Rs 6,000 respectively.
Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use. Computation of effective capital is given in Explanation I to Schedule II of the CoRead more
Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use.
Computation of effective capital is given in Explanation I to Schedule II of the Companies Act. Schedule II deals with remuneration payable to managers in case of no profit or inadequate profit in the following manner:
Computation of effective capital is done in the following manner:
Numerical example:
ABC Ltd reports its balance sheet as given below:
We will compute its effective capital for both an investment company and a non-investment company.
Before answering the question let’s understand what a government grant is. Meaning of government grants Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawbacRead more
Before answering the question let’s understand what a government grant is.
Meaning of government grants
Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawback, or assets provided at concessional rate or at no cost etc.
These grants when provided have some rules and conditions attached to them. If such conditions are not fulfilled or rules are violated, the grant becomes refundable to the government.
Treatment
AS-12 ‘Government Grant’ provides two approaches for the treatment of government grants in the books of accounts of an enterprise:
Income approach: Under this approach, the grant is treated as income and taken to profit and loss A/c in one or more accounting periods.
For example, X Ltd purchase an asset for ₹ 10,00,000 and the government provided a grant of ₹2,00,000 to X Ltd. The useful life of the asset is 4 years and the residual value is nil.
Now there are two methods to treat this grant as income.
Method – 1: The grant amount will be deducted from the asset’s value. This will result in a decreased amount of depreciation. This is an indirect way to recognize government grants as income.
The journal entries are as follows: (Method-1)
The journal entries for the 3rd and the 4th years will be the same as of 2nd year.
In absence of a government grant, the annual depreciation would have been ₹2,50,000 (₹10,00,000 / 4). Hence, due to the grant, the profit will be 50,000 more for the 4 consecutive accounting years.
Method – 2: The grant amount is credited to a special account called the ‘deferred government grant’ account. Over the useful life of the asset, the grant will be credited to the profit and loss account in equal instalments. This is a direct way to recognize government grants as income.
The journal entries are as follows: (Method-2)
The journal entries for the 3rd and the 4th years will be the same as of 2nd year.
Capital approach: Under this approach, the grant is treated as part of the shareholders’ funds (as capital reserve)
When any grant is given is in nature of promoter’s contribution i.e. as a percentage of total investment to be done by an enterprise, and then such grant received from government will be treated as part of shareholder’s funds.
The grant amount will be transferred to the capital reserve account and it will be treated neither as deferred income nor to be distributed as a dividend.
Example: ABC Ltd has set up its business in a designated backward area which entitles the company to receive from the government a subsidy of 20% of total investment. ABC Ltd fulfilled all the conditions associated with the scheme and received ₹20 crores toward its total investment of ₹100 crores.
This ₹20 crore will be transferred to the capital reserve account.
Special case: If the grant is received in relation to a non-depreciable asset like land, then the entire amount of the grant will be recognized in the profit and loss account in the same year.
Treatment of non-monetary government grant
When a government grant is in the form of non-monetary assets like land or other resources at a concessional rate, then the assets are to be recognised at their acquisition cost.
If the assets are acquired at no cost, then they are to be recorded at their nominal value.
For example, if an enterprise receives land for free as a government grant, then it has to record the land at cost based on prevailing market rates.
‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘sRead more
‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘surplus’ generally means the surplus amount in the profit and loss A/c or the operating surplus in case of a non-profit organisation, reserves are of many types:
Revenue reserve
Specific reserves
Reserves created from shareholder’s contribution
Capital reserve
Secret reserves
Let’s discuss each of the above:
Revenue reserves:
Revenue reserve has two different definitions.
First – Revenue reserves are the reserves that are created out of the profit made by an enterprise in the ordinary course of business. As per this definition, the examples of revenue reserves are:
General reserve: There is no restriction on the purpose for which this reserve can be used. It is a free reserve. Generally, this reserve is used to pay dividends.
Debenture Redemption Reserve: This reserve is mandatory to be created by law. The purpose is to ensure the timely redemption of debentures.
Dividend Equalisation Reserve: This reserve is created to maintain a steady rate of dividend every year even if the enterprise reports loss in any financial year.
Capital Redemption Reserve: This reserve can be solely used to issue bonus shares to fill the void created in total capital by redemption of preference shares.
