The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months. The current ratio is calculated using two standard figures thatRead more
The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months.
The current ratio is calculated using two standard figures that are shown in the company’s balance sheet: current assets and current liabilities. The formula for the same goes as:
Current ratio = Current Assets / Current Liabilities
A current ratio of 2:1 is considered ideal. Generally, a ratio between 1.5 to 2 is considered beneficial for the business, which means that the company has more financial resources (Current Assets) to cover its short-term debt (Current Liabilities).
A high current ratio may indicate that the business is having difficulties managing its capital efficiently to generate profits.
On the other hand, a lower current ratio (especially lower than 1) would signify that the company’s current liabilities exceed its current assets and the business may have difficulty covering its short-term debt. Although the definition of a good current ratio may vary in the different industry groups.
Example- Where,
1) CR is 2:1, the company is in a good situation as it has double the Current Assets in order to cover the short-term debt.
2) CR is 0.5:1, the company is not in a good situation as it has only half the Current Assets in order to cover the short-term debt.
Let us assume that we are discussing Input Tax Credit in GST of India. Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can claim credit and use it to reduce its tax liability when it makes a sale. In other words, it means at the time of paying tax on output (Final sRead more
Let us assume that we are discussing Input Tax Credit in GST of India.
Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can claim credit and use it to reduce its tax liability when it makes a sale. In other words, it means at the time of paying tax on output (Final sale product), you can reduce the tax you have already paid on inputs (Purchase).
Example For a manufacturer, tax payable on output (Final product) is Rs 500 and tax paid on input A is Rs 100, input B is Rs 50 and, input C is Rs50. You can claim INPUT CREDIT of Rs 200(100+50+50) and you only need to deposit Rs 300(500-200) in taxes.
Conditions- Only a Registered Person would be able to claim the benefit of Input Tax Credit of GST after satisfying the following:
He is in possession of a Tax Invoice or any other specified tax-paid document.
He has received the goods or services. Includes “Bill to ship” scenarios.
Tax is actually paid by the supplier.
The supplier has furnished the GST Return.
To claim ITC, the buyer should pay the supplier for the supplies received (inclusive of tax) within 180 days from the date of issuing the invoice.
Claiming of ITC – Discussed by taking an example, seller A sold his goods to B. Now B who is a buyer will be eligible to claim the input tax credit on purchases based on the invoices when he makes further sales. Now,
S will upload the details of all the tax invoices in GSTR 1.
All the details in accordance with the sales to B will reflect in GSTR 2A, and the same data will be taken by B to file GSTR 2 (i.e. details of inward supply).
B will accept the details about the purchase that has been made and uploaded by the seller, the tax on purchases will be credited to ‘Electronic Credit Ledger’ of B and he can adjust it against future output tax liability and get the refund.
Order of Liquidity Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so onRead more
Order of Liquidity
Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so on and further. In the end, we will write goodwill.
Liabilities are presented based on the order of urgency of payment. On the liabilities side, we start from short-term liabilities for example outstanding expenses, creditors and bill payable, and so on. In the end, we write capital adjusted with net profit and drawings if any.
This approach is generally used by sole traders and partnerships firms. The following is the format of Balance sheet in order of liquidity:
Order of Permanence
Under this method, while preparing a balance sheet by a company assets are listed according to their permanency. Permanent assets are shown at first and then less permanent assets are shown afterward. On the assets side of the balance sheet starts with more fixed and permanent assets i.e. it begins with goodwill, building, machinery, furniture, then investments and ends with cash in hand as the last item.
The fixed or long-term liabilities are shown first under the order of permanence method, and the current liabilities are listed afterward. On the liabilities side, we start from capital, Reserve and surplus, Long term loans and end with outstanding expenses.
The following is the format of the Balance sheet in order of permanence:
Such order or arrangement of balance sheet items are refer as ‘Marshalling of Balance Sheet’.
No, capital account is not a real account. Capital account represents the amount of money invested by the owner/owners of the business along with the retained earnings net of drawings or dividends. Capital account has a natural credit balance because it is an internal liability of the business. CapiRead more
No, capital account is not a real account.
Capital account represents the amount of money invested by the owner/owners of the business along with the retained earnings net of drawings or dividends. Capital account has a natural credit balance because it is an internal liability of the business.
Capital account is a personal account because, as discussed above, it represents the investment of the owner or owners. Personal account represents person or persons.
Whereas a real account represents the material assets of a business. Example:- Cash A/c, Fixed assets A/c etc. That’s why the capital account is not a real account.
