Financial analysis of a company means analyzing the previous data of the company and giving recommendations based on that whether the company will improve in the future on not. It is the process of evaluating the financial performance and stability of the company. There are various types of financiaRead more
Financial analysis of a company means analyzing the previous data of the company and giving recommendations based on that whether the company will improve in the future on not.
It is the process of evaluating the financial performance and stability of the company.
There are various types of financial analysis. They are leverage, growth, cash flow, liquidity, profitability, etc.
The main objectives of Financial analysis are
1.Reviewing the current position: In order to know if the company is doing well, past analysis of data is required to be carried out. Regular recording of the transactions helps to understand the financial position of the company.
For example, A company wants to generate a revenue of 2000 crores in the next 5 years. The last four years’ data shows revenue as 1100, 1300,1600, 1800 crores respectively.
So from the above, we can say that the company is performing well and looks like it will reach the desired target in the fifth year or may perform better than the target desired.
However, if the revenue declines, it will cause concern for the team but the team will get time to gear up and work efficiently to achieve the desired target.
2. Ease in decision making: For Future decision-making, quarterly financials play an important role. Subsidiary books and accounts like the sales book, purchase orders, manufacturing a/c, etc. help in giving more reliable information.
For example, If sales are increasing inconsistently in a quarter, and in the next quarter the level of sales decrease due to any reason then the management can analyze and change the strategy.
3. Performance Comparison: It helps in comparing the performance of the business every month, quarterly, half-yearly, and yearly. Analyzing the data can help the management to compare if the company is proceeding in the right direction.
4. Assessing the profitability: Financial statements are used to assess the profitability of the firm. The analysis is made through the accounting ratios, trend line, etc. Accounting ratios calculated for a number of years shows the trend of change of position i.e. positive, negative or static. The assessing of the trend helps the management to analyze if the company is making profits or not.
5. Measure the solvency of the firm: Financial analysis helps to measure the short-term and long-term efficiency of the firm for the benefit of the Stakeholders.
6. Helps the end-users: The owners are the end-users for whom the financial statements are prepared. Financial statements are the summaries that are prepared for providing various disclosures to the owners which helps them understand the statements in a better way. If the end-users arrive at the right decision with the help of financial statements that means the objective is achieved.
7. Other objectives:
It helps to settle disputes among the parties.
It helps in the expansion decision of the firm.
It helps in analyzing the amount of tax to be paid.
It reduces the chances of fraud.
It provides information about resources.
It provides a true and fair view of financial position.
The Furniture and Fixture is depreciated @10% according to the income tax act and as per the companies act, 2013 @9.50% under Straight line method and @25.89% under written down value method. Furniture and fixture form a major part to furnish an office. For Example, the chair, table, bookshelves, etRead more
The Furniture and Fixture is depreciated @10% according to the income tax act and as per the companies act, 2013 @9.50% under Straight line method and @25.89% under written down value method.
Furniture and fixture form a major part to furnish an office. For Example, the chair, table, bookshelves, etc. all comes under Furniture and Fixture. The useful life of Furniture and Fixtures is estimated as 5-10 years depending upon the kind of furniture.
Rate of depreciation in reference to days
If Furniture is bought and put to use for more than 180 days, then the full rate of depreciation will be charged.
If the furniture is bought and put to use for less than 180 days, then half the rate of depreciation will be charged.
If the furniture is bought but is not put to use, then no depreciation will be charged.
The correct option is 2. Amortization. Depreciation in spirit is similar to Amortization because both depreciation and amortization have the same characteristics except that depreciation is used for tangible assets and amortization for intangible assets. To make it clear, intangible assets are thoseRead more
The correct option is 2. Amortization.
Depreciation in spirit is similar to Amortization because both depreciation and amortization have the same characteristics except that depreciation is used for tangible assets and amortization for intangible assets.
To make it clear, intangible assets are those assets that cannot be touched i.e. they are not physically present. For example, goodwill, patent, trademark, etc. Hence, these assets are amortized over their useful life and not depreciated.
