Meaning of Workmen's Compensation Reserve Workmen compensation reserve is a reserve created to compensate the labourers and employees of a firm in case of an uncertain future event in the line with their work. For example, if a labourer or group of labourers get injured seriously while working on thRead more
Meaning of Workmen’s Compensation Reserve
Workmen compensation reserve is a reserve created to compensate the labourers and employees of a firm in case of an uncertain future event in the line with their work. For example, if a labourer or group of labourers get injured seriously while working on the premises of the firm, then they will be compensated from the money kept aside in the workmen’s compensation reserve.
Workmen’s compensation reserve is created using the profits of a business. The journal entry for the creation of workmen compensation reserve is as follows:
When a claim arises, the claim amount is transferred to Provision for workmen compensation claim A/c
Treatment of workmen compensation reserve in revaluation account
At the time of admission, retirement or death of partner or change in profit sharing ratio, the reserve is distributed among the old or existing partners or kept intact.
Workmen’s compensation reserve is also distributed among the old or existing partners subject to the claim arising on the reserve.
Here are the three situations:
The revaluation account comes into the picture only when the claim is more than the amount available in the reserve. For example, the claim is Rs. 20,000 but the amount in the reserve is only Rs. 15,000.
In such a case, the excess claim will be met by debiting the revaluation account.
The journal will as  given below:
Since the revaluation account is debited, it is a loss and this loss will be written from old or existing partners’ capital in the old profit sharing ratio. The journal entry is given below:
Meaning The term ‘Sundry creditors’ consist of two words: ‘Sundry’ and ‘creditors’. The word ‘sundry’ means the items which are not significant enough to be named separately. It also refers to a collection of miscellaneous items. Creditors are the person from whom money is borrowed or goods are puRead more
Meaning
The term ‘Sundry creditors’ consist of two words: ‘Sundry’ and ‘creditors’.Â
The word ‘sundry’ means the items which are not significant enough to be named separately. It also refers to a collection of miscellaneous items.
Creditors are the person from whom money is borrowed or goods are purchased on credit by a business or a non-business entity. They have to be repaid after a period of time which is usually less than or up to one year.
By combining the meaning of both words, ’sundry’ and ‘creditor’, the term ‘sundry creditor’ will refer to the collection of insignificant creditors of an entity.
Back in the days when accounting records were maintained on paper, only the records of those creditors were maintained separately, from whom goods are purchased regularly and in large amounts.Â
But there used to be numerous other creditors with whom the transactions were occasional and insignificant. To reduce the paperwork, records of all such creditors were maintained on a single page or book under the head ‘Sundry Creditors’
Nowadays, as accounting records are maintained digitally, hence maintaining records of each and every creditor is not a problem.Â
Hence, every creditor whether small or big, is grouped under the head ‘Sundry creditor’ or ‘Trade Creditor’.
Accounting TreatmentÂ
Sundry creditors are the persons to whom a business owes money.Â
Hence, as per golden rules of accounting, Sundry creditor is a personal account and the golden rule for personal account is, ‘Debit the receiver and credit the giver’Â
We know sundry creditors are liabilities, hence, as per modern rule of accounting, sundry creditors are credited in case of increase and debited in case of decrease.
Example, a business purchased goods for Rs. 10,000 from ABC & Co. The journal entry will as follows:
Here, ABC & Co is the creditor. It is credited as it is a personal account and the creditor has given the goods to the business, hence the giver is credited.
From point of view of modern rules of accounting, ABC & Co. is a creditor, a liability. On purchase of goods on credit, a liability is created. Hence, ABC & Co A/c is credited.
Balance sheet
Sundry creditor is a current liability, so it is shown on the liabilities side of a balance sheet. Trade payable and accounts payable mean sundry creditors only.
Accounting Concepts Accounting concepts are the rules, assumptions and methods generally accepted by accountants in the preparation and presentation of financial statements of an entity. These concepts have been developed by the accounting profession for a long period. These concepts constitute theRead more
Accounting Concepts
Accounting concepts are the rules, assumptions and methods generally accepted by accountants in the preparation and presentation of financial statements of an entity. These concepts have been developed by the accounting profession for a long period.
These concepts constitute the foundation of accounting and one has to be aware of them to maintain correct and uniform financial statements.
