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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Samar Sparsh

    The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months. The current ratio is calculated using two standard figures thatRead more

    The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months.

    The current ratio is calculated using two standard figures that are shown in the company’s balance sheet: current assets and current liabilities. The formula for the same goes as:

    Current ratio = Current Assets / Current Liabilities

    A current ratio of 2:1 is considered ideal. Generally, a ratio between 1.5 to 2 is considered beneficial for the business, which means that the company has more financial resources (Current Assets) to cover its short-term debt (Current Liabilities).

    A high current ratio may indicate that the business is having difficulties managing its capital efficiently to generate profits.

    On the other hand, a lower current ratio (especially lower than 1) would signify that the company’s current liabilities exceed its current assets and the business may have difficulty covering its short-term debt. Although the definition of a good current ratio may vary in the different industry groups.

    Example- Where,

    1) CR is 2:1, the company is in a good situation as it has double the Current Assets in order to cover the short-term debt.

    2) CR is 0.5:1, the company is not in a good situation as it has only half the Current Assets in order to cover the short-term debt.

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Jayesh Gupta
Jayesh GuptaCurious
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  2. Rahul_Jose Aspiring CA currently doing Bcom

    When a partnership firm decides to admit a new partner into their firm, the old partners have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share for the new partner. The partnerRead more

    When a partnership firm decides to admit a new partner into their firm, the old partners have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share for the new partner. The partners can choose to forego their shares equally or in an agreed proportion.

    Before admission of the new partner, the existing partners would be sharing their profits in the old ratio. Upon admission, the profit-sharing ratio would change to accommodate the new partner. This would give rise to the new ratio. Hence Sacrificing ratio formula can be calculated as:
    Sacrificing Ratio = Old Ratio – New Ratio

    To further understand the formula, let’s say Bruce and Barry are sharing a pizza of 6 slices equally (3 slices each). They decide to share their pizza with Arthur such that they all get equal slices (2 slices each). Hence, we can use the formula to calculate their sacrifice as follows:
    Bruce’s sacrifice = 3 – 2 = 1 slice
    Barry’s sacrifice = 3 – 2 = 1 slice

    Therefore, their sacrificing ratio = 1:1. In this same way, we can solve various problems to calculate the sacrifice of partners during a change in their profit sharing ratio.

    For example, Joshua and Edwin are partners, sharing profits in the ratio 7:3. They admit Adam into their partnership such that the new profit-sharing ratio is 5:2:3. Therefore, their sacrificing ratio can be calculated as:
    Joshua’s sacrifice = old share – new share = 7/10 – 5/10 = 2/10
    Edwin’s sacrifice = old share – new share = 3/10 – 2/10 = 1/10

    Hence, sacrificing ratio of Joshua and Edwin is 2:1. Once the denominators are equal, we ignore them and only consider numerators while showing sacrificing ratio.

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Radha
Radha
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  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    When a loan is taken from a person by a business, there is an asset and liability being created. Cash is being brought into the business which increases the asset whereas the financial obligation of the company rises when a loan is taken and hence a liability increases. For example, Mark Ltd. has taRead more

    When a loan is taken from a person by a business, there is an asset and liability being created. Cash is being brought into the business which increases the asset whereas the financial obligation of the company rises when a loan is taken and hence a liability increases.

    For example, Mark Ltd. has taken a loan from John for $5,000. Therefore the journal entry can be shown as:

    According to the modern rules of accounting, increase in assets is Debit and increase in liability is credit. The company may have taken the loan to finance its business or for some emergency. When it is time for the business to pay off the loan, they can either pay it off completely or in instalments. They must pay off the principal amount along with interest.

    Now for our above example, if Mark Ltd paid off the entire loan after one year at 10% interest, then the journal entry would be:

    Here, the interest on loan account is debited since an increase in expense is debited. Loan account will be debited because the obligation is now reduced and hence liability decreases. Finally, we credit cash since cash is leaving the business which implies a decrease in assets.

