The profits earned by a company are mainly divided into two parts: Dividend, and Retained Earnings The part of profit distributed to its shareholders is called a dividend. The part of the profit that the company holds for future expansion or diversification plans is called retained earnings. As theRead more
The profits earned by a company are mainly divided into two parts:
Dividend, and
Retained Earnings
The part of profit distributed to its shareholders is called a dividend. The part of the profit that the company holds for future expansion or diversification plans is called retained earnings.
As the name suggests, retained earnings are the profit that is retained in the company. Retained earnings can be used for various purposes:
To distribute as dividends to shareholders
Expansion of business
Diversification
For an expected merger or acquisition
As the profits of the company belong to shareholders, retained earnings are considered as profits re-invested in the company by the shareholders.
The formula to calculate the cost of retained earnings is:
(Expected dividend per share / Net proceeds) + growth rate
Expected dividend is the dividend an investor expects for his investment in the company’s shares based on the last year’s dividend, trends in the markets, and financial statements presented by the company.
Net proceeds is the market value of a share, that is, how much an investor would get if he sells his shares today.
Growth rate represents growth of company’s revenue, dividend from previous years in the form of a percentage.
The expected dividend per share is divided by net proceeds or the current selling price of the share, to find out the market value of retained earnings.
The growth rate is then added to the formula. It’s the rate at which the dividend grows in the company.
For example:
The net proceeds from share is Rs 100, expected dividend growth rate is 2% and expected dividend is 5.
Cost of retained earnings
= (Expected dividend per share / Net proceeds) + Growth rate
Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company. Workmen Compensation Reserve Account is generally given effect in case of admiRead more
Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company.
Workmen Compensation Reserve Account is generally given effect in case of admission, retirement of partners or dissolution of firm.
If there is a change in the estimated value of reserve it is given effect during the revaluation of assets and liabilities.
Journal entry if the existing reserve is less than the new estimated amount:
Revaluation A/c (Dr)
To Workmen Compensation Reserve A/c
The reserve is credited because we need to create more than the existing reserve, since the new estimated liability is more than the existing.
Journal entry if the existing reserve is more than the new estimated amount:
Workmen Compensation Reserve A/c (Dr)
To Revaluation A/c
The reserve is debited because we need to decrease the existing reserve, since the new estimated liability is less than the existing.
If a worker claims compensation, it is said to be a liability against the reserve. In case of dissolution, any such liability against workmen compensation reserve takes priority to be paid off according to the law.
Journal entry in case of claim against reserve is:
Workmen Compensation Reserve A/c (Dr)
To Workmen Compensation Claim
The amount is transferred from the reserve to a new liability, hence the reserve is debited and the claim is credited.
If there are not sufficient funds in the firm to pay the liability, partners will have to bring funds from their personal assets to pay the workers.
Journal entry when partner’s have to bring funds:
Partner’s Capital Account (Dr)
To Workmen Compensation Reserve A/c
Partner’s need to bring funds to fulfill the liability, hence there account is debited and since the reserve is increased, hence it is credited.
If there is no liability against the Workmen Compensation Reserve then it is distributed amongst the partners in their existing profit-sharing ratio.
Journal entry for distribution of reserve is:
Workmen Compensation Reserve A/c (Dr)
To Partner’s Capital Account
Since, reserve is more than required it is distributed among partners, hence their account is credited and as the reserve decreases, it is debited.
Profits earned by a firm are not completely distributed to its owners, some of the profits are retained for various purposes. Reserves are profits that are apportioned or set aside to use in the future for a specific or general purpose. Reserves follow the Conservative Principle of accounting. ReveRead more
Profits earned by a firm are not completely distributed to its owners, some of the profits are retained for various purposes. Reserves are profits that are apportioned or set aside to use in the future for a specific or general purpose. Reserves follow the Conservative Principle of accounting.
Revenue reserve is created from the net profits of a company during a financial year. Revenue reserve is created from revenue profit that a company earns from the daily operations of the business.
Various types of reserves are:
Capital Redemption Reserve: It is created to issue fully paid bonus shares or reduction of capital in accordance with Article 3 of the Companies Act, 2013.
General Reserve: It is a reserve created to provide for various requirements of the company from time to time.