Workmen Compensation Reserve: This reserve is created to pay for uncertain compensation that an enterprise may be liable to pay to its employees.
Investment Fluctuation Reserve: This reserve is created out of the profit of
Second: Revenue reserve is a reserve from which can be used to any use. It can be the payment of dividends, creation of other reserves or reinvestment in the business. It is another name for general reserve.
Specific reserves
These are the reserves that are restricted to specific purposes only. These reserves are not free reserves i.e. dividends cannot be declared out of these reserves. However, if in case such reserve is not a statutory reserve, an enterprise can very well use such reserves for other purposes too. Specific reserves can be further classified into two types:
Statutory specific reserves: These are reserves that are mandatory to be created to comply with legal provisions applicable to an enterprise. Use of such reserves is restricted to some specific purposes.
If such reserves are not created whenever applicable or if the amount in such reserves is used for a purpose other than the purpose for which it is created, the enterprise can invite face legal consequences. The examples of statutory reserves are as follows:
Capital Redemption Reserve
Debenture Redemption Reserve
Securities Premium Reserve
Non – Statutory specific reserves: It is not mandatory to create such reserves. They are created to meet with specific uncertainties of the future.
Workmen Compensation Reserve
Investment Fluctuation Reserve
Important Note: Statutory reserve in the context of insurance companies means the minimum amount of cash and marketable securities to be set aside to comply with legal requirements.
Reserves created from shareholder’s contribution
This is a reserve that is created out of a shareholder’s contribution. Securities premium reserve is the only such reserve that is created out of such shareholder’s contribution.
Securities Premium Reserve: It is a reserve that is created when securities of a company such as shares or debentures are issued at a premium. The share or debenture premium money is created for this reserve. The purposes of which this reserve may be used as per section 52 of the Companies Act, 2013 are as follows:
For the issue of fully paid bonus shares.
For meeting preliminary expenses incurred by the company
For meeting the expense, commission or discount allowed on the issue of securities of the company.
In providing premium payable on the redemption of preference shares.
For the purchase of its own shares or other securities under section 68.
Capital Reserve:
Capital reserve is a reserve that is created out of the profit made by an enterprise from its non-operating activities like
selling of capital assets(fixed assets) at a profit
buying a business at profit (where net assets acquired is more than the purchase consideration)
This reserve is used to finance long term projects of a company like buying or construction of fixed assets, writing off capital losses( selling of fixed assets at loss).
Secret Reserve:
A secret reserve is a reserve that exists but its existence is not shown in the balance sheet of an enterprise. An enterprise creates such reserves to hide from its competitor that it is in a better financial position than it appears in its balance sheet. Although the creation of secret reserves is prohibited by law, there are provisions for banking companies to create such reserves.
The correct option is Option (b) at a particular point of time. A balance sheet discloses the financial position of an entity at a particular point of time. The particular point of time is generally the last date of an accounting year. Most of the business concerns follow an accounting year ending oRead more
The correct option is Option (b) at a particular point of time.
A balance sheet discloses the financial position of an entity at a particular point of time. The particular point of time is generally the last date of an accounting year. Most of the business concerns follow an accounting year ending on 31st March and prepare their balance sheet as at 31st March.
By financial position, it means the value of assets and liabilities of the entity. As an entity may enter into monetary transactions every day, the values of the assets and liabilities may also vary every day. Hence, to prepare the balance sheet of an entity, a particular point of time is to be chosen which is generally the last date of an accounting year
Option (a) for a given period of time is incorrect.
It is because the values of assets and liabilities of concern may differ daily, a balance sheet cannot be prepared to disclose the financial position of an entity for a given period of time.
The statement of profit or loss is prepared for a given period of time as it discloses the overall performance of an entity for a given period of time.
Option (c) after a fixed date is also incorrect.
The phrase, “after a fixed date” does not indicate a particular point of time. It may mean any day after a fixed date. For example, if there is an instruction to prepare a balance sheet that discloses the financial position of a concern after 30th March, it may mean 31st March, 1st April or any day thereafter.
As we know that a balance can be prepared for a particular point of time, this option seems wrong.
Option (d) None of these is incorrect too as Option (b) is the correct one.
Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called. A company may issue its shares and receive the money either in full or in instalments. The instalments are named: Application money – Received by a compRead more
Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called.
