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.
When a manager provides services to a company, he is expected to receive some kind of compensation. This is given in the form of managerial remuneration. Section 197 of the Companies Act allows a maximum remuneration of 11% of the net profit of the company to the directors, managing directors and whRead more
When a manager provides services to a company, he is expected to receive some kind of compensation. This is given in the form of managerial remuneration. Section 197 of the Companies Act allows a maximum remuneration of 11% of the net profit of the company to the directors, managing directors and whole-time directors etc. This section is applicable for public companies and not private companies
Yes, a company can pay managerial remuneration in case of inadequacy of profits or losses, provided they follow the condition in Schedule V of the Companies Act 2013.
Conditions
In order to pay remuneration while the company is at a loss, it has to comply with the following:
Pass a resolution at the board meeting
The company has not defaulted in payments to any Banks, non-convertible debenture holders or any secured creditors. But in case of default, the company has obtained prior approval from such creditors or banks before obtaining approval from their general meeting.
Ordinary resolution or special resolution (if the limit is exceeded)
The limit mentioned above refers to the maximum limit of Rs 60 lakhs when the effective capital is negative or less than Rs 5 Crore. Such remuneration can also only be paid if such a manager does not have any interest in the company and also possesses special knowledge and expertise along with a graduate-level qualification.
Effective capital is the aggregate of paid-up share capital, share premium, reserves and surplus, long term loans and deposits and after subtracting Investments, accumulated losses and preliminary expenses not written off.
Percentage of Remuneration
When the Company earns adequate profits, they are allowed to provide remuneration up to a certain per cent. The percentage of remuneration depends on whether the directors are working whole-time or part-time according to the Companies Act.
‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘sRead more
‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘surplus’ generally means the surplus amount in the profit and loss A/c or the operating surplus in case of a non-profit organisation, reserves are of many types:
Revenue reserve
Specific reserves
Reserves created from shareholder’s contribution
Capital reserve
Secret reserves
Let’s discuss each of the above:
Revenue reserves:
Revenue reserve has two different definitions.
First – Revenue reserves are the reserves that are created out of the profit made by an enterprise in the ordinary course of business. As per this definition, the examples of revenue reserves are:
General reserve: There is no restriction on the purpose for which this reserve can be used. It is a free reserve. Generally, this reserve is used to pay dividends.
Debenture Redemption Reserve: This reserve is mandatory to be created by law. The purpose is to ensure the timely redemption of debentures.
Dividend Equalisation Reserve: This reserve is created to maintain a steady rate of dividend every year even if the enterprise reports loss in any financial year.
Capital Redemption Reserve: This reserve can be solely used to issue bonus shares to fill the void created in total capital by redemption of preference shares.
Workmen Compensation Reserve: This reserve is created to pay for uncertain compensation that an enterprise may be liable to pay to its employees.
Investment Fluctuation Reserve: This reserve is created out of the profit of
Second: Revenue reserve is a reserve from which can be used to any use. It can be the payment of dividends, creation of other reserves or reinvestment in the business. It is another name for general reserve.
Specific reserves
These are the reserves that are restricted to specific purposes only. These reserves are not free reserves i.e. dividends cannot be declared out of these reserves. However, if in case such reserve is not a statutory reserve, an enterprise can very well use such reserves for other purposes too. Specific reserves can be further classified into two types:
Statutory specific reserves: These are reserves that are mandatory to be created to comply with legal provisions applicable to an enterprise. Use of such reserves is restricted to some specific purposes.
If such reserves are not created whenever applicable or if the amount in such reserves is used for a purpose other than the purpose for which it is created, the enterprise can invite face legal consequences. The examples of statutory reserves are as follows:
Capital Redemption Reserve
Debenture Redemption Reserve
Securities Premium Reserve
Non – Statutory specific reserves: It is not mandatory to create such reserves. They are created to meet with specific uncertainties of the future.
Workmen Compensation Reserve
Investment Fluctuation Reserve
Important Note: Statutory reserve in the context of insurance companies means the minimum amount of cash and marketable securities to be set aside to comply with legal requirements.
Reserves created from shareholder’s contribution
This is a reserve that is created out of a shareholder’s contribution. Securities premium reserve is the only such reserve that is created out of such shareholder’s contribution.
Securities Premium Reserve: It is a reserve that is created when securities of a company such as shares or debentures are issued at a premium. The share or debenture premium money is created for this reserve. The purposes of which this reserve may be used as per section 52 of the Companies Act, 2013 are as follows:
For the issue of fully paid bonus shares.
For meeting preliminary expenses incurred by the company
For meeting the expense, commission or discount allowed on the issue of securities of the company.
In providing premium payable on the redemption of preference shares.
For the purchase of its own shares or other securities under section 68.
