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Vijay
VijayCurious
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Capital ExpenditureRevenue Expenditure
  2. Manvi Pursuing ACCA
    This answer was edited.

    Capital Expenditure: Capital expenditure is the expenditure incurred by an entity or organization to acquire or purchase a fixed asset. This expenditure forms part of non-current assets. The fixed asset is not expensed at the time of purchase instead, it is depreciated or amortized over its useful lRead more

    Capital Expenditure:

    Capital expenditure is the expenditure incurred by an entity or organization to acquire or purchase a fixed asset. This expenditure forms part of non-current assets. The fixed asset is not expensed at the time of purchase instead, it is depreciated or amortized over its useful life.

    Example of Capital Expenditure:

    • Machinery: Machinery is a tangible non-current asset purchased by a company for business purposes. Since it is a non-current asset company will be using it for more than one accounting period hence, it should be capitalized in the balance sheet under the head assets. Capitalization is a method in which cost is included in the value of the asset and expensed over its useful life.

    For example, XYZ Ltd purchased machinery worth $1,00,000 and its useful life is 10 years.

    In this case, XYZ Ltd will capitalize the amount of machinery because it will be using it for more than one accounting year. Any asset used for more than one accounting year should be capitalized.

    • Installation charges on machinery: This expense is incurred while installing machines in the business premises and is a one-time expenditure. The whole amount of installation will be capitalized along with the cost of machinery in the balance sheet.

    In the above example cost of the machine is given as $1,00,000 and at the time of installation company incurred a further expenditure of $10,000. Here, the company will add the amount of installation with the cost of machinery because the installation charge is a one-time expense. The total cost of the machine will be $1,10,000.

    • Improvement cost of machinery: Any cost incurred in the improvement of the machine will be capitalized. It is so as it will improve the quality or extend the life of the machinery. Hence, this cost should be added to the historic cost of the machine.

    In the above example, after installation charges were incurred historic cost of the machine was $1,10,000. After a few years, the company made some improvements to the machine which amounted to $20,000 and the machine’s useful life was extended to more 5 years.

    The improvement cost of $20,000 will be added to the historical cost of $1,10,000. The total amount of $1,30,000 ($1,10,000+$20,000) will be shown in the balance sheet.

    Revenue Expenditure:

    Revenue expenditure is expenditure incurred for the purpose of trade or to maintain non-current assets. These are short-term expenses and consumed within one accounting year and also known as operating expenses.

    Examples of Revenue Expenditure:

    • Rent: It is an expense paid by the company for using the premises for business purposes to the owner of the premises. It is recurring in nature and hence, should be classified under revenue expenditure.

    For example, a company rented premises for business purposes and paid a monthly rent of $10,000. This expenditure of $10,000 incurred will fall under revenue expenditure because the company is incurring this expenditure monthly.

    • Depreciation: Depreciation is a non-cash expense and it is added back to the cash flow statement, alongside other expenses. This expense is incurred as a basis of consuming a portion of fixed assets for the current period. Depreciation is charged to the fixed assets to reduce their carrying amount as their value is consumed over time. This expense is of recurring in nature.

    For example, a company purchased an asset worth $2,00,000 and charges 10% depreciation every year for 10 years. Since, the company will charge 10% depreciation every year it is recurring in nature and hence, should be considered as revenue expenditure.

    • Purchase of raw material: Raw materials are materials used in primary production for the manufacturing of goods. These are needed on a regular basis and the cost of purchasing them is recurring in nature. Hence, they are classified under revenue expenditure.

    For example, a manufacturing company orders stock of its raw material every quarter. Here, the company is going to reorder stock in every quarter and hence, this will be a revenue expenditure.

    Capital expenditure can be capitalized as a part of non-current assets. Revenue expenditure cannot be capitalized and must be expensed in the statement of profit and loss.