I have listed and briefly explained the following accounting concepts.
Entity ConceptÂ
Money Measurement conceptÂ
Going on concernÂ
Periodicity conceptÂ
Accrual conceptÂ
Cost conceptÂ
Realisation conceptÂ
Matching conceptÂ
Dual aspect conceptÂ
Conservatism conceptÂ
Materiality conceptÂ
Consistency concept
Â
#1 Entity ConceptÂ
As per this concept, the business and its owner are separate entities from the point of view of accounting. It means the assets and liabilities of the business and owner are not the same.Â
However, in the eyes of law, the business and its owner may be a single entity.
#2 Money measurement concept
This concept states that the transaction which can be measured in terms of money shall only be recorded in the books of accounts.
Any transaction which cannot be measured in terms of money shall not be recorded.
#3 Going concern conceptÂ
Going concern concept is also a fundamental accounting assumption. It assumes that an enterprise will continue to be in business for the foreseeable future.
It means its accounts will also be prepared to take such assumptions that the business will continue in future.
#4 Periodicity conceptÂ
The periodicity concept states an entity needs to carry out accounting for a definite period, generally for a year known as the accounting period. The period can also be half-year or a quarter.
The cycle of accounting restarts at the start of every accounting period.
#5 Accrual conceptÂ
The word accrual comes from the word
As per the accrual concept, the expense and incomes are recorded in the books of accounts in the period in which they are expected to incur whether payment in cash is made or cash is received or not.
For example, the salary to be paid by a business is to be recorded as an expense in the year in which it is expected or liable to be paid.
#6 Cost conceptÂ
It is concerned with the purchase of the assets of a business. As per the cost concept, a business shall record any asset in its books at the acquisition cost or purchase cost.
#7 Realisation conceptÂ
This concept is concerned with the sale of assets. A business shall record the sale of the assets in its books only at the realised cost.
#8 Matching conceptÂ
As per this concept, revenue earned during a period should be matched with the expenses incurred in that period. In short, an entity needs to record the income and the expenses of the same period.
#9Â Dual conceptÂ
This concept is the foundation of double-entry accounting. Dual concepts state that every transaction has two effects, debit and credit.Â
One or more accounts may be debited and other one or more accounts are credited so that the total amount of debit and credit equals.
#10 Conservatism conceptÂ
The conservatism concept states that an entity has to account for expected losses and expenses but not for future expected profits and gains.
#11 Materiality conceptÂ
As per this concept, only those items which are material should be shown in the financial statements of an entity. It says that items which are immaterial or insignificant in terms of value or importance to stakeholders can be ignored.
#12 Consistency conceptÂ
It says that an entity should follow consistent accounting policies every accounting period so that a comparison can be made among the financial statements of different accounting periods.
GAAPÂ
Generally Accepted Accounting Principles or GAAP is a combination of authoritative standards which are set by policy boards and commonly accepted methods of recording and presenting accounting information.Â
GAAP or US GAAP is formulated by the Financial Accounting Standards Board or FASBÂ and almost state in the USA is compliant with GAAP.Â
The main goal of the GAAP is to ensure that the financial statements of an entity are complete, consistent and comparable.
It can be said accounting concepts are part of GAAP.
Ten key principles of GAAP
#1 Principle of regularity
It states that an accountant has to comply with GAAP regulations as a standard.
#2 Principle of Consistency
Accountants should be committed to applying the same set of standards throughout the accounting and reporting process, from one period to another. This is to be done to ensure comparability of financial statements between periods. Â
Also, the accountants have to fully disclose and explain the reason behind any changed or updated standards in the note of accounts of financial statements.
#3 Principle of sincerity
It states that the accountant should strive to provide an accurate and unbiased view of the financial situation of a company.
#4 Principle of Permanence of Methods
As per this principle, a company should be consistent in procedures used in financial statements so that it allows the comparison of the company’s financial information.
#5 Principle of Non-Compensation
Both negative and positive should be reported with full transparency. There should be no debt compensation i.e. debt should not be set off against any asset or expenses against revenue.
#6 Principle of Prudence
It states that financial data presentation should be fact-based. This principle is similar to the conservatism concept.
#7 Principle of Continuity
This is as same the going concern concept. It states that while valuing assets, it should assume that the business will continue for the foreseeable future.