A company may issue its shares and receive the money either in full or in instalments. The instalments are named:
Application money – Received by a company from the people who apply for allotment of the shares.
Allotment money – Called by the company from the people to whom the shares are allotted at the time of allotment.
Call money – The outstanding amount is called by way of call money in one or more instalments.
For example, X Ltd issues 1000 shares at a price of Rs. 100 per share which is payable Rs. 25 at application, Rs. 30 at the allotment, Rs. 25 at the first call and Rs. 20 at the second and final call.
The shares at fully subscribed and X Ltd has called and received money till the first call. The second call is not made yet.
This amount of Rs 20,000 (1000 x Rs.20) will be uncalled capital.
Now, It is up to the management when to make the second and final call.
If the management shows no intention of calling the outstanding money on such shares, then the uncalled capital will be called reserve capital.
Such shares which are not fully called are known as party paid shares.
It is ultimately payable to the company by the shareholders of partly paid shares at the time of dissolution.
Reserve capital is not shown either in the balance sheet or in the notes to accounts to the balance sheet. But one can ascertain it just by examining the notes to accounts to the balance. If the shares are partly paid and the management seems to have no intention of calling the outstanding money then such uncalled share capital is reserve capital.
Reserve capital is neither a liability nor an asset for the company.
But at the time of winding up of the company, it becomes a liability for the shareholders to pay the balance amount of their shares.
By now, you must have understood why reserve capital is not part of unsubscribed capital. It is because reserve capital is related to shares that are issued and subscribed.
A capital account is a personal account as per the traditional rules of accounting. The real, nominal and personal account classification comes from the traditional rules of accounting. Let’s discuss each type of account and understand why the capital account is a personal account: Real account geneRead more
A capital account is a personal account as per the traditional rules of accounting.
The real, nominal and personal account classification comes from the traditional rules of accounting. Let’s discuss each type of account and understand why the capital account is a personal account:
Real account generally represents assets or possessions of a business other than those which are related to any person (debtors account).
Such accounts don’t close by the year-end and are carried forward.
Examples are cash account, bank account, fixed accounts etc. The golden rule of accounting for real accounts is: “Debit what comes in, credit what goes out.”
Nominal accounts are the accounts that represent the income, expense, gain or loss of an entity.
Examples are salaries account, purchase account, sales account etc. Such accounts are closed at the year-end to the profit and loss account.
The golden rule of accounting for the nominal account is: “Debit all expenses and losses and credit all incomes and gains”
Personal accounts are the accounts that represent a person. For example, a debtors’ account represents the persons to whom a business owes money. Likewise, the creditor’s account, any personal loan account etc
The golden rule of accounting for personal accounts is: “Debit the receiver and credit the giver”
A capital account is therefore a personal account as it represents the money invested by the owner of a business. It is shown in the liabilities side of the balance sheet because it is an internal liability of a business; the money is to be paid back to the owner on liquidation.
Let’s a journal entry related to capital account to understand the golden rules of accounting for personal accounts:
Example,
Cash A/c Dr Amt
To Capital A/c Amt
( Being cash introduced into the business)
As cash comes into the business as capital and is given by the owner (who is a person), the Capital A/c is credited (credit the giver).
Now, there are modern rules of accounting too. As per the modern rules of accounting, there are five types of accounts. One of which is the capital account.
Capital when increased, it is credited and when decreased it is debited.
Here are a few entries related to capital account:
Cash A/c Dr Amt
To Capital A/c Amt (Credited as capital is increased)
(Being cash introduced into the business)
Capital A/c Dr Amt (Debited as capital is reduced)
To Cash A/c Amt
(Being cash withdrawn from business)
Profit and loss A/c Dr Amt
To Capital A/c Amt (Capital is increased, so credited)
Let’s understand what a cashbook is: A petty cash book is a cash book maintained to record petty expenses. By petty expenses, we mean small or minute expenses for which the payment is made in coins or a few notes like tea or coffee expense, bus or taxi fare, stationery expense etc. Such expenses areRead more
Let’s understand what a cashbook is:
A petty cash book is a cash book maintained to record petty expenses.
By petty expenses, we mean small or minute expenses for which the payment is made in coins or a few notes like tea or coffee expense, bus or taxi fare, stationery expense etc.
