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What is the Difference Between Revenue and Profit?

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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

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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

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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?

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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

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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

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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

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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

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?

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

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

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

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

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

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

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

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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 TopicWhat 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 TopicJournal 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 TopicIs 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 TopicWhat 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 TopicHow 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 TopicHow 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 TopicThe 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 TopicHow 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 TopicHow 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.

 

>Read Journal entry for outstanding subscription



 

Difference Between Depreciation and Provision for Depreciation

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Depreciation Vs Provision for Depreciation

Depreciation is an accounting process of distributing the cost of an asset over its estimated useful life as per the matching concept. However, when such depreciation is accumulated in a separate account till the date of the concerned asset’s disposal or sale, it is called provision for depreciation.

In other words, provision for depreciation refers to the amount of depreciation accumulated over the useful life of an asset and is also known as accumulated depreciation.

Thus, we can say that the two terms are quite inter-linked but are not the same. Following are the key differences between the two;

Depreciation Provision for Depreciation
1) Gradual fall in the value of fixed tangible assets due to normal wear & tear or obsolescence over their expected useful life is called depreciation. 1) Provision for depreciation is a provision created against the depreciation accumulated on a fixed tangible asset over its expected useful life.
2) It is a nominal account. 2) It is a real account.
3) Being an expense, depreciation is reflected in the profit & loss account and not in the balance sheet. 3)Provision for depreciation is reflected in the balance sheet as it is a contra asset account.
4) The asset account is recorded in the books at written down value. It is the value that remains after charging depreciation for that year. 4) The asset is recorded in the books at the original cost. The balance of the “provision for depreciation account” is shown on the liability side of a balance sheet.
5) Depreciation is an expense. Hence, its balance is transferred to the profit and loss account. 5) Provision for depreciation is a contra asset. Thus, it will always have a credit balance.

Related Topic – Provision for depreciation in the trial balance

 

The most commonly used methods for charging depreciation are;

a) Straight Line Value Method – In this method, the depreciation is always charged on the original cost of the tangible asset. Thus, the amount of depreciation charged remains constant each year irrespective of asset usage. Hence, it is also called the fixed installment method of charging depreciation.

b) Written Down Value Method – In this method, the depreciation in the first year is charged on the historical cost of the asset but in the following years, it is charged on the respective asset’s written down value. Therefore, this method is also called the diminishing balance method.

Related Topic – Which contra account is used in recording depreciation?

 

Depreciation

Depreciation refers to the fall in the value of fixed tangible assets over its expected useful life. Various reasons behind the depreciation of fixed tangible assets can be wear & tear, obsolescence, consumption, and so on.

Example

Suppose Berkshire Hathaway Inc. depreciates its equipment having a useful life of 10 years, at @10% p.a. using the diminishing balance method. The opening balance of the equipment is 90,000.

Thus, the depreciation in the equipment account in the books of Berkshire Hathaway Inc. for a period of say 3 years will be as follows;

                                                  Equipment A/C                             
Particular Amount Particular Amount
 Balance b/d  90,000  Depreciation 9,000
     Balance c/d 81,000
Total 90,000 Total 90,000
 Balance b/d 81,000  Depreciation 8,100
 Balance c/d 72,900
Total 81,000 Total 81,000
 Balance b/d 72,900  Depreciation 7,290
 Balance c/d 65,610
Total 72,900 Total 72,900

 

Alternatively, if in the same example the depreciation was charged @10% p.a. using the Straight Line method or Fixed Installment Method, an amount of 9,000(90,000*10%) would be credited each year and the balance of the equipment account at the end of the third year would be 90,000 – 9,000*3 i.e. 63,000.

Related Topic – Is depreciation an operating expense?

 

Treatment of Depreciation in the Books

Firstly, credit the amount of depreciation to the respective tangible asset account because it will reduce the value of the asset.

Now, debit the depreciation account to the profit & loss account as depreciation is an indirect expense for the business.

Related Topic – Can depreciation be charged in the year of sale?

 

Provision for Depreciation

Provision for Depreciation refers to the total amount of depreciation charged on a fixed tangible asset till the date of its sale or disposal. Hence, it is a contra asset and is also called accumulated depreciation.

Example

Let’s assume that Toyota Group has an opening balance of machinery of 70,000 & it charges depreciation on its machinery at @5% p.a. using the straight-line method. Further, the firm maintains a provision for depreciation account for the same.

Therefore, the provision for depreciation account in the books of the Toyota Group for a period supposing 5 years will be as follows;

Depreciation = 5% * 70,000 = 3500 annually.

                                            Provision for Depreciation A/C                              
Particular Amount Particular Amount
 Balance c/d 3,500  Depreciation 3,500
Total 3,500 Total 3,500
   Balance b/d 3,500
 Balance c/d 7,000  Depreciation 3,500
Total 7,000 Total 7,000
 Balance b/d 7,000
 Balance c/d 10,500  Depreciation 3,500
Total 10,500 Total 10,500
 Balance b/d 10,500
 Balance c/d 14,000  Depreciation 3,500
Total 14,000 Total 14,000
 Balance b/d 14,000
 Balance c/d 17,500  Depreciation 3,500
Total 17,500 Total 17,500

Related Topic – Can assets have a credit balance?

 

Treatment of Provision for Depreciation in the Books

Depreciation is an indirect expense for an enterprise. Hence, debit the firm’s profit & loss account by the depreciation amount.

Now, transfer the amount of depreciation charged during a given financial year to the credit side of the provision for depreciation account as it will increase the amount of accumulated depreciation.

The accumulated depreciation in the provision account shall be transferred to the asset account at the time of its sale or disposal.