Being a personal account, the following golden rule of accounting applies to capital account:-
“Debit the receiver and credit the giver”
Here, as the owner gives an amount as an investment into the business (owner and the business are separate entities), the capital account has a credit balance.
Based on duration, expenses can be categorized as capital expenditure and revenue expenditure. A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility inRead more
Based on duration, expenses can be categorized as capital expenditure and revenue expenditure.
A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility in the long-term i.e. more than one year.
The formula of CAPEX can be given as –
Capital expenditure = Net increase in PP & E + Depreciation Expense
. It is showed in companies’ cash flow statement and in its Balance Sheet under the head of fixed assets. These capital expenditures are capitalized.
List of some capital expenses –
Buildings (Including costs of purchase and other cost that extend the useful life of a building)
Computer equipment (Cost of purchase and installation cost)
Office equipment (Purchase cost)
Furniture and fixtures (Cost of purchase and installation cost)
Intangible assets (i.e. patent, trademark)
Land (Including the cost of purchasing and upgrading the land)
Machinery (Purchase cost and costs that bring the equipment to its location and for its intended use)
Software (Installation cost)
Vehicles
Example- If an asset costs Rs10,000 when bought and installation cost is Rs2000. The total capital expenditure will be Rs12000 and is expected to be in use for five years, Rs2,500 may be charged to depreciation in each year over the next five years.
B) Revenue expenditure or OPEX are those expenses that are incurred during its course of the operation. It can also be termed as total expenses that are incurred by firms through their production activities. Such costs do not result in asset creation, and the benefits resulting from it are limited to one accounting year. These are for managing operational activities and revenue within a given accounting period.
The accounting treatment for revenue expenditure for an accounting period is shown in a companies Income Statement, but it is not recorded in the firm’s Balance Sheet. OPEX is not capitalized and depreciation is not levied on such expenses.
Examples for revenue expenditures are as follows –
Direct expenses
These types of expenses are mostly incurred directly through the production process. Common direct expenses include – direct wages, freight charge, rent, material cost, legal expenses, and electricity cost.
Indirect expenses
These expenses are indirectly related to production like during sale, distribution, and management of finished goods or services. They include expenses like selling salaries, repairs, interest, commission, depreciation, rent, and taxes, among others.
No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use. Drawings are actually shown in the balance sheet as a deduction from the capital account. Let’s take an example, Mr X runs a tradingRead more
No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use.
Drawings are actually shown in the balance sheet as a deduction from the capital account.
Let’s take an example, Mr X runs a trading business. For meeting his personal expense we withdrew cash from his business cash of amount Rs. 15,000. It shall be reported like this:
Journal Entries:
Balance sheet:
Profit and loss account reports only the nominal accounts i.e. incomes and expenses. That’s why drawings are not shown in the statement of profit or loss because it is neither an expense nor an income.
It represents the owner’s withdrawal of capital from business for personal use. Hence, the drawings account is a personal account. Drawings lead to a simultaneous reduction in capital and cash or stock of a business which has nothing to do with Profit and loss A/c.
Therefore it is reported in the balance sheet only.
Journal Entry Prepaid Rent A/c Dr. To Cash A/C (Being rent paid in advance) "Prepaid Account" is treated as an asset and as per the modern rules debit the increase in the asset. "Cash Account" is an asset and as per the accounting rules credit the decrease in the asset. Adjustment entry: TheRead more
Journal Entry
Prepaid Rent A/c Dr.
To Cash A/C
(Being rent paid in advance)
“Prepaid Account” is treated as an asset and as per the modern rules debit the increase in the asset.
“Cash Account” is an asset and as per the accounting rules credit the decrease in the asset.
Adjustment entry: The prepaid rent entry has an adjustment entry when the rent expense account is due. The journal entry for that is
Rent Expense A/c
To Prepaid Rent A/c
(Being the rent expense due and adjusted from the prepaid expense)
Example: ABC.Ltd signs a one-year lease on an office floor for Rs 10,000 a month. The landlord requires that the Company pays the annual amount Rs 120,000 at the beginning of the year.
The journal entry for Company would be as follows:
At the beginning
Prepaid Rent A/c – 1,20,000
To Cash A/c – 1,20,000
(Being rent paid in advance for the year)
At the time rent was due (Month 1)
Rent Expense A/c – 10,000
To Prepaid Rent A/c – 10,000
(Being the rent expense due and adjusted from the prepaid expense)
The same entry done in month 1 will be repeated in the next 11 months.
