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Mehak
Mehak
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  2. Aditi

    Biological Assets comes under International Accounting Standard IAS 41 Agriculture. IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity. Agricultural Activity- It is the management of biological transformatRead more

    Biological Assets comes under International Accounting Standard IAS 41 Agriculture.

    IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity.

    • Agricultural Activity- It is the management of biological transformation by an entity and measuring the change in the quality and quantity of biological assets.
    • Biological Transformation- It comprises the process of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset
    • Biological Asset – They are living plants or animals owned by an entity
    • Agricultural Produce- It is the harvested / detached product of the entity’s biological asset.

    IAS 41 does not apply to

    • Agricultural land
    • Intangible assets related to agricultural activity
    • Products that are the result of processing after the point of harvest, for example, yarn, carpet, rubber, wine, etc
    • The land on which the biological assets grow, regenerate, degenerate.

     

     

    Biological Assets

    Definition

    Biological assets are living plants or animals that go through biological transformation, owned by an entity to prepare agricultural produce for the purpose of agricultural activities only.

    Living plants include plants that are consumable within 1 year and are harvested. It also includes plants that are used for lumbering and wood-cutting activities.

    Examples

    Examples of biological assets are:

    Sheep, pigs, poultry, beef cattle, fish, dairy cows, plants for harvest etc

    Importance

    • Farming: They are key to agriculture and food production.
    • Income: They generate substantial income for businesses in industries such as vineyards, livestock, silviculture, etc.
    • Sustainability: Properly managing them helps the environment.

     

    Accounting & Presentation

    Recognition

    Under IAS 41 biological assets are recognised when

    • The business must have ownership over them from a past event.
    • The future economic benefits are expected to flow to the business from their ownership.
    • The cost or fair value of the asset can be measured reliably.

    Agricultural produce is recognised

    • It is recognised at the point of harvest or detachment.

    Agricultural produce is derecognised when

    • They enter the trading.
    • Enters the production process.

    Measurement

    • Biological assets are measured on initial recognition and at each balance sheet date at their fair value less costs to sell.
    • Costs to sell are incremental costs incurred in selling the asset.
    • Agricultural produce is measured at the point of harvest, at fair value less costs to sell at the point of harvest.
    • Agricultural produce after the point of harvest/ detachment is transferred and treated under the IAS 2 Inventory

    Gains & Losses

    • Gains and losses arising from the initial recognition of biological assets are reported in the statement of profit and loss.
    • The change in fair value less costs to sell of a biological asset between balance sheet dates is reported as gain or loss in the statement of profit and loss.
    • A gain or loss arising on initial recognition of agricultural produce at fair value less selling costs is included in profit or loss for the period in which it arises.

    Treatment

    • The sale of agricultural produce is treated as revenue in the statement of profit and loss.
    • Agricultural produce to be harvested for more than 12 months, livestock to be held for more than 12 months and trees cultivated for lumber are recorded as Biological assets under the Non-current assets head in the balance sheet.
    • Agricultural produce to be harvested within 12 months, livestock to be slaughtered within 12 months and annual crops like wheat, and maize are recorded as Biological assets under the head Current assets in the balance sheet.
    • Inventories produced from agricultural produce are presented as Inventory under the head Current assets in the balance sheet.

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Aadil
AadilCurious
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  2. Aditi
    This answer was edited.

    Deferred Tax Liability A deferred tax liability represents an obligation to pay taxes in the future. These taxes are owed by a company but are not due to be paid until a future date. Companies that incur such an obligation prepare and maintain two financial reports every year: a tax statement and anRead more

    Deferred Tax Liability

    A deferred tax liability represents an obligation to pay taxes in the future. These taxes are owed by a company but are not due to be paid until a future date.

    Companies that incur such an obligation prepare and maintain two financial reports every year: a tax statement and an income statement.

    This is because companies maintain their books as per book accounting rules (GAAP/IFRS), but they have to pay taxes according to tax accounting rules, and they each have to follow their own guidelines.

    For example, a tax statement follows the cash basis of accounting, and an income statement follows the accrual basis of accounting.

    Companies calculate their profit as per the accounting rules as well as tax laws known as accounting income and taxable income, respectively. Some differences arise due to the application of different provisions of law.