Such expenses are numerous in a day for a business and to account for such small expenses along with major bank and cash transactions may create an extra hassle for the chief cashier of a business.
So, the cash is allocated for petty expenses and a petty cashier is appointed and the task of recording the petty expenses in the petty cashbook is delegated to him.
The manner in which entries are made
When cash is given to the petty cashier, entry is made on the debit side and in the petty cashbook and credit entry in the general cashbook.
Entries for all the expenses are made on the credit side.
Generally, the petty cashbook is prepared as per the Imprest system. As per the Imprest system, the petty expenses for a period (month or week) are estimated and a fixed amount is given to the petty cashier to spend for that period.
At the end of the period, the petty cashier sends the details to the chief cashier and he is reimbursed the amount spent. In this way, the debit balance of the petty cashbook always remains the same.
Format and items which appear in the petty cashbook
The format of the petty cashbook depends upon the type of petty cash book is prepared and the items appearing in it are nothing but petty expenses. Let’s see an example:-
A business incurred the following petty expenses for the month of April:-
Stamp – Rs. 10
Postage – Rs. 50
Cartage- Rs. 100
Telephone expense – Rs. 500
Refreshments – Rs. 250
Now we will prepare two types of cashbooks:
Ordinary Petty Cashbook:
Here, the Petty cash book is of the same format as the general cash book.
The cash allocated for petty expensesis recorded on the debit side of the petty cash book and on the credit side of the general cash book.
Analytical Petty Cashbook
Here, there are separate amount columns for each type of expense. As the name suggests, this type of petty cashbook helps to analyse the petty cash spending on basis of the type of expense.
Let the business in our example be X Trading. The 15 transactions are as follows: 1st April - X Trading started its business with Rs. 10,000 cash and furniture of Rs. 5,000. 5th April - Purchased 1,000 units of goods for Rs. 1,000 in cash from Ram. 10th April – Bought stationery for Rs. 100 in cash.Read more
Let the business in our example be X Trading. The 15 transactions are as follows:
1st April – X Trading started its business with Rs. 10,000 cash and furniture of Rs. 5,000.
5th April – Purchased 1,000 units of goods for Rs. 1,000 in cash from Ram.
10th April – Bought stationery for Rs. 100 in cash.
25Th April – Sold 500 goods for Rs. 750 in cash.
1st May – Paid a rent of Rs. 1200 ( 1st April to 31st March)
1st June – Took a loan of Rs. 15,000 from the bank at interest@10%.
15Th June – Sold 400 goods for Rs. 600 to Shyam in credit.
1st August – Bought a computer for Rs. 10,000 in from ABC Computers in credit.
15th October – Received Rs. 300 from Shyam in cash.
1st November – Purchased 2,000 units of goods for 2,000 from Ram in credit.
15th November – Paid Rs. 5,000 to ABC Computers through cheque.
1st December – Sold 1,000 units of goods for Rs. 1,500. Received cheque as payment.
1st January – Obtained Trade license (valid for 5 years) by paying fees of Rs. 1000 through online bank transfer.
15Th February – Paid Rs. 1,500 to Ram. Through cheque.
15Th March – Drawings made of Rs. 2000 in cash.
We will prepare the journal, ledgers and the trial balance from the above transactions.
Journal
Journal is known as the book of primary entry or book of original entry. It is because every transaction is recorded in form of journal entries in the journal. Every journal entry affects at least two accounts (dual effect). A transaction has to be a monetary transaction otherwise it cannot be recorded as a journal entry.
The procedure of recording transactions as journal entries is simple if we follow the modern rules of accounting.
So first we have to identify which and what type of account does a transaction affect. The types of accounts are:
Asset – Debit in case of increase Credit in case of decrease.
Liabilities – Debit in case of decrease Credit in case of increase.
Capital – Debit in case of decrease Credit in case of increase.
Expense – Debit in case of increase Credit in case of decrease.
Income – Debit in case of decrease Credit in case of increase.
Ledger
Ledgers are known as the books of principal entry or book of final entry. All the journal entries recorded in the journal are posted to the ledgers. A Ledger is where the entries related to a particular account are recorded. For example, all the transactions related to salary will be recorded in the salary account ledger.
It is very important to prepare the ledger to arrive at the balance of each account in the books of concern so that it can prepare its trial balance.
