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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA

    Introduction A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account. TyRead more

    Introduction

    A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account.

    Type of account

    A capital reduction account is a temporary account open just to carry out internal reconstruction. It represents the sacrifices made by the shareholders, debenture holders and creditors. Also, any appreciation in the value of assets is credited to this account. It is closed to capital reduction when internal reconstruction is completed.

    Entries passed through capital reduction account

    When paid-up capital is cancelled.

    When paid-up capital is cancelled, the share capital account is debited and the capital reduction account is debited as share capital is getting reduced.

    Share Capital A/c Dr. Amt
    To Capital Reduction A/c Cr. Amt

    When assets and liabilities are revalued

    At the time of internal reconstruction, the gain or loss on revaluation is transferred to the capital reduction account instead of the revaluation reserve.

    Writing off of accumulated losses and intangible assets

    The credit balance of the capital reduction account is used to write off the accumulated losses and intangible assets like goodwill, patents etc which are unrepresented by capital. The capital reduction account is debited and profit and loss account and intangible assets accounts are credited.

    Capital Reduction A/c Dr. Amt
    To Profit and loss A/c Cr. Amt
    To Goodwill/ Patents A/c Cr. Amt

    Treatment in books of account

    The balance in the capital reduction account, whether debit or credit, it is transferred to the capital reduction account. Hence, it doesn’t appear on the balance sheet.

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

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

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

    In the books of Rural Literacy Society

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

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

     

    Balance Sheet as on 31 March 2019

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

     

    Working Notes:

    W.N.1: Calculation of Subscription

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

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

     

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

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

     

    W.N.3: Calculation of Capital Fund

    Balance Sheet as on 31 March 2018

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

     

    W.N.4: Calculation of Accrued Interest

    Interest as of 30 September 2018 9,000
    Less: Interest as of 31 March 2019 -4,500
                   Accrued Interest 4,500
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Simerpreet
SimerpreetHelpful
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  2. Radhika
    This answer was edited.

    The profits earned by a company are distributed to its shareholders monthly, quarterly, half-yearly, or yearly in the form of dividends. The dividend payable by the company is transferred to the Dividend Account and is then claimed by the shareholders. If the dividend is not claimed by the members aRead more

    The profits earned by a company are distributed to its shareholders monthly, quarterly, half-yearly, or yearly in the form of dividends. The dividend payable by the company is transferred to the Dividend Account and is then claimed by the shareholders.

    If the dividend is not claimed by the members after transferring it to the Dividend Account, it is called Unclaimed Dividend. Such a dividend is a liability for the company and it is shown under the head Current Liabilities.

    The dividend is transferred from the Dividend Account to the Unclaimed Dividend Account if it is not claimed by the shareholders within 37 days of declaration of dividend.

    For the Cash Flow Statement, unclaimed dividend comes under the head Financing Activities. 

    Items shown under the head Financing Activities are those that are used to finance the operations of the company. Since, money raised through the issue of shares finances the company, any item related to shareholding or dividend is shown under the head Financing Activities.

    However, there are two approaches to deal with the treatment of Unclaimed Dividend:

    First, since there is no inflow or outflow of cash, there is no need to show it in the cash flow statement.

    Second, the unclaimed dividend is deducted from the Appropriations, that is, when Net Profit before Tax and Extraordinary Activities is calculated.

    Then, it is added under the head Financing Activities because the amount of dividend that has to flow out of the company (that is Dividend Paid amount which has already been deducted from Financing Activities) remained in the company only since it has not been claimed by the members.

    The second approach to the treatment of an Unclaimed Dividend is used when the company has not transferred the unclaimed dividend amount from the Dividend Account to a separate account. 

     

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Bonnie
BonnieCurious
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  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    A balance sheet of a company is a financial statement that depicts the assets, liabilities and shareholders’ equity of the company at a point of time, usually at the end of the accounting year. A balance sheet of a company is reported in a vertical format which is different from that of a partnershiRead more

    A balance sheet of a company is a financial statement that depicts the assets, liabilities and shareholders’ equity of the company at a point of time, usually at the end of the accounting year. A balance sheet of a company is reported in a vertical format which is different from that of a partnership where the horizontal format is used.

    COMPONENTS OF A BALANCE SHEET

    The three main components of a balance sheet are Assets, Liabilities and Shareholders’ equity.

