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| Questions/Answers Ask us and have your doubts clarified. Submit your questions here* . | 1. Here are the details of the New router purchased in exchange for old router: We purchased a Cisco 2801 Router on 2nd June 2006 for Rs 229,758 under an exchange offer where our existing CISCO Router 1760 was bought back for Rs 60,000/-. We paid the Vendor – RNS Infotech Rs 169,758/- (229,758 - 60,000). Now the vendor raised an invoice on EITS of Rs 169,758/- (equal to the amount that we had to pay them) on 2nd June 2006 instead of Rs 229,758/- (full Value of the new Router). After months of following-up with the vendor, they agreed to raised a second invoice of Rs 60,000/- but dated 9th Jan 2007 (due to VAT, back dated invoices cannot be raised). So now I have 2 invoices for one Router and accordingly Rs 169,758 got capitalized in June 2006 while Rs 60,000/- got capitalized in Jan 2007. Sale entry and loss has been booked in June 2006. Cost of old CISCO Router 1760 was Rs 120,000/- Accumulated Depreciation on old CISCO Router 1760 from date of purchase to 31 May 2006 is Rs 39,996/- Therefore Loss on sale of old CISCO router is Rs 20,004/- This treatment is not correct but I don’t know how to capitalize full 229,758/- in June 2006 so do let me know how best we can deal with this? Also should I calculate depreciation on full Rs 229,758 from June 2006 or depreciate only Rs 169,758 till Dec 2006 and then depreciate Rs 60,000 over the remaining life of Rs 169,758/-? Alternative solutions: On 2nd June, I pass the following entry: Computer Equipment Dr Rs 229,758/- To RNS Infotech Cr Rs 169,758/- To Suspense Account Cr Rs 60,000/- And on 9th Jan 2007, I pass the following entry Suspense Account Dr 60,000/- To RNS Infotech Cr 60,000/- This way the problem of capitalization and depreciation calculation will not arise. I was also wondering if there is any VAT implication of the above. EITS is not registered with ST/VAT authorities. (Submitted by Atul Paliwal) | It is important to understand the difference between a capital expenditure and revenue expenditure. If the item purchased is only to replace a spare part in an existing asset which will in no way increase its asset character such as its life, earning capacity etc. the expenditure can be written off as Revenue expenditure. If the item purchased is to bring into existence a new asset or to increase the value, life or earning capacity of an existing asset, it has to be capitalised. The Router purchased in exchange for the old one depending upon the circumstances can be treated as a capital expenditure.
The full value of the new Router as agreed Rs.229758 purchased on 2nd June 06 assuming that the property in it passed on to the buyer on taking possession of the asset, can be debited to the New Router account crediting the supplier, of course on the basis of any agreement or any other supporting documentary evidence. The supplier account has to be debited on the date of delivery of the old Router, with the exchange value agreed Rs. 60000 and on the date of payment with the actual amount paid Rs.169758. The original cost of the old Router Rs.120000 less the accumulated depreciation Rs. 39996 is the book value of the asset on date of sale. The difference between the book value and the exchange value agreed is Rs. 20004. This should be accounted for as Loss on sale of asset. The later invoice for the difference amount Rs.60000 is to be used as a document to set right the records. Assuming that the Router was installed and put to use on 2nd June 06 itself, depreciation can be calculated right from that date on the full value of the Router. The entries already passed can be corrected by a rectification entry. The purchaser being not a Registered dealer under VAT and the item purchased being for own use the question of VAT credit does not arise. | | 2.What is meant by the term carriage and where should the term 'carriage'(not carriage in wards or out wards) be taken? | Carriage expenses incurred to bring goods purchased to the factory site (in the case of a Manufacturing concern) or selling spot (in the case of a Trading concern) is called Carriage Inward. Such expense incurred to send the goods out on sale is called Carriage Outward. Carriage Inward is an element of cost whereas Carriage Outward is a Selling Expense. Carriage Inward being an element of cost, should be considered in the Manufacturing Account or as the case may be in Trading Account. Carriage Outward is a charge against profit and should be shown in Profit & Loss Account.
In practical situation you will know whether a particular carriage expense actually relates to purchase (Carriage inward) or sales (Carriage outward). Generally all business enterprises, when they make purchases from different sources, they will have to incur Carriage Inwards to bring the goods to their own place, either to factory site or to the selling spot. But only in special cases, based on terms of agreement, goods will be delivered to a customer at the expense of the seller.