Example for Amortizing intangible assets: A manufacturing company buys a patent for Rs 80,000 for 8 years. Assuming that the residual value of the patent after 8 years to be zero.
The depreciation to be written off will be
Yearly Depreciation = Cost of the patent – Residual value / Expected life of the asset.
= 80,000 – 0 / 8
= Rs 10,000 every year.
Whereas, tangible assets are those assets that can be touched i.e. they are physically present. For example, building, plant & machinery, furniture, etc. Hence, these assets are depreciated over their useful life and not amortized.
Example of Depreciating tangible asset:Â A manufacturing company bought machinery for Rs 8,10,000 and its estimated life is 8 years, scrap value being Rs 10,000.
The depreciation to be written off will be
Yearly Depreciation = Cost of machinery – Scrap value / Expected life of the asset.
The correct answer is 4. Revenue Expenditure. Depreciation is a non-cash expense and is charged on the fixed asset for its continuous use. Revenue expenditure is a day-to-day expense incurred by a firm in order to carry on its normal business. Depreciation is considered a revenue expense due to theRead more
The correct answer is 4. Revenue Expenditure.
Depreciation is a non-cash expense and is charged on the fixed asset for its continuous use. Revenue expenditure is a day-to-day expense incurred by a firm in order to carry on its normal business. Depreciation is considered a revenue expense due to the regular use of the fixed assets.
Depreciation is the systematic and periodic reduction in the cost of a fixed asset. It is a non-cash expense. Mostly, depreciation is charged according to the straight-line method or written down method as per the policy of the company.
Depreciation is the systematic and periodic reduction in the cost of a fixed asset. It is a non-cash expense. Mostly, depreciation is charged according to the straight-line method or written down method as per the policy of the company. It is calculated as-
Depreciation = Cost of the asset – Scrap value / Expected life of the asset.
For Example, ONGC bought machinery at the beginning of the year for Rs 10,00,000
It charges depreciation @10% at the end of the year.
10,00,000 x 10/100 = 1,00,000 will be depreciation for the year and will be shown on the debit side of Profit & Loss A/c.
As the fixed assets are used in the day-to-day activities of the firm and hence the depreciation charged on it on the daily basis would be revenue in nature. so depreciation is said to be an item of revenue expenditure.
Specimen of Ledger account This is the specimen of a ledger account. J.F. here represents the journal folio. A Ledger account is an account that consists of all the business transactions that take place during the current financial year. For Example, cash, bank, machinery, A/c receivable account, etRead more
Specimen of Ledger account
This is the specimen of a ledger account. J.F. here represents the journal folio.
A Ledger account is an account that consists of all the business transactions that take place during the current financial year.
For Example, cash, bank, machinery, A/c receivable account, etc.
After the financial data is recorded in the Journal. It is then classified according to the nature of accounts viz. Asset, liability, expenses, revenue, and capital to be posted in the ledger account.
With this head, the identification as to whether the opening balance will come under the debit side or the credit side is done.
The table below would help to understand the concept of opening balance in the ledger.
For further clarification of the concept let me give you a practical example.
Suppose, a manufacturing firm Amul purchased machinery for, say, Rs 2,50,000. The installation charges were Rs 25,000 and the opening balance of machinery during the year was Rs 5,00,000.
So as the machinery account comes under the category assets, its opening balance would come under the debit side of the ledger account.
And as purchase and installation charges mean expenses for the firm, they would also come under the debit side of the account.
And in case of any sale of a part of the machinery, it would be posted on the credit side of the account as the sales would generate revenue for the firm.
To begin with, let me first give you a small explanation of what Contingent assets are A contingent asset is a potential asset or economic benefit that does not exist currently but may arise in the near future. Such an asset arises from an uncertain and unpredictable event. To make it clear with anRead more
To begin with, let me first give you a small explanation of what Contingent assets are
A contingent asset is a potential asset or economic benefit that does not exist currently but may arise in the near future. Such an asset arises from an uncertain and unpredictable event.
To make it clear with an example: String Co. filed a lawsuit against a competitor company Weave Tech Co. for infringing on company ABC’s patent. Even if it is probable (but not certain) that Strings Co. will win the lawsuit, it is a contingent asset.