    • Assets: They are divided into two main categories that are current assets and non-current assets. If an asset is expected to be realised within 12 months or is primarily held for being traded, or is cash or cash equivalent, then those assets are termed as current assets. All assets that are not current assets are grouped under non-current assets. They are normally realised after 12 months.
    • Liabilities: They are categorised as current liabilities and non-current liabilities. If the amount owed by the company to an outside party is due to be settled in 12 months, then it can be termed as a current liability. The rest of the liabilities are referred to as non-current liability.
    • Shareholders’ Equity: This is the money owed to the owners of the company, that is shareholders. It is also called net assets since it is equal to the difference between total assets and total liabilities. Their main categories are Shareholders’ Capital and Reserves and Surplus.

    FORMAT OF BALANCE SHEET

    As per the Companies Act 2013, the following format should be used for preparing a balance sheet.

    From the above Balance sheet, we should get:

    Assets = Liabilities + Shareholders’ Equity

    Relevant notes for each component should also be prepared when necessary.

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Simerpreet
SimerpreetHelpful
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AmortizationDifference BetweenImpairment
  2. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    Let us first understand the concepts of Amortization and Impairment. Amortization refers to the expense recorded on the decline of the value of intangible assets of a company. Intangible assets include goodwill, patents, copyrights, etc. It reflects the reduction in the value of Intangible assets ovRead more

    Let us first understand the concepts of Amortization and Impairment.

    Amortization refers to the expense recorded on the decline of the value of intangible assets of a company. Intangible assets include goodwill, patents, copyrights, etc. It reflects the reduction in the value of Intangible assets over its life span.

    Amortization is similar to Depreciation, however, while depreciation is over tangible assets amortization is over Intangible assets of the company.

    For example, Cipla Ltd. acquired a patent over a new drug for a period of 10 years. The cost of creating the new drug was 80,000 and the company must record its patent at 80,000. However, the company must amortize this cost by dividing the cost over the patent’s life, i.e., the amortization cost would be 8,000 (80,000/10) p.a. for the next 10 years.

    Impairment means a decline in the value of fixed assets due to unforeseen circumstances. Assets are impaired when the carrying value of assets increases its market value or “realizable value” and such increase is recorded as an impairment loss.

    Now suppose, Cipla Ltd. had existing machinery which suffered physical damage and is recorded at 50,000 in the books but the realizable value of the asset would only be 20,000. Hence, the asset would be written down to 20,000 and an impairment loss of 30,000 will be recorded.

    Impairment Vs Amortization

    Differences between the two can be shown as follows:

    Amortization Impairment
    Amortization is a reduction in the value of Intangible Assets over their useful life. Impairment is a reduction in the value of assets due to unforeseen circumstances.
    Amortization is a continuous process and the value of an asset reduces over time. Value of asset reduces drastically, creating a need to write down the value to its fair market value.
    Amortization is charged annually. Impairment is not an annual charge.
    Amortization is shown as an amortization expense. Impairment is shown as an impairment loss.
    Reasons for amortization includes consumption, obsolescence, etc. Reasons for impairment include damage to the asset, change in preferences, etc.
    Amortization is charged on Intangible assets Impairment is charged on fixed assets whether tangible or intangible.

    Suppose Unilever Ltd. has a patent over one of its products for a period of 5 years. The cost of the patent was 1,00,000. Then after 2 years one of its rivals, say ITC Ltd., launches a new product which is more preferred by the consumers over the one produced by Unilever Ltd. and the fair market value of the patent of Unilever Ltd. changes to 10,000.

    Now in this scenario, Unilever Ltd. would have amortized the patent (costing 1,00,000) at 20,000 (1,00,000/5) p.a. for 2 years and the book value at the end of the 2nd year is 60,000 (1,00,000 – 40,000). Now due to the new launch by ITC Ltd. the drastic change in the value of the asset from the book value of 60,000 to the realizable value of 10,000 will be recorded as an Impairment loss. Hence Impairment loss would be recorded at 50,000 (60,000 – 10,000).

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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Tally ERP does not have a voucher for recording closing stock journal entries. It automatically calculates closing stock and reports it in the Profit and Loss account and Balance sheet. However, Tally do have vouchers through which you can adjust the closing stock to be shown at the end of the year.Read more

    Tally ERP does not have a voucher for recording closing stock journal entries. It automatically calculates closing stock and reports it in the Profit and Loss account and Balance sheet.