#8 Principle of Periodicity
It is the same as the matching concept. It states that the revenue and expenses should be recorded in the period in which they occur.
#9 Principle of Materiality
Accountants should disclose all the financial information that is significant in the decision-making of the users of financial statements.
#10 Principle of Utmost Good Faith
It states that all parties to a transaction should act honestly and not mislead or hide crucial information from one another.
Ledger posting The process of entering all transactions from journal to ledger is called ledger posting. Each ledger account contains an individual asset, person, revenue, or expense. As we're aware the journal records all the transactions of the business. Posting to the ledger account not only helpRead more
Ledger posting
The process of entering all transactions from journal to ledger is called ledger posting. Each ledger account contains an individual asset, person, revenue, or expense. As we’re aware the journal records all the transactions of the business.
Posting to the ledger account not only helps the proper maintenance of the ledger book but also helps in reflecting a permanent summary of all the journal accounts. In the end, all the accounts that are entered and operated in the ledger are closed, totaled, and balanced.
Balancing the ledger means finding the difference between the debit and credit amounts of a particular account, it’s done on the day of closing of the accounting year. Sometimes journal entries are made and maintained monthly. Therefore, the balancing of the ledger’s date depends on the business’ closing date and the way a business maintains its books of accounts.
Example
Mr. Jack Sparrow decided to start a new clothing business. On 1st April 2021, He started the business with a total sum of $100,000 cash. He purchased furniture, including desks and shelves for $25,000. Mr. Sparrow then decided to start with women’s clothing and purchased a complete range of clothes from the wholesale market for $50,000. On the next day, he sold all the stock for $75,000. He also hired a worker for $5,000.
We need to journalize these transactions and post them into the ledger account.
Introduction Working capital refers to the capital which is required by an enterprise to smoothly run its daily operations. It is the measure of the short-term liquidity of a business. Working capital is the total of the current assets of a business, net of its current liabilities. Working capitalRead more
IntroductionÂ
Working capital refers to the capital which is required by an enterprise to smoothly run its daily operations.
It is the measure of the short-term liquidity of a business.Â
Working capital is the total of the current assets of a business, net of its current liabilities.
Working capital = Current Assets – Current LiabilitiesÂ
The working capital consists of cash, accounts receivable and inventory of raw materials and finished goods fewer accounts payable and other short-term liabilities.
Without a proper level of working capital, a business cannot maintain regular production and pay its creditors and expenses.
Hence, for proper management of working capital, it is divided into types:
Permanent working capitalÂ
Temporary working capitalÂ
I have discussed them below:
Permanent Working CapitalÂ
It is the fixed level or minimum level of working capital that an enterprise needs to maintain to ensure production at the normal capacity and pay for its daily expenses. It is independent of the level of production.
It is also known as fixed working capital.
By ‘permanent’, it does not mean that it will forever remain at the same level or amount but it may change if the overall production capacity changes. But such changes in permanent working capital are not often.
Temporary Working CapitalÂ
It is the level of working capital that depends upon the level of production of a business. It is the excess working capital over the permanent capital that is required to meet seasonal high demand.
It is also known as fluctuating working capital because it tends to change often depending on the level of production.
Temporary working capital is required when high production is required to meet seasonal demands.Â
For example, a bakery will need more working capital to meet the increased demand for cakes and pastry during Christmas seasonÂ
Graph showing permanent and temporary working capital
Here, the temporary working capital is fluctuating whereas the permanent working capital is gradually increasing with time.
Ledger posting As we know, a business records all of its transactions in the journal. After the transactions are recorded in the journal, they are posted in the principal book called ‘Ledger’. Transferring the entries from journals to respective ledger accounts is called ledger posting or posting toRead more
Ledger posting
As we know, a business records all of its transactions in the journal. After the transactions are recorded in the journal, they are posted in the principal book called ‘Ledger’. Transferring the entries from journals to respective ledger accounts is called ledger posting or posting to the ledger accounts. Balancing of ledgers is carried out to find differences at the year’s end.
Posting to the ledger account means entering information in the ledger, and respective accounts from the journal for individual records. The accounts that are credited are posted to the credit side and vice versa.
