Meaning New profit-sharing ratio is the profit-sharing ratio after the new partner is admitted in the partnership. At the time of such admission there is change in old/existing partners’ ratio too. The share of new partner’s profit is acquired from old/existing partners’ share of profit. Thus, New pRead more
Meaning
New profit-sharing ratio is the profit-sharing ratio after the new partner is admitted in the partnership. At the time of such admission there is change in old/existing partners’ ratio too. The share of new partner’s profit is acquired from old/existing partners’ share of profit.
Thus, New profit-sharing ratio can be stated as ratio in which all the partners, Old and New will share profits and losses of the partnership in future. The new profit-sharing ratio can be calculated as follows.
Formula
Sacrifice ratio is the ratio in which old/existing partners agrees to give away their share in profits for the new partner.
For better understanding let’s see how calculation of New profit-sharing ratio can be done:
Example : There are two partners in a partnership firm, Mr. Anil & Mr. Mukesh. Their profit-sharing ratio is 2:3. They wants to admit Mr. Nikhil as their third partner for 1/3rd share.
In such case, Calculation of New profit-sharing ratio would be as follows:
Total profit = 1
Mr. Nikhil’s Share = 1/3
Remaining Profit = 1 – 1/3 = 2/3
So, this remaining share of 2/3 is shared among the old partners in their old ratio of 2:3.
Mr. Anil’s Share = 2/3 x 2/5 = 4/15
Mr. Mukesh’s Share = 2/3 x 3/5 = 6/15
Mr. Nikhil’s Share = 1/3 x 5/5 =5/15
So, New ratio would be 4/15: 6/15: 5/15 i.e., 6:4:5
Interest on Drawings Interest on drawings is debited to the capital account. As Interest on drawings is charged on the drawings made by partners/proprietors from their respective capital accounts in a partnership firm or proprietary concern. Drawings refer to the amount withdrawn by an owner or parRead more
Interest on Drawings
Interest on drawings is debited to the capital account.
As Interest on drawings is charged on the drawings made by partners/proprietors from their respective capital accounts in a partnership firm or proprietary concern.
Drawings refer to the amount withdrawn by an owner or partner for his personal use. Thereby, interest on drawings is an income of a firm payable by the owner hence, it’s deducted/debited.
The Profit and Loss Account, on the other hand, shows the income and expenses of a business incurred over an accounting period. Accounts like interest on drawings and capital are not shown in the P&L a/c because they are internal transactions and P&L a/c focuses only on the financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.
Meaning of Opening Stock Opening stock is the inventory or stock of goods that are available at the beginning of the new accounting year carried down from the previous year's closing stock which is recorded in the books of accounts. In simple words, Opening stock is the goods/quantity/products thatRead more
Meaning of Opening Stock
Opening stock is the inventory or stock of goods that are available at the beginning of the new accounting year carried down from the previous year’s closing stock which is recorded in the books of accounts.
In simple words, Opening stock is the goods/quantity/products that are held by a business at the beginning of a new accounting period and it is the closing stock of the preceding year carried down.
Similarly, the closing stock is the number of unsold goods that remain with the business at the end of an accounting year and is further carried down to the next year as Opening Stock.
Formula
There are 3 main formulas used for Opening Stock’s calculation. They are-
For manufacturing companies
Opening Stock = Raw Material Cost + Work in Progress + Finished Goods Cost
When only Sales, GP, COGS, and Closing Stock are given
Opening Stock = Sales – Gross Profit – Cost of Goods Sold + Closing Stock
You can use this one when only limited information is provided
Meaning of lease A lease is an agreement or a contract in which the right to use an asset like land, building, or machinery is given by one party to the other party for a fixed period of time against the consideration of a single payment or a series of payments. There are two parties in a lease agreRead more
Meaning of lease
A lease is an agreement or a contract in which the right to use an asset like land, building, or machinery is given by one party to the other party for a fixed period of time against the consideration of a single payment or a series of payments.
There are two parties in a lease agreement:
Lessor: The party who gives the right to use its asset in return for a series of payments or a single payment.
Lessee: The party who receives the right to use the asset from the Lessor.
This is similar to a rent agreement or contract. The only difference between lease and rent is duration. A rent agreement is generally for less than 12 months while a lease agreement is for more than 12 months like 5 years or 10 years, sometimes even for like 99years.
Type of lease
There are two types of lease:
Operating lease
Finance Lease
Operating lease
An operating lease is a type of lease in which the possession of the leased asset is transferred back from the lessee to the lessor at the end of the lease period.
Here, all the risk and rewards incident to ownership remains with the lessor, not the lessee.
