Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company. Workmen Compensation Reserve Account is generally given effect in case of admiRead more
Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company.
Workmen Compensation Reserve Account is generally given effect in case of admission, retirement of partners or dissolution of firm.
If there is a change in the estimated value of reserve it is given effect during the revaluation of assets and liabilities.
Journal entry if the existing reserve is less than the new estimated amount:
Revaluation A/c (Dr)
To Workmen Compensation Reserve A/c
The reserve is credited because we need to create more than the existing reserve, since the new estimated liability is more than the existing.
Journal entry if the existing reserve is more than the new estimated amount:
Workmen Compensation Reserve A/c (Dr)
To Revaluation A/c
The reserve is debited because we need to decrease the existing reserve, since the new estimated liability is less than the existing.
If a worker claims compensation, it is said to be a liability against the reserve. In case of dissolution, any such liability against workmen compensation reserve takes priority to be paid off according to the law.
Journal entry in case of claim against reserve is:
Workmen Compensation Reserve A/c (Dr)
To Workmen Compensation Claim
The amount is transferred from the reserve to a new liability, hence the reserve is debited and the claim is credited.
If there are not sufficient funds in the firm to pay the liability, partners will have to bring funds from their personal assets to pay the workers.
Journal entry when partner’s have to bring funds:
Partner’s Capital Account (Dr)
To Workmen Compensation Reserve A/c
Partner’s need to bring funds to fulfill the liability, hence there account is debited and since the reserve is increased, hence it is credited.
If there is no liability against the Workmen Compensation Reserve then it is distributed amongst the partners in their existing profit-sharing ratio.
Journal entry for distribution of reserve is:
Workmen Compensation Reserve A/c (Dr)
To Partner’s Capital Account
Since, reserve is more than required it is distributed among partners, hence their account is credited and as the reserve decreases, it is debited.
When a company earns profit, it distributes a proportion of its income to its shareholders, and such distribution is called the dividend. The dividend is allocated as a fixed amount per share and shareholders receive dividends proportional to their shareholdings. However, a company can only pay diviRead more
When a company earns profit, it distributes a proportion of its income to its shareholders, and such distribution is called the dividend. The dividend is allocated as a fixed amount per share and shareholders receive dividends proportional to their shareholdings.
However, a company can only pay dividends out of its current year profits or retained earnings (profits of the company that are not distributed as dividend and retained in the business is called retained earnings) of previous years but not out of capital.
Dividends can be paid to shareholders in the form of
Cash
dividend re-investing plan of the company
future shares
share repurchase.
For companies, payment of regular dividends boosts the morale of the shareholders, investors trust the companies more and it reflects positively on the share price of the company.
For example, Nestle in India paid an interim dividend of 1100.00% to its shareholders in 2021.
The journal entry for dividend paid is
Particulars
Debit
Credit
Retained Earnings A/c                                                         Dr.
Amt
To Cash A/c
Amt
According to the golden rules of accounting-
Retained earnings is a credit account by nature and since dividends are paid from retained earnings resulting in a deduction of the account, we debit
Cash is credited because the account is debit in nature and since dividends are paid in cash it’s credited to present the deduction in the account.
According to modern rules of accounting-
Since cash is decreasing, we credit
Since retained earnings are decreasing and it is a part of capital it should be
For example-
A company paid a dividend of 25 crores to its shareholders in cash, the journal entry according to golden rules will be-
Working Capital is the capital used in the daily operations of the business. It is calculated as the difference between current assets and current liabilities. Gross working capital means current assets and net working capital means the difference between current assets and current liabilities. WorkRead more
Working Capital is the capital used in the daily operations of the business.It is calculated as the difference between current assets and current liabilities. Gross working capital means current assets and net working capital means the difference between current assets and current liabilities.
Working Capital indicates the short-term liquidity of its business. It means the ability of a company to meet its daily requirements through short-term financing.
Working Capital can be;
Positive
Zero, or
Negative
Positive or negative working capital follows a simple rule of math. If current assets are more than current liabilities, working capital is positive and if current assets are less than current liabilities, working capital is negative. When current assets are equal to current liabilities, working capital is zero.
Negative working capital for a short period means that the company has made a big payment to its vendors, or a significant increase in the creditor’s account because of credit purchases.
However, if working capital is negative for a longer period it indicates that the company is struggling with its operating requirements or that it has to finance its daily operations through long-term borrowings.
