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Journal Entry for Amortization

Ahuja Sahil
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Journal Entry for Amortization
  1. Amortization Journal Entry for Intangible Assets
    1. Example
  2. Entry using Accumulated Amortization A/c
    1. Example with Accumulated Amortization
  3. Treatment in the Financial Statements
  4. Journal Entry for Amortization of Patent
  5. Journal Entry for Amortization of Goodwill
  6. Is Amortization an Expense?

 

Amortization means spreading out the cost of an intangible asset, like a patent or trademark, over the time it is useful. This cost is considered an expense in accounting and is subtracted from the income periodically.

Depreciation is a similar concept, but it’s used for tangible fixed assets, like equipment or buildings.

Intangible assets are things that do not have a physical existence, and they’re usually hard to evaluate. Examples include patents, copyrights, franchises, goodwill, trademarks, customer data, etc.

 

Amortization Journal Entry for Intangible Assets

When amortization is charged, it is shown on the debit side of the income statement as an expense. This means some value of the intangible asset was used in the current accounting period, and the value was therefore reduced.

The net cost of the asset (or current value) = Cost of acquisition – amortization.

The journal entry for the Amortization of intangible assets is as follows:

Amortization Expense A/c Debit Debit the increase in expense
 To Intangible Asset A/c Credit Credit the decrease in assets

(Being intangible asset amortized)

Two accounts are involved in the journal entry for amortization of intangible assets: the amortization expense account & the intangible asset account.

Related Topic – Amortization Vs Depreciation

 

Example

Unreal Co. registers a new trademark in the year 20YY for 20,000 for a period of 10 years. Show the journal entry to be passed in the books of XYZ Ltd every year for the amortization charged on this trademark.

In the books of XYZ Ltd.

Amortization Expense A/c 2,000
 To Trademark A/c 2,000

(Being trademark amortized for the year 1)

The firm will debit the Amortization expense with the amount of 2,000, crediting the Trademark A/c for the same amount for the next 10 years.

This entry reduces the value of the intangible asset on the balance sheet by 2,000 and recognizes the expense on the profit & loss account. You would repeat this entry each year until the asset is fully amortized.

Related Topic – What is Goodwill in Accounting?

 

Entry Using Accumulated Amortization Account

Similar to the accumulated depreciation account, the accumulated amortization account can also be used to record the journal entry for amortization.

Amortization Expense A/c Debit
 To Accumulated Amortization A/c Credit

An accumulated amortization account is a contra-asset account, which is a type of contra account. This means that it offsets the value of the intangible asset account on the balance sheet.

  • Amortization expense is collected in the Accumulated Amortization account instead of being charged directly to the asset every year.
  • It helps track the amount of amortization charged to an asset and shows its net value.
  • Each year, the amortization expense is recorded as a debit to the amortization expense account and a credit to the Accumulated Amortization account.
  • The Accumulated Amortization account appears as a deduction from the intangible asset account on the balance sheet.
  • The difference between these two accounts shows the net value of the intangible asset after accounting for the amount of its cost that has been written off as amortization.

The Accumulated Amortization account acts as a running total of the amount of the asset’s cost written off over time.

Related Topic – Is Accumulated Depreciation an Asset or Liability?

 

Example with Accumulated Amortization Account

ABC Ltd. has a trademark of 50,000 for a period of 5 years. The company maintains a related accumulated amortization account to charge the amortization expense.

Show the journal entries for 5 years. In addition, pass the journal entry at the end of those 5 years when the trademark has been fully amortized. (no scrap value)

Here’s a table to illustrate the amortization process over five years:

Year Cost of Trademark Amortization Expense Accumulated Amortization
Year 1 50,000 10,000 10,000
Year 2 50,000 10,000 20,000
Year 3 50,000 10,000 30,000
Year 4 50,000 10,000 40,000
Year 5 50,000 10,000 50,000

 

In the books of QPR Ltd for year 1

Amortization Expense A/c 10,000
 To Accumulated Amortization A/c 10,000

(Being amortization expense charged on the trademark for year 1)

  • The amortization expense account is debited to recognize the expense for the year.
  • The accumulated amortization account is credited to record the reduction in the value of the trademark.

The same entry will be repeated in the books of QPR Ltd. for the next 5 years until it is balanced out at the end of the period to nullify the asset balance.

Ensure that amortization expense is accurately recorded by reviewing the intangible asset’s useful life and estimated salvage value.

 

At the end of 5 years

The accumulated amortization account will have a total balance of 50,000 after 5 years of amortization. This balance represents the total amount of the intangible asset that has been expensed. Eventually, the intangible asset will have zero remaining cost, meaning it’s fully amortized.

Journal entry at the end of 5 years

Accumulated Amortization A/c 50,000
 To Trademark A/c 50,000

In the end, we credit the intangible asset account with the remaining balance of 50,000 to bring the account balance to zero while debiting the accumulated amortization account with the same amount to clear out the balance in the account.

This reflects that the asset has been fully expensed and is no longer on the balance sheet.

Related Topic – What are Fixed Assets?

 

Treatment in the Financial Statements

There are mainly two effects of amortization in the financial statements.

  1. It is shown as an expense in the income statement (profit & loss account)
  2. It is shown as a reduction from the intangible asset’s value in the balance sheet.

 

Amortization Expense Shown in the Income StatementAmortization Expense Shown in the Income Statement

Amortization Reduced from the Respective Intangible Asset in the Balance SheetAmortization Expense Shown in the Balance SheetRelated Topic – Adjustments in Final Accounts (financial statements)

 

Journal Entry for Amortization of Patent

A patent is a legal right provided by the government to the inventor or the owner of an invention (if a patent is sold). This gives the owner the exclusive right to make, use, and sell their invention. No one can copy or use the invention without the patent owner’s permission.

It is recorded as an intangible asset on the balance sheet. However, like other assets, patents also lose their value over time as they can be obsolete, expire, etc. To reflect this decrease in value, firms amortize their patents.

Let us understand the journal entry to amortize a patent with an example.

XYZ Ltd purchased a patent for 50,000 which is expected to expire after five years. Show the entry for amortization expense charged each year on the patent.

Amortization Expense A/c 10,000
 To Patent A/c 10,000

This journal entry will be passed in the books of XYZ Ltd. every year until the asset’s value becomes zero. (5 x 10,000)

  • The price of a patent includes the cost of registration, legal charges, documentation, etc.
  • Initially, these patents are recorded at the original purchase price or estimated cost, and then annual amortization entries are passed until the account reaches zero.

Related Topic – Depletion Vs Depreciation Vs Amortization

 

Journal Entry for Amortization of Goodwill

Goodwill in accounting refers to the intangible value of a business that is above and beyond its tangible assets, such as equipment or inventory. It represents the reputation, customer base, and other non-physical assets contributing to the business’s value.

Goodwill is typically created when one business acquires another business, and in the process, the acquiring business pays more than the book value of the acquired business. It is recorded on the acquiring company’s balance sheet.

Goodwill = Amount Paid to Acquire a Business – Book Value of the Acquired Business

 

Let us understand the journal entry to amortize goodwill with an example.

ABC Ltd. purchased the business of XYZ Ltd. for a total of 50,000, while the actual book value of the business was 30,000. Show the journal entry for amortization of goodwill in the books of ABC LTD. in year 1 after the acquisition assuming it will be amortized over 10 years.

The annual journal entry in the books of ABC ltd. will be as follows,

Amortization Expense A/c 2,000
 To Goodwill A/c 2,000

Working Note – The difference of 20,000 will be treated as Goodwill of the business and written off annually for the next 10 years.

  • Annual amortization entries are passed until the goodwill reaches zero.
  • Valuation of Goodwill can be changed over time due to changes in the business environment, market conditions, or other factors.

Related Topic –  Capex and Opex

 

Is Amortization an Expense?

The short answer is yes. Amortization is considered an expense. This is because the cost of an intangible asset is spread over the years, and such periodic charges reduce its value over time.

Let’s consider a hypothetical example. Suppose a company purchases a patent for 50,000 with a useful life of 5 years. The company should not show it as a one-time charge; instead, it should spread the cost over its life and expense off by 10,000 per year.

 

Short Quiz for Self-Evaluation

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>Related Long Quiz for Practice Quiz 15 – Amortization

>Read Journal Entry for Depreciation

 

What is a Chattel Mortgage and How Does it Work?

Ahuja Sahil
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In this post, we are going to take a look at a niche, and often overlooked form of financing – the Chattel Mortgage. While Chattel Mortgages are limited in their suitability they nevertheless form an essential part of the lending canon when it comes to certain asset classes – let’s get started.

mortgage stock photo

 

What Is a Chattel Mortgage?

Put simply, a Chattel Mortgage is a mortgage that is secured over a moveable asset (or chattel) such as a manufactured (i.e. prefab) home, a high-value vehicle such as a plane or boat, or a piece of construction equipment.

 

How Does a Chattel Mortgage Work?

There are some crucial differences between a regular mortgage and a chattel mortgage which we will now examine. A regular mortgage is taken as security for land and more often than not a property built upon it. When a borrower obtains a regular mortgage, they still own the land and property and the mortgage is secured by way of a lien or charge at the land register. The mortgagee can obtain possession of the property in the event of a default and sell it to repay the loan.

With a chattel mortgage, the loan is secured over a moveable asset rather than land. In the case of a chattel mortgage over a manufactured house or a trailer, the property is used as security but not the land on which it is situated. Additionally, with chattel mortgages, the asset is technically owned in the name of the lender until such a time as the borrower has fully repaid the loan at which point ownership is transferred.

 

How Does A Chattel Mortgage Compare With Unsecured Financing?

The obvious difference between a chattel mortgage and unsecured financing is that with a chattel mortgage, the lender does have some form of security. In the case of a chattel mortgage over a boat, the lender can repossess the boat and sell it in the case of a default.

With an unsecured loan, the lender has no security for the money and effectively has to take its chances and hope that the borrower fully repays. While an unsecured lender can take legal action against a borrower personally, this is often more expensive than it’s worth.

That said, by their nature, the kind of assets secured under chattel mortgages are not always easy to recover or resell and so it is not a watertight form of security. For this reason, the interest rates of chattel mortgages can be almost as high as with unsecured lending.

 

How Does A Chattel Mortgage Compare With Secured Financing?

There are some striking similarities between a chattel mortgage and some secured loans and in some ways, a chattel mortgage could even be viewed as a form of secured loan. For example, vehicles can sometimes be offered as security or collateral for loans such as in the case of car leases – if the borrower defaults, then the lender can take the car and sell it to repay the debt

However, it is less common for lenders to offer secured loans over assets such as boats, planes or pieces of high-value construction equipment. Also, chattel mortgages can sometimes be for very large sums that far exceed the maximum loan amounts offered by secured loan lenders.

 

A Chattel Mortgage vs Lease

There are some strong similarities between a chattel mortgage and a lease and some consumers do confuse the two. Indeed in both cases, the ownership of the asset is retained by the lender for the duration of the loan repayment period. This can be frustrating for some consumers as they are still usually responsible for maintaining, insuring and generally looking after an asset of which they are not the legal owner.

The main difference, however, is that once a chattel mortgage is repaid, the asset is transferred to the borrower whereas, when the lease expires the lessee simply acquires the right to buy the asset, but still needs to pay over a further sum of cash. Of course, in the case of a vehicle or a piece of equipment, there is a possibility that the asset may have become malfunctioning or even obsolete over the term of the loan and as such may be something of a compromised asset anyway.

Issues regarding legal liability also sometimes come into play here too. Under a chattel mortgage, the borrower sometimes can be held liable as both user and owner in the event that the asset causes injury or death. With a lease, the borrower can only be held liable as the user in the same eventuality.

The other notable difference is that leases are usually offered over more conventional kinds of assets such as cars, as opposed to aeroplanes.

 

Final Thoughts on Chattel Mortgages

Chattel mortgages are a relatively rare form of credit and most consumers are unaware that the concept even exists. Still, for those looking for finance on planes, cranes or manufactured homes (a growth industry by the way) they can be invaluable.

Of course, the interest rates are high and the ownership situation does bother some prospective borrowers but nevertheless, there is most certainty a place for chattel mortgages in the credit landscape.

 

 

Alternatives to short-term loans

Ahuja Sahil
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0

Short-term loans come in a range of forms, with one of the most popular being payday loans. They are a quick and easy way to get cash when you need it and can be helpful when faced with an unprecedented expense or emergency.

However, these loans can come with high interest rates and fees, making them a costly option for many people. Below, we will explore some alternatives to short-term loans that may be more affordable and less risky so you can still benefit from funds when you need them.

stock image for alternatives to short-term loans

 

What are short-term loans?

Before we dive into finding out what some of the most popular alternatives to short-term loans are, it helps to get to know more about these loans themselves. Short-term loans refer to a type of loan that is typically repaid within a short period of time, usually between a few weeks to a few months.

These loans are designed to provide borrowers with immediate access to funds to cover unexpected expenses or emergencies, for example, a broken boiler or an urgent car repair. Short-term loans often come with higher interest rates and fees compared to traditional loans, as they are considered a higher risk due to the shorter repayment period.

They can be obtained from a variety of lenders, including banks, credit unions, and online lenders, and can be used for a range of purposes. It’s important that borrowers think carefully about the repayment period that their chosen lender requires so that they can decide whether they are able to afford the loan.

 

Who can benefit?

So, who can benefit from these types of loans? Short-term loans can be helpful to a wide range of individuals who are in need of immediate funds to cover unexpected expenses or emergencies. This may include individuals who have experienced a sudden job loss, unexpected medical bills, or a car breakdown.

Small business owners who need quick cash flow to cover payroll, inventory, or other expenses can also benefit from short-term loans. Additionally, those with poor credit scores who may not qualify for traditional loans may find short-term loans to be a viable option as the approval requirements tend to be more lenient.

However, it’s important to note that while short-term loans can provide immediate relief, they often come with higher interest rates and fees, so as we mentioned previously, borrowers should carefully consider their ability to repay the loan before taking on any debt.

 

Credit Cards

The first alternative that could be helpful is credit cards. They offer a revolving line of credit, which means you can borrow money as you need it up to a certain limit that you can set yourself.

Many credit cards also offer 0% introductory interest rates, which can be a great way to save money on interest charges. However, it’s important to be aware that credit card interest rates can be quite high, so paying off your balance in full each month is important to avoid accruing interest and damaging your credit score.

 

Personal Loans

The first alternative that could be helpful is credit cards. They offer a revolving line of credit, which means you can borrow money as you need it up to a certain limit that you can set yourself. Many credit cards also offer 0% introductory interest rates, which can be a great way to save money on interest charges.

However, it’s important to be aware that credit card interest rates can be quite high, so paying off your balance in full each month is important to avoid accruing interest and damaging your credit score.

 

Credit Union Loans

The first alternative that could be helpful is credit cards. They offer a revolving line of credit, which means you can borrow money as you need it up to a certain limit that you can set yourself. Many credit cards also offer 0% introductory interest rates, which can be a great way to save money on interest charges.

However, it’s important to be aware that credit card interest rates can be quite high, so paying off your balance in full each month is important to avoid accruing interest and damaging your credit score.

 

Government Assistance Programs

Government assistance programs can also be an alternative to short-term loans. These programs may provide financial assistance to people in need, such as low-income families or those facing a financial crisis.

Examples of government assistance programs include the Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), and the Low-Income Home Energy Assistance Program (LIHEAP).

 

Peer-to-Peer lending

Peer-to-peer lending may be able to help if you’re trying to avoid a payday loan. With peer-to-peer lending, borrowers can get a loan from individual investors rather than a bank or other traditional lender.