The procedure of posting journal entries in the ledger account is done is as follows:
The ledgers are as follows:
Trial Balance
The trial balance is not a part of the books of accounts. It is just a statement prepared to check the arithmetical accuracy of the books of the accounts. It also helps to know about the omission and posting mistakes. It is prepared after the ledger accounts have been drawn and their balances have been ascertained.
The balance of all the ledger accounts is posted on either side of the trial balance. Debit balance of the account on the debit side and credit balance of the account on the credit side.
Also, the closing stock from the financial statements of the previous year is posted on the debit side of the trial balance as opening stock to account for the stock with the business at the beginning of the financial year.
Who are shareholders in accounting?
Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company. By entity, it means a shareholder may be: An individual Any other company Any other incorporatRead more
Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company.
By entity, it means a shareholder may be:
The rights of shareholders depend on the type of shareholder one is.
Types of shareholders
1. Equity Shareholders: By the term ‘shareholders’ we usually mean equity shareholders. They are permanent in nature i.e. they are not repaid the money they have invested into the company until the company is liquidated or wound up. Equity shareholders have the following rights:
2. Preference Shareholders: They are shareholders who are given preference regarding:
Unlike equity shareholders, they are not of permanent nature. Preference shares are redeemable i.e. they are to be repaid after a period which cannot be more than 20 years from the date of allotment of such shares (as the Companies Act, 2013). Also, a company cannot issue irredeemable preference shares. The rights of preference shareholders are as follows:-
3. Differential Voting Rights Shareholders: These shareholders hold equity shares but with differential, right as to voting i.e. they may either have less voting rights or more voting right as compared to ordinary equity shares. Generally, DVR shares carry less voting power.
For example, a DVR shareholder gets 1 vote for 10 shares whereas an ordinary equity shareholder gets 10 votes for 10 shares i.e. one vote for every share. DVR shares issued to raise not only permanent capital but also prevent dilution of voting rights.
The rest of the right remains the same as the equity shareholders.
See lessCan you show a revaluation account example?
Yes, sure! But lets us first understand what a revaluation account is. A revaluation account is prepared to recognise the change in the book value of assets and liabilities of an entity. These changes happen when assets and liabilities are revalued to present their fair value. It is a nominal accounRead more
Yes, sure! But lets us first understand what a revaluation account is.
A revaluation account is prepared to recognise the change in the book value of assets and liabilities of an entity. These changes happen when assets and liabilities are revalued to present their fair value.
It is a nominal account because it represents gain or loss in value of assets and liabilities. However such gain or loss is unrealised because the assets and liabilities are not sold or discharged.
After revaluation of assets and liabilities, the balance of the revaluation account can be debit or credit. The debit balance means ‘loss on revaluation’ and credit balance means ‘gain on revaluation’.
The balance of revaluation is transferred to the capital account.
Journal Entries related to Revaluation Account
1. Increase in value of an asset upon revaluation:
2. Decrease in value of an asset upon revaluation:
3. Increase in value of liabilities upon revaluation:
4. Decrease in value of liabilities upon revaluation:
5. Transfer or distribution of the balance of revaluation account
or
Numerical example
P, Q and R are partners of the firm ‘PQR Trading’. They share profits and losses in the ratio 3:2:1. On 1st May 20X1, they decided to admit S for 1/6th share in profits and losses of the firm. Upon the revaluation:
Let’s prepare the revaluation account.
See lessWhat is effective capital?
Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use. Computation of effective capital is given in Explanation I to Schedule II of the CoRead more
Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use.
Computation of effective capital is given in Explanation I to Schedule II of the Companies Act. Schedule II deals with remuneration payable to managers in case of no profit or inadequate profit in the following manner:
Computation of effective capital is done in the following manner:
Numerical example:
ABC Ltd reports its balance sheet as given below:
We will compute its effective capital for both an investment company and a non-investment company.
See lessHow government grants are treated in the books of accounts as per AS-12?
Before answering the question let’s understand what a government grant is. Meaning of government grants Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawbacRead more
Before answering the question let’s understand what a government grant is.
Meaning of government grants
Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawback, or assets provided at concessional rate or at no cost etc.
These grants when provided have some rules and conditions attached to them. If such conditions are not fulfilled or rules are violated, the grant becomes refundable to the government.