The current ratio for a company is calculated as:Â
Current Assets divided by Current Liabilities.
Working Capital and Current Ratio are interrelated. If the Current Ratio is more than 1, it means current assets exceed current liabilities and Working Capital is positive. However, if the Current Ratio is less than 1, it means current liabilities exceed current assets and Working Capital is negative.
For example-
If Current Assets are Rs 50,000 and Current Liabilities are Rs 70,000 then
Working Capital= Current Assets – Current Liabilities
WCÂ Â Â Â Â Â =Â Â Â Â Rs 70,000Â Â –Â Â Â Rs 50,000
WCÂ Â Â Â Â Â =Â Â Â Â Â Â Â Â Â Â Rs. 20,000
Current Ratio = Current Assets / Current Liabilities
Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company. Retained earnings are shown under shareholders’ equity in the balance sheet and are calculaRead more
Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company.
Retained earnings are shown under shareholders’ equity in the balance sheet and are calculated as follows: Retained earnings at the end of the year = Retained earnings at the beginning of the year + Net Income – Dividend
From the above formula, Yes, it is possible for retained earnings to be negative. Negative earnings occur when the cumulative dividend payout is higher than the earnings made by a company during the year. This results in a negative balance as per the formula.
Negative Retained earnings indicate a number of concerning facts about a company:
That the company is experiencing Long term losses.
That there are chances for the company to go into bankruptcy.
That the company may be paying out dividends to the shareholders from borrowed finance.
Positive Retained Earnings
When a company is said to have positive retained earnings, the company has several advantages. The company has excess profit to hold on to. This helps in expansion and also acts as a safety net in case of unforeseen expenses. Hence if a company shows positive Retained earnings it can be interpreted that the company is profitable.
However, higher retained earnings mean the distribution of lesser dividends to shareholders. This makes the company look less attractive to investors. Another reason for high retained earnings could be that the company has not found any profitable investment for its earnings.
Therefore, there should be adequate retained earnings with the company but at the same time, keep a check that the amount of retained earnings does not exceed a limit.
Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called. A company may issue its shares and receive the money either in full or in instalments. The instalments are named: Application money – Received by a compRead more
Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called.
A company may issue its shares and receive the money either in full or in instalments. The instalments are named:
Application money – Received by a company from the people who apply for allotment of the shares.
Allotment money – Called by the company from the people to whom the shares are allotted at the time of allotment.
Call money – The outstanding amount is called by way of call money in one or more instalments.
 For example, X Ltd issues 1000 shares at a price of Rs. 100 per share which is payable Rs. 25 at application, Rs. 30 at the allotment, Rs. 25 at the first call and Rs. 20 at the second and final call.
The shares at fully subscribed and X Ltd has called and received money till the first call. The second call is not made yet.
 This amount of Rs 20,000 (1000 x Rs.20) will be uncalled capital.
Now, It is up to the management when to make the second and final call.
If the management shows no intention of calling the outstanding money on such shares, then the uncalled capital will be called reserve capital.
Such shares which are not fully called are known as party paid shares.
It is ultimately payable to the company by the shareholders of partly paid shares at the time of dissolution.
Reserve capital is not shown either in the balance sheet or in the notes to accounts to the balance sheet. But one can ascertain it just by examining the notes to accounts to the balance. If the shares are partly paid and the management seems to have no intention of calling the outstanding money then such uncalled share capital is reserve capital.
Reserve capital is neither a liability nor an asset for the company.
But at the time of winding up of the company, it becomes a liability for the shareholders to pay the balance amount of their shares.
By now, you must have understood why reserve capital is not part of unsubscribed capital. It is because reserve capital is related to shares that are issued and subscribed.
A revenue reserve is a type of reserve where a portion of the net profit is set aside for future requirements. It serves as a great source of internal finance for the company to meet its short term requirements. The funds put into this reserve are earned from the daily operations of a company. RevenRead more
A revenue reserve is a type of reserve where a portion of the net profit is set aside for future requirements. It serves as a great source of internal finance for the company to meet its short term requirements. The funds put into this reserve are earned from the daily operations of a company. Revenue reserves are shown on the liabilities side of a balance sheet under reserves and surplus. Some examples of revenue reserve are :
General Reserve: This reserve is used for no specific purpose, but the general financial growth of the company. It is a free reserve which means the company is not compelled to make one. It helps to curb future losses which may arise in the future.