Peer-to-peer lending platforms, such as Lending Club and Prosper, can connect borrowers with investors who are willing to lend money at lower interest rates than traditional lenders. However, it’s important to note that peer-to-peer lending may not be available to people with bad credit.

While short-term loans can be a quick and easy way to get cash when you need it, they can come with high interest rates and fees. Alternatives to short-term loans, such as credit cards, personal loans, credit union loans, government assistance programs, and peer-to-peer lending, can be more affordable and less risky.

It’s important to consider all your options before taking out a short-term loan and be aware of the terms, fees, and interest rates associated with each alternative.

 

Choosing a finance option for you

Choosing the right finance option can be a crucial decision that can impact your financial health and overall well-being. When considering different finance options such as credit cards, peer-to-peer lending, and credit unions, there are several factors to consider. Start by assessing your financial needs and goals, and then research each option’s interest rates, fees, and eligibility requirements.

Consider your credit score and whether you are likely to qualify for each option. Additionally, think about how quickly you need the funds and whether you prefer the flexibility of revolving credit, like a credit card, or a fixed-term loan. It’s also important to read the fine print and understand the repayment terms and any potential penalties or fees for late payments or early repayment.

 

 

Investing in Second Citizenship

Ahuja Sahil
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A Lucrative Investment You Should Consider in 2023

Second citizenship refers to being a citizen of more than one country. The dual citizen shares the rights and responsibilities of both countries and is regarded as a national citizen in more than one country under the laws of those countries.

Having a second passport nowadays is the new life insurance policy. The safety, freedom, and stability of the second country are priceless when it comes to the abrupt abandonment of the home country and relocating to a new one. Such circumstances can include civil unrest, political and economic instability, or in the worst-case scenario, a war.

But is dual citizenship worth the investment? Definitely! Many entrepreneurs and wealthy business people started investing in dual citizenship to take advantage of the multiple benefits it provides. They are always seeking prosperous ways to secure their future and expand their business apertures globally.

In this article, we’ll give you reasons why a second passport is your and your family’s getaway to a better future.

 

Citizenship by Investment Programs

What are CBIs or Citizenship by Investment Programs? These are programs that facilitate the process of obtaining dual citizenship in return for a certain investment from a foreign investor. The programs help families to acquire alternative citizenship and enjoy the rights of a second country as their home.

Those on these programs invest in the economy of the host country and must uphold the customs and laws of the country. They then have rights such as being able to own property and vote.

CBI programs offer citizenship through legal conduct, and it’s a faster process compared to the traditional immigration process.

 

How Dual Citizenship Opens the Doors?

Visa-Free Traveling

Owning a second passport opens the doors to multiple opportunities, including visa-free travel to more than a hundred countries. For instance, the St. Lucian citizenship by investment programs secures dual passports for foreign investors. St. Lucian passports allow citizens to travel without a visa or with a visa on arrival to more than 140 countries, including Singapore, the UK, Israel, Hong Kong, and the Schengen Zone.

St. Lucia offers a globally respected CBI program and has rolled out an e-payment platform to facilitate the virtual application process. The processing time was cut to 56 days after the platform was implemented, and the country has also updated the “qualifying dependent” category to include co-dependents in all investment options.

 

Lifestyle Benefits

lifestyle

The various lifestyle benefits open up new life horizons and allow dual citizens to experience the world from a whole new perspective. Besides adopting a new lifestyle, a second passport will also allow you to meet new people, explore different areas, learn about new and exciting cultures, and travel the world.

Additionally, it’s a secure option for relocating safely to another location and a sense of pride knowing you own a piece of paper that enables you to work and live in another country.

 

Global Mobility

One of the main reasons people invest in alternative citizenship is freedom of movement. Global mobility enables them to travel abroad and form business partnerships, purchase property, and enter a particular country without going through the visa-acquirement process.

Global mobility is priceless to business people who want to save time, money, energy, and resources on acquiring visas for travelling.

 

Business Opportunities

If you want to do business abroad and save money on visa application fees, consider investing in St. Kitts and Nevis or St. Lucia.

St. Kitts and Nevis’ passport ranks 25th globally, while St. Lucian is 31st. These Caribbean passports are very powerful and enable applicants to travel freely between countries.

The passport is valid for ten years after it has been obtained.

 

Tax Management

Dual citizenship eases the tax burdens and allows for a better tax optimization process. For example, the Caribbean countries have zero taxes on capital gains, inheritance, and wealth acquired overseas. These profits are not subject to taxes, so investors can manage their wealth more effectively.

 

Asset Protection

Banking options in countries of dual citizenship strictly implement services for preserving investors’ assets and protecting their wealth. They offer a variety of protection tools like offshore trusts, offshore banks, and specialized bonds for maximizing wealth and protecting assets.

 

Best CBI Programs

According to a survey, the best citizenship programs in the last four years are:

  • For 2023, St. Kitts and Nevis was chosen as the best CBI Program;
  • In 2022, Dominica took the trophy home;
  • 2021 was in favour of St. Lucia;
  • Grenada took first place in 2020;

 

The Perks of Caribbean Citizenship

The perks of Caribbean citizenship include:

  • Fast application process – the applicants can receive their passports within 60 days;
  • Remote application – no need to visit the country where you’ll obtain citizenship; the program will process the citizenship even when the applicant is in the home country;
  • Obtain citizenship for the whole family;
  • Minimal investments, starting from $100,000;
  • Various investment options;
  • Visa-free traveling; Dominica’s passport enables dual citizens to enter 127 countries without a visa or with a visa on arrival; Grenada allows entrance to 131 countries, and St. Kitts and Nevis to 156 countries;
  • The Vanuatu passport can be obtained for the main applicant and co-dependent applicants like parents, grandparents, or a spouse; You can obtain the Vanuatu passport within a month – it’s the fastest route to get alternative citizenship.

Fun fact – St. Kitts and Nevis’ program is the oldest in the world. It’s considered the great-grandfather to the rest of the programs that were established later on.

 

Requirements

The requirements are different in each country, and every applicant must fulfil them to become part of the program and eventually obtain a second passport. For instance, some programs require the applicants to provide a document as proof of good health and undergo medical examinations, and others don’t.

The common requirements for all programs are:

  • Invest in one of the investment options – includes real estate, national funds, enterprise projects, and government bonds;
  • Have a clean criminal record;
  • Provide a legal document of the source of the investment;

Check the specific requirements for the country you’ll apply to make sure you fulfil them all!

 

You Should Consider Dual Citizenship

You should consider investing in dual citizenship if you want to improve your lifestyle and secure a plan B. A passport has been an invaluable document ever since the Biblical ages, and it represented a “safe passage” document that allowed people to cross borders and travel between regions.

Nowadays, passports have great advantages, especially if you’re a dual citizen and have the doors opened in many countries.

Before you decide to apply for a second passport, make sure you contact an authorized agency that works in the industry and can help you secure dual citizenship.

 

 

Credit Balance of Profit and Loss Account

Ahuja Sahil
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0

Meaning and Definition

The income statement or Profit & Loss account is an essential financial statement that provides a summary of a firm’s expenses, losses, incomes, and gains for a specific accounting period.

The credit side (right) of a profit and loss account deals with income and gains, whereas the debit side (left) deals with expenses and losses. The difference between the two sides is written on the smaller side.

If we have a credit balance in the Profit and Loss account, it means the credit side is larger than the debit side. In short, if the Credit Total > Debit Total = Credit Balance. For the business, it means that the money we earned (credit) was more than the money we lost (debit).

The credit balance of a Profit and Loss Account means “Net Profit” for the business, whereas a debit balance of a profit and loss account indicates a net loss.

 

Example

Following is the Profit and Loss account of PQR for the year ending Dec 20YY

Credit Balance shown in Profit and Loss Account as Net ProfitIn the above example, the debit total is 22,000, and the credit total is 92,000. The balance of 70,000 represents the balancing figure, which has been highlighted in red.

The above example shows a credit balance in the Profit and Loss account. This simply means that the income generated by the firm is higher than the indirect expenses incurred.

70,000 will be added to the Capital A/C, thereby increasing the total capital invested in the business.

Related Topic – Meaning of Capitalized in Accounting

 

Credit Balance of Profit and Loss Account shown in the Balance Sheet

At the end of a financial year, the net profit is transferred to the balance sheet and shown as an addition to the Capital. This means that the company has made more money after covering its costs.

It is reflected as a positive amount. This addition in equity signifies that the company’s overall financial position has been positively impacted.

The image given below shows the transfer:

Credit balance of profit and loss account transferred in the balance sheet

Net Loss

When the debit side of the Profit and Loss account is greater than the credit side, it is a debit balance. This debit balance is called Net Loss. It means that the indirect income of the business is less than the expenses. The net loss is subtracted from the capital.

Related Topic – Gross Profit and Gross Loss

 

Frequently Asked Questions Related to this Topic

Question – 1 – Select the most appropriate alternative from those given below:

The credit balance of the Profit and Loss Account means _____?

  1. Gross Loss
  2. Net Loss
  3. Net Profit
  4. Gross Profit

Answer – The answer is C. The reason is clearly explained in the above text in this article.

 

Question – 2 – What is the credit side of the profit and loss account?

Answer – The credit side of a profit and loss account shows a combination of Gross profit, Revenues from secondary activities, and Gains.

 

Question – 3 – The credit balance of the profit and loss account is shown on the _______.

A. “Assets” side of the balance sheet.

B. “Liability” side of the balance sheet.

C. not shown on the balance sheet.

D. half on the “Assets” side and half on the “Liabilities side.

The answer is B. Profits earned and losses incurred by a business are to be transferred to the owner(s). This is why it is added to the capital and adjusted accordingly.

 

Question – 4 – Profit and Loss Account is a _____ account?

  1. Personal
  2. Real
  3. Nominal
  4. Valuation

Answer – The answer is C. It is a nominal account prepared at the end of an accounting period.

Related Topic – Net Profit Ratio

 

Conclusion

  • Both external and internal users of accounting information utilize an income statement to assess overall business performance and efficiency.
  • An income statement with a credit balance indicates that the business is seeing a net profit.
  • As a result of net profit, investors benefit from an increase in total capital.

 

>Read Debit Balance of Profit and Loss Account

 

What to Do When Living Paycheck to Paycheck

Ahuja Sahil
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0
What to Do When Living Paycheck to Paycheck

63% of Americans live paycheck to paycheck, and the cost of living is quickly outpacing wage growth. There are a few reasons people find themselves in this situation, but poor budgeting and overspending are the most common. In this article, we’ll look at what you can do to save money if you’re living paycheck to paycheck.

 

1. Take a look at your biggest expenses first

The things that cost you the most will make the biggest impact on your overall financial health. Typically, these are your fixed expenses like rent, mortgages, car payments, and student loans. Many people make the mistake of cutting small expenses like Netflix subscriptions or take-out coffee when they’re trying to save money. While every little bit counts, these changes won’t make much difference unless you first cut out your major expenses.

Some of these (such as student loans) can’t be reduced, but others (like your rent) can be controlled. For example, if your rent is $1,800 per month and you’re only making $3,000 per month, 60% of your income goes towards housing. If you can find a way to reduce your rent by even $100 per month, that will give you an extra $1,200 per year to work with.

 

2. Downsize your biggest amenities

Once you identify your biggest expenses, it’s time to look at your lifestyle and see where you can cut back. If you’re overspending on rent, that’s probably the best place to start. Moving to a place that’s a few hundred dollars cheaper can make a huge difference in your monthly budget.

If you have a car payment, consider selling your car and buying a cheaper one (or no car). Public transportation, walking, or biking can save you a lot of money each month. And if you work from home, you could even Uber whenever you need to go somewhere. A few other areas where you might be able to cut back are eating out, drinking, and travelling. If you’re spending a lot of money in these areas, see if you can reduce your spending or find cheaper alternatives.

 

3. Make a budget and stick to it

One of the best ways to take control of your finances is to create a budget, which is a plan that allocates your income towards different expenses. If you aren’t good at money management, you can use a budgeting app like Albert to help you track your spending and stay on track. You can also use a simple Excel spreadsheet to create your budget. A few best practices to keep in mind when creating a budget include:

Make sure your income and expenses match up: If your expenses are more than your income, you’ll need to find a way to reduce your spending.

Automate your bills and savings: This will help ensure you’re always paying your bills on time and saving money each month. Give yourself some wiggle room: It’s important to be realistic when budgeting, so make sure you allow yourself some flexibility.

 

4. Create a plan for your debts

If you’re struggling to make ends meet because of high-interest debt, it is important to create a plan to pay it off as quickly as possible. There are a few different ways to do this, but the most effective is the debt snowball method.

This involves paying off your debts from smallest to largest while making minimum payments on your other debts. As you pay off each debt, you’ll have more money to put towards your next debt and eventually be debt-free.

 

5. Don’t sacrifice what makes you happy

There’s no point in compromising your quality of life just to save a few extra dollars. If there are things that make you happy, find ways to keep them in your budget. For example, if you love going out to eat, try cooking at home more often and only eating out a few times per month. Or, if you enjoy travelling, look for cheaper destinations or ways to save money on travel costs.

The key is to find a reasonable balance between your happiness and your financial goals, and the reality is that cutting out your five-dollar coffee won’t make much of a difference if you’re overspending in other areas.

 

6. Put money aside for investing

Apps like Acorns and Robinhood make it easy to start investing with just a few dollars. If you’re unsure where to start, plenty of resources online can help you begin. Investing is important because it allows you to grow your money without doing anything. Over time, your investments will compound, and you’ll be able to achieve financial freedom slowly but surely.

 

7. Live below your means

This may seem obvious, but it’s worth repeating: if you want to save money, you need to spend less than you make. One way to do this is to figure out your monthly take-home pay, and then create a budget that doesn’t exceed that number. This will force you to find ways to cut back on your spending.

Another way to live below your means is to list your non-negotiable expenses and find ways to save money in other areas. For example, if you have a gym membership that you use regularly, it might not make sense to cancel it. If your gym membership costs $100 per month, you could consider opting for a more budget-friendly option.

 

8. Find other ways to make more money

If you’re struggling to make ends meet, it might be time to find ways to increase your income. There are a few different ways to do this, such as:

  • Asking for a raise at work
  • Getting a second job or side hustle
  • Selling items you no longer need
  • Refinancing your debt to get a lower interest rate
  • Freelancing work

 

9. Prepare for emergencies and upcoming bills

If an unforeseen expense comes up, you could use loans from My Canada Pay in a pinch, but it’s always best to have an emergency fund to cover unexpected costs. You should also make sure you’re prepared for upcoming bills by setting money aside each month. This way, you won’t have to worry about how you’ll pay your bills if something unexpected comes up.

 

Endnote

If you’re like most Americans, putting money aside for the future can be tough, but it’s important to remember that you’re not alone in this struggle. By following the tips in this guide, you can make headway on your financial goals and be on your way to a more secure future.

 

 

Cent Vs Micro Account: Which One Is Better?

Ahuja Sahil
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Cent Vs Micro Account: Which One Is Better?

When you start trading, your broker will likely ask whether you want a cent account or a micro account. If you are a beginner, chances are that you will give your broker a strange look. What are the differences – and does it matter which type of account you choose?

The fact is that it does matter. Depending on your level of experience, the wrong account may just bring you losses. This may be a result of investing more than you can afford, or even missing out on investments that you could have done.

To make sure that you are investing like a professional, here is some information about cent and micro accounts that you will want to know.

 

Defining the Cent Account

As the name may suggest, the cent account allows you to trade small amounts of currencies, with the standard lot being at around 0.001%. With this type of account, it does not matter how small your deposit is. Some forex brokers don’t even set a limit; it can be $0, for all it’s worth. That being said, you will need at least a few cents to start trading.