 

>Related Long Quiz for Practice Quiz 39 – Depreciation

>Read Difference between depreciation, amortization and depletion



 

Difference Between Bad Debts and Doubtful Debts

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Bad Debts Vs Doubtful Debts

Bad debts & doubtful debts are two terms that are often considered synonymous, but there is a fine line between the two. Bad debts refer to the amount of trade receivables that have become uncollectible i.e. they cannot be recovered from the debtors. On the contrary, doubtful debts refer to the amount of trade receivables that are likely to become uncollectible and might eventually become a part of bad debts at some point of time in the future.

bad debts vs doubtful debts
Difference between bad debts and doubtful debts

Related Topic – Reasons to create provision for doubtful debts

 

Broadly, there are two methods to account for bad debts & doubtful debts in the financial statements:

1) Direct Write-Off Method – in this method no provision is created for bad or doubtful debts & hence the bad debts when incurred by the firm are directly written off from that year’s profit & loss account.

2) Allowance Method – in this method a separate provision is created for bad & doubtful debts. Therefore, when bad or doubtful debts are incurred by the firm, these are written off from the provision maintained. However, the excess is to be written off from that particular year’s profit & loss account.

Most of the firms follow the allowance method only, majorly because it is more practical as well as in line with the principle of conservatism.

 

Bad Debts

It refers to the number of debtors & bills receivables, the amount against which has become uncollectible. The following are probable reasons behind bad debts;

  • Debtors are not willing to repay their debts,
  • Bankruptcy or insolvency of the debtor,
  • Other financial difficulties.

Bad debts are also referred to as non-performing assets in the case of banks and other financial institutions.

Sometimes, a portion of debts (already written off) in any of the previous accounting years may be recovered in a future accounting period and is called bad debts recovered.

Following is the journal entry for bad debts recovery;

Cash or Bank A/C            Dr.
   To Bad Debt Recovered A/C

(a portion of previously written off bad debt recovered)

 

Bad Debt Recovered A/C            Dr.
    To Profit & Loss A/C

(amount of bad debt recovered transferred to profit & loss account)

Logic – The recovery of previously written off bad debts will add to the firm’s revenue in the year of its recovery.

 

Example

Suppose Dell Ltd. sells 100 desktops worth 4,000 each to XYZ Ltd. on a credit of 1 month. But on the due date, Dell Ltd. recovers only 40% of the amount due as XYZ Ltd. got insolvent.

Therefore the amount of bad debts incurred by Dell Ltd. will be equal to 60% of the total credit sale of 4,00,000 made to XYZ Ltd.

Amount of Bad Debts = 60% of total amount receivable from XYZ Ltd.

= 60% x (100 x 4,000) = 60% x 400,000 = 240,000

or

      = Amount receivable from XYZ Ltd. – Amount actually recovered from XYZ Ltd.

                        = (100 x 4,000) – (40% x (100 x 4,000))

                        = 400,000 – (40% x 400,000) = 400,000 – 160,000 = 240,000

 

Formula to compute bad debts

Bad Debts = Amount Due – Amount recovered

or

Bad Debt = Amount due – (Amount due * % of the amount recovered)

or

Bad Debt = Amount due * (100 – % of amount recovered)

 

There is no universal or fixed formula to calculate bad debts & it can be derived using basic maths and logic. Although a generic % based formula has been mentioned above that can be used generally. 

Related Topic – How to calculate the provision for doubtful debts?

 

Treatment in Financial Statements

Bad debts will be reflected in the books of accounts as follows;

Case 1: When provision for bad debts account is maintained

If an enterprise maintains a provision for b/debts account then debit the amount of bad debts to that account, whereas any amount exceeding such provision will be debited to the firm’s profit & loss account.

Bad Debts Treatment in Financial Statements - Case 1

 

Case 2.  When no provision is maintained

Debit the entire amount of bad debts to the firm’s profit & loss account in case the firm does not maintain provision for bad debts.

Further, the bad debts will also reduce the amount of accounts receivables. Hence, credit it to the respective asset account.

Bad Debts Treatment in Financial Statements - Case 2

Related Topic – Are bad debts shown in the income statement?

 

Doubtful Debts

It refers to the amount against the number of debtors or bills receivables that might turn bad at some point of time in the future.  In other words, it directs to the amount of accounts receivables that are unlikely to be repaid by the firm’s debtors in the future.

Also, as doubtful debts have not yet become a part of bad debts & are just anticipated losses, thus these are not to be recorded in the books, instead, a provision is made for the same.

 

Example

Let’s assume that Amazon has total accounts receivables of 99,000. However, the firm expects 10% of its trade receivables to turn bad at some point of time in the future.

Therefore,

Amount of Doubtful Debts = 10% x 99,000 = 9,900

Related Topic – Treatment of provision for doubtful debts in the trial balance

 

Formula to compute doubtful debts

There is no fixed formula. In fact, the amount of such debts is based upon the firm’s evaluation & judgment.

However, the standard formula used is as follows;

Provision for Doubtful Debts = Given Rate x [Gross Amount of Accounts Receivables – Good Debts (including the amount of provision for discount on debtors) – Bad Debts – Further Bad Debts – Provision for Bad Debts (if any, already exists in the firm’s balance sheet)]

 

Treatment in Financial Statements

Doubtful debts are just anticipated losses that have not been actually incurred by the business entity. Hence, these will be shown in the books of accounts only if it becomes a part of bad debts.

However, the provision created to anticipate such d/debts will be shown in the books as follows;

To reflect the creation of provision for d/debts in the books of accounts, debit the profit & loss account by the amount of such provision.

Treatment of doubtful debts in financial statements

Also, the provision for doubtful debts is a contra asset account. Hence, show it as a deduction from the concerned trade receivables in the firm’s balance sheet.

Treatment of doubtful debts in the balance sheet

 

>Read How to show contra assets on the balance sheet?



 

How do I keep track of income when self-employed

Keeping records of your income when self-employed can be difficult. It’s not just about the money you make either, but your business expenses and all of this needs to be monitored to help you keep the info you need for HM Revenue and Customs (HMRC) when it’s time to file your self-assessment tax return as a self-employed person by January 31st.

So, how do you keep track of your income whilst working in self-employment? Let’s find out below.

self employed woman

Deciding on your accounting method

Your accounting period is the same each year in the UK – from April 6th through to April 5th. The 2021-2022 tax year runs from April 6th 2021 to April 5th 2022, for example.