    However, Tally do have vouchers through which you can adjust the closing stock to be shown at the end of the year.

    Explanation

    Tally, as we know is an ERP which can automate many aspects of accounting like calculation of ledger balance, creation of trial balance, financial statements and other reports. Only the data entry in vouchers is done manually.

    Tally also calculates closing stock automatically because it already has the required data to do so.

    Closing stock = Opening stock + Purchase – Cost of goods sold.

    Using the above formula, Tally automatically calculates the closing stock.

    But it may happen that the closing stock as per Tally and closing stock as per physical verification of stock do not match.

    This may be due to damaged caused to some items of inventory or even theft of inventory items which is usually discovered when stock is physically checked and counted at the end of the financial year.

    In that case, we can use the Physical Stock voucher to correct our closing stock in Tally.

    Physical Stock Voucher

    A physical Stock voucher is an inventory voucher which is used to adjust the amount of closing stock as per the physical stock verified at the end of the year.

    Suppose, if the closing stock for Bricks is 500pcs. Like in my stock summary, the item ‘Bricks’ is shown in the image below:

    But after physical verification, it was found that there around there are only 450pcs of whole bricks are there. The rest of the bricks were broken.

    To rectify this, we will open a Physical Stock voucher.

    The steps to open a Physical stock voucher are as follows:

    In Tally ERP 9 : Gateway of Tally → Accounting Vouchers → Press Alt + F10 

    In the physical stock voucher, we will select the stock item and enter the correct quantity, which is 450pcs. 

    After entering the details above, accept the voucher and open the stock summary again from Gateway of Tally. It will show the Bricks at 450pcs.

    Hence, this is how we can adjust our closing stock in Tally.

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Bonnie
BonnieCurious
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Compound EntryLedger
  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    When in a single transaction two or more accounts are involved, such kinds of transactions are termed as Compound entries. Example 1, Johnson Co. purchased goods worth 5,000, and half of the amount was paid in cash and the other half by cheque. So here three accounts are involved: Purchase account-Read more

    When in a single transaction two or more accounts are involved, such kinds of transactions are termed as Compound entries.

    Example 1, Johnson Co. purchased goods worth 5,000, and half of the amount was paid in cash and the other half by cheque.

    So here three accounts are involved:

    Purchase account- That is to be debited.

    Cash account- That is to be credited.

    Bank account- That is to be credited.

    Journal entry:

    Now posting the above journal entry in a ledger account.

    In the Journal, the Purchase account has been debited. So in the ledger, the purchase account will also be debited. Since the purchase account is debited in the ledger, the corresponding two credit accounts of this entry i.e. the cash and the bank will be written on the debit side in the particulars column. So while posting, the amount to be considered would be the amount individually paid in cash and bank as shown in the journal entry.

    Cash a/c is credited with the purchase account.  In the ledger, purchase a/c will be posted on the credit side. So while posting, the amount to be considered would be the amount individually paid in cash.

    Bank a/c is credited with the purchase account. In the ledger, purchase a/c will be posted on the credit side. So while posting, the amount to be considered would be the amount individually paid in Bank a/c.

    Example 2,  Johnson Co purchased goods and made payment in cash 2,000. Along with it, it also paid commission and interest of 1,000 and 500 respectively.

    So here four accounts are involved:

    Purchase account- That is to be debited.

    The commission allowed account- That is to be debited.

    Interest allowed account- That is to be debited.

    Cash account- That is to be credited.

    Journal Entry:

    Now posting the above journal entry in a ledger account.

    In the journal entry, the cash account has been credited. So in the ledger, the cash account will also be credited. Since the cash account is credited in the ledger, the corresponding three accounts will also be credited in the particulars column. As in the journal entry the three debit accounts viz. Purchase, the commission allowed, and interest allowed, the amounts written against them shall be entered in the respective accounts in the amount column on the credit side of the cash account.

    Purchase a/c is debited with a cash account.  In the ledger, Cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in the Purchase account.

    The commission allowed a/c is debited with a cash account.  In the ledger, cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in Commission allowed a/c.

    Interest allowed a/c is debited with a cash account.  In the ledger, cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in Interest allowed a/c.

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