The main issue is that these types of accounts are very small – and, therefore, are not provided by many brokers. This is relatively expectable, as most brokers keep their focus on profit. The more money you make, the better. When you only earn a few cents a time, it is not too rewarding.

Still, the couple of cents that you earn would be much more advantageous than what you’d earn if you had a demo account. You can earn a significant amount of profit, but it would take a long time to do so, along with a lot of dedication.

The main goal of a cent account is to help you get used to the real market without risking too much of your money. You can test out a couple of strategies and figure out your trading style while setting aside your fear of loss.

 

Defining the Micro Account

Micro accounts trade more than a cent account but less than a standard account (another common option offered by forex brokers). The micro account trades about 1/100 of the lot of a standard account. In other words, you trade only about $1,000 per transaction, which is why it got the name “micro.”

This type of account uses micro lots for trading, which is why you won’t need to make too big of a deposit. Usually, it starts for less than $50, and the rest of the profit is brought by leverage. When compared to the standard account, which usually requires a $500-$1,000 deposit, the amounts are rather small. It’s a good option for those that are serious about trading but don’t have the confidence to commit to a standard account. 

The problem is that while you earn more profit than cent accounts, it is still relatively small. This is why micro accounts are mostly recommended before you upgrade to the standard version. 

However, it does help give you a better feel of the real market. The risk is still relatively low, making it a good option for novices who have basic knowledge of trading. Microaccounts are also a common choice for experts who wish to test out new trading strategies. This way, they can work their theories without putting too much of your money in danger.

Each micro account may have different fine details, from one broker to another. This is why you may want to ask them for the exact features before you sign up.

 

Differences between the Cent and Micro Accounts

The differences between cent and micro accounts are not that many, but they are rather significant. Here are the main areas where they are different:

Trading Volume

The cent account has a trading volume of 100 units, regardless of the base currency that you use. On the other hand, micro accounts go as high as $1,000 units in the base currency. This makes the latter a better option for those who are more experienced in the trading process.

Lots

The lots in both accounts are similar but hold different trading volumes. For the cent account, 100 units are called 1-cent lots. As expected, trading volumes or micro accounts are 1,000 units per one micro lot. Therefore, the Forex Cent lot is the equivalent of 10% of a Micro lot.

What Do These Differences Mean?

Forex trading comes with several risks. To minimize the risks while maximizing your profits, forex brokers with “Micro” or “Cent” types of accounts will choose the best type for your needs. Your forex experience will also be taken into account when they do that.

To make the trading risks as low as possible, the micro account reduces the minimum trading lot, whereas the cent account makes use of the account currency. When the minimum trading size of a micro account is turned into a trading lot, it can reach much lower in comparison to a micro account.

As such, cent accounts come at lower risks when compared to micro accounts while not needing a high deposit. If you are a beginner in the trading industry, a cent account may be the better choice for you. This allows you to browse through the market and exchange forex currencies without putting too much money at risk.

On the other hand, micro accounts give you a better chance for profit. This is because the micro account holds more power, the earnings being more significant. This is why micro accounts represent the better choice for traders who already know the market and want to take a better chance at a profit.

The Bottom Line

Both accounts are a good option for beginner brokers who are still learning their way around the real market. That being said, cent accounts bring less financial risk, whereas micro accounts bring more potential profit. It’s up to you to choose which one works best for you.

 

 

What Are The 7 Components Of Effective Financial Planning?

Ahuja Sahil
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What Are The 7 Components Of Effective Financial Planning?

When it comes to financial planning, it’s important to consider all aspects of your current and future financial well-being. This means not just looking at immediate goals and expenses but also considering long-term plans and investments.

When it comes to managing your money, whether you are an individual or a business, it is always important to speak to a qualified financial planner, and you can visit bestfinancialplanners.com.au to find one in your area.

In the meantime, here are the seven critical components of effective financial planning to set you up for a wealthier and more comfortable future:

Setting Clear Goals

Without clear goals, it’s easy to get sidetracked and spend money on unnecessary things rather than investing in your long-term goals. In addition, having specific targets in mind helps you measure your progress and make adjustments as needed.

When setting goals, it’s important to be realistic and ambitious – aiming too high can lead to frustration, but setting low expectations can limit your potential. It’s also helpful to break down larger goals into smaller, achievable steps you can work towards over time.

By setting clear financial goals and creating a plan to reach them, you’ll be able to take control of your finances and work towards a bright future.

 

Identifying Potential Risks

When it comes to our finances, we often want to focus on the positive aspects – investments that are performing well, steady income, and meeting our goals. However, it’s just as important to consider potential risks to plan for future uncertainties.

This could include the loss of a job, unexpected medical expenses, or changes in the economy like the current official cash rate determined by the Reserve Bank of Australia.

By identifying and planning for these potential risks, we can minimise their impact and ensure financial stability for the long term. This may involve building an emergency savings fund, diversifying investments, or purchasing insurance policies.

While it’s never fun to think about negative scenarios, taking the time to identify potential risks is a vital component of effective financial planning.

 

Creating a Budget and Tracking Expenses

It’s easy to lose track of where your money is going, particularly when faced with a plethora of expenses, both necessary and frivolous. That’s why creating a budget and tracking expenses is such a crucial part of financial planning.

By setting goals and determining what you can realistically afford to spend, you can ensure that your spending aligns with your overall financial objectives. And by consistently monitoring your expenses, you can identify patterns and adjust as needed to stay on track.

So don’t underestimate the importance of budgeting and expense tracking in any effective financial plan.

 

Determining Insurance Needs

Before determining how much to invest or save, it’s crucial to ensure that your assets and loved ones are protected in unexpected circumstances. This includes evaluating needs for life, disability, health, and property insurance.

These types of coverage can help provide security and peace of mind, knowing that you and your family will be taken care of in unfortunate situations. It’s also important to periodically reassess your insurance needs as they may change over time.

 

Planning for Taxes

One mistake and you could end up owing thousands to the government, putting a major strain on your finances. That’s why it’s crucial to plan for taxes as part of your overall financial strategy.

This means ensuring that you have enough set aside to cover any tax payments, taking advantage of any deductions or credits available to you, and staying on top of any changes in tax laws that could affect your financial situation. By taking taxes into account in your planning process, you can save yourself stress and money in the long run.

So don’t forget to factor in taxes when creating your financial plan – it could make all the difference.

 

Developing a Retirement Strategy

Without a solid retirement strategy, you may be unable to sustain your desired lifestyle after leaving the workforce. When you consider only one in five Australians will have enough superannuation to fund a comfortable retirement, this becomes extremely important.

The earlier you start planning for retirement and contributing to a retirement fund, the more time your money has to grow through investments and compound interest.

It’s important to continually reassess and adjust your retirement strategy, taking into account changes in income, expenses, and the market. Working with a financial advisor can help ensure that you have enough money saved to maintain your desired standard of living during retirement.

 

Managing Investment Portfolios

By carefully selecting and monitoring various investments, individuals and businesses can grow their wealth and ensure long-term financial security. However, managing an investment portfolio is not a simple task. It requires knowledge of various investment options, the ability to monitor and adjust positions constantly, and a clear understanding of personal financial goals.

Seeking the assistance of a professional financial advisor or investment manager can help in this process. Still, ultimately individuals must take responsibility for actively managing their portfolios. Neglecting this critical component of financial planning can have significant negative consequences for both short-term and long-term financial success.

By taking the time to address each of these areas, you can ensure that you have a solid foundation for achieving both short and long-term financial success. And remember – don’t be afraid to seek guidance from a financial advisor or planner if necessary. They can provide valuable expertise and support in navigating these sometimes overwhelming tasks. Ultimately, actively engaging in comprehensive financial planning can alleviate stress and lead to increased peace of mind about your financial future.

 

 

How to Hire an Accountant for Your Startup Business

Ahuja Sahil
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How to Hire an Accountant for Your Startup Business

As a new business owner, you want to focus on running and growing your company. You may have thought about hiring a full-time or a part-time accountant as a solution depending on your workload. An accountant could be the only person who will ease off the financial paperwork that is taking too much of your time. This post looks at why you should hire an accountant, how to hire and how much it costs.

Why Should You Hire an Accountant?

Small businesses also need an accounting professional. Below are reasons why you need an accountant as a small business owner.

Perfect Financial Records and Financial Statements

A professional accountant will ensure that your financial records and statements are in order. As a business owner, you will be able to get a snapshot of all the necessary financial information whenever you need it. This information will help you in doing an analysis of your business and assist you in sticking to your plans to grow the enterprise.

Keeping Up With Laws On Taxation and Saving Tax

A certified public accountant will ensure that your business complies with the latest tax laws. An accountant will also ensure that you get tax write-offs when you file your taxes and assist with tax planning.

 

How to Hire an Accounting Professional

It is crucial for you to find a person with the financial knowledge that matches your business and how it operates. Taxation and financial needs for various companies are different. For instance, a sole proprietorship business setup without employees is different from a business with employees. Below are things to consider when hiring an accountant:

  • Make a list of the services you would like the accountant to handle
  • Network and consult with business owners to find out the accounting firms or accountants they chose to work with and why. For example, you can choose to work with an accounting firm such as Pherrus Financial for business taxation compliance services.
  • Create a list of questions to ask a prospective accountant or an accounting firm, then make an appointment. There are some accountants or firms that offer free consultations.
  • Issues to discuss during the hiring process include fees for tasks such as payroll, financial statements, financial reporting, first tax filing and all tax-related charges.
  • During the interview, ask for recommendations for accounting software.

 

The Cost of Hiring an Accountant

Costs will be different depending on the accounting service that you need. The amount of money you’ll pay will also depend on the qualifications of the accountant and their experience.

Costs for a CPA with a college degree without experience will differ from a certified professional with five years of experience. If you wish to work with an accounting firm, you will pay between $100 to $250 an hour. A self-employed accountant working as a subcontractor will cost you $40 an hour.

Availability

As a startup business, you don’t want to hire an accountant who will be available during the tax season only. This type of accountant leaves you without a solution for other areas, such as tax advice and payroll.

You need to ensure that your accountant will be available throughout the year. Ensure that your CPA will solve other business challenges in addition to record statements and taxes. Most startup owners utilize an accountant’s services such as discussing:

  • Business Planning
  • Financial Management
  • Operating Costs
  • Tax Laws
  • Tax Preparation
  • Recording transactions

Your accountant should not only deliver the tax return but also talk to you about all the above.

An Understanding of Your Industry and Business

While you seek professional candidates who know all aspects of accounting, look for someone with the right background for your business. The ideal accountant is familiar with the operations of your specific business. They should have experience working with similar businesses in your industry and understand the operating procedure and costs associated with managing your business.

Additionally, you should hire a professional with experience working with companies at a similar stage as your business. With this kind of experience, the accountant knows the challenges and opportunities ahead, so they will not be caught off guard as the business grows.

 

Endnote

Hiring an accountant for your startup is a wise decision. You will have more time to concentrate on growing your business. You don’t have to be an expert in bookkeeping and taxes to run a business, but you can find someone who is certified to help you out. If you have not hired an accountant yet, start by following the steps above and grow your business.

 

 

What is the Difference Between Revenue and Profit?

Ahuja Sahil
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Revenue Vs Profit

Revenue – is the excess of revenue earned over expenditure incurred by a business for a given accounting period. It increases the total capital invested in a business.

Loss is Expenses Minus Revenues

Such monetary benefit arise due to the;

  • Business operations – Relating to business activities.
  • Non-recurring events – Relating to unforeseen events e.g. fire, theft, loss on sale of fixed assets, etc.
  • Accounting loss – Relating to accounting policy or accounting standard changes, etc.

 

Loss Shown in Financial Statements

Net Loss incurred by a business is shown on the credit side of an income statement as a balancing figure. At the time of preparation of final accounts, the loss is transferred to the balance sheet.

Loss shown in financial statements

 

Profit – Money spent by a firm for generating revenue is termed as expenditure or expenses. The cost incurred as expense usually expires during the same accounting period, i.e. it is not carried forward to a future period.

Expenses may occur in the following forms;

  1. Cash payment of currency, for e.g. paying bills such as rent, salaries, etc.
  2. A decline in the value of assets (e.g revaluation loss or investment loss), etc.
  3. Accepting a liability, for example – accrual of rent, etc.
  4. The total cost of goods sold.
  5. Depreciation & Amortization.
  6. Bad debts, etc.

Expenses are classified in various different ways;

 

Expenses Shown in Financial Statements

Expenses incurred by a business are shown on the debit side of an income statement and are further used to compute the net gain or net loss of the company.

Expense shown in financial statements

One of the main differences between loss and expense is that total loss is computed with the help of total expenses and affects the total capital invested in the business. On the other hand, expenses do not directly affect the capital invested in a business.

 

Table Format of Difference

Basis of difference Revenue Income
Definition It is the amount of money generated from the primary operations(selling of goods or services) of an organisation It is the excess of revenue over expenses
Calculation Gross Revenue= Number of goods× selling price per unit.

Net Revenue= Gross Revenue – Sales return- Discount

 Income= Revenue- Total cost(operating costs, administrative expenses etc
Position in the Production cycle It is the starting point of income  It provides monetary cash flow to continue the next production cycle and thus generates revenue
Placement It is placed at the top of a Company’s financial statement thus Revenue is referred to as Topline It is placed at the bottom of a Company’s financial statement thus Income is referred to as the Bottom line
Depiction It shows the details of the number of goods or services sold and the price.

It does not depict the utilization of resources

 It shows how well a company utilizes its resources and controls its operational costs and other expenses to increase the income of the company
Superset/ Subset Revenue includes Income thus it is the Superset Income is included in Revenue thus it is a Subset
Example ABC Ltd sold 2000 units of its product @ Rs 10.

Thus the Revenue is Rs 20000

 ABC Ltd incurred Rs 5000  as operating and administrative expenses.

Income= Rs 20000- Rs 5000 = Rs 15000

 

>Read Difference Between Loss and Expense

 

Mobile Phone Depreciation Rate

Ahuja Sahil
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  1. Mobile as a Capital Asset
  2. Mobile Depreciation Rate as per the Income Tax Act
  3. Mobile Depreciation Rate as per the Companies Act
  4. Example
  5. Why Should a Mobile be Depreciated at all?

Most businesses today rely on company mobile phones for after the work communication. These mobiles are considered an asset since they usually last for more than a year.

At the time this article was written they are considered “office equipment” therefore mobile phone depreciation rate is the same as that of Plant and Machinery. Like any other long-term asset, mobiles are also depreciated according to the Income Tax Act of 1961 & the Companies Act of 2013.

 

Mobile as a Capital Asset

Any property that generates value over time is considered a capital asset for a business. The organization benefits from having a mobile phone.

Two main reasons why it qualifies as a capital asset are:

  1. The control of this asset lies with the organization. It is purchased in the name of the company and the usage is for business purposes so there is a direct value addition for the business.
  2. It is a communication device, just like a landline telephone, so the economic benefit accrued from mobile phones will continue till the mobile lasts.

Treatment of mobiles purchased by the company:

  • Irrespective of the value, the mobiles should be capitalized under the Companies Act, 2013 if purchased on or after 1st April 2014.
  • If the mobile is purchased on or before 31st March 2014 and the value is < INR 5,000 (greater than) then the mobile should be capitalized.

Related Topic – Accounting Interview Questions with PDF

 

Mobile Depreciation Rate as per the Income Tax Act 1961

We are almost in 2023 and for AY 2022-2023, the rules and standards are as follows:

The depreciation rate according to the Income Tax Act of 1961 is 15% WDV (Written Down Value). Businesses other than companies charge this rate for mobile phone depreciation.