In an examination question, if it is not clearly mentioned to know whether it is Carriage Inward or Carriage Outward, a student is entitled to make assumption based on normality. Specialties can not be presumed. If it is simply given as Carriage, it is nothing but Carriage Inward and therefore should be shown either in Manufacturing Account or Trading Account, as the case may be, depending upon whether it relates to purchase of raw materials or goods meant for sales. | | 3. What is the meaning of purchase adjustments?please explain its treatment? | Usually to test the knowledge in the preparation of Final Accounts, in examination questions a Trial Balance, extracted from the Ledger, when some more entries are still to be made in the books of accounts, will be given. Students will be asked to prepare Final Accounts after taking in to account those left out entries also. Such items are generally termed as Adjustments. The question asked here is taken to mean such Adjustments to be made in Purchase Account. Purchase adjustments will include rectification of errors made in accounting for purchases. (e.g.) Goods withdrawn by proprietor for personal use not accounted. An entry to bring in to account the Closing stock at the end of the accounting period can be made as a purchase adjustment. The entry is to debit the closing stock account crediting the purchase account. This recognizes the fact that the closing stock is nothing but purchases made in advance for sales to be made in next year.
| 4. what is the meaning of unmarked application in underwriting of shares and debenture? (Shweta singhal)
| Public companies to mobilise funds, either in the form of capital or borrowings, make public issues. The company making a public issue of shares/debentures, at the time of issue, may not be sure, that the issue will get subscribed in full. To be certain of the subscription, it takes the support of Under-writers by entering in to an agreement with them. The Under-writers guarantee the subscription. In other words, if there is under subscription, the Under-writers will take the short fall themselves. For this Under-writing service, they are entitled to a commission as agreed. The under-writing may be partial. Some times, for one issue, there may be more than one under-writer with distinctive liabilities. To judge their performance, and to find the individual liablities, it will be necessary for the company to know the applications received by their effort individually. The under-writers, in their effort to mobilise subscription, will issue blank applications with their seal/stamp to the prospective subscribers. These applications, when used by the subscribers and received by the company, bearing the under-writer's seal/stamp are called 'marked applications'. Some subscribers would have made application, on their own stationery, or the forms provided by the company directly. Such applications received by the company are called 'Un-marked applications'.
| | 5. What is Deferred Tax Asset ? | Books of accounts are maintained, based on certain generally accepted accounting principles, in compliance with applicable enactments, accounting standards and other transparency & disclosure requirements. The requirements of Taxation law, under certain circumstances are different. Certain expenses actually incurred and accounted, may not be allowable under Income tax law. Certain expenses, irrespective of the accounting method followed, are allowed only on actual payment. It is possible that such expenses accounted on accrual basis in one year, may get allowed in any subsequent year on actual payment. Machinery, if any, purchased for scientific research related to the business, is fully allowable in the year of installation itself, but, in the books of accounts it is to be accounted as a capital expenditure and gradually depreciated over its life. Rates of depreciation and the method of depreciation used in the books of accounts may not in all cases be the same as allowable under Income tax law. The above are some of the differences to mention. Such differences cause a significant gap between tax payable on income as per books of accounts and the tax due on taxable income worked out in accordance with tax law. Some of the differences are permanent. (e.g. disallowance of certain expenses as not being incidental to business.). These are not reversible in subsequent years. Some of the differences that originate in one year are reversible in one or more subsequent years. (e.g. expenses accounted on accrual basis that get disallowed in that year, may get allowed in subsequent year on actual payment.) This type of difference is known as Timing difference. The tax effect of this timing difference is called Deferred Tax. In the year in which, expenses accounted on accrual basis, are not allowable under tax law, the incidence of tax will be more. In the subsequent year, when the expenses are allowed to be deducted, the incidence of tax will be less. When it is sure that an expense that gets disallowed in one year will get allowed in one or more subsequent years on actual payment, there is a Deferred Tax Asset. In a reverse case, when the tax paid in one year is lower than the tax payable for the accounted income in that year, as the incidence of tax will be more in a future year, there is Deferred Tax Liability. The measurement, accounting and disclosure requirements, of Deferred Tax Asset and Deferred Tax Liability are dealt with in greater detail in Accounting Standard 22.
| | 6. What is the treatment of commission paid to a partner who has agreed to undertake dissolution with the emphasis on the fact whether the realisation expense is to be shown in Realisation Account? (Vyasakhgmenon) | When a Firm gets dissolved one of the partners of the firm may be appointed to realise the assets and settle the liabilities. The partner so appionted, by way of remuneration, may be offered a commission for his services as a fixed sum or as a percentage on the amounts realised. The accounting treatment of such commission depends on the agreement of the partners. The commission, unless otherwise agreed, will be treated as a common expenditure and will be debited to Realisation account crediting the concerned partner. Other Realisation Expenses, if any, will normally be debited to Realisation account. It may be agreed among the partners that the appiontee partner receiving commission, should bear the Realisation Expenses himself. In such cases, Realisation Expenses, if paid by the Firm, should be debited to the said partner's account and not to Realisation account. In case of dissolution involving insolvency of partners, (specially in examination problems ) the commission may be offered as a percentage on the amounts finally paid to other partner in return of capital. Such commission should not be charged to Realisation account and should be debited to such other partner who gets the final payment.
