Introduction The term 'gain ratio' is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners. There is a method of calculating this gain ratio. The method alongRead more
Introduction
The term ‘gain ratio’ is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners.
There is a method of calculating this gain ratio. The method along with the concept behind gain ration is discussed below.
Concept behind gain ratio
A partnership firm is a form of business organisation which is conducted and carried on by members known as partners. It requires at least two partners to start a firm and the maximum limit is 50.
The partners share the profit and loss of a business in a ratio known as Profit and loss sharing ratio.
For example, Amanda, Bill and Chang are partners, having a P/L sharing ratio of 3:2:1 i.e. Amanda is getting 3/6, Bill is getting 2/6 of the same and Chang is getting ⅓ of the profit and loss
If the profit is $6,000 , then Amanda will get $3,000 (3/6 of $6,000) and Bill will get $2,000 (2/6 of $6,000) and Chang will get $1,000 (1/6 of $6,000).
Now if Amanda retires from the firm, then naturally, Bill and Chang’s share of profit will increase.
The profit and loss sharing ratio will now be 2:1 (earlier it was 3:2:1) and the share of profit of Bill will be $4,000 and of Chang will be $2,000.
Calculation of gain ratio
The formula for calculating gain ratio = New ratio – Old Ratio
As per the above case:
Gain ratio of Bill = 2/3 – 2/6 = 2/6
Gain ratio of Chang = 1/3 – 1/6 = 1/6
Therefore the gain ratio in which Bill and Chang gained the share of profit of Amanda is 2/6 : 1/6 or simply 2:1
This is how we can calculate the gain ratio. But one thing to notice is that the gain ratio is equal to the P/L sharing ratio of the partnership between Bill and Chang.
Hence, whenever a partner retires and the existing partner keep the P/L sharing ratio unchanged among themselves then, the gain ratio will be equal to their P/L sharing ratio. In that case, there is no need to calculate the gain ratio from the formula given above.
But, when the remaining partners change the P/L sharing ratio among themselves after a partner retires, then the gain ratio is to be calculated using the formula given above.
Suppose, upon retirement of Amanda, Bill and Chang change the P/L sharing between them to from 2:1 to 3:2
In that case,
The gain ratio of Bill = 3/5 – 2/6 = 8/30
The gain ratio of Chang = 2/5 – 1/6 = 7/30
Therefore the gain ratio in which Bill and Chang will gain the share of profit of Amanda is 8/30 : 7/30 or simply 8:7
The correct option is 3.) The term current assets do not include furniture. Explanation A current asset is any asset that can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within one accounting year. Thus, current assets don't have life for morRead more
The correct option is 3.)
The term current assets do not include furniture.
Explanation
A current asset is any asset that can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within one accounting year. Thus, current assets don’t have life for more than a year.
Example: Cash and cash equivalent, stock, liquid assets, etc.
Furniture is expected to have a useful life for more than a year and they are bought for a long term by a company.
Cash is a more liquid asset of a company making it a more “current” asset. It requires no conversion and is spendable as it is. Thus, making it a vital current asset.
Stock in trade is a current asset because it can be converted into cash within one year and all the stock in trade of a company is expected to be sold within one accounting period and should not stick for a longer period.
Advance payment, on the other hand, is an amount paid to an employee, essentially a short-term loan by the employer. It’s recorded on the asset side of the balance sheet and as these assets are used, they are expended and recorded on the income statement for the period in which they are incurred, making it a short-term asset ending within an accounting year.
Thus, on the asset side of the balance sheet, we can clearly see which current assets are and which are not included in the current asset
Balance Sheet (As at…..)
Therefore, (3) Furniture, won’t be included in current assets.
Fixed Working Capital Permanent working capital is also known as fixed working capital. Working capital is the excess of the current assets over the current liability and further, it is classified on the basis of periodicity, into two categories, permanent working capital, and variable working capitRead more
Fixed Working Capital
Permanent working capital is also known as fixed working capital.
Working capital is the excess of the current assets over the current liability and further, it is classified on the basis of periodicity, into two categories, permanent working capital, and variable working capital.
Permanent working capital meansthe part of working capital that is permanently locked up in current assets to carry business smoothly and effortlessly. Thus, it’s also known as fixed working capital.
The minimum amount of current assets which is required to conduct a business smoothly during the year is called permanent working capital. The amount of permanent working capital depends upon the nature, growth, and size of the business.
Fixed working capital can further be divided into two categories:
Regular working capital: It is the minimum amount of capital required by a business to fund its day-to-day operations of a business. E.g. payment of wages, salary, overhead expenses, etc.
Reserve margin working capital: Apart from day-to-day activities, additional working capital may also be required for contingencies that may arise at any time like strike, business depression, etc.