The depreciation on the leased asset in case of operating lease is not charged by the lessee to its profit and loss account as the leased asset is not shown in the balance sheet. A leased asset is an off-balance sheet item in the case of an operating lease.
Finance lease
Unlike an operating lease, the ownership of the leased asset is transferred to the lessee at the end of the leased period.
Thus, at the inception of the lease agreement, all the risk and rewards incident to ownership is transferred from the lessor to the lessee.
The depreciation on the leased asset is charged by the lessee to its profit and loss account as the leased asset is shown in the balance sheet. A leased asset is a balance sheet item in the case of an operating lease.
Along with the leased asset, the obligation to pay the future lease payment is also shown in the balance sheet as a non-current liability or current liability as the case may be.
Difference between operating lease and finance lease in tabular format
Introduction Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds. Explanation To undRead more
Introduction
Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds.
Explanation
To understand the concept of minority interest, we need to first understand the relationship between a holding company and its subsidiary company or companies.
A holding company means a company that controls one or more companies by:
Holding more than fifty percent of the total voting rights or equity share capital.
having the power to appoint or remove the majority of the board members.
A subsidiary company is a company that is controlled by another company.
From the above, we can simply deduce that a holding company holds the majority of the equity in its subsidiary company or companies.
So, the equity of the subsidiary company which does not belong to the holding company, but to the outsiders is known as the minority interest as it is, in fact, the minority in comparison to the majority stake of the holding company.
Example
For example, A Ltd holds 75% of the equity in B Ltd, then the rest 25% which belongs to the outsiders will be the Minority Interest.
Minority Interest means the share of outsiders in the:
Paid-up share capital of the subsidiary
Reserve and Surplus
For example, B Ltd has the following particulars under Shareholders’ Funds.
Equity Share Capital
Rs. 10,00,000
Revaluation Reserve
Rs. 4,00,000
Balance of Profit and Loss A/c
Rs. 1,00,000
General Reserves
Rs. 5,00,000
B Ltd is a subsidiary company of the A Ltd. A Ltd holds 75% of B Ltd.
It means minority interest in B Ltd is 25% (100% – 75%)
Therefore, in the consolidated balance sheet of A Ltd and its subsidiary, the minority interest will be as follows:
Introduction In GST, a supply is a taxable event. This means whenever there is a supply of goods or services or both, GST is charged. Supply includes the exchange of goods or services between supplier and recipient by way of sale, barter, lease etc for consideration and in the course or furtheranceRead more
Introduction
In GST, a supply is a taxable event. This means whenever there is a supply of goods or services or both, GST is charged. Supply includes the exchange of goods or services between supplier and recipient by way of sale, barter, lease etc for consideration and in the course or furtherance of business. The rate of GST on any supply depends on the type of good or service supplied.
Composite supply and mixed supply are two special types of supplies, in which two or more goods or services or both are offered together in a bundle. As two or more goods are supplied together, the question arises at which rate the GST is to be charged on such supplies as such goods or services may have different rates of GST applicable to them. Sections 8 of the CGST act, 2017 deals with the tax liability of such supplies.
Composite supply
A composite supply is a type of supply in which two or more goods or services or both are supplied together in the ordinary course of business. Such goods or services are natural bundles. By natural bundle, we mean the goods or services are complementary to each, they are naturally provided together and are to be used along with each other.
For example, mobile phones and chargers are supplied as a bundle. This concept of the natural bundle is the main determiner of a composite supply.
In such supplies, there is one main product which is called the principal supply. Like in the above example, the mobile phone is the principal supply. Other goods or services are dependent on the principal supply.
A composite supply will be taxable as the rate of GST applicable on the principal supply.
For example, suppose the rate of GST on mobile phones is 18% and that on the charger is 12%, then the whole supply will be taxable at the rate of 18%.
Mixed supply
A mixed supply is a type of supply in which two or more goods or services or both are supplied together but they do not complement each other and are not a natural bundle. They are not supplied in the ordinary course of business, For example, a combo of bottled honey and face cream.
In mixed supply, the good or service which attracts the highest rate of GST is considered the rate of supply for the whole supply.
For example, suppose bottled honey attracts 5% GST and face cream 18% GST, then the whole supply will be charged 18% GST.
Introduction Like, in the case of excise duty, the taxable event is the manufacture of goods, supply is a taxable event with respect to the Goods and Services Tax regime in India. A taxable event is an event on occurrence of which tax is charged. Excise duty is charged when any specified good is manRead more
Introduction
Like, in the case of excise duty, the taxable event is the manufacture of goods, supply is a taxable event with respect to the Goods and Services Tax regime in India. A taxable event is an event on occurrence of which tax is charged.
