Definition Section 43 of the companies act 2013 prescribes that the share capital of a company broadly can be of two types or classes : Preference shares Equity shares Preference shares Preference shares are the shares that carry the following two preferential rights : Preferential rights to receivRead more
Definition
Section 43 of the companies act 2013 prescribes that the share capital of a company broadly can be of two types or classes :
Preference shares
Equity shares
Preference shares
Preference shares are the shares that carry the following two preferential rights :
Preferential rights to receive dividends, to be paid as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income tax before it is paid to equity shareholders, and
Return of capital on the winding up of the company before that of equity shares.
Classes of preference shares
Preference shares are broadly classified as follows :
With reference to the dividend
Participation in surplus profit
Convertibility
Redemption
With reference to the dividend
Cumulative preference shares are those preference shares that carry the right to receive arrears of dividends before the dividend is paid to the equity shareholders.
Non-cumulative preference shares are those that do not carry the right to receive arrears of dividends.
Participation in surplus profit
Participating preference shares of the company may provide that after the dividend has been paid to the equity shareholders, the holders of preference shares will also have a right to participate in the remaining profits.
Non-participating preference shares are those preference shares that do not carry the right to participate in the remaining profits after the equity shareholders have paid the dividend.
Convertibility
Convertible preference shares are those preference shares that carry the right to be converted into equity shares.
Non-convertible preference shares are those that do not carry the right to be converted into equity shares.
Redemption
Redeemable preference shares are those preference shares that are redeemed by the company at the time specified for the repayment or earlier.
Irredeemable preference shares are preference shares the amount of which can be returned by the company to the holders of such shares when the company is wound up.
Equity shares
Equity shares are those shares that are not preference shares.
Equity shares are the most commonly issued class of shares that carry the maximum ‘risk and reward ‘ of the business the risks of losing part or all the value of the shares if the business incurs losses.
The rewards are the payment of higher dividends and appreciation in the market value.
Definition Not-for-profit organizations are also known as non-profit organizations set up to further cultural, educational, religious, professional, or public service objectives. Its aim is not to earn profit Accounting done by non-profit organizations is fund based. Type of accounting Non-pRead more
Definition
Not-for-profit organizations are also known as non-profit organizations set up to further cultural, educational, religious, professional, or public service objectives. Its aim is not to earn profit
Accounting done by non-profit organizations is fund based.
Type of accounting
Non-profit organizations do Fund Based Accounting.
Donations received or funds set aside for specific purposes are credited to a separate fund account and are shown on the liabilities side of the balance sheet.
The income from or donations for these funds are credited to the respective fund account. On the other hand, expenses or payments out of these funds are debited.
Accounting when done on this basis is known as Fund Based Accounting.
Let me explain to you with an example :
The sports fund has a balance of Rs 100000 which is invested as a fixed deposit in a bank earning 8% interest. A further donation of Rs 10000 is received towards it. Expenses incurred towards prizes are Rs 7000; Rs 3000 towards trophies and Rs 4000 distribution of cash prizes. The accounts are shown as follows :
Categories of funds
In the case of non-profit organizations, funds may be classified under the following heads :
Unrestricted fund :
The unrestricted fund does not carry any restriction with respect to its use. In other words, management can use the amounts in the funds as it deems appropriate, but to carry out the purpose for which the organization exists.
This is known as the general fund or the capital fund to which the surplus for the year is added and in case of deficit, deducted.
Restricted fund :
A restricted fund is a fund, the use of which is restricted either by the management or by the donor for a specific purpose.
Examples of such funds are endowment funds, annuity funds, loan funds, prize funds, sports funds, etc.
Government grant: grant received from the government for a specific purpose is restricted to be used for the purpose it is granted. It is accounted for in the books following fund-based accounting.
For example, a grant received from the government for ‘the polio eradication program is credited to the polio eradication fund, and income earned relating to the fund is credited to the fund while expenses are debited.