As such, it will not be recorded in Strings Co. general ledger accounts until the lawsuit is settled.
At most the Strings Co. can do is, prepare a note disclosing the fact that it has filed the lawsuit the outcome of which is uncertain.
Disclosing Contingent Assets
The probability of occurrence is virtually certain or probable: It will be disclosed as an asset in the balance sheet.
For Example, The court orders for reimbursement to Strings Co. say 1,00,000 for the damages, but it has not yet received the money. Although it is virtually certain that the company will receive the money in the near future, it will be treated as an asset and can be disclosed in the balance sheet on the assets side.
The probability of occurrence is probable: It will be disclosed as notes to accounts below the balance sheet.
For Example, Strings Co. filed a lawsuit against a competitor company Weave Tech for infringing on Strings Co. patent. Even if it is probable (but not certain) that Strings Co. will win the lawsuit, it is a contingent asset.
As such, it will not be recorded in Strings company’s general ledger until the lawsuit is settled.
At most the Strings Co. can do is, prepare a note disclosing the fact that it has filed the lawsuit the outcome of which is uncertain.Â
The probability of occurrence is remote or not probable:Â Â It will not be treated as a contingent asset.
In this case, the disclosure of it is not permitted.
Miscellaneous expenditure in the balance sheet The expenses that are written off in the current financial year are shown on the debit side of the profit and loss account. However, those that are not written off during the current financial year are shown in the balance sheet on the Assets Side as MiRead more
Miscellaneous expenditure in the balance sheet
The expenses that are written off in the current financial year are shown on the debit side of the profit and loss account. However, those that are not written off during the current financial year are shown in the balance sheet on the Assets Side as Miscellaneous expenditure.
Miscellaneous expenditure are those expenses that are not categorized as Operating expenses i.e. these are not classified as manufacturing, selling, and administrative expenses.
For example, BlackRock has spent 5,00,000 which will be written of in 5 consecutive years as an Advertisement expense. During the current financial year, only 1,00,000 will be written off and the rest will be carried to the next year and year thereafter.
Treatment in the first year:
1,00,000 which is written off during the current financial year will be shown on the debit side of the Profit and Loss account.
4,00,000 which is carried forward will be shown on the assets side of the balance sheet as miscellaneous expenditure because all assets and expenses have a debit balance.
Treatment in the second year:
1,00,000 which is written off during the current financial year will be shown on the debit side of the Profit and Loss account.
4,00,000 which is carried forward will be shown in the assets side of the balance sheet as a miscellaneous expenditure.
The same will be done in the third, fourth, and fifth years.
Conclusion
Deferred revenue expenditure is also a long-term expenditure the benefit of which cannot be derived within the same year. So the amount that is written off during the current year is shown on the debit side of the profit and loss account and the amount which is not written off during the current financial year is shown on the assets side under the head Miscellaneous expenditure.
Before starting with the main discussion, let me give you a brief explanation of what rent received is When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received. Rent can be monthly, quRead more
Before starting with the main discussion, let me give you a brief explanation of what rent received is
When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received.
Rent can be monthly, quarterly, half-yearly, or yearly rent depending upon the organization’s agreement.
The journal entry for rent received will be
Here, Cash account is debited due to the increase in assets or because of a real account. Rent account is credited due to the increase in income or because of the nominal account.
However, Rent received in advance means the amount of rent that is not yet due but is received in advance. It is treated as a current liability because the benefit related is yet to be provided to the tenant.
The Journal entry for Rent received in advance will be-
Here, rent is debited due to a decrease in income.
Rent received in Advance is credited due to an increase in liability.
For Example, Johnson company rented out a part of its building that was not used to earn some extra income from it. The monthly rent was fixed as 20000. Johnson company follows calendar year as their accounting year. The tenant, therefore, paid 4 months advance rent to Johnson company i.e. the tenant in January gave his advance rent for February, March, April, and May.
