Plant and Machinery are the equipment attached to the earth that supports the manufacturing of the company or its operations. These are tangible non-current assets to the company and as a result, have a debit balance. Depreciation is the decrease in the value of an asset that is spread over the expeRead more
Plant and Machinery are the equipment attached to the earth that supports the manufacturing of the company or its operations. These are tangible non-current assets to the company and as a result, have a debit balance.
Depreciation is the decrease in the value of an asset that is spread over the expected life of the asset. Not depreciating an asset presents a false image of the company as the asset is recorded at a higher value and profit is overstated as depreciation expense is not provided for.
There are two ways that a company provide depreciation:
By reducing the balance of an asset in the Asset Account by passing a journal entry.
Bymaintaining a separate account for depreciation called Accumulated Depreciation A/c. The nature of this account is naturally credit since it is created to reduce the value of an asset.
For most of the depreciation methods, we need a rate to provide for depreciation every year. Now, for accounting purposes, the management can use a rate they think is suitable depending on the use and expected life of the machinery.
Depreciation is calculated on the basis of the Companies act, 2013 for the purpose of book-keeping. According to Schedule 2 of the Companies Act, depreciation on plant and machinery is calculated on the basis of either SLM or WDV.
Plant and machinery for those special rates are not assigned useful life is considered to be 15 years and depreciation is calculated @ 18.10% on WDV and @6.33% on SLM.
According to the Income Tax Act, 15% depreciation is provided every year on Plant and Machinery and, an additional 20% depreciation is provided in the first year of installation of machinery.
Depreciation on Machinery is charged on the basis of usage of such machinery. if it is used for 180 days or more then full depreciation is allowed and if it is used for less than 180 days then only 50% depreciation is allowed.
A revaluation Account is an account created to record the changes in the value of assets and liabilities during: Change in profit sharing ratio Admission of a partner Retirement of a partner Death of a partner The realization Account is prepared to sell assets and pay liabilities in the event of theRead more
A revaluation Account is an account created to record the changes in the value of assets and liabilities during:
Change in profit sharing ratio
Admission of a partner
Retirement of a partner
Death of a partner
The realization Account is prepared to sell assets and pay liabilities in the event of the dissolution of the firm.
Revaluation Account is prepared for dissolution of the partnership while Realization Account is prepared for dissolution of the partnership firm.
The increase or decrease in the value of assets and liabilities is transferred to the Realisation Account and the gain or loss thereof is transferred to the old partner’s capital account.
A decrease in Assets and an Increase in Liabilities is debited since it is a loss for the firm and all the losses are debited.
An increase in Assets and a Decrease in Liabilities is credited since it is gained for the firm and all the profits are credited.
Format of Revaluation Account will be:
Format of Realization Account will be:
The difference between Realisation and Revaluation Account is:
Revaluation Account
Realization Account
Prepared to record changes in assets and liabilities
Prepared to record sale of assets and payment of liabilities
Prepared at the time of dissolution of the partnership
Prepared at the time of dissolution of partnership firm
Assets and liabilities still exist in the books only their values change
Assets and liabilities do not exist in the books of the firm
This account contains only those assets and liabilities that are to be revalued.
This account contains all the assets and liabilities of the firm.
A revaluation Account can be prepared any number of times during the lifetime of the firm.
The realization Account is only made once during the dissolution of the firm.
The gain or loss during revaluation is transferred to the old partner’s capital accounts.
The gain or loss during realization is transferred to the capital account of all the partners.
The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes: Raw Material Work-in-Progress Finished Goods Example: If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then valueRead more
The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes:
Raw Material
Work-in-Progress
Finished Goods
Example:
If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then value of Closing Stock will be Rs (10,000 + 5,000 + 15,000) = Rs 30,000
Adjustment entries are done on the accrual basis of accounting, that is, income is recorded when earned and not received and expenses are recorded when incurred and not paid. Adjustment entries are usually made before or after the preparation of the trial balance at the end of the accounting period.
If the entries are made after the preparation of the trial balance, then two adjustment entries are recorded while preparing Trading and Profit & Loss A/c.
Since closing stock is an item outside the trial balance, the double-entry would be:
The journal entry
Closing Stock A/c (Dr.)
Amt
To Trading and Profit & Loss A/c
Amt
Trading and Profit & Loss A/c is credited because it is of profit to the company and hence will be shown on the credit side.
Closing Stock is debited as an asset for the company and it will be recorded for the first time in accounting books, hence, will be debited.
