Similarly, someone asked Are loose tools current assets
Similarly, someone asked Are loose tools current assets
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Outstanding Income is the income that is due and is being earned but not yet received. The person/ firm has the legal rights to receive that part of the income which it has earned. Outstanding Income is an Asset Account for the business/ the person. According to the modern approach, for Asset AccounRead more
Outstanding Income is the income that is due and is being earned but not yet received. The person/ firm has the legal rights to receive that part of the income which it has earned.
Outstanding Income is an Asset Account for the business/ the person.
According to the modern approach, for Asset Account:
- When there is an increase in the Asset, it is Debited.
- When there is a decrease in Asset, it is Credited.
So the journal entry will be-
For Example, Mr. Rashid works as a laborer in a factory and he earns wages @Rs 500/day.
So by the end of the week, he receives a payment of Rs 3000 of Rs 3500 i.e. he receives payment of 6 days instead of 7 days. So here Rs 500 would be an outstanding income of Mr. Rashid as he has earned that income but has not received it yet.
Journal Entry –
Another example, Yes Bank gave a loan of Rs 10,00,000 to company Ford @ 10% as interest payable monthly. The interest for one month i.e. Rs 1,00,000 has not been received by Yes Bank which is being due. So it will be outstanding income for Yes Bank since it is due but not yet received.
Journal entry-
Accounting Treatment for Outstanding Income-
- Treatment in Income Statement
The Outstanding Income is shown on the credit side of the income statement as the income is earned for the current year but not yet received.
- Treatment in Balance Sheet
Outstanding Income is an Asset for the business and hence shown on the Assets side of the balance sheet.
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Introduction Internal reconstruction refers to the process of restructuring a sick company’s balance sheet by certain methods to turn it financially healthy, thus saving it from potential liquidation. Explanation When a company has been making losses for many years, it has a huge amount of accumulatRead more
Introduction
Internal reconstruction refers to the process of restructuring a sick company’s balance sheet by certain methods to turn it financially healthy, thus saving it from potential liquidation.
Explanation
When a company has been making losses for many years, it has a huge amount of accumulated losses due to which the reserve and surplus appear at a very low or negative amount in the balance sheet.
Also, such a company is said to be overcapitalised as it is not able to generate enough returns to its capital.
As the company is overcapitalised, the assets are also overvalued. The balance sheet also contains many fictitious assets and unrepresented intangible assets.
The balance sheet of such a ‘sick’ company looks like the following:
Hence, to save the company from liquidation,
- its assets and liabilities are revalued and reassessed,
- its capital is reduced by paying off part of paid-up capital to shareholders or cancelling the paid-up capital.
- the right of shareholders related to preference dividends is altered,
- agreements are made with creditors to reduce their claims and
- fictitious assets and accumulated losses are written off.
In this way, its balance sheet gets rid of all undesirable elements and the company gets a new life without being liquidated. This process is known as internal reconstruction.
Legal compliance
The internal reconstruction of a company is governed by the provisions of the Companies Act, 2013.
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Deferred Tax Liability A deferred tax liability represents an obligation to pay taxes in the future. These taxes are owed by a company but are not due to be paid until a future date. Companies that incur such an obligation prepare and maintain two financial reports every year: a tax statement and anRead more
Deferred Tax Liability
A deferred tax liability represents an obligation to pay taxes in the future. These taxes are owed by a company but are not due to be paid until a future date.
Companies that incur such an obligation prepare and maintain two financial reports every year: a tax statement and an income statement.
This is because companies maintain their books as per book accounting rules (GAAP/IFRS), but they have to pay taxes according to tax accounting rules, and they each have to follow their own guidelines.
For example, a tax statement follows the cash basis of accounting, and an income statement follows the accrual basis of accounting.
Companies calculate their profit as per the accounting rules as well as tax laws known as accounting income and taxable income, respectively. Some differences arise due to the application of different provisions of law.
These temporary differences are accounted for, recognized, and carried forward in the books of accounts and create deferred tax.
Example
Here is an example of deferred tax liability.
In the given example, tax as per income statement is 70,000, whereas as per tax statement it is 56,000. This temporary difference is termed as deferred tax liability of 14,000.
When accounting income is more than taxable income, it creates Deferred Tax Liability. It will be adjusted in the books of accounts during one or more subsequent year(s).
How Does it Arise?
There are several instances under which a company creates a deferred tax liability. Some other instances are:
Depreciation Methods
- One of the most common reasons for deferred tax liability is when a company uses different depreciation methods in the Income and Tax Statement.