While receiving the rent in the month of January. The journal entry would be
Now, the adjustment entry of rent received in advance would be
The rent received in advance will also be posted individually in each month of February, March, April, and May as
Furthermore, Rent received in advance is deducted from the amount of rent in the income and expenditure account and thereafter the amount received in advance is posted on the liability side of the Balance sheet.
When in a single transaction two or more accounts are involved, such kinds of transactions are termed as Compound entries. Example 1, Johnson Co. purchased goods worth 5,000, and half of the amount was paid in cash and the other half by cheque. So here three accounts are involved: Purchase account-Read more
When in a single transaction two or more accounts are involved, such kinds of transactions are termed as Compound entries.
Example 1, Johnson Co. purchased goods worth 5,000, and half of the amount was paid in cash and the other half by cheque.
So here three accounts are involved:
Purchase account- That is to be debited.
Cash account- That is to be credited.
Bank account- That is to be credited.
Journal entry:
Now posting the above journal entry in a ledger account.
In the Journal, the Purchase account has been debited. So in the ledger, the purchase account will also be debited. Since the purchase account is debited in the ledger, the corresponding two credit accounts of this entry i.e. the cash and the bank will be written on the debit side in the particulars column. So while posting, the amount to be considered would be the amount individually paid in cash and bank as shown in the journal entry.
Cash a/c is credited with the purchase account. In the ledger, purchase a/c will be posted on the credit side. So while posting, the amount to be considered would be the amount individually paid in cash.
Bank a/c is credited with the purchase account. In the ledger, purchase a/c will be posted on the credit side. So while posting, the amount to be considered would be the amount individually paid in Bank a/c.
Example 2, Â Johnson Co purchased goods and made payment in cash 2,000. Along with it, it also paid commission and interest of 1,000 and 500 respectively.
So here four accounts are involved:
Purchase account- That is to be debited.
The commission allowed account- That is to be debited.
Interest allowed account- That is to be debited.
Cash account- That is to be credited.
Journal Entry:
Now posting the above journal entry in a ledger account.
In the journal entry, the cash account has been credited. So in the ledger, the cash account will also be credited. Since the cash account is credited in the ledger, the corresponding three accounts will also be credited in the particulars column. As in the journal entry the three debit accounts viz. Purchase, the commission allowed, and interest allowed, the amounts written against them shall be entered in the respective accounts in the amount column on the credit side of the cash account.
Purchase a/c is debited with a cash account. In the ledger, Cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in the Purchase account.
The commission allowed a/c is debited with a cash account. In the ledger, cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in Commission allowed a/c.
Interest allowed a/c is debited with a cash account. In the ledger, cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in Interest allowed a/c.
Let me first explain the meaning of both the terms CapEx and OpEx Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or imRead more
Let me first explain the meaning of both the terms CapEx and OpEx
Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building,furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or improve an existing one or maintain the asset in use.
Capital expenditure is commonly found in the Cash flow statement under Investing activities as Investment in plant, machinery, equipment, etc.
Operating Expenditure (in short OpEx) are day-to-day expenses incurred by a firm in order to carry its normal business.
Expenses such as rent, advertisement, inventory costs, etc.
Operating Expenses are shown in the income statement of the company as expenses incurred during the period.
For Example: If a company purchases a printer, the printer would be a capital expenditure and the papers used for the printer would be operating expenditure.
Difference between CapEx and OpEx
Example 1: A company wants to lease machinery instead of buying it, in this case buying machinery would be capital expenditure, and leasing the machinery would be an Operating expense.
Example 2: Buying machinery would cost a company for 50000 and leasing the same would cost 35000. So in this case leasing will be more preferred by a company which means operating expenditure would be preferred instead of a capital expenditure.
From the point of view of tax treatment operating expenditure is more preferred over Capital expenditure because the expenses incurred during the year are deducted during the same year which reduces the tax levied on net income.
Some real Examples from the Company Amazon
This is the cash flow statement of Amazon, where the investing activities shows the capital expenditure incurred by the company during the years.
This is the income statement of Amazon, it shows the operating expenditure incurred by the company during the year.
What are the objectives of Financial Analysis?