It is important to note that mobiles are viewed as “Plant & Machinery” therefore, the same depreciation rate applies. Here is how to find current depreciation rates as per the Income Tax Act of India, including mobile phone depreciation rates.

  1. Follow this Link – Income Tax India – Charts & Tables
  2. In the search bar type “depreciation rates” and hit “Search”.
  3. You can also search other tables and charts available on IT India’s government website with this method.

how to search depreciation rates on income tax India website-1

Related Topic – Difference Between Depreciation and Provision for Depreciation

 

Mobile Depreciation Rate as per the Companies Act 2013

For AY 2022-2023, nearly 2023 at the time of writing this article, the following rules and standards apply:

Companies also use the same rate of depreciation as that of “Plant and Machinery” to depreciate mobiles.

The rates according to the Companies Act of 2013 are:

  • 4.75% SLM (Straight Line Method)
  • 13.91% WDV (Written Down Value)

There is an argument about whether to charge the same rate of depreciation as computers. The Madras High Court held that in the case of Federal Bank Ltd. Vs. ACIT, mobiles are not in fact computers and, therefore, the depreciation will be allowed at the general rate of depreciation on plant and machinery.

Here is a PDF as per the MCA website (Ministry of Corporate Affairs).

Related Topic – Which Contra Account is used to Record Depreciation?

 

Example of a Smartphone being Depreciated

Unreal Pvt. Ltd. provides mobile phones to its staff for office use. The company purchased two of them at a total of INR 80,000 during FY 2021-22.

Following is the calculation of depreciation under the Companies Act of 2013 for the next two years:

Example of Mobile Phone Depreciation as per Company's Act 2013
Rounded to remove decimal points

While depreciating as per the written-down value method the charges and calculations shall happen on the diminished value.

Related Topic – How to Show Amortization in Financial Statements?

 

Why should a Mobile be Depreciated?

Compared to other assets, smartphones undergo frequent innovation and become obsolete in a shorter period of time.

Like office equipment, smartphones contribute to the success of an organization. Mobile phones should be depreciated annually in the books of accounts since their value decreases over time.

Although it takes more time to write off the entire value of a mobile phone even when the rate is 15% compared to its actual useful life, smartphones purchased for business purposes should be depreciated.

 

>Read Accumulated Depreciation in Trial Balance

 

Top Strategies to Get Past a Cash Flow Crisis

Ahuja Sahil
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Top Strategies to Get Past a Cash Flow Crisis

As a small business owner, you like to feel optimistic. You have a good plan and implement it, believing that your business will only grow. The problem is that about 6 out of 10 businesses are still struggling with cash flow at the beginning of their road. Unless they find a way to overcome the crisis, they risk going into bankruptcy way too soon.

But what can you do when you reach such an impasse? How do you gather enough money to pay for the company expenses, while maintaining some profit? Here are some tricks to bring yourself back up when you are in such a crisis.

cash falling down on floor in a glass

1. Adjust Your Business Plan

When you have a cash flow problem at the very beginning of your career, there may be an issue with your business plan. Perhaps you overestimated how much your demand will be, and therefore, made unnecessary purchases. Or maybe you are focusing on an area that is not very profitable, ignoring the one that brings promise. Review your business plan and check whether any adjustments are due or not.

2. Offer More Payment Options

Clients like it when you make payments easy for them. You may want to take only cash or debit card payments, but considering other options may be helpful. For example, you should offer online or credit card payments as an alternative. Digital wallets such as PayPal are also popular.

Few companies use cryptocurrencies, but if you work for investors, you may want to make it easy for them. For instance, setting up a Guarda TRX wallet or something similar may prove helpful.

3. Offer Incentive for Early Payments

Very often, cash flow issues appear when your clients do not make their payments on time. One way to prevent a recurring cash flow issue is to offer incentives to the people who make early invoice payments.

This may be something as simple as a discount. If your clients are expected to pay within the next 30 days, make sure they have a reason to deliver the money faster. Similarly, you can penalize late payments, which can give them even more of an incentive.

4. Increase Your Prices

Prices are rising everywhere to keep up with inflation. If you are suddenly facing a cash flow crisis and have no idea where it came from, perhaps you should consider increasing the prices.

That being said, make sure your clients know why you did it. You should also ensure the prices remain within reasonable limits. If you make them too high compared to your competition, it may end up backfiring on you.

5. Sell Unnecessary Assets

Perhaps you have duplicate tangible assets that you never really use, such as a second car that you use for sales. You may even have a patent or trademark that you are not using but are still paying for. If this is your case, you should consider selling them. The measure may be temporary, but it can still be helpful.

6. Send Your Invoices Early

To survive a cash flow crisis, you need to accelerate your receivables. Sending the invoices early can help prompt this action. Once your clients receive the invoices, they will be more likely to pay them and get them done.

If you send them at the end of the month, it might take longer to receive the payment. So, to get your money, send your invoice as soon as possible.

7. Get a Loan

The last thing you may want during a cash flow is to attract even more debt, but sometimes, it may save you. Consider getting a cash advance on your credit card or a business loan. If the problem is temporary, the next month’s cash flow can help you cover the debt. If it’s a recurring problem, you may want to avoid getting such financing, as it can make things worse.

8. Make an Inventory Check

When going through cash flow problems, you may want to make an inventory check. If your goods are not moving, you should not keep on putting your resources there. Consider selling them in bulk or at a discount.

Everyone loves a good deal, and you will solve your cash flow problem as the products get sold. Once you are done selling the items, consider reevaluating the prices or removing them from the line altogether.

9. Leverage Happy Customers

To get past a cash flow issue, you need more customers. Use your past clients for that, and put up a referral program. For instance, if they bring buying customers your way, they can get credit or a discount for the next purchase. It’s a win-win for both of you, as it costs them nothing to recommend your products to someone else.

The Bottom Line

Cash flow issues can appear in any business, big or small. It’s important to take a look at the cause so that you may come up with a solution. Sometimes, a change in strategy may be enough.

 

 

How to manage your finances to increase your income?

Ahuja Sahil
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In today’s challenging economy, more and more people are looking for ways to boost their earnings. So if you’re looking for ways to increase your income know that you’re not alone.
One of the best ways to do this is by managing your finances in a strategic way.

There are several things you can do to improve your financial situation and increase your income. In this article, we will discuss some of the most effective methods for doing just that.

So let’s begin exploring the ways now.plant growing with coins

 

What is money management?

Money management is all about budgeting, investing, saving, and spending wisely in order to reduce anxiety and build confidence in your financial goals. You can do research or get professional advice to help you create a plan that works for you.

Many people reach their financial independence due to creating some passive income. It can be done by various options from investing in crypto to trading forex.
To carry out the last one check the lowest spread forex broker to pick up a reliable brokerage company.

But before getting some results you have to take control of your financial sphere.
Let’s look at some ways to manage your finances and increase your profits with time.

 

Create a personal realistic budget

Creating a budget that works with your lifestyle and spending habits is important for money management. Don’t set yourself up for failure by creating a budget based on drastic changes, such as never eating out when you currently order takeout four times a week. A realistic budget will encourage better money-management habits, such as cooking at home more often.

 

Build up your savings

Creating an emergency fund is a great way to be prepared for unexpected events. Even small contributions can help you avoid risky situations and keep your finances in order. Having this type of fund can help you avoid borrowing money at high interest rates or falling behind on your bills. If you are already struggling to make ends meet, an emergency fund can give you the peace of mind and financial security you need to get through tough times.

 

Start an investment strategy

Even if you don’t have a lot of money to invest, small contributions to investment accounts can help you make your money work harder for you. Over time, the money you invest can start to earn more money through interest and dividends.

 

Track Your Spendings

If you’re not aware of where your money is going each month, there is a good chance that your personal spending habits need some improvement. Managing money effectively starts with knowing how much you’re spending on things like dining out and entertainment.

 

Train your financial mindset

Managing your money in a more positive way could include keeping sight of your goals, taking a solution-oriented approach, and focusing on the things you can control – like repayment of debts and spending habits.

 

Conclusion

To wrap it up, there are lots of things to consider when it comes to money management but the most important thing is to get started. Use these tips as a guide to help you create a budget, save money, and make smarter financial decisions.

 

 

Steps to Accept Credit Card Payments In-Store and Online

Ahuja Sahil
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With the rapid changes in the payment ecosystem over the last few years, business owners need to adapt quickly to the new payment systems to provide a seamless service to customers.

Among the various payment methods today, credit card payment has emerged as the most preferred payment option that customers use to shop offline and online.

Once the business owner decides if he wants to use a merchant account, a payment service provider, or an app, he can open a credit card processing account and set up a payment system. Here is how a merchant can accept credit card payments in-store and online.

lady using credit card online

 

Steps to Accept In-Store Credit Card Payment

Customers may make in-store credit card payments at a restaurant, in shopping stores, or at other points of sale. To accept credit card payments at physical sale points, a business owner requires the following equipment and services:

  • Payment processor: A payment processor is a vendor who processes credit card payment transactions done by a customer. Small business owners can use the services of a payment processor, and large business owners can opt for a merchant account. A merchant account is more suitable for business owners doing a high-risk business or having many transactions daily.
  • Point-of-sale system: A point-of-sale system is a combination of hardware and software computing and physical tools that facilitate a payment transaction. A merchant must purchase hardware like mobile card readers, fixed card readers, barcode scanners, etc., and pay a monthly fee for software like sales, inventory, and tax monitors.
  • Payment terminals: Payment terminals are devices that process credit card transactions.

Now that you know the services and equipment required to accept credit card payments let us see the steps in the in-store payment process.

Step 1: Determining the payment processing needs: The first step for merchants is to determine payment processing needs. They need to decide if they will accept online, in-store, mobile, etc.; the payment can be one-time, recurring, or subscription-based. It will help the merchants understand the features they need in th
eir payment system.

Step 2: Choosing a payment processor: The merchant’s payment processor must be compatible with other software like the point-of-sale system. It reduces the scope of errors by eliminating the need for manual entries in the payment processor. The merchant’s point-of-sale system may have an in-built payment processor for convenience.

Step 3: Opening a credit card processing account: A small business can choose a credit card processing service which is a payment service provider. However, if the merchant has large-scale operations, he will require a merchant account.

Step 4: Setting up the payment software: After the merchant selects the payment processor and has an active account, he needs to learn to use the software. The software depends on whether the credit card payment processor is integrated into the point-of-sale system or the merchant uses tools provided by the card-providing service.

Step 5: Setting up the hardware: The merchant would require card readers to accept in-store credit card payments. The card readers come in various forms, like a small dongle that the merchant can sync with his smartphone or a complete POS system.

Step 6: Testing the system: Once the set-up is complete, the business owner should test the system before opening it to customers. It ensures smooth processing when the merchant is dealing with customers. To test the system, the merchant can process a small transaction and get his amount refunded.

 

Steps to Accept Online Credit Card Payment

Financial transactions made over the internet are called online credit card payments. The online credit card payment system functions in a pattern similar to in-store payments. In the online credit card payment system, the payment processor transfers the payment information, and the customer’s credit card company and the bank accept or reject the transaction.

The merchant receives the money in his account within one or two working days in the online payment system. The steps to accept online credit card payments are as follows:

Step 1: Setting up an online store: The merchant must first set up an online store where customers can shop for various products.

Step 2: Setting up a check-out process: Once the merchant has created an online store, he needs to set up a check-out process to make the payment process simple for the customers. For this, the check-out process should be mobile-friendly.

Step 3: Setting up the online payment services: After this, the merchant needs to integrate an online payment processing solution to give more options to the customers to make a payment and speed up the payment process.

The merchants should ensure that the customer data is secure while accepting online and offline payments. By setting up an effective credit card payment system, the merchant can offer better services and a better shopping experience for the customers.

 

 

Benefits of Virtual Accounting Services

Nabia Saher
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2 persons working calculator and some papers

Virtual accounting services have been in high demand, especially after the COVID-19 pandemic disrupted business operations. In conventional accounting, you employ an internal accountant and provide them with a workspace. In addition to a salary, you have to cater for additional costs like health insurance. 

As the advantages appear to outweigh the expenses, many businesses are attempting to operate entirely virtually. However, many small organizations still accept the concept of a virtual accountant at a slower rate. Here are some of the benefits of virtual accounting services:

Simplify Tax Calculations

Issues with taxes can be challenging and time-consuming. Only a seasoned company should handle your tax records. For an additional price, some online bookkeeping firms will also offer tax preparation. To provide clients with detailed reports on a predetermined timetable, most virtual accounting firms have set protocols. Additionally, you’ll likely get notifications about any outstanding issues that need to be resolved.

 

Cost Effective

Most virtual accounting platforms impose a set rate for their services. You save money by forgoing standard accounting expenses like hiring fees, paid sick time, payroll taxes, and employee perks. Small firms with tight financial restrictions that cannot employ a full-time accountant for the company can choose virtual accounting.

 

Organized and Up-to-Date Books

Maintaining accurate books is essential for any business owner, but it can be a time-consuming and tedious task. This is where virtual accounting services can be of assistance. Virtual accounting services can take care of all your bookkeeping needs, including tracking income and expenses, preparing financial statements, and more.

Another benefit of virtual accounting services is that they can help you stay organized and on top of your finances. With everything in one place, you can easily see where your money is going and track your progress towards financial goals. This can help you make informed decisions about where to allocate your resources and make adjustments as needed. If you’re looking for a way to save time and simplify your financial life, virtual accounting services may be the perfect solution.

 

Increased Efficiency

With the help of cloud storage technology, virtual accounting companies may maintain digital copies of their client’s records. In addition, it will help them manage their work effectively and efficiently. It is essential to seek the services of an experienced virtual accounting company such as Geekbooks for assistance in growing your business.

 

Improved Data Security

You can have the assurance you require regarding your critical financial data by working with virtual accounting services. Your financial information will be safe since your data will be saved on the cloud, so you won’t lose your data in the case of a natural disaster or cyber attack. Cloud accounting systems with the highest level of dependability have Secure Sockets Layer (SSL) certification.

 

Effective for Managing Large Business

Virtual accounting offers customizable services and can connect with the current department to offer services and support. It is helpful for large businesses that need assistance but does not want to pay accounting professionals. A virtual accountant can respond swiftly to increased job volume, and you can immediately scale up if your business expands quickly or requires additional help, all without incurring overhead costs.

 

Flexibility

Financial information is now stored online thanks to cloud-based software in advanced virtual accounting services. This gives you access from various devices, and your virtual accountant can complete the work according to a schedule that fits your company’s timelines.

Virtual accounting services have many advantages over hiring an in-house accountant. Due to improved internet services, cyber security, cloud computing, and communications tools, more businesses will undoubtedly adopt virtual accounting. As a business owner, your survival ability depends on raising output, sales, and efficiency while lowering expenses.

 

 

The Complete Guide for Forex Trading in Malaysia

Ahuja Sahil
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Foreign exchange is taking over the trading world all over the globe. It is all you hear about on the news, TV, and the internet! The great thing about forex trading is that you can do it from the comfort of your home, and you can invest or trade currencies anywhere and everywhere. If you want to berdagang forex (trade forex) in Malaysia, there is nothing stopping you. You might want to familiarise yourself with how things are carried out there, but once you have come to grips with the rules and regulations, you can get started.

