To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions; Condition A Stay in India for 182 days or more in the previous year, or Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 yeaRead more
To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions;
Condition A
Stay in India for 182 days or more in the previous year, or
Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 years immediately preceding the previous year.
The second condition above is not applicable if he is an Indian citizen leaving India for the purpose of employment, or he is a member of the crew of an Indian ship, or he is only coming to India on a visit.
If he fails to fulfil either of the two conditions, then he is termed as a non-resident.
In India, a resident person can be classified into two:
Resident and ordinarily resident
Resident but not ordinarily resident
Condition B
A resident is a resident and ordinarily resident if (B):
He has been a resident in India for at least 2 out of the previous 10 years immediately preceding the relevant previous year, and
He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
If a person satisfies any one condition of (A) but does not follow all conditions of (B), then he is termed as a resident but not ordinarily resident.
EXAMPLE
If Nithin is living in India for 190 days in the previous year and was a resident for the previous two years only staying for 400 days in the previous 7 years, then he fulfils condition (A) but not both conditions of (B) and hence he is a resident but not ordinarily resident.
When a manager provides services to a company, he is expected to receive some kind of compensation. This is given in the form of managerial remuneration. Section 197 of the Companies Act allows a maximum remuneration of 11% of the net profit of the company to the directors, managing directors and whRead more
When a manager provides services to a company, he is expected to receive some kind of compensation. This is given in the form of managerial remuneration. Section 197 of the Companies Act allows a maximum remuneration of 11% of the net profit of the company to the directors, managing directors and whole-time directors etc. This section is applicable for public companies and not private companies
Yes, a company can pay managerial remuneration in case of inadequacy of profits or losses, provided they follow the condition in Schedule V of the Companies Act 2013.
Conditions
In order to pay remuneration while the company is at a loss, it has to comply with the following:
Pass a resolution at the board meeting
The company has not defaulted in payments to any Banks, non-convertible debenture holders or any secured creditors. But in case of default, the company has obtained prior approval from such creditors or banks before obtaining approval from their general meeting.
Ordinary resolution or special resolution (if the limit is exceeded)
The limit mentioned above refers to the maximum limit of Rs 60 lakhs when the effective capital is negative or less than Rs 5 Crore. Such remuneration can also only be paid if such a manager does not have any interest in the company and also possesses special knowledge and expertise along with a graduate-level qualification.
Effective capital is the aggregate of paid-up share capital, share premium, reserves and surplus, long term loans and deposits and after subtracting Investments, accumulated losses and preliminary expenses not written off.
Percentage of Remuneration
When the Company earns adequate profits, they are allowed to provide remuneration up to a certain per cent. The percentage of remuneration depends on whether the directors are working whole-time or part-time according to the Companies Act.
A statutory reserve is any reserve that has to be maintained by an Act or law. When it comes to insurance, a statutory reserve is a reserve that an insurance company is legally bound to maintain to ensure that the company is able to meet its policy obligations. In India, as per the Banking RegulatioRead more
A statutory reserve is any reserve that has to be maintained by an Act or law. When it comes to insurance, a statutory reserve is a reserve that an insurance company is legally bound to maintain to ensure that the company is able to meet its policy obligations. In India, as per the Banking Regulations Act, every banking company has to maintain at least 25% of its net profits as statutory reserves.
The companies are required to maintain such reserves to guarantee the availability of cash when it is required by the customer. Common examples of statutory reserves are Cash reserve ratio (CSR), Statutory Liquidity Ratio (SLR).
Treatment
Statutory reserves are shown in the Profit and Loss account under the head “appropriations”.
It is also shown under the head Reserves and Surplus (Schedule 2) in the Balance Sheet.
Method
Rule-Based Approach – The company calculates the amount required by using standard formulas. However, since they are pre-determined formulas, it does not cover all risk determining factors.
Principle-based approach – This method is used to protect customers and ensure that the company stays solvent. They hold a higher amount of reserves than required after predicting all possible risks.
Statutory reserves are different from general reserves as general reserves are maintained voluntarily by the company. A company that does not follow statutory requirements will face financial penalties. These reserves are mostly maintained in the form of cash.
Maintenance of reserves gives confidence to investors that their money is secure. However, funds from these reserves can be used only for specific purposes. They should also maintain such reserves whether or not they earn profits.
When a partnership firm decides to admit a new partner into their firm, the old partners have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share for the new partner. The partnerRead more
When a partnership firm decides to admit a new partner into their firm, the old partners have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share for the new partner. The partners can choose to forego their shares equally or in an agreed proportion.
