Unrecorded Assets are the assets that are completely written off but still physically available in the company or assets that are not shown in the books of the company. Unrecorded assets are generally recorded or recognized at the event of admission, retirement, death of a partner when all the assetRead more
Unrecorded Assets are the assets that are completely written off but still physically available in the company or assets that are not shown in the books of the company.
Unrecorded assets are generally recorded or recognized at the event of admission, retirement, death of a partner when all the assets and liabilities are revalued or dissolution of the firm.
Since Accounting Standards require firms to record all the assets and liabilities in their books, it is therefore mandatory to record such unrecorded assets.
There can be two cases for treatment of such unrecorded assets:
Unrecorded Asset entered into the business and recorded in books
Unrecorded Asset A/c (Dr.)
Amt
To Revaluation A/c
Amt
The unrecorded asset is now debited since it has to be recorded in the books now and Revaluation Account is credited since it is again for the business which will eventually be transferred to Partners’ Capital Account.
Unrecorded Asset taken over by a partner and paid cash
Cash A/c (Dr.)
Amt
To Partners’ Capital A/c
Amt
If a partner decides to take over an unrecorded asset then his account is credited with that amount and since cash paid by the partner comes into business Cash Account is debited.
Unrecorded Asset discovered during Dissolution
Cash/ A/c (Dr)
Amt
To Realization A/c
Amt
When an unrecorded asset is discovered during the dissolution of the firm, such an asset is sold directly to the outsider and as a result, cash A/c is debited since the cash is entering the business. The entry is made through the Revaluation A/c and it is hence credited.
Example:
At the time of revaluation, firms find a typewriter that has not been recorded in the books and is valued at Rs 10,000. The journal entry to record that typewriter will be:
Capital maintenance is a principle that states profit should not be recorded until its cost or capital has been maintained. In other words, profit should not be recognized unless net assets have been maintained. Capital maintenance states that profit recognized is the increase in the value of net asRead more
Capital maintenance is a principle that states profit should not be recorded until its cost or capital has been maintained. In other words, profit should not be recognized unless net assets have been maintained.
Capital maintenance states that profit recognized is the increase in the value of net assets. However, there are two exceptions to it:
Cash increased because of sale of stock to shareholders
Cash decreased because of dividend payout to its shareholders
It is important because:
It protects the interest of shareholders
It protects the interest of creditors
Accurately analyzing the performance of the company
Capital maintenance is of two types:
Financial Capital Maintenance
It is measured by the value of assets at the beginning and end of the financial year.
Physical Capital Maintenance
It is measured by the production capacity at the beginning and end of the financial year.
Capital maintenance is concerned with keeping proper account balances of assets and not the physical assets.
Inflation is the increase in the economic value of goods due to the lower purchasing power and not an actual increase in the value of assets. So, if the value of an asset is increased due to inflation it does not depict the right picture for the company.
Hence, if the value of assets increases due to inflation, companies need to adjust the value of assets to assess if capital maintenance has occurred.
An asset is a resource in the name of the company or controlled by the company that holds economic value and will provide it future benefits. A company invests in various kinds of assets for manufacturing purposes and investment purposes as well. Some examples of assets are: Plant and Machinery InveRead more
An asset is a resource in the name of the company or controlled by the company that holds economic value and will provide it future benefits.
A company invests in various kinds of assets for manufacturing purposes and investment purposes as well. Some examples of assets are:
Plant and Machinery
Investments
Inventory
Cash and Cash Equivalents, etc.
Assets can be broadly divided into two categories based on their physical existence:
Tangible Assets
Intangible Assets
Tangible Assets can be further divided into two categories based on their life and role in the operating cycle:
Non-Current Assets
Current Assets
Since the company derives benefit from the asset, an asset account is debit in nature. If an asset account has a credit balance, it would fundamentally make it a liability. However, there are certain exceptions to it.
In the case of Bank Overdraft, which means a company withdraws more from the bank than it has deposited in its account, Bank Account can also be shown having a credit balance.
