Revenue also called income is nothing but the income generated by individuals or businesses from the sale of goods or investing capital or assets. Some examples of revenue are as follows:- Sales revenue Dividend received Interest earned Rent received Commission 1. SALES REVENUE Sales revenueRead more
Revenue also called income is nothing but the income generated by individuals or businesses from the sale of goods or investing capital or assets. Some examples of revenue are as follows:-
Sales revenue
Dividend received
Interest earned
Rent received
Commission
1. SALES REVENUE
Sales revenue is the income received by the individual or business by selling its product or provision of services. the words “sale” and “revenue” are used interchangeably to mean the same thing. It is to be noted that revenue does not necessarily mean it has been received in cash, it can be partly in cash or partly on credit also.
How to calculate sales revenue?
SALES REVENUE = NO. OF UNITS SOLD * AVERAGE PRICE PER UNIT
For example:- Amazon sold 4000 units of shirts @ 500 each. Therefore sales revenue for amazon is
Sales revenue = 4000 * 500
= 20,00,000
Treatment of sales revenue in the financial statement, since sales are part of a trading account and appear on the credit side of the trading account.
2. DIVIDEND RECEIVED
Naina, this can be explained in simple terms. Suppose you own shares of a company which declares dividend so the dividend received is income for you. Since it does not reduce the assets of a company nor creates a liability it is shown as income and posted on the credit side of profit & loss A/c.
Let me give you a short example of a dividend received, suppose you own 1000 shares of ABC.ltd. the company at the quarter-end calculate its earnings and decides to declare a dividend of Rs 5 per share. Therefore you would receive 1000* 5 i.e Rs 5000 as dividend income.
3. INTEREST INCOME EARNED
Interest income is the earnings the entity receives on any investments made. To be more precise it is money earned by an individual or business for lending their fund either by putting them as deposit in the bank. It is shown on the credit side of the profit & loss A/c.
A very simple example for interest earned is when a business or an individual deposits money in the bank as savings and decided not to touch it for the coming years then such a depositor will gain interest on such savings by the bank. such type of income so received is treated as interest received and shown as income in the profit & loss A/c.
3. RENT RECEIVED
When money is received by the business for exchange of use of assets of the business by the other person, then it will be called rent received. Rent can be received by the business firm in respect of land, building, machinery, etc. As rent received is income for the business firm, it is shown on the credit side of profit & loss A/c.
For example, X. ltd received Rs 20,000 via cash on one of its properties to Mr. Z. Then rent so received shall be treated as income in the books of ABC. ltd and same shall be treated as income and shown in the profit & loss statement.
Summarised extract of profit & loss account is shown below for dividend received, Rent received and interest earned.
One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll beRead more
One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll be explaining internal users of accounting information in detail.
Internal users are people within an organization/business who need accounting information to make day-to-day decisions.
The various internal users of accounting information include:
Owners/Promoters/Directors:
Owners are the people who contribute capital to the business and therefore they are interested to know the profit earned or loss incurred by the business as well as the safety of their capital. In the case of a Sole Proprietorship, the proprietor is the owner of the business. In the case of a Partnership, the partners are considered as the owners of the firm.
The use for them: To know how the business is doing financially, owners need to know the profit and loss reflected in the financial statements.
Management:
Management is responsible for setting objectives, formulating plans, taking informed decisions, and ensuring that pre-planned objectives are met within the stipulated time period.
The use for them: To achieve objectives, management needs accounting information to make decisions related to determining the selling price, budgeting, cost control and reduction, investing in new projects, trend analysis, forecasting, etc.
Employees/Workers:
Employees and workers are the ones who implement the plans set by the management. Their well-being is dependent on the profitability of the business.
The use for them: They are interested to check the financial statements so that they can get a better knowledge of the business. Some organizations also give their employees a share in their profits in the form of a bonus at the year-end. This also creates an interest in the employees to check the financial statements.
External users are people outside the business or entity who use accounting information. They do not have a direct link with the organization but can influence or can be influenced by the organization's activities. For example - Tax Authorities, Banks, Customers, Trade Unions, Government, Investors,Read more
External users are people outside the business or entity who use accounting information. They do not have a direct link with the organization but can influence or can be influenced by the organization’s activities.
For example – Tax Authorities, Banks, Customers, Trade Unions, Government, Investors, or Creditors.
External Users:
Investors – Investors are interested in the past performance and future earnings of the business. They want to track the performance of their business whether it is giving them any benefit or not. A business’s past information helps investors in assessing their investments.