    If the entire loan is not paid off in that year, then the balance of the loan amount will be shown in the balance sheet under the head liabilities.

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Radha
Radha
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in: Contra accounts Contra entries The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corRead more

    The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in:

    • Contra accounts
    • Contra entries

    The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corresponds to.

    Contra entries are entries of the debit and credit aspects related to the same parent account.  Let’s discuss them in detail.

    Contra accounts

    Any account which is created with the purpose of reducing or offsetting the balance of another account is known as a contra account.

    A contra account is just the opposite of the account to which it relates. The most common examples are the sales discount account and sales return account which is the contra account of the sales account.  They are just the opposite of the sales accounts.

    Contra Entries

    Contra entries refer to the entries which show the movement of the amount within the same parent account. Here, the debit and credit entry is posted on the debit and credit side respectively of a single parent account.  Mainly, contra entries are the entries involving cash and bank accounts.

    The following transactions are recorded as contra entries:

    • Cash to Bank transactions: Deposit of cash into the bank account by the entity.
    • Bank to Cash transactions: Withdrawal of cash from the bank.
    • Cash to cash transactions: Transfer of cash to the petty cash account.
    • Bank to Bank transactions: Transfer of amounts from one bank account to other bank accounts of the same entity.

    Contra entries are marked by the letter ‘C’ beside the postings in the ledger. Deposit of cash in to bank will be posted in cashbook as below:

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Jayesh Gupta
Jayesh GuptaCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    The journal entry for the dividend collected by the bank is as follows: Bank A/c                                                                Dr. Amt To Dividend Received A/c Amt Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below. The logRead more

    The journal entry for the dividend collected by the bank is as follows:

    Bank A/c                                                                Dr. Amt
    To Dividend Received A/c Amt

    Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below.

    The logic behind the journal entry

    This can be explained through the following rules of accounting:

    • Golden rules of accounting
    • Modern rules of accounting

    Golden rules of accounting

    A bank account is a real account and the golden rule of accounting for the real account is, “Debit what comes in and credit what goes out”

    Hence, the bank account is debited as the money is coming into the bank.

    Dividend is an income hence dividend received is a nominal account. The golden rule of accounting for a nominal account is “Debit all expenses and losses and credit all income and gains”

    Hence, the dividend received account is credited as income.

    Modern rules of accounting

    As per modern rules of accounting, a bank account is an asset account.

    The asset account is debited when increased and credited when decreased.

    Hence, the Bank account is debited here as it is increased.

    A dividend received account is an income account.

    The income account is credited when increase and debited when decreased.

    Hence, the dividend received account is credited here as it is increased.

    Treatment in the financial statements

    Since the dividend received is an income; it is shown on the credit side of the Statement of profit and loss.

    The bank account is an asset so it will be shown on the balance sheet.

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Astha
AsthaLeader
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Ledger is the book where the transaction related to a particular account is recorded. For example, the Sales ledger will only record the transactions related to sales. Ledgers in Tally also serve the same purpose. Posting in the ledger is automatically done when the transactions are entered in the vRead more

    Ledger is the book where the transaction related to a particular account is recorded. For example, the Sales ledger will only record the transactions related to sales.

    Ledgers in Tally also serve the same purpose. Posting in the ledger is automatically done when the transactions are entered in the vouchers.

    Now, if you want to delete a ledger, you can easily do by following some simple steps.

    I have shared the steps of deleting a ledger in Tally Prime and Tally ERP 9 both.

     

    Deleting a ledger in Tally Prime 

    To delete a ledger in Tally Prime, the steps are as follows:

    Gateway of Tally → Alter → Ledger → Click on the ledger you want to delete.

    Upon clicking the ledger, the ledger alteration menu will open.

    At the bottom, there is a ‘Delete’ option. Either click on it or simply press Alt + D and click on ‘Yes’. Your ledger will be deleted.