Endowment fund: it’s a fund usually a non-profit organization, arising from a bequest or gift, the income of which is devoted to a specific purpose.
Annuity fund: an annuity fund is established when a non-profit organization receives assets from a donor with a condition to pay
Loan fund: loan fund is set up to grant loans for specific purposes say loans to pursue higher studies.
A fixed assets fund is a fund earmarked for investment in fixed assets or already invested in fixed assets.
Prize funds: it is a fund set up to use for distribution as prizes say for achievements or contributions to the welfare of society.
Definition Goodwill is an intangible asset that places an enterprise in an advantageous position due to which the enterprise is able to earn higher profits without extra effort. For example, if the enterprise has rendered good services to its customers, it will be satisfied with the quality of its sRead more
Definition
Goodwill is an intangible asset that places an enterprise in an advantageous position due to which the enterprise is able to earn higher profits without extra effort.
For example, if the enterprise has rendered good services to its customers, it will be satisfied with the quality of its services, which will bring them back to the enterprise.
Features
The value of goodwill is a subjective assessment of the valuer.
• It helps in earning higher profits.
• It is an intangible asset.
• It is an attractive force that brings in customers to the business.
• It has realizable value when the business is sold out.
Need for goodwill valuation
The need for the valuation of goodwill arises in the following circumstances :
• When there is a change in profit sharing ratio.
• When a new partner is admitted.
• When partner retires or dies.
• When a partnership firm is sold as a going concern.
• When two or more firms amalgamate.
Classification of goodwill
Goodwill is classified into two categories:
• Purchased goodwill
• Self-generated goodwill
Purchased goodwill :
Is that goodwill acquired by the firm for consideration whether paid or kind? For example: when a business is purchased and purchase consideration is more than the value of net assets the difference amount is the value of purchase goodwill.
Self-generated goodwill
It is that goodwill that is not purchased for consideration but is earned by the management’s efforts.
It is an internally generated goodwill that arises from a number of factors ( such as favorable location, efficient management, good quality of products, etc ) that a running business possesses due to which it is able to earn higher profits.
Methods of valuation
1. Average profit method
2. Super profit method
3. Capitalization method
Average profit method: goodwill under the average profit method can be calculated either by :
• Simple average profit method or
• Weighted average profit method
Definition A limited liability partnership (LLP)is a business vehicle like a partnership that features the partners ‘ liability is limited. Thus, it has elements of partnership and company. Another important feature of LLP is that each partner is not responsible or liable for another partner’s miscoRead more
Definition
A limited liability partnership (LLP)is a business vehicle like a partnership that features the partners ‘ liability is limited. Thus, it has elements of partnership and company.
Another important feature of LLP is that each partner is not responsible or liable for another partner’s misconduct or negligence.
LLP as constituted in INDIA:
The limited liability partnership act, 2008 came into effect on 31st march, 2009. LLP is different from a partnership as it operates like a partnership, but in an LLP each partner is protected from personal liability, except to the extent of his capital contribution in the LLP.
• LLP is subject to income tax like any other partnership firm.
• A partner is not liable for independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner‘s wrongful business decisions or misconduct.
• LLP is a body corporate and legal entity separate from its partners. It has perpetual succession like a limited liability company.
Indian partnership act 1932 is not applicable to LLPs and also the limit on the number of partners in an LLP is not applicable, unlike an ordinary partnership firm where the maximum number of partners cannot exceed the number specified under SEC 464 of Companies Act 2013, which at present is 50.
The LLP Act, 2008 specifies that a least one of the partners in the LLP is a citizen of India and an Indian national.
• The Registrar Of Companies ( ROC) is authorized to register and control LLPs.
Characteristics
• Separate legal entity :
Like a company, LLP also has a separate legal entity. Therefore partners and LLP are distinct from each other, like a company where the company has a legal entity separate from its shareholders.