Treatment
AS-12 ‘Government Grant’ provides two approaches for the treatment of government grants in the books of accounts of an enterprise:
For example, X Ltd purchase an asset for ₹ 10,00,000 and the government provided a grant of ₹2,00,000 to X Ltd. The useful life of the asset is 4 years and the residual value is nil.
Now there are two methods to treat this grant as income.
Method – 1: The grant amount will be deducted from the asset’s value. This will result in a decreased amount of depreciation. This is an indirect way to recognize government grants as income.
The journal entries are as follows: (Method-1)
The journal entries for the 3rd and the 4th years will be the same as of 2nd year.
In absence of a government grant, the annual depreciation would have been ₹2,50,000 (₹10,00,000 / 4). Hence, due to the grant, the profit will be 50,000 more for the 4 consecutive accounting years.
Method – 2: The grant amount is credited to a special account called the ‘deferred government grant’ account. Over the useful life of the asset, the grant will be credited to the profit and loss account in equal instalments. This is a direct way to recognize government grants as income.
The journal entries are as follows: (Method-2)
The journal entries for the 3rd and the 4th years will be the same as of 2nd year.
When any grant is given is in nature of promoter’s contribution i.e. as a percentage of total investment to be done by an enterprise, and then such grant received from government will be treated as part of shareholder’s funds.
The grant amount will be transferred to the capital reserve account and it will be treated neither as deferred income nor to be distributed as a dividend.
Example: ABC Ltd has set up its business in a designated backward area which entitles the company to receive from the government a subsidy of 20% of total investment. ABC Ltd fulfilled all the conditions associated with the scheme and received ₹20 crores toward its total investment of ₹100 crores.
This ₹20 crore will be transferred to the capital reserve account.
Special case: If the grant is received in relation to a non-depreciable asset like land, then the entire amount of the grant will be recognized in the profit and loss account in the same year.
Treatment of non-monetary government grant
When a government grant is in the form of non-monetary assets like land or other resources at a concessional rate, then the assets are to be recognised at their acquisition cost.
If the assets are acquired at no cost, then they are to be recorded at their nominal value.
For example, if an enterprise receives land for free as a government grant, then it has to record the land at cost based on prevailing market rates.
See lessCan you give types of reserves and surplus?
‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘sRead more
‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘surplus’ generally means the surplus amount in the profit and loss A/c or the operating surplus in case of a non-profit organisation, reserves are of many types:
Let’s discuss each of the above:
Revenue reserve has two different definitions.
First – Revenue reserves are the reserves that are created out of the profit made by an enterprise in the ordinary course of business. As per this definition, the examples of revenue reserves are:
Second: Revenue reserve is a reserve from which can be used to any use. It can be the payment of dividends, creation of other reserves or reinvestment in the business. It is another name for general reserve.
These are the reserves that are restricted to specific purposes only. These reserves are not free reserves i.e. dividends cannot be declared out of these reserves. However, if in case such reserve is not a statutory reserve, an enterprise can very well use such reserves for other purposes too. Specific reserves can be further classified into two types:
If such reserves are not created whenever applicable or if the amount in such reserves is used for a purpose other than the purpose for which it is created, the enterprise can invite face legal consequences. The examples of statutory reserves are as follows:
Important Note: Statutory reserve in the context of insurance companies means the minimum amount of cash and marketable securities to be set aside to comply with legal requirements.
This is a reserve that is created out of a shareholder’s contribution. Securities premium reserve is the only such reserve that is created out of such shareholder’s contribution.
Securities Premium Reserve: It is a reserve that is created when securities of a company such as shares or debentures are issued at a premium. The share or debenture premium money is created for this reserve. The purposes of which this reserve may be used as per section 52 of the Companies Act, 2013 are as follows:
Capital reserve is a reserve that is created out of the profit made by an enterprise from its non-operating activities like
This reserve is used to finance long term projects of a company like buying or construction of fixed assets, writing off capital losses( selling of fixed assets at loss).
A secret reserve is a reserve that exists but its existence is not shown in the balance sheet of an enterprise. An enterprise creates such reserves to hide from its competitor that it is in a better financial position than it appears in its balance sheet. Although the creation of secret reserves is prohibited by law, there are provisions for banking companies to create such reserves.