Ledger maintenance is done at the end of an accounting period and it’s maintained to reflect a permanent summary of all the journal accounts. In the end, all the accounts that are entered and operated in the ledger are closed, totaled, and balanced. Balancing the ledger means finding the difference between the debit and credit amounts of a particular account.
While posting to the ledger account, suppose goods were bought for cash. While passing the journal entry, we’ll be debiting the purchases a/c and crediting the cash a/c by stating it as, ‘To Cash A/c’.
Now, this entry will be affecting both the purchases account and the cash account. In the cash account, we’ll be debiting purchases. Whereas in the purchases account, we’ll be crediting the cash. That’s how it works in the double-entry bookkeeping system of accounting.
Example
Mr. Tony Stark started the business with cash of $100,000 on April 1, 2021. He bought furniture for business for $15,000. He further purchased goods for $75,000.
Now, we’ll be journalizing the transactions and posting them into the ledger accounts.
Non-debt capital receipts As we're aware, there are two main sources of the government’s income — revenue receipts and capital receipts. Revenue receipts are all those receipts that neither create any liability nor cause any reduction in assets for the government, whereas, capital receipts are thoseRead more
Non-debt capital receipts
As we’re aware, there are two main sources of the government’s income — revenue receipts and capital receipts. Revenue receipts are all those receipts that neither create any liability nor cause any reduction in assets for the government, whereas, capital receipts are those money receipts of the government that either create a liability for a government or cause a reduction in assets.
Revenue receipts comprise both tax and non-tax revenues while capital receipts consist of capital receipts and non-debt capital receipts. Non-debt capital receipt is a part of capital receipt.
Definition
Non-debt capital receipts, also known as NDCR, are the taxes and duties levied by the government forming the biggest source of its income. Those receipts of the government lead to a decrease in assets, and not an increase in liabilities. It accounts for just 3% of the central government’s total receipts.
The union government usually lists non-debt capital receipts in two categories:
Recovery of loans – Recovery of loans means the amount recovered when a loan defaults.
Other receipts – Other receipts basically mean disinvestment proceeds from the sale of the government’s share in public-sector companies.
Money accrued to the union government from the listing of central government companies and the issue of bonus shares.
For Example –Â Disinvestment and recovery of loans are non-debt creating capital receipts.
How to treat workmen compensation claim in revaluation account?
Meaning of Workmen's Compensation Reserve Workmen compensation reserve is a reserve created to compensate the labourers and employees of a firm in case of an uncertain future event in the line with their work. For example, if a labourer or group of labourers get injured seriously while working on thRead more
Meaning of Workmen’s Compensation Reserve
Workmen compensation reserve is a reserve created to compensate the labourers and employees of a firm in case of an uncertain future event in the line with their work. For example, if a labourer or group of labourers get injured seriously while working on the premises of the firm, then they will be compensated from the money kept aside in the workmen’s compensation reserve.
Workmen’s compensation reserve is created using the profits of a business. The journal entry for the creation of workmen compensation reserve is as follows:
When a claim arises, the claim amount is transferred to Provision for workmen compensation claim A/c
Treatment of workmen compensation reserve in revaluation account
At the time of admission, retirement or death of partner or change in profit sharing ratio, the reserve is distributed among the old or existing partners or kept intact.
Workmen’s compensation reserve is also distributed among the old or existing partners subject to the claim arising on the reserve.
Here are the three situations:
The revaluation account comes into the picture only when the claim is more than the amount available in the reserve. For example, the claim is Rs. 20,000 but the amount in the reserve is only Rs. 15,000.
In such a case, the excess claim will be met by debiting the revaluation account.
The journal will as  given below:
Since the revaluation account is debited, it is a loss and this loss will be written from old or existing partners’ capital in the old profit sharing ratio. The journal entry is given below:
See lessWhat is the meaning of sundry creditors?
Meaning The term ‘Sundry creditors’ consist of two words: ‘Sundry’ and ‘creditors’. The word ‘sundry’ means the items which are not significant enough to be named separately. It also refers to a collection of miscellaneous items. Creditors are the person from whom money is borrowed or goods are puRead more
Meaning
The term ‘Sundry creditors’ consist of two words: ‘Sundry’ and ‘creditors’.Â
The word ‘sundry’ means the items which are not significant enough to be named separately. It also refers to a collection of miscellaneous items.