Whereas, on the other hand, variable working capital, also known as temporary working capital refers to the level of working capital that is temporary and keeps fluctuating.
Capital Expenditure Capital expenditure refers to the money a business spends to buy, maintain, or improve the quality of its assets. Capital expenditures are the expenses incurred by an organization for long-term benefits, i.e on the long-term assets which help in improving the efficiency or capaciRead more
Capital Expenditure
Capital expenditure refers to the money a business spends to buy, maintain, or improve the quality of its assets. Capital expenditures are the expenses incurred by an organization for long-term benefits, i.e on the long-term assets which help in improving the efficiency or capacity of the company. These expenses are borne by the company to boost its earning capacity.
The investment done by the companies on assets is capital in nature and through capital expenditure, the company may use it for acquiring new assets or may use it in the maintenance of previous ones. These expenditures are added to the asset side of the balance sheet.
Example: Purchase of machinery, patents, copyrights, installation of equipment, etc.
Revenue Expenditure
Revenue expenditure refers to the routine expenditures incurred by the business to manage day-to-day expenses. They are incurred for a shorter duration and are mostly limited to an accounting year. These expenses are borne by a company to sustain its profitability. These expenditures are shown in the income statement.
These expenditures do not increase the revenue but stay maintained. These expenses are not capitalized.
They are divided into two sub-categories:
Expenditures for generating revenue for a business- Those expenditures essential for meeting the operational cost of the business are further classified as operating expenses.
Expenditures for maintaining revenue-generating assets- Those expenses incurred by the business for repairing and maintenance of the assets of an organization to keep them in a working state.
Example: Wages, salary, insurance, rent, electricity, taxes, etc.
The accounting equation for a non-profit organisation is almost the same as in the case of the profit-oriented organisation. Let's first briefly understand what accounting equation and non-profit organisation are: Accounting Equation Accounting equation is an equation that depicts the relationship bRead more
The accounting equation for a non-profit organisation is almost the same as in the case of the profit-oriented organisation. Let’s first briefly understand what accounting equation and non-profit organisation are:
Accounting Equation
Accounting equation is an equation that depicts the relationship between assets, liabilities and capital of an entity.
Assets = Liabilities + Capital
As per this equation, the total assets of an entity are equal to the sum of its total liabilities and total capital. This equation holds good in every situation.
Non-Profit Organisation
A Non-Profit Organisation is an entity which exists for purposes other than for profit. Such organizations exist and operate for charitable purposes, promotion of culture and sports and welfare of society. The accounting for Non-profit organisation is slightly different from For-profit organisations. In the case of a non-profit organisation, the capital account is known as the capital fund.
Accounting Equation for non-profit organisations
The Accounting equation for a non-profit organisation is as follows:
Assets = Liabilities + Capital fund.
The difference is only in name. In the case of non-profit organizations, the capital is known as a capital fund. Rest everything is the same. The accounting equation will be prepared as normally prepared for business concerns.
Fluctuating Capital Fluctuating capital is a capital that is unstable and keeps changing frequently. In the fluctuating capital, the capital of each partner changes from time to time. In partnership firms, each partner will have a separate capital account. Any additional capital introduced during thRead more
Fluctuating Capital
Fluctuating capital is a capital that is unstable and keeps changing frequently. In the fluctuating capital, the capital of each partner changes from time to time. In partnership firms, each partner will have a separate capital account. Any additional capital introduced during the year will also be credited to their capital account. In the fluctuating capital method, only one capital a/c is maintained i.e no current accounts like in the fixed capital a/c method. Therefore, all the adjustments like interest on capital, drawings, etc. are completed in the capital a/c itself.
It is most commonly seen in partnership firms and it is not essential to mention the Fluctuating Account Method in the partnership deed.
All the adjustments resulting in a decrease in the capital will be debited to the partner’s capital, such as drawings made by each partner, interest on drawings, and share of loss.
Similarly, the activities or adjustments that lead to an increase in the capital are credited to the partner’s capital account, such as interest on capital, salary, the share of profit, and so on.
Sundry Debtors in Trial Balance The debtor is a company's asset, and assets are always debited in the trial balance. The trial balance is a statement maintained at the end of an accounting period, listing the ending balances in each general ledger account. There are two sides to this account, debit,Read more
Sundry Debtors in Trial Balance
The debtor is a company’s asset, and assets are always debited in the trial balance.
The trial balance is a statement maintained at the end of an accounting period, listing the ending balances in each general ledger account.
There are two sides to this account, debit, and credit and they include all the transactions done in the business over a particular accounting period.
As we know, assets, expenses, and drawings are always debited. That applies not only in journals but here as well, hence, all of your assets are to be debited.
