ATSPM’S

ARTS,COMMERCE SCIENCE
COLLAGE, ASHTI

B.C.A. :- ACCOUNTANCY –II

BY : KOKANE PRATIBHA SHIVAJI

 UNIT –I
Goodwill is defined as the amount by which the fair value of the net
assets of the business exceeds the book value of the net assets. It arises
due to factors such as the reputation, location, customer base, expertise or
market position of the business.

How do you calculate net profit in a partnership?

Net Income of the partnership is calculated by subtracting total expenses
from total revenues. After that salary and interest allowances are
subtracted from Net Income, and the result is Remaining Income, which is
divided equally in accordance with the partnership agreement.

What are the main characteristics of partnership?

Partnership Firm: Nine Characteristics of Partnership Firm!
 Existence of an agreement: Partnership is the outcome of an
agreement between two or more persons to carry on business. ...
 Existence of business: ...
 Sharing of profits: ...
 Agency relationship: ...
 Membership: ...
 Nature of liability: ...
 Fusion of ownership and control: ...
 Non-transferability of interest:

What are the 4 types of partnership?

There are three relatively common partnership types:
general partnership (GP), limited partnership (LP) and limited
liability partnership (LLP). A fourth, the limited liability
limited partnership (LLLP), is not recognized in all states.
artnership Firm: Nine Characteristics of Partnership Firm!
According to the Indian Partnership Act, 1932: “Partnership is the relation
between persons who have agreed to share the profits of a business carried
on by all or any of them acting for all.”

1. Existence of an agreement:
Partnership is the outcome of an agreement between two or more persons
to carry on business. This agreement may be oral or in writing. The
Partnership Act, 1932 (Section 5) clearly states that “the relation of
partnership arises from contract and not from status.”

2. Existence of business:
Partnership is formed to carry on a business. As stated earlier, the
Partnership Act, 1932 [Section 2 (6)] states that a “Business” includes every
trade, occupation, and profession. Business, of course, must be lawful.

3. Sharing of profits:
The purpose of partnership should be to earn profits and to share it. In the
absence of any agreement, the partner should share profits (and losses as
well) in equal proportions.

ADVERTISEMENTS:

Here it is pertinent to quote the Act (Section 6) which talks of the ‘mode of
determining existence of partnership’. It says that sharing of profits is as
essential condition, but not a conclusive proof, of the existence of
partnership between partners. In the following cases, persons do share
profits, but are not the partners:
(a) By a lender of money to person engaged or about to engage in any
business.

(b) By a servant or agent as remuneration.

(c) By the widow or child of a deceased partner, as annuity {i.e., fixed

periodical payment), or

ADVERTISEMENTS:

(d) By a previous owner or part-owner of the business as consideration for

the sale of the goodwill or share thereof, does not of itself make the receiver
a partner with the persons carrying on the business. Thus, in determining
whether a group of persons is or is not a firm, whether a person is or is not
a partner in a firm, regard shall be had to the real relation between the
parties as shown by all relevant facts taken together, and not by profit
sharing alone.

4. Agency relationship:
The partnership business may be carried on by all or any of them acting for
all. Thus, the law of partnership is a branch of the law of Agency. To the
outside public, each partner is a principal, while to the other partners he is
an agent. It must, however, be noted that a partner must function within
the limits of authority conferred on him.

5. Membership:
The minimum number of persons required to constitute a partnership is
two. The Act, however, does not mention the upper limit. For this a
recourse has to be taken to the Companies Act, 1956 [Section 11 (1) & (2)].
It states that the maximum number of persons is ten, in case of a banking
business and twenty, in case of any other business.

6. Nature of liability:
The nature of liability of partners is the same as in case of sole
proprietorship. The liability of partners is both individual and collective.
The creditors have a right to recover the firm’s debts from the private
property of one or all partners, where firm’s assets are insufficient.

7. Fusion of ownership and control:

ADVERTISEMENTS:

In the eyes of law, the identity of partners is not different from the identity
of partnership firm. As such, the right of management and control vests
with the owners (i.e., partners).

8. Non-transferability of interest:
No partner can assign or transfer his partnership share to any other person
so as to make him a partner in the business without the consent of all other
partners.

9. Registration of firm:
Registration of a partnership firm is not compulsory under the Act. The
only document or even an oral agreement among partners required is the
‘partnership deed’ to bring the partnership into existence.