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Bonnie
BonnieCurious
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  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    To proceed with how to make a partnership deed, let me explain to you in short what is partnership deed? A partnership deed is the written agreement between the partners who have agreed to share profits of a business carried on by them. This basically contains terms and conditions to be followed betRead more

    To proceed with how to make a partnership deed, let me explain to you in short what is partnership deed?

    A partnership deed is the written agreement between the partners who have agreed to share profits of a business carried on by them. This basically contains terms and conditions to be followed between the partners.

    Few contents of the partnership deed are as follows:

    • Name, address, and type of business of the partnership firm.
    • Name & address of all the partners
    • Profit-sharing ratio.
    • Rights, duties, and liabilities of all partners.
    • Date of commencement of the partnership
    • Method of settlement of dispute among the partners.
    • Treatment of loss in case of insolvency of one or more partners.

     

    Generally, a partnership deed contains all those matters which can affect the relationship between the partners. However, if there is no such agreement the partnership should follow the provisions mentioned under The Partnership Act, 1932.

    Now coming to the main question how to make a partnership deed? See the process is not so complicated. The partnership deed may be oral or written, but as the oral agreement has no value for obtaining tax benefits, a partnership firm always prefers a written agreement.

    To prepare the same the partnership deed must be prepared on a stamp paper and signed by all the partners as per Indian Stamp Act and copies of the same should be with all the partners and also must be filed by the registrar of the firm.

    A deed may vary depending on the nature of the partnership they are engaged in. Generally, partnerships are of three types

    • General partnership
    • Limited partnership
    • Limited liability partnership

    the process of making deed is same for all but, the content of deed may vary depending on the liability of partners in the partnership.

    Further to know more about the registration process of partnership firm you can refer the following link https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf

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Bonnie
BonnieCurious
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Receipts and Payments Account for the year ended 31st March 2019 Receipts Amt Payments Amt To Balance b/d By General Expenses 32,000 Cash in Hand 40,000 By Newspapers 18,500 Cash at Bank 155,500 By Electricity 30,000 To Subscription By Fixed Deposits with Bank 180,000       2017-18                         12,000      (On 30 ...

  2. Karan B.com and Pursuing ACCA
    This answer was edited.

    In the books of Rural Literacy Society Income & Expenditure A/c for the year ended 31 March 2019 Expenditure Amt Amt Income Amt Amt To General Expenses 32,000 By Subscription (W.N.1) 2,72,000 To Newspapers 18,500 By Legacy 12,500 To Electricity 30,000 By Government Grant 1,20,000 To Rent 65,000Read more

    In the books of Rural Literacy Society

    Income & Expenditure A/c for the year ended 31 March 2019

    Expenditure Amt Amt Income Amt Amt
    To General Expenses 32,000 By Subscription (W.N.1) 2,72,000
    To Newspapers 18,500 By Legacy 12,500
    To Electricity 30,000 By Government Grant 1,20,000
    To Rent 65,000 By Interest Received on Fixed Deposit 9,000
    Less: Prepaid Rent (65,000/13) -5,000 60,000     (1,80,000*10%*6/12)
    To Salary 36,000
    Add: Outstanding Salary 6,000 42,000
    To Postage Charges 3,000
    To Loss on Sale of Furniture (W.N.2) 13,000
    To Surplus (excess of income over expenditure) 2,15,000
    4,13,500 4,13,500

     

    Balance Sheet as on 31 March 2019

    Liabilities Amt Amt Assets Amt Amt
    Capital Fund (W.N.3) 3,85,500 Fixed Deposit 1,80,000
    Add: Surplus 2,15,000
    Advance Subscription 5,000 Books 50,000
    Outstanding Salaries 6,000 Add: Purchased 70,000 1,20,000
    Furniture 1,20,000
    Add: Purchased 1,05,000
    Less: Sold -50,000 1,75,000
    Outstanding Subscription 15,000
    Prepaid Rent 5,000
    Cash in Hand 30,000
    Cash at Bank 82,000
    Accrued Interest (W.N.4) 4,500
    6,11,500 6,11,500

     

    Working Notes:

    W.N.1: Calculation of Subscription

    Subscription for 2018-19 2,65,000
    Add: Outstanding Subscription (31 March 2019) 15,000
    Less: Outstanding Subscription (2017-18) -8,000
                     Total Subscription 2,72,000

    In the above calculation, for the year 2017-18 subscription amount was 12,000, and in the adjustment at the end of the year subscription was 20,000 so the difference of 8,000 is the amount of subscription that was outstanding.