See lessBalance Sheet discloses the financial position of a business
The correct option is Option (b) at a particular point of time. A balance sheet discloses the financial position of an entity at a particular point of time. The particular point of time is generally the last date of an accounting year. Most of the business concerns follow an accounting year ending oRead more
The correct option is Option (b) at a particular point of time.
A balance sheet discloses the financial position of an entity at a particular point of time. The particular point of time is generally the last date of an accounting year. Most of the business concerns follow an accounting year ending on 31st March and prepare their balance sheet as at 31st March.
By financial position, it means the value of assets and liabilities of the entity. As an entity may enter into monetary transactions every day, the values of the assets and liabilities may also vary every day. Hence, to prepare the balance sheet of an entity, a particular point of time is to be chosen which is generally the last date of an accounting year
Option (a) for a given period of time is incorrect.
It is because the values of assets and liabilities of concern may differ daily, a balance sheet cannot be prepared to disclose the financial position of an entity for a given period of time.
The statement of profit or loss is prepared for a given period of time as it discloses the overall performance of an entity for a given period of time.
Option (c) after a fixed date is also incorrect.
The phrase, “after a fixed date” does not indicate a particular point of time. It may mean any day after a fixed date. For example, if there is an instruction to prepare a balance sheet that discloses the financial position of a concern after 30th March, it may mean 31st March, 1st April or any day thereafter.
As we know that a balance can be prepared for a particular point of time, this option seems wrong.
Option (d) None of these is incorrect too as Option (b) is the correct one.
See lessIs ‘Reserve Capital’ a Part of ‘Unsubscribed Capital’ or ‘Uncalled Capital’?
Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called. A company may issue its shares and receive the money either in full or in instalments. The instalments are named: Application money – Received by a compRead more
Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called.
A company may issue its shares and receive the money either in full or in instalments. The instalments are named:
For example, X Ltd issues 1000 shares at a price of Rs. 100 per share which is payable Rs. 25 at application, Rs. 30 at the allotment, Rs. 25 at the first call and Rs. 20 at the second and final call.
The shares at fully subscribed and X Ltd has called and received money till the first call. The second call is not made yet.
This amount of Rs 20,000 (1000 x Rs.20) will be uncalled capital.
Now, It is up to the management when to make the second and final call.
If the management shows no intention of calling the outstanding money on such shares, then the uncalled capital will be called reserve capital.
Such shares which are not fully called are known as party paid shares.
It is ultimately payable to the company by the shareholders of partly paid shares at the time of dissolution.
Reserve capital is not shown either in the balance sheet or in the notes to accounts to the balance sheet. But one can ascertain it just by examining the notes to accounts to the balance. If the shares are partly paid and the management seems to have no intention of calling the outstanding money then such uncalled share capital is reserve capital.
Reserve capital is neither a liability nor an asset for the company.
But at the time of winding up of the company, it becomes a liability for the shareholders to pay the balance amount of their shares.
By now, you must have understood why reserve capital is not part of unsubscribed capital. It is because reserve capital is related to shares that are issued and subscribed.
See lessCapital account is which type of account?
A capital account is a personal account as per the traditional rules of accounting. The real, nominal and personal account classification comes from the traditional rules of accounting. Let’s discuss each type of account and understand why the capital account is a personal account: Real account geneRead more
A capital account is a personal account as per the traditional rules of accounting.
The real, nominal and personal account classification comes from the traditional rules of accounting. Let’s discuss each type of account and understand why the capital account is a personal account:
Such accounts don’t close by the year-end and are carried forward.
Examples are cash account, bank account, fixed accounts etc. The golden rule of accounting for real accounts is: “Debit what comes in, credit what goes out.”
Examples are salaries account, purchase account, sales account etc. Such accounts are closed at the year-end to the profit and loss account.
The golden rule of accounting for the nominal account is: “Debit all expenses and losses and credit all incomes and gains”
The golden rule of accounting for personal accounts is: “Debit the receiver and credit the giver”
A capital account is therefore a personal account as it represents the money invested by the owner of a business. It is shown in the liabilities side of the balance sheet because it is an internal liability of a business; the money is to be paid back to the owner on liquidation.
Let’s a journal entry related to capital account to understand the golden rules of accounting for personal accounts:
Example,
Cash A/c Dr Amt
To Capital A/c Amt
( Being cash introduced into the business)
As cash comes into the business as capital and is given by the owner (who is a person), the Capital A/c is credited (credit the giver).