Trial Balance Statement
As we can see here, the sundry debtors (on the 4th) are debited like all the other assets, expenses, and losses. In the end, if the basic accounting equation i.e. assets=capital+liability is violated, a mismatch arises which in the balancing figure is shown under the name of suspense account. Such errors must not be found and corrected to avoid any mismatch in the balance sheet of the company.
Total Assets = Capital + Other Liabilities.
Therefore, this is how the sundry debtors are treated in the Trial Balance.
What is gain ratio formula?
Introduction The term 'gain ratio' is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners. There is a method of calculating this gain ratio. The method alongRead more
Introduction
The term ‘gain ratio’ is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners.
There is a method of calculating this gain ratio. The method along with the concept behind gain ration is discussed below.
Concept behind gain ratio
A partnership firm is a form of business organisation which is conducted and carried on by members known as partners. It requires at least two partners to start a firm and the maximum limit is 50.
The partners share the profit and loss of a business in a ratio known as Profit and loss sharing ratio.
For example, Amanda, Bill and Chang are partners, having a P/L sharing ratio of 3:2:1 i.e. Amanda is getting 3/6, Bill is getting 2/6 of the same and Chang is getting ⅓ of the profit and loss
If the profit is $6,000 , then Amanda will get $3,000 (3/6 of $6,000) and Bill will get $2,000 (2/6 of $6,000) and Chang will get $1,000 (1/6 of $6,000).
Now if Amanda retires from the firm, then naturally, Bill and Chang’s share of profit will increase.
The profit and loss sharing ratio will now be 2:1 (earlier it was 3:2:1) and the share of profit of Bill will be $4,000 and of Chang will be $2,000.
Calculation of gain ratio
The formula for calculating gain ratio = New ratio – Old Ratio
As per the above case:
Therefore the gain ratio in which Bill and Chang gained the share of profit of Amanda is 2/6 : 1/6 or simply 2:1
This is how we can calculate the gain ratio. But one thing to notice is that the gain ratio is equal to the P/L sharing ratio of the partnership between Bill and Chang.
Hence, whenever a partner retires and the existing partner keep the P/L sharing ratio unchanged among themselves then, the gain ratio will be equal to their P/L sharing ratio. In that case, there is no need to calculate the gain ratio from the formula given above.
But, when the remaining partners change the P/L sharing ratio among themselves after a partner retires, then the gain ratio is to be calculated using the formula given above.
Suppose, upon retirement of Amanda, Bill and Chang change the P/L sharing between them to from 2:1 to 3:2
In that case,
Therefore the gain ratio in which Bill and Chang will gain the share of profit of Amanda is 8/30 : 7/30 or simply 8:7
See lessThe term current assets does not include?
The correct option is 3.) The term current assets do not include furniture. Explanation A current asset is any asset that can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within one accounting year. Thus, current assets don't have life for morRead more
The correct option is 3.)
The term current assets do not include furniture.
Explanation
A current asset is any asset that can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within one accounting year. Thus, current assets don’t have life for more than a year.
Example: Cash and cash equivalent, stock, liquid assets, etc.
Furniture is expected to have a useful life for more than a year and they are bought for a long term by a company.
Cash is a more liquid asset of a company making it a more “current” asset. It requires no conversion and is spendable as it is. Thus, making it a vital current asset.
Stock in trade is a current asset because it can be converted into cash within one year and all the stock in trade of a company is expected to be sold within one accounting period and should not stick for a longer period.
Advance payment, on the other hand, is an amount paid to an employee, essentially a short-term loan by the employer. It’s recorded on the asset side of the balance sheet and as these assets are used, they are expended and recorded on the income statement for the period in which they are incurred, making it a short-term asset ending within an accounting year.
Thus, on the asset side of the balance sheet, we can clearly see which current assets are and which are not included in the current asset
Balance Sheet (As at…..)
Therefore, (3) Furniture, won’t be included in current assets.
See lessPermanent working capital is also known as?
Fixed Working Capital Permanent working capital is also known as fixed working capital. Working capital is the excess of the current assets over the current liability and further, it is classified on the basis of periodicity, into two categories, permanent working capital, and variable working capitRead more
Fixed Working Capital
Permanent working capital is also known as fixed working capital.
Working capital is the excess of the current assets over the current liability and further, it is classified on the basis of periodicity, into two categories, permanent working capital, and variable working capital.
Permanent working capital means the part of working capital that is permanently locked up in current assets to carry business smoothly and effortlessly. Thus, it’s also known as fixed working capital.
The minimum amount of current assets which is required to conduct a business smoothly during the year is called permanent working capital. The amount of permanent working capital depends upon the nature, growth, and size of the business.