Debenture Redemption Reserve: It is required by the Companies Act, 2013 to transfer the amount of debentures that are going to be redeemed in the following year to minimize the risk of default.
Securities Premium Reserve: When shares and debentures are issued at a price higher than the book value, then such higher amount is transferred to Securities Premium Reserve
Revaluation Reserve: It is created to revalue the assets and liabilities and provide for gain or loss.
Different parts of profit are apportioned to create a different reserve and those reserves can only be used for purposes as defined.
While accounting for Revenue Reserve, the profit decided to transfer to Revenue Reserve are first transferred to Profit and Loss Appropriation Account and then to Revenue Reserve Account. In the balance sheet, Revenue Account is shown under the Capital and Reserves head.
Liabilities
Amount
Amount
Share Capital
Reserve and Surplus
General Reserve
Capital Redemption Reserve
Securities Premium Account
Profit and Loss Account
Uses of Revenue Reserve:
Revenue Reserves are created to expand business or for meeting contingencies that may arise in the future.
It can also be used to distribute dividends or bonus shares to its shareholders.
Example:
Given that Revenue Reserve Account stands at Rs 1,00,000 and the company wants to distribute Rs. 40,000 as dividend to its shareholders. The treatment of this transaction in the financial statements will be-
Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be: Admission of a partner Death of a partner Retirement of a partner Dissolution of firm In the event of the above cases, the existing partnership is dRead more
Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be:
Admission of a partner
Death of a partner
Retirement of a partner
Dissolution of firm
In the event of the above cases, the existing partnership is dissolved and a new partnership is created with the new partners without affecting the firm.
A new partnership deed is created, in case there is a partnership deed agreed among partners and new profit-sharing ratios among the partners are decided, while the assets and liabilities of the firm remain the same.
Dissolution of a firm means the firm no longer exists. Various reasons for the dissolution of a partnership firm could be:
Mutual decision of partners
By the court of law
A partnership firm is dissolved by a court of law when there has been a non-compliance of law, the firm is engaged in illegal practices, or that the court’s opinion is that it is in the public interest for the firm to be dissolved.
The partnership is also dissolved with the dissolution of the firm but the converse need not be true.
When a firm is dissolved, there is a sequence that is followed to pay creditors and partners.
First, outside creditors like banks, third party creditors are paid firstly with the cash available with the firm and then by selling the assets.
Second, partners who have lent moneyin the form of a loan to the firm are paid.
Lastly, if there is any surplus, partners are paid with the amount of their capital. In case of loss, partners are required to pay from their personal assets.
Dissolution of the firm can be done by the partners themselves and they could also appoint a third person to do so on the payment of fees, charges, the proportion of surplus, or any contract that has been agreed to.
To summarize, we can a draw a difference table as follows:
Dissolution of Partnership
Dissolution of Partnership Firm
The partnership ends but the firm still stands.
A partnership firm no longer exists.
A new partnership deed is created by the mutual agreement of partners.
A new partnership firm is created if the partners decide.
What is cost of retained earnings formula?
The profits earned by a company are mainly divided into two parts: Dividend, and Retained Earnings The part of profit distributed to its shareholders is called a dividend. The part of the profit that the company holds for future expansion or diversification plans is called retained earnings. As theRead more
The profits earned by a company are mainly divided into two parts:
The part of profit distributed to its shareholders is called a dividend. The part of the profit that the company holds for future expansion or diversification plans is called retained earnings.
As the name suggests, retained earnings are the profit that is retained in the company. Retained earnings can be used for various purposes:
As the profits of the company belong to shareholders, retained earnings are considered as profits re-invested in the company by the shareholders.
The formula to calculate the cost of retained earnings is:
(Expected dividend per share / Net proceeds) + growth rate
The expected dividend per share is divided by net proceeds or the current selling price of the share, to find out the market value of retained earnings.
The growth rate is then added to the formula. It’s the rate at which the dividend grows in the company.
For example:
The net proceeds from share is Rs 100, expected dividend growth rate is 2% and expected dividend is 5.
Cost of retained earnings
= (Expected dividend per share / Net proceeds) + Growth rate
= (5 / 100) + 0.02
= 0.07 or 7%
See lessWhat is a workmen compensation reserve?
Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company. Workmen Compensation Reserve Account is generally given effect in case of admiRead more
Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company.