    These temporary differences are accounted for, recognized, and carried forward in the books of accounts and create deferred tax.

     

    Example

    Here is an example of deferred tax liability.

    In the given example, tax as per income statement is 70,000, whereas as per tax statement it is 56,000. This temporary difference is termed as deferred tax liability of 14,000.

    When accounting income is more than taxable income, it creates Deferred Tax Liability. It will be adjusted in the books of accounts during one or more subsequent year(s).

     

     

    How Does it Arise?

    There are several instances under which a company creates a deferred tax liability. Some other instances are:

    Depreciation Methods

    • One of the most common reasons for deferred tax liability is when a company uses different depreciation methods in the Income and Tax Statement.
    • Assets are depreciated by calculating the straight-line method in the Income Statement, while the written-down value method is used in the Tax Statement.
    • Since the straight-line value method produces lower depreciation when compared to the WDV method, accounting income is temporarily higher than taxable income.
    • The company recognises deferred tax liability as this difference between accounting income and taxable income.

    Treatment of Revenue & Expenses

    • Deferred tax liability can also arise when there is a difference in the way revenue and expenses are treated in books of accounts.
    • As mentioned earlier, accounting rules follow the accrual basis of accounting while tax laws follow the cash basis of accounting.
    • Meaning in the tax statement, income and expenses are recorded when they are received or paid, not when they are incurred or realised.
    • This difference in the treatment of revenue and expenses creates deferred tax liability.

     

     

    Impact on Financial Statements

    Recognising deferred tax liability and its subsequent effect on the company’s financial statement is important as it simplifies the process of auditing and analysing financial reports.

    Balance Sheet

    • Deferred tax liabilities are recorded on the liability side of the balance sheet under non-current liabilities.

    Cash Flow Statement

    • The deferred tax liability is added back to the net income in calculating cash flow from operating activities to show the actual cash flow.
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Aadil
AadilCurious
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  2. Mehak
    This answer was edited.

    To understand why we do not record self-generated goodwill in accounting, let us first understand what goodwill is and its accounting treatment. What is Goodwill? Goodwill is an intangible asset of a business.  It represents the reputation and brand value of a business built over time. It is a valueRead more

    To understand why we do not record self-generated goodwill in accounting, let us first understand what goodwill is and its accounting treatment.

    What is Goodwill?

    Goodwill is an intangible asset of a business.  It represents the reputation and brand value of a business built over time. It is a value over and above the tangible assets of the business.

    Goodwill often arises when a business purchases another business and pays a premium, which means a price higher than the fair value of the business.

    Characteristics of Goodwill

    Goodwill has the following characteristics:

    1. It is an Intangible asset, meaning it has no physical existence and cannot be seen or touched.
    2. It is generally recognized during transactions in mergers and acquisitions.
    3. It is the value attributed to the brand value and reputation of the business.
    4. It adds value to a business beyond its tangible assets.

    Example of Goodwill

    Let us take an example to understand the concept of goodwill better.

    Suppose there is a company ABC Ltd. It is planning to acquire XYZ Ltd. The fair value of the assets of XYZ is calculated to be 600,000. However, ABC has agreed to pay a sum of 650,000 to acquire the company. This difference of 50,000 is goodwill.

    Impact on Financial Statements

    Goodwill is shown under the assets side of the Balance Sheet.

    What is self-generated goodwill?

    Self-generated goodwill in simple words means the positive reputation or trust that a business earns over time through their own hard work and decisions. It’s not something bought or inherited but something built from scratch internally, like a brand’s reputation, loyal customers, strong relationships, or unique ideas.

    For example, a small business that goes the extra mile to offer great customer service or always delivers high-quality products over the years will naturally build goodwill.

    It is also known as internally generated goodwill.

    Why do we not record sef-generated goodwill?

    Self-generated goodwill is not recorded in the financial statements because of the following reasons:

    1. Measurement may not be reliable: The measurement of self-generated goodwill is majorly based on the judgment of the managers. It is based on the value creation because of a good reputation or consumer base of the business, which might not be measured accurately.
    2. Conservatism principle: As per the conservatism principle, a business shall not overstate its assets or liabilities. However, self-generated goodwill might be overstated.
    3. Lack of market transaction: There is a lack of a market transaction that ensures verification of the value of goodwill as in the case of purchased goodwill.
    4. Manipulation: There are higher chances of manipulation of financial statements through self-generated goodwill.