Specific Reserve: These are those reserves that can only be used for specific purposes. This money cannot be used for any other requirement. It is not a free reserve. A reserve created to redeem debentures would be called a debenture redemption reserve.
Secret Reserve: This is a type of reserve whose existence is not disclosed in the balance sheet. This type of reserve cannot be created by joint-stock companies. However, banks and financial institutions are allowed to create such secret reserves.
Retained Earnings is that part of the net profit which is left after the distribution of dividends to shareholders. This amount can be invested in the company to gain profits. It is not technically a reserve as it is held after distribution of dividends but it can still be used as one.
On the other hand, a capital reserve is not a part of the revenue reserve. It is created from capital profits to finance long term projects of a company. It is used for specific purposes only.
Profits earned by a firm are not completely distributed to its owners, some of the profits are retained for various purposes. Reserves are profits that are apportioned or set aside to use in the future for a specific or general purpose. Reserves follow the Conservative Principle of accounting. ReveRead more
Profits earned by a firm are not completely distributed to its owners, some of the profits are retained for various purposes. Reserves are profits that are apportioned or set aside to use in the future for a specific or general purpose. Reserves follow the Conservative Principle of accounting.Â
Revenue reserve is created from the net profits of a company during a financial year. Revenue reserve is created from revenue profit that a company earns from the daily operations of the business.
Various types of reserves are:
Capital Redemption Reserve: It is created to issue fully paid bonus shares or reduction of capital in accordance with Article 3 of the Companies Act, 2013.
General Reserve: It is a reserve created to provide for various requirements of the company from time to time.
Debenture Redemption Reserve: It is required by the Companies Act, 2013 to transfer the amount of debentures that are going to be redeemed in the following year to minimize the risk of default.
Securities Premium Reserve: When shares and debentures are issued at a price higher than the book value, then such higher amount is transferred to Securities Premium Reserve
Revaluation Reserve: It is created to revalue the assets and liabilities and provide for gain or loss.
Different parts of profit are apportioned to create a different reserve and those reserves can only be used for purposes as defined.
While accounting for Revenue Reserve, the profit decided to transfer to Revenue Reserve are first transferred to Profit and Loss Appropriation Account and then to Revenue Reserve Account. In the balance sheet, Revenue Account is shown under the Capital and Reserves head.
Liabilities
Amount
Amount
Share Capital
Reserve and Surplus
General Reserve
Capital Redemption Reserve
Securities Premium Account
Profit and Loss Account
Uses of Revenue Reserve:
Revenue Reserves are created to expand business or for meeting contingencies that may arise in the future.
It can also be used to distribute dividends or bonus shares to its shareholders.
Example:
Given that Revenue Reserve Account stands at Rs 1,00,000 and the company wants to distribute Rs. 40,000 as dividend to its shareholders. The treatment of this transaction in the financial statements will be-
Particulars                                                              Amount (Rs.)
Revenue Reserve Account                                                  1,00,000
(less) Dividend distributed                                                  (40,000)
The amount shown in Balance Sheet                                          60,000
What is a workmen compensation reserve?
Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company. Workmen Compensation Reserve Account is generally given effect in case of admiRead more
Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company.
Workmen Compensation Reserve Account is generally given effect in case of admission, retirement of partners or dissolution of firm.
If there is a change in the estimated value of reserve it is given effect during the revaluation of assets and liabilities.
Journal entry if the existing reserve is less than the new estimated amount:
Revaluation A/c (Dr)
To Workmen Compensation Reserve A/c
The reserve is credited because we need to create more than the existing reserve, since the new estimated liability is more than the existing.
Journal entry if the existing reserve is more than the new estimated amount:
Workmen Compensation Reserve A/c (Dr)
To Revaluation A/c
The reserve is debited because we need to decrease the existing reserve, since the new estimated liability is less than the existing.
If a worker claims compensation, it is said to be a liability against the reserve. In case of dissolution, any such liability against workmen compensation reserve takes priority to be paid off according to the law.
Journal entry in case of claim against reserve is:
Workmen Compensation Reserve A/c (Dr)
To Workmen Compensation Claim
The amount is transferred from the reserve to a new liability, hence the reserve is debited and the claim is credited.
If there are not sufficient funds in the firm to pay the liability, partners will have to bring funds from their personal assets to pay the workers.