 

The Regulation of Forex in Malaysia

Forex trading is regulated by many commissions, bodies, agencies, and institutions – they are all responsible for setting regulations. Forex trading cannot occur unless you are trading with licensed international Islamic banks, investment banks, commercial banks, or Islamic banks. The central bank of Malaysia is ‘Bank Negara Malaysia’ – its main objective is to issue currencies. Other responsibilities include the regulation of Malaysia’s financial institutions, monetary policy, and credit system. Bank Negara also acts as an advisor and banker to the Malaysian government. Under the guidance of Bank Negra, the Financial Accreditation Agency (also known as the FAA) was established. The FAA was introduced as an attempt to spearhead the certification and standardization efforts for the financial service industry and develop better learning standards.

The ‘Security Commission manages the regulation of businesses in association with securities’ (also known as the SC). This body has many responsibilities, including the supervision of exchanges, approval of corporate bond issues, the regulation of any acquisitions and mergers of companies, central depositories, and the regulation of any matters that have relevance or relation to future contracts and securities. 

Regarding the ascertainment of Islamic Law, the ‘Shariah Advisory Council’ (also known as the SAC) has full authority. The SAC allows Islamic banking businesses, Islamic financial businesses, takaful businesses, and any other businesses that are based on the Shariah principles to be run under Islamic law whilst being both regulated and supervised by Bank Negra Malaysia.

 

Forex Trading Laws in Malaysia

It is extremely important to first understand any trading laws before you begin to attempt to trade forex. There are around three laws that are of the utmost importance to understand.

The securities and commission act of 1993 – allows for the securities commission Malaysia to regulate any businesses dealing in security, as well as license any of these businesses. The money changing act of 1998 – along with licensing, this act provides the regulation of any matters relating to money changing as well as the regulation of any money-changing business. 

If you are attempting to buy or sell any foreign currency in Malaysia, the money changing act ensures that you are not only licensed under this act but also under the exchange control act of 1953. 

The exchange control act of 1953 – is an act that imposes restrictions on any forex dealing, regardless of whether the dealings are occurring amongst residents or non-residents. 

Though there aren’t any restrictions for non-residents when wishing to invest in Malaysia, this is dependent on whether the non-resident is choosing to purchase certain assets such as securities and land property.

 

How To Start Trading in Malaysia

When beginning to trade forex in Malaysia, you should use an approved broker or institution – you will also want to ensure you have maintained an Islamic account. To do this, you need to ensure that the broker or agent that you choose has been deemed as being Shariah compliant. Be careful when doing your research on brokers – there are many reviews online by other users, which can make this process a lot easier. Income that is gained from forex can be taxed as income tax; however, the exception is any forex capital gains – these remain exempt.

 

 

Simple petty cash book

Ahuja Sahil
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A petty cash book is just as its name suggests a book which is used for the purpose of recording small amounts of expenses in a business. Usually, the petty cashier maintains a petty cash book. It is like a petty cash account. A simple petty cash book looks like a cash book with two main columns (left for receipts & right for payments).

There are mainly two types of petty cash books;

  1. Simple petty cash book
  2. Analytical petty cash book

This article emphasizes on the first time that is “simple”.

Related Topic – Petty Cash book PDF Format

 

Meaning and Definition

A simple type of petty cash book is one that is maintained simply with the help of 2 primary columns, one for receipts (left) and one for payments (right).

This means any cash that the petty cashier receives is recorded on the left-hand side (debit side) of the book whereas any cash that is paid is recorded on the right-hand side (credit side). The date, along with the particulars of the item is recorded in chronological order.

Simple petty cash book

Related Topic – Normal Balance and Type of Account of Petty Cash Book

 

Simple Petty Cash Book Format

Simple petty cash book format

Amount Received – The money received from the chief cashier for petty cash expenses

L.F. (Ledger Folio) – The page number of the relevant ledger account

Cash Book Folio – The page number in the cash book of the relevant ledger account

Date – Date of transaction

Particulars – Short description of the transaction

Voucher No. – Voucher number related to the transaction

Amount Paid – The sum of money paid for a particular transaction

 

Example

From the following information please show a simple petty cash book for the 1st week of Jan YYYY.

Details of petty cash transactions
Date Particulars Amt
YYYY
Jan 1 Received 10,000 for petty cash
Jan 2 Purchased stationery 200
Jan 4 Paid for bank WIRE charges 500
Jan 5 Bought postage stamps 100
Jan 6 Paid for office expenses 1000
Jan 7 Paid for festival celebration 200

 

Solution

(Solved Example)
Amount Received Cash Book Folio Date Particulars Voucher Amt
10,000 YYYY

Jan 1

Jan 2

Jan 4

Jan 5

Jan 6

Jan 7

Jan 7

  

To Cash A/c

By Stationery A/c

By Bank Charges A/c

By Postage A/c

By Office Expenses A/c

By Miscellaneous Exp. A/c

By Balance c/d

 

 

 

  

 

200

500

100

1000

200

8000

 
10,000 10,000

 

> Read The balance of a petty cash book is an asset or income?

 

What is Write off or Expense off in Accounting?

Ahuja Sahil
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Meaning & Explanation

In layman’s terms, write-off or expense-off simply means disregarding something as insignificant or eliminating something.

The term write-off or expense-off refers to the “elimination of an asset from the financial books” when it is no longer valuable to the business. For example, if a debtor fails to pay his/her dues, then the related account should be written off from the financial statements, or, if a company vehicle is destroyed, then the asset should be eliminated from the books of accounts and such accounts be closed.

Meaning of write off in accounting

It helps reflect the actual amount of revenue and assets in the books of the business entity. Also, it is treated as a non-cash indirect expense that reduces the taxable income & hence, benefits the assessee by reducing the tax liability.

Examples of a write-off in accounting (also known as an expense-off);

  • Debtors failed to pay the amount owed by them to the enterprise. (Bad debts)
  • Impairment of the entity’s machinery, equipment, etc. (Asset write-offs)
  • Spoilage, wastage, loss due to theft, etc., of inventory.

Related Topic – Accounts not closed at the end of an accounting period

 

Example

Suppose Volkswagen Ltd. owns four machines worth 32,000 each. During the year, one of the machines got impaired, and as a result, the company writes off the same.

Therefore, machine write-off expense = book value of the impaired machinery = 32,000

Now, it will be recorded as follows in the books of the company as follows;

a) Credit the machinery account by the amount of machine impaired.

Machinery Written Off A/C 32,000
 To Machinery A/C 32,000

(Impaired machinery written off)

Ledger Posting

Machinery A/C
Particulars Amt Particulars Amt
Machinery Written Off A/C 32,000

 

b)Record write-off expense on the debit side of the profit & loss account as it is an indirect expense for the company.

Profit & Loss A/C 32,000
 To Machinery Written Off A/C 32,000

(Amount of machinery written off transferred to the profit & loss account)

Related Topic – Balance of a Petty Cash Book is an Asset or Income?

 

Journal Entry for Write-Off in Accounting

1) Entry to record the amount of an asset written off.

Expense A/C (write-off) Debit
 To (related) Asset A/C Credit

(Asset written-off)

 

2)  Entry to transfer the amount of asset expense-off to the profit & loss account.

Profit & Loss A/C Debit
 To Expense A/C (write-off) Credit

(Amount of asset written off transferred to the profit & loss account)

Related Topic – Meaning of Set-off in Accounting

 

Reasons & Similarities

Reasons

  • In order for business owners to reduce their tax liability, they take advantage of write-offs by ultimately reducing the reported income.
  • Additionally, it is helpful in ensuring that the accounting books are kept accurately.

 

Similarities

In accounting, various terms that are often used interchangeably with the term write-off or expense-off but have different meanings;

1) Consumption – It means to write down the value of the materials like stores & spare parts, loose tools, etc., with respect to their consumption & recording the same as a direct expense in the entity’s trading and profit & loss account as per the matching concept of accounting.

2) Depreciation – It refers to the gradual fall in the value of the entity’s tangible fixed assets like machinery, furniture & fixtures, etc., because of obsolescence, wear-tear, etc., over its expected useful life.

3) Amortization – The phrase “amortization” is used to write down intangible assets like goodwill, trademarks, patents, etc., until disposed of.

4) Depletion – The word “depletion” is used to write down the gradual degradation in the value of natural resources like coal, etc. which are being extracted from the earth.

Note – All the above-listed terms are a part of non-cash expenses & are a part of the write-down, not a write-off. The term “Written down” refers to reducing the value of an asset in order to match its current market value. It is a partial reduction in an asset’s value. Whereas an asset is written off if it has become completely unproductive to generate any revenue.

Additionally, fictitious assets like advertisement expenditures, etc, are always written off because fictitious assets don’t have any fair value.

Related Topic – Difference Between Receipt, Payment, Income, and Expense

 

Tax Write-Off

A tax write-off refers to an authorized expense that can be claimed as a deduction. Hence, it is also termed a tax deduction as it results in lowering the taxable income & thereby, the amount of tax payable.

In addition to business incomes, such tax write-offs can also be claimed on personal taxes, expenses, or credits to reduce personal taxable income. Some of the commonly availed tax write-offs are deductions on mortgage interest, student loan interest, dental & medical expenses, standard deductions, etc, provided the assessee qualifies all the required criteria of the governing tax laws.

Therefore, individuals, self-employed, small corporations as well as large business firms can benefit from tax write-offs. But, it must be noted that everyone can not avail of all the deductions because it is also based on several other factors like filing status, tax provisions, income, dependents, etc.

 

Write Off Vs Disposal

Basis Write Off Disposal
1) Meaning Write Off refers to eliminating the entire amount of an asset from the books of accounts because it is no longer of any value to the business. Disposal refers to discarding an asset because of uncertainty, asset replacement, or maybe it is no longer needed or of any use to the firm.
2) Effect on Income Statement It is an indirect expense for the enterprise. It is an indirect income for the business, but there may be a loss on disposal if an asset is sold for a value less than its book value.
3) Tax Benefit Tax write-offs or deductions result in a reduction in the taxable income & hence in reducing the tax liability. Unlike write-offs, the disposal of an asset leads to an increase in the taxable income, thereby further adding to the tax liability under certain conditions.
4) Part or Whole The write-off of an asset is done as a whole. An asset may be disposed of in parts or as a whole.
5) Other Name It is also called Expense Off. It is also known as sale or scrapping.
6) Effect on Cash Flow Write off of an asset will not affect cash flow as it is a non-cash expense. The disposal of an asset will lead to the inflow of cash.

Related Topic – Can Assets have a credit balance?

 

Write Off Vs Allowance Method

Direct Write Off Method & Allowance Method are the two methods to write off or expense off an asset.

The major difference between the two methods is that in the direct write-off method, the assets are written off only when the asset actually becomes valueless or the balance from debtors actually becomes uncollectible, whereas, in the allowance method, an amount is set aside from the asset for the possibility of future write-offs, as a matter of prudence.

In the direct write-off method, the amount of asset written off is directly credited to the concerned asset’s ledger account. Whereas, in the allowance method, a separate allowance account is maintained to write off an asset & hence, the amount written off is credited to the respective allowance account & not the asset’s ledger account.

 

Example

Suppose a company has debtors worth 57,000. Consequently, these debtors get bankrupt & fail to pay the amount due.

Case-1: (Direct Write-Off Method) If the company does not maintain a separate allowance to write off book debts.

Bad Debts A/C 57,000
 To Debtors A/C 57,000

(Bad debts written off)

 

Case-2: (Allowance Method) If the company already maintains an allowance worth 66,000 to write off the bad debts if any arise.

Bad Debts A/C 57,000
 To Allowance for Bad Debts A/C 57,000

(Bad debts written off)

 

>Read Profit and Loss Suspense Account

 

Help With QR Code Scanning Problems

Ahuja Sahil
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0

9 Reasons Why Your QR Code Is Not Working

QR codes have become a critical tool for transactions as they are one of the most convenient methods of accepting cash for the goods and services sold by a business. Therefore, if QR codes are not set up properly, they can result in a loss of business because consumers could walk over to the competition.

In this article, we will look at the various reasons why your QR code payment might not be working and what you could do to fix it!

QR code

 

1. Quality of the QR Code

Ensure that the QR code is sharp and not blurry because it affects the scannability of the code. Ensure that you have a high-quality QR code before you use it for scanning by consumers because if it is not, consumers may not be able to make a payment.

2. Never Invert Colors

Choosing design over efficiency is a strict no. What good is a code if it does not work? A QR code should have a white background with a black foreground; if someone decides to invert that color, it may become non-functional. So, as a word of advice, always choose functionality over design choices for QR codes.

3. Size

The minimum functional size for a QR code is 2×2 inches. It is a standard format and anything smaller than that could make it extremely difficult to scan. A consumer might miss the code due to its tiny size. It is especially true for QR codes printed in newspapers because their tiny size makes it harder to notice amongst all the other information.

4. Paying Attention to the Contrast

Always stick to a lighter background with a stronger foreground when trying to design a QR code matching the style and theme of your business. Contrast plays a major role in determining how easy it is to scan the code, and if not done right, it might render the code non-functional. As a tip, remember to keep the foreground 40% darker than the background for the most efficient contrast.

5. QR Code Placement

Do not place the QR code where it is hard to reach or at a level that is difficult for a consumer to scan. Even if you did everything right technically, you would still end up with a QR code that functions but won’t work for the business. Therefore, whenever you place a QR code ensure that the code is placed at eye level and large enough to make it noticeable. Also, it is best to place it where the surface is less reflective to ensure that light does not interfere with the scanning of the code.

6. Prevent Information Overload

Keep in mind the purpose of the QR code. Do you want to promote a URL or create one exclusively for payments? The best QR codes are the ones that are neat and are not overloaded with information as that can interfere with the functioning of the code.

7. Expired Code

Never use a poor-quality QR code generator that could lead to expired QR codes. The best way to figure out if your QR code has expired is to test it regularly.

8. Broken Links

It is the same as having a 404 error for your website. Prevent broken links in your QR code to ensure the best possible user experience.

9. Customizing the QR Code

While customizing the QR code is good for brand recall, you should not overdo it. Stick to simple customization options such as your brand’s logo, color, and fonts, but ensure that the QR is easily scannable if you do not want to lose out on the purpose of the code that it is designed to solve.

Properly functioning QR codes are crucial for electronic payment to go through; therefore, you must always keep these points in mind when creating one for your business. It will help in creating and deploying an effective QR code that works as expected and helps customers quickly transact or get the information they need.

 

 

Types Of E-Commerce According To Your Business Model

Ahuja Sahil
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0

Every internet retailer has a unique business plan. Many people make money by getting website visits. It might be challenging to choose an e-commerce business plan, especially for newcomers with negligible field experience.

For your e-commerce business to succeed and generate consistent revenues, choosing the right model is crucial. You must ask yourself these questions, how to know what payment to choose to accept online, and what business model should I select? When preparing for an online business, many people skip directly to the specifics and forget that everything depends on the products you intend to sell and the model you choose for disposing of your inventory. 

Here in this article, we will discuss which e-commerce model is best for your business.

 

How to identify an e-commerce business model?

An e-commerce business model describes how your online store is conceptually organized to reach customers and increase sales. Business-to-Government (B2G), Business-to-Business (B2B), Business-to-Consumer (B2C), Consumer-to-Consumer (C2C), Consumer-to-Business (C2B), and Business-to-Business-to-Consumer (B2B2C) are the six primary categories of e-commerce business models.

You need to identify two things before choosing the best e-commerce model for your company:

  • Decide your target audience.
  • Create your e-commerce business strategy. 

This will specify how you will draw clients and how they might interact with your offerings. Decide on your distribution structure by considering what would be most effective for your e-commerce enterprise.

 

Identify your selling product or service

This is the core business operation of your online strategy. The appeal of online business is that virtually anything can be sold. But it’s usually a smart idea, to begin with, a limited selection of goods. Clothing and shoes are examples of tangible goods that you may sell in your business. You can also offer digital goods, such as ebooks or services.