• Minimum capital :
LLP is not required to maintain minimum capital. Thus partners in LLP decide how much capital will be contributed by each partner.
• The Minimum number of members :
An LLP can be established with at least two members who shall also be the designated partners and shall have Director Identification Number (DIN).
There is no limit on the maximum number of partners. Members other than designated partners are required to have DIN.
• Audit is not mandatory :
All companies, whether private or public, are required to get their accounts audited. However, an audit of LLP‘s books of accounts is not mandatory except :
• If the contribution of the LLP exceeds Rs 25 lakhs: or • If the annual turnover of the LLP exceeds Rs 40 lakhs.
Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not in a specific period. Types of error in theRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not in a specific period.
Types of error in the trial balance
Now let me explain to you that what are the errors of trail balance which are as follows :
• Error of principle
• Compensating error
• Transactions completely omitted
• Error of recording
• Error of posting
A trial balance is not conclusive proof of the accuracy of the books of accounts since certain types of errors remain even when it tallies. They are explained below :
Error of principle
This error arises due to the incorrect application of the principle of accounting is not disclosed by the trial balance.
Compensating error
It means the group of errors committed in such a way that one mistake is compensated by another and the trial balance still agrees.
Transaction completely omitted
When the transaction is entirely omitted from recording in the books of account cannot be detected.
Error of recording
When both aspects of recording a transaction twice in the books of account take place.
Error of posting
Posting the correct amount on the correct side but in the wrong account is not reflected in the trial balance.
Steps to locate errors
Differences in the trial balance, howsoever minor they may be, must be located and rectified. The following steps are useful in locating errors are :
• Two columns of the trial balance should be totaled again.
• The list of sundry debtors and creditors should be checked to find out whether all balances of debtors and creditors have been correctly written in the trial balance or not.
• It should be checked that the balances of every account including cash and bank balances ( from the cash book ) have been written in the correct column of the trial balance.
• If the errors remain undetected, try to locate the errors by trial and error techniques such as finding an account showing a balance difference from the trial balance.
• Ledger balances should be balanced again.
• Check the totals of subsidiary books.
• Check the posting of nominal accounts.
• And at last if not possible to locate the difference in the trial balance is temporarily transferred to a suspense account.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
Purpose of trial balance
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Rules of trial balance
When we prepare a trial balance from the given list of ledger balances, the following rules to be kept in mind that are as follows :
• The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
Definition Debit balance may arise due to timing differences in which case income will be accrued at the year's end to offset the debit. The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits. The account which has debit balances are aRead more
Definition
Debit balance may arise due to timing differences in which case income will be accrued at the year’s end to offset the debit.
The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits.
The account which has debit balances are as follows:
• Assets accounts
Land, furniture, building machinery, etc
• Expenses accounts
Salary, rent, insurance, etc
• Losses
Bad debts, loss by fire, etc
• Drawings
Personal drawings of cash or assets
• Cash and bank balances
Balances of these accounts
In class 11th, we learned about all these accounts that have debit balances.
Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “
Here are some examples showing the debit balances of the accounts :
Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not on a particular period. What does trial balRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not on a particular period.
What does trial balance include?
As in each double-entry system, each account has two aspects debit and credit.
Hence the following trial balance includes:
• Debit or credit of the reporting period.
• The amount which is to be debited or credited to each account.
• The account numbers.
• The dates of the reporting period.
• The totaled sums of debits and credits entered during that time.
When we prepare a trial balance from the given list of ledger balances, these need to be included which are as follows :
The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
The purpose of the trial balance is as follows:
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Definition Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “ A furniture account that is an asset has a debit balance. Debit balance may arise due to timing differences in which case income wilRead more
Definition
Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “
A furniture account that is an asset has a debit balance.
Debit balance may arise due to timing differences in which case income will be accrued at the year’s end to offset the debit.
The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits.
