What is effective capital?
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Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use.
Computation of effective capital is given in Explanation I to Schedule II of the Companies Act. Schedule II deals with remuneration payable to managers in case of no profit or inadequate profit in the following manner:
Computation of effective capital is done in the following manner:
Numerical example:
ABC Ltd reports its balance sheet as given below:
We will compute its effective capital for both an investment company and a non-investment company.