But that’s all that remains the same in accounting. How you choose to keep your business records for accounting is really up to you. So let’s look at the options.

 

Traditional accounting

Traditional accounting is simply where you record all income and expenses based on when you were given the invoices or bills. Regardless of whether you are yet to receive payments or pay the outstanding bill yourself.

For example, you might have an outstanding bill from a supplier that was given to you on March 18th 2022, but they don’t want payment until April 18th 2022. Of course, you won’t be paying them until the next tax year, but you would still include the payments in this tax year in traditional accounting because you’re concerned with when the bill was given, not when it’s due.

Cash basis accounting

Cash basis accounting is where you record all income and expenses only when the bill has been paid or the money has been received. This is typically used by self-employed individuals and most small businesses earning less than £150,000 per year, as it means you pay less tax in the accounting period as you won’t need to pay income tax on business income that hasn’t been received yet.

 

What records do I need to keep?

Regardless of your accounting method, you’ll still need to keep similar records. Some will be needed for your self-assessment tax return, and others simply if HMRC launches an investigation into your business income.

Keeping inadequate business records can lead to hefty fines of up to £3000, so it’s in your best interest to brush up on your record-keeping and know what exactly you need to keep. A spokesperson from the Darlington Office of Auditox Accountancy said that 80% of self-employed people who came to them after they had started their business rather than before required almost double the workload to get back on track and so ended up costing them more in the long run.

Here’s everything you’ll need to keep records of:

  • all sales and income
  • all business expenses
  • VAT records (if you’re VAT registered, not everybody is because not everybody needs to be)
  • personal income (recording where you’ve put your own personal funds into your business, too)
  • PAYE records (if you have employees)

If you’re using the traditional accounting method, you’ll also need:

  • Info about money owed but not received
  • Invoices received but not yet paid
  • Value of stock at the end of the accounting period
  • Year-end bank account balance
  • Personal investment
  • Business money used for personal use

 

Why is keeping records important?

Keeping accurate records is vital. It will help you fill in your self-assessment tax return but also helps HMRC work out how much income tax you will have to pay and the national insurance contributions you’ll have to make.

Without accurate records, you won’t be able to show every business expense and appropriate accounting records for HMRC to work out the taxable income you’ll pay tax on. You can read more here about bookkeeping.

Because you’re running your own business as a sole trader, you can claim business expenses, tax relief on pension contributions, and other benefits available to you that qualify you for some reduction in the amount of income tax you’ll pay that tax year. That’s because you haven’t taken home every penny of your income like you would do if you were employed by someone else, because some of your money has gone back into the business. HMRC needs to know about all of this.

By keeping accurate records and receipts of your business income and expenses, HMRC will be able to tell you how much tax you actually owe.

 

Business expenses

Below is a list of business expenses you’ll need to keep:

  • Travel and accommodation
  • Legal and financial costs
  • Marketing costs
  • Clothing expenses
  • Utilities
  • Subscriptions

Basically, if you have to spend money as part of your business, you should record that.

 

How long should I keep records?

As a small business or self-employed individual, you’ll need to keep all of your basic records for five years after the January 31st deadline.

That means all receipts, records, invoices, expenses, etc, for the 2021-2022 tax year (which is due by January 31st, 2023) will need to be kept until January 31st, 2028. This is a legal requirement and is non-negotiable.

 

What evidence do I need to keep?

For those five years, you simply need to keep all evidence of your business income and expenses. Evidence would include:

  • receipts for goods and stocks
  • bank statements from your business bank account (showing all account payments and income)
  • cheque book stubs
  • sales invoices (including own invoices you’ve sent out)
  • physical receipts of cash payments
  • paying in slips etc.

All of this information should show the date and information about the services that your business has paid for or your business has been paid for.

 

How to store this evidence

Ideally, self-employed people will store all of their record-keeping electronically, as this makes it much easier to send over to HMRC should they require it. Keeping physical copies isn’t always practical, and can result in loss or damage, which could see you receiving a hefty fine.

As Making Tax Digital is due to take full effect in April 2023, sole traders must get used to using tax software to store all their info for filing their tax returns.

Certain tax software will allow you to take pictures of physical receipts instead too, which just streamlines your record-keeping and makes everything easier.

 

Final thoughts

So long as you record everything (electronically if possible), choose the accounting method that works for you, and keep accurate records of all expenses and income relating to your business for 5 years after the January 31st deadline of the tax year the records relate to, then recording your income whilst self-employed is easy enough.

Then simply use the information you’ve kept to tell HMRC via the self-assessment tax return, and you can be sure that you’re meeting all legal requirements! It really is as easy as that.

 



 

How to Make Money Using Free Apps

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Several apps can help you earn a side income. From banking to making purchases, we use smartphones for many chores. So why not use it to earn a little money as well? You won’t get rich, but this money may come in handy here and there.

We’ve listed a few of these apps below:

Worthy Bonds

Worthy Bonds lets you invest as little as $10 (or $1,000 if you feel like it) and gain 5% in fixed interest. The company creates and trades U.S. Securities and Exchange Commission-qualified bonds that help fuel small businesses while offering a 5% yield to you – with no fees and with access to your funds at any time. These bonds have a 36-month term.

Through the app, you can schedule how much and how often you want to purchase bonds, and the company can round up your everyday purchases to the next whole number and automatically invest this leftover change in a $10 bond. Bonds have a 36-month term but can be cashed out at any time without being penalized. The company has sold $150 million in bonds, and its 100,000 consumers have made $5.1 million in interest.

Users can also enjoy special deals from insurance to leisure and exclusive access to financial education resources.

 

Foap

If you’re a shutterbug constantly taking photos, you could leverage Foap to sell these pictures. Foap is a social media advertising platform that lets you upload your photo collection and sell it to well-known brands. Alternatively, you can also go on missions that require specific tasks and earn at least $50. One photo can be sold as often as you like, and every time you sell a photo on Foap, you get 50% of the commission. Foap also distributes your content through partners, such as Getty Images.