The account which has debit balances are as follows:
Assets accounts
Land, furniture, building machinery, etc
Expenses accounts
Salary, rent, insurance, etc
Losses
Bad debts, loss by fire, etc
Drawings
Personal drawings of cash or assets
Cash and bank balances
Balances of these accounts
The account has credit balances as follows:
Liabilities accounts
Creditors, bills payable, etc
Income accounts
Salary received, interest received, etc
Profits
Dividends, interest, etc
Capital
Partners Capital
Here are some examples showing the debit balances and credit balances of the accounts :
Definition Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle. Posting helps us to classify transactions in a better manner. A journal is used to record transactions in chronological order while ledgerRead more
Definition
Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle.
Posting helps us to classify transactions in a better manner.
A journal is used to record transactions in chronological order while ledger books are used to classify transactions into assets, liabilities, expenses, and incomes.
Steps of Posting
• Create and name ledger accounts for different items of trial balance
• Identify those entries in the journal that relate to the relevant ledger book under consideration.
• Post the entry on the debit or credit side of the ledger account.
• For example, when salaries are paid a salary account is debited and a bank account is credited. When posting this transaction in the bank account we will debit the bank account and write “To salaries” under the head “particular”. This will indicate that salaries were paid from a bank account causing a reduction in the bank balance.
• After all the journal entries relevant to a particular ledger account have been posted in it, we will tally the total of the debit and the credit side of the ledger account to ascertain any balance left.
• Usually, asset accounts have the debit side exceeding the credit side. That is to say, they have a debit balance. Liability accounts usually have a credit balance.
• It is not necessary that every ledger account may have a balance left at the end. The total of the amounts on the debit side may be equal to the total of the amounts on the credit side in some ledger accounts.
• The last step is to recheck the ledger account to identify and correct any mistakes that may have occurred during the posting process.
Importance of Posting
• Posting helps us to classify transactions in a better and more efficient manner.
• Posting makes the books of accounts more readable.
• An accountant may choose to engage in posting once every month or even once every day as per the requirements of the business and the financial reporting norms.
• Posting is necessary for the creation of financial statements. A trial balance cannot be drafted without determining the balance of each ledger account.
• Posting helps us to know the balance of each account This helps to run the business smoothly by tracking balances timely and making up for any likely deficiency in advance.
• Analysis of how balances of various ledger accounts have changed over time helps us to draw valuable conclusions for the business.
Conclusion
We can conclude by saying that the process of posting refers to transferring the entries from the journal to the ledger accounts.
Posting is an essential step of the accounting cycle and without it, financial statements cannot be prepared. Any error while posting is bound to adversely affect the creation of the financial statements.
Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more
Definition
Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.
However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.
For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.
Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.
For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.
Meaning as per AS – 29
Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-
• Contingent asset
A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.
• Contingent liability
A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
A reliable estimate of the amount of obligation cannot be made.
Recognition In Financial Statements
Contingent assets and liabilities are recognized as follows:-
• Contingent Assets
As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.
It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.
However, when the realization of income is virtually certain, the related asset no longer remains contingent.
• Contingent liability
As per the rules, it is not recognized by an enterprise.
When recognized?
Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.
The assets and the related income are recognized in the financial statements of the period in which the change occurs.
Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.
And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.
A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.
Disclosure
Now we will see how contingent assets and liability are disclosed which is mentioned below:-
• Contingent asset
These contingent assets are not disclosed in financial statements.
A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.
• Contingent Assets
A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.
What are kind or classes of shares issued by companies in accounting ?
Definition Section 43 of the companies act 2013 prescribes that the share capital of a company broadly can be of two types or classes : Preference shares Equity shares Preference shares Preference shares are the shares that carry the following two preferential rights : Preferential rights to receivRead more
Definition
Section 43 of the companies act 2013 prescribes that the share capital of a company broadly can be of two types or classes :
Preference shares
Preference shares are the shares that carry the following two preferential rights :
Classes of preference shares
Preference shares are broadly classified as follows :
With reference to the dividend
Cumulative preference shares are those preference shares that carry the right to receive arrears of dividends before the dividend is paid to the equity shareholders.