Need for Valuation of Goodwill:

Valuation of goodwill may be made due to any one of the
following reasons:
(a) In the Case of a Sole-Proprietorship Firm:
(i) If the firm is sold to another person;

(ii) If it takes any person as a partner and

(iii) If it is converted into a company.

(b) In the Case of a Partnership Firm:

(i) If any new partner is taken;

(ii) If any old partner retires from the firm;

(iii) If there is any change in profit-sharing ratio among the partners;

(iv) If any partner dies;

(v) If different partnership firms are amalgamated;

(vi) If any firm is sold and

(vii) If any firm is converted into a company.

(c) In the Case of a Company:

(i) If the goodwill has already been written-off in the past but value of the
same is to be recorded further in the books of accounts.

(ii) If an existing company is being taken with or amalgamated with

another existing company;

(iii) If the Stock Exchange Quotation of the value of shares of the company
is not available in order to compute gift tax, wealth tax etc.; and
Factors Affecting the Value of Goodwill:
The following factors affect the value of goodwill:
(a) Locational Factor:
If the firm is centrally located or located in a very prominent place, it can
attract more customers, resulting in an increase in turnover. Therefore,
locational factor should always be considered while ascertaining the value
of goodwill.

(b) Time Factor:

Time dimension is another factor which influences the value of goodwill.
The comparatively old firm will enjoy more commercial reputation than the
other one since the old one is better known to its customers, although both
of them may have the same locational advantages.

(c) Nature of Business:

This is another factor which also influences the value of goodwill
which includes:
(i) The nature of goods;

(ii) Risk involved;

(iii) Monopolistic nature of business;

(iv) Benefits of Patents and Trade-marks; and

(v) Easy access of raw materials, etc.

(d) Capital Required:

More buyers may be interested to purchase a business which requires
comparatively small amount of capital but rate of earning profit is high and,
consequently, raise the value of goodwill. On the contrary, for a business
which required large amount of capital but the rate of earning profit is
comparatively less, no buyer will be interested to have the business and,
hence, goodwill of the said firm is pulled down.

(e) Trend of Profit:

Value of goodwill may also be affected due to the fluctuation in the amount
of profit (i.e., on the basis of rate of return). If the trend of profit is always
rising, no doubt value of goodwill will be high, and vice versa.

(f) Efficiency of Management:

The efficient management may also help to increase the value of goodwill
by increasing profits through proper planned production, distribution and
services. Therefore, in order to ascertain the value of goodwill, it must be
noted that such efficiency in management must not be curtailed.

(g) Other Factors:

(i) Condition of the money market;

(ii) Possibility of competition;

(iii) Government policy; and

(iv) Peace and security in the country.

Precaution to be Taken in Valuing Goodwill:

We know that the amount of goodwill is always paid for the future. The
buyer will pay a little more than the intrinsic value of assets only when he
expects that he will enjoy some extra benefits from such goodwill in the
near future. On the other hand, if the buyer thinks that there is no
possibility of having such advantages in future, he will not be ready to pay
anything for goodwill—even if the value of goodwill is very high.

Methods of Valuing Goodwill:

1. Years’ Purchase of Average Profit Method:
Under this method, average profit of the last few years is multiplied by one
or more number of years in order to ascertain the value of goodwill of the
firm. How many years’ profit should be taken for calculating average and
the said average should be multiplied by how many number of years — both
depend on the opinions of the parties concerned.

The average profit which is multiplied by the number of years for

ascertaining the value of goodwill is known as Years’ Purchase. It is also
called Purchase of Past Profit Method or Average Profit Basis Method.

Profit Basis Method:

Average Profit = Total Profits for all the years/Number of years

Value of Goodwill = Average Profit × Years’ Purchase.

PROBLEM:1
Sumana, Suparna and Aparna are partners in a firm. They share profits and
losses in the ratio of 3: 2: 1. The partnership deed provides that, on the
retirement of a partner, Goodwill shall be calculated on the basis of 5 years’
purchase of the average net profits of the preceding 8 years. Aparna retires
from the business on 31.12.1993.

The net profits for the last 8 years are as follows:

1996 Rs. 6,000; 1997 Rs. 12,000; 1998 Rs. 20,000; 1999 Rs. 16,000; 2000
Rs. 25,000; 2001 Rs. 30,000; 2002 Rs. 36,000; 2003 Rs. 31,000.

