Accounting Archives - Page 5 of 5

Posted on December 27, 2018May 27, 2024 by admin-s20

Accounting Reserves: Concept

Several times we have heard the word reserve in accounting but the exact meaning…

Several times we have heard the word reserve in accounting but the exact meaning is at times not explained in various accounting classes and also most of the classes are not covering in the accounting courses. And even if it is explained in various accounting classes by learned faculties, students fail to understand the basics. They know it’s accounting effect. Do they really know what is it? Or why it is created for?

Let us understand the concept of reserves and their types:

Profit earned by any business is payable to its proprietor. But the proprietor does not withdraw the whole amount of profit. He leaves some amount of profit to maintain the liquidity and strengthen the financial position of the business. This amount is known as the reserve. Reserve is profits, appropriated for a particular purpose.

There is a long list of reserves created for in the books of accounts as explained in various accounting classes. And truly, it is so. However, primarily we can classify reserves in two categories:

Revenue reserve
Capital reserve

Revenue reserves can be further classified into:

General reserve: Profit determined by the profit and loss statement at the end of the year, the proportion of such profit is not aid to the proprietor, but kept apart is known as revenue reserve. General reserve is created to maintain the liquidity of the business resources, meeting any known contingencies, liabilities, etc.
Specific reserve: If the provision is created for any specific period it is known as a specific reserve. This reserve cannot be utilized for any other purposes. For example- Reserve for Repairs and Maintenance, Reserve for Outstanding Expenses.

On the other hand, Capital Reserve refers to the profit that arises from the sources other than the normal trading activities. Such profit is known as capital profit. A capital reserve is an account on the balance sheet which can be used for contingencies or to offset capital losses. It is built out of capital profit and not out of business profit.

Hence, we can infer that reserve is a great source for financing any long-term project of any company, and if a company which isn’t keen to go for debt, term loan etc. can use this reserve to fully finance their new projects. There are many sub-classifications we focus during our accounting classes on reserves. For more such details you can attend our free demo classes.

Posted on December 20, 2018May 27, 2024 by admin-s20

Understanding Methods of Depreciation

Generally, methods for providing depreciation are based on the formula developed on a study of…

depreciation method - Best accounting classes in ahmedabad

Generally, methods for providing depreciation are based on the formula developed on a study of the behavior of the assets over a period of years for readily computing the amount of depreciation suffered by different forms of assets. However, various accounting institutes focus on a few methods and overlook the other methods. Due to space constraint, we will explain only two most commonly used depreciation methods here.

The two methods for providing depreciation are the Straight Line Method and the Reducing Balance Method. The Straight Line Method is the most suitable and accurate method to adapt in most case. The income tax rules, however, prescribe the Reducing Balance Method except in the case of assets of an undertaking engaged in generation and distribution of power.

Straight Line Method: An equal amount is written off every year during the working life of an asset so as to reduce the cost of the asset to nil or its residual value at end of its useful life. The advantages of this method are that it is simple to apply and give accurate result results especially in the case of leases, patent and copyrights, and also in case of plant and machinery. This method is even known as Fixed Instalment Method.

Methods of Depreciation - best tally classes in ahmedabad

So, it is very simple. And it is like apportioning some expenses every year. So, no need to attend any accounting institute for this purpose.

Reducing Balance Method: Under this method, a fixed percentage of diminishing value of the asset is written off each year, so as to the asset to its break – up value at the end of its life, repairs and small renewals being charged to revenue. This method is commonly used for plants, fixtures, etc. Under this system, the annual charge for depreciation decreases from year to year, so that the earlier years suffer to the benefit of the later years. Also, under this method, the value of the asset can never be completely extinguished, which happens in the early explained Straight Line Method.

Many accounting institutes and academies stop at this juncture instead of teaching students exact formulae of arriving at the proper depreciation rate. But our accounting training in Ahmedabad focuses on every nitty-gritty of this method since this method is generally the only allowed method of calculating income tax applicable to the firm.

In this method, Depreciation goes on decreasing every year. The formula is –

best accounting classes in ahmedabad 2018-12-19

Suppose that the fixed asset purchase price is 10,000, the scrap value is 1,000, and the depreciation rate is 30%.

Using the Reducing balance method, 30% of the depreciation base (net book value minus scrap value) is calculated at the end of the previous depreciation period. Calculation of depreciation for the first three years is shown in the following table.

Understanding Methods of Depreciation - accounting classes in ahmedabad

If you have any questions related to this topic, we will be happy to revert to you or you can visit our accounting institute in Ahmedabad and attend a free demo class of depreciation accounting.