Capital Reserve:
Capital reserve is a reserve that is created out of the profit made by an enterprise from its non-operating activities like
selling of capital assets(fixed assets) at a profit
buying a business at profit (where net assets acquired is more than the purchase consideration)
This reserve is used to finance long term projects of a company like buying or construction of fixed assets, writing off capital losses( selling of fixed assets at loss).
Secret Reserve:
A secret reserve is a reserve that exists but its existence is not shown in the balance sheet of an enterprise. An enterprise creates such reserves to hide from its competitor that it is in a better financial position than it appears in its balance sheet. Although the creation of secret reserves is prohibited by law, there are provisions for banking companies to create such reserves.
The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well. Amount tRead more
The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well.
Amount to any specific reserve is generally transferred from the Profit and Loss Appropriation Account.
Various specific reserves are:
Debenture Redemption Reserve
Debentures are debt instruments of a company and they have to be redeemed, that is, paid back after the expiry of the specified period. According to Accounting Standards, companies are required to set aside a specific amount in Debenture Redemption Reserve, when they are due for redemption.
Securities Premium Reserve
When shares or debentures are issued at a price higher than its book value/face value, the difference between the market value and book value is called Securities Premium. The amount of Securities Premium is transferred to Securities Premium Account. This amount is utilized to issue fully paid bonus shares, write off preliminary expenses, write off commission discounts, etc., to provide a premium on redemption of debentures.
Investment Fluctuation Reserve
The investments made by a company are subject to fluctuations in its market value. Company Law and Accounting Standards require companies to provide for such fluctuations by creating a reserve called Investment Fluctuation Reserve.
Dividend Equalisation Reserve
Companies are required to pay a dividend to their shareholders. It is often difficult for a company to maintain a consistent rate of dividend as the dividend paid is equivalent to the profit made by a company during the financial year which is not consistent. So, Dividend Equalisation Reserve is created to maintain a consistent rate of dividend on shares over time, in the event of both high and low profits.
When a company issues shares to shareholders at a price over the face value (at a premium), that amount is termed as securities premium. This amount is transferred to what we call the securities premium reserve. The company is required to maintain a separate reserve for securities premium. UtilizatiRead more
When a company issues shares to shareholders at a price over the face value (at a premium), that amount is termed as securities premium. This amount is transferred to what we call the securities premium reserve. The company is required to maintain a separate reserve for securities premium.
Utilization
Securities premium reserve can be used for the following reasons:
Issue of fully paid Bonus share capital.
To cover preliminary expenses of a company.
For funding the buy-back of securities.
Since it is not a free reserve, it can only be used for a few specific purposes. The amount received as securities premium cannot be used to transfer dividends to shareholders
Treatment
When a company issues shares at a premium, the securities premium reserve account is credited along with share capital as an increase in capital is credited according to the modern rule of accounting.
For example,
Sonly Ltd. issues 1,000 shares of $10 face value at $15. Here, the amount of premium would be $5 (15 – 10) per share. Therefore, the journal entry would show:
Bank a/c (15 x 1,000) Dr 15,000
To Share Capital (10 x 10,000) 10,000
To Securities Premium Reserve a/c (5 x 10,000) 5,000
From the above example, we can see that the company receives $15,000, but transfers $10,000 to share capital and the excess $5,000 to securities premium reserve.
In the balance sheet, this securities premium reserve is shown under the title “Equity and Liabilities” under the head ‘‘Reserves and Surplus”.
The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors. Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business. WriRead more
The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors.
Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business.
Written off means an expense, income, asset, liability is no more recorded in the books of accounts because they no longer hold relevance for the business.
When doubtful debts turn into bad debt, they are written off from the books after a stipulated time as they no longer seem recoverable.
If any cash is received against such bad debts that were written off, it is known as cash received against bad debts written off. Cash is received against bad debts usually when the debtor is declared insolvent and money is recovered from its estate.
Bad debts recovered are considered an income for the company as they were previously written off as a loss and any cash received against it is considered as income.
Journal entry for such situation is:
Cash or Bank A/c (Dr.)
To Bad Debts Recovered A/c
We debit the increase in assets, and since cash is coming into the business it is debited.
We credit the income, and since bad debts recovered is an income to the business it is credited.
The profits earned by a company are mainly divided into two parts: Dividend, and Retained Earnings The part of profit distributed to its shareholders is called a dividend. The part of the profit that the company holds for future expansion or diversification plans is called retained earnings. As theRead more
The profits earned by a company are mainly divided into two parts:
Dividend, and
Retained Earnings
The part of profit distributed to its shareholders is called a dividend. The part of the profit that the company holds for future expansion or diversification plans is called retained earnings.