Creditors are the person from whom money is borrowed or goods are purchased on credit by a business or a non-business entity. They have to be repaid after a period of time which is usually less than or up to one year.
By combining the meaning of both words, ’sundry’ and ‘creditor’, the term ‘sundry creditor’ will refer to the collection of insignificant creditors of an entity.
Back in the days when accounting records were maintained on paper, only the records of those creditors were maintained separately, from whom goods are purchased regularly and in large amounts.Â
But there used to be numerous other creditors with whom the transactions were occasional and insignificant. To reduce the paperwork, records of all such creditors were maintained on a single page or book under the head ‘Sundry Creditors’
Nowadays, as accounting records are maintained digitally, hence maintaining records of each and every creditor is not a problem.Â
Hence, every creditor whether small or big, is grouped under the head ‘Sundry creditor’ or ‘Trade Creditor’.
Accounting TreatmentÂ
Sundry creditors are the persons to whom a business owes money.Â
Hence, as per golden rules of accounting, Sundry creditor is a personal account and the golden rule for personal account is, ‘Debit the receiver and credit the giver’Â
We know sundry creditors are liabilities, hence, as per modern rule of accounting, sundry creditors are credited in case of increase and debited in case of decrease.
Example, a business purchased goods for Rs. 10,000 from ABC & Co. The journal entry will as follows:
Here, ABC & Co is the creditor. It is credited as it is a personal account and the creditor has given the goods to the business, hence the giver is credited.
From point of view of modern rules of accounting, ABC & Co. is a creditor, a liability. On purchase of goods on credit, a liability is created. Hence, ABC & Co A/c is credited.
Balance sheet
Sundry creditor is a current liability, so it is shown on the liabilities side of a balance sheet. Trade payable and accounts payable mean sundry creditors only.
See lessWhat do you mean by Accounting concepts? What do you mean by GAAP? Explain briefly.
Accounting Concepts Accounting concepts are the rules, assumptions and methods generally accepted by accountants in the preparation and presentation of financial statements of an entity. These concepts have been developed by the accounting profession for a long period. These concepts constitute theRead more
Accounting Concepts
Accounting concepts are the rules, assumptions and methods generally accepted by accountants in the preparation and presentation of financial statements of an entity. These concepts have been developed by the accounting profession for a long period.
These concepts constitute the foundation of accounting and one has to be aware of them to maintain correct and uniform financial statements.
I have listed and briefly explained the following accounting concepts.
Â
#1 Entity ConceptÂ
As per this concept, the business and its owner are separate entities from the point of view of accounting. It means the assets and liabilities of the business and owner are not the same.Â
However, in the eyes of law, the business and its owner may be a single entity.
#2 Money measurement concept
This concept states that the transaction which can be measured in terms of money shall only be recorded in the books of accounts.
Any transaction which cannot be measured in terms of money shall not be recorded.
#3 Going concern conceptÂ
Going concern concept is also a fundamental accounting assumption. It assumes that an enterprise will continue to be in business for the foreseeable future.
It means its accounts will also be prepared to take such assumptions that the business will continue in future.
#4 Periodicity conceptÂ
The periodicity concept states an entity needs to carry out accounting for a definite period, generally for a year known as the accounting period. The period can also be half-year or a quarter.
The cycle of accounting restarts at the start of every accounting period.
#5 Accrual conceptÂ
The word accrual comes from the word
As per the accrual concept, the expense and incomes are recorded in the books of accounts in the period in which they are expected to incur whether payment in cash is made or cash is received or not.
For example, the salary to be paid by a business is to be recorded as an expense in the year in which it is expected or liable to be paid.
#6 Cost conceptÂ
It is concerned with the purchase of the assets of a business. As per the cost concept, a business shall record any asset in its books at the acquisition cost or purchase cost.
#7 Realisation conceptÂ
This concept is concerned with the sale of assets. A business shall record the sale of the assets in its books only at the realised cost.
#8 Matching conceptÂ
As per this concept, revenue earned during a period should be matched with the expenses incurred in that period. In short, an entity needs to record the income and the expenses of the same period.
#9Â Dual conceptÂ
This concept is the foundation of double-entry accounting. Dual concepts state that every transaction has two effects, debit and credit.Â
One or more accounts may be debited and other one or more accounts are credited so that the total amount of debit and credit equals.