Creditors or Suppliers – Some suppliers provide goods and services on credit, and before providing any credit they check the company’s ability to pay. Creditors are interested in the company’s liquidity i.e to see if a company can fulfill short-term obligations.
Customers – Customers are more interested in a company’s financial statement as they rely on them for goods and services. They check the ability of the company whether it is providing them good quality goods and will continue to provide them in future.
Banks – Banks are most likely interested in the liquidity and profitability of the company. They keep track of whether the company can pay the debt when it is due along with interest.
Government – The company’s activities are central to the economy and must be met by them. The government controls a company’s actions if they break a law or damage the environment.
Environmental agencies – They keep an eye on organizations whether their activities are harming the environment or not.
Trade unions – They take an active part in the decision-making process. They want to see the financial statements of the company and want to decide the compensation of the employees they represent.
Tax authorities – They determine whether the business has declared the correct amount of tax in its tax returns. They conduct audits of the tax returns to verify them with the accounting records disclosed.
Whenever the proprietor/owner of a business withdraws cash or goods from the business for his/her personal use, we call it drawings. For example, Alex, proprietor of a soap manufacturing company, takes 50 pack of soaps costing 30 each for his personal use. So, 1,500 (50*30) will be considered as draRead more
Whenever the proprietor/owner of a business withdraws cash or goods from the business for his/her personal use, we call it drawings. For example, Alex, proprietor of a soap manufacturing company, takes 50 pack of soaps costing 30 each for his personal use. So, 1,500 (50*30) will be considered as drawings of Alex. One important thing to note here is whenever goods are withdrawn for personal use they are valued at cost.
Drawings are not an asset/liability/expense/income to the business. The drawings account is a contra-equity account. A contra-equity account is a capital account with a negative balance i.e. debit balance. It reduces the owner’s equity/capital.
Drawings being a contra-equity account has a debit balance, reducing the owner’s capital in the business. This is because withdrawals for personal use represent a reduction of the owner’s equity in the business.
Drawings are not shown in the Income Statement as they are neither an expense nor an income for the business. However, the following journal entries are passed to record drawings for the year:
Drawings A/c is debited because it reduces the owner’s capital. Cash/Purchases A/c is debited as a withdrawal reduces the assets of the business.
At the end of the year, drawings A/c are closed by transferring it to the owner’s capital A/c. We post the following entry to close the drawings A/c at the end of the year:
In the balance sheet, drawings are shown by deducting it from the owner’s capital A/c.
Let us take our earlier example of Alex. He withdrew soaps worth 1,500. At the end of the year, his capital was worth 5,500. The journal entry for recording the drawings is as follows:
In the balance sheet, drawings worth 1,500 are shown as follows:
Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use. It is also called economic lRead more
Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use. It is also called economic life or service life
It is a useful concept in accounting as it is used to work out depreciation. By knowing this useful life of an asset an entity can easily analyze how to allot the initial cost of an asset across the relevant accounting period rather than doing it unfairly manner.
How do we calculate the useful life of an asset?
The useful life of an asset is not an accounting policy, but an accounting estimate. calculating useful life is not an exact phenomenon but an estimate that is done because it directly impacts how much an asset is to expense every year.
Factors affecting “how long an asset is expected to be useful” depends on some stated points as below:
Usage, the more the assets are used, the more quickly it will deteriorate.
Whether the asset is new at the time of purchase or reused model.
Change in technology.
As per the companies act 2013, some of the useful life of assets are stated below
To know more about the different categories of assets you can follow the given link useful life of assets.
POINT TO BE NOTED:- There lies a huge difference in the useful life v/s the physical life of an asset. It is very important to note that amount of time an asset is used in a business is not always be same as an asset’s entire life span.
Drawings mean the certain sum of amount or goods withdrawn by owners from the business for personal use. The drawings account is not an asset/liability/expense/income account, it is a contra account to the owner's equity or capital account. Drawings A/c will always have a debit balance. Drawings A/cRead more
Drawings mean the certain sum of amount or goods withdrawn by owners from the business for personal use. The drawings account is not an asset/liability/expense/income account, it is a contra account to the owner’s equity or capital account. Drawings A/c will always have a debit balance.
Drawings A/c debit balance is contrary to the Capital A/c credit balance because any withdrawal from the business for personal use will reduce the capital.
Effect on Trial Balance: Drawings will be shown in the debit column of the trial balance.
Effect on Financial Statements: The owner’s drawings will affect the company’s balance sheet by decreasing the asset that is withdrawn, and a corresponding decrease in the owner’s equity or capital invested.