As the name suggests, retained earnings are the profit that is retained in the company. Retained earnings can be used for various purposes:
To distribute as dividends to shareholders
Expansion of business
Diversification
For an expected merger or acquisition
As the profits of the company belong to shareholders, retained earnings are considered as profits re-invested in the company by the shareholders.
The formula to calculate the cost of retained earnings is:
(Expected dividend per share / Net proceeds) + growth rate
Expected dividend is the dividend an investor expects for his investment in the company’s shares based on the last year’s dividend, trends in the markets, and financial statements presented by the company.
Net proceeds is the market value of a share, that is, how much an investor would get if he sells his shares today.
Growth rate represents growth of company’s revenue, dividend from previous years in the form of a percentage.
The expected dividend per share is divided by net proceeds or the current selling price of the share, to find out the market value of retained earnings.
The growth rate is then added to the formula. It’s the rate at which the dividend grows in the company.
For example:
The net proceeds from share is Rs 100, expected dividend growth rate is 2% and expected dividend is 5.
Cost of retained earnings
= (Expected dividend per share / Net proceeds) + Growth rate
How government grants are treated in the books of accounts as per AS-12?
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:
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.
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.
See lessCan a company pay managerial remuneration in case of inadequate profit or loss?
When a manager provides services to a company, he is expected to receive some kind of compensation. This is given in the form of managerial remuneration. Section 197 of the Companies Act allows a maximum remuneration of 11% of the net profit of the company to the directors, managing directors and whRead more
When a manager provides services to a company, he is expected to receive some kind of compensation. This is given in the form of managerial remuneration. Section 197 of the Companies Act allows a maximum remuneration of 11% of the net profit of the company to the directors, managing directors and whole-time directors etc. This section is applicable for public companies and not private companies
Yes, a company can pay managerial remuneration in case of inadequacy of profits or losses, provided they follow the condition in Schedule V of the Companies Act 2013.
Conditions
In order to pay remuneration while the company is at a loss, it has to comply with the following:
The limit mentioned above refers to the maximum limit of Rs 60 lakhs when the effective capital is negative or less than Rs 5 Crore. Such remuneration can also only be paid if such a manager does not have any interest in the company and also possesses special knowledge and expertise along with a graduate-level qualification.
Effective capital is the aggregate of paid-up share capital, share premium, reserves and surplus, long term loans and deposits and after subtracting Investments, accumulated losses and preliminary expenses not written off.
Percentage of Remuneration
When the Company earns adequate profits, they are allowed to provide remuneration up to a certain per cent. The percentage of remuneration depends on whether the directors are working whole-time or part-time according to the Companies Act.
See lessCan you give types of reserves and surplus?
‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘sRead more
‘Reserve and surplus’ is a heading under ‘Equities and Liabilities’ in which various reserves and surplus of profit of an enterprise appear. Reserve are the amount set aside to meet with uncertainties of the future. They have credit balance as they are internal liabilities of an enterprise. While ‘surplus’ generally means the surplus amount in the profit and loss A/c or the operating surplus in case of a non-profit organisation, reserves are of many types:
Let’s discuss each of the above:
Revenue reserve has two different definitions.
First – Revenue reserves are the reserves that are created out of the profit made by an enterprise in the ordinary course of business. As per this definition, the examples of revenue reserves are:
Second: Revenue reserve is a reserve from which can be used to any use. It can be the payment of dividends, creation of other reserves or reinvestment in the business. It is another name for general reserve.
These are the reserves that are restricted to specific purposes only. These reserves are not free reserves i.e. dividends cannot be declared out of these reserves. However, if in case such reserve is not a statutory reserve, an enterprise can very well use such reserves for other purposes too. Specific reserves can be further classified into two types:
If such reserves are not created whenever applicable or if the amount in such reserves is used for a purpose other than the purpose for which it is created, the enterprise can invite face legal consequences. The examples of statutory reserves are as follows:
Important Note: Statutory reserve in the context of insurance companies means the minimum amount of cash and marketable securities to be set aside to comply with legal requirements.
This is a reserve that is created out of a shareholder’s contribution. Securities premium reserve is the only such reserve that is created out of such shareholder’s contribution.
Securities Premium Reserve: It is a reserve that is created when securities of a company such as shares or debentures are issued at a premium. The share or debenture premium money is created for this reserve. The purposes of which this reserve may be used as per section 52 of the Companies Act, 2013 are as follows:
Capital reserve is a reserve that is created out of the profit made by an enterprise from its non-operating activities like
This reserve is used to finance long term projects of a company like buying or construction of fixed assets, writing off capital losses( selling of fixed assets at loss).
A secret reserve is a reserve that exists but its existence is not shown in the balance sheet of an enterprise. An enterprise creates such reserves to hide from its competitor that it is in a better financial position than it appears in its balance sheet. Although the creation of secret reserves is prohibited by law, there are provisions for banking companies to create such reserves.