#10 Conservatism conceptÂ
The conservatism concept states that an entity has to account for expected losses and expenses but not for future expected profits and gains.
#11 Materiality conceptÂ
As per this concept, only those items which are material should be shown in the financial statements of an entity. It says that items which are immaterial or insignificant in terms of value or importance to stakeholders can be ignored.
#12 Consistency conceptÂ
It says that an entity should follow consistent accounting policies every accounting period so that a comparison can be made among the financial statements of different accounting periods.
GAAPÂ
Generally Accepted Accounting Principles or GAAP is a combination of authoritative standards which are set by policy boards and commonly accepted methods of recording and presenting accounting information.Â
GAAP or US GAAP is formulated by the Financial Accounting Standards Board or FASBÂ and almost state in the USA is compliant with GAAP.Â
The main goal of the GAAP is to ensure that the financial statements of an entity are complete, consistent and comparable.
It can be said accounting concepts are part of GAAP.
Ten key principles of GAAP
#1 Principle of regularity
It states that an accountant has to comply with GAAP regulations as a standard.
#2 Principle of Consistency
Accountants should be committed to applying the same set of standards throughout the accounting and reporting process, from one period to another. This is to be done to ensure comparability of financial statements between periods. Â
Also, the accountants have to fully disclose and explain the reason behind any changed or updated standards in the note of accounts of financial statements.
#3 Principle of sincerity
It states that the accountant should strive to provide an accurate and unbiased view of the financial situation of a company.
#4 Principle of Permanence of Methods
As per this principle, a company should be consistent in procedures used in financial statements so that it allows the comparison of the company’s financial information.
#5 Principle of Non-Compensation
Both negative and positive should be reported with full transparency. There should be no debt compensation i.e. debt should not be set off against any asset or expenses against revenue.
#6 Principle of Prudence
It states that financial data presentation should be fact-based. This principle is similar to the conservatism concept.
#7 Principle of Continuity
This is as same the going concern concept. It states that while valuing assets, it should assume that the business will continue for the foreseeable future.
#8 Principle of Periodicity
It is the same as the matching concept. It states that the revenue and expenses should be recorded in the period in which they occur.
#9 Principle of Materiality
Accountants should disclose all the financial information that is significant in the decision-making of the users of financial statements.
#10 Principle of Utmost Good Faith
It states that all parties to a transaction should act honestly and not mislead or hide crucial information from one another.
See lessWhat is a ledger posting example?
Ledger posting The process of entering all transactions from journal to ledger is called ledger posting. Each ledger account contains an individual asset, person, revenue, or expense. As we're aware the journal records all the transactions of the business. Posting to the ledger account not only helpRead more
Ledger posting
The process of entering all transactions from journal to ledger is called ledger posting. Each ledger account contains an individual asset, person, revenue, or expense. As we’re aware the journal records all the transactions of the business.
Posting to the ledger account not only helps the proper maintenance of the ledger book but also helps in reflecting a permanent summary of all the journal accounts. In the end, all the accounts that are entered and operated in the ledger are closed, totaled, and balanced.
Balancing the ledger means finding the difference between the debit and credit amounts of a particular account, it’s done on the day of closing of the accounting year. Sometimes journal entries are made and maintained monthly. Therefore, the balancing of the ledger’s date depends on the business’ closing date and the way a business maintains its books of accounts.
Example
Mr. Jack Sparrow decided to start a new clothing business. On 1st April 2021, He started the business with a total sum of $100,000 cash. He purchased furniture, including desks and shelves for $25,000. Mr. Sparrow then decided to start with women’s clothing and purchased a complete range of clothes from the wholesale market for $50,000. On the next day, he sold all the stock for $75,000. He also hired a worker for $5,000.
We need to journalize these transactions and post them into the ledger account.
Journal Entries
Ledger Accounts
Cash A/c
Capital A/c
Purchases A/c
Sales A/c
Salary A/c
See lessWhat is permanent working capital and temporary working capital?
Introduction Working capital refers to the capital which is required by an enterprise to smoothly run its daily operations. It is the measure of the short-term liquidity of a business. Working capital is the total of the current assets of a business, net of its current liabilities. Working capitalRead more
IntroductionÂ
Working capital refers to the capital which is required by an enterprise to smoothly run its daily operations.
