How to pass the entries in Accounting books (Tally ERP 9)

How to pass the entries in Accounting books (Tally ERP 9)

F2 - To Change Date

F3 - Creat a new Company / Alter the Company / Back up / Restore ...,

F4 - Contra Entry :-

      Eg:- Fund transfer from Bank to Cash in hand A/c.  

      Cr. Bank A/c.

      Dr. Cash in hand 

             Cash in hand to Bank

      

       Cr. Cash in hand A/c. 

       Dr. Bank A/c.

F5 - Payment Advice / Payment Voucher

      

       Eg:- M/s. Rahmat (Supplier) want to pay $50,000/-

             

       Dr. M/s. Rahamat (Supplier)  - $ 50,000/-

       Cr. Cash / Bank A/c.

F6 - Cash Receipts / Bank Receipts

       Eg:- M/s. Anand Engineering Co., - (Customer) - Sundry Debtor Paid to us $ 

              50,000/- 

              Cr. M/s. Anand Engineering Co.,   - $ 50,000/-

              Dr. Cash / Bank

F7 - Journal Entry's

       Eg:- To pass salary entry

              Dr. Salary A/c.

              Cr. Salary Payable A/c.

              At the time of Salary Payment 

              Dr. Salary Payable A/c.

              Cr. Bank / Cash A/c.

       Depreciation Entries :-

              Dr. Depreciation (Indirect Expenses) A/c.

              Cr. Computer (Fixed Assets) A/c. 

       Out Standing Expenses as on 31st March end of the Financial Year :-

              Dr. Telephone Expenses A/c.

              Cr. Telephone Outstanding expenses A/c.

       Discount Journal Entry :-

              Dr. M/s. Rahamat (Supplier A/c.)

              Cr. Discount Received (Indirect Income) A/c. 

Basic Formula for Calculating Retained Earnings

Basic Formula for Calculating Retained Earnings

In addition to explaining the basic formula used to calculate retained earnings, we’ll also look at the various advantages of not distributing all of a company’s profits. Even if a business isn't planning any new acquisitions, it’s still a good idea to keep some reserves.

·         Managing a company’s operations, marketing and sales activities and expense management are but a few of the decisions that management has to deal with. After it has made a profit the company will then need to decide what to do with those profits. Among the options for using profits are: operations, returning cash to shareholders, or keeping cash in reserve for future use. In this article we discuss how to calculate expanding the figure that is reported as retained earnings on balance sheets and presenting an overview of why a company would want to keep a reserve.

Retained earnings represent the amount a company has left after it has paid all its expenses, taxes, and dividends. A company can return all the cash it has left after it has taken care of its obligations, but that would handicap its efforts to expand operations, make acquisitions, and replace equipment. Some investors like when this figure is returned to them in the form of dividends, but most do understand that something must be reinvested for the long term.

·         Saving for the Future

The formula to calculate retained earnings is quite simple. The figure is calculated by adding the net profits (less dividends paid) to the beginning retained earning balance from a previous period:

Retained Earnings (RE) = Beginning RE + Net Income – Dividends

If there is a net loss and it is larger than the beginning retained earnings, there will be what is called negative retained earnings.

Definition of 'Return On Equity - ROE'

Definition of 'Return On Equity - ROE' ?

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares.

Also known as "return on net worth" (RONW).

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income - preferred dividends / common equity.

2. Return on equity may also be calculated by dividing net income byaverage shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period.

Definition of 'Retained Earnings'

The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders' equity on the balance sheet. 

The formula calculates retained earnings by adding net income to (or subtracting any net losses from) beginning retained earnings and subtracting any dividends paid to shareholders:

Also known as the "retention ratio" or "retained surplus".

In most cases, companies retain their earnings in order to invest them into areas where the company can create growth opportunities, such as buying new machinery or spending the money on more research and development.

Should a net loss be greater than beginning retained earnings, retained earnings can become negative, creating a deficit. 

The retained earnings general ledger account is adjusted every time a journal entry is made to an income or expense account.

Definition of 'Cash Flow from Operating Activities'

Definition of 'Cash Flow from Operating Activities':-

Cash Flow From Operating Activities = EBIT + Depreciation – Taxes
Cash Flow From Operating Activities = EBIT + Depreciation – Taxes
Comparing the cash flow from operating activities with EBITDA can give insights into how a company finances short-term capital.
Comparing the cash flow from operating activities with EBITDA can give insights into how a company finances short-term capital.