Posted on December 11, 2018May 27, 2024 by admin-s20

Depreciation: Concept

As you are aware that during various accounting courses fixed asset accounting is highly…

depreciation - Best accounting class in ahmedabad

As you are aware that during various accounting courses fixed asset accounting is highly stressed upon. Fixed assets like plant and machinery are used in the business for the purpose of production of goods or for providing useful services in the course of production. Value of such fixed assets decreases with time and its utilization i.e. wear and tear. Vale of the portion of fixed assets utilized for generating revenue must be recovered during the particular accounting year to ascertain true income. This portion of the cost of fixed assets allocated to a particular accounting year is called Depreciation. Hence, all accounting courses state it imperative to understand how to calculate depreciation.

Depreciation means a diminution in the value of assets, due to natural wear and tear, exhaustion of subject-matter or similar causes.

The loss in the value of assets employed for carrying on the business being an essential element of business expenditure, it is necessary to calculate the amount of such loss, to get a stipulation, and hence, come at the amount of profit or loss obtained by the business.

Reasons for Depreciation:

Physical wear and tear resulting from the use
Tangible fixed assets like machinery, building, furniture, etc. can get exhausted or discarded on account of resistance, pressure, weathering, the power of use, chemical reaction, handling, etc.
Physical deterioration resulting in exposure to the element
Number of assets deteriorates with the mere passage of time, being continually exposed to forces of nature, like wind, weather, etc.
Disuse
A machine kept continuously idle become potentially less useful by the passage of time.
Depletion
Wasting assets such as mines and quarries lose their value because they get exhausted on account of continuous extraction.
Obsolescence
Some equipment will be rendered out of date by more efficient equipment, which reduces the usability of the original equipment.
Accident
If an asset meets an accident, the value of an asset may go down.

But now the question arises, why do we need to provide Depreciation? The following are the objectives for providing Depreciation.

Funds for replacement
Generation of adequate funds in the hand of business for replacement of the asset at the end of its useful life.
Correct income measurement
Depreciation must be charged for proper estimation of periodic profit or loss.
True position statement
Value of fixed assets should be adjusted for depreciation charged in order to depict the actual financial position.
Ascertainment of true cost of production
For ascertaining the true cost of production, it is necessary to charge depreciation as an item of cost of production.

Too much theory… Uh… Ok. So our institute runs various accounting courses in Ahmedabad and focuses on learning practical accounting. So, let us learn accounting entries related to depreciation.

When the depreciation is directly charged to an asset account, the entry to be made on writing off depreciation is:

s20 Depreciation concepts 3.21.30 PM

Alternatively, when the asset continues to be shown at its original cost till discarded or destroyed or sold the following entries may be passed:

s20 accounting classes in ahmedabad - Depreciation concepts

However, where the assets are sold or discarded or exchanged for the new asset. The total accumulated depreciation for the asset in the provision for depreciation account is transferred to the asset account by the following journal entry

s20 deprecation and accounting concept Screenshot 2018-12-11 at 3.21.46 PM

In the balance sheet, the asset account is shown at its original cost less accumulated balance in the provision for depreciation account.

To know more about such topics stay tuned to S20 or join our accounting courses.

Posted on October 24, 2018May 27, 2024 by admin-s20

Rule of Debit and Credit

In the previous topic, we saw how Double Entry System works but that concept…

credit debit rules by s20

In the previous topic, we saw how Double Entry System works but that concept cannot handle the accounting work independently. So some more basic concepts are introduced for channelizing double entry system. As you are aware that Super 20 Training Institute (S20) is recognized as one of best accounting training institute in Ahmedabad and we have various accounting courses, tally courses, taxation courses, GST courses for students of various backgrounds, we will endeavour to explain the concepts of debits and credits in detail.

The two sides of any account are arbitrarily distinguished. The left of an account is called the debit side; the right side is called the credit side. Any entry on the left side of an account is called a debit entry or debit, an entry on the right side is called a credit entry or credit.

Double entry system means the recording of both the aspects i.e., receiving of values and giving of values of each transaction. When an account receives the value or benefits it is debited and when it gives a value or benefit, it is credited. As every transaction affects at least two accounts, one account receives a benefit of the certain value; another account would give the benefit of the same value. So it is simply no need to go to any tally academy or accounting academy for this.