Contra Assets Accounts are the accounts that are contrary to the basic nature of an assets account, that is it is contrary to the debit nature of the assets account and hence are credit in nature.
Examples of Contra Assets Account are:
Accumulated Depreciation Account which is essentially Plant Assets Account also has a credit balance as it is used to depreciate the asset, or in other words, reduce the value of the assets, hence it also has a credit balance.
When there are balances in the Account Receivables Account that are not paid to the company or have a very low probability of being paid, they are recorded in a separate account called Bad Debts Account, which is also credit in nature.
A Capital Account is an account that shows the owner's equity in the firm and a Partner's Capital Account is an account that shows the partner's equity in a partnership firm. Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are: CapitalRead more
A Capital Account is an account that shows the owner’s equity in the firm and a Partner’s Capital Account is an account that shows the partner’s equity in a partnership firm.
Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are:
Capital introduced in the firm
Capital withdrawn
Interest on Capital
Interest on Drawings
Profit or loss in the financial year, etc.
When partners are given interest on their capital contribution in the firm, it is called on Interest on Capital.
In case the partnership firm does not have a Partnership Deed, the Partnership Act does not include a provision for Interest on Capital. However, if the partners want they can mutually decide the rate of Interest on Capital.
Interest on Capital is calculated on the opening capital of the partners and is only allowed when the firm makes a profit, that is, in case a firm incurs losses, it cannot allow Interest on Capital to its partners.
Example:
In a partnership firm, there are two partners A and B, and their capital contribution is Rs 10,000 and 20,000 respectively. Interest on capital is @ 10% p.a. The Interest on Capital for both the partners is:
Partner A- 10,000 * 10/100 = 1,000
Partner B- 20,000 * 10/100 = 2,000
The journal entry for Interest on Capital is an adjusting entry and is shown as:
Interest on Capital A/c Dr.
3,000
To A’s Capital a/c
1,000
To B’s Capital A/c
2,000
Partner’s Capital Account is credited because it is credit in nature and interest on capital is an addition to the account.
Interest on Capital Account is debited because it is an expense account.
A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company. The Cash Flow Statement provides a picture to the sRead more
A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company.
The Cash Flow Statement provides a picture to the shareholders, government, and the public of how the company manages its obligations and fund its operations. It is a crucial measure to determine the financial health of a company.
The Cash Flow Statement is created from the Income Statement and the Balance Sheet. While Income Statement shows money engaged in various transactions during the year, the Balance Sheet presents information about the opening and closing balances.
The primary objective of a Cash Flow Statement is to present a record of inflow and outflow of cash, cash equivalents, and marketable securities through various activities of a company.
Various activities in a company can be broadly classified into three parts or heads:
Cash Flow from Operating Activities: it represents how money from regular business activities is derived and spent. It includes Net Profit from Income Statement after adjusting for tax and extra-ordinary activities. Items included in Operating Activities are adjustments in Working Capital. If current liabilities are paid or current assets are bought it means outflow of cash, hence it is deducted and if liabilities are increased or assets are sold it means the inflow of cash, hence it is added. Operating Activities take into account taxation, dividend, depreciation, and other adjustments.
Cash Flow from Investing Activities: it represents aggregate inflow or outflow of cash due to various investments activities that the company was engaged in. Purchase and sale of non-current assets like fixed assets and long-term investments are considered under this head. If there is an investment made, it means outflow of cash, hence it is deducted and if there is an investment sold it means the inflow of cash, and hence it is added.
Cash Flow from Financing Activities:it represents the activities that are used to finance a company’s operations, like, issue of cash or debentures, paying dividends and interest, long-term borrowing taken by a company, etc. If these are paid, it means outflow of cash and is hence deducted and if they are acquired, it means the inflow of cash and hence ae added.
Cash Flow Statements also present a picture of the liquidity of the company and are therefore used by the management of a company to take decisions with the help of the right information.
Cash Flow Statements are a great source of comparison between a company’s last year’s performance to its current year or with other companies in the same industry and hence, helps shareholders and potential investors to make the right decisions.