Example:
Mr.B a sole proprietor withdraws $100 each month for personal use. At the end of the year Drawings A/c had a debit balance of $1,200.
Mr.B records drawings of $100 each month and debits drawings a/c and credits cash a/c. At the end of the year, he will transfer the balance and will debit capital a/c and credit drawings a/c by $1,200.
He will show a balance of $1,200 ($100*12) in the trial balance in the debit column. Assuming closing capital of $50,000.
In the financial statement, the balance of drawings a/c will be deducted from the owner’s capital because it is a contra account and this will reduce the owner’s capital for the year.
Let me begin by giving a small explanation of what loose tools are before we dive into their accounting treatment. Loose tools are assets that are used in various steps of the production process and therefore are vital for the conversion of raw materials into finished goods. They are considered as cRead more
Let me begin by giving a small explanation of what loose tools are before we dive into their accounting treatment.
Loose tools are assets that are used in various steps of the production process and therefore are vital for the conversion of raw materials into finished goods. They are considered as current assets of the business as their useful life is limited. They have a small monetary value (cost-efficient) and high turnover. Examples of loose tools include screwdrivers, hammers, etc.
One may say loose tools like screwdrivers and hammers can be used for more than one year and therefore should be classified as non-current assets. But unlike fixed assets, these loose tools have a high probability of being misplaced or lost. Hence they are classified as current assets.
Since loose tools are treated as an asset for the business, they are shown as a debit balance in the trial balance.
The cost of loose tools consumed for the year will be shown on the debit side of the Profit & Loss A/c as an expense. In the balance sheet, loose tools are shown on the Assets side under the head Current Assets and sub-head Inventories. Since they aid the production process, loose tools are shown as a part of the inventory of the business.
Let us take an example,
XYZ Ltd. at the beginning of the year had loose tools worth 5,000. During the year they purchased loose tools worth 500. At the end of the year, the company valued its loose tools at 4,500.
Now let us find the cost of loose tools consumed. The formula for finding the cost of loose tools consumed is as follows:
Cost of loose tools consumed =
Opening inventory of loose tools + Purchases of loose tools – Closing inventory of loose tools
So, the cost of loose tools consumed (1000) will be shown on the debit side of the P&L A/c as follows:
The closing inventory of loose tools worth 4,500 will be shown on the assets side of the balance sheet under the head current assets and sub-head inventory in the following manner:
One thing to remember here is there is an exception to loose tools. While calculating liquidity ratios like the Current ratio, Quick ratio, etc. loose tools are excluded from current assets. The reason for this is loose tools cannot be easily converted into cash i.e. they are less liquid. The purpose of calculating the current ratio is to check the liquidity of a company. Including loose tools (which cannot be easily converted into cash) in current assets defeats the purpose of calculating the ratio.
Give any three examples of revenue?
Revenue also called income is nothing but the income generated by individuals or businesses from the sale of goods or investing capital or assets. Some examples of revenue are as follows:- Sales revenue Dividend received Interest earned Rent received Commission 1. SALES REVENUE Sales revenueRead more
Revenue also called income is nothing but the income generated by individuals or businesses from the sale of goods or investing capital or assets. Some examples of revenue are as follows:-
1. SALES REVENUE
Sales revenue is the income received by the individual or business by selling its product or provision of services. the words “sale” and “revenue” are used interchangeably to mean the same thing. It is to be noted that revenue does not necessarily mean it has been received in cash, it can be partly in cash or partly on credit also.
How to calculate sales revenue?
SALES REVENUE = NO. OF UNITS SOLD * AVERAGE PRICE PER UNIT
For example:- Amazon sold 4000 units of shirts @ 500 each. Therefore sales revenue for amazon is
Sales revenue = 4000 * 500
= 20,00,000
Treatment of sales revenue in the financial statement, since sales are part of a trading account and appear on the credit side of the trading account.
2. DIVIDEND RECEIVED
Naina, this can be explained in simple terms. Suppose you own shares of a company which declares dividend so the dividend received is income for you. Since it does not reduce the assets of a company nor creates a liability it is shown as income and posted on the credit side of profit & loss A/c.
Let me give you a short example of a dividend received, suppose you own 1000 shares of ABC.ltd. the company at the quarter-end calculate its earnings and decides to declare a dividend of Rs 5 per share. Therefore you would receive 1000* 5 i.e Rs 5000 as dividend income.
3. INTEREST INCOME EARNED
Interest income is the earnings the entity receives on any investments made. To be more precise it is money earned by an individual or business for lending their fund either by putting them as deposit in the bank. It is shown on the credit side of the profit & loss A/c.