Excise duty is charged when any specified good is manufactured, GST is charged when any good or service is supplied.
Definition of Supply
The concept of supply is of great significance to the GST architecture. It can be called the ‘bones to the body of GST’.
Section 7 of the CGST defines ‘supply’.
At first, I have provided the whole Section 7 which consists of four sub-sections:
7(1)
7(1A)
7(2)
7(3).
Thereafter will be the explanation of each sub-section in simple language.
Section 7
Section 7(1) of the CGST Act, 2017 defines ‘supply’. As per section 7(1) of the CGST Act, 2017, the supply includes:
All forms of supply of goods and services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made for a consideration by a person in the course or furtherance of business
Importation of service, for a consideration whether or not in the course or furtherance of business and
The activities specified in Schedule I, made or agreed to be made with or without consideration.
Section 7(1A) states, ‘where certain activities or transaction constitute as supply in accordance of with the provisions of sub-section (1), they shall be treated either as a supply of good or supply of services as referred to Schedule II.
Section 7(2) states, ‘notwithstanding with anything contained in sub-section (1).
Activities and transactions stated specified in Schedule III or
Such activities and transactions undertaken by the Central government, state government or local authority in which they are engaged as public authorities, as may be notified by the government on the recommendation of the Council
shall not be treated neither as a supply of goods nor a supply of services.
Section 7(3) states ‘subject to sub-section (1), (1A) and (2), the government may, on the recommendation of the council specify, by the notification, the transaction that is treated as :
a supply of goods and not as a supply of services
a supply of services and not as a supply of goods.
Explanation of Section 7 in simple terms.
Section 7(1) (a) sets three parameters of an activity or transaction to be a supply.
Supply should be only of goods and services. Supply of anything other than goods or services like money, securities do not attract GST.
Supply should be made for a consideration
Supply should be made in the course or furtherance of business
Any activity or transaction will be treated as a supply if the above parameters are fulfilled as per sub-section (1) clause (a).
Section 7(1)(b) is actually an exception to the 3rd parameter of supply. Import of service for a consideration will be considered a supply even if it is not made in furtherance of business,
Section 7(1)(c) states that item in the schedule I will be treated as supply whether there is consideration or not. This is an exception to the 2nd parameter.
Section 7(1A) states any activity which is a supply as per sub-section (1), shall be classified either as a supply of goods or as a supply of service as per schedule II. There are many activities and transactions which have the characteristics of both goods and services.
For example, dining in a restaurant. Schedule II helps to eliminate this confusion and helps to classify such activities or transactions as either supply of goods or supply of services. As per Schedule II, dining or take-away from a restaurant is a supply of service.
Section 7(2) states the activities which are neither supply of goods nor neither of services even if they fulfilled the condition of the sub-section (1).
Section 7(3) says that the central government have the power to notify transactions that are to be treated as supply of goods nor as a supply of service or supply of services not as a supply of services
What is the formula for new profit sharing ratio?
Meaning New profit-sharing ratio is the profit-sharing ratio after the new partner is admitted in the partnership. At the time of such admission there is change in old/existing partners’ ratio too. The share of new partner’s profit is acquired from old/existing partners’ share of profit. Thus, New pRead more
Meaning
New profit-sharing ratio is the profit-sharing ratio after the new partner is admitted in the partnership. At the time of such admission there is change in old/existing partners’ ratio too. The share of new partner’s profit is acquired from old/existing partners’ share of profit.
Thus, New profit-sharing ratio can be stated as ratio in which all the partners, Old and New will share profits and losses of the partnership in future. The new profit-sharing ratio can be calculated as follows.
Formula
Sacrifice ratio is the ratio in which old/existing partners agrees to give away their share in profits for the new partner.
For better understanding let’s see how calculation of New profit-sharing ratio can be done:
Example : There are two partners in a partnership firm, Mr. Anil & Mr. Mukesh. Their profit-sharing ratio is 2:3. They wants to admit Mr. Nikhil as their third partner for 1/3rd share.
In such case, Calculation of New profit-sharing ratio would be as follows:
Total profit = 1
Mr. Nikhil’s Share = 1/3
Remaining Profit = 1 – 1/3 = 2/3
So, this remaining share of 2/3 is shared among the old partners in their old ratio of 2:3.
Mr. Anil’s Share = 2/3 x 2/5 = 4/15
Mr. Mukesh’s Share = 2/3 x 3/5 = 6/15
Mr. Nikhil’s Share = 1/3 x 5/5 =5/15
So, New ratio would be 4/15: 6/15: 5/15 i.e., 6:4:5
See lessInterest on drawings is
Interest on Drawings Interest on drawings is debited to the capital account. As Interest on drawings is charged on the drawings made by partners/proprietors from their respective capital accounts in a partnership firm or proprietary concern. Drawings refer to the amount withdrawn by an owner or parRead more
Interest on Drawings
Interest on drawings is debited to the capital account.