7. what is a Sight Bill ?
A sight bill is a bill of exchange drawn on a customer made payable after some time (eg. 60 days after sight of the bill). Such bills are drawn by a supplier extending credit period to his customer.It is an order bill and therefore needs 'acceptance' by the customer.
8. A and B are two underwriters, underwrite 2000 and 3000 shares.Total applications are for 4000 shares out of which marked applications are for A 1700 and for B 2100.The liability of A&B unsubscribed shares will be Ans: A B Total Gross liability 2000 3000 5000 Less:marked applicatins 1700 2100 3800 300 900 1200 Less:unmarked applications(2:3) 80 120 200 Net liability 220 780 1000 ........... In this ,My question is I didn,t understand how lessmarked datas are calculated ?ie,(2:3) of 2000 and 3000.) please explain the ratio concept . (Reshmipavan)
If there is only one underwriter and there is under subscription, all the unmarked applications will be given credit to him. When there are more than one underwriter and there is under subscription, while marked applications are given credit to the under writers on the basis of actual marked applications received with their seal or rubber stamp, by principle, unmarked applications are given credit to the underwriters, in the ratio of their gross liablity.
9. Suppose a capital expenditure is recorded as revenue expenditure what would be the impact of the error in the financial statements as well as the business? (ssri_1811)
It is an error of principle. If a capital expenditure is treated as a revenue expenditure, The Financial statements both the Profit & Loss account and the Balance sheet will go wrong. Profit & Loss account will show a lower profit and asset gets disclosed in Balance sheet at a lower figure. In Profit & Loss account more expenditurte is shown. Also depreciation claim will be wrong ,because it is calculated considering a wrong lower amount for asset. It will affect the Income tax calculations also. Tax liabilty of the organisation, because of lower profit shown in the Profit & Loss account, will get reduced. In Income tax assessment, such capital expenditure charged to revenue will get disallowed.
10. How to calculate Material Efficiency Variance? Give one or two reasons that cause a favourable Material Efficiency Variance? (Tammypan2003) Material Efficiency Variance is also called Material Usage variance and can be calculated using the following formula: Material Usage Variance = Standard price (Difference between standard quantity that should have been used for actual production and actual quantity used). The reasons for a favourable Material Usage Variance are:- 1. Working with more efficiency, in such a way that a given input of material yields more than the standard out put.
2. Using an efficient cost effective input mix for a given total input than the standard mix for that input.
The above two are the components of Material Usage Variance.
11. Please explain 'Capitalisation of Profits' in detail. (Parveen Dhawan) Capitalisation of profits is nothing but converting the accumulated profits in to share capital. When a company has earned a profit of Rs. 5000000 during a year, do you think that, on the Balancesheet date, all the profits will be available with the company in the form of cash? No. The profits earned would have gone to increase the net assets of the company. Some part of it would have gone to increase even the Fixed Assets. To distribute all the profit as dividend, the company will not have sufficient cash balance. Also to allow growth of the business, atleast a part of the profit should be retained in business. This is achieved by appropriation of profit to General Reserve. In Balance sheets, apart from General Reserve,you can find, Capital Reserve, Securities Premium, Capital Redemption Reserve etc. All these belong only to shareholders and these can be distributed to them as Bonus Shares. This will have the effect of reducing the Reserves and increasing the Share Capital. This is called Capitalisation of Profits. To know more about Capitalisation of Profits refer any standard text book.
12. Please explain unexpired insurance and its treatement in accounts. Is it a personal or real or nominal account? (Sunder rajan)
Insurance is an agreement between the insurer and the insured, whereby the insurer covers an insurable risk and indemnifies the loss if any, suffered by the insured. In fire insurance schemes, insurance premium is normally paid for one year. If a policy is taken in the middle of the year, it will cover partly the current year and partly the next year. Of the total premium paid only that part of the benefit enjoyed in the current year can be treated as amount spent. The balance part of the premium paid relates actually to next year which has been paid in advance. That part of the premium, paid this year itself, but the benefit of which is going to be enjoyed only next year, is called 'Prepaid Insurance'. It is also called 'Un expired Insurance'. At the time of making payment itself, we will know exactly, what portion of premium should be trearted as expense for this year, and what portion of it, is prepaid. The accounting entry is
Insurance expenses account Dr (Debit the expense) Prepaid insurance account Dr (Debit the receiver) To cash (Credit what goes out) Prepaid insurance account is neither a real account nor a nominal account. It is a representative personal account. Instead of debiting prepaid insurance account, the amount may be kept debited to the Insurance company account. Next year, when the insurance gets expired, risk coverage is enjoyed and therefore Prepaid insurance account / Insurance compamy account should be closed by transfer to Insurance expenses account. For a detailed understanding refer any text book in Basic Accountancy.
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* Answers to the questions asked and posted in this site are given in the academic interest and should not be construed as a professional opinion to be acted upon. | |
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