Before admission of the new partner, the existing partners would be sharing their profits in the old ratio. Upon admission, the profit-sharing ratio would change to accommodate the new partner. This would give rise to the new ratio. Hence Sacrificing ratio formula can be calculated as: Sacrificing Ratio = Old Ratio – New Ratio
To further understand the formula, let’s say Bruce and Barry are sharing a pizza of 6 slices equally (3 slices each). They decide to share their pizza with Arthur such that they all get equal slices (2 slices each). Hence, we can use the formula to calculate their sacrifice as follows:
Bruce’s sacrifice = 3 – 2 = 1 slice
Barry’s sacrifice = 3 – 2 = 1 slice
Therefore, their sacrificing ratio = 1:1. In this same way, we can solve various problems to calculate the sacrifice of partners during a change in their profit sharing ratio.
For example, Joshua and Edwin are partners, sharing profits in the ratio 7:3. They admit Adam into their partnership such that the new profit-sharing ratio is 5:2:3. Therefore, their sacrificing ratio can be calculated as:
Joshua’s sacrifice = old share – new share = 7/10 – 5/10 = 2/10
Edwin’s sacrifice = old share – new share = 3/10 – 2/10 = 1/10
Hence, sacrificing ratio of Joshua and Edwin is 2:1. Once the denominators are equal, we ignore them and only consider numerators while showing sacrificing ratio.
A revenue reserve is a type of reserve where a portion of the net profit is set aside for future requirements. It serves as a great source of internal finance for the company to meet its short term requirements. The funds put into this reserve are earned from the daily operations of a company. RevenRead more
A revenue reserve is a type of reserve where a portion of the net profit is set aside for future requirements. It serves as a great source of internal finance for the company to meet its short term requirements. The funds put into this reserve are earned from the daily operations of a company. Revenue reserves are shown on the liabilities side of a balance sheet under reserves and surplus. Some examples of revenue reserve are :
General Reserve: This reserve is used for no specific purpose, but the general financial growth of the company. It is a free reserve which means the company is not compelled to make one. It helps to curb future losses which may arise in the future.
Specific Reserve: These are those reserves that can only be used for specific purposes. This money cannot be used for any other requirement. It is not a free reserve. A reserve created to redeem debentures would be called a debenture redemption reserve.
Secret Reserve: This is a type of reserve whose existence is not disclosed in the balance sheet. This type of reserve cannot be created by joint-stock companies. However, banks and financial institutions are allowed to create such secret reserves.
Retained Earnings is that part of the net profit which is left after the distribution of dividends to shareholders. This amount can be invested in the company to gain profits. It is not technically a reserve as it is held after distribution of dividends but it can still be used as one.
On the other hand, a capital reserve is not a part of the revenue reserve. It is created from capital profits to finance long term projects of a company. It is used for specific purposes only.
When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the nRead more
When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the new partner. The partners can choose to forego their shares equally or in an agreed proportion.
Before admission of the new partner, the existing partners would be sharing their profits in the old ratio. Upon admission, the profit-sharing ratio would change to accommodate the new partner. This would give rise to the new ratio. Hence Sacrificing ratio can be calculated as:
Sacrificing Ratio = Old Ratio – New Ratio
For example, Tony and Steve are partners in a firm, sharing profits in the ratio of 3:2. They decide to admit Bruce into the partnership such that the new profit-sharing ratio is 2:1:2. Now, to calculate the sacrificing ratio of Tony and Steve, we subtract their new share from their old share.
Tony’s Sacrifice = 3/5 – 2/5 = 1/5
Steve’s Sacrifice = 2/5 – 1/5 = 1/5
Therefore, the Sacrificing ratio of Tony and Steve is 1:1. This shows that Tony gave up 1/5th of his share while Steve also sacrificed 1/5th of his share.
Calculation of sacrificing ratio is important in a partnership as it helps in measuring that portion of the share of existing partners that have to be sacrificed. This ensures a smooth reconstitution of the partnership. Since the old partners are foregoing a part of their share in profits, the new partner has to bring in some amount as goodwill to compensate for their loss.
Interest on Investment is to be shown on the Credit side of a Trial Balance. Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return onRead more
Interest on Investment is to be shown on the Credit side of a Trial Balance.
Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return on investment (ROI).
Since interest on investment is an income, it is shown on the creditside of the Trial Balance. This is based on the accounting rule that all increase in incomes are credited and all increase in expenses are debited. A Trial Balance is a worksheet where the balances of all assets, expenses and drawings are shown on the debit side while the balances of all liabilities, incomes and capital are shown on the credit side.