See lessWhat is an example of specific reserve?
The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well. Amount tRead more
The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well.
Amount to any specific reserve is generally transferred from the Profit and Loss Appropriation Account.
Various specific reserves are:
Debentures are debt instruments of a company and they have to be redeemed, that is, paid back after the expiry of the specified period. According to Accounting Standards, companies are required to set aside a specific amount in Debenture Redemption Reserve, when they are due for redemption.
When shares or debentures are issued at a price higher than its book value/face value, the difference between the market value and book value is called Securities Premium. The amount of Securities Premium is transferred to Securities Premium Account. This amount is utilized to issue fully paid bonus shares, write off preliminary expenses, write off commission discounts, etc., to provide a premium on redemption of debentures.
The investments made by a company are subject to fluctuations in its market value. Company Law and Accounting Standards require companies to provide for such fluctuations by creating a reserve called Investment Fluctuation Reserve.
Companies are required to pay a dividend to their shareholders. It is often difficult for a company to maintain a consistent rate of dividend as the dividend paid is equivalent to the profit made by a company during the financial year which is not consistent. So, Dividend Equalisation Reserve is created to maintain a consistent rate of dividend on shares over time, in the event of both high and low profits.
See lessWhat is securities premium reserve?
When a company issues shares to shareholders at a price over the face value (at a premium), that amount is termed as securities premium. This amount is transferred to what we call the securities premium reserve. The company is required to maintain a separate reserve for securities premium. UtilizatiRead more
When a company issues shares to shareholders at a price over the face value (at a premium), that amount is termed as securities premium. This amount is transferred to what we call the securities premium reserve. The company is required to maintain a separate reserve for securities premium.
Utilization
Securities premium reserve can be used for the following reasons:
Since it is not a free reserve, it can only be used for a few specific purposes. The amount received as securities premium cannot be used to transfer dividends to shareholders
Treatment
When a company issues shares at a premium, the securities premium reserve account is credited along with share capital as an increase in capital is credited according to the modern rule of accounting.
For example,
Sonly Ltd. issues 1,000 shares of $10 face value at $15. Here, the amount of premium would be $5 (15 – 10) per share. Therefore, the journal entry would show:
Bank a/c (15 x 1,000) Dr 15,000
To Share Capital (10 x 10,000) 10,000
To Securities Premium Reserve a/c (5 x 10,000) 5,000
From the above example, we can see that the company receives $15,000, but transfers $10,000 to share capital and the excess $5,000 to securities premium reserve.
In the balance sheet, this securities premium reserve is shown under the title “Equity and Liabilities” under the head ‘‘Reserves and Surplus”.
See lessReceived cash for a bad debt written off last year journal entry?
The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors. Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business. WriRead more
The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors.
Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business.
Written off means an expense, income, asset, liability is no more recorded in the books of accounts because they no longer hold relevance for the business.
When doubtful debts turn into bad debt, they are written off from the books after a stipulated time as they no longer seem recoverable.
If any cash is received against such bad debts that were written off, it is known as cash received against bad debts written off. Cash is received against bad debts usually when the debtor is declared insolvent and money is recovered from its estate.
Bad debts recovered are considered an income for the company as they were previously written off as a loss and any cash received against it is considered as income.
Journal entry for such situation is:
Cash or Bank A/c (Dr.)
To Bad Debts Recovered A/c
We debit the increase in assets, and since cash is coming into the business it is debited.
We credit the income, and since bad debts recovered is an income to the business it is credited.
See lessWhat is cost of retained earnings formula?
The profits earned by a company are mainly divided into two parts: Dividend, and Retained Earnings The part of profit distributed to its shareholders is called a dividend. The part of the profit that the company holds for future expansion or diversification plans is called retained earnings. As theRead more
The profits earned by a company are mainly divided into two parts:
The part of profit distributed to its shareholders is called a dividend. The part of the profit that the company holds for future expansion or diversification plans is called retained earnings.
As the name suggests, retained earnings are the profit that is retained in the company. Retained earnings can be used for various purposes:
As the profits of the company belong to shareholders, retained earnings are considered as profits re-invested in the company by the shareholders.
The formula to calculate the cost of retained earnings is:
(Expected dividend per share / Net proceeds) + growth rate
The expected dividend per share is divided by net proceeds or the current selling price of the share, to find out the market value of retained earnings.
The growth rate is then added to the formula. It’s the rate at which the dividend grows in the company.
For example:
The net proceeds from share is Rs 100, expected dividend growth rate is 2% and expected dividend is 5.
Cost of retained earnings
= (Expected dividend per share / Net proceeds) + Growth rate
= (5 / 100) + 0.02
= 0.07 or 7%
See less