It is the measure of the short-term liquidity of a business.Â
Working capital is the total of the current assets of a business, net of its current liabilities.
Working capital = Current Assets – Current LiabilitiesÂ
The working capital consists of cash, accounts receivable and inventory of raw materials and finished goods fewer accounts payable and other short-term liabilities.
Without a proper level of working capital, a business cannot maintain regular production and pay its creditors and expenses.
Hence, for proper management of working capital, it is divided into types:
I have discussed them below:
Permanent Working CapitalÂ
It is the fixed level or minimum level of working capital that an enterprise needs to maintain to ensure production at the normal capacity and pay for its daily expenses. It is independent of the level of production.
It is also known as fixed working capital.
By ‘permanent’, it does not mean that it will forever remain at the same level or amount but it may change if the overall production capacity changes. But such changes in permanent working capital are not often.
Temporary Working CapitalÂ
It is the level of working capital that depends upon the level of production of a business. It is the excess working capital over the permanent capital that is required to meet seasonal high demand.
It is also known as fluctuating working capital because it tends to change often depending on the level of production.
Temporary working capital is required when high production is required to meet seasonal demands.Â
For example, a bakery will need more working capital to meet the increased demand for cakes and pastry during Christmas seasonÂ
Graph showing permanent and temporary working capital
Here, the temporary working capital is fluctuating whereas the permanent working capital is gradually increasing with time.
See lessWhat is the meaning of post to the ledger accounts?
Ledger posting As we know, a business records all of its transactions in the journal. After the transactions are recorded in the journal, they are posted in the principal book called ‘Ledger’. Transferring the entries from journals to respective ledger accounts is called ledger posting or posting toRead more
Ledger posting
As we know, a business records all of its transactions in the journal. After the transactions are recorded in the journal, they are posted in the principal book called ‘Ledger’. Transferring the entries from journals to respective ledger accounts is called ledger posting or posting to the ledger accounts. Balancing of ledgers is carried out to find differences at the year’s end.
Posting to the ledger account means entering information in the ledger, and respective accounts from the journal for individual records. The accounts that are credited are posted to the credit side and vice versa.
Ledger maintenance is done at the end of an accounting period and it’s maintained to reflect a permanent summary of all the journal accounts. In the end, all the accounts that are entered and operated in the ledger are closed, totaled, and balanced. Balancing the ledger means finding the difference between the debit and credit amounts of a particular account.
While posting to the ledger account, suppose goods were bought for cash. While passing the journal entry, we’ll be debiting the purchases a/c and crediting the cash a/c by stating it as, ‘To Cash A/c’.
Now, this entry will be affecting both the purchases account and the cash account. In the cash account, we’ll be debiting purchases. Whereas in the purchases account, we’ll be crediting the cash. That’s how it works in the double-entry bookkeeping system of accounting.
Example
Mr. Tony Stark started the business with cash of $100,000 on April 1, 2021. He bought furniture for business for $15,000. He further purchased goods for $75,000.
Now, we’ll be journalizing the transactions and posting them into the ledger accounts.
Journal Entries
Posting to Ledger Account
Cash A/c
Capital A/c
Furniture A/c
Purchases A/c
See lessWhat are non debt capital receipts?
Non-debt capital receipts As we're aware, there are two main sources of the government’s income — revenue receipts and capital receipts. Revenue receipts are all those receipts that neither create any liability nor cause any reduction in assets for the government, whereas, capital receipts are thoseRead more
Non-debt capital receipts
As we’re aware, there are two main sources of the government’s income — revenue receipts and capital receipts. Revenue receipts are all those receipts that neither create any liability nor cause any reduction in assets for the government, whereas, capital receipts are those money receipts of the government that either create a liability for a government or cause a reduction in assets.
Revenue receipts comprise both tax and non-tax revenues while capital receipts consist of capital receipts and non-debt capital receipts. Non-debt capital receipt is a part of capital receipt.
Definition
Non-debt capital receipts, also known as NDCR, are the taxes and duties levied by the government forming the biggest source of its income. Those receipts of the government lead to a decrease in assets, and not an increase in liabilities. It accounts for just 3% of the central government’s total receipts.
The union government usually lists non-debt capital receipts in two categories:
For Example –Â Disinvestment and recovery of loans are non-debt creating capital receipts.
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