For example, if Jack bought Corporate Bonds of Amazon, worth $50,000 with a 10% interest on investment, then the accounting treatment for interest on investment would be
Cash/Bank A/C Dr 5,000
To Interest on Investment in Corporate Bonds (Amazon) 5,000
As per the above entry, since interest on investment is credited, it will show a credit balance and hence be shown on the credit side of the Trial Balance. Interest on investment account is not to be confused with an Investment account. Investment is an asset whereas interest on investment is an income.
How to determine residential status of an individual as per Income Tax Act, 1961?
To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions; Condition A Stay in India for 182 days or more in the previous year, or Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 yeaRead more
To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions;
Condition A
The second condition above is not applicable if he is an Indian citizen leaving India for the purpose of employment, or he is a member of the crew of an Indian ship, or he is only coming to India on a visit.
If he fails to fulfil either of the two conditions, then he is termed as a non-resident.
In India, a resident person can be classified into two:
Condition B
A resident is a resident and ordinarily resident if (B):
If a person satisfies any one condition of (A) but does not follow all conditions of (B), then he is termed as a resident but not ordinarily resident.
EXAMPLE
If Nithin is living in India for 190 days in the previous year and was a resident for the previous two years only staying for 400 days in the previous 7 years, then he fulfils condition (A) but not both conditions of (B) and hence he is a resident but not ordinarily resident.
See lessCan a company pay managerial remuneration in case of inadequate profit or loss?
When a manager provides services to a company, he is expected to receive some kind of compensation. This is given in the form of managerial remuneration. Section 197 of the Companies Act allows a maximum remuneration of 11% of the net profit of the company to the directors, managing directors and whRead more
When a manager provides services to a company, he is expected to receive some kind of compensation. This is given in the form of managerial remuneration. Section 197 of the Companies Act allows a maximum remuneration of 11% of the net profit of the company to the directors, managing directors and whole-time directors etc. This section is applicable for public companies and not private companies
Yes, a company can pay managerial remuneration in case of inadequacy of profits or losses, provided they follow the condition in Schedule V of the Companies Act 2013.
Conditions
In order to pay remuneration while the company is at a loss, it has to comply with the following:
The limit mentioned above refers to the maximum limit of Rs 60 lakhs when the effective capital is negative or less than Rs 5 Crore. Such remuneration can also only be paid if such a manager does not have any interest in the company and also possesses special knowledge and expertise along with a graduate-level qualification.
Effective capital is the aggregate of paid-up share capital, share premium, reserves and surplus, long term loans and deposits and after subtracting Investments, accumulated losses and preliminary expenses not written off.
Percentage of Remuneration
When the Company earns adequate profits, they are allowed to provide remuneration up to a certain per cent. The percentage of remuneration depends on whether the directors are working whole-time or part-time according to the Companies Act.
See lessWhat is a statutory reserve?
A statutory reserve is any reserve that has to be maintained by an Act or law. When it comes to insurance, a statutory reserve is a reserve that an insurance company is legally bound to maintain to ensure that the company is able to meet its policy obligations. In India, as per the Banking RegulatioRead more
A statutory reserve is any reserve that has to be maintained by an Act or law. When it comes to insurance, a statutory reserve is a reserve that an insurance company is legally bound to maintain to ensure that the company is able to meet its policy obligations. In India, as per the Banking Regulations Act, every banking company has to maintain at least 25% of its net profits as statutory reserves.
The companies are required to maintain such reserves to guarantee the availability of cash when it is required by the customer. Common examples of statutory reserves are Cash reserve ratio (CSR), Statutory Liquidity Ratio (SLR).
Treatment
Method
Rule-Based Approach – The company calculates the amount required by using standard formulas. However, since they are pre-determined formulas, it does not cover all risk determining factors.
Principle-based approach – This method is used to protect customers and ensure that the company stays solvent. They hold a higher amount of reserves than required after predicting all possible risks.
Statutory reserves are different from general reserves as general reserves are maintained voluntarily by the company. A company that does not follow statutory requirements will face financial penalties. These reserves are mostly maintained in the form of cash.
Maintenance of reserves gives confidence to investors that their money is secure. However, funds from these reserves can be used only for specific purposes. They should also maintain such reserves whether or not they earn profits.
See lessWhat is sacrificing ratio formula?
When a partnership firm decides to admit a new partner into their firm, the old partners have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share for the new partner. The partnerRead more
When a partnership firm decides to admit a new partner into their firm, the old partners have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share for the new partner. The partners can choose to forego their shares equally or in an agreed proportion.