Let’s look at the categories of items currently available online and how to reach their market.

 

Physical Goods

This is the product that e-commerce stores sell the most. The most popular physical goods are often those that need to be packaged, shipped, and delivered.

But how do you choose which goods to market?

Determine your areas of passion. If you enjoy driving or love cars, try selling car parts or accessories.  Do you adore reading? Why not open a bookshop online? Thanks to online commerce, you have the ideal opportunity to turn your passion into a successful business.

Find the opportunity gaps by analyzing the niche you have picked. This addresses all the underserved facets of the sector. Analyze the target clients’ issues in a similar manner.

 

Digital goods

Next, investigate keywords related to the item you want to sell. You can then plan your stock management and orders by determining the level of demand for your product.

A buyer may order a wide variety of things online. Are you a graphic artist, content writer, or web designer? You may build an online store for digital goods. For such stores, copyright violations and piracy pose a severe problem. The FAQ and Legal sections, which address the method of product distribution and the status of your items’ copyrights, are also crucial requirements.

 

Service

Why not build a website to sell these services online if you have a team of competent carpenters, house cleaners, or expert hair stylists who offer to visit the customer’s home? By adding thorough FAQ and Legal sections that explain what you are doing and what the clients might anticipate, you can significantly boost the demand for your services.

 

Six different E-commerce Business Models

E-commerce supports several models since it is a global phenomenon. The benefit of online shopping is that you may select one or more business models.

 

Business to Business model

Setting up a B2B strategy is your best option if the nature of your goods or services is focused on satisfying the demands of enterprises. Reaching out and networking are more critical components of this technique. Large advertising budgets are of little use.

Convincing established firms that your products/services are an excellent fit for their processes will be your biggest obstacle.

If you ensure the integrity of your goods and services, this business model has the benefit that orders are often substantial in size, and repeat business is highly common. Media Lounge serves as a superb illustration of this model.

 

Business to Consumer

This is the approach you should take if your goods or services are primarily geared at people. The prospective consumer sees your website and evaluates if your offering may help them with their problems.

After looking around the shop, the consumer can opt to order anything. Portugal Footwear is an illustration of a prosperous Business to Consumer model.

 

Consumer to Consumer model

This model is unique to E-commerce. This is mostly a result of the overwhelming demand on websites like Craigslist, OLX, and eBay.

Users of these sites can rent, buy, sell, and exchange goods and services. The platforms earn a small fee from each transaction. This company concept is intricate and has to be operated with great care. A lot of platforms have collapsed, usually because of legal problems.

 

Consumer to Business model

Another excellent idea that has gained popularity is the customer-to-business (C2B) business model, which is mostly owing to websites that cater to independent contractors. Freelancers in the C2B industry do tasks given to them by customers. These clients tend to be businesses, whereas the freelancers are frequently individuals. Consider C2B as a sole proprietorship that caters to larger enterprises, to put it simply.

This business strategy includes reverse auction websites, freelancing markets, and affiliate marketing. Again, the legal complications in this paradigm necessitate planning.

 

Business to Government model

A company advertises its products to government organizations as part of a business strategy known as business to government. You will need to submit bids for government contracts if you decide to use this e-commerce business model. Governments frequently post requests for proposals, and e-commerce companies must subsequently submit bids for those projects. 

Most of the time, a government organization wouldn’t visit your e-commerce website to make a purchase. Nevertheless, depending on their requirements, some local government entities may be an exception to the norm.

 

Business to Business to Consumer model

B2B2C e-commerce is described as when a firm sells goods to another business, which then sells those goods to consumers online.

This kind of e-commerce business strategy involves three partners. If you decide to follow it, for instance, you will need to join another company before you can sell that company’s items and pay the partner a commission on every sale.

Owners of e-commerce businesses select this business strategy mostly for gaining new clients. This occurs because, despite the fact that customers are already aware of the partner’s items, they are unable to buy from them online owing to restrictions like geography and expensive delivery charges, among other things.

Therefore, this e-commerce business strategy is most suited for new e-store proprietors who wish to increase their clientele.

 

 

Valuation of Goodwill

Ahuja Sahil
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0

Meaning and Formula

Goodwill refers to the prestige or reputation attached to a brand name. Additionally, the goodwill of a firm is the result of a firm’s past efforts, which puts it in a profitable position to gain higher revenue without investing any extra amount of capital & effort. It is because goodwill adds value to a firm’s brand name & acts as an attractive force for the potential buyers of the firm’s products or services.

In addition, (purchased) goodwill is recorded in the books and is viewed as a long-term intangible asset for the company. The valuation of goodwill is subjective & depends upon the method of valuation that the valuer assumes.

Formula to compute the value of goodwill;

(Purchased) Goodwill = Purchase price of the acquired company – (Fair market value of the total assets acquired – Fair market value of the total liabilities taken over)

 

When to Value Goodwill

  • In the case of mergers and acquisitions of entities,
  • In case of reconstitution of partnership firms, i.e., in case of admission, retirement, death of a partner, or change in profit sharing ratio among existing partners.

Related Topic – Is goodwill a fictitious asset?

 

Methods of Valuation of Goodwill

Following are the various methods for valuation of goodwill;

1) Average Profit Method – This method involves the multiplication of the average profit of the firm by the number of years of purchase (number of years in which the entity is expected to continue earning the average profits) to get the value of the goodwill.

Goodwill = Average Profit x Number of Years Purchase

Additionally, either simple average profit or weighted average profit can be used for this computation based on the requirements of the business.

a) Simple Average Profit Method – Here, profits of the business for a certain number of years are simply averaged to calculate the average profit. Then this simple average profit is multiplied by the number of years of purchase.

b) Weighted Average Profit Method – Here, firstly a certain weight is assigned to the normal profits of each year according to their relevant importance & then the weighted average profit is computed. Lastly, this weighted average profit is multiplied by the number of years purchased to arrive at the value of goodwill.

Weighted average profit = Sum of profits multiplied by weights/Sum of weights (agree)
Goodwill = Weighted Average Profit x Number of Years Purchase

Note – Major benefit of using the weighted average profit method over the simple average profit method is that under this method the trend of profitability is also considered as recent years are given more weight than the earlier years, unlike simple average profit.

 

Example

Suppose profits of Mitsubishi Motors Corporation for the last five years are;

Year (Ended) I Year  II Year III Year IV Year V Year
Profits 60,000 28,000 50,000 40,000 56,000

Provided the number of years purchase is 3.

 

Simple Average Profit Method i.e. when equal weight is assigned to the five years.

Simple Average Profit = Total Profit / Total Number of Years

= (60,000 + 28,000 + 50,000 + 40,000 + 56,000) / 5

= 234,000 / 5 = 46,800

Goodwill = Simple Average Profit x Number of Years Purchase

= 46,800 x 3 = 140,400

Weighted Average Profit Method i.e when 1, 2, 3, 4, & 5 weights are assigned to the five years, respectively.

Weighted Average Profit = Total Weighted Profit / Total of Weights

= [(60,000 x 1) + (28,000 x 2) + (50,000 x 3) + (40,000 x 4) + (56,000 x 5)] / 15

= [60,000 + 56,000 + 150,000 + 160,000 + 280,000] / 15 = 706,000 / 15

= 47,066.67 = 47,067 approx.

Goodwill = Weighted Average Profit x Number of Years Purchase

= 47,067 x 3 = 141,201 (approx.)

Related Topic – Which accounts are not closed at the end of accounting period?

 

2) Super Profit Method – In this method, the value of goodwill is calculated by multiplying the super profit by the number of years of purchase. Super profit refers to the amount of profit earned by the business over and above the normal profits usually earned on the given amount of capital.

Goodwill = Super Profit x Number of Years purchase

where Super profit = Actual or Average profit – Normal profit

Normal Profit = Capital Employed or Average Capital Employed x Normal Rate of Return/ 100, and

Average Capital Employed (for the given year) = (Opening Capital Employed + Closing Capital Employed) / 2

Further, two approaches are there to compute the amount of capital employed from the balance sheet of a partnership firm.

 

a) Liabilities side approach 

Capital Employed = Partners’ Capital Accounts+ Partners’ Current Accounts + Reserves + Longterm loans – Existing Goodwill – Fictitious Assets – Non Trade Investments – Deferred Revenue Expenditure – Debit Balance of Profit & Loss Account

 

b) Assets side approach

Capital Employed = All Assets (except goodwill, non-trade investments & fictitious assets) – Current Liabilities

Note – Both the approaches will give the same figure of capital employed by the business.

 

Example

Let’s assume the net profits of PepsiCo over the last three years as given below;

Year I II III
Profits 16,000 20,000 24,000

The amount of capital investment is 60,000 & the normal rate of return is 20%. The number of years purchase is 4 years.

Average Profit = Total Profit / Total Number of Years

= (16,000 + 20,000 + 24,000) / 3 = 60,000 / 3 = 20,000

Normal Profit = Capital Employed x Normal Rate of Return

= 60,000 x 20/100 = 12,000

Therefore, Super Profit = Average Profit – Normal Profit = 20,000 – 12,000 = 8,000

Goodwill = Super Profit x Number of Years purchase

= 8,000 x 4 = 32,000

Related Topic – Difference between receipt, payment, income and expenditure

3) Capitalization Method – Under this method, the value of goodwill is calculated either by subtracting the total net assets of the entity from its total capitalized value or by simply capitalizing the super profit of the entity.

Thus, two alternatives are there to compute the amount of goodwill under this method that is as follows;

a) Capitalization of Average Profit Method – Here, the total capitalized value of the firm is calculated first by capitalizing the average profit based on the normal rate of return. Then, the amount of net assets is deducted from the total capitalized value to get the value of goodwill.

Goodwill = Total Capitalized Value of the Firm – Net Assets

Where, Total Capitalized Value of the Business = Average Profit  x 100 / Normal Rate of Return, and

Net Assets of the Business = All Assets (except goodwill, non-trade investments & fictitious assets) – Outside Liabilities

=[(Total Fixed Assets + Total Current Assets) – (Total Current Liabilities + Total Long Term Liabilities)]

 

b) Capitalization of Super Profit Method – Here, the amount of goodwill is computed by simply capitalizing on the super profit.

Goodwill = (Super Profit x 100) / Normal Rate of Return

Note – Both the above two methods will always give the same amount of goodwill of the business at a given point in time.

Example

Assume Harry & Hermione are partners having capital worth 400,000 & 300,000, respectively. Also, at the end of the given financial year, the firm earned a profit of 90,000. The normal rate of return is 10%.

Normal Rate of Return = 10%

Capital Employed = Capital of Harry + Capital of Hermione

= 400,000 + 300,000 = 700,000

 

Capitalization of Average Profit

Average Profit = 90,000 (assumed as per the given data)

Total Capitalized Value = (Average Profit x 100) / Normal Rate of Return

= (90,000 x 100) / 10 = 900,000

Goodwill = Total Capitalized Value – Net Assets = 900,000 – (400,000 + 300,000)

= 2,000,000 – 700,000 = 200,000

 

Capitalization of Super Profit

Super Profit = Average Profit – Normal Profit

= 90,000 – [(700,000 x 10) / 100] = 20,000

Goodwill = (Super Profit x 100) / Normal Rate of Return

= (20,000*100) / 10 = 200,000

Related Topic – 5 principles of accounting with examples

4) Annuity Method – In this method, goodwill is computed by calculating average super profit as the value of an annuity over a set number of years. Discounting at the provided normal rate of return gives the present value of this annuity.

The value of goodwill is the discounted present value of the annuity. Annuity tables may be used to determine the value of a $1 annuity.

Formula to calculate the present value of a $1 annuity

formula to calculate present value of 1$ annuity

where,

  • A = Present value of $1 annuity for n years
  • r = Discount or Interest Rate / Normal Rate of Return (in%)
  • n = number of years

 

Formula to compute goodwill

Goodwill = Super Profit x Present Value of $1 Annuity

 

Example

Suppose net profits after tax of KPMG International Limited for the last five years are;

Year (Ended) I Year  II Year III Year IV Year V Year
Profits 20,000 25,000 35,000 30,000 40,000

The amount of capital employed is 200,000 & the normal rate of return is 5%. It is also expected that the company will be able to maintain its super-profits for the next five years.

Average Profit = Total Profit / Total Number of Years

= (20,000 + 25,000 + 35,000 + 30,000 + 40,000) / 5

= 150,000 / 5 = 30,000

Normal Profit = Capital Employed x Normal Rate of Return

= 200,000 x 5 / 100 = 10,000

Super Profit = Average Profit – Normal Profit

= 30,000 – 20,000 = 10,000

Now, refer to the annuity table to look for the present value of $1 after 5 years, a @5% normal rate of return.

annuity table to look for the present value of $1 after 5 years

Goodwill = Super Profit x Present Value of $1 Annuity

= 10,000 x 4.329 = 43,290

Although there is no best method for the valuation of goodwill because the method to be used depends on the situation of an individual business & its trade practices. Thus, different methods for goodwill valuation might prove to be appropriate for different kinds of businesses.

 

>Read Can goodwill be negative?

 

Top 7 Factors That Determine the Interest Rate of Your Mortgage Loan

Ahuja Sahil
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0

Buying a property requires a considerable outlay of funds. Many buyers take a property mortgage loan to finance their property. You have to repay the borrowed amount and the interest on the loan in equal monthly instalments.

The interest rates determine your EMI and also your overall interest burden. Most borrowers focus on getting the best rate for a mortgage, but do you know what factors determine mortgage loan interest rates? Read on to find out more.

 

7 Factors That Determine Your Mortgage Loan Interest Rate

There are many aspects to a loan, and interest is one of the crucial ones. The below-mentioned factors determine your mortgage rates:

1. Current MCLR

The marginal Cost of Funds based Lending Rate (MCLR) is the minimum rate at which the lender can offer you a loan. The MCLR further depends on factors like the operating cost, cost of funds, Cash Reserve Ratio (CRR), and tenor premium.

The MCLR is reset annually, and banks review the rates they charge borrowers annually based on the change in the MCLR. So whether it is an existing loan or a new loan, it is linked to MCLR and may increase or decrease as per changes in it.

 

2. Fixed Or Floating Rate

Your property mortgage rate also depends on whether it is a fixed, floating, or a combination of both.

Floating rates change as per changes made by the Reserve Bank of India. Your EMIs may go up or down depending on the changes announced by the RBI. Fixed-rate loans do not change throughout the loan tenure.

You can also choose a combination of fixed and floating rates, where the rates remain constant for some time and may change after that.

 

3. Loan-to-Value (LTV) Ratio

LTV ratio is the proportion of the property value you can take out for a loan. Most lenders have an upper limit fixed for the LTV ratio; you can choose to borrow a lower amount by making a larger down payment.

If your LTV ratio is high, you tend to get a higher interest rate on your loan as the lender is undertaking a bigger credit risk.

 

4. Credit Score

Your credit score is another factor that influences the mortgage rate. If you have a good credit rating, it shows you are a responsible borrower who is less likely to default, and this reduces the credit risk for the lender.

Lenders prefer applicants with a healthy credit history and are willing to offer them loans at lower rates. If you want the best mortgage loans, you should focus on improving your credit rating before applying for a loan.

 

5. Employment Details

When lenders assess the loan application, they consider the applicant’s employment records before they sanction a loan.

If you have a stable job and are employed with the same organization for a considerable period, you are considered a low-risk applicant. The lenders are willing to sanction loans to such candidates at lower rates.

Chartered accountants and doctors are considered low-risk in the self-employed category.

 

6. Loan Tenure

Interest rates also depend on the loan tenure. Property mortgage loan interest rate is lower for loans with a shorter term.