    Conclusion

    On a concluding note, self-generated goodwill is something that adds real value to a business, but it’s not something that can easily be measured or captured in financial statements. Accounting is all about providing clear, reliable information, and including goodwill would make things murky and open to manipulation. Even though it doesn’t show up on the books, you can still see its effects in a company’s reputation and success. Maybe in the future, businesses will find a way to highlight it better, but for now, leaving it out helps keep financial reports honest and straightforward.

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Anushka Lalwani
Anushka Lalwani
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  2. Kajal

    All expenses whose benefits are received over the years or the expenses or losses that are to be written off over the years are classified as Deferred revenue expenses. It includes fictitious expenses like preliminary expenses, loss on issue of debentures, advertising expenses, loss due to unusual oRead more

    All expenses whose benefits are received over the years or the expenses or losses that are to be written off over the years are classified as Deferred revenue expenses. It includes fictitious expenses like preliminary expenses, loss on issue of debentures, advertising expenses, loss due to unusual occurrences like loss due to fire, theft, and research and development expenses, etc. 

     

    DEFERRED REVENUE EXPENSES

    There are certain expenses which are revenue in nature (i.e. expenses incurred to maintain the earning capacity of the firm and generate revenue) but whose benefits are received over a period of years generally between 3 to 7 years. It means its benefit is received not only in the current accounting period but over a few consecutive accounting periods.

    CHARACTERISTICS

    • Revenue in nature
    • Benefits received for more than one accounting period.
    • Huge expenditure (large amount is involved)
    • Affects the profitability of the business (since a large amount is involved if charged in the same accounting period, then it will decrease the profitability for the year)
    • Written off over the years either partially or entirely.
    • Fictitious asset It doesn’t result in the creation of any asset but is shown as an asset (fictitious asset) on the Balance Sheet till fully written off.

     

    EXAMPLES

     

    ADVERTISING EXPENSES refers to the expenses incurred for promoting the goods or services of the firm through various channels like TV, Social media, Hoardings, etc.

    As the benefit of advertising is not received not only in the period when such expenses were incurred but also in the coming few years, it is classified as Deferred revenue expense.

    For example – Suppose the company incurred $10 lakh on advertising to introduce a new product in the market and estimated that its benefit will last for 4 years. In this case, $250,000 will be written off every year, for 4 consecutive years.

     

    EXCEPTIONAL LOSSES are losses that are incurred because of some unusual event and don’t happen regularly like loss from fire, theft, earthquake, flood or any other natural disaster, confiscation of property, etc.

    Since these losses can’t be written off in the year they occurred they are also treated as Deferred revenue expenditure and are written off over the years.

     

    RESEARCH AND DEVELOPMENT EXPENSES are expenses incurred on researching and developing new products or improving the existing ones. Its benefits are received for many years and thus are classified as Deferred revenue expenses.

    For example – Expenses incurred on the creation of intangible assets like patents, copyrights, etc.

     

    PRELIMINARY EXPENSES are those expenses which are incurred before the incorporation and commencement of the business. It includes legal fees, registration fees, stamp duty, printing expenses, etc.

    These expenses are fictitious assets and are written off over the years.

     

    TREATMENT

    It is debited to the P&L amount (amount written off that year) and the remaining amount on the Aeest side of the Balance Sheet.

    In the above example of advertising expenses, in Year 1, $250,000 will be debited in the P&L A/c and the remaining amount of $750,000 is shown on the Asset side of the Balance Sheet.

    In Year 2, $250,00 in P&L A/c and the remaining $500,000 in Balance Sheet.

    In Year 3, $250,000 in P&L A/c and the remaining $250,000 in the Balance Sheet and in the last Year 4, only the remaining amount of $250,000 in P&L A/c and nothing in the Balance Sheet.