Financial analysis of a company means analyzing the previous data of the company and giving recommendations based on that whether the company will improve in the future on not. It is the process of evaluating the financial performance and stability of the company. There are various types of financiaRead more
Financial analysis of a company means analyzing the previous data of the company and giving recommendations based on that whether the company will improve in the future on not.
It is the process of evaluating the financial performance and stability of the company.
There are various types of financial analysis. They are leverage, growth, cash flow, liquidity, profitability, etc.
The main objectives of Financial analysis are
1.Reviewing the current position: In order to know if the company is doing well, past analysis of data is required to be carried out. Regular recording of the transactions helps to understand the financial position of the company.
For example, A company wants to generate a revenue of 2000 crores in the next 5 years. The last four years’ data shows revenue as 1100, 1300,1600, 1800 crores respectively.
So from the above, we can say that the company is performing well and looks like it will reach the desired target in the fifth year or may perform better than the target desired.
However, if the revenue declines, it will cause concern for the team but the team will get time to gear up and work efficiently to achieve the desired target.
2. Ease in decision making: For Future decision-making, quarterly financials play an important role. Subsidiary books and accounts like the sales book, purchase orders, manufacturing a/c, etc. help in giving more reliable information.
For example, If sales are increasing inconsistently in a quarter, and in the next quarter the level of sales decrease due to any reason then the management can analyze and change the strategy.
3. Performance Comparison: It helps in comparing the performance of the business every month, quarterly, half-yearly, and yearly. Analyzing the data can help the management to compare if the company is proceeding in the right direction.
4. Assessing the profitability: Financial statements are used to assess the profitability of the firm. The analysis is made through the accounting ratios, trend line, etc. Accounting ratios calculated for a number of years shows the trend of change of position i.e. positive, negative or static. The assessing of the trend helps the management to analyze if the company is making profits or not.
5. Measure the solvency of the firm: Financial analysis helps to measure the short-term and long-term efficiency of the firm for the benefit of the Stakeholders.
6. Helps the end-users: The owners are the end-users for whom the financial statements are prepared. Financial statements are the summaries that are prepared for providing various disclosures to the owners which helps them understand the statements in a better way. If the end-users arrive at the right decision with the help of financial statements that means the objective is achieved.
7. Other objectives:
- It helps to settle disputes among the parties.
- It helps in the expansion decision of the firm.
- It helps in analyzing the amount of tax to be paid.
- It reduces the chances of fraud.
- It provides information about resources.
- It provides a true and fair view of financial position.
See lessExplain with rates furniture and fixtures depreciation.
The Furniture and Fixture is depreciated @10% according to the income tax act and as per the companies act, 2013 @9.50% under Straight line method and @25.89% under written down value method. Furniture and fixture form a major part to furnish an office. For Example, the chair, table, bookshelves, etRead more
The Furniture and Fixture is depreciated @10% according to the income tax act and as per the companies act, 2013 @9.50% under Straight line method and @25.89% under written down value method.
Furniture and fixture form a major part to furnish an office. For Example, the chair, table, bookshelves, etc. all comes under Furniture and Fixture. The useful life of Furniture and Fixtures is estimated as 5-10 years depending upon the kind of furniture.
Rate of depreciation in reference to days
- If the furniture is bought but is not put to use, then no depreciation will be charged.
See lessDepreciation in spirit is similar to?
The correct option is 2. Amortization. Depreciation in spirit is similar to Amortization because both depreciation and amortization have the same characteristics except that depreciation is used for tangible assets and amortization for intangible assets. To make it clear, intangible assets are thoseRead more
The correct option is 2. Amortization.
Depreciation in spirit is similar to Amortization because both depreciation and amortization have the same characteristics except that depreciation is used for tangible assets and amortization for intangible assets.
To make it clear, intangible assets are those assets that cannot be touched i.e. they are not physically present. For example, goodwill, patent, trademark, etc. Hence, these assets are amortized over their useful life and not depreciated.
Example for Amortizing intangible assets: A manufacturing company buys a patent for Rs 80,000 for 8 years. Assuming that the residual value of the patent after 8 years to be zero.