As Interest on drawings is charged on the drawings made by partners/proprietors from their respective capital accounts in a partnership firm or proprietary concern.
Drawings refer to the amount withdrawn by an owner or partner for his personal use. Thereby, interest on drawings is an income of a firm payable by the owner hence, it’s deducted/debited.
The Profit and Loss Account, on the other hand, shows the income and expenses of a business incurred over an accounting period. Accounts like interest on drawings and capital are not shown in the P&L a/c because they are internal transactions and P&L a/c focuses only on the financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.
Partners’ Capital A/c
See lessWhat is the meaning of opening stock?
Meaning of Opening Stock Opening stock is the inventory or stock of goods that are available at the beginning of the new accounting year carried down from the previous year's closing stock which is recorded in the books of accounts. In simple words, Opening stock is the goods/quantity/products thatRead more
Meaning of Opening Stock
Opening stock is the inventory or stock of goods that are available at the beginning of the new accounting year carried down from the previous year’s closing stock which is recorded in the books of accounts.
Formula
There are 3 main formulas used for Opening Stock’s calculation. They are-
Opening Stock = Raw Material Cost + Work in Progress + Finished Goods Cost
Opening Stock = Sales – Gross Profit – Cost of Goods Sold + Closing Stock
Opening Stock = COGS + Closing Inventory – Purchases
Types of Opening Stock
There are three types of Opening Stock or we may also say that Opening Stock consists of these 3 elements. They are-
Opening Stock in Final Accounts
Opening stock is a part of the Trading Account while preparing the Final Accounts. And this is how it is posted in the Trading A/c.
Trading A/c (for the year ending…)
Example of Opening Stock
Example
IKEA, the biggest Furniture manufacturer collected this data on April 1, 2021,
Timber – $300,000
Wood – $30,000
Nails – $15,000
Pre-cut Wood – $120,000
Assembled Furniture – $400,000
Now, adding them (as said earlier, Opening stock is a combination of these three.)
Opening Stock (Raw Material + Work in Progress + Finished Goods) = $865,000
Therefore, that’s how one can calculate Opening Stock.
See lessWhat is the difference between operating lease and finance lease?
Meaning of lease A lease is an agreement or a contract in which the right to use an asset like land, building, or machinery is given by one party to the other party for a fixed period of time against the consideration of a single payment or a series of payments. There are two parties in a lease agreRead more
Meaning of lease
A lease is an agreement or a contract in which the right to use an asset like land, building, or machinery is given by one party to the other party for a fixed period of time against the consideration of a single payment or a series of payments.
There are two parties in a lease agreement:
This is similar to a rent agreement or contract. The only difference between lease and rent is duration. A rent agreement is generally for less than 12 months while a lease agreement is for more than 12 months like 5 years or 10 years, sometimes even for like 99years.
Type of lease
There are two types of lease:
Operating lease
Finance lease
Difference between operating lease and finance lease in tabular format
See lessWhat is minority interest?
Introduction Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds. Explanation To undRead more
Introduction
Minority interest refers to the interest of the outsiders in the subsidiary or subsidiaries of a holding company. In the presentation of the consolidated balance sheet of a parent company and its subsidiaries, Minority Interest is shown just below Shareholders’ Funds.
Explanation
To understand the concept of minority interest, we need to first understand the relationship between a holding company and its subsidiary company or companies.
A holding company means a company that controls one or more companies by:
A subsidiary company is a company that is controlled by another company.
From the above, we can simply deduce that a holding company holds the majority of the equity in its subsidiary company or companies.
So, the equity of the subsidiary company which does not belong to the holding company, but to the outsiders is known as the minority interest as it is, in fact, the minority in comparison to the majority stake of the holding company.
Example
For example, A Ltd holds 75% of the equity in B Ltd, then the rest 25% which belongs to the outsiders will be the Minority Interest.
Minority Interest means the share of outsiders in the:
For example, B Ltd has the following particulars under Shareholders’ Funds.
B Ltd is a subsidiary company of the A Ltd. A Ltd holds 75% of B Ltd.
It means minority interest in B Ltd is 25% (100% – 75%)
Therefore, in the consolidated balance sheet of A Ltd and its subsidiary, the minority interest will be as follows:
Minority Interest in B Ltd (25%)
See lessWhat is composite supply and mixed supply?