Before admission of the new partner, the existing partners would be sharing their profits in the old ratio. Upon admission, the profit-sharing ratio would change to accommodate the new partner. This would give rise to the new ratio. Hence Sacrificing ratio formula can be calculated as:
Sacrificing Ratio = Old Ratio – New Ratio
To further understand the formula, let’s say Bruce and Barry are sharing a pizza of 6 slices equally (3 slices each). They decide to share their pizza with Arthur such that they all get equal slices (2 slices each). Hence, we can use the formula to calculate their sacrifice as follows:
Bruce’s sacrifice = 3 – 2 = 1 slice
Barry’s sacrifice = 3 – 2 = 1 slice
Therefore, their sacrificing ratio = 1:1. In this same way, we can solve various problems to calculate the sacrifice of partners during a change in their profit sharing ratio.
For example, Joshua and Edwin are partners, sharing profits in the ratio 7:3. They admit Adam into their partnership such that the new profit-sharing ratio is 5:2:3. Therefore, their sacrificing ratio can be calculated as:
Joshua’s sacrifice = old share – new share = 7/10 – 5/10 = 2/10
Edwin’s sacrifice = old share – new share = 3/10 – 2/10 = 1/10
Hence, sacrificing ratio of Joshua and Edwin is 2:1. Once the denominators are equal, we ignore them and only consider numerators while showing sacrificing ratio.
See lessWhat is example of revenue reserve?
A revenue reserve is a type of reserve where a portion of the net profit is set aside for future requirements. It serves as a great source of internal finance for the company to meet its short term requirements. The funds put into this reserve are earned from the daily operations of a company. RevenRead more
A revenue reserve is a type of reserve where a portion of the net profit is set aside for future requirements. It serves as a great source of internal finance for the company to meet its short term requirements. The funds put into this reserve are earned from the daily operations of a company. Revenue reserves are shown on the liabilities side of a balance sheet under reserves and surplus. Some examples of revenue reserve are :
Retained Earnings is that part of the net profit which is left after the distribution of dividends to shareholders. This amount can be invested in the company to gain profits. It is not technically a reserve as it is held after distribution of dividends but it can still be used as one.
On the other hand, a capital reserve is not a part of the revenue reserve. It is created from capital profits to finance long term projects of a company. It is used for specific purposes only.
See lessWhat is sacrificing ratio?
When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the nRead more
When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the new partner. The partners can choose to forego their shares equally or in an agreed proportion.
Before admission of the new partner, the existing partners would be sharing their profits in the old ratio. Upon admission, the profit-sharing ratio would change to accommodate the new partner. This would give rise to the new ratio. Hence Sacrificing ratio can be calculated as:
Sacrificing Ratio = Old Ratio – New Ratio
For example, Tony and Steve are partners in a firm, sharing profits in the ratio of 3:2. They decide to admit Bruce into the partnership such that the new profit-sharing ratio is 2:1:2. Now, to calculate the sacrificing ratio of Tony and Steve, we subtract their new share from their old share.
Tony’s Sacrifice = 3/5 – 2/5 = 1/5
Steve’s Sacrifice = 2/5 – 1/5 = 1/5
Therefore, the Sacrificing ratio of Tony and Steve is 1:1. This shows that Tony gave up 1/5th of his share while Steve also sacrificed 1/5th of his share.
Calculation of sacrificing ratio is important in a partnership as it helps in measuring that portion of the share of existing partners that have to be sacrificed. This ensures a smooth reconstitution of the partnership. Since the old partners are foregoing a part of their share in profits, the new partner has to bring in some amount as goodwill to compensate for their loss.
See lessHow to show interest on investment in trial balance?
Interest on Investment is to be shown on the Credit side of a Trial Balance. Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return onRead more
Interest on Investment is to be shown on the Credit side of a Trial Balance.
Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return on investment (ROI).
Since interest on investment is an income, it is shown on the credit side of the Trial Balance. This is based on the accounting rule that all increase in incomes are credited and all increase in expenses are debited. A Trial Balance is a worksheet where the balances of all assets, expenses and drawings are shown on the debit side while the balances of all liabilities, incomes and capital are shown on the credit side.
For example, if Jack bought Corporate Bonds of Amazon, worth $50,000 with a 10% interest on investment, then the accounting treatment for interest on investment would be
Cash/Bank A/C Dr 5,000
To Interest on Investment in Corporate Bonds (Amazon) 5,000
As per the above entry, since interest on investment is credited, it will show a credit balance and hence be shown on the credit side of the Trial Balance. Interest on investment account is not to be confused with an Investment account. Investment is an asset whereas interest on investment is an income.
See less