The depreciation to be written off will be
Yearly Depreciation = Cost of the patent – Residual value / Expected life of the asset.
= 80,000 – 0 / 8
= Rs 10,000 every year.
Whereas, tangible assets are those assets that can be touched i.e. they are physically present. For example, building, plant & machinery, furniture, etc. Hence, these assets are depreciated over their useful life and not amortized.
Example of Depreciating tangible asset:Â A manufacturing company bought machinery for Rs 8,10,000 and its estimated life is 8 years, scrap value being Rs 10,000.
The depreciation to be written off will be
Yearly Depreciation = Cost of machinery – Scrap value / Expected life of the asset.
= 8,10,000 – 10,000 / 8
= 8,00,000 / 8
= Rs 1,00,000 every year.
See lessDepreciation of fixed assets is an example of which expenditure?
The correct answer is 4. Revenue Expenditure. Depreciation is a non-cash expense and is charged on the fixed asset for its continuous use. Revenue expenditure is a day-to-day expense incurred by a firm in order to carry on its normal business. Depreciation is considered a revenue expense due to theRead more
The correct answer is 4. Revenue Expenditure.
Depreciation is a non-cash expense and is charged on the fixed asset for its continuous use. Revenue expenditure is a day-to-day expense incurred by a firm in order to carry on its normal business. Depreciation is considered a revenue expense due to the regular use of the fixed assets.
Depreciation is the systematic and periodic reduction in the cost of a fixed asset. It is a non-cash expense. Mostly, depreciation is charged according to the straight-line method or written down method as per the policy of the company.
Depreciation is the systematic and periodic reduction in the cost of a fixed asset. It is a non-cash expense. Mostly, depreciation is charged according to the straight-line method or written down method as per the policy of the company. It is calculated as-
Depreciation = Cost of the asset – Scrap value / Expected life of the asset.
For Example, ONGC bought machinery at the beginning of the year for Rs 10,00,000
It charges depreciation @10% at the end of the year.
10,00,000 x 10/100 = 1,00,000 will be depreciation for the year and will be shown on the debit side of Profit & Loss A/c.
As the fixed assets are used in the day-to-day activities of the firm and hence the depreciation charged on it on the daily basis would be revenue in nature. so depreciation is said to be an item of revenue expenditure.
See lessGive a specimen of an account?
Specimen of Ledger account This is the specimen of a ledger account. J.F. here represents the journal folio. A Ledger account is an account that consists of all the business transactions that take place during the current financial year. For Example, cash, bank, machinery, A/c receivable account, etRead more
Specimen of Ledger account
This is the specimen of a ledger account. J.F. here represents the journal folio.
A Ledger account is an account that consists of all the business transactions that take place during the current financial year.
For Example, cash, bank, machinery, A/c receivable account, etc.
After the financial data is recorded in the Journal. It is then classified according to the nature of accounts viz. Asset, liability, expenses, revenue, and capital to be posted in the ledger account.
With this head, the identification as to whether the opening balance will come under the debit side or the credit side is done.
The table below would help to understand the concept of opening balance in the ledger.
For further clarification of the concept let me give you a practical example.
Suppose, a manufacturing firm Amul purchased machinery for, say, Rs 2,50,000. The installation charges were Rs 25,000 and the opening balance of machinery during the year was Rs 5,00,000.
So as the machinery account comes under the category assets, its opening balance would come under the debit side of the ledger account.
And as purchase and installation charges mean expenses for the firm, they would also come under the debit side of the account.
And in case of any sale of a part of the machinery, it would be posted on the credit side of the account as the sales would generate revenue for the firm.
See lessWhen and where are Contingent Assets disclosed?
To begin with, let me first give you a small explanation of what Contingent assets are A contingent asset is a potential asset or economic benefit that does not exist currently but may arise in the near future. Such an asset arises from an uncertain and unpredictable event. To make it clear with anRead more
To begin with, let me first give you a small explanation of what Contingent assets are
A contingent asset is a potential asset or economic benefit that does not exist currently but may arise in the near future. Such an asset arises from an uncertain and unpredictable event.