Journal entry when partner’s have to bring funds:
Partner’s Capital Account (Dr)
To Workmen Compensation Reserve A/c
Partner’s need to bring funds to fulfill the liability, hence there account is debited and since the reserve is increased, hence it is credited.
If there is no liability against the Workmen Compensation Reserve then it is distributed amongst the partners in their existing profit-sharing ratio.
Journal entry for distribution of reserve is:
Workmen Compensation Reserve A/c (Dr)
To Partner’s Capital Account
Since, reserve is more than required it is distributed among partners, hence their account is credited and as the reserve decreases, it is debited.
See lessWhat is dividend paid journal entry?
When a company earns profit, it distributes a proportion of its income to its shareholders, and such distribution is called the dividend. The dividend is allocated as a fixed amount per share and shareholders receive dividends proportional to their shareholdings. However, a company can only pay diviRead more
When a company earns profit, it distributes a proportion of its income to its shareholders, and such distribution is called the dividend. The dividend is allocated as a fixed amount per share and shareholders receive dividends proportional to their shareholdings.
However, a company can only pay dividends out of its current year profits or retained earnings (profits of the company that are not distributed as dividend and retained in the business is called retained earnings) of previous years but not out of capital.
Dividends can be paid to shareholders in the form of
For companies, payment of regular dividends boosts the morale of the shareholders, investors trust the companies more and it reflects positively on the share price of the company.
For example, Nestle in India paid an interim dividend of 1100.00% to its shareholders in 2021.
The journal entry for dividend paid is
According to the golden rules of accounting-
According to modern rules of accounting-
For example-
A company paid a dividend of 25 crores to its shareholders in cash, the journal entry according to golden rules will be-
(in crores)
(in crores)
See lessCan working capital be negative?
Working Capital is the capital used in the daily operations of the business. It is calculated as the difference between current assets and current liabilities. Gross working capital means current assets and net working capital means the difference between current assets and current liabilities. WorkRead more
Working Capital is the capital used in the daily operations of the business. It is calculated as the difference between current assets and current liabilities. Gross working capital means current assets and net working capital means the difference between current assets and current liabilities.
Working Capital indicates the short-term liquidity of its business. It means the ability of a company to meet its daily requirements through short-term financing.
Working Capital can be;
Positive or negative working capital follows a simple rule of math. If current assets are more than current liabilities, working capital is positive and if current assets are less than current liabilities, working capital is negative. When current assets are equal to current liabilities, working capital is zero.
Negative working capital for a short period means that the company has made a big payment to its vendors, or a significant increase in the creditor’s account because of credit purchases.
However, if working capital is negative for a longer period it indicates that the company is struggling with its operating requirements or that it has to finance its daily operations through long-term borrowings.
The current ratio for a company is calculated as:Â
Current Assets divided by Current Liabilities.
Working Capital and Current Ratio are interrelated. If the Current Ratio is more than 1, it means current assets exceed current liabilities and Working Capital is positive. However, if the Current Ratio is less than 1, it means current liabilities exceed current assets and Working Capital is negative.
For example-
If Current Assets are Rs 50,000 and Current Liabilities are Rs 70,000 then
Working Capital= Current Assets – Current Liabilities
WCÂ Â Â Â Â Â =Â Â Â Â Rs 70,000Â Â –Â Â Â Rs 50,000
WCÂ Â Â Â Â Â =Â Â Â Â Â Â Â Â Â Â Rs. 20,000
Current Ratio = Current Assets / Current Liabilities
CRÂ Â Â Â =Â Â Â Â Â Rs.50,000/ Rs. 70,000
CRÂ Â Â Â =Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.71< 1
See lessCan retained earnings be negative?
Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company. Retained earnings are shown under shareholders’ equity in the balance sheet and are calculaRead more
Retained Earnings refer to the total net profits left with the company after deduction of all dividends. This amount is a source of internal finance and can be used for the growth or expansion of the company.
Retained earnings are shown under shareholders’ equity in the balance sheet and are calculated as follows:
Retained earnings at the end of the year = Retained earnings at the beginning of the year + Net Income – Dividend
From the above formula, Yes, it is possible for retained earnings to be negative. Negative earnings occur when the cumulative dividend payout is higher than the earnings made by a company during the year. This results in a negative balance as per the formula.