The second adjustment would be to show closing stock on the balance sheet and since the closing stock is an asset it is shown under the head Current Assets.
In case where adjustment for Closing Stock is to be done before preparation of Trial Balance, then it will be shown on the credit side of the Trial Balance, since it is an asset for the company and will have a credit brought down balance as shown in the image.
Later, while preparing Balance Sheet, Closing Stock will be shown on the Asset side of the Balance Sheet.
Sales return shows the sale price of goods returned by customers. It is deducted from sales or gross sales in the income statement. It is a contra revenue account that represents returns from the customers and deductions to the original selling price, in case of any defective product received by theRead more
Sales return shows the sale price of goods returned by customers. It is deducted from sales or gross sales in the income statement.
It is a contra revenue account that represents returns from the customers and deductions to the original selling price, in case of any defective product received by the customer or any other manufacturing default.
Sales allowances arise when any customer accepts the product at a lower price than the original price or, in other words, a reduction in the price charged by a seller, due to any problem related to the sold product like a quality issue, an incorrect price charged or shipment issue.
Sales allowances are created before the final billing is paid by the buyer.
Journal entry for sales return and allowances:
Dr.
Sales return and allowances
Amt
Cr.
Accounts receivable
Amt
Sales Return Account is debited because it is reverse of Sales Account which is credited at the time of sale.
Account Receivable Account is credited to reverse the debtors debited at the time of sale.
Hence Sales Return entry is just reverse of the entry recorded at the time of sale.
Yes, Capital Work in Progress is Tangible Asset. To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets. Capital work in progress is the cost incurred on fixed aRead more
Yes, Capital Work in Progress is Tangible Asset.
To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets.
Capital work in progress is the cost incurred on fixed assets that are under construction as on the balance sheet date. Since the asset cannot be used for operation it cannot be classified as a Fixed Asset.
For example:
If an asset takes 1.5 years to be constructed as on 1.4.2020 then on the balance sheet date 31.3.2021, the cost incurred on the asset will be classified as Capital Work in Progress.
Common examples of Capital Work in Progress include immovable assets like Plant and Machinery, Buildings.
It is shown under the head Non-Current Assets in the balance sheet. Examples of cost included in Capital Work in Progress can be:
Advance payment to the contractor
Material used/purchased
Cost of labor incurred, etc.
Since the assets under the head Capital Work in Progress are in the process of completion and not completed, hence they are not depreciable until completed. Once the asset is completed it is moved under the head Fixed Assets.
Capital Work in Progress is shown in the Balance Sheet as:
A Cash Flow Statement analyzes the effect of various activities in the company on cash and, that is, it shows the inflow and outflow of cash and cash equivalents. A Fund Flow Statement analyzes the financial position of a company by the inflow and outflow of funds. Both the statements are financialRead more
A Cash Flow Statement analyzes the effect of various activities in the company on cash and, that is, it shows the inflow and outflow of cash and cash equivalents.
A Fund Flow Statement analyzes the financial position of a company by the inflow and outflow of funds.
Both the statements are financial statements and are used to analyze the financial performance of the company of two different reporting periods. Both the statements record the inflow and outflow of cash or funds, as the case may be.
The primary objective of preparing a Cash Flow Statement is to gain an understanding of the changes in the net working capital of the company and to classify the activities in the company under three different heads which helps in better analysis of Financial Statements for management, outsiders, and investors.
The primary objective of preparing a Fund Flow Statement is to track the movements of funds in the company, as the extent of use of long-term and short-term borrowings, frequency of their procurement, its application, etc.
The components of the Cash Flow Statement are:
Cash Flow from Operating Activities- activities concerning the regular business operations and working capital are classified under this head.
Cash Flow from Investing Activities- investment in long-term assets or sale of such assets are considered under this head.
Cash Flow from Financing Activities- borrowings that a company makes to fund its operations, their interest payment, and repayment are covered under this head.