It also helps to differentiate between non-cash and cash items;incomes and expenditures are divided into separate heads.
The profits earned by a company are distributed to its shareholders monthly, quarterly, half-yearly, or yearly in the form of dividends. The dividend payable by the company is transferred to the Dividend Account and is then claimed by the shareholders. If the dividend is not claimed by the members aRead more
The profits earned by a company are distributed to its shareholders monthly, quarterly, half-yearly, or yearly in the form of dividends. The dividend payable by the company is transferred to the Dividend Account and is then claimed by the shareholders.
If the dividend is not claimed by the members after transferring it to the Dividend Account, it is called Unclaimed Dividend. Such a dividend is a liability for the company and it is shown under the head Current Liabilities.
The dividend is transferred from the Dividend Account to the Unclaimed Dividend Account if it is not claimed by the shareholders within 37 days of declaration of dividend.
For the Cash Flow Statement, unclaimed dividend comes under the head Financing Activities.
Items shown under the head Financing Activities are those that are used to finance the operations of the company. Since, money raised through the issue of shares finances the company, any item related to shareholding or dividend is shown under the head Financing Activities.
However, there are two approaches to deal with the treatment of Unclaimed Dividend:
First, since there is no inflow or outflow of cash, there is no need to show it in the cash flow statement.
Second, the unclaimed dividend is deducted from the Appropriations, that is, when Net Profit before Tax and Extraordinary Activities is calculated.
Then, it is added under the head Financing Activities because the amount of dividend that has to flow out of the company (that is Dividend Paid amount which has already been deducted from Financing Activities) remained in the company only since it has not been claimed by the members.
The second approach to the treatment of an Unclaimed Dividend is used when the company has not transferred the unclaimed dividend amount from the Dividend Account to a separate account.
The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio. The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI. CRR meansRead more
The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio.
The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI.
CRR means that commercial banks cannot lend money in the market or make investments or earn any interest on the amount below what is required to be kept in CRR.
RBI mandates Cash Reserve Ratio so that a percentage of the bank’s deposit is kept safe with the RBI, hence, in an uncertain event bank can still fulfill its obligation against its customers.
CRR also helps RBI to control liquidity in the economy. When CRR is kept at a higher rate, the lower the liquidity in the economy, and similarly when CRR is kept at a lower rate, there is higher liquidity in the economy.
The Reserve Bank of India also regulates inflation through the Cash Reserve Ratio:
During inflation, that is when RBI wants to apply contractionary monetary policy, it increases CRR so that the money left with banks to lend is reduced. Such measures reduce the money supply in the economy and therefore help combat inflation.
During deflation, that is when RBI wants to apply expansionary monetary policy, it reduces CRR, so that the money left with banks to lend is increased. Such measures increase the money supply in the economy and therefore help combat deflation.
The formula for CRR is-
Reserves maintained with Central Banks / Bank Deposits * 100%
For example:
The current CRR is 3% which means that for every Rs 100 deposit in the commercial banks have to keep Rs 3 as a deposit with RBI.
When a company earns profit, it distributes a proportion of its income to its shareholders, and such distribution is called the dividend. The dividend is allocated as a fixed amount per share and shareholders receive dividends proportional to their shareholdings. However, a company can only pay diviRead more
When a company earns profit, it distributes a proportion of its income to its shareholders, and such distribution is called the dividend. The dividend is allocated as a fixed amount per share and shareholders receive dividends proportional to their shareholdings.
However, a company can only pay dividends out of its current year profits or retained earnings (profits of the company that are not distributed as dividend and retained in the business is called retained earnings) of previous years but not out of capital.
Dividends can be paid to shareholders in the form of
Cash
dividend re-investing plan of the company
future shares
share repurchase.
For companies, payment of regular dividends boosts the morale of the shareholders, investors trust the companies more and it reflects positively on the share price of the company.
For example, Nestle in India paid an interim dividend of 1100.00% to its shareholders in 2021.
The journal entry for dividend paid is
Particulars
Debit
Credit
Retained Earnings A/c Dr.