Compute the Goodwill of the firm which is payable to Aparna.

Solution:
Average profit of the last 8 years:

= Rs. 22,000

Total value of Goodwill = Rs. 22,000 × 5 = Rs. 1,10,000

Aparna’s share of Goodwill Rs. 1,10,000 × 1/6 = Rs. 18,333 Say, Rs. 18,300

2. Years’ Purchase of Weighted Average Method:

This method is the modified version of Years’ Purchase of Average Profit
Method. Under this method, each and every year’s profit should be
multiplied by the respective number of weights, e.g. 1, 2, 3 etc., in order to
find out the value of product which is again to be divided by the total
number of weights for ascertaining the weighted average profit. Therefore,
the weighted average profit is multiplied by the years’ purchase in order to
ascertain the value of goodwill. This method is particularly applicable
where the trend of profit is rising.

Weighted Average Profit = Total Profits for all the years/Number of years

Value of Goodwill = Weighted Average Profit x Years’ Purchase.

PROBLEM :2
X Y, Z Co. Ltd intends to purchase the business of ABC & Co. Ltd. Goodwill
in the purpose is agreed to be valued at 13 years’ purchase of the weighted
average profits of the past 4 years.

The appropriate weights to be:

2003 — 1

2004 — 2

2005 — 3

2006 — 4

The profits in these years were 2003 Rs. 30,900; 2004 Rs. 45,400; 2005
Rs. 35,700; and 2006 Rs. 48,000.

The following information was available:

(i) On 1.9.2004 a major repair was made in respect of a Plant at a cost of
Rs. 8,000 and this was charged to revenue. The said sum is agreed to be
capitalised for Goodwill calculation subject to adjustment of Depreciation
of 10% p.a. on Diminishing Balance Method.

(ii) The Closing Stock for the year 2005 was overvalued by Rs. 3,000.

(iii) To cover the Management cost an annual charge of Rs. 10,000 should
be made for the purpose of Goodwill valuation.

You are asked to compute the value of Goodwill of the company.

3. Capitalisation Method:
Under this method, the value of the entire business is determined on the
basis of normal profit. Goodwill is taken as the difference between the
Values of the Business minus Net Tangible Assets.

Under this method, the following steps should be taken into

consideration for ascertaining the amount of goodwill:
(i) Expected Average Net Profit should be ascertained;
(ii) Capitalised value of profit is to be calculated on the basis of normal rate
of return;

(iii) Net Tangible Assets (i.e. Total Tangible Assets – Current Liabilities)
should also be calculated;

(iv) To be deducted (iii) from (ii) in order to ascertain the value of Goodwill.

Capitalised Value of Profit = Profit (Adjusted)/Normal Rate of Return ×

100

Value of Goodwill = Capitalised Value of Profit – Net Tangible Assets.

PROBLEM : 3
The following is the Balance Sheet of P. Ltd as at 31.12.1999:

The profits of the past four years (before providing for taxation)
were:
1996 Rs. 20,000; 1997 Rs. 30,000; 1998 Rs. 36,000 and 1999 Rs. 40,000.

Compute the value of Goodwill of the company assuming that the normal
rate of return for this type of company is 10%. Income Tax is payable @
50% on the above profits.
4. Annuity Method:
Under this method, Super-profit (excess of actual profit over normal profit)
is being considered as the value of annuity over a certain number of years
and for this purpose, compound interest is calculated at a certain respective
percentage. The present value of the said annuity will be the value of
goodwill.

PROBLEM:4
The net profits of a company, after providing for taxation for the
past five years, are:
Rs. 20,000; Rs. 25,000; Rs. 15,000; Rs. 35,000; and Rs. 40,000. The Net
Tangible Assets in the business is Rs. 2,00,000 on which the normal rate of
return is expected to be 10%. It is also expected that the company will be
able to maintain its super-profits for the next ten years.

Calculate the value of Goodwill of the business on the basis of an annuity of

super-profits, taking the Present Value of an annuity of one rupee for five
years at 10% interest as Rs. 3.78.

5. Super-Profit Method:
Super-profit represents the difference between the average profit earned by
the business and the normal profit (on this basis of normal rate of return
for representative firms in the industry) i.e., the firm’s anticipated excess
earnings. As such, if there is no anticipated excess earning over normal
earnings, there will be no goodwill.