What is a good current ratio?
The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months. The current ratio is calculated using two standard figures thatRead more
The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months.
The current ratio is calculated using two standard figures that are shown in the company’s balance sheet: current assets and current liabilities. The formula for the same goes as:
Current ratio = Current Assets / Current Liabilities
A current ratio of 2:1 is considered ideal. Generally, a ratio between 1.5 to 2 is considered beneficial for the business, which means that the company has more financial resources (Current Assets) to cover its short-term debt (Current Liabilities).
A high current ratio may indicate that the business is having difficulties managing its capital efficiently to generate profits.
On the other hand, a lower current ratio (especially lower than 1) would signify that the company’s current liabilities exceed its current assets and the business may have difficulty covering its short-term debt. Although the definition of a good current ratio may vary in the different industry groups.
Example- Where,
1) CR is 2:1, the company is in a good situation as it has double the Current Assets in order to cover the short-term debt.
2) CR is 0.5:1, the company is not in a good situation as it has only half the Current Assets in order to cover the short-term debt.
See lessWhat is Input Tax Credit in GST?
Let us assume that we are discussing Input Tax Credit in GST of India. Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can claim credit and use it to reduce its tax liability when it makes a sale. In other words, it means at the time of paying tax on output (Final sRead more
Let us assume that we are discussing Input Tax Credit in GST of India.
Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can claim credit and use it to reduce its tax liability when it makes a sale. In other words, it means at the time of paying tax on output (Final sale product), you can reduce the tax you have already paid on inputs (Purchase).
Example For a manufacturer, tax payable on output (Final product) is Rs 500 and tax paid on input A is Rs 100, input B is Rs 50 and, input C is Rs50. You can claim INPUT CREDIT of Rs 200(100+50+50) and you only need to deposit Rs 300(500-200) in taxes.
Conditions- Only a Registered Person would be able to claim the benefit of Input Tax Credit of GST after satisfying the following:
Claiming of ITC – Discussed by taking an example, seller A sold his goods to B. Now B who is a buyer will be eligible to claim the input tax credit on purchases based on the invoices when he makes further sales. Now,
- S will upload the details of all the tax invoices in GSTR 1.
- All the details in accordance with the sales to B will reflect in GSTR 2A, and the same data will be taken by B to file GSTR 2 (i.e. details of inward supply).
- B will accept the details about the purchase that has been made and uploaded by the seller, the tax on purchases will be credited to ‘Electronic Credit Ledger’ of B and he can adjust it against future output tax liability and get the refund.
See lessWhat is order of liquidity and order of permanence related to balance sheet?
Order of Liquidity Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so onRead more
Order of Liquidity
Under this method, a company organizes current and fixed assets in the balance sheet in the order of liquidity and the degree of ease by which it is converts converted into cash.On the asset side, we will write most liquid assets at first i.e. cash in hand, cash at bank and so on and further. In the end, we will write goodwill.
Liabilities are presented based on the order of urgency of payment. On the liabilities side, we start from short-term liabilities for example outstanding expenses, creditors and bill payable, and so on. In the end, we write capital adjusted with net profit and drawings if any.
This approach is generally used by sole traders and partnerships firms. The following is the format of Balance sheet in order of liquidity:
Order of Permanence
Under this method, while preparing a balance sheet by a company assets are listed according to their permanency. Permanent assets are shown at first and then less permanent assets are shown afterward. On the assets side of the balance sheet starts with more fixed and permanent assets i.e. it begins with goodwill, building, machinery, furniture, then investments and ends with cash in hand as the last item.
The fixed or long-term liabilities are shown first under the order of permanence method, and the current liabilities are listed afterward. On the liabilities side, we start from capital, Reserve and surplus, Long term loans and end with outstanding expenses.
The following is the format of the Balance sheet in order of permanence:
Such order or arrangement of balance sheet items are refer as ‘Marshalling of Balance Sheet’.
See lessIs capital a real account?
No, capital account is not a real account. Capital account represents the amount of money invested by the owner/owners of the business along with the retained earnings net of drawings or dividends. Capital account has a natural credit balance because it is an internal liability of the business. CapiRead more
No, capital account is not a real account.
Capital account represents the amount of money invested by the owner/owners of the business along with the retained earnings net of drawings or dividends. Capital account has a natural credit balance because it is an internal liability of the business.
Capital account is a personal account because, as discussed above, it represents the investment of the owner or owners. Personal account represents person or persons.