To make it clear with an example: String Co. filed a lawsuit against a competitor company Weave Tech Co. for infringing on company ABC’s patent. Even if it is probable (but not certain) that Strings Co. will win the lawsuit, it is a contingent asset.
As such, it will not be recorded in Strings Co. general ledger accounts until the lawsuit is settled.
At most the Strings Co. can do is, prepare a note disclosing the fact that it has filed the lawsuit the outcome of which is uncertain.
Disclosing Contingent Assets
For Example, The court orders for reimbursement to Strings Co. say 1,00,000 for the damages, but it has not yet received the money. Although it is virtually certain that the company will receive the money in the near future, it will be treated as an asset and can be disclosed in the balance sheet on the assets side.
For Example, Strings Co. filed a lawsuit against a competitor company Weave Tech for infringing on Strings Co. patent. Even if it is probable (but not certain) that Strings Co. will win the lawsuit, it is a contingent asset.
As such, it will not be recorded in Strings company’s general ledger until the lawsuit is settled.
At most the Strings Co. can do is, prepare a note disclosing the fact that it has filed the lawsuit the outcome of which is uncertain.Â
In this case, the disclosure of it is not permitted.
See lessWhy is miscellaneous expenditure shown in balance sheet?
Miscellaneous expenditure in the balance sheet The expenses that are written off in the current financial year are shown on the debit side of the profit and loss account. However, those that are not written off during the current financial year are shown in the balance sheet on the Assets Side as MiRead more
Miscellaneous expenditure in the balance sheet
The expenses that are written off in the current financial year are shown on the debit side of the profit and loss account. However, those that are not written off during the current financial year are shown in the balance sheet on the Assets Side as Miscellaneous expenditure.
Miscellaneous expenditure are those expenses that are not categorized as Operating expenses i.e. these are not classified as manufacturing, selling, and administrative expenses.
For example, BlackRock has spent 5,00,000 which will be written of in 5 consecutive years as an Advertisement expense. During the current financial year, only 1,00,000 will be written off and the rest will be carried to the next year and year thereafter.
Treatment in the first year:
Treatment in the second year:
The same will be done in the third, fourth, and fifth years.
Conclusion
Deferred revenue expenditure is also a long-term expenditure the benefit of which cannot be derived within the same year. So the amount that is written off during the current year is shown on the debit side of the profit and loss account and the amount which is not written off during the current financial year is shown on the assets side under the head Miscellaneous expenditure.
See lessCan you explain rent received in advance with journal entry?
Before starting with the main discussion, let me give you a brief explanation of what rent received is When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received. Rent can be monthly, quRead more
Before starting with the main discussion, let me give you a brief explanation of what rent received is
When a business or an organization rents out its unused property to earn some extra income and receive some amount from it, that amount of money is said to be rent received.
Rent can be monthly, quarterly, half-yearly, or yearly rent depending upon the organization’s agreement.
The journal entry for rent received will be
Here, Cash account is debited due to the increase in assets or because of a real account. Rent account is credited due to the increase in income or because of the nominal account.
However, Rent received in advance means the amount of rent that is not yet due but is received in advance. It is treated as a current liability because the benefit related is yet to be provided to the tenant.
The Journal entry for Rent received in advance will be-
Here, rent is debited due to a decrease in income.
Rent received in Advance is credited due to an increase in liability.
For Example, Johnson company rented out a part of its building that was not used to earn some extra income from it. The monthly rent was fixed as 20000. Johnson company follows calendar year as their accounting year. The tenant, therefore, paid 4 months advance rent to Johnson company i.e. the tenant in January gave his advance rent for February, March, April, and May.
While receiving the rent in the month of January. The journal entry would be
Now, the adjustment entry of rent received in advance would be
The rent received in advance will also be posted individually in each month of February, March, April, and May as
Furthermore, Rent received in advance is deducted from the amount of rent in the income and expenditure account and thereafter the amount received in advance is posted on the liability side of the Balance sheet.