     

    Deleting a ledger in Tally ERP 9 

    To delete a ledger in Tally ERP 9, the steps are as follows:

    Gateway of Tally → Accounts Info → Ledger → Alter → Select the ledger you want to delete.

    Steps are almost similar in both versions of Tally. Little difference is there due to the different interfaces of the two versions.

    Just like Tally Prime, you can click on the ‘Delete’ option at the bottom or press Alt + D to delete the ledger.

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Bonnie
BonnieCurious
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  2. Ishika Pandey Curious ca aspirant
    This answer was edited.

    What is net credit sales? Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales. Formula  The formula for net credit sales is as follows: Net credit sales  = Sales on credit - Sales returns - SalRead more

    What is net credit sales?

    Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales.

    Formula

     The formula for net credit sales is as follows:

    Net credit sales  = Sales on credit – Sales returns – Sales allowances

    In the balance sheet, you can find credit sales in the “short-term assets “section. It can be calculated from account receivables, bills receivables, and debtors of the balance sheet.

    Credit sales = closing debtors + receipts – opening debtors

    Steps to calculate net credit sales

    • Calculate total sales for the period
    • Subtract the Sales Returns
    • Subtract the Sales Allowances
    • Subtract the Cash Sales ( if any )

     

    Terms relevant to understand before calculation

    Sales return:  A sales return is when a customer or client returns or sends a product back to the seller. And this can happen due to various reasons, including:

    • Excess quantity ordered
    • Not upto Customer expectations
    • Shipping delays ( product arrived late )
    • Accidentally ordered an item and there can be more such reasons.

    Sales allowance: A sales allowance is a discount that a seller offers a buyer as an alternative to the buyer for returning the product.

    Because of a problem or issue with the buyer’s order or we can say that he is not satisfied with the product.

    Cash sales: Cash sales are sales in which the payment is done at once or I can say that buyer has obligation to make payment to the seller.

    Cash sales are considered to include bills, checks, credit cards, and money orders as forms of payment.

    Example

    Now after understanding the terms used in the formula let me explain to you with an example which is as follows:-

      • First, we will calculate the Total Sales for the Period:- In the month of May, Flipkart company had cash sales of Rs 80,000. The total amount in Accounts Receivables is Rs 150,000, with Rs 30,000 as the carryover from April’s receivables.
      • Since you only want to know about credit sales in the current period (September), you subtract Rs 30,000 from the total. This means that for the month of September, Flipcart Company had sales totaling Rs 200,000 (80,000 + 120,000).

     

      • Second, we will subtract the Sales Returns:- During the month of September, Flipcart Company issued Rs 20,000 in refunds, because several items were damaged during shipment, so the customer could not use them.
      • This amount would reduce the total number of cash sales if the accounts receivable balance was from a credit customer. This reduces the total sales to Rs 180,000 (Rs 200,000 in total sales – Rs 20,000 in returns).

     

      • Thirdly we will subtract the Sales Allowances:- Sales allowances are discounts offered to customers for not asking for full refunds.
      • For example, an item that had been shipped to a customer was the wrong size, but the customer told that he will agree to keep the item if the price could be adjusted. Flipcart Company issued Rs 10,000 in allowances in May.
      • After this deduction, the total sales for May are Rs 170,000 (Rs 180,000 – Rs 10,000).

     

      • Then at last there are any cash sales then subtract:- After figuring out the total number of sales for September and then subtracting the sales returns and allowances, the cash sales are deducted since you are focusing on net credit sales for the period.
      • After deducting the Rs 60,000 in cash sales, Flipcart Company has Rs 110,000 as net credit sales.

     

    Why do we need net credit sales?

    • Net Credit sales help to calculate the accounts receivable turnover ratio.

     

    • Net credit sales also indicate the amount of credit you offer to your customer.

     

    •  Net credit sale is also used to calculate other financial analysis items like days sales outstanding.
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