Foap lets you cash out your earnings through PayPal.

 

Gigwalk

Gigwalk pays you to perform small tasks based on where you are located. Download the app and find a gig near you. Each listing includes the payment, a short description of the gig and the location. Most of the gigs are typically from retail stores looking for brand audits or feedback on products and product displays, but online gigs like website testing and surveys are also listed.

Occasionally, a business may ask a screener question, and once you’re accepted, you’ll be notified and provided with instructions. Once you’ve completed the task, there may be follow-up questions for you to answer. The app is linked to PayPal for payments.

 

Field Agent

Audits, research, mystery shopping, and product trials are some of the jobs that can be found on Field Agent. Once you’ve reserved a job, complete it within the time frame and make sure to follow instructions carefully in order to be paid. Jobs generally pay in the range of $3 and $20. Before you graduate to paying jobs, you have to complete ticket jobs. Jobs posted are generally on a first-come-first-served basis, so it’s best to check the app often for any new jobs. The company said it had paid more than $20 million to its agents.

 

Inbox Dollars

Inbox Dollars pays you for taking surveys, reading emails, completing offers, playing games or shopping online. It has a simple, easy-to-navigate user interface, and the company is transparent about how much you can earn by completing tasks. However, you can only cash out once you have $30 in your Inbox Dollars account, and a $3 processing fee is deducted from your withdrawal amount. The company also offers a $5 sign-up bonus. If you do not use the app for 10 days, your account is automatically deactivated.

Since 2000, the company has paid more than $57 million in cash rewards to its members.

 

Neighbour

Have an unused space in your home like a shed or basement? You can rent it on Neighbor and earn passive income. As a host, you decide who stores, what they store, and how they access the space. Neighbour runs a verification check and provides a $2 million host guarantee as well as a $25,000 renter guarantee. The peer-to-peer platform claims that it saves renters 50% on average, compared to self-storage and is 14 times safer than storing at a self-storage facility. Hosts are protected from unfair liability, receive guaranteed payouts, and don’t pay to use the platform.

 



 

What is Reconstitution of Partnership?

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Meaning and Example

The term “reconstitution of partnership” refers to an alteration in the financial relationship between the existing partners of a partnership firm. As a result, the existing agreement ends and a new one is formed.

A reconstitution occurs whenever the terms of a partnership agreement are modified and the profit-sharing ratio is changed. Such an alteration may occur due to admission of a new partner, death of a partner, retirement of a partner, insolvency of a partner, etc.

Example: Two partners W & X operate a partnership firm and they decide to admit a third partner Y. In this case, Y will also have a share in the profits of the firm and this will lead to a change in the profit-sharing ratio leading to a new partnership agreement.

Reconstitution of a partnership infographic

Related TopicRevaluation Account

 

Partnership Firms: Forms of Reconstitution

Following are the various forms of reconstitution of partnership firms that lead to an alteration in the terms of the existing agreement & result in a new partnership;

forms of reconstitution of a partnership

 

1. Mutual Change in Profit Sharing Ratio of the Existing Partners

Sometimes, the partners of a firm decide to change their profit-sharing ratio and adjust the increase and decrease of share among themselves.

As a result, some partners gain whereas others sacrifice, however, the total amount of gain will always be equal to the total amount of sacrifice.

Points to remember for its treatment

  • Computation of sacrificing Ratio & gaining ratio.
  • Accounting treatment of (existing) goodwill, reserves, accumulated profits & losses.
  • Revaluation of firm’s assets & liabilities.
  • Adjustment of partners’ capital accounts.

 

2. Admission of a Partner

The entry of new partner(s) can be done either as per the partnership deed or by the mutual consent of all the current partners, in case of absence of deed.

Also, the new partner has a right over the profits & assets of the firm. The share of the newly admitted partner(s) will be equal to the aggregate of the sacrifice made by the existing partners or the share given by the existing partner(s).

As a result, a change in the profit-sharing ratio amongst the partners will lead to the reconstitution of the partnership.

Points to remember for its treatment

  • Calculation of the new profit-sharing ratio & sacrificing ratio.
  • Valuation of goodwill under different scenarios & its adjustment.
  • Revaluation of firm’s assets & liabilities.
  • Adjustment of deferred revenue expenditure, reserves, accumulated profits & losses.
  • Adjustment of the partners’ capital accounts as per the agreement between the partners.

 

3) Retirement of an Existing Partner                                                                         

When a partner ceases to continue as a partner of a firm, either as per the agreement or by mutual consent of all the partners, it is termed as “retirement of an existent partner”.

Also, a partner can retire by giving a written notice stating his retirement to all the remaining partners, provided the partnership is at will.

A retiring partner is liable for the firm’s acts only up to the date of his/her retirement. However, such a partner will also be liable to others for the firm’s acts until public notice of retirement is delivered, irrespective of the actual date of retirement.

Lastly, the remaining partners (minimum 2) will continue to run the firm with the new-profit sharing ratio, which will result in the reconstitution of the firm.

Points to remember for its treatment

  • Calculation of the new profit-sharing ratio & gaining ratio.
  • Valuation & adjustment of firm’s goodwill.
  • Reassessment of firm’s assets & liabilities.
  • Settlement of reserves & undistributed profits or losses.
  • Estimation of retiring partner(s) interest & aggregate payment to be made to such a partner.
  • Adjustment of the partners’ capital accounts, if so agreed.

 

4) Death or Insolvency of an Existing Partner                                                    

Death or Insolvency of a partner leads to an end of the old partnership & the beginning of a new agreement provided the remaining partners (2 or more) continue to run the firm. Consequently, this will result in the reconstitution of partnership.

Further, as a bankrupt partner is incompetent to carry out the business, all the dues will be settled with such a partner. However, in the case of a deceased partner, all money is paid to the legal heir.