The components of the Fund Flow Statement are:
Sources of Funds:
Owners
Outsiders
Application of Funds:
Funds deployed in Fixed Assets
Funds deployed in Current Assets
A sample format of the Cash Flow Statement will be:
Particulars
Amount
Cash Flow from Operating Activities
XXX
Cash Flow from Investing Activities
XXX
Cash Flow from Financing Activities
XXX
Net Increase (Decrease) in Cash and Cash Equivalents
XXX
Cash and Cash Equivalents at the beginning
XXX
Cash and Cash Equivalents at the end
XXX
A sample format of the Fund Flow Statement will be:
Particulars
Amount
Sources of Funds
XXX
Funds from Operations
XXX
Sale of Fixed Assets
XXX
Issue of Shares
XXX
Issue of Debentures
XXX
Long Term Borrowings
XXX
Total (A)
XXX
Application of Funds
XXX
Loss from Operations
XXX
Payment of Tax
XXX
Repayment of Loan
XXX
Redemption of Debentures
XXX
Redemption of Preference Shares
XXX
Total (B)
XXX
Net Increase (Decrease) in Working Capital
XXX
To conclude the difference between Fund Flow and Cash Flow Statement will be:
Cash Flow Statement
Fund Flow Statement
Record of inflow and outflow of cash.
Record of sources and application of funds.
Prepared to analyze cash used in various activities.
Prepared to track the movement of funds and their applications.
Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income. According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultuRead more
Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income.
According to Section 10(1) of the Income Tax Act,agricultural income is exempt from tax. However, the government can levy tax if agricultural income is above Rs 5,000.
Following are the sources to be considered for agricultural income according to the conditions mentioned in Section 2 (1A) of the Income Tax Act:
Revenue generated through rent or lease of land in India that is used for agricultural purposes.
Revenue generated through the commercial sale of produce gained from agricultural land.
Revenue generated through the renting or leasing of buildings in and around the agricultural land subject to the following conditions:
The cultivator or farmer should have occupied the building, either through rent or revenue.
The building is used as a residential place, storeroom, or outhouse.
The agricultural land or the land where the building is located, is being assessed for land revenue or subject to a local rate assessed.
If the land does not fall under the provisions stated above, the Income Tax Act requires a separate evaluation to calculate tax.
The Income-tax Act has laid down a method to indirectly tax such income.
This method or concept is called the partial integration of agricultural income with non-agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.
Partial integration of agricultural income with non-agricultural income involves the following steps:
For example, the base income of the individual is Rs. 20,000 and agricultural income is Rs 10,000, then we first have to calculate tax on Rs 30,000. For convenience, we can call this tax T(30,000)
Assuming that the income falls under tax slab A, this tax slab A has to be added to the agricultural income and tax has to be calculated on it as well and it is called T(S+10,000).
The final tax on the individual’s income will be T(30,000)- T(A+10,000)
The important step to keep in mind is to aggregate the agricultural income while calculating tax otherwise it can lead to double taxation, extra tax, or interest on tax.
Activity-based costing (ABC) is a system used to find production costs. It breaks down overhead costs between production-related activities and other activities. The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABC is based on the principleRead more
Activity-based costing (ABC)is a system used to find production costs. It breaks down overhead costs between production-related activities and other activities.
The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABCis based on the principle that ‘products consume activities.’
Traditional cost systems allocate costs based on direct labor, material costs, revenue, or other simplistic methods. As a result, traditional systems tend to over-cost high volume products, services, and customers; and under-cost low volume.
Hence, Activity Based Costing was developed for determining the cost. The basic feature of ABC is its focus on activities. It uses activities as the basis for determining the costs of products or services.
Activity-Based Costing is mostly used in manufacturing industries, however, its application is not only limited to that. Various industries like, construction, health care, medical organizations also use this method of assigning costs. Industries where customized products are made also tend to use such methods as it is easier to charge appropriate overhead costs from the customer.
Objectives of Activity-Based Costing:
Companies adopt ABC to assign cost elements to the products, activities, or services so that it helps the management to decide:
which cost can be eliminated or cut back
which products are unprofitable
if a product is over-priced or under-priced
if any activity is ineffective
various processing of the same product to yield better results
Advantages of Activity Based Costing are:
it takes into consideration both direct and overhead costs of creating a product.
it recognizes the fact that different products require different indirect expenses.
it sets prices more accurately.
it helps to see what overhead cost the company might be able to cut back on.
it helps to segregate fixed costs, variable cost, and overhead cost which helps to identify “cost drivers”.
it focuses on cost allocation in operational management.
Before implementing ABC, a company should consider the following:
manually driven Activity Based Accounting cost derivers is an inefficient use of resources.
it is an expensive method and it is difficult to implement
for small gains, there are alternative costing methods available for a company to use.
Formula= Total Cost Pool / Cost Driver
For example:
For a company, the salary for workers is Rs 1,00,000 for a financial year, the number of labor hours worked is 50,00 hrs. The cost driver rate is calculated by dividing the workers’ salary by the labor hours worked, that is,
Salary of the workers / Number of labor hours
Rs 1,00,000 / 50,000 hrs = Rs 2 per labor hour.