This method for calculating goodwill depends on:

(i) Normal rate of return of the representative firms:

(ii) Value of Capital Employed /Average Capital Employed; and

(iii) Estimated future profit, i.e. the average profit of the last few years.

Super-Profit = Average Profit (Adjusted) – Normal Profit

Value of Goodwill = Super -Profit X Years’ Purchase

The students should remember that the number of years’ purchase of

goodwill differs from firm to firm and industry to industry. Also that one or
two years’ purchase should be taken into consideration if the retiring
partner of a business was the main source of success. It should also be
remembered that three to five years’ purchase is usually taken. Of course, a
large number of years’ purchase may be considered if the super-profit itself
is found to be large. If there is a declining trend in super-profit, one or two
years’ purchase may be considered.

Illustration 5:
State with reasons whether the following statement is correct or
not: X and Y’s financial position is as under:
Illustration 6:
The following is the Balance sheet of Mithu Ltd as on 31.12.2005:
Illustration 7:
The Balance sheet of ABC Co. Ltd disclosed the following
financial position as at 31.12.2005:
Illustration 8:
From the following information, compute the Goodwill of the
firm XYZ Co. Ltd on the basis of four years’ purchase of the
average Super-Profits on a 10% yield basis:

As per the Articles of Association of this private company, its Directors have
declared and paid dividends to its members in the month of December each
year out of the profit of the related year.

The cost of the Goodwill to the company was Rs. 5,00,000. Capital
employed at the beginning of the year 2003 was Rs. 19,30,000 including
the cost of Goodwill and balance in Profit and Loss Account at the same
time was Rs. 60,000.
UNIT – II

How receipt and payment account is prepared?

Step 1: Take opening balance of cash in hand and cash at bank from the
Cash Book and enter on the debit side of Receipts and Payments
Accounts as its first item. Credit Balance, if any, of bank balance (i.e.,
Bank Overdraft) shall be shown on the credit side of Receipts and
Payments Account as its first item.

What is receipt and payment account?

Definition and Explanation:
"A receipt and payment account is a summarized cash book (cash and
bank) for a given period". or. "This is simply a summary of the cash
transactions as in the cash book, analyzed and classified under suitable
headings, including the opening and closing balances".

Steps in the Preparation of Receipts and Payments Account:

Step 1:

Take opening balance of cash in hand and cash at bank from the Cash Book
and enter on the debit side of Receipts and Payments Accounts as its first
item. Credit Balance, if any, of bank balance (i.e., Bank Overdraft) shall be
shown on the credit side of Receipts and Payments Account as its first item.

Step 2:

Take item wise aggregate of various receipts and enter on the debit side
irrespective of their nature (i.e., capital or revenue) and ignoring the period
(past, current or future) to which these receipts pertain.

Step 3:
Take item wise aggregate of various payments and enter on the credit side
irrespective of their nature (i.e., capital or revenue) and ignoring the period
(past, current or future) to which these payments pertain.

Step 4:

Compute the difference between the total of debit side and total of credit
side of the Receipts and Payments Account and put the difference on the
side which is short.

Let us take an example through which we will explain how Receipts and
Payments Account can be prepared from the given cash book.

Example: cash book

What is Income and Expenditure Account?

The income and expenditure account is outlined by the non-trading entities
to determine surfeit or deficit of income over expenditures for a particular
time frame. The accumulated or accrual concept of accounting is rigidly
pursued while outlining income and expenditure a/c of non-trading
concerns. It is outlined as a portion of final accounts of non-trading entities
and is equal to the profit and loss account outlined by for profit business
entities.
Features of Income and Expenditure Account
Below mentioned are the characteristic features of Income and Expenditure
Account :

 I and E a/c outlined by non-trading entities are much like the profit
and loss a/c outlined by trading entities.
 It is outlined by stringently following the fundamentals of double-entry
system of bookkeeping or accounting.
 It is always outlined during the end of the period which normally
comprises of 1 year.
 It decides the surfeit or deficit of income over expends of the non-
trading entities for the particular year.
 The surfeit or deficit from the income and expenditure account is
moved to the capital fund a/c.
 The I and E a/c of only revenue nature are incorporated in this
account. Any income and expenditure of capital nature are not
comprehended.
 It is prepared by accountants chosen by the enterprise’s
management and is audited by an independent auditor.
  It does not begin with the opening balance and it follows back the
incomes received and expenditures incurred by the non-trading
entities during the financial year.
 The accumulated or accrual concept of accounting is rigidly pursued
when it is prepared.