An accounting item indicating the cash a company brings in from ongoing, regular business activities. Cash flow from operating activities does not include long-term capital or investment costs. It can be calculated as: 

Cash flow from operating activities is reported on the cash flow statement in a company's quarterly/annual report. Income that a company receives from investment activities is reported separately, since it is not from business operations. 

How is dividend to shareholder calculated?

There are three important ways dividends paid by companies are usually declared. Dividend Percentage is relevant for calculating how much you will receive in your hands. But that doesn't tell you which a better dividend paying share is. For that Dividend Payout and Dividend Yield are more relevant. Unfortunately in the media and company reports, you will usually see only Dividend percentage getting reported :-)

1. Dividend percentage - relates to face value of the share. so for e.g. Marico declared a dividend of 37%. Marico shares face value is 1. So for 100 shares, you would get Rs.37
2. Dividend Payout = Dividend per share/Earnings per shareHere you get an idea of how much the company is paying you back as dividends from Net profits; and how much it is retaining for use in the business. A steadily increasing or maintaining dividend payout ratio over the years is a godd indicator of a good share -a company that is shareholder friendly
3. Dividend Yield - = Dividend per share/Price per shareThis is by far the most useful of the dividend measurements. This tells you for every Rs. 100 invested, how many Rs are you likely getting back as dividend (usually good stable companies maintain the dividend payout ratios). E.g there are companies liek Abuja Cement, Grind well Norton or Wyeth Pharma if you buy at to days price, you are likely to get a dividend of approx. Rs. 6 back for every Rs. 100 invested. Remember this is tax free and compares very favorably with FD rates which are taxable!!
So look at all three ratios before you fix on a share for the quality of its dividends. Even a 400% dividend may mean only Rs 4 per share, if the face value is Rs1, but the market value can be anything

Definition of 'Dividend'

Definition of 'Dividend'

1.    A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

Also referred to as "Dividend Per Share (DPS)."

2. Mandatory distributions of income and realized capital gains made to mutual fund investors. 

2.       1. Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this.

High-growth companies rarely offer dividends because all of their profits are reinvested to help sustain higher-than-average growth.

2. Mutual funds pay out interest and dividend income received from their portfolio holdings as dividends to fund shareholders. In addition, realized capital gains from the portfolio's trading activities are generally paid out (capital gains distribution) as a year-end dividend.

WORKING CAPITAL MANAGEMENT CALCULATIONS

Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

Calculation

• accounts receivable (current asset)

• inventory (current assets), and

• accounts payable (current liability)

Decision criteria

• One measure of cash flow is provided by the cash conversion cycle—the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

• In this context, the most useful measure of profitability is return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed;return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. Seeeconomic value added (EVA).

• Credit policy of the firm: Another factor affecting working capital management is credit policy of the firm. It includes buying of raw material and selling of finished goods either in cash or on credit. This affects the cash conversion cycle.

Management of working capital

• Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.

• Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Process (WIP) and similarly, the Finished Goods should be kept on as low level as possible to avoid over production - see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic quantity

• Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.

• Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact:

The current portion of debt (payable within 12 months) is critical, because it represents a short-term claim to current assets and is often secured by long term assets. Common types of short-term debt are bank loans and lines of credit.

An increase in working capital indicates that the business has either increased current assets (that it has increased its receivables, or other current assets) or has decreased current liabilities—for example has paid off some short-term creditors, or a combination of both.

Implications on M&A: The common commercial definition of working capital for the purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital adjustment mechanism in a sale and purchase agreement) is equal to:

Current Assets – Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets and/or deposit balances.

Cash balance items often attract a one-for-one, purchase-price adjustment.

Working Capital Management                                                                       

Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue itsoperations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

By definition, working capital management entails short-term decisions—generally, relating to the next one-year period—which are "reversible". These decisions are therefore not taken on the same basis as capital-investment decisions (NPV or related, as above); rather, they will be based on cash flows, or profitability, or both.

Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. The policies aim at managing the current assets (generally cash andcash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.