The treatment in case of the death of a partner is similar to the treatment done in the event of the retirement of a partner, except for the dues of the deceased partner, which are settled with the official executor of the deceased partner, as per the agreement between remaining partners and the executor.

 

5) Amalgamation of Two or More Partnership Firms                                                 

The term amalgamation refers to the merger of two or more business firms operating on similar lines of business to expand the market, benefit from the economies of scale, etc.

Thus, the amalgamation of two or more partnership firms will lead to the termination of the older separate business entities and the creation of a new firm, further leading to the alteration of the terms of the agreement of partnership. As a result, it will lead to the reconstitution of partnership.

Points to remember for its treatment

  • Calculation of the new profit-sharing ratio & gaining ratio.
  • Adjustment of goodwill for all the amalgamating firms.
  • Calculation of purchase considerations.
  • Settlement of reserves & undistributed profits or losses.
  • Adjustment of the partners’ capital accounts and calculation of new capital of the partners in the new firm.

Related TopicRealisation Account

 

Why is it Necessary?

Any change or modification in the terms of an existing agreement of partnership should be accounted for and documented. Following are the points highlighting the need for reconstitution of a partnership firm,

  1. Reconstitution of two or more partnership firms by amalgamation can help in reducing the cost of business as well as in strengthening the capital position of such firms.
  2. Further, reconstitution resulting from the change in the profit-sharing ratios of the partners largely assists in incentivising the partners in accordance with their workload & capital contribution.
  3. Similarly, the admission of a new partner not only helps in raising more capital but also adds to the creditworthiness of the partnership firm.

However, such a change in the terms of the agreement might also be discouraging for the partners who are supposed to sacrifice or give their share of profits to the other partner(s).

Related TopicAccounting Quiz with Answers

 

Difference Between Reconstitution and Dilution

The term “Reconstitution” refers to the restructuring of a business firm or organization as a result of alteration in the terms of its agreement. Whereas, the term “Dilution” directs towards the fall in the ownership of the existing stakeholders of a company because of the issue of additional shares.

Unlike, joint-stock companies a partnership firm can not be diluted because it can not issue shares. But, the reconstitution of a partnership firm can be simply done by altering the terms of its agreement.

Related TopicDifference Between Revaluation and Realisation Account

 

Solved Question

Suppose Q, R & N are partners in a firm, having a profit-sharing ratio of 3: 2: 1. Assume that following is the balance sheet of the firm at the end of the accounting year.

        Balance Sheet as on – (End of financial year)         
Liabilities Amt Assets Amt
Sundry Creditors 6,000 Cash in Hand 6,000
General Reserve 60,000 Sundry Debtors 90,000
Capital A/Cs Stock in Hand 70,000
Q – 80,000 Machinery 60,000
R – 80,000 Building 80,000
N – 80,000 2,40,000
Total 3,06,000 Total 3,06,000

Partner N retires on the balance sheet date and they decide to adjust the value of assets as follows;

  1. Create provision for doubtful debts @5% on sundry debtors.
  2. Reduce stock by 5% & machinery by 10%.
  3. Building to be revalued at 91,000.
  4. The firm’s goodwill is valued at 1,50,000.

Partner Q & R decide to continue the business & share profits equally.

 

Solution:

Working Notes

1) The balance of N’s capital is to be transferred to his loan A/C assuming it is payable on a future date.

2) Gaining Ratio = New Ratio – Old Ratio

  • Q’s Gain = 1/2 – 3/6
    • 1/2 – 1/2 = 0
  • R’s Gain = 1/2 – 2/6
    • 1/2 – 1/3 = 1/6

Thus, R is the sole gaining partner who will compensate the retiring partner N.

3) N’s share in Goodwill = 1,50,000 x 1/6 = 25,000, which is contributed by the gaining partner R.

 

Revaluation account, prepared at the time of reconstitution so that the revaluation gain or loss can be distributed among the existing partners as per their old profit sharing ratio.

 

Partners’ capital account, prepared to determine the closing balances of all the partners after all profits and reserves are distributed, plus goodwill is adjusted.

 

Final balance sheet, on the date of partner N’s retirement.

 

>Read Overcapitalization and Undercapitalization



 

What is Sacrificing Ratio?

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Meaning and Explanation

Sacrificing ratio is the proportion in which old partners of a firm forego their share of profits in favour of new partner(s). The sacrificed portion is given to the new partner by the existing partner(s). On the other hand, the partner who gains the share calculates a gaining ratio at his/her end.

Such a ratio is calculated in two situations;

  1. When partners change their profit/loss sharing ratio.
  2. When a new partner is admitted.

Sacrificing ratio helps a partnership firm calculate the profit or loss that current partners have given up as a result of newly admitted partners. This ratio results in a decrease in the profit-sharing ratio of existing partners.

When existing partner(s) sacrifice their share of profit for a newly admitted partner, they are compensated in the form of goodwill by the new partner to the extent of their sacrifice.

Sacrificing Ratio Explained
Both Partners A & B sacrificed 1/6th of their share and gave it to Partner C

Related TopicCan goodwill be Negative?

 

Formula

This ratio is important because the new partner will compensate the old partners accordingly for offering their share of profit. The sacrifice is set off against the gain in this way.

Sacrificing Ratio Formula

 

How to Calculate Sacrificing Ratio

Knowledge of the following two ratios is necessary to calculate the sacrificing ratio for each of the partners who are sacrificing a share in the partnership firm’s profits.

  1. Old Profit-Sharing Ratio – It is the ratio in which the existing partners have been sharing the profits & losses until the change in their profit sharing ratio/change in the terms of the partnership agreement.
  2. New Profit-Sharing Ratio It is the ratio in which all the partners including the newly admitted partners will share the future profits & losses of the partnership firm.

 

Sacrificing ratio can be calculated in the following manner;

Case I: When the old and new ratios of partners are mentioned

Calculate the sacrificing ratio using the formula;

Sacrificing Ratio = Old profit sharing ratio – New profit sharing ratio

 

Case II: When the Profit Sharing Ratio of the incoming partner is mentioned and the new ratio of old partners is missing.