What Is a Balance Sheet?

A balance sheet is a financial statement that reports a company's assets,
liabilities and shareholders' equity at a specific point in time, and provides a
basis for computing rates of return and evaluating its capital structure. It is
a financial statement that provides a snapshot of what a company owns
and owes, as well as the amount invested by shareholders.

It is used alongside other important financial statements such as the

income statement and statement of cash flows in conducting fundamental
analysis or calculating financial ratios.

Formula Used for a Balance Sheet

The balance sheet adheres to the following accounting equation, where
assets on one side, and liabilities plus shareholders' equity on the other,
balance out:

\text{Assets} = \text{Liabilities} + \text{Shareholders'

Equity}Assets=Liabilities+Shareholders’ Equity

This formula is intuitive: a company has to pay for all the things it owns
(assets) by either borrowing money (taking on liabilities) or taking it from
investors (issuing shareholders' equity).

For example, if a company takes out a five-year, $4,000 loan from a bank,
its assets (specifically, the cash account) will increase by $4,000. Its
liabilities (specifically, the long-term debt account) will also increase by
$4,000, balancing the two sides of the equation. If the company takes
$8,000 from investors, its assets will increase by that amount, as will its
shareholders' equity. All revenues the company generates in excess of its
liabilities will go into the shareholders' equity account, representing the net
assets held by the owners. These revenues will be balanced on the assets
side, appearing as cash, investments, inventory, or some other asset.

Assets, liabilities and shareholders' equity each consist of several smaller

accounts that break down the specifics of a company's finances. These
accounts vary widely by industry, and the same terms can have different
implications depending on the nature of the business. Broadly, however,
there are a few common components investors are likely to come across.

Assets
Within the assets segment, accounts are listed from top to bottom in order
of their liquidity – that is, the ease with which they can be converted into
cash. They are divided into current assets, which can be converted to cash
in one year or less; and non-current or long-term assets, which cannot.

Here is the general order of accounts within current assets:

 Cash and cash equivalents are the most liquid assets and can
include Treasury bills and short-term certificates of deposit, as well as
hard currency.
 Marketable securities are equity and debt securities for which there
is a liquid market.
 Accounts receivable refers to money that customers owe the
company, perhaps including an allowance for doubtful accounts since
a certain proportion of customers can be expected not to pay.
 Inventory is goods available for sale, valued at the lower of the cost
or market price.
 Prepaid expenses represent the value that has already been paid
for, such as insurance, advertising contracts or rent.

Long-term assets include the following:

 Long-term investments are securities that will not or cannot be

liquidated in the next year.
 Fixed assets include land, machinery, equipment, buildings and
other durable, generally capital-intensive assets.
 Intangible assets include non-physical (but still valuable) assets
such as intellectual property and goodwill. In general, intangible
assets are only listed on the balance sheet if they are acquired, rather
than developed in-house. Their value may thus be wildly understated
 – by not including a globally recognized logo, for example – or just as
wildly overstated.

Liabilities
Liabilities are the money that a company owes to outside parties, from bills
it has to pay to suppliers to interest on bonds it has issued to creditors to
rent, utilities and salaries. Current liabilities are those that are due within
one year and are listed in order of their due date. Long-term liabilities are
due at any point after one year.

Current liabilities accounts might include:

 current portion of long-term debt

 bank indebtedness
 interest payable
 rent, tax, utilities
 wages payable
 customer prepayments
 dividends payable and others
 earned and unearned premiums

Long-term liabilities can include:

 Long-term debt: interest and principal on bonds issued

 Pension fund liability: the money a company is required to pay into
its employees' retirement accounts
 Deferred tax liability: taxes that have been accrued but will not be
paid for another year (Besides timing, this figure reconciles
differences between requirements for financial reporting and the way
tax is assessed, such as depreciation calculations.)

Some liabilities are considered off the balance sheet, meaning that they will
not appear on the balance sheet.

Example of income expenditure and balancesheet.

 UNIT –III

How are provisions treated in financial statements?