Amt
To Cash A/c
Amt
According to the golden rules of accounting-
Retained earnings is a credit account by nature and since dividends are paid from retained earnings resulting in a deduction of the account, we debit
Cash is credited because the account is debit in nature and since dividends are paid in cash it’s credited to present the deduction in the account.
According to modern rules of accounting-
Since cash is decreasing, we credit
Since retained earnings are decreasing and it is a part of capital it should be
For example-
A company paid a dividend of 25 crores to its shareholders in cash, the journal entry according to golden rules will be-
Working Capital is the capital used in the daily operations of the business. It is calculated as the difference between current assets and current liabilities. Gross working capital means current assets and net working capital means the difference between current assets and current liabilities. WorkRead more
Working Capital is the capital used in the daily operations of the business.It is calculated as the difference between current assets and current liabilities. Gross working capital means current assets and net working capital means the difference between current assets and current liabilities.
Working Capital indicates the short-term liquidity of its business. It means the ability of a company to meet its daily requirements through short-term financing.
Working Capital can be;
Positive
Zero, or
Negative
Positive or negative working capital follows a simple rule of math. If current assets are more than current liabilities, working capital is positive and if current assets are less than current liabilities, working capital is negative. When current assets are equal to current liabilities, working capital is zero.
Negative working capital for a short period means that the company has made a big payment to its vendors, or a significant increase in the creditor’s account because of credit purchases.
However, if working capital is negative for a longer period it indicates that the company is struggling with its operating requirements or that it has to finance its daily operations through long-term borrowings.
The current ratio for a company is calculated as:
Current Assets divided by Current Liabilities.
Working Capital and Current Ratio are interrelated. If the Current Ratio is more than 1, it means current assets exceed current liabilities and Working Capital is positive. However, if the Current Ratio is less than 1, it means current liabilities exceed current assets and Working Capital is negative.
For example-
If Current Assets are Rs 50,000 and Current Liabilities are Rs 70,000 then
Working Capital= Current Assets – Current Liabilities
WC = Rs 70,000 – Rs 50,000
WC = Rs. 20,000
Current Ratio = Current Assets / Current Liabilities
Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business. Capital Accounts in a partnership firm can be ofRead more
Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business.
Capital Accounts in a partnership firm can be of two types:
Fixed Capital Account
Fluctuating Capital Account
A fixed Capital Account is one where only non-recurring transactions related to capital accounts are recorded. For example:
Capital introduced
Capital withdrawn/ Drawings
For transactions that are recurring in nature like interest on capital, the interest of drawings a separate account called Partner’s Current Account is created.
Fluctuating Capital Accounts are the ones where there is a single account to record all types of transactions related to the partner’s capital account, whether recurring or nonrecurring.
Fixed Capital Accounts are usually created in cases where there are numerous recurring transactions and partners want to keep a record of the fixed amount invested in the business by all the partners at any point in time.
Fluctuating Capital Account is usually created in cases where the number of recurring transactions is not high or partners want to keep a record of the amount due to all the partners in business at any point in time.
However, the decision to choose what kind of capital account should be implemented in the firm is complete with the partners. They may choose whatever they think is a more suitable fit.
To summarise the difference between the two following table can be used:
Fixed Capital Account
Fluctuating Capital Account
Non-recurring transactions are recorded.
Recurring transactions are recorded.
Created where the number of recurring transactions is high to maintain a separate record.
Created where the number of recurring transactions is low.
What are unrecorded assets?
Unrecorded Assets are the assets that are completely written off but still physically available in the company or assets that are not shown in the books of the company. Unrecorded assets are generally recorded or recognized at the event of admission, retirement, death of a partner when all the assetRead more
Unrecorded Assets are the assets that are completely written off but still physically available in the company or assets that are not shown in the books of the company.
Unrecorded assets are generally recorded or recognized at the event of admission, retirement, death of a partner when all the assets and liabilities are revalued or dissolution of the firm.
Since Accounting Standards require firms to record all the assets and liabilities in their books, it is therefore mandatory to record such unrecorded assets.