- Assets are depreciated by calculating the straight-line method in the Income Statement, while the written-down value method is used in the Tax Statement.
- Since the straight-line value method produces lower depreciation when compared to the WDV method, accounting income is temporarily higher than taxable income.
- The company recognises deferred tax liability as this difference between accounting income and taxable income.
Treatment of Revenue & Expenses
- Deferred tax liability can also arise when there is a difference in the way revenue and expenses are treated in books of accounts.
- As mentioned earlier, accounting rules follow the accrual basis of accounting while tax laws follow the cash basis of accounting.
- Meaning in the tax statement, income and expenses are recorded when they are received or paid, not when they are incurred or realised.
- This difference in the treatment of revenue and expenses creates deferred tax liability.
Impact on Financial Statements
Recognising deferred tax liability and its subsequent effect on the company’s financial statement is important as it simplifies the process of auditing and analysing financial reports.
Balance Sheet
- Deferred tax liabilities are recorded on the liability side of the balance sheet under non-current liabilities.
Cash Flow Statement
- The deferred tax liability is added back to the net income in calculating cash flow from operating activities to show the actual cash flow.
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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.
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The profit earned by an entity is determined through the profit and loss account. All the expenses are recorded on the debit side of the profit and loss account while all the incomes are recorded on the credit side. The profit is shown as the credit balance of profit and loss A/c. When the sum of itRead more
The profit earned by an entity is determined through the profit and loss account. All the expenses are recorded on the debit side of the profit and loss account while all the incomes are recorded on the credit side.
The profit is shown as the credit balance of profit and loss A/c. When the sum of items on the debit side of a profit and loss account is less than the sum of those on the credit side, it implies profit while when the sum of the items on the credit side is less than the sum of those on the debit side, it implies a loss for the entity.
The Reason for Credit
Profit is recorded as an increase in equity
To understand the reason why profit is recorded as a credit balance, we must first understand the basic principle of debit and credit.
The basic principle of debits and credits is that debits increase asset accounts and decrease liability and equity accounts while credits decrease asset accounts and increase liability and equity accounts.
The revenue that a company earns is credited to the income account and increases equity.
The expenses that a company incurs to earn that revenue are debited to the expense account and decrease equity.
The difference between revenue and expenses is the profit, which is recorded as an increase in equity.
Increase in equity due to revenue – decrease in equity due to expense = profit
Gross Profit Vs Net Profit
Revenue is the total income that a business or profession earns. Profit is the excess revenue that remains after reducing all expenses from it.
Gross profit is the profit that a company earns after reducing the cost of goods sold from sales revenue while net profit is the profit that a business earns after reducing the total of all its direct and indirect expenses from its direct as well as indirect allowable business income.
Conclusion
The basic principle of debit and credit governs the classification of profit as a debit or credit. Since profit increases our equity, it is a credit.
In the case of a company, it belongs to the shareholders. It is usually recorded in the retained earnings account. Profit can be reinvested in the business or can be distributed as a dividend. In the case of a sole proprietorship, the profit belongs to the owner and is recorded in the owner’s capital account.
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Yes, sure! But lets us first understand what a revaluation account is. A revaluation account is prepared to recognise the change in the book value of assets and liabilities of an entity. These changes happen when assets and liabilities are revalued to present their fair value. It is a nominal accounRead more
Yes, sure! But lets us first understand what a revaluation account is.
A revaluation account is prepared to recognise the change in the book value of assets and liabilities of an entity. These changes happen when assets and liabilities are revalued to present their fair value.
It is a nominal account because it represents gain or loss in value of assets and liabilities. However such gain or loss is unrealised because the assets and liabilities are not sold or discharged.
After revaluation of assets and liabilities, the balance of the revaluation account can be debit or credit. The debit balance means ‘loss on revaluation’ and credit balance means ‘gain on revaluation’.
The balance of revaluation is transferred to the capital account.
Journal Entries related to Revaluation Account
1. Increase in value of an asset upon revaluation:
2. Decrease in value of an asset upon revaluation:
3. Increase in value of liabilities upon revaluation:
4. Decrease in value of liabilities upon revaluation:
5. Transfer or distribution of the balance of revaluation account
or
Numerical example
P, Q and R are partners of the firm ‘PQR Trading’. They share profits and losses in the ratio 3:2:1. On 1st May 20X1, they decided to admit S for 1/6th share in profits and losses of the firm. Upon the revaluation:
Let’s prepare the revaluation account.
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