See lessHow to post a compound entry in ledger account?
When in a single transaction two or more accounts are involved, such kinds of transactions are termed as Compound entries. Example 1, Johnson Co. purchased goods worth 5,000, and half of the amount was paid in cash and the other half by cheque. So here three accounts are involved: Purchase account-Read more
When in a single transaction two or more accounts are involved, such kinds of transactions are termed as Compound entries.
Example 1, Johnson Co. purchased goods worth 5,000, and half of the amount was paid in cash and the other half by cheque.
So here three accounts are involved:
Purchase account- That is to be debited.
Cash account- That is to be credited.
Bank account- That is to be credited.
Journal entry:
Now posting the above journal entry in a ledger account.
In the Journal, the Purchase account has been debited. So in the ledger, the purchase account will also be debited. Since the purchase account is debited in the ledger, the corresponding two credit accounts of this entry i.e. the cash and the bank will be written on the debit side in the particulars column. So while posting, the amount to be considered would be the amount individually paid in cash and bank as shown in the journal entry.
Cash a/c is credited with the purchase account. In the ledger, purchase a/c will be posted on the credit side. So while posting, the amount to be considered would be the amount individually paid in cash.
Bank a/c is credited with the purchase account. In the ledger, purchase a/c will be posted on the credit side. So while posting, the amount to be considered would be the amount individually paid in Bank a/c.
Example 2, Â Johnson Co purchased goods and made payment in cash 2,000. Along with it, it also paid commission and interest of 1,000 and 500 respectively.
So here four accounts are involved:
Purchase account- That is to be debited.
The commission allowed account- That is to be debited.
Interest allowed account- That is to be debited.
Cash account- That is to be credited.
Journal Entry:
Now posting the above journal entry in a ledger account.
In the journal entry, the cash account has been credited. So in the ledger, the cash account will also be credited. Since the cash account is credited in the ledger, the corresponding three accounts will also be credited in the particulars column. As in the journal entry the three debit accounts viz. Purchase, the commission allowed, and interest allowed, the amounts written against them shall be entered in the respective accounts in the amount column on the credit side of the cash account.
Purchase a/c is debited with a cash account. In the ledger, Cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in the Purchase account.
The commission allowed a/c is debited with a cash account. In the ledger, cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in Commission allowed a/c.
Interest allowed a/c is debited with a cash account. In the ledger, cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in Interest allowed a/c.
See lessWhat is the difference between CAPEX and OPEX?
Let me first explain the meaning of both the terms CapEx and OpEx Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or imRead more
Let me first explain the meaning of both the terms CapEx and OpEx
Capital expenditure (in short CapEx) is basically incurred for Fixed assets like building, furniture, machinery, etc., or an intangible asset like Goodwill, patent, etc. This expenses are incurred in order to acquire a new asset or improve an existing one or maintain the asset in use.
Capital expenditure is commonly found in the Cash flow statement under Investing activities as Investment in plant, machinery, equipment, etc.
Operating Expenditure (in short OpEx) are day-to-day expenses incurred by a firm in order to carry its normal business.
Expenses such as rent, advertisement, inventory costs, etc.
Operating Expenses are shown in the income statement of the company as expenses incurred during the period.
For Example: If a company purchases a printer, the printer would be a capital expenditure and the papers used for the printer would be operating expenditure.
Difference between CapEx and OpEx
Example 1: A company wants to lease machinery instead of buying it, in this case buying machinery would be capital expenditure, and leasing the machinery would be an Operating expense.
Example 2: Buying machinery would cost a company for 50000 and leasing the same would cost 35000. So in this case leasing will be more preferred by a company which means operating expenditure would be preferred instead of a capital expenditure.
From the point of view of tax treatment operating expenditure is more preferred over Capital expenditure because the expenses incurred during the year are deducted during the same year which reduces the tax levied on net income.
Some real Examples from the Company Amazon
This is the cash flow statement of Amazon, where the investing activities shows the capital expenditure incurred by the company during the years.
This is the income statement of Amazon, it shows the operating expenditure incurred by the company during the year.
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