Rules have been framed for the correct debit and credit of following
– Personal account
– Real account
– Nominal account

Personal Account: ‘Debit the receiver and credit the giver’
Debit the account of a person who receives something and credit the account of the person who gives something. For example: if you purchase goods from the Ram, on credit, the two accounts involved are Goods (Purchase) Account and Ram’s Account. Since Ram is a giver in this transaction his account will be credited. Similarly, if cash is paid to Ram, Ram’s Account will be debited since he is the receiver.

Real Account: ‘Debit what comes in, credit what goes out’
Debit the account of the thing which comes in and credit the account of the thing which goes out. For example: when furniture is purchased in cash, furniture account is debited while cash account should be credited.

Nominal Account: ‘Debit all expenses and losses and credit all income and gains’
Debit the accounts of expenses and losses and credit all income and gain. For example: if you pay salary to the clerk, the two accounts involves are salary account and cash account. Salary account is a nominal account. Salary paid is an expense of the business and therefore this account will be debited. Similarly, if the interest is received, interest account will be credited, since interest is an income item.

If the three fundamental rules described above are kept in mind, it would be possible to record all the transactions correctly.

You must have noted that if a transaction involves two accounts of different kinds then relevant positions of relevant rules will be applied. For example payment of salary affects salary account and the cash account – the former is a nominal account whereas the letter is a real account.

Hence, the former part of the third rule and the latter part of the second rule will be applicable, i.e., the rule will be: Debit all expenses and losses and credit what goes out. Salary account will be debited and cash account is credited.

Well, if you want to know debit credit in details, you can surely approach us and join our Executive of Commerce course or visit our website www.s20.in. you can also visit our centre in Ahmedabad.

Posted on October 8, 2018May 27, 2024 by admin-s20

IL&FS fiasco and accounting ratios

We have a space constraint, so let us not discuss what was discusses in…

We have a space constraint, so let us not discuss what was discusses in the previous article. But you can refer my article IL&FS fiasco and accounting statements for basic understanding.

Now let us straight away understand what are accounting ratios or financial ratios as they are famously referred to.

I have produced direct ratios as calculated by me in MS Excel. If you do not know how to calculate financial ratios or how to arrive at accounting ratios you can approach Super 20 Training Institute – Ahmedabad. We provide such case based, practical and detailed understanding of various topics in our Accounting Courses, Taxation Courses, GST Courses, Tally Courses etc. at our training institute in Ahmedabad.

Now let us look at Operating Profit Margin. In FY1617, Operating Profit Margin was 49%, whereas, in FY1718, Operating Profit Margin was 39%. Such a big erosion in margins is worrisome. That means the company has some serious operating issue which needs to be looked at. Or the figures may be misleading for the previous years.

The next important accounting ratio is EBIT margin. That is Earning Before Interest and Taxes Margin. In FY1617, EBIT Margin was 42%, whereas, in FY1718, EBIT Margin was 31%. This is the significant decline. That means the company has less amount of money to meet their interest expenses.

Finally, we are staring at Net Profit Margin. In FY1617, Net Profit Margin was 1%, whereas, in FY1718, Net Profit Margin was -10%. The company was barely profitable in the previous year. Hence, everything was not ok even in FY1617 also. It was not ignored by everyone concerned with the company. And now we are staring at a big loss in FY1718. Signals were there, but they were ignored.

How default is evident from the above analysis. It is from Interest Coverage Ratio. In FY1617, the company was barely able to meet its interest obligations. On the other side, in FY1718 the interest cover was less than 1.

That means that the company did not have sufficient funds to service their interest obligations. Still, the company kept raising funds from the markets. All these funds were short-term funds basically to see the day has gone off or passed. The management was doing time pass all these days. The regulators were sleeping. The Government thought that the investors like LIC, SBI are taking care of IL&FS. LIC, SBI and other foreign investors were thinking that the management was very much able and worthy. Credit rating agencies were giving AAA rating blindly. Lenders took money from public and loaned to IL&FS thinking it is backed by the Government and anyways AAA. But it was written on the wall that IL&FS is not functioning well. And the worst came true. The institution of this size, scale and reputation are staring at bankruptcy.

Friends, these are the easy tools to analyse the company’s accounting records. Anyone, who wants to understand such topics in detail may contact us at info@s20.in. or visit our website. We are proud to be known as the best accounting training institute in Ahmedabad. All the best.

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Category: Accounting

Accounting Reserves: Concept

Understanding Methods of Depreciation

Depreciation: Concept

Rule of Debit and Credit

IL&FS fiasco and accounting ratios

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