  1. Calculate the total share of profits left for all the old partners by deducting the share of the new partner from the total i.e., 1
  2. Calculate the new share of old partners by multiplying their old profit sharing ratio with the total share calculated in the previous step (1).
  3. Calculate the sacrificing ratio using the formula-Sacrificing Ratio = Old profit sharing ratio – New profit sharing ratio.

Related TopicInterest on Capital Adjustment in Final Accounts

 

Example

Alpha and Beta are partners in a partnership firm sharing profits in the ratio 2:1. Gamma is the new partner admitted for a 25% share (1/4th) of the profits.

Alpha Beta Gamma
Old Profit Sharing Ratio 2/3 1/3
Share of Admitted partner 1/4

Let the total profit of the firm be = 1

Gamma’s share of profit = 1/4

Share of profit left for Alpha and Beta = 1 – 1/4 = 3/4

 

Post induction of the partner,

Alpha Beta Gamma
New Share Calculation*

(Old Ratio x Share of Profit Left for Partners)

2/3 * 3/4 = 2/4 1/3 * 3/4 = 1/4 1/4
New Profit Sharing Ratio 1/2 1/4 1/4
Sacrificing Ratio = Old Profit Sharing Ratio – New Profit Sharing Ratio
= 2/3 – 1/2 = 1/6 1-3 – 1/4 = 1/12 No Sacrifice

Note: In a partnership firm, the old profit-sharing ratio and the sacrificing ratio will be the same if mentioned in the partnership deed, and mutually agreed upon by all partners.

Related TopicDifference Between Revaluation Account and Realisation Account

 

Gaining Ratio Vs Sacrificing Ratio

The Gaining Ratio refers to the share of profit gained by a partner, from the other partners of a partnership firm.

Basis Sacrificing Ratio Gaining Ratio
Meaning It is the proportion in which old partners of a partnership firm forego their share of profits in favour of new partner/s It refers to the share of profit gained by a partner, from the other partners of a partnership firm
Purpose It helps in calculating the share of profit sacrificed by existing partners. It helps in calculating the share of profit gained by existing partners.
Event It is calculated while admission of a new partner or during the change in profit sharing ratio among existing partners. It is calculated while the retirement or death of an existing partner or during the change in profit sharing ratio among existing partners.
Formula Sacrificing Ratio = Old profit sharing ratio – New profit sharing ratio Gaining Ratio = New profit sharing ratio – Old profit sharing ratio
Outcome Compensation is received by the sacrificing partners for foregoing their share in profit. Compensation is paid by the gaining partners to the ones who are sacrificing.

 

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What is Gaining Ratio?

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Meaning and Explanation

The gaining ratio is the proportion in which one or more partners gain a share in the firm’s profit as a result of other partner(s) sacrifice. It is used to compute the amount of compensation paid by the gaining partners to the ones who are sacrificing their share of profit (known as sacrificing ratio). The compensation is paid in the form of goodwill.

Following are the various events wherein gaining ratio is usually calculated;

  • If the partners decide to change their profit sharing ratio to divide the profit more appropriately & motivate the partners to work more efficiently,
  • Retirement of an existing partner will result in a sacrifice of share of profit by such a partner, due to which  the remaining partners will gain a profit share,
  • Likewise, in the case of the death of a partner, the remaining partners will again gain a share in the firm’s profit, equal to the profit-sharing ratio of the deceased partner.

Thus, the total gain received by gaining partners is always equal to the total amount of sacrifice made by the sacrificing partners.

Gaining Ratio Explanation
1/3rd of Partner C’s share is spread equally among Partner A & Partner B

Related TopicWhat is a Revaluation Account?

 

Gain Ratio Formula

Knowledge of the following two ratios is necessary to calculate the gaining ratio for each of the partners who are gaining a share in the partnership firm’s profits.

  1. Old Profit-Sharing Ratio – It is the ratio in which the existing partners have been sharing the profits & losses until the change in their profit sharing ratio/change in the terms of the partnership agreement.
  2. New Profit-Sharing Ratio It is the ratio in which all the partners including the newly admitted partners will share the future profits & losses of the partnership firm.

 

Steps

  • Determine the new profit sharing ratio of the old partners – The new profit sharing ratio is either mentioned as per the agreement between the partners or is the same as the old ratio between them when nothing is mentioned.
  • Calculate the Gain Ratio – The gaining ratio is the difference between the new and old profit sharing of the remaining partners.

Hence, the Gaining Ratio refers to the ratio in which one or more partners acquire the share of profit from the sacrificing partners & is equal to the difference between the new & the old shares of the respective gaining partners.

Related TopicComponents of Financial Reporting

 

Formula

Gain ratio is equal to the difference between the new profit sharing ratio and the old profit sharing ratio of the gaining partner. It is computed separately for each gaining partner.

gaining ratio formula

Note – The aggregate amount of gain made by some partners is always equal to the aggregate amount of sacrifice made by others.

Therefore, Gaining Ratio (of all the gainers) = -Sacrificing Ratio (of all the sacrificers)

= -(Old profit sharing ratio – New profit sharing ratio)

= (New profit sharing ratio – Old profit sharing ratio)

 

Example

Suppose P, Q, R & S are four partners sharing profits in the ratio 4: 3: 2: 1. Partner P dies and as per the new agreement, the remaining partners decide to share profits equally.

Therefore, after P’s death;

New profit sharing ratio of Q, R & S = 1: 1: 1

 

Calculation of gaining ratio;

Q’s gaining ratio = New share – Old share = 1/3 – 3/10 = 1/30

similarly,

R’s gaining ratio = 1/3 – 2/10 = 4/30

S’s gaining ratio = 1/3 – 1/10 = 7/30

Total gain made by all the partners = 1/30 + 4/30 + 7/30 = 12/30 or 4/10

Sacrificing ratio for for partner P = 4/10

Gaining ratio of Q, R & S = 1: 4: 7

That is, Q, R & S will gain 1/12, 4/12 & 7/12 respectively because of the lost partner P.