Non-cumulative preference shares are those that do not carry the right to receive arrears of dividends.
Participation in surplus profit
Participating preference shares of the company may provide that after the dividend has been paid to the equity shareholders, the holders of preference shares will also have a right to participate in the remaining profits.
Non-participating preference shares are those preference shares that do not carry the right to participate in the remaining profits after the equity shareholders have paid the dividend.
Convertibility
Convertible preference shares are those preference shares that carry the right to be converted into equity shares.
Non-convertible preference shares are those that do not carry the right to be converted into equity shares.
Redemption
Redeemable preference shares are those preference shares that are redeemed by the company at the time specified for the repayment or earlier.
Irredeemable preference shares are preference shares the amount of which can be returned by the company to the holders of such shares when the company is wound up.
Equity shares
Equity shares are those shares that are not preference shares.
Equity shares are the most commonly issued class of shares that carry the maximum ‘risk and reward ‘ of the business the risks of losing part or all the value of the shares if the business incurs losses.
The rewards are the payment of higher dividends and appreciation in the market value.
See lessWhich type of accounting is done by NPOs ?
Definition Not-for-profit organizations are also known as non-profit organizations set up to further cultural, educational, religious, professional, or public service objectives. Its aim is not to earn profit Accounting done by non-profit organizations is fund based. Type of accounting Non-pRead more
Definition
Not-for-profit organizations are also known as non-profit organizations set up to further cultural, educational, religious, professional, or public service objectives. Its aim is not to earn profit
Accounting done by non-profit organizations is fund based.
Type of accounting
Non-profit organizations do Fund Based Accounting.
Donations received or funds set aside for specific purposes are credited to a separate fund account and are shown on the liabilities side of the balance sheet.
The income from or donations for these funds are credited to the respective fund account. On the other hand, expenses or payments out of these funds are debited.
Accounting when done on this basis is known as Fund Based Accounting.
Let me explain to you with an example :
The sports fund has a balance of Rs 100000 which is invested as a fixed deposit in a bank earning 8% interest. A further donation of Rs 10000 is received towards it. Expenses incurred towards prizes are Rs 7000; Rs 3000 towards trophies and Rs 4000 distribution of cash prizes. The accounts are shown as follows :
Categories of funds
In the case of non-profit organizations, funds may be classified under the following heads :
Unrestricted fund :
The unrestricted fund does not carry any restriction with respect to its use. In other words, management can use the amounts in the funds as it deems appropriate, but to carry out the purpose for which the organization exists.
This is known as the general fund or the capital fund to which the surplus for the year is added and in case of deficit, deducted.
Restricted fund :
A restricted fund is a fund, the use of which is restricted either by the management or by the donor for a specific purpose.
Examples of such funds are endowment funds, annuity funds, loan funds, prize funds, sports funds, etc.
- Prize funds: it is a fund set up to use for distribution as prizes say for achievements or contributions to the welfare of society.
See lessWhat do you mean by goodwill ?
Definition Goodwill is an intangible asset that places an enterprise in an advantageous position due to which the enterprise is able to earn higher profits without extra effort. For example, if the enterprise has rendered good services to its customers, it will be satisfied with the quality of its sRead more
Definition
Goodwill is an intangible asset that places an enterprise in an advantageous position due to which the enterprise is able to earn higher profits without extra effort.
For example, if the enterprise has rendered good services to its customers, it will be satisfied with the quality of its services, which will bring them back to the enterprise.
Features
The value of goodwill is a subjective assessment of the valuer.
• It helps in earning higher profits.
• It is an intangible asset.
• It is an attractive force that brings in customers to the business.
• It has realizable value when the business is sold out.
Need for goodwill valuation
The need for the valuation of goodwill arises in the following circumstances :
• When there is a change in profit sharing ratio.