Definition: A provision is an amount set aside for the probable, but
uncertain, economic obligations of an enterprise. A provision is an amount
that you put in aside in your accounts to cover a future liability. ... When
accounting, provisions are recognized on the balance sheet and then
expensed on the income statement.

Examples of provisions include accruals, asset impairments, bad debts,

depreciation, doubtful debts, guarantees (product warranties), income
taxes, inventory obsolescence, pension, restructuring liabilities and sales
allowances. Often provision amounts need to be estimated.

Types of provision in accounting

 Restructuring Liabilities.
 Provisions for bad debts.
 Guarantees.
 Depreciation.
 Accruals.

Treatment of Dividends,

A dividend is a distribution made to shareholders that is

proportional to the number of shares owned. A dividend is not
an expense to the paying company, but rather a distribution of
its retained earnings.
There are four components of the financial statements. The
following table shows how dividends appear in or impact each
one of these statements (if at all):

Type of Financial Impact of Dividends

Statement

Balance sheet Will reduce the balance in the Cash and Retained Earnings
accounts once the dividends have been paid

Income statement Dividends have no impact here, since they are not an
expense

Statement of cash Reported as a use of cash in the Cash Flow from Financing
flows Activities section

Statement of retained Reported as a reduction in retained earnings

earnings*

* Also known as the statement of changes in stockholders'

equity

A brief narrative description of a dividend issuance may also be

included in the notes that accompany the financial statements,
though these notes may not be included if the statements are
only issued for internal use.

Before dividends are paid, there is no impact on the balance

sheet. Paying the dividends reduces the amount of retained
earnings stated in the balance sheet. Simply reserving cash for
a future dividend payment has no net impact on the financial
statements.
If a dividend is in the form of more company stock, it may result
in the shifting of funds within equity accounts in the balance
sheet, but it will not change the overall equity balance.

How are dividends treated in the balance sheet?

When the dividends are paid, the effect on the balance sheet is a
decrease in the company's retained earnings and its cash balance. As a
result, the balance sheet size is reduced. Retained earnings are listed in
the shareholders' equity section of the balance sheet.

Final Versus Interim Dividends
Dividends are paid out per share owned. ... Final dividends are
announced and paid out on an annual basis along with earnings. Final
dividends are announced after earnings are determined, but companies
pay out interim dividends from retained earnings, not current earnings

An interim dividend is a distribution to shareholders that has been both

declared and paid before a company has determined its full-year earnings.
Such dividends are frequently distributed to the holders of a company's
common stock on either a quarterly or semi-annual basis.

Dividend distribution tax - ClearTax

An interim dividend is a distribution to shareholders that has been both
declared and paid before a company has determined its full-year earnings.
Such dividends are frequently distributed to the holders of a company's
common stock on either a quarterly or semi-annual basis.

Currently, DDT is paid by the companies before paying dividend to their

shareholders. Therefore, it made dividend received by the shareholders of
the company of tax-free in their hands. Further, taxpayers
earning dividend income of more than Rs 10 lakh are required to
pay tax at the rate of 10 per cent.
 payment  of  dividends

A dividend is a payment made by a corporation to its shareholders,

usually as a distribution of profits. When a corporation earns a profit or
surplus, the corporation is able to re-invest the profit in the business (called
retained earnings) and pay a proportion of the profit as a dividend to
shareholders.

How do I calculate my dividend payment?

To calculate dividends, find out the company's dividend per share (DPS),
which is the amount paid to every investor for each share of stock they
hold. Next, multiply the DPS by the number of shares you hold in the
company's stock to determine approximately what you're total payout will
be.

What is unclaimed dividend?

Unclaimed dividend are those dividend which have been paid by the
company but they are not taken or claimed by the shareholder, the reason
for dividend being not claimed may be ignorance or shareholder may have
shifted to other place and therefore missed the dividend cheque.
Unclaimed dividend is a short term liability which need to be paid in the
next years. This has to be shown as current liability in balance
sheet. Unclaimed dividend is shown on the liability side of a balance
sheet under the head “Reserves and Surplus” along with capital.

What is a preliminary expense, and how is it treated in a balance sheet?