Though the EMI burden may be higher compared to the longer-term loan, the interest rate charged by the lender is lower.

 

7. Property Location

As the loan is for the property you intend to buy, its location also impacts the mortgage rates.

Properties in localities with good amenities are well-connected and have higher resale values. These properties would be expensive, but lenders would offer loans for them at lower rates.

The converse is also true. Properties in not-so-sought-after localities are less expensive, but lenders would give loans to them at higher interest. Lenders find properties with a higher resale value less risky than properties that may be difficult to sell or might not appreciate much. So they will charge higher rates for them.

 

Conclusion

If you want the best home mortgage loans, you should research well and choose a lender after careful comparison. Loans run for a long duration; the decision to take a loan today will have long-term consequences for you, so choose a reputed and reliable lender.

The above factors are the most crucial when it comes to mortgage rates. Some of these factors are beyond your control, but others you can control.

 

 

Goodwill

Ahuja Sahil
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0

Meaning and Example

Goodwill refers to an intangible asset that facilitates a company in making higher profits & is a result of a business’s consistent efforts over the past years. In other words, it is the advantageous outcome of the firm’s good name, reputation, prestige, connections, quality services or products, etc.

It is an attractive force that helps old reputed businesses in earning higher revenues as compared to the normal expected rate of return on capital as a result of its already-established reputation among potential buyers or consumers.

Also, Goodwill is a long-term intangible asset that does have a separate existence from that of the business which means that it cannot be sold separately in the market like other assets. Hence, its realizable value is considered only at the time of sale of the business venture. The value of goodwill is subjective because it depends upon the valuation criteria of the valuer.

Various factors affecting the value of goodwill are as follows;

  • Efficiency & competency of the management,
  • Nature of the business,
  • Benefits of intellectual property rights – patents/trademarks/copyrights,
  • Risks associated with the business & market situations,
  • Past performance and so on.

Related Topic – Profit and Loss suspense account

 

Example of Goodwill

McDonald’s Corporation, the fast-food giant is now able to generate higher revenues than its local competitors because of its goodwill. Further, this goodwill is a result of the company’s past performance, efficient management, advantageous locations of its franchises, benefits of its patents, etc.

Hence, if this company decides to sell its franchise or the entire business to any third party then the realizable value of its goodwill will also be considered while calculating the total purchase consideration. The other party should also compensate for the goodwill because it will get benefitted from the same.

 

Type of Account & Formula

To understand the accounting of a transaction, it is first crucial to know the type of accounts involved in it.

Name of Account Golden Rules Modern Rules
Goodwill
  • Real account (intangible asset).
  • Debit what comes in. Credit what goes out.
  • Asset account (intangible).
  • Debit the increase in the asset. Credit the decrease in the asset.

 

Formula to calculate the value of goodwill;

(Purchased) Goodwill = Purchase price of the targeted/acquired company – (Fair market value of the total assets of the acquired company – Fair market value of the total liabilities of the acquired company)

Related Topic – Meaning of set-off in accounting

 

Journal Entries

a) Inherent, existing, or self-built goodwill

Inherent or internally generated goodwill is the value of the business in excess of the fair value of the net assets of the business. It arises over a period of time due to the good reputation of the business.

Internally generated goodwill is never recognized in books of accounts, so no journal entry is passed.

 

b) Acquired or purchased goodwill

In the case of the acquisition of one business by another, any amount that is paid over and above the net assets simply refers to the amount of (Purchased) Goodwill.

Asset A/C                                                      Dr. Amt
Goodwill A/C                                                  Dr. Amt
       To Liabilities A/C Amt
        To Transferor A/C  Amt

(Purchase of goodwill)

Logic – Debit the increase in assets (including goodwill which is an intangible asset) & credit the increase in liabilities (including the amount payable to the transferor).

 

c) Entry to write off existing goodwill 

All partner’s capital or current A/C                 Dr. Amt
    To Goodwill A/c Amt

(goodwill written off in old profit sharing ratio)

Logic – Debit the Partners’ capital or current accounts to reflect the decrease in the capital whereas, credit the Goodwill account to reflect the decrease in the asset.

Note – Additionally, the impairment loss of goodwill shall also be written off from the books of accounts if goodwill is impaired/devalued. Thus, Debit the impairment loss to the profit & loss account as well as deduct the same from the amount of goodwill (credit it to the goodwill account).

Related Topic – Can an asset have a credit balance?

 

Types of Goodwill

i) Inherent Goodwill – Inherent Goodwill refers to the goodwill that is generated by a company internally, over the years which is also termed non-purchased & self-generated goodwill. It is the value of the business over and above the value of its net assets.

Also, the valuation of self-generated goodwill is subjective & is not to be recorded in the books of accounts as it is an unidentifiable resource.

Example

Suppose Ben & Kevin are partners in a firm having fluctuating capitals of 50,000 & 40,000 respectively. Further, the partnership firm makes a profit of 10,000 on an average basis every year & the normal rate of return is 10%.

Then the valuation of the firm’s goodwill for the given year by capitalization method will be as follows; (Capitalization of Average Normal Profit)

Capital Employed = 50,000 + 40,000 = 90,000

Normal Rate of Return = 10%

Average Normal Profit (given)= 10,000

Total Capitalized Value of the Business = Average Normal Profit x 1/Normal Rate of Return(in %)

= 10,000 x 100/ 10 = 100,000

Therefore, Goodwill = Total Capitalized Value of the Business – Actual Capital Employed = 100,000 – 90,000 = 10,000

Note – Provided it is the self-generated goodwill of the business, hence it will not be recorded in the books of accounts.

 

ii) Acquired Goodwill – Acquired Goodwill refers to the goodwill which is bought against the payment of a consideration in cash or kind. Hence, it is recorded in the books of accounts & amortized.

It is also called purchased goodwill as it arises from the purchase of a business. Further, the amount of acquired goodwill is equal to the amount paid over & above the net assets of the company being acquired.

Example

Suppose Deloitte acquires the business of ABC & Co. for a purchase consideration of 1,000,000. The assets acquired & liabilities taken over are as follows;

Assets Amt Liabilities Amt
Bills Receivables 300,000 Creditors 550,000
Inventory 850,000 Salaries Payable 250,000
Debtors 250,000 Outstanding Expenses 100,000

 

Therefore, for Deloitte

Value of Goodwill = Purchase price of the targeted/acquired company – (Fair market value of the total assets of the acquired company – Fair market value of the total liabilities of the acquired company)

= Purchase price of the acquired company -[(Bills Receivables + Inventory + Debtors) – (Creditors +Salaries Payable + Outstanding Expenses)]

= 1,000,000 – [(300,000 + 850,000 + 250,000) – (550,000 + 250,000 + 100,000)]

= 1,000,000 – [1,400,000 – 900,000] = 1,000,000 – 500,000 = 500,000

Being a long-term intangible asset, the purchased goodwill will be shown on the asset side of Deloitte’s balance sheet.

Related Topic – List of fixed assets and current assets

 

Calculation of Goodwill & Sale of Goodwill

Goodwill simply refers to the value attached to the brand of an entity that puts the business in an advantageous position by attracting more & more potential consumers without putting any extra effort into the same.

Thus, valuation & computation of the existing goodwill is to be done at the time of the sale of the business, or during reconstitution of the partnership in the case of a firm. The following are the various methods for the valuation of goodwill;

1) Average Profit Method – In this method, the simple average profit or weighted average profit of the previous several years is multiplied by a certain number of years, referred to as years of purchase. The goodwill here represents the potential benefit of producing income in the coming years.

Goodwill = Simple Average Profit or Weighted Average Profit x Numbers of Years’ Purchase

where, Weighted average profits = Sum of profits multiplied by weights / Sum of weights

 

2) Super Profit Method – Super profits are the profits earned by the business over and above the normal profits of the business i.e. the profit margin of the business is more than its competitors in the same industry. Here, we calculate the super-profits earned by the company at an agreed no of years of purchase.

Goodwill  = Super profit * No of years of Purchase, where

Super profit = Actual or Average profit – Normal profit

Normal profit = Capital Employed * (Normal rate of return/100)

 

3) Capitalization Method – Under this method, goodwill is calculated by computing the average or super profit and using the real capital invested in the business.

Goodwill = Total Capitalized Value of the Business – Net Assets

or

Goodwill = (Super Profit x 100) / Normal Rate of Return

where, Total Capitalized Value of the Business = Average Profit  x 100 / Normal Rate of Return, and

Net Assets = Total Assets (except goodwill, non-trade investments & fictitious assets) – Outside Liabilities

 

4) Annuity Method – In this method, future profits of the company are calculated and then they are discounted at an established rate of interest to calculate the goodwill of the business. This method considers the time value of money.

Goodwill = Super profits * Discounting factor

Apart from mergers and acquisitions of the companies, the need for its computation can also arise in the case of partnership firms in the following events;

  • Admission of partner,
  • Retirement of a partner,
  • Death of a partner,
  • Change in profit sharing ratio amongst the existing partners,
  • Dissolution of the firm,
  • Conversion of a partnership firm into a company,
  • & Amalgamation of two or more partnership firms.

Related Topic – Different branches of accounting

 

Sale of Goodwill

The premium received over and above the fair value of net assets at the time of sale of a business is the value of goodwill. However, as discussed above it cannot be sold independently but only along with other assets at the time of sale of the business.

Moreover, the sale not only leads to the transfer of brand value along with the business but also gives some rights to the buyer as well as the seller.

Rights of the buyer

  • Can use the firm’s brand name & value,
  • Can represent himself as a part of the ongoing firm,
  • Appeal to the previous established customers of the business, and
  • Can even deny the seller of the goodwill from being in touch with old customers.

Rights of the seller

The seller has the right to start his own competing firm (without using the old brand name/goodwill). However, if the parties agree to a restriction of trade during the transaction, he has no such rights.

Related Topic – Is goodwill a fictitious asset?

 

Goodwill in Balance Sheet

It is an intangible asset for a company as it cannot be touched or seen. It adds value by attracting more customers to buy the products or avail of the services offered by the entity.

Therefore, it helps in raising the overall revenue of the enterprise without any additional efforts & is recorded on the asset side of its balance sheet.

However, as discussed earlier, only purchased goodwill can be recognized in books.

goodwill shown in the balance sheet

It is usually shown under the head “intangible fixed assets”.

 

>Read Different types of financial statements

 

 

Fulfil Your Dreams By Getting An Instant Personal Loan

Ahuja Sahil
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0

Instant Personal Loan Stock Picture

Remember that gadget you always wanted to buy? Or, the destination wedding you want? If you do not have enough funds to realise your dreams, worry not! You can fulfil them through a personal loan.

You can get the required funds with an instant personal loan from https://www.fullertonindia.com/personal-loan to fulfil your dreams or meet emergencies. Access funds on the same day as the loan application, provided you meet the eligibility criteria.

 

Features and Benefits of Instant Personal Loans

Here are the features of an instant personal loan to understand it better.

Digital Loans
These loans are available online. Unlike traditional loans, you can apply for instant personal loans online using smart devices. You can apply for these loans via an instant loan mobile app within a few minutes.

For example, loan apps of leading lending institutions, like the Fullerton India InstaLoan App (available only for salaried borrowers), can provide the funds shortly after the final loan approval. Also, you can keep tracking your loan application via such instant loan mobile applications.

Easy Repayment
Instant personal loans can be repaid in convenient monthly instalments. Lending institutions allow you to repay personal loans for 12-60 months. Keep the tenure longer if you want to pay a small amount as EMI.

If you can afford a larger EMI, you can repay the loan faster by choosing a shorter tenure. Use a personal loan calculator available online to calculate your personal loan EMI. It is a useful tool provided by lending institutions to help borrowers calculate their monthly EMIs.

Multipurpose Loans
Instant personal loans are multipurpose loans. Borrowers are free to use the loan amount the way they want to. It is unlike a home loan where the fund usage is specified.

Minimal requirement of Documents
You can get approval for your instant personal loan without providing documents in physical form. You can upload scanned copies of required documents in the app, and the lending institution can process your documents in real time. The required documents are mentioned below here in the post.

Fast Disbursal
Personal loans are attractive due to their fast disbursal. If you are eligible for a loan, disbursing it to your bank account is very quick, providing that your documentation is in order, and passes the lender’s verification checks.

 

Easy Eligibility Criteria for Instant Personal Loans

Instant personal loans are the most transparent and easily available loans in the financial market. To meet the increasing demands, reputed lending institutions like Fullerton India make the eligibility criteria for instant personal loans easy. Here are some of the basic personal loan eligibility criteria:

  • The loan applicant should be a resident Indian.
  • The age of the applicant should be between 21 years (at the time of loan application) and less than 65 years (at the time of loan maturity).
  • The applicant should be a salaried person, self-employed, or an entrepreneur.
  • The applicant’s minimum monthly income should be Rs 25,000 (for Mumbai or Delhi residents), and Rs 20,000 for others. To avoid loan rejection, the borrower should ensure that their current EMIs do not exceed 50% of their income. Applicants can also use a personal loan eligibility calculator to get an estimate of the maximum amount they may be able to borrow and apply for an amount within this limit.
  • Salaried applicants must have a minimum work experience of 1 year with at least 6 months in the current organisation.
  • You should have good credit history and a CIBIL score of 750 or more. A high credit score can be maintained by timely repayment of EMIs and credit card bills on time and in full.
  • Depending on the lending institution’s eligibility criteria, they can check for other crucial aspects for instant loan approval.

The loan amount sanctioned by the lending institution depends on various factors like the applicant’s age, credit history, nature of employment or business, employer, and others. Apply online in the comfort of your home.

What makes Fullerton InstaLoan special from others:

– Your loan amount can go as high as Rs. 25 lakhs with Fullerton India.
– Hassle-free documentation
– Completely digital process
– Dynamic tracking status
– Quick disbursal and sanction of loan

Required Documents

  • PAN
  •  Address Proof (residence and employment)
  • Passport-size Photos
  • Income Proof (for self-employed)
  • Salary slips for the last three months (for salaried)
  • Current Bank Statements (for the last six months)
  • ITR/Form 16

Instant Personal Loan Application Process

Salaried applicants can complete the loan process instantly in just four steps after installing the Fullerton India InstaLoan mobile application from the Play Store or the App Store.

  • Step 1: Create your account.
  • Step 2: Fill in your details and upload scanned copies of the required documents.
  • Step 3: Check your eligibility. Just after applying, the app will show your eligibility for your personal loan.
  • Step 4: Apply for an instant personal loan. If your application is deemed eligible, the lender’s representative will connect with you.

Download the InstaLoan App today and see your dreams turn into reality.

 

100 Basic Accounting Terms for Interview

Ahuja Sahil
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Basic Accounting Terms for Interview word cloud

Accounting interviews can be tricky and we compiled 100 Basic Accounting Terms for Interview.

  1. Debit – The term ‘Debit’ denotes the left side or leftwards column of a given account.
  2. Credit – The term ‘Credit’ denotes the right side or rightward column of a given account.

Related Topic – 3 Golden rules of accounting

3. Journal – It is a day-book in which all the transactions are recorded regularly & is also called the book of prime entry. Further, the process of recording transactions in the journal is known as journalizing.

4. Ledger – It is a book in which all the transactions from the journal related to different accounts are recorded in one place under that account head. This process is called posting. Ledger is also called the principal book of account as it implicitly helps in the preparation of the financial statements.

5. Financial Statements – The income statement, balance sheet & cash flow statement are collectively termed financial statements. They provide information about the financial performance, cash flow, and financial position of the business. They are also called final accounts.