• When a new partner is admitted.
• When partner retires or dies.
• When a partnership firm is sold as a going concern.
• When two or more firms amalgamate.
Classification of goodwill
Goodwill is classified into two categories:
• Purchased goodwill
• Self-generated goodwill
Purchased goodwill :
Is that goodwill acquired by the firm for consideration whether paid or kind?
For example: when a business is purchased and purchase consideration is more than the value of net assets the difference amount is the value of purchase goodwill.
Self-generated goodwill
It is that goodwill that is not purchased for consideration but is earned by the management’s efforts.
It is an internally generated goodwill that arises from a number of factors ( such as favorable location, efficient management, good quality of products, etc ) that a running business possesses due to which it is able to earn higher profits.
Methods of valuation
1. Average profit method
2. Super profit method
3. Capitalization method
Average profit method: goodwill under the average profit method can be calculated either by :
• Simple average profit method or
• Weighted average profit method
See lessWhat do you mean by LLP ?
Definition A limited liability partnership (LLP)is a business vehicle like a partnership that features the partners ‘ liability is limited. Thus, it has elements of partnership and company. Another important feature of LLP is that each partner is not responsible or liable for another partner’s miscoRead more
Definition
A limited liability partnership (LLP)is a business vehicle like a partnership that features the partners ‘ liability is limited. Thus, it has elements of partnership and company.
Another important feature of LLP is that each partner is not responsible or liable for another partner’s misconduct or negligence.
LLP as constituted in INDIA:
The limited liability partnership act, 2008 came into effect on 31st march, 2009. LLP is different from a partnership as it operates like a partnership, but in an LLP each partner is protected from personal liability, except to the extent of his capital contribution in the LLP.
• LLP is subject to income tax like any other partnership firm.
• A partner is not liable for independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner‘s wrongful business decisions or misconduct.
• LLP is a body corporate and legal entity separate from its partners. It has perpetual succession like a limited liability company.
Indian partnership act 1932 is not applicable to LLPs and also the limit on the number of partners in an LLP is not applicable, unlike an ordinary partnership firm where the maximum number of partners cannot exceed the number specified under SEC 464 of Companies Act 2013, which at present is 50.
The LLP Act, 2008 specifies that a least one of the partners in the LLP is a citizen of India and an Indian national.
• The Registrar Of Companies ( ROC) is authorized to register and control LLPs.
Characteristics
• Separate legal entity :
Like a company, LLP also has a separate legal entity. Therefore partners and LLP are distinct from each other, like a company where the company has a legal entity separate from its shareholders.
• Minimum capital :
LLP is not required to maintain minimum capital. Thus partners in LLP decide how much capital will be contributed by each partner.
• The Minimum number of members :
An LLP can be established with at least two members who shall also be the designated partners and shall have Director Identification Number (DIN).
There is no limit on the maximum number of partners. Members other than designated partners are required to have DIN.
• Audit is not mandatory :
All companies, whether private or public, are required to get their accounts audited. However, an audit of LLP‘s books of accounts is not mandatory except :
• If the contribution of the LLP exceeds Rs 25 lakhs: or
• If the annual turnover of the LLP exceeds Rs 40 lakhs.
See lessHow to locate errors in trial balance?
Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not in a specific period. Types of error in theRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not in a specific period.
Types of error in the trial balance
Now let me explain to you that what are the errors of trail balance which are as follows :
• Error of principle
• Compensating error
• Transactions completely omitted
• Error of recording
• Error of posting
A trial balance is not conclusive proof of the accuracy of the books of accounts since certain types of errors remain even when it tallies. They are explained below :
Error of principle
This error arises due to the incorrect application of the principle of accounting is not disclosed by the trial balance.
Compensating error
It means the group of errors committed in such a way that one mistake is compensated by another and the trial balance still agrees.
Transaction completely omitted
When the transaction is entirely omitted from recording in the books of account cannot be detected.