Before incorporation and commencement of business, company and the

promoters of the company may incurred so many types of expenses like
statuary fees and company logo designing, in some cases rent for the office
premises during the time of incorporation not after incorporation etc...
These are all comes under preliminary expenses .in simple words
preliminary expenses are the expenses that spent by the promoters before
the incorporation of company

The benefit of the preliminary expenses is long-term so it is treated as

intangible asset and shown in Balance sheet under Miscellaneous assets.
Th...

Preliminary expenses are those expenses which are incurred in business

before incorporation and commencement of business, like statuary fees
,company logo, survey report, project report etc are called preliminary
expenses.

Capital profit is a capital gain which is arise from the sale of capital asset

such as stock, bond,real estate etc. when the asset is sold at a price which
exceeds the purchase price the profit is capital profit. capital gain are
also taxable.

What is meant by revenue profit?

Revenue is the total amount of income generated by the sale of goods or
services related to the company's primary operations. Profit is the amount
of income that remains after accounting for all expenses, debts, additional
income streams, and operating costs.

How do you explain profit?

Profit describes the financial benefit realized when revenue generated
from a business activity exceeds the expenses, costs, and taxes involved in
sustaining the activity in question. Any profits earned funnel back to
business owners, who choose to either pocket the cash or reinvest it back
into the business

INCOME TAX PROVISIONS.

A provision for income taxes is the estimated amount that a

business or individual taxpayer expects to pay in income taxes
for the current year. The amount of this provision is derived by
adjusting the reported net income  of a business with a variety
of permanent differences  and temporary differences . The
adjusted net income figure is then multiplied by the applicable
income tax rate to arrive at the provision for income taxes.

This provision can be altered to a considerable extent by the

amount of tax planning  that a person or business engages in to
defer or eliminate the income tax liability. Consequently, the
proportional size of this provision can vary significantly from
taxpayer to taxpayer, based on their tax planning abilities.

A planned provision for income taxes can also be included in a

company's budget model. In a well-crafted model, this planned
provision would include both permanent and temporary
differences. In a more basic model, the provision is simply
based on the applicable tax rate.

How do you calculate provision for income tax?

Provision amount is calculated by applying rate as per tax rules on profit

before tax figure. Profit before tax is usually a gross profit less operating,
financial and other expenses plus other income.

ADVANCE PAYMENT

Advance payment is a type of payment made ahead of its normal

schedule such as paying for a good or service before you actually receive
it. Advance payments are sometimes required by sellers as protection
against nonpayment, or to cover the seller's out-of-pocket costs for
supplying the service or product.

An advance payment, or simply an advance, is the part of a contractually

due sum that is paid or received in advance for goods or services, while
the balance included in the invoice will only follow the delivery.

What is payment of tax?

 A tax (from the Latin taxo) is a compulsory financial charge or some other
type of levy imposed upon a taxpayer (an individual or legal entity) by a
governmental organization in order to fund various public
expenditures. ... Taxes consist of direct or indirect taxes and may
be paid in money or as its labour equivalent.

What are the 4 types of taxes?

They describe ways that a tax applies to the person or group being
taxed.
 Progressive taxes. ...
 Regressive taxes. ...
 Proportional and flat taxes. ...
 Federal income tax. ...
 State and local income taxes. ...
 FICA and other payroll taxes. ...
 Self-employment taxes. ...
 Capital gains taxes.

TAX DEDUCTED AT SOURCE (TDS)

 

Introduction
The concept of TDS was introduced with an aim to collect
tax from the very source of income. As per this concept, a
person (deductor) who is liable to make payment of
specified nature to any other person (deductee) shall deduct
tax at source and remit the same into the account of the
Central Government. The deductee from whose income tax
has been deducted at source would be entitled to get credit
of the amount so deducted on the basis of Form 26AS or TDS
certificate issued by the deductor.
 
 Rates for deduct of tax at source
Taxes shall be deducted at the rates specified in the
relevant provisions of the Act or the First Schedule to the
Finance Act. However, in case of payment to non-resident
persons, the withholding tax rates specified under the
Double Taxation Avoidance Agreements shall also be
considered

 TDS Rates
 Withholding Tax Rates

 Tax Rates DTAA v. Income-tax Act

 
How to pay Tax Deducted/Collected at source?
Tax deducted or collected at source shall be deposited to
the credit of the Central Government by following modes:

 1) Electronic mode: E-Payment is mandatory for

o a) All corporate assesses; and
o b) All assesses (other than company) to whom
provisions of section 44AB of the Income Tax Act, 1961
are applicable.
 2) Physical Mode: By furnishing the Challan 281 in the
authorized bank branch