Negative Retained earnings indicate a number of concerning facts about a company:
Positive Retained Earnings
When a company is said to have positive retained earnings, the company has several advantages. The company has excess profit to hold on to. This helps in expansion and also acts as a safety net in case of unforeseen expenses. Hence if a company shows positive Retained earnings it can be interpreted that the company is profitable.
However, higher retained earnings mean the distribution of lesser dividends to shareholders. This makes the company look less attractive to investors. Another reason for high retained earnings could be that the company has not found any profitable investment for its earnings.
Therefore, there should be adequate retained earnings with the company but at the same time, keep a check that the amount of retained earnings does not exceed a limit.
See lessIs ‘Reserve Capital’ a Part of ‘Unsubscribed Capital’ or ‘Uncalled Capital’?
Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called. A company may issue its shares and receive the money either in full or in instalments. The instalments are named: Application money – Received by a compRead more
Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called.
A company may issue its shares and receive the money either in full or in instalments. The instalments are named:
 For example, X Ltd issues 1000 shares at a price of Rs. 100 per share which is payable Rs. 25 at application, Rs. 30 at the allotment, Rs. 25 at the first call and Rs. 20 at the second and final call.
The shares at fully subscribed and X Ltd has called and received money till the first call. The second call is not made yet.
 This amount of Rs 20,000 (1000 x Rs.20) will be uncalled capital.
Now, It is up to the management when to make the second and final call.
If the management shows no intention of calling the outstanding money on such shares, then the uncalled capital will be called reserve capital.
Such shares which are not fully called are known as party paid shares.
It is ultimately payable to the company by the shareholders of partly paid shares at the time of dissolution.
Reserve capital is not shown either in the balance sheet or in the notes to accounts to the balance sheet. But one can ascertain it just by examining the notes to accounts to the balance. If the shares are partly paid and the management seems to have no intention of calling the outstanding money then such uncalled share capital is reserve capital.
Reserve capital is neither a liability nor an asset for the company.
But at the time of winding up of the company, it becomes a liability for the shareholders to pay the balance amount of their shares.
By now, you must have understood why reserve capital is not part of unsubscribed capital. It is because reserve capital is related to shares that are issued and subscribed.
See lessWhat is example of revenue reserve?
A revenue reserve is a type of reserve where a portion of the net profit is set aside for future requirements. It serves as a great source of internal finance for the company to meet its short term requirements. The funds put into this reserve are earned from the daily operations of a company. RevenRead more
A revenue reserve is a type of reserve where a portion of the net profit is set aside for future requirements. It serves as a great source of internal finance for the company to meet its short term requirements. The funds put into this reserve are earned from the daily operations of a company. Revenue reserves are shown on the liabilities side of a balance sheet under reserves and surplus. Some examples of revenue reserve are :
Retained Earnings is that part of the net profit which is left after the distribution of dividends to shareholders. This amount can be invested in the company to gain profits. It is not technically a reserve as it is held after distribution of dividends but it can still be used as one.
On the other hand, a capital reserve is not a part of the revenue reserve. It is created from capital profits to finance long term projects of a company. It is used for specific purposes only.
See lessWhat is revenue reserve?
Profits earned by a firm are not completely distributed to its owners, some of the profits are retained for various purposes. Reserves are profits that are apportioned or set aside to use in the future for a specific or general purpose. Reserves follow the Conservative Principle of accounting. ReveRead more
Profits earned by a firm are not completely distributed to its owners, some of the profits are retained for various purposes. Reserves are profits that are apportioned or set aside to use in the future for a specific or general purpose. Reserves follow the Conservative Principle of accounting.Â
Revenue reserve is created from the net profits of a company during a financial year. Revenue reserve is created from revenue profit that a company earns from the daily operations of the business.
Various types of reserves are:
Different parts of profit are apportioned to create a different reserve and those reserves can only be used for purposes as defined.
While accounting for Revenue Reserve, the profit decided to transfer to Revenue Reserve are first transferred to Profit and Loss Appropriation Account and then to Revenue Reserve Account. In the balance sheet, Revenue Account is shown under the Capital and Reserves head.
Uses of Revenue Reserve:
Example:
Given that Revenue Reserve Account stands at Rs 1,00,000 and the company wants to distribute Rs. 40,000 as dividend to its shareholders. The treatment of this transaction in the financial statements will be-
Particulars                                                              Amount (Rs.)
Revenue Reserve Account                                                  1,00,000
(less) Dividend distributed                                                  (40,000)
The amount shown in Balance Sheet                                          60,000
See less