Error of recording
When both aspects of recording a transaction twice in the books of account take place.
Error of posting
Posting the correct amount on the correct side but in the wrong account is not reflected in the trial balance.
Steps to locate errors
Differences in the trial balance, howsoever minor they may be, must be located and rectified. The following steps are useful in locating errors are :
• Two columns of the trial balance should be totaled again.
• The list of sundry debtors and creditors should be checked to find out whether all balances of debtors and creditors have been correctly written in the trial balance or not.
• It should be checked that the balances of every account including cash and bank balances ( from the cash book ) have been written in the correct column of the trial balance.
• If the errors remain undetected, try to locate the errors by trial and error techniques such as finding an account showing a balance difference from the trial balance.
• Ledger balances should be balanced again.
• Check the totals of subsidiary books.
• Check the posting of nominal accounts.
• And at last if not possible to locate the difference in the trial balance is temporarily transferred to a suspense account.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
Purpose of trial balance
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Rules of trial balance
When we prepare a trial balance from the given list of ledger balances, the following rules to be kept in mind that are as follows :
• The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
See lessWhat is debit balance class 11?
Definition Debit balance may arise due to timing differences in which case income will be accrued at the year's end to offset the debit. The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits. The account which has debit balances are aRead more
Definition
Debit balance may arise due to timing differences in which case income will be accrued at the year’s end to offset the debit.
The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits.
The account which has debit balances are as follows:
• Assets accounts
Land, furniture, building machinery, etc
• Expenses accounts
Salary, rent, insurance, etc
• Losses
Bad debts, loss by fire, etc
• Drawings
Personal drawings of cash or assets
• Cash and bank balances
Balances of these accounts
In class 11th, we learned about all these accounts that have debit balances.
Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “
Here are some examples showing the debit balances of the accounts :
See lesswhat does a trial balance include?
Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not on a particular period. What does trial balRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not on a particular period.
What does trial balance include?
As in each double-entry system, each account has two aspects debit and credit.
Hence the following trial balance includes:
• Debit or credit of the reporting period.
• The amount which is to be debited or credited to each account.
• The account numbers.
• The dates of the reporting period.
• The totaled sums of debits and credits entered during that time.
When we prepare a trial balance from the given list of ledger balances, these need to be included which are as follows :
The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
The purpose of the trial balance is as follows:
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Structure of trial balance
See lessWhich of the following accounts have a debit balance?
Definition Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “ A furniture account that is an asset has a debit balance. Debit balance may arise due to timing differences in which case income wilRead more
Definition
Where the total of the debit side is more than the credit side therefore the difference is the debit balance and is placed credit side as “ by balance c/d “
A furniture account that is an asset has a debit balance.
Debit balance may arise due to timing differences in which case income will be accrued at the year’s end to offset the debit.
The amount is shown in the record of a company s finances, by which its total debits are greater than its total credits.
The account which has debit balances are as follows:
Land, furniture, building machinery, etc
Salary, rent, insurance, etc
Bad debts, loss by fire, etc
Personal drawings of cash or assets
Balances of these accounts
The account has credit balances as follows:
Creditors, bills payable, etc
Salary received, interest received, etc
Dividends, interest, etc
Partners Capital
Here are some examples showing the debit balances and credit balances of the accounts :
See lessWhat is the meaning of posting in journal entries
Definition Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle. Posting helps us to classify transactions in a better manner. A journal is used to record transactions in chronological order while ledgerRead more
Definition
Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle.
Posting helps us to classify transactions in a better manner.
A journal is used to record transactions in chronological order while ledger books are used to classify transactions into assets, liabilities, expenses, and incomes.
Steps of Posting
• Create and name ledger accounts for different items of trial balance
• Identify those entries in the journal that relate to the relevant ledger book under consideration.
• Post the entry on the debit or credit side of the ledger account.