Related Topic30 transactions of journal, ledger, trial balance, and financial statements

 

Gaining Ratio Vs Sacrificing Ratio

Basis Gaining Ratio Sacrificing Ratio
Meaning It is the proportion in which one or more partners gain a share in the profit of the firm. It is the proportion in which one or more partners forgo their share in the profit of the firm.
Purpose To find the amount of compensation (goodwill, etc.) to be paid by the gainers. To ascertain the amount of compensation to be received by the sacrificers.
Computation The old share is subtracted from the new share. The new share is subtracted from the old share.
Event Usually computed in the event of the admission of a new partner or change in profit sharing ratio of the existing partners upon mutual consent. Calculated at the time of death or retirement of an existing partner or change in profit sharing ratio of the existing partners.
Compensation Compensation is paid by the gaining partners to the ones who are sacrificing. Compensation is received by the sacrificing partners for foregoing their share in profit.

 

 

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What is Net Book Value?

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Meaning and Formula

Net Book Value represents the carrying value of an asset that is equal to the value after deducting depreciation, depletion, amortization and/or accumulated impairment, to date. It is the value at which an asset is recorded in the balance sheet of an enterprise.

Further, normal wear-tear, obsolescence, natural factors and other such factors lead to a fall in the value of an asset over the course of its expected useful life. Such a loss is termed as;

  • Depreciation – for tangible fixed assets
  • Depletion – for natural resources
  • Amortization – for intangible assets

However, impairment involves an unexpected and extraordinary drop in the value of an asset.

Net Book Value helps in reflecting the value of an unutilized asset as on a given date because of which, it is also termed as Net Asset Value or Carrying Value.

 

Formula to Compute Net Book Value / Net Asset Value

Net Book Value Formula

Note – When an asset reaches the end of its expected useful life, its net book value equals its salvage value.

Related TopicIs accumulated depreciation an asset or liability?

 

How to Calculate Net Book Value

Steps to Calculate N.B.V of an Asset

Step 1 – Find the historical cost of the asset by computing its total cost of acquisition.

Step 2 – Calculate the total amount of depreciation to be charged on the asset to date.

Step 3 – Subtract accumulated depreciation from the historical cost of the asset.

 

Example 1 – Suppose a company purchases a pre-owned truck worth 80,000 & further, incurs a cost of 10,000 for its repairs before using it. Also, it decides to charge depreciation @ 10% as per the straight-line method.

Original cost of truck = cost of acquisition + cost of repairs

= 80,000 + 10,000 = 90,000

Depreciation after first year = 90,000 x 10% = 9,000

Net Asset Value of the truck will be as follows,

  • Year 1 = 90,000 – 9,000 = 81,000
  • Year 2 = 81,000 – 9,000 = 72,000
  • Year 3 = 72,000 – 9,000 = 63,000
  • Year 4 = 63,000 – 9,000 = 54,000

and so on.

 

Example 2 – With accumulated depreciation, impairment loss and salvage value.

Suppose VIP Ltd. purchased machinery worth 2,00,000, with a useful life of 10 years. Its salvage value at the end to 10 years was estimated to be 10,000. After 2 years, the company revalued the asset and its revised value at the end of the 2nd year turns out to be 1,40,000. Its remaining useful life was re-estimated at 5 years with nil salvage value. The company uses the straight-line method of depreciation.

We know, Depreciation = (Cost of asset – Salvage value) / Useful Life

Initial Depreciation per year = (2,00,000 – 10,000) / 10 = 1,90,000 / 10 = 19,000

At the end of 2nd year

Accumulated Depreciation = 19,000 X 2 = 38,000

Net book value = Cost of Asset – Accumulated depreciation

= 2,00,000 – 38,000 = 1,62,000

Calculation of Impairment Loss

Impairment loss = Revalued Value – Carrying value of the asset

= 1,40,000 – 1,62,000 = 22,000

Calculation of new Depreciation for machinery (for 3rd year onwards)

Depreciation per year = (Revised Value of asset – Revised Salvage value) / Revised Life

= (1,40,000 – 0) / 5 = 28,000

Note: Impairment loss of 22,000 will be debited to the profit and loss account. Machinery will be shown at its revised value, which is 1,40,000, at the end of 2nd year. This can also be verified with the formula as follows;

Net Book Value = Original Cost – Accumulated depreciation – Impairment loss

= 2,00,000 – 38,000 – 22,000 = 1,40,000

Related TopicAre accounts receivable assets or revenue?

 

NBV in Financial Statements

The term Net Book Value (NBV) is related to the net value of a firm’s assets & hence, it is shown on the asset side of a balance sheet.

Net Book Value shown in the balance sheet

 

Net Book Value Vs. Book Value Vs. Market Value

Both Net Book Value & Book Value simply refer to the value of unused assets left with the organization. They are both equal to the difference between the historical cost of an asset and the amount of depreciation/impairment accumulated on that. Therefore, they are quite synonymous and may be used interchangeably.

Market Value is the amount that an asset will bring if it is sold in the market today. It is the price that people are willing to pay in an open market for an asset. Any asset’s market value and book value are usually never the same.

For example, a business that owns a laptop for 50,000 lasts for five years. The depreciation charged is at 20% every year. After the end of the 1st year, its net book value (or book value) will be 50,000 – 20%, i.e. 40,000.

However, if the business decides to sell the same laptop in an open market after 1 year it might only fetch 20,000. The maximum amount a buyer is willing to pay for the laptop after one year is its market value.

Related TopicHow is provision for depreciation shown in the trial balance?

 

Advantages and Disadvantages

Advantages

Recording Assets at their Net book value is of high importance because of the following reasons;

  1. It helps in maintaining more accurate accounting records because the value of assets is recorded after deducting any actual or anticipated loss as per prudence.
  2. It helps in estimating the real value of the assets which also helps in business valuation at the time of liquidation of the company.