Now, there are modern rules of accounting too. As per the modern rules of accounting, there are five types of accounts. One of which is the capital account.
Capital when increased, it is credited and when decreased it is debited.
Here are a few entries related to capital account:
Cash A/c Dr Amt
To Capital A/c Amt (Credited as capital is increased)
(Being cash introduced into the business)
Capital A/c Dr Amt (Debited as capital is reduced)
To Cash A/c Amt
(Being cash withdrawn from business)
Profit and loss A/c Dr Amt
To Capital A/c Amt (Capital is increased, so credited)
(Being profit transferred to capital account)
That’s it! I would conclude my answer.
There is another answer available to this question. You can refer to that answer by clicking this URL. https://www.accountingqa.com/topic-financial-accounting/accounting-terms-and-basics/is-capital-a-real-account/
See lessWhat is a petty cash book?
Let’s understand what a cashbook is: A petty cash book is a cash book maintained to record petty expenses. By petty expenses, we mean small or minute expenses for which the payment is made in coins or a few notes like tea or coffee expense, bus or taxi fare, stationery expense etc. Such expenses areRead more
Let’s understand what a cashbook is:
The manner in which entries are made
When cash is given to the petty cashier, entry is made on the debit side and in the petty cashbook and credit entry in the general cashbook.
Entries for all the expenses are made on the credit side.
Generally, the petty cashbook is prepared as per the Imprest system. As per the Imprest system, the petty expenses for a period (month or week) are estimated and a fixed amount is given to the petty cashier to spend for that period.
At the end of the period, the petty cashier sends the details to the chief cashier and he is reimbursed the amount spent. In this way, the debit balance of the petty cashbook always remains the same.
Format and items which appear in the petty cashbook
The format of the petty cashbook depends upon the type of petty cash book is prepared and the items appearing in it are nothing but petty expenses. Let’s see an example:-
A business incurred the following petty expenses for the month of April:-
Now we will prepare two types of cashbooks:
Here, the Petty cash book is of the same format as the general cash book.
The cash allocated for petty expenses is recorded on the debit side of the petty cash book and on the credit side of the general cash book.
Here, there are separate amount columns for each type of expense. As the name suggests, this type of petty cashbook helps to analyse the petty cash spending on basis of the type of expense.
See lessCan you show 15 transactions with their journal entries, ledger, and trial balance?
Let the business in our example be X Trading. The 15 transactions are as follows: 1st April - X Trading started its business with Rs. 10,000 cash and furniture of Rs. 5,000. 5th April - Purchased 1,000 units of goods for Rs. 1,000 in cash from Ram. 10th April – Bought stationery for Rs. 100 in cash.Read more
Let the business in our example be X Trading. The 15 transactions are as follows:
We will prepare the journal, ledgers and the trial balance from the above transactions.
Journal
Journal is known as the book of primary entry or book of original entry. It is because every transaction is recorded in form of journal entries in the journal. Every journal entry affects at least two accounts (dual effect). A transaction has to be a monetary transaction otherwise it cannot be recorded as a journal entry.
The procedure of recording transactions as journal entries is simple if we follow the modern rules of accounting.
So first we have to identify which and what type of account does a transaction affect. The types of accounts are:
Ledger
Ledgers are known as the books of principal entry or book of final entry. All the journal entries recorded in the journal are posted to the ledgers. A Ledger is where the entries related to a particular account are recorded. For example, all the transactions related to salary will be recorded in the salary account ledger.
It is very important to prepare the ledger to arrive at the balance of each account in the books of concern so that it can prepare its trial balance.
The procedure of posting journal entries in the ledger account is done is as follows:
The ledgers are as follows:
Trial Balance
The trial balance is not a part of the books of accounts. It is just a statement prepared to check the arithmetical accuracy of the books of the accounts. It also helps to know about the omission and posting mistakes. It is prepared after the ledger accounts have been drawn and their balances have been ascertained.
The balance of all the ledger accounts is posted on either side of the trial balance. Debit balance of the account on the debit side and credit balance of the account on the credit side.
Also, the closing stock from the financial statements of the previous year is posted on the debit side of the trial balance as opening stock to account for the stock with the business at the beginning of the financial year.
Following is the trial balance of X trading:
See less