• For example, when salaries are paid a salary account is debited and a bank account is credited. When posting this transaction in the bank account we will debit the bank account and write “To salaries” under the head “particular”. This will indicate that salaries were paid from a bank account causing a reduction in the bank balance.
• After all the journal entries relevant to a particular ledger account have been posted in it, we will tally the total of the debit and the credit side of the ledger account to ascertain any balance left.
• Usually, asset accounts have the debit side exceeding the credit side. That is to say, they have a debit balance. Liability accounts usually have a credit balance.
• It is not necessary that every ledger account may have a balance left at the end. The total of the amounts on the debit side may be equal to the total of the amounts on the credit side in some ledger accounts.
• The last step is to recheck the ledger account to identify and correct any mistakes that may have occurred during the posting process.
Importance of Posting
• Posting helps us to classify transactions in a better and more efficient manner.
• Posting makes the books of accounts more readable.
• An accountant may choose to engage in posting once every month or even once every day as per the requirements of the business and the financial reporting norms.
• Posting is necessary for the creation of financial statements. A trial balance cannot be drafted without determining the balance of each ledger account.
• Posting helps us to know the balance of each account This helps to run the business smoothly by tracking balances timely and making up for any likely deficiency in advance.
• Analysis of how balances of various ledger accounts have changed over time helps us to draw valuable conclusions for the business.
Conclusion
We can conclude by saying that the process of posting refers to transferring the entries from the journal to the ledger accounts.
Posting is an essential step of the accounting cycle and without it, financial statements cannot be prepared. Any error while posting is bound to adversely affect the creation of the financial statements.
See lessHow are contingent assets different from contingent liabilities ?
Definition Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are discloRead more
Definition
Contingent Asset is an asset the existence, ownership, or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.
However, the difference between Contingent assets is not disclosed whereas Contingent liabilities are disclosed by way of notes they do have different criteria for recognition which are discussed below.
For example:– a claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.
Contingent liabilities are defined as obligations relating to existing conditions or situations which may arise in the future depending on the occurrence or non-occurrence of one or more uncertain events.
For example:- Billis discounted but not yet matured, arrears of dividend on cum –preferences-shares, etc.
Meaning as per AS – 29
Now let me try to explain to you the meaning according to Accounting Standard 29 of the above contingent assets and liabilities which is as follows:-
• Contingent asset
A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise.
• Contingent liability
A possible obligation that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
Not wholly within the control of the enterprise.
A present obligation that arises from past events but is not recognized because it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or,
A reliable estimate of the amount of obligation cannot be made.
Recognition In Financial Statements
Contingent assets and liabilities are recognized as follows:-
• Contingent Assets
As per the prudence concept s well as present accounting standards, an enterprise should not recognize a contingent asset.
It is possible that the recognition of contingent assets may result in the recognition of income that may never be realized.
However, when the realization of income is virtually certain, the related asset no longer remains contingent.
• Contingent liability
As per the rules, it is not recognized by an enterprise.
When recognized?
Contingent assets are assessed continually and if it has become virtuality an outflow of economic benefits will arise.
The assets and the related income are recognized in the financial statements of the period in which the change occurs.
Contingent liability is assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.
And if it becomes probable that an outflow or future economic benefits will require for an item previously dealt with as a contingent liability.
A provision is recognized in financial statements of the period in which the change probability occurs except in extremely rare circumstances where no reliable estimate can be made.
Disclosure
Now we will see how contingent assets and liability are disclosed which is mentioned below:-
• Contingent asset
These contingent assets are not disclosed in financial statements.
A contingent asset is usually disclosed in the report of the approving authority ( ie.e., Board Of Directors in the case of a company, and the corresponding approving authority in case of any enterprise), if ab inflow of economic benefits is probable.
• Contingent Assets
A contingent liability is required to be disclosed by way of a note to the balance sheet unless the possibility of an outflow of a resource embodying economic benefit is remote.
See less