 

Disadvantages

Using Net Book Value can be misleading because of the following two disadvantages;

  1. NBV is sometimes mistaken as market value however, as explained earlier, it is never equal to the market value of the asset. Market value is the amount that an asset will get if it is sold in the market. Many times, the market value of an asset is too less than its book value because of which, book value can show an inaccurate image of the position of a company.
  2. The estimates made by the management has an impact on the net book value of assets. For example, the rate of depreciation and the scrap values of an asset has a direct effect on its NBV.

 

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What is a Revaluation Account?

Meaning, Example & Purpose

Revaluation means “reassessing the value of something”. In the event of a change to the original partnership of a business, such a reassessment is done. Only assets & liabilities of a firm are revalued and a “Revaluation Account” is opened to determine profit/loss resulting from the exercise.

Note: Revaluation is only done for assets & liabilities whereas income and expenses generated from the core business operations are excluded.

It is a nominal account that is prepared in the event of admission, retirement, or death of a partner and changes in profit sharing ratio. Alternatively, it can be said that it is prepared at the time of reconstitution of a partnership.

Example

Suppose R, M & S are partners in a firm, sharing profits & losses in the ratio of 5:3:2 However, after a mutual decision, they changed their profit-sharing ratio to 2:5:3

  • Workmen’s Compensation Reserve is 12,000 but, the workers claim 20,000.
  • Creditors worth 9,000 are unclaimed.
  • Investments of 38,000 is revalued at 40,000.
  • Unrecorded furniture worth 34,000 is there.
  • Stock worth 40,000 is to be reduced by 10%.

Revaluation Account

Particulars (Dr.) Amt Particulars (Cr.) Amt
Stock A/C 4,000 Creditors A/C 9,000
Workmen’s Compensation Claim A/C 8,000 Furniture (unrecorded) A/C 34,000
Profit on Revaluation transferred to:- Investments A/C 2,000
R’s Capital A/C – 16,500
M’s Capital A/C – 9,900
S’s Capital A/C – 6,600 33,000
Total 45,000 Total 45,000

Note – Profit on revaluation of the firm’s assets & liabilities above is to be distributed amongst the partners in their old profit sharing ratio i.e. 5: 3: 2.

 

Computing the Gaining & Sacrificing Ratios

Gaining Ratio = New Ratio – Old Ratio

M’s Gaining Ratio = 5/10 – 3/10 = 2/10

S’s Gaining Ratio = 3/10 – 2/10 = 1/10

 

Sacrificing Ratio = Old Ratio – New Ratio

R’s Sacrificing Ratio = 5/10  – 2/10 = 3/10

Related TopicCan assets have a credit balance?

 

Type of Account and Format of Revaluation Account

Information regarding the type of account helps in recording the various transactions in the right way using the right accounting rules.

As per the golden rules of accounting

Type of Account Nominal Account
Rule Applied Debit all expenses & losses. Credit all incomes & gains.

 

Template of Revaluation Account

Revaluation account formatNote – Either profit or loss will be there, on account of revaluation of the firm’s assets & liabilities. However, sometimes it might even balance i.e. neither profit nor loss.

Further, when a revaluation account is prepared then assets & liabilities are shown at their revised value in the balance sheet.

Related TopicIs debit balance positive and credit balance negative?

 

Steps to Prepare

Following are the various steps involved in the preparation of the Revaluation Account

  1. Debit the Revaluation Account with the decrease in the value of the firm’s assets & the increase in the value of its liabilities.
  2. Similarly, Credit the Revaluation Account with the decrease in the value of the firm’s liabilities & the increase in its assets.
  3. Same way, debit the unrecorded liabilities & expenses but, credit the unrecorded assets.
  4. If the total credit side of the revaluation account is greater than the total of its debit side then, there will be a profit on revaluation, which is to be credited to Partners’ Capital Accounts in their old profit sharing ratio.
  5. However, the Partners Capital Accounts are to be debited if there is a Loss on Revaluation in their old profit sharing ratio.

Related TopicWhere is Amortization Shown in Financial Statements?

 

Important Points to Remember

  • It helps in settling the profit or loss on revaluation of the assets & liabilities till the date of change in the terms of agreement of partnership amongst the existing partners in their old profit sharing ratio.
  • Free Reserves, Amount claimed out of Workmen’s Compensation Reserve, Credit balance of Profit & Loss Account, etc. should not be transferred to the Revaluation Account instead, should be Credited directly to the partners’ capital account.
  • A debit balance is regarded as “Loss on Revaluation”.
  • A credit balance is categorised as “Profit on Revaluation”.
  • Sometimes, the Revaluation Account can be also balanced which is when neither profit nor any loss is there on the reassessment of the firm’s assets & liabilities.
  • A revaluation account is different from a memorandum revaluation account. Memorandum Revaluation Account is prepared in the case when partners do not want to alter or revise the value of assets and liabilities, at the time of reconstitution of the partnership firm.

Related TopicIs investment an asset?

 

Difference between Revaluation Account and Realisation Account

Basis Revaluation Account Realisation Account
1) Meaning Revaluation account records the effect of revaluation of the firm’s assets & liabilities. Realisation account records the effect of reassessment of a firm’s assets & settlement of liabilities.
2) Objectives By calculating the gain or loss on revaluation, it assists in making appropriate modifications to the value of assets and liabilities. By computing the gain or loss on realisation of assets & payment of the outsider liabilities, it helps in settling the various balances.
3) Time This account is prepared when a partner retires, dies, or when the profit-sharing ratio changes, etc. This account is prepared when the partnership firm dissolves.
4) List of Contents Contains only the amount of change in the value of the firm’s Assets and Liabilities. Contains all the Assets (except fictitious assets, cash/bank & loan to partners) & outsiders’ liabilities of the firm.
5) Effect on firm’s assets &  liabilities It only results in the reassessment of the assets & liabilities account and not their closure. It results in the closure of all the assets & liabilities accounts of the firm.
6) Recurrence of preparation It can be prepared more than once during the lifetime of a business. It is prepared only once, during the dissolution of the firm.

 

 

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