Introduction In GST, a supply is a taxable event. This means whenever there is a supply of goods or services or both, GST is charged. Supply includes the exchange of goods or services between supplier and recipient by way of sale, barter, lease etc for consideration and in the course or furtheranceRead more
Introduction
In GST, a supply is a taxable event. This means whenever there is a supply of goods or services or both, GST is charged. Supply includes the exchange of goods or services between supplier and recipient by way of sale, barter, lease etc for consideration and in the course or furtherance of business. The rate of GST on any supply depends on the type of good or service supplied.
Composite supply and mixed supply are two special types of supplies, in which two or more goods or services or both are offered together in a bundle. As two or more goods are supplied together, the question arises at which rate the GST is to be charged on such supplies as such goods or services may have different rates of GST applicable to them. Sections 8 of the CGST act, 2017 deals with the tax liability of such supplies.
Composite supply
A composite supply is a type of supply in which two or more goods or services or both are supplied together in the ordinary course of business. Such goods or services are natural bundles. By natural bundle, we mean the goods or services are complementary to each, they are naturally provided together and are to be used along with each other.
For example, mobile phones and chargers are supplied as a bundle. This concept of the natural bundle is the main determiner of a composite supply.
In such supplies, there is one main product which is called the principal supply. Like in the above example, the mobile phone is the principal supply. Other goods or services are dependent on the principal supply.
A composite supply will be taxable as the rate of GST applicable on the principal supply.
For example, suppose the rate of GST on mobile phones is 18% and that on the charger is 12%, then the whole supply will be taxable at the rate of 18%.
Mixed supply
A mixed supply is a type of supply in which two or more goods or services or both are supplied together but they do not complement each other and are not a natural bundle. They are not supplied in the ordinary course of business, For example, a combo of bottled honey and face cream.
In mixed supply, the good or service which attracts the highest rate of GST is considered the rate of supply for the whole supply.
For example, suppose bottled honey attracts 5% GST and face cream 18% GST, then the whole supply will be charged 18% GST.
See lessWhat is the concept of supply in GST?
Introduction Like, in the case of excise duty, the taxable event is the manufacture of goods, supply is a taxable event with respect to the Goods and Services Tax regime in India. A taxable event is an event on occurrence of which tax is charged. Excise duty is charged when any specified good is manRead more
Introduction
Like, in the case of excise duty, the taxable event is the manufacture of goods, supply is a taxable event with respect to the Goods and Services Tax regime in India. A taxable event is an event on occurrence of which tax is charged.
Excise duty is charged when any specified good is manufactured, GST is charged when any good or service is supplied.
Definition of Supply
The concept of supply is of great significance to the GST architecture. It can be called the ‘bones to the body of GST’.
Section 7 of the CGST defines ‘supply’.
At first, I have provided the whole Section 7 which consists of four sub-sections:
Thereafter will be the explanation of each sub-section in simple language.
Section 7
Section 7(1) of the CGST Act, 2017 defines ‘supply’. As per section 7(1) of the CGST Act, 2017, the supply includes:
Section 7(1A) states, ‘where certain activities or transaction constitute as supply in accordance of with the provisions of sub-section (1), they shall be treated either as a supply of good or supply of services as referred to Schedule II.
Section 7(2) states, ‘notwithstanding with anything contained in sub-section (1).
shall not be treated neither as a supply of goods nor a supply of services.
Section 7(3) states ‘subject to sub-section (1), (1A) and (2), the government may, on the recommendation of the council specify, by the notification, the transaction that is treated as :
Explanation of Section 7 in simple terms.
Section 7(1) (a) sets three parameters of an activity or transaction to be a supply.
Any activity or transaction will be treated as a supply if the above parameters are fulfilled as per sub-section (1) clause (a).
Section 7(1)(b) is actually an exception to the 3rd parameter of supply. Import of service for a consideration will be considered a supply even if it is not made in furtherance of business,
Section 7(1)(c) states that item in the schedule I will be treated as supply whether there is consideration or not. This is an exception to the 2nd parameter.
Section 7(1A) states any activity which is a supply as per sub-section (1), shall be classified either as a supply of goods or as a supply of service as per schedule II. There are many activities and transactions which have the characteristics of both goods and services.
For example, dining in a restaurant. Schedule II helps to eliminate this confusion and helps to classify such activities or transactions as either supply of goods or supply of services. As per Schedule II, dining or take-away from a restaurant is a supply of service.
Section 7(2) states the activities which are neither supply of goods nor neither of services even if they fulfilled the condition of the sub-section (1).
Section 7(3) says that the central government have the power to notify transactions that are to be treated as supply of goods nor as a supply of service or supply of services not as a supply of services
See less