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Anushka Lalwani
Anushka Lalwani
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  2. Saurav

    Brands can be considered as an Intangible asset as they are a long-term investment done by the company and it gives benefit to an entity in future periods. Like any other intangible asset, brands require long-term investment and will pay over time. Like any other asset, these brands can be bought anRead more

    Brands can be considered as an Intangible asset as they are a long-term investment done by the company and it gives benefit to an entity in future periods.

    Like any other intangible asset, brands require long-term investment and will pay over time. Like any other asset, these brands can be bought and sold. Brands are best used when they serve the vision and mission of the company.

    So, we can definitely consider an organization brand as an intangible as it is expected to increase sales volume in the future period.

    Further, we can understand both terms to get a deep understanding-

     

    BRAND

    Brand means a product, or service which has a unique identification and can be distinct from other products in the market. Branding is a process by which expenditure is incurred by an entity to create awareness towards the product in the customer’s eyes.

    For example- Maggie, Coca-Cola, BMW

    Brands can be created through these elements-

    • Design
    • Packaging
    • Advertisement

     

    INTANGIBLE ASSETS

    Intangible asset are assets that can’t be seen or touched but the benefit of it occur in future periods for the entity. Even though intangible assets have no physical form but their benefits will accrue in future years. Businesses commonly hold intangible assets. Intangible assets can be further bifurcated in

    Definite– Intangible assets that stay and give benefit for a limited or specific period of time covered under this

    For example- An agreement is entered with an entity to patent a product for 5 years so this will stay for a definite period only

    Indefinite– Intangible assets that stay and  give benefit for an unlimited  period of time covered under this

    For example- A brand which is made by an entity will stay for an indefinite period

    Intangible assets can be in various forms these are the following –

    Trademark– A trademark is a sign, design, and expression that distinguish the company’s product or services from other company. Trademark is considered an Intellectual Property Right.

    Goodwill– Goodwill refers to the value of the company that the company gets from its brand, customer base, and brand Reputation associated with its intellectual property.

    Patents– A patent refers to a right reserved for a product exclusively by a person or entity. Under this the right of such making of the product gets reserved by the company and other person or entity can’t make this product.

    Copyright– Copyright refers to an intellectual property right that protects the work of the original owner from being copied by some other person.

    Brand– Brand means a product, or service that has a unique identification and can be distinct from other products in market

    So, we can definitely consider that brand is a subpart of an intangible asset and can be considered as an intangible asset as it also can’t be touched or seen. Still, its benefit will accrue till future time. These both help an entity to grow its business till the future

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Simerpreet
SimerpreetHelpful
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  2. Karishma

    Realisation account  A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more

    Realisation account 

    A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.

    All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.

    If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.

    The debit side of the realisation account

    All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.

    • Assets: All the assets including Land and building, Plant and machinery, Furniture, Stock,  sundry debtors, and investments are transferred to the debit side of the realisation account. The debit balance of profit and loss balance is not transferred.
      • Accounting entry for this is as follows:

    Realisation A/c Dr…..

    To Assets A/c …..

    (All the assets transferred to the realisation account)

    • Cash and bank A/c: Payment for the liabilities including sundry creditors, outstanding expenses, bills payable, loans and advances, bank overdrafts and cash credit is transferred to the debit side of the realisation account.
      • Accounting entry for this is as follows:

    Realisation A/c Dr…..

    To Cash A/c …..

    (Payment made for liabilities)

    • Profit on realisation: If the credit side of the realisation account exceeds the debit side, it results in a profit then the capital account is credited.
      • Accounting entry for this is as follows:

    Realisation A/c Dr…..

    To Capital A/c …..

    (Being profit transferred to the capital account)

    Credit side of realisation account:

    All the liabilities and provisions are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred. Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.