Fixed working capital can further be divided into two categories:
Whereas, on the other hand, variable working capital, also known as temporary working capital refers to the level of working capital that is temporary and keeps fluctuating.
See lessWhat is Capital Expenditure and revenue Expenditure?
Capital Expenditure Capital expenditure refers to the money a business spends to buy, maintain, or improve the quality of its assets. Capital expenditures are the expenses incurred by an organization for long-term benefits, i.e on the long-term assets which help in improving the efficiency or capaciRead more
Capital Expenditure
Capital expenditure refers to the money a business spends to buy, maintain, or improve the quality of its assets. Capital expenditures are the expenses incurred by an organization for long-term benefits, i.e on the long-term assets which help in improving the efficiency or capacity of the company. These expenses are borne by the company to boost its earning capacity.
The investment done by the companies on assets is capital in nature and through capital expenditure, the company may use it for acquiring new assets or may use it in the maintenance of previous ones. These expenditures are added to the asset side of the balance sheet.
Example: Purchase of machinery, patents, copyrights, installation of equipment, etc.
Revenue Expenditure
Revenue expenditure refers to the routine expenditures incurred by the business to manage day-to-day expenses. They are incurred for a shorter duration and are mostly limited to an accounting year. These expenses are borne by a company to sustain its profitability. These expenditures are shown in the income statement.
These expenditures do not increase the revenue but stay maintained. These expenses are not capitalized.
They are divided into two sub-categories:
Example: Wages, salary, insurance, rent, electricity, taxes, etc.
See lessWhat is the accounting equation for non profit organisation?
The accounting equation for a non-profit organisation is almost the same as in the case of the profit-oriented organisation. Let's first briefly understand what accounting equation and non-profit organisation are: Accounting Equation Accounting equation is an equation that depicts the relationship bRead more
The accounting equation for a non-profit organisation is almost the same as in the case of the profit-oriented organisation. Let’s first briefly understand what accounting equation and non-profit organisation are:
Accounting Equation
Accounting equation is an equation that depicts the relationship between assets, liabilities and capital of an entity.
Assets = Liabilities + Capital
As per this equation, the total assets of an entity are equal to the sum of its total liabilities and total capital. This equation holds good in every situation.
Non-Profit Organisation
A Non-Profit Organisation is an entity which exists for purposes other than for profit. Such organizations exist and operate for charitable purposes, promotion of culture and sports and welfare of society. The accounting for Non-profit organisation is slightly different from For-profit organisations. In the case of a non-profit organisation, the capital account is known as the capital fund.
Accounting Equation for non-profit organisations
The Accounting equation for a non-profit organisation is as follows:
Assets = Liabilities + Capital fund.
The difference is only in name. In the case of non-profit organizations, the capital is known as a capital fund. Rest everything is the same. The accounting equation will be prepared as normally prepared for business concerns.
See lessWhat is fluctuating capital?
Fluctuating Capital Fluctuating capital is a capital that is unstable and keeps changing frequently. In the fluctuating capital, the capital of each partner changes from time to time. In partnership firms, each partner will have a separate capital account. Any additional capital introduced during thRead more
Fluctuating Capital
Fluctuating capital is a capital that is unstable and keeps changing frequently. In the fluctuating capital, the capital of each partner changes from time to time. In partnership firms, each partner will have a separate capital account. Any additional capital introduced during the year will also be credited to their capital account. In the fluctuating capital method, only one capital a/c is maintained i.e no current accounts like in the fixed capital a/c method. Therefore, all the adjustments like interest on capital, drawings, etc. are completed in the capital a/c itself.
It is most commonly seen in partnership firms and it is not essential to mention the Fluctuating Account Method in the partnership deed.
Fluctuating Capital Account Format
See lessHow to treat sundry debtors in trial balance?
Sundry Debtors in Trial Balance The debtor is a company's asset, and assets are always debited in the trial balance. The trial balance is a statement maintained at the end of an accounting period, listing the ending balances in each general ledger account. There are two sides to this account, debit,Read more
Sundry Debtors in Trial Balance
The debtor is a company’s asset, and assets are always debited in the trial balance.
As we know, assets, expenses, and drawings are always debited. That applies not only in journals but here as well, hence, all of your assets are to be debited.
Trial Balance Statement
As we can see here, the sundry debtors (on the 4th) are debited like all the other assets, expenses, and losses. In the end, if the basic accounting equation i.e. assets=capital+liability is violated, a mismatch arises which in the balancing figure is shown under the name of suspense account. Such errors must not be found and corrected to avoid any mismatch in the balance sheet of the company.
Total Assets = Capital + Other Liabilities.
Therefore, this is how the sundry debtors are treated in the Trial Balance.
See less