A very simple example for interest earned is when a business or an individual deposits money in the bank as savings and decided not to touch it for the coming years then such a depositor will gain interest on such savings by the bank. such type of income so received is treated as interest received and shown as income in the profit & loss A/c.
3. RENT RECEIVED
When money is received by the business for exchange of use of assets of the business by the other person, then it will be called rent received. Rent can be received by the business firm in respect of land, building, machinery, etc. As rent received is income for the business firm, it is shown on the credit side of profit & loss A/c.
For example, X. ltd received Rs 20,000 via cash on one of its properties to Mr. Z. Then rent so received shall be treated as income in the books of ABC. ltd and same shall be treated as income and shown in the profit & loss statement.
Summarised extract of profit & loss account is shown below for dividend received, Rent received and interest earned.
See lessWho are internal users of accounting information?
One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll beRead more
One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll be explaining internal users of accounting information in detail.
Internal users are people within an organization/business who need accounting information to make day-to-day decisions.
The various internal users of accounting information include:
Owners are the people who contribute capital to the business and therefore they are interested to know the profit earned or loss incurred by the business as well as the safety of their capital. In the case of a Sole Proprietorship, the proprietor is the owner of the business. In the case of a Partnership, the partners are considered as the owners of the firm.
The use for them: To know how the business is doing financially, owners need to know the profit and loss reflected in the financial statements.
Management is responsible for setting objectives, formulating plans, taking informed decisions, and ensuring that pre-planned objectives are met within the stipulated time period.
The use for them: To achieve objectives, management needs accounting information to make decisions related to determining the selling price, budgeting, cost control and reduction, investing in new projects, trend analysis, forecasting, etc.
Employees and workers are the ones who implement the plans set by the management. Their well-being is dependent on the profitability of the business.
The use for them: They are interested to check the financial statements so that they can get a better knowledge of the business. Some organizations also give their employees a share in their profits in the form of a bonus at the year-end. This also creates an interest in the employees to check the financial statements.
See lessWho are external users of accounting information?
External users are people outside the business or entity who use accounting information. They do not have a direct link with the organization but can influence or can be influenced by the organization's activities. For example - Tax Authorities, Banks, Customers, Trade Unions, Government, Investors,Read more
External users are people outside the business or entity who use accounting information. They do not have a direct link with the organization but can influence or can be influenced by the organization’s activities.
For example – Tax Authorities, Banks, Customers, Trade Unions, Government, Investors, or Creditors.
External Users:
Here is a summary of external users
See lessDo we show drawings in income statement?
Whenever the proprietor/owner of a business withdraws cash or goods from the business for his/her personal use, we call it drawings. For example, Alex, proprietor of a soap manufacturing company, takes 50 pack of soaps costing 30 each for his personal use. So, 1,500 (50*30) will be considered as draRead more
Whenever the proprietor/owner of a business withdraws cash or goods from the business for his/her personal use, we call it drawings. For example, Alex, proprietor of a soap manufacturing company, takes 50 pack of soaps costing 30 each for his personal use. So, 1,500 (50*30) will be considered as drawings of Alex. One important thing to note here is whenever goods are withdrawn for personal use they are valued at cost.
Drawings are not an asset/liability/expense/income to the business. The drawings account is a contra-equity account. A contra-equity account is a capital account with a negative balance i.e. debit balance. It reduces the owner’s equity/capital.
Drawings being a contra-equity account has a debit balance, reducing the owner’s capital in the business. This is because withdrawals for personal use represent a reduction of the owner’s equity in the business.
Drawings are not shown in the Income Statement as they are neither an expense nor an income for the business. However, the following journal entries are passed to record drawings for the year:
Drawings A/c is debited because it reduces the owner’s capital. Cash/Purchases A/c is debited as a withdrawal reduces the assets of the business.
At the end of the year, drawings A/c are closed by transferring it to the owner’s capital A/c. We post the following entry to close the drawings A/c at the end of the year:
In the balance sheet, drawings are shown by deducting it from the owner’s capital A/c.
Let us take our earlier example of Alex. He withdrew soaps worth 1,500. At the end of the year, his capital was worth 5,500. The journal entry for recording the drawings is as follows:
In the balance sheet, drawings worth 1,500 are shown as follows:
See lessWhat is useful life of assets as per the Companies Act?
Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use. It is also called economic lRead more
Simply explaining the meaning of the useful life of an asset, it is nothing but the number of years the asset would remain in the business for purpose of revenue generation, making it more simple, the amount of time an asset is expected to be functional and fit for use. It is also called economic life or service life
It is a useful concept in accounting as it is used to work out depreciation. By knowing this useful life of an asset an entity can easily analyze how to allot the initial cost of an asset across the relevant accounting period rather than doing it unfairly manner.
How do we calculate the useful life of an asset?
The useful life of an asset is not an accounting policy, but an accounting estimate. calculating useful life is not an exact phenomenon but an estimate that is done because it directly impacts how much an asset is to expense every year.
Factors affecting “how long an asset is expected to be useful” depends on some stated points as below:
As per the companies act 2013, some of the useful life of assets are stated below
To know more about the different categories of assets you can follow the given link useful life of assets.
POINT TO BE NOTED:- There lies a huge difference in the useful life v/s the physical life of an asset. It is very important to note that amount of time an asset is used in a business is not always be same as an asset’s entire life span.
See lessHow to treat drawings in the trial balance?
Drawings mean the certain sum of amount or goods withdrawn by owners from the business for personal use. The drawings account is not an asset/liability/expense/income account, it is a contra account to the owner's equity or capital account. Drawings A/c will always have a debit balance. Drawings A/cRead more
Drawings mean the certain sum of amount or goods withdrawn by owners from the business for personal use. The drawings account is not an asset/liability/expense/income account, it is a contra account to the owner’s equity or capital account. Drawings A/c will always have a debit balance.
Drawings A/c debit balance is contrary to the Capital A/c credit balance because any withdrawal from the business for personal use will reduce the capital.
Effect on Trial Balance: Drawings will be shown in the debit column of the trial balance.
Effect on Financial Statements: The owner’s drawings will affect the company’s balance sheet by decreasing the asset that is withdrawn, and a corresponding decrease in the owner’s equity or capital invested.
Example:
Mr.B a sole proprietor withdraws $100 each month for personal use. At the end of the year Drawings A/c had a debit balance of $1,200.
Mr.B records drawings of $100 each month and debits drawings a/c and credits cash a/c. At the end of the year, he will transfer the balance and will debit capital a/c and credit drawings a/c by $1,200.
He will show a balance of $1,200 ($100*12) in the trial balance in the debit column. Assuming closing capital of $50,000.
In the financial statement, the balance of drawings a/c will be deducted from the owner’s capital because it is a contra account and this will reduce the owner’s capital for the year.
See lessWhat is loose tools account and treatment in final accounts?
Let me begin by giving a small explanation of what loose tools are before we dive into their accounting treatment. Loose tools are assets that are used in various steps of the production process and therefore are vital for the conversion of raw materials into finished goods. They are considered as cRead more
Let me begin by giving a small explanation of what loose tools are before we dive into their accounting treatment.
Loose tools are assets that are used in various steps of the production process and therefore are vital for the conversion of raw materials into finished goods. They are considered as current assets of the business as their useful life is limited. They have a small monetary value (cost-efficient) and high turnover. Examples of loose tools include screwdrivers, hammers, etc.
One may say loose tools like screwdrivers and hammers can be used for more than one year and therefore should be classified as non-current assets. But unlike fixed assets, these loose tools have a high probability of being misplaced or lost. Hence they are classified as current assets.
Since loose tools are treated as an asset for the business, they are shown as a debit balance in the trial balance.
The cost of loose tools consumed for the year will be shown on the debit side of the Profit & Loss A/c as an expense. In the balance sheet, loose tools are shown on the Assets side under the head Current Assets and sub-head Inventories. Since they aid the production process, loose tools are shown as a part of the inventory of the business.
Let us take an example,
XYZ Ltd. at the beginning of the year had loose tools worth 5,000. During the year they purchased loose tools worth 500. At the end of the year, the company valued its loose tools at 4,500.
Now let us find the cost of loose tools consumed. The formula for finding the cost of loose tools consumed is as follows:
Cost of loose tools consumed = 5,000 + 500 – 4,500 = 1,000
So, the cost of loose tools consumed (1000) will be shown on the debit side of the P&L A/c as follows:
The closing inventory of loose tools worth 4,500 will be shown on the assets side of the balance sheet under the head current assets and sub-head inventory in the following manner:
One thing to remember here is there is an exception to loose tools. While calculating liquidity ratios like the Current ratio, Quick ratio, etc. loose tools are excluded from current assets. The reason for this is loose tools cannot be easily converted into cash i.e. they are less liquid. The purpose of calculating the current ratio is to check the liquidity of a company. Including loose tools (which cannot be easily converted into cash) in current assets defeats the purpose of calculating the ratio.
See less