    Format for realisation Account is as under:

    Realisation A/c
    Particulars Amount Particulars Amount
    To Land & Building By Provision for Doubtful Debts A/c
    To Plant & Machinery By Sundry Creditors A/c
    To Furniture By Bills Payable A/c
    To Debtors By Outstanding Expenses A/c
    To Goodwill A/c By Bank Loan, Overdraft, Cash Credit A/c
    To Investment A/c By Bank/ Cash A/c (Assets realized):
    To Bank/ Cash A/c (Liabilities Paid): Land and Building
    Sundry Creditors Plant and Machinery
    Bill Payable Furniture
    Outstanding Expenses Stock
    Bank Loan, Debtors
    Overdraft, Bad Debts recovered
    Cash Credit Investment
    To Bank/ Cash A/c By  Capital A/cs
    (Realisation Expenses) (assets taken over)
    To Capital A/c By Capital A/cs
    (Realisation Expenses) (Loss on Realisation)
    To Capital A/cs
    (Profit on Realisation)
    Total Total
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Simerpreet
SimerpreetHelpful
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  2. Kajal
    This answer was edited.

    The Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities thatRead more

    The Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities that are to be paid are recorded in the Realisation A/c.

     

    DISSOLUTION OF PARTNERSHIP FIRM

    It means the firm closes down its business and comes to an end. Simply, it means the firm will cease to exist in the future. As the firm is closing down, it will sell all its assets to realise all the value blocked in the assets, it is liable to pay off all of its liabilities whether due now or on some future date, and the remaining amount (if any) is distributed among the partners.

     

    REALISATION ACCOUNT

    This account is prepared only once, at the time of dissolution of the Partnership firm. It is opened to dispose of all the assets of the firm and make payments to all the external creditors of the firm.

    It ascertains the profit earned or loss incurred on the realisation of assets and payment of liabilities.

    The Realisation account is a NOMINAL ACCOUNT (Debit all expenses and losses, Credit all incomes and gains)

     

    ITEMS RECORDED IN THE REALISATION ACCOUNT

    DEBIT SIDE OF REALISATION ACCOUNT

    1. TRANSFER OF ASSETS

    Assets are any property or the possession of the business enterprise that allows it to get cash or any other benefit in the future.

    Since all assets are sold at the time of the dissolution, all assets that can be converted into cash are transferred to the  Debit side of the Realisation A/c at their book values.

    Such as Plant & Machinery, Building, Debtors, etc.

    EXCEPTIONS

    • Cash and Bank balances (as already in the most liquid form)
    • Fictitious assets ( Don’t have any realisable value)

     

    NOTE – If there is any provision against any asset, such as ‘Provisions for Bad debts’ or ‘Provision for Depreciation, then such assets are transferred to the Debit side of the Realisation A/c at its gross value and the Provision is transferred to the Credit side of the Realisation A/c.

    For example – Suppose there are Debtors of $50,000 and the Provision for Doubtful Debts is $2,000.

    Then, Debtors will be recorded on the Debit side with a value of $50,000 and the Provision for Doubtful Debt on the Credit side with the amount of $2,000.

     

    2. PAYMENT OF LIABILITIES

    All liabilities are either paid in cash or the Partner agrees to pay for some liabilities. Since they are expenses, they are recorded on the debit side of the Realisation A/c as “Debit all expenses and Losses”

     

    3. PROFIT ON REALISATION

    There is profit when Cr. side > Dr. side, as it means incomes are more than the payments made. This profit is distributed among the partners.

     

    CREDIT SIDE OF THE REALISATION ACCOUNT

     

    1. TRANSFER OF LIABILITIES

    Liabilities refer to the amount owed by the firm to outsiders. All liabilities must be paid off before accounts are closed. So, all external liabilities are transferred to the Credit side of the Realisation account, to make their payment.

    Such as creditors, bills payable, loans, outstanding expenses, partner’s wife’s loan, etc.

    EXCEPTION (not included)

    • Partner’s loan (internal liability and a separate account is created for it)
    • Undistributed Profits (like General reserve, Credit balance of P&L A/c, etc. because they belong to partners and are distributed among them. Also, they can’t be sold)

     

    2. SALE OF ASSETS

    Assets can be sold for cash or taken by the Partner. The amount received from the sale of assets is recorded on the credit side of the Realisation account as “Credit all incomes and gains”.

    Also, if any asset is given to the creditors in part or full payment of his dues, then the agreed amount is deducted from the creditor’s claim and no other entry is passed.

     

    3. LOSS ON REALISATION:

    There is a loss, if the Dr. side> Cr. side, which means Expenses > Incomes. This loss is also distributed among the Partners.

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