     

    W.N.2: Calculation of loss on sale of furniture

    Book Value of Furniture 50,000
    Less: Sold -37,000
                    Loss on Sale of Furniture 13,000

     

    W.N.3: Calculation of Capital Fund

    Balance Sheet as on 31 March 2018

    Liabilities  Amt  Assets Amt
    Capital Fund (Balancing Figure) 3,85,500 Books 50,000
    Furniture 1,20,000
    Outstanding Subscription 20,000
    Cash in Hand 40,000
    Cash at Bank 1,55,500
    3,85,500 3,85,500

     

    W.N.4: Calculation of Accrued Interest

    Interest as of 30 September 2018 9,000
    Less: Interest as of 31 March 2019 -4,500
                   Accrued Interest 4,500
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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    TDS stands for Tax Deducted at Source It is the tax deducted on certain incomes as specified under sections 192 to 194N of the Income Tax Act,1961 by the person who is responsible to pay such income. For example, an employer is liable to deduct the TDS on the salary paid to the employee subject to tRead more

    TDS stands for Tax Deducted at Source

    It is the tax deducted on certain incomes as specified under sections 192 to 194N of the Income Tax Act,1961 by the person who is responsible to pay such income.

    For example, an employer is liable to deduct the TDS on the salary paid to the employee subject to the provisions of the Income Tax Act, 1961.

    TDS is deducted either,

    • at the time of payment

    OR

    • At time of credit to the account of the payee or at the time of payment; whichever is earlier

    We know that Income tax liability is calculated after the income for a year is earned. In the next year, which is called the Assessment Year, income tax payable is calculated on the income earned in the Previous Year

    For example:

    Year 2021-2022 – This year (Previous Year) – Income is earned here.

    Year 2021-2022 – Next Year (Assessment Year) – Income tax is assessed here.

    But, the government collects the income tax from the income of the assessee in the Previous Year itself by the following ways:

    1. TDS – Tax Deducted at Source
    2. TCS – Tax Collected at Source
    3. Advance Tax

    Some of the most common sections are given below:

    1. Section 192 – Salary
    2. Section 194A – Interest other on securities deposits with the bank, post office etc) –  @10%
    3. Section 194B and 194BB – Winning from lotteries, crossword puzzle – @30%
    4. Section 194 – DA – Payment in respect of Life Insurance Policy – @5%.

    So, according to sections 192 to 194N, some amount of income tax is deducted from the income of the assessee in the Previous Year itself.

    In the Assessment Year, the assessee also gets a tax credit for the TDS i.e. the Income Tax liability gets reduced by the amount of Tax Deducted at Source in the Previous Year.

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Before answering the question let’s understand what a government grant is. Meaning of government grants Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawbacRead more

    Before answering the question let’s understand what a government grant is.

    Meaning of government grants

    Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawback, or assets provided at concessional rate or at no cost etc.

    These grants when provided have some rules and conditions attached to them. If such conditions are not fulfilled or rules are violated, the grant becomes refundable to the government.

    Treatment

    AS-12 ‘Government Grant’ provides two approaches  for the treatment of government grants in the books of accounts of an enterprise:

    • Income approach: Under this approach, the grant is treated as income and taken to profit and loss A/c in one or more accounting periods.

    For example, X Ltd purchase an asset for ₹ 10,00,000 and the government provided a grant of ₹2,00,000 to X Ltd. The useful life of the asset is 4 years and the residual value is nil.