In the above example, the salary of the workers is the total cost pool or the overhead cost for which we want to find the cost driver rate and labor hours is the cost driver, that is, on the basis of what we want to find the rate.
The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well. Amount tRead more
The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well.
Amount to any specific reserve is generally transferred from the Profit and Loss Appropriation Account.
Various specific reserves are:
Debenture Redemption Reserve
Debentures are debt instruments of a company and they have to be redeemed, that is, paid back after the expiry of the specified period. According to Accounting Standards, companies are required to set aside a specific amount in Debenture Redemption Reserve, when they are due for redemption.
Securities Premium Reserve
When shares or debentures are issued at a price higher than its book value/face value, the difference between the market value and book value is called Securities Premium. The amount of Securities Premium is transferred to Securities Premium Account. This amount is utilized to issue fully paid bonus shares, write off preliminary expenses, write off commission discounts, etc., to provide a premium on redemption of debentures.
Investment Fluctuation Reserve
The investments made by a company are subject to fluctuations in its market value. Company Law and Accounting Standards require companies to provide for such fluctuations by creating a reserve called Investment Fluctuation Reserve.
Dividend Equalisation Reserve
Companies are required to pay a dividend to their shareholders. It is often difficult for a company to maintain a consistent rate of dividend as the dividend paid is equivalent to the profit made by a company during the financial year which is not consistent. So, Dividend Equalisation Reserve is created to maintain a consistent rate of dividend on shares over time, in the event of both high and low profits.
The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors. Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business. WriRead more
The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors.
Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business.
Written off means an expense, income, asset, liability is no more recorded in the books of accounts because they no longer hold relevance for the business.
When doubtful debts turn into bad debt, they are written off from the books after a stipulated time as they no longer seem recoverable.
If any cash is received against such bad debts that were written off, it is known as cash received against bad debts written off. Cash is received against bad debts usually when the debtor is declared insolvent and money is recovered from its estate.
Bad debts recovered are considered an income for the company as they were previously written off as a loss and any cash received against it is considered as income.
Journal entry for such situation is:
Cash or Bank A/c (Dr.)
To Bad Debts Recovered A/c
We debit the increase in assets, and since cash is coming into the business it is debited.
We credit the income, and since bad debts recovered is an income to the business it is credited.
What is plant and machinery depreciation rate?
Plant and Machinery are the equipment attached to the earth that supports the manufacturing of the company or its operations. These are tangible non-current assets to the company and as a result, have a debit balance. Depreciation is the decrease in the value of an asset that is spread over the expeRead more
Plant and Machinery are the equipment attached to the earth that supports the manufacturing of the company or its operations. These are tangible non-current assets to the company and as a result, have a debit balance.
Depreciation is the decrease in the value of an asset that is spread over the expected life of the asset. Not depreciating an asset presents a false image of the company as the asset is recorded at a higher value and profit is overstated as depreciation expense is not provided for.
There are two ways that a company provide depreciation:
For most of the depreciation methods, we need a rate to provide for depreciation every year. Now, for accounting purposes, the management can use a rate they think is suitable depending on the use and expected life of the machinery.
Depreciation is calculated on the basis of the Companies act, 2013 for the purpose of book-keeping. According to Schedule 2 of the Companies Act, depreciation on plant and machinery is calculated on the basis of either SLM or WDV.
Plant and machinery for those special rates are not assigned useful life is considered to be 15 years and depreciation is calculated @ 18.10% on WDV and @6.33% on SLM.
According to the Income Tax Act, 15% depreciation is provided every year on Plant and Machinery and, an additional 20% depreciation is provided in the first year of installation of machinery.
Depreciation on Machinery is charged on the basis of usage of such machinery. if it is used for 180 days or more then full depreciation is allowed and if it is used for less than 180 days then only 50% depreciation is allowed.
See lessDifference between revaluation account and realization account?
A revaluation Account is an account created to record the changes in the value of assets and liabilities during: Change in profit sharing ratio Admission of a partner Retirement of a partner Death of a partner The realization Account is prepared to sell assets and pay liabilities in the event of theRead more
A revaluation Account is an account created to record the changes in the value of assets and liabilities during:
The realization Account is prepared to sell assets and pay liabilities in the event of the dissolution of the firm.
Revaluation Account is prepared for dissolution of the partnership while Realization Account is prepared for dissolution of the partnership firm.