There can be two cases for treatment of such unrecorded assets:
The unrecorded asset is now debited since it has to be recorded in the books now and Revaluation Account is credited since it is again for the business which will eventually be transferred to Partners’ Capital Account.
If a partner decides to take over an unrecorded asset then his account is credited with that amount and since cash paid by the partner comes into business Cash Account is debited.
When an unrecorded asset is discovered during the dissolution of the firm, such an asset is sold directly to the outsider and as a result, cash A/c is debited since the cash is entering the business. The entry is made through the Revaluation A/c and it is hence credited.
Example:
At the time of revaluation, firms find a typewriter that has not been recorded in the books and is valued at Rs 10,000. The journal entry to record that typewriter will be:
See lessWhat is capital maintenance?
Capital maintenance is a principle that states profit should not be recorded until its cost or capital has been maintained. In other words, profit should not be recognized unless net assets have been maintained. Capital maintenance states that profit recognized is the increase in the value of net asRead more
Capital maintenance is a principle that states profit should not be recorded until its cost or capital has been maintained. In other words, profit should not be recognized unless net assets have been maintained.
Capital maintenance states that profit recognized is the increase in the value of net assets. However, there are two exceptions to it:
It is important because:
Capital maintenance is of two types:
It is measured by the value of assets at the beginning and end of the financial year.
It is measured by the production capacity at the beginning and end of the financial year.
Capital maintenance is concerned with keeping proper account balances of assets and not the physical assets.
Inflation is the increase in the economic value of goods due to the lower purchasing power and not an actual increase in the value of assets. So, if the value of an asset is increased due to inflation it does not depict the right picture for the company.
Hence, if the value of assets increases due to inflation, companies need to adjust the value of assets to assess if capital maintenance has occurred.
See lessCan assets ever have a credit balance?
An asset is a resource in the name of the company or controlled by the company that holds economic value and will provide it future benefits. A company invests in various kinds of assets for manufacturing purposes and investment purposes as well. Some examples of assets are: Plant and Machinery InveRead more
An asset is a resource in the name of the company or controlled by the company that holds economic value and will provide it future benefits.
A company invests in various kinds of assets for manufacturing purposes and investment purposes as well. Some examples of assets are:
Assets can be broadly divided into two categories based on their physical existence:
Tangible Assets can be further divided into two categories based on their life and role in the operating cycle:
Since the company derives benefit from the asset, an asset account is debit in nature. If an asset account has a credit balance, it would fundamentally make it a liability. However, there are certain exceptions to it.
In the case of Bank Overdraft, which means a company withdraws more from the bank than it has deposited in its account, Bank Account can also be shown having a credit balance.
Contra Assets Accounts are the accounts that are contrary to the basic nature of an assets account, that is it is contrary to the debit nature of the assets account and hence are credit in nature.
Examples of Contra Assets Account are:
Accumulated Depreciation Account which is essentially Plant Assets Account also has a credit balance as it is used to depreciate the asset, or in other words, reduce the value of the assets, hence it also has a credit balance.
When there are balances in the Account Receivables Account that are not paid to the company or have a very low probability of being paid, they are recorded in a separate account called Bad Debts Account, which is also credit in nature.
See lessWhat is interest on partner’s capital?
A Capital Account is an account that shows the owner's equity in the firm and a Partner's Capital Account is an account that shows the partner's equity in a partnership firm. Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are: CapitalRead more
A Capital Account is an account that shows the owner’s equity in the firm and a Partner’s Capital Account is an account that shows the partner’s equity in a partnership firm.
Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are:
When partners are given interest on their capital contribution in the firm, it is called on Interest on Capital.
In case the partnership firm does not have a Partnership Deed, the Partnership Act does not include a provision for Interest on Capital. However, if the partners want they can mutually decide the rate of Interest on Capital.
Interest on Capital is calculated on the opening capital of the partners and is only allowed when the firm makes a profit, that is, in case a firm incurs losses, it cannot allow Interest on Capital to its partners.