    Now there are two methods to treat this grant as income.

    Method – 1:  The grant amount will be deducted from the asset’s value. This will result in a decreased amount of depreciation. This is an indirect way to recognize government grants as income.

    The journal entries are as follows: (Method-1)

    The journal entries for the 3rd and the 4th years will be the same as of 2nd year.

    In absence of a government grant, the annual depreciation would have been ₹2,50,000 (₹10,00,000 / 4). Hence, due to the grant, the profit will be 50,000 more for the 4 consecutive accounting years.

    Method – 2: The grant amount is credited to a special account called the ‘deferred government grant’ account. Over the useful life of the asset, the grant will be credited to the profit and loss account in equal instalments. This is a direct way to recognize government grants as income.

    The journal entries are as follows: (Method-2)

    The journal entries for the 3rd and the 4th years will be the same as of 2nd year.

    • Capital approach: Under this approach, the grant is treated as part of the shareholders’ funds (as capital reserve)

    When any grant is given is in nature of promoter’s contribution i.e. as a percentage of total investment to be done by an enterprise, and then such grant received from government will be treated as part of shareholder’s funds.

    The grant amount will be transferred to the capital reserve account and it will be treated neither as deferred income nor to be distributed as a dividend.

    Example: ABC Ltd has set up its business in a designated backward area which entitles the company to receive from the government a subsidy of 20% of total investment. ABC Ltd fulfilled all the conditions associated with the scheme and received ₹20 crores toward its total investment of ₹100 crores.

    This ₹20 crore will be transferred to the capital reserve account.

    Special case: If the grant is received in relation to a non-depreciable asset like land, then the entire amount of the grant will be recognized in the profit and loss account in the same year.

    Treatment of non-monetary government grant

    When a government grant is in the form of non-monetary assets like land or other resources at a concessional rate, then the assets are to be recognised at their acquisition cost.

    If the assets are acquired at no cost, then they are to be recorded at their nominal value.

    For example, if an enterprise receives land for free as a government grant, then it has to record the land at cost based on prevailing market rates.

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Karan
Karan
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more

    Negative working capital means the excess of current liabilities over current assets in an enterprise.

    Let’s understand what working capital is to get more clarity about negative working capital.

    Meaning of Working Capital

    Working Capital refers to the difference between current assets and current liabilities of a business.

    Working Capital = Current Assets – Current Liabilities

    It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.

    Items under Current Assets and Current Liabilities

    It is important to know about the items under current assets and current liabilities to understand the significance of working capital.

    Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.

    Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.

    Types of working capital

    Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:

    • Positive (Current assets > Current liabilities)
    • Zero  (Current assets = Current liabilities)
    • Negative (Current assets < Current liabilities)

    Hence, negative working capital exists when current liabilities are more than current assets.

    Implications of having negative working capital

    Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.

    An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.

    The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.

    Current Assets  = 2(Current Liabilities)

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA

    Introduction Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity.  An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fairRead more

    Introduction

    Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity.  An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fair view of the affairs of the entity.

    In audit reports, an auditor uses the term ‘true and fair’ is used to express that the financial statements are free from any kind of material misstatement and depict a correct financial image of the entity.

    The term holds great significance in the audit reports of entities and auditors have to use this term carefully.

    Meaning of ‘True’ and ‘Fair’

    The term consists of two words, ‘True’ and ‘Fair’. Let’s understand what each of these words actually means.

    True

    The word ‘true’ suggests that the auditor, after examining the financial statements, has found no material misstatement whether due to error or fraud. The financial information depicted by the financial statements and the underlying accounting records is correct. The preparation and presentation of the financial statements are in accordance with the accounting standards applicable to the entity.

    Fair

    The word ‘fair’ means the financial information presented through the financial statement does not have an element of bias or sugar coating. There is a faithful presentation of financial information and the amounts at which the assets and liabilities, income and expenses and equity are shown is justified.

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