The increase or decrease in the value of assets and liabilities is transferred to the Realisation Account and the gain or loss thereof is transferred to the old partner’s capital account.
Format of Revaluation Account will be:
Format of Realization Account will be:
The difference between Realisation and Revaluation Account is:
See lessHow to do adjustment entry for closing stock?
The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes: Raw Material Work-in-Progress Finished Goods Example: If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then valueRead more
The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes:
Example:
If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then value of Closing Stock will be Rs (10,000 + 5,000 + 15,000) = Rs 30,000
Adjustment entries are done on the accrual basis of accounting, that is, income is recorded when earned and not received and expenses are recorded when incurred and not paid. Adjustment entries are usually made before or after the preparation of the trial balance at the end of the accounting period.
If the entries are made after the preparation of the trial balance, then two adjustment entries are recorded while preparing Trading and Profit & Loss A/c.
Since closing stock is an item outside the trial balance, the double-entry would be:
The journal entry
The second adjustment would be to show closing stock on the balance sheet and since the closing stock is an asset it is shown under the head Current Assets.
In case where adjustment for Closing Stock is to be done before preparation of Trial Balance, then it will be shown on the credit side of the Trial Balance, since it is an asset for the company and will have a credit brought down balance as shown in the image.
Later, while preparing Balance Sheet, Closing Stock will be shown on the Asset side of the Balance Sheet.
See lessWhat are sales returns and allowances?
Sales return shows the sale price of goods returned by customers. It is deducted from sales or gross sales in the income statement. It is a contra revenue account that represents returns from the customers and deductions to the original selling price, in case of any defective product received by theRead more
Sales return shows the sale price of goods returned by customers. It is deducted from sales or gross sales in the income statement.
It is a contra revenue account that represents returns from the customers and deductions to the original selling price, in case of any defective product received by the customer or any other manufacturing default.
Sales allowances arise when any customer accepts the product at a lower price than the original price or, in other words, a reduction in the price charged by a seller, due to any problem related to the sold product like a quality issue, an incorrect price charged or shipment issue.
Sales allowances are created before the final billing is paid by the buyer.
Journal entry for sales return and allowances:
See lessIs capital work in progress a tangible asset?
Yes, Capital Work in Progress is Tangible Asset. To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets. Capital work in progress is the cost incurred on fixed aRead more
Yes, Capital Work in Progress is Tangible Asset.
To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets.
Capital work in progress is the cost incurred on fixed assets that are under construction as on the balance sheet date. Since the asset cannot be used for operation it cannot be classified as a Fixed Asset.
For example:
If an asset takes 1.5 years to be constructed as on 1.4.2020 then on the balance sheet date 31.3.2021, the cost incurred on the asset will be classified as Capital Work in Progress.
Common examples of Capital Work in Progress include immovable assets like Plant and Machinery, Buildings.
It is shown under the head Non-Current Assets in the balance sheet. Examples of cost included in Capital Work in Progress can be:
Since the assets under the head Capital Work in Progress are in the process of completion and not completed, hence they are not depreciable until completed. Once the asset is completed it is moved under the head Fixed Assets.
Capital Work in Progress is shown in the Balance Sheet as:
See lessWhat is the difference between cash flow statement and funds flow statement?
A Cash Flow Statement analyzes the effect of various activities in the company on cash and, that is, it shows the inflow and outflow of cash and cash equivalents. A Fund Flow Statement analyzes the financial position of a company by the inflow and outflow of funds. Both the statements are financialRead more
A Cash Flow Statement analyzes the effect of various activities in the company on cash and, that is, it shows the inflow and outflow of cash and cash equivalents.
A Fund Flow Statement analyzes the financial position of a company by the inflow and outflow of funds.
Both the statements are financial statements and are used to analyze the financial performance of the company of two different reporting periods. Both the statements record the inflow and outflow of cash or funds, as the case may be.
The primary objective of preparing a Cash Flow Statement is to gain an understanding of the changes in the net working capital of the company and to classify the activities in the company under three different heads which helps in better analysis of Financial Statements for management, outsiders, and investors.
The primary objective of preparing a Fund Flow Statement is to track the movements of funds in the company, as the extent of use of long-term and short-term borrowings, frequency of their procurement, its application, etc.
The components of the Cash Flow Statement are:
The components of the Fund Flow Statement are:
Sources of Funds:
Application of Funds:
A sample format of the Cash Flow Statement will be:
A sample format of the Fund Flow Statement will be:
To conclude the difference between Fund Flow and Cash Flow Statement will be:
· Sources of Funds
· Application of Funds
See lessIs agricultural income taxable in India?
Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income. According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultuRead more
Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income.
According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultural income is above Rs 5,000.
Following are the sources to be considered for agricultural income according to the conditions mentioned in Section 2 (1A) of the Income Tax Act:
If the land does not fall under the provisions stated above, the Income Tax Act requires a separate evaluation to calculate tax.
The Income-tax Act has laid down a method to indirectly tax such income.
This method or concept is called the partial integration of agricultural income with non-agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.
Partial integration of agricultural income with non-agricultural income involves the following steps:
The important step to keep in mind is to aggregate the agricultural income while calculating tax otherwise it can lead to double taxation, extra tax, or interest on tax.
See lessWhat is Activity Based Costing?
Activity-based costing (ABC) is a system used to find production costs. It breaks down overhead costs between production-related activities and other activities. The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABC is based on the principleRead more
Activity-based costing (ABC) is a system used to find production costs.
It breaks down overhead costs between production-related activities and other activities.
The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABC is based on the principle that ‘products consume activities.’
Traditional cost systems allocate costs based on direct labor, material costs, revenue, or other simplistic methods. As a result, traditional systems tend to over-cost high volume products, services, and customers; and under-cost low volume.
Hence, Activity Based Costing was developed for determining the cost. The basic feature of ABC is its focus on activities. It uses activities as the basis for determining the costs of products or services.
Activity-Based Costing is mostly used in manufacturing industries, however, its application is not only limited to that. Various industries like, construction, health care, medical organizations also use this method of assigning costs. Industries where customized products are made also tend to use such methods as it is easier to charge appropriate overhead costs from the customer.
Objectives of Activity-Based Costing:
Companies adopt ABC to assign cost elements to the products, activities, or services so that it helps the management to decide:
Advantages of Activity Based Costing are:
Before implementing ABC, a company should consider the following:
Formula= Total Cost Pool / Cost Driver
For example:
For a company, the salary for workers is Rs 1,00,000 for a financial year, the number of labor hours worked is 50,00 hrs. The cost driver rate is calculated by dividing the workers’ salary by the labor hours worked, that is,
Salary of the workers / Number of labor hours
Rs 1,00,000 / 50,000 hrs = Rs 2 per labor hour.
In the above example, the salary of the workers is the total cost pool or the overhead cost for which we want to find the cost driver rate and labor hours is the cost driver, that is, on the basis of what we want to find the rate.
See lessWhat is an example of specific reserve?
The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well. Amount tRead more
The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well.
Amount to any specific reserve is generally transferred from the Profit and Loss Appropriation Account.
Various specific reserves are:
Debentures are debt instruments of a company and they have to be redeemed, that is, paid back after the expiry of the specified period. According to Accounting Standards, companies are required to set aside a specific amount in Debenture Redemption Reserve, when they are due for redemption.
When shares or debentures are issued at a price higher than its book value/face value, the difference between the market value and book value is called Securities Premium. The amount of Securities Premium is transferred to Securities Premium Account. This amount is utilized to issue fully paid bonus shares, write off preliminary expenses, write off commission discounts, etc., to provide a premium on redemption of debentures.
The investments made by a company are subject to fluctuations in its market value. Company Law and Accounting Standards require companies to provide for such fluctuations by creating a reserve called Investment Fluctuation Reserve.
Companies are required to pay a dividend to their shareholders. It is often difficult for a company to maintain a consistent rate of dividend as the dividend paid is equivalent to the profit made by a company during the financial year which is not consistent. So, Dividend Equalisation Reserve is created to maintain a consistent rate of dividend on shares over time, in the event of both high and low profits.
See lessReceived cash for a bad debt written off last year journal entry?
The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors. Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business. WriRead more
The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors.
Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business.
Written off means an expense, income, asset, liability is no more recorded in the books of accounts because they no longer hold relevance for the business.
When doubtful debts turn into bad debt, they are written off from the books after a stipulated time as they no longer seem recoverable.
If any cash is received against such bad debts that were written off, it is known as cash received against bad debts written off. Cash is received against bad debts usually when the debtor is declared insolvent and money is recovered from its estate.
Bad debts recovered are considered an income for the company as they were previously written off as a loss and any cash received against it is considered as income.
Journal entry for such situation is:
Cash or Bank A/c (Dr.)
To Bad Debts Recovered A/c
We debit the increase in assets, and since cash is coming into the business it is debited.
We credit the income, and since bad debts recovered is an income to the business it is credited.
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