Example:
In a partnership firm, there are two partners A and B, and their capital contribution is Rs 10,000 and 20,000 respectively. Interest on capital is @ 10% p.a. The Interest on Capital for both the partners is:
Partner A- 10,000 * 10/100 = 1,000
Partner B- 20,000 * 10/100 = 2,000
The journal entry for Interest on Capital is an adjusting entry and is shown as:
See lessWhat is the primary objective of cash flow statement?
A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company. The Cash Flow Statement provides a picture to the sRead more
A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company.
The Cash Flow Statement provides a picture to the shareholders, government, and the public of how the company manages its obligations and fund its operations. It is a crucial measure to determine the financial health of a company.
The Cash Flow Statement is created from the Income Statement and the Balance Sheet. While Income Statement shows money engaged in various transactions during the year, the Balance Sheet presents information about the opening and closing balances.
The primary objective of a Cash Flow Statement is to present a record of inflow and outflow of cash, cash equivalents, and marketable securities through various activities of a company.
Various activities in a company can be broadly classified into three parts or heads:
Cash Flow Statements also present a picture of the liquidity of the company and are therefore used by the management of a company to take decisions with the help of the right information.
Cash Flow Statements are a great source of comparison between a company’s last year’s performance to its current year or with other companies in the same industry and hence, helps shareholders and potential investors to make the right decisions.
It also helps to differentiate between non-cash and cash items; incomes and expenditures are divided into separate heads.
See lessHow to do treatment of unclaimed dividend in cash flow statement?
The profits earned by a company are distributed to its shareholders monthly, quarterly, half-yearly, or yearly in the form of dividends. The dividend payable by the company is transferred to the Dividend Account and is then claimed by the shareholders. If the dividend is not claimed by the members aRead more
The profits earned by a company are distributed to its shareholders monthly, quarterly, half-yearly, or yearly in the form of dividends. The dividend payable by the company is transferred to the Dividend Account and is then claimed by the shareholders.
If the dividend is not claimed by the members after transferring it to the Dividend Account, it is called Unclaimed Dividend. Such a dividend is a liability for the company and it is shown under the head Current Liabilities.
The dividend is transferred from the Dividend Account to the Unclaimed Dividend Account if it is not claimed by the shareholders within 37 days of declaration of dividend.
For the Cash Flow Statement, unclaimed dividend comes under the head Financing Activities.
Items shown under the head Financing Activities are those that are used to finance the operations of the company. Since, money raised through the issue of shares finances the company, any item related to shareholding or dividend is shown under the head Financing Activities.
However, there are two approaches to deal with the treatment of Unclaimed Dividend:
First, since there is no inflow or outflow of cash, there is no need to show it in the cash flow statement.
Second, the unclaimed dividend is deducted from the Appropriations, that is, when Net Profit before Tax and Extraordinary Activities is calculated.
Then, it is added under the head Financing Activities because the amount of dividend that has to flow out of the company (that is Dividend Paid amount which has already been deducted from Financing Activities) remained in the company only since it has not been claimed by the members.
The second approach to the treatment of an Unclaimed Dividend is used when the company has not transferred the unclaimed dividend amount from the Dividend Account to a separate account.
See lessWhat is Cash Reserve Ratio?
The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio. The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI. CRR meansRead more
The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio.
The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI.
CRR means that commercial banks cannot lend money in the market or make investments or earn any interest on the amount below what is required to be kept in CRR.
RBI mandates Cash Reserve Ratio so that a percentage of the bank’s deposit is kept safe with the RBI, hence, in an uncertain event bank can still fulfill its obligation against its customers.
CRR also helps RBI to control liquidity in the economy. When CRR is kept at a higher rate, the lower the liquidity in the economy, and similarly when CRR is kept at a lower rate, there is higher liquidity in the economy.
The Reserve Bank of India also regulates inflation through the Cash Reserve Ratio:
The formula for CRR is-
Reserves maintained with Central Banks / Bank Deposits * 100%
For example:
The current CRR is 3% which means that for every Rs 100 deposit in the commercial banks have to keep Rs 3 as a deposit with RBI.