Workmen Compensation Reserve Account is generally given effect in case of admission, retirement of partners or dissolution of firm.
If there is a change in the estimated value of reserve it is given effect during the revaluation of assets and liabilities.
Journal entry if the existing reserve is less than the new estimated amount:
Revaluation A/c (Dr)
To Workmen Compensation Reserve A/c
The reserve is credited because we need to create more than the existing reserve, since the new estimated liability is more than the existing.
Journal entry if the existing reserve is more than the new estimated amount:
Workmen Compensation Reserve A/c (Dr)
To Revaluation A/c
The reserve is debited because we need to decrease the existing reserve, since the new estimated liability is less than the existing.
If a worker claims compensation, it is said to be a liability against the reserve. In case of dissolution, any such liability against workmen compensation reserve takes priority to be paid off according to the law.
Journal entry in case of claim against reserve is:
Workmen Compensation Reserve A/c (Dr)
To Workmen Compensation Claim
The amount is transferred from the reserve to a new liability, hence the reserve is debited and the claim is credited.
If there are not sufficient funds in the firm to pay the liability, partners will have to bring funds from their personal assets to pay the workers.
Journal entry when partner’s have to bring funds:
Partner’s Capital Account (Dr)
To Workmen Compensation Reserve A/c
Partner’s need to bring funds to fulfill the liability, hence there account is debited and since the reserve is increased, hence it is credited.
If there is no liability against the Workmen Compensation Reserve then it is distributed amongst the partners in their existing profit-sharing ratio.
Journal entry for distribution of reserve is:
Workmen Compensation Reserve A/c (Dr)
To Partner’s Capital Account
Since, reserve is more than required it is distributed among partners, hence their account is credited and as the reserve decreases, it is debited.
See lessWhat is revenue reserve?
Profits earned by a firm are not completely distributed to its owners, some of the profits are retained for various purposes. Reserves are profits that are apportioned or set aside to use in the future for a specific or general purpose. Reserves follow the Conservative Principle of accounting. ReveRead more
Profits earned by a firm are not completely distributed to its owners, some of the profits are retained for various purposes. Reserves are profits that are apportioned or set aside to use in the future for a specific or general purpose. Reserves follow the Conservative Principle of accounting.
Revenue reserve is created from the net profits of a company during a financial year. Revenue reserve is created from revenue profit that a company earns from the daily operations of the business.
Various types of reserves are:
Different parts of profit are apportioned to create a different reserve and those reserves can only be used for purposes as defined.
While accounting for Revenue Reserve, the profit decided to transfer to Revenue Reserve are first transferred to Profit and Loss Appropriation Account and then to Revenue Reserve Account. In the balance sheet, Revenue Account is shown under the Capital and Reserves head.
Uses of Revenue Reserve:
Example:
Given that Revenue Reserve Account stands at Rs 1,00,000 and the company wants to distribute Rs. 40,000 as dividend to its shareholders. The treatment of this transaction in the financial statements will be-
Particulars Amount (Rs.)
Revenue Reserve Account 1,00,000
(less) Dividend distributed (40,000)
The amount shown in Balance Sheet 60,000
See lessWhat is the difference between dissolution of partnership and dissolution of firm?
Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be: Admission of a partner Death of a partner Retirement of a partner Dissolution of firm In the event of the above cases, the existing partnership is dRead more
Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be:
In the event of the above cases, the existing partnership is dissolved and a new partnership is created with the new partners without affecting the firm.
A new partnership deed is created, in case there is a partnership deed agreed among partners and new profit-sharing ratios among the partners are decided, while the assets and liabilities of the firm remain the same.
Dissolution of a firm means the firm no longer exists. Various reasons for the dissolution of a partnership firm could be:
A partnership firm is dissolved by a court of law when there has been a non-compliance of law, the firm is engaged in illegal practices, or that the court’s opinion is that it is in the public interest for the firm to be dissolved.
The partnership is also dissolved with the dissolution of the firm but the converse need not be true.
When a firm is dissolved, there is a sequence that is followed to pay creditors and partners.
Dissolution of the firm can be done by the partners themselves and they could also appoint a third person to do so on the payment of fees, charges, the proportion of surplus, or any contract that has been agreed to.
To summarize, we can a draw a difference table as follows:
· Admission
· Retirement
· Death
· By court
· Mutual decision of partners