Whereas a real account represents the material assets of a business. Example:- Cash A/c, Fixed assets A/c etc. That’s why the capital account is not a real account.
Being a personal account, the following golden rule of accounting applies to capital account:-
“Debit the receiver and credit the giver”
Here, as the owner gives an amount as an investment into the business (owner and the business are separate entities), the capital account has a credit balance.
See lessWhat are some capital and revenue expenditure examples?
Based on duration, expenses can be categorized as capital expenditure and revenue expenditure. A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility inRead more
Based on duration, expenses can be categorized as capital expenditure and revenue expenditure.
A) Capital expenditure or CAPEX are those funds that are used to acquire or maintain or enhance long-term assets. Such expenses do not occur frequently and are incurred to enhance the company’s utility in the long-term i.e. more than one year.
The formula of CAPEX can be given as –
Capital expenditure = Net increase in PP & E + Depreciation Expense
. It is showed in companies’ cash flow statement and in its Balance Sheet under the head of fixed assets. These capital expenditures are capitalized.
List of some capital expenses –
Example- If an asset costs Rs10,000 when bought and installation cost is Rs2000. The total capital expenditure will be Rs12000 and is expected to be in use for five years, Rs2,500 may be charged to depreciation in each year over the next five years.
B) Revenue expenditure or OPEX are those expenses that are incurred during its course of the operation. It can also be termed as total expenses that are incurred by firms through their production activities. Such costs do not result in asset creation, and the benefits resulting from it are limited to one accounting year. These are for managing operational activities and revenue within a given accounting period.
The accounting treatment for revenue expenditure for an accounting period is shown in a companies Income Statement, but it is not recorded in the firm’s Balance Sheet. OPEX is not capitalized and depreciation is not levied on such expenses.
Examples for revenue expenditures are as follows –
These types of expenses are mostly incurred directly through the production process. Common direct expenses include – direct wages, freight charge, rent, material cost, legal expenses, and electricity cost.
These expenses are indirectly related to production like during sale, distribution, and management of finished goods or services. They include expenses like selling salaries, repairs, interest, commission, depreciation, rent, and taxes, among others.
See lessAre drawings recorded in profit and loss account?
No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use. Drawings are actually shown in the balance sheet as a deduction from the capital account. Let’s take an example, Mr X runs a tradingRead more
No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use.
Drawings are actually shown in the balance sheet as a deduction from the capital account.
Let’s take an example, Mr X runs a trading business. For meeting his personal expense we withdrew cash from his business cash of amount Rs. 15,000. It shall be reported like this:
Journal Entries:
Balance sheet:
Profit and loss account reports only the nominal accounts i.e. incomes and expenses. That’s why drawings are not shown in the statement of profit or loss because it is neither an expense nor an income.
It represents the owner’s withdrawal of capital from business for personal use. Hence, the drawings account is a personal account. Drawings lead to a simultaneous reduction in capital and cash or stock of a business which has nothing to do with Profit and loss A/c.
Therefore it is reported in the balance sheet only.
See lessWhat is the journal entry for prepaid rent?
Journal Entry Prepaid Rent A/c Dr. To Cash A/C (Being rent paid in advance) "Prepaid Account" is treated as an asset and as per the modern rules debit the increase in the asset. "Cash Account" is an asset and as per the accounting rules credit the decrease in the asset. Adjustment entry: TheRead more
Journal Entry
Prepaid Rent A/c Dr.
To Cash A/C
(Being rent paid in advance)
“Prepaid Account” is treated as an asset and as per the modern rules debit the increase in the asset.
“Cash Account” is an asset and as per the accounting rules credit the decrease in the asset.
Adjustment entry: The prepaid rent entry has an adjustment entry when the rent expense account is due. The journal entry for that is
Rent Expense A/c
To Prepaid Rent A/c
(Being the rent expense due and adjusted from the prepaid expense)
Example: ABC.Ltd signs a one-year lease on an office floor for Rs 10,000 a month. The landlord requires that the Company pays the annual amount Rs 120,000 at the beginning of the year.
The journal entry for Company would be as follows:
At the beginning
Prepaid Rent A/c – 1,20,000
To Cash A/c – 1,20,000
(Being rent paid in advance for the year)
At the time rent was due (Month 1)
Rent Expense A/c – 10,000
To Prepaid Rent A/c – 10,000
(Being the rent expense due and adjusted from the prepaid expense)
The same entry done in month 1 will be repeated in the next 11 months.
See less