See lessWhat is dividend paid journal entry?
When a company earns profit, it distributes a proportion of its income to its shareholders, and such distribution is called the dividend. The dividend is allocated as a fixed amount per share and shareholders receive dividends proportional to their shareholdings. However, a company can only pay diviRead more
When a company earns profit, it distributes a proportion of its income to its shareholders, and such distribution is called the dividend. The dividend is allocated as a fixed amount per share and shareholders receive dividends proportional to their shareholdings.
However, a company can only pay dividends out of its current year profits or retained earnings (profits of the company that are not distributed as dividend and retained in the business is called retained earnings) of previous years but not out of capital.
Dividends can be paid to shareholders in the form of
For companies, payment of regular dividends boosts the morale of the shareholders, investors trust the companies more and it reflects positively on the share price of the company.
For example, Nestle in India paid an interim dividend of 1100.00% to its shareholders in 2021.
The journal entry for dividend paid is
According to the golden rules of accounting-
According to modern rules of accounting-
For example-
A company paid a dividend of 25 crores to its shareholders in cash, the journal entry according to golden rules will be-
(in crores)
(in crores)
See lessCan working capital be negative?
Working Capital is the capital used in the daily operations of the business. It is calculated as the difference between current assets and current liabilities. Gross working capital means current assets and net working capital means the difference between current assets and current liabilities. WorkRead more
Working Capital is the capital used in the daily operations of the business. It is calculated as the difference between current assets and current liabilities. Gross working capital means current assets and net working capital means the difference between current assets and current liabilities.
Working Capital indicates the short-term liquidity of its business. It means the ability of a company to meet its daily requirements through short-term financing.
Working Capital can be;
Positive or negative working capital follows a simple rule of math. If current assets are more than current liabilities, working capital is positive and if current assets are less than current liabilities, working capital is negative. When current assets are equal to current liabilities, working capital is zero.
Negative working capital for a short period means that the company has made a big payment to its vendors, or a significant increase in the creditor’s account because of credit purchases.
However, if working capital is negative for a longer period it indicates that the company is struggling with its operating requirements or that it has to finance its daily operations through long-term borrowings.
The current ratio for a company is calculated as:
Current Assets divided by Current Liabilities.
Working Capital and Current Ratio are interrelated. If the Current Ratio is more than 1, it means current assets exceed current liabilities and Working Capital is positive. However, if the Current Ratio is less than 1, it means current liabilities exceed current assets and Working Capital is negative.
For example-
If Current Assets are Rs 50,000 and Current Liabilities are Rs 70,000 then
Working Capital= Current Assets – Current Liabilities
WC = Rs 70,000 – Rs 50,000
WC = Rs. 20,000
Current Ratio = Current Assets / Current Liabilities
CR = Rs.50,000/ Rs. 70,000
CR = 0.71< 1
See lessWhat is the difference between fixed and fluctuating capital account?
Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business. Capital Accounts in a partnership firm can be ofRead more
Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business.
Capital Accounts in a partnership firm can be of two types:
A fixed Capital Account is one where only non-recurring transactions related to capital accounts are recorded. For example:
For transactions that are recurring in nature like interest on capital, the interest of drawings a separate account called Partner’s Current Account is created.
Fluctuating Capital Accounts are the ones where there is a single account to record all types of transactions related to the partner’s capital account, whether recurring or nonrecurring.
Fixed Capital Accounts are usually created in cases where there are numerous recurring transactions and partners want to keep a record of the fixed amount invested in the business by all the partners at any point in time.
Fluctuating Capital Account is usually created in cases where the number of recurring transactions is not high or partners want to keep a record of the amount due to all the partners in business at any point in time.
However, the decision to choose what kind of capital account should be implemented in the firm is complete with the partners. They may choose whatever they think is a more suitable fit.
To summarise the difference between the two following table can be used:
· Capital introduced
· Capital withdrawn
· Interest on capital
· Interest in drawings
See less