 
Note:-
Where tax is deducted/collected by government office, it can
remit tax to the Central Government without production of
income-tax challan. In such case, the Pay and Accounts
Officer or the Treasury Officer or the Cheque Drawing and
Disbursing Officer or any other person by whatever name
called to whom the deductor reports the tax so deducted
 and who is responsible for crediting such sum to the credit
of the Central Government, shall submit a statement in Form
No. 24G.to NSDL with prescribed time-limit.

 e-Pay TDS/TCS
 Download Challan

UNIT –IV

Ascertainment of Profit under the Single Entry System!

No Trading and Profit and Loss Account can be prepared. Profit, therefore,
under the Single Entry System can be ascertained only by comparing
capital at the end of the trading period with that in the beginning. Suppose,
A finds that his capital on March 31, 2012 was Rs 1, 16,000, whereas it was
Rs 80,000 on April 1, 2011, it is safe to conclude that there was a profit of
Rs 36,000 during the year—otherwise how could the capital of Rs 80,000
(in the beginning of the year) grow to Rs 1, 16,000 at the end of the year?
This is true but for two things.

If A introduced fresh capital during the year, the capital would increase and
to that extent there would be no profit. If, in the above example, A
introduced a further Rs 15,000 during the year, the profit is, then, not Rs
36,000 but only Rs 21,000 because Rs 15,000 of the increase is due to fresh
capital.

Also, if A withdrew some of his capital during the year, then to that extent,
the profit would be higher. Had he not been drawn the sum, the capital at
the end would have been higher showing that profits are higher than they
appear to be. Suppose, to continue the example, A withdrew Rs 20,000
during the year, his profits for 2011-2012 would be Rs 21,000 + Rs 20,000
or Rs 41,000.

Hence, to ascertain profit under the Single Entry System:

To the capital at the end of the year, add drawings during the year; and
from this deduct fresh capital introduced during the year and also capital in
the beginning of the year.

Capital = Assets – Liabilities.

One has, therefore, to prepare a “balance sheet” which, in Single Entry, is

called Statement of Affairs. The various assets and liabilities will be
estimated as best as one can.

FOR EXAMPLE :
A commenced business on April 1, 2011 with a capital of Rs 1, 00,000.
He immediately bought furniture and fixtures for Rs 20,000. On 30th
September, 2011, he borrowed Rs 50,000 from his wife at 9% p.a. (interest
not yet paid) and introduced a further capital of his own amounting to Rs
15,000 A drew at the rate of Rs 3,000 per month at the end of each month
for household expenses.

Ascertainment of Profit or Loss: Method # 1.

Statement of Affairs/Increase in Net Worth Method:
Profit is ascertained by comparing the capitals between two accounting
periods, viz., capital at the beginning and capital at the closing, when
double entry system is not followed. Here, capital represents the net assets
of the business.

Therefore, if closing capital is greater than the opening capital (or, if closing
net assets are greater in comparison with the opening net assets), the
difference will simply represent profit; and there will be a loss in the
opposite case.

Now, the net assets or the capitals—either at the beginning or at the closing
—can be ascertained by preparing a Statement of Affairs as at the opening
and also as at the closing date. But if there are any adjustments or any
drawings, these are also to be accounted for.

Statement of Affairs:
A Statement of Affairs is a summarised statement of financial position (i.e.,
a statement of assets and liabilities) at a particular date of a business which
is very much similar to the Balance Sheet. Care should be taken for
different adjustments, like depreciation on assets, outstanding and prepaid
expenses etc. at the time of preparing a Statement of Affairs.

Statement of Profit and Loss:

Statement of Profit and Loss is to be prepared in order to find out the profit
or loss so made during the yeah In this statement, at first, the opening
capital is to be deducted from the closing capital, thereafter, the drawings
of the proprietor will have to be added and further capital, if any, will have
to be deducted and the rest will represent profit or loss as the case may be.
But, if there are any adjustments, those are also to be adjusted.

How is profit or loss calculated under single entry system?

It is prepared under the single entry system in order to find out the
amount of opening or closing capital of the business. According to net
worth method, profit or loss of the business is determined by making
comparison between the capitals of two dates of a period. Statement of
affairs is prepared as balance sheet.