Related Topic – 3 types of accounts in accounting

6. Income Statement – The trading account and profit & loss account are together termed as an income statement. It helps in demonstrating the financial performance of a business over a given accounting year. It is based on the flow concept.

7. Balance Sheet – It is a statement showing all the assets & liabilities held by a business. It reflects the financial position of the business on a specified date. It is based on the stock concept.

8. Trial Balance – It is a list of all the debit & credit balances of various accounts that are present in the ledger of a business. It helps in maintaining arithmetical accuracy & in the preparation of the financial statements.

9. Trading Account – It is the account in which all the direct expenses, direct incomes along with net sales, net purchases, and opening & closing stock are recorded. The balance of this account will either be gross profit or gross loss.

10. Profit & Loss Account – It is the account in which all the Indirect expenses & Indirect incomes are recorded. The gross profit or loss from the trading account is transferred here and the balance of this account will either be a net profit or a net loss.

Related Topic – What is a profit and loss suspense account?

11. Profit & Loss Appropriation Account – It is an extension of the profit & loss account. The items that are an appropriation of profits such as interest on capital, commission to partners, etc. are recorded in this account. It shows how the profit earned during the year is distributed.

12. Cash Flow Statement – It is a statement that shows how the cash is generated and spent during a specific period. It reflects the inflows & outflows of cash flows from operating, investing & financing activities of the business over the given financial year.

13. Funds Flow Statement – It is the statement that shows the inflows & outflows of funds over a given period, thereby revealing the possible reasons behind the discrepancies in financial position between the two balance sheet dates of the enterprise.

14. Suspense Account – It is the account in which transactions are temporarily documented in the event of the uncertainty of accurate recording of such transactions in the books.

15. Depreciation – It refers to the amount of gradual fall in the value of a tangible fixed asset due to wear & tear obsolescence, or any other reasons over its expected useful life.

16. Amortization – It refers to the periodic writing off of intangible assets like patents, trademarks, copyrights, etc. over their estimated useful life.

17. Depletion – It is a measure of exhaustion of the wasting assets. For example- the extraction of coal from the coal mines.

18. Tangible Assets – These are the assets that have a physical existence i.e. can be seen and touched. For example – machinery, furniture, etc.

19. Fictitious Assets – These are the assets that are actually a kind of expenditure but benefit the enterprise for more than one accounting year. Hence, these fictitious assets also do not have any realizable value. For example – Advertisement expenditure.

20. Bank Reconciliation Statement – It is a statement that is prepared to reconcile the bank balance in the cash book with the balance in the bank pass-book.

Related Topic – Journal entry for rent paid in advance

 

21. Sundry Debtors – Debtors are individuals, firms, or corporates who owe money to others. In the case of a business, debtors owe money to the organization against the goods sold or services rendered to them on credit.

22. Sundry Creditors – Creditors are individuals, firms, or corporates to whom others owe money. In the case of a business, the organization owes an amount to the creditors against the goods bought or services received on credit.

23. Account – An account is simply a record of all the transactions relating to a particular income, expense, asset, etc are recorded under a given head.

24. Accounting – It is the process of recording, classifying & summarizing all the material monetary transactions of a business & analyzing the results thereof.

25. Book Keeping – Bookkeeping is the basis of accounting. It includes identification, measurement, and documentation of the financial transactions & their classification thereof.

26. Purchases Book – It is the book in which all the transactions relating to the credit purchases by the business organization are recorded.

27. Special Journal – It collectively refers to all the subsidiary books namely sales book, purchases book, sales return book, purchases return book, journal proper & cash book. Also, no separate journal entries are passed for the transactions recorded in the special journal.

28. Petty Cash Book – It is like a petty cash account in which petty expenses are recorded by the petty cashier regularly.

29. Cash Book – It is one of the books of original entries in which all the cash & bank transactions are documented. There are three types of cash book- single column (cash), double column (cash & bank), and triple column (cash, bank, & discount).

30. Source Voucher – It is a document that provides evidence or proof in support of a monetary transaction & hence acts as a supporting document. For example – cash memos, invoices, pay-in-slip, cheques, etc.

Related Topic – Is a purchase order legally binding?

 

31. Accounting Voucher – It is a written document prepared by the accountant for analyzing the accounts to be debited or credited in the books. It is based on source vouchers.

32. Debit Note – It is an accounting voucher evidencing that a debit has been made against the party named in it. It is also known as a debit memo.

33. Credit Note – It is an accounting voucher evidencing that a credit has been made against the party named in it. It is also known as a credit memo.

34. Working Capital – It reflects the liquidity level of a business in carrying out its day-to-day operations. It is synonymous with the term net working capital. It is equal to the difference between the firm’s current assets & current liabilities and can be positive or negative.

35. Compound Entry – It is an accounting entry in which more than two accounts are involved and hence more than one account is either debited or credited.

36. Contra Entry – A contra entry is an entry that is recorded when a transaction affects both cash & bank resulting in zero effect. Hence, we define it mostly in reference to cash books only. For example –  cash deposited into the bank.

37. Revaluation Account – This account is prepared to reassess the values of existing assets & liabilities of a business, in addition, to recording its unrecorded assets & liabilities. This account is nominal in nature.

38. Realization Account – This account is prepared to close the various accounts in the books of a partnership firm at the time of its dissolution and thus helps in determining the profit or loss on the realization of the firm’s assets & the settlement of its liabilities.

39. Bills Payables – A bill of exchange when accepted by a person becomes bills payable for that person. The amount of such money will be payable by that person on a specified date in the future.

40. Bills Receivables – A bill of exchange becomes bills receivable for the person who draws it and sends it for acceptance to the debtor. The amount of such money will receivable by the drawer on a specified date in the future.

Related Topic – What is the journal entry for received cash?

 

41. Revenue Expenditure – It is a kind of expenditure the benefit of which gets exhausted within a given accounting year. For example – salary, rent, commission, etc.

42. Deferred Revenue Expenditure – It is a kind of revenue expenditure that benefits the business for more than one accounting year. For example – advertisement expenditure.

43. Capital Expenditure – It refers to the expenditure that is incurred either to repay the liabilities or to create assets of a business.

44. Abnormal Loss – It refers to the unexpected loss which is a result of some unusual activity or neglect. For example – loss of stock by fire, etc.

45. Trade Investments – These are the investments that are made majorly to run the business operations smoothly. For example – investment in security deposits to gain dealership, etc.

46. Direct Expenses – These are the expenses incurred in procurement, purchase, or production of the goods till they are fetched to the place of business. Further, such expenses are debited to the trading account. For example – wages, power & fuel, carriage inwards, etc.

47. Indirect Expenses – These are expenses incurred either to run a business as a whole or its segments. Hence, indirect expenses can not be directly linked to a cost object & are thus debited in the profit & loss account. For example – salary, rent, freight outwards, etc.

48. Prepaid Expenses – It refers to the expenses that have been paid in advance and the benefit of which will be available in the subsequent accounting years. It forms part of the current assets of the firm. For example – prepaid rent, prepaid salary, etc.

49. Outstanding Expenses – These are the expenses that have been incurred but not yet paid. Hence, outstanding expenses are a part of a business firm’s current liabilities.

50. Non-Trade Investments – Investments made in the shares, debentures, etc of other companies to earn additional income from activities other than own business operations are called non-trade investments. Such investments are made solely to earn income & are not meant for the furtherance of the business.

Related Topic – How is the provision for depreciation shown in a trial balance?

 

51. General Reserves – General reserves represent the money that is appropriated out of the business profits, but is not meant for any specific purpose. Hence, general reserves can be utilized to support the working capital needs of the business or expand the business, etc.

52. Provisions – Provisions represent the money that is set aside for the purpose of meeting some future liabilities or losses. It is a charge against profits.

53. Reserves – Being an appropriation of profits reserves are created only in the years in which the business makes profits by setting aside some money out of those profits. They are mainly created to strengthen & expand the business. For example – general reserves

54. Accrued Income – It refers to the income that has been already earned usually as against the services rendered or goods sold but money is yet to be received.

55. Journal Proper – It is one of the subsidiary books in which all the leftover transactions are recorded i.e. the transaction that are not recorded in any of the other subsidiary books like cash book, sales book, purchases book, etc.

56. Write Off – It refers to the elimination of an asset or liability from the books of accounts because either it is no longer of any worth for the enterprise or has been settled.

57. Capitalization – It refers to a process whereby a cost is included in the value of an asset instead of being expensed completely in the same year when such cost was incurred. It is written off over the useful life of such an asset.

58. Financial Ratios – These are the accounting ratios that help in carrying out the ratio analysis of the financial statements of a business, thereby making the analysis more comprehensive. Broadly, there are four types of financial ratios namely liquidity ratios, solvency ratios, turnover ratios, & profitability ratios.

59. Prudence Concept – It states that a business must account for all the anticipated losses and ignore all the prospective gains. This concept is also termed as conservatism concept.

60. Cash Basis of Accounting – It is a method of accounting in which transactions are recorded in the books of accounts only at the time of payment or receipt of cash.

Related Topic – How is return inwards treated in trial balance?

 

61. Accrual Basis of Accounting – It is a method of accounting in which transactions are recorded in the books as and when they occur, irrespective of the cash receipt or cash payment.

62. Book Value – It is the net value at which an asset is recorded in the books of accounts.

63. Fair Value / Market Value – It is the price at which an asset is saleable in the marketplace at a given point in time.

64. Historical Cost – It refers to the amount paid by an enterprise at the time of acquisition of an asset.

65. Sundry Expenses – It refers to all those miscellaneous expenses that are not incurred on a recurring basis by a business entity.

66. Operating Activities – These refer to the major revenue-generating or key dealing activities of a business firm. For example – the sale of furniture by a furniture manufacturing entity would be treated as one of its operating activities.

67. Investing Activities – Activities relating to the purchase, sale & disposal of long-term assets or other investments, excluding the ones that are a part of cash equivalents are called investing activities. For example – the purchase of furniture by a consulting firm would be treated as one of its investing activities.

68. Drawings – It refers to the amount of capital withdrawn or goods taken by the owner for personal use. Also, this term is majorly used for sole proprietorship & partnership firms.

69. Capital Employed / Capital – It directs to the resources or money invested by the owners of the business to start or run the business.

70. Retained Earnings – The net profit available with a business firm after the payment of dividends to its shareholders, when retained or held within the business, is called retained earnings.

Related Topic – The balance of a petty cash book is an asset or income?

 

71. Net Profit – It refers to the excess of total income over the total expenses of a business. In order words, the excess of credit side of profit & loss account over its debit side is called net profit.

72. Accounting Equation – It is a mathematical equation reflecting the equality between the total assets & the total liabilities of an enterprise. Further, it is based on the concept of duality & forms the basis of accounting.

73. Cash Equivalents – These are the most liquid assets in a firm’s balance sheet that are readily convertible into known amounts of cash without much loss in value. For eg – bank balance, short-term deposits, marketable securities, etc.

74. Accounting Cycle – It refers to the process starting from the recording of business transactions & ending with the preparation of financial statements.

75. Contingent Liabilities – These are the liabilities that may or may not arise depending upon certain unforeseen situations. Hence, these are never recorded in an entity’s balance sheet but, are always shown in the notes.

76. Current Liabilities – These are the liabilities that are repayable within one accounting year. For example – creditors, bills payables, etc.

77. Reserve Fund – It is an amount that is set aside from the profits of the business to be able to meet any unexpected financial obligation. However, the fund could be invested outside of the business in securities or short-term instruments, etc.

78. Contra Asset – A contra asset is a negative asset account that is coupled with a respective asset account. Further, a contra asset account’s function is to maintain a reserve that decreases the amount in the matched asset account & thus it always has a credit balance. For example – accumulated depreciation account.

79. Contra Liability – A contra Liability is a negative liability account that is coupled with a respective liability account. Further, a contra liability account’s function is to hold a reserve that decreases the amount in the matched liability account & thus it always has a debit balance. For example – discount on creditors’ accounts.

80. Comparative Balance Sheet – It directs to the horizontal analysis of the same accounts or groups of accounts in the balance sheets of the same entity on different dates.

Related Topic – How to show prepaid expense inside trial balance?

 

81. Common Size Statements – It refers to the vertical analysis of the income statement & the balance sheet by taking a common base that is revenue from operations & total assets or liabilities in the two statements, respectively. Also, common size statements can be prepared for intra-firm as well as inter-firm comparisons.

82. Income & Expenditure Account – It is a nominal account that summarises all the incomes and expenses of revenue nature of a not-for-profit organization over an accounting year. Further, the balance of this account would be either surplus or a deficit of income over expenses.

83. Receipts & Payment Account – This account is a synopsis of cash receipts & payments including the ones made by/through the bank over an accounting year by a not-for-profit organization. It is always prepared on a cash basis & is based on the NPO’s cash book.

84. Liquid Assets – These are the assets that are readily convertible into known amounts of cash or cash equivalents without much loss in their value. For example – cash, treasury bills, etc.

85. Cost of Goods Sold – It refers to the direct cost incurred by a business for manufacturing goods to be sold or for rendering services.

86. Rebate – It is a kind of compensation that is offered on already completed sales to compensate for reasons other than for which trade discount is allowed eg – poor quality of goods sold, etc.

87. Insolvency – The condition when a business or a person is not in a position to repay debts is called insolvency.

88. Revenue from Operations – Revenue from operations or operating revenue can be defined as the income generated by an entity from its daily core business operations.

89. Interest on Drawings – It refers to the certain percentage charged by the business from the owners on the total amount of drawings made by them during an accounting year. This term is majorly used for sole proprietorships & partnership firms.

90. Inventory – It refers to the stock of tangible assets held by an enterprise either for sale or further production of the goods to be sold during the normal course of business. There are three types of inventory namely inventory of raw materials, work-in-progress inventory, & inventory of finished goods.

Related Topic – How to do interest on capital adjustment in final accounts?

 

91. Realization or Dissolution Expenses – These are the expenses incurred by a partnership firm in order to carry out its dissolution process.

92. Normal Profit – It refers to the amount of profit that is normally earned by businesses dealing in the same industry & having a similar amount of capital investment. Further, it is based on a normal rate of return.

93. Super Profit – The excess of the average profit of an enterprise over its normal profit is called super profit. Usually, reputed firms having an edge over their competitors earn a  higher super profit.

94. Real Account – It is an account relating to the tangible and intangible assets of the business. However, assets like debtors, bank balance, prepaid rent, etc are the exception, as they are not real accounts but personal accounts. Examples of real accounts are furniture, machinery, etc.

95. Nominal Account – It is an account relating to the incomes, expenses, gains, losses, etc of the business. For example – salary account, rent account, etc.

96. Personal Account – It is the account relating to a person including a living person, companies, clubs, cooperative societies, debtors, etc. Natural, Artificial & Representative are the three types of personal accounts. For example – debtors account, drawings account, accrued income, etc.

97. Sacrificing Ratio – It refers to the ratio in which one or more partners offer their share of profits in the favour of the other partners in a partnership firm. It is equal to the difference between the old ratio & the new ratio, respectively. It is usually computed at the time of change in profit sharing ratio, admission, retirement, or death, etc.

98. Gaining Ratio – It refers to the ratio in which one or more partners gain a share of profits as a result of sacrifice by the other partners in a partnership firm. It is equal to the difference between the new ratio & the old ratio, respectively. It is usually computed at the time of change in profit sharing ratio, admission, retirement, or death of a partner, etc.

99. Expense – It is the cost incurred by a business to generate revenue.

100. Cheques in Hand – These are the cheques that have been received but, are yet to be deposited in the bank. Hence, such cheques are treated as current assets as these can be encashed from the bank at any point in time.

 

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