SAMPLE BUDGET FORMAT

MONTHLY BUDGET FORMAT
	MONTHLY INCOME			PERCENTAGE OF INCOME SPENT
	Item	Amount					62%
	Income 1	$2,500.00
	Income 2	$1,000.00
	Other	$250.00		SUMMARY
				Total Monthly Income	Total Monthly Expenses	Balance
	MONTHLY EXPENSES			$3,750	$2,336	$1,414
	Item	Amount
	Rent/mortgage	$800.00
	Electric	$120.00
	Gas	$50.00
	Cell phone	$45.00
	Groceries	$500.00
	Car payment	$273.00
	Auto expenses	$120.00
	Student loans	$50.00
	Credit cards	$100.00
	Auto Insurance	$78.00
	Personal care	$50.00
	Entertainment	$100.00
	Miscellaneous	$50.00

Differences Between Internal Audit And Statutory Audit

Differences Between Internal Audit And Statutory Audit

An internal audit is conducted by the permanent staff of the same office to detect weakness in system, procedures and for the improvement. But statutory audit is the act of checking books of accounts as per the provision of company act. Both of them check books of account, detect errors and frauds even though they have certain differences which are as follows:

1. Appointment

An internal auditor is generally appointed by the management but statutory auditor is appointed by the shareholders or Annual General Meeting.

2. Legal Requirement

Internal audit is the need of management but it is not legal obligation but statutory audit is the legal requirement.

3. Qualification

An internal auditor does not required specific qualification as per the provision of law but qualification of statutory auditor is specified.

4. Conducting Of Audit

Internal audit is of regular nature but final audit is conducted after the preparation of final account.

5. Status

An internal auditor is a staff who is appointed by the management but statutory auditor is an independent [person appointed by the shareholders.

6. Scope Of Work

Internal audit is related to the examination of books of accounts and other activities of an organization but statutory audit checks the books of accounts and related evidential documents. So, scope of internal audit is vague but scope of statutory audit is limited.

7. Removal

Internal auditor can be removed by the management but statutory auditor can be removed by the annual general meeting only.

8. Remuneration

Internal auditor is appointed by the management; so remuneration is fixed by the management but remuneration of statutory auditor is fixed by the shareholders.

9.Report

Internal auditor needs to give suggestions to improve weakness but no need to present report but statutory auditor requires to prepare report after the completion of work on the basis of facts found during the course of audit and present such report to the appointing authority.

International Financial Reporting System - Differences for assets are :-

Inventory :- I F R S allows the use of impairment reversals, while G A A P does not. Last-In First-Out is not an acceptable Inventory  method under       I F R S, while it remains acceptable under G A A P. Inventory is valued at the lower of cost or market for G A A P and the lower of  Cost or net  realizable value for I F R S.

Intangible Assets :- I F R S allows for impairment reversal in certain circumstances. G A A P does not.

Goodwill:- Measuring for impairments for I F R S uses a one-step method; G A A P still uses a two-step method.

Property, Plant & Equipment :- I F R S allows for impairment reversal of fixed assets; G A A P does not. I F R S also requires. Companies to view its fixed assets at a more Componentized level; G A A P does not.

Deferred Taxes :- I F R S requires all deferred tax assets to be classified as non current, whereas G A A P allows the split  between current and non current. Additionally,under I F R S there is no deferred tax asset set-up if there is a corresponding valuation allowance to offset it. The net deferred tax asset is what is ultimately recognized.

Key remaining differences for liabilities are :-

Definition - G A A P uses the term "Probable," whereas I F R S uses the term " more likely than not." On the surface, they appears to be the same thing. However, People do have varying  definitions of these when they are applied in everyday situations.

Debt Covenants - If debt covenant violations are not cured before year - end under I F R S, the corresponding liability is classified as current; under G A A P the company has the ability to obtain a waiver subsequent to year-end, but before the financial statements are issued, in order for the violation to be cured.

Taxes - The concept of "uncertain tax positions" is not a term that is readily defined under I F R S.

Other key differences : - 

Research and Development Costs -  under I F R S, there is an opportunity to capitalize costs if certain bogeys are met. 

Correction of an Error - Under I F R S, the correction of an error is handled in the opening equity of the earliest period presented. Under G A A P, the company would present the prior period financials where the error first occurred.

Going Concern - Under I F R S, the going concern concept is for a period  defined as for the foreseeable future; G A A P is generally 1 months from the balance sheet date or 12 months from the date the financial statements are released.

Interim Reporting - Generally, I F R S views each interim period as a discrete period; G A A P views them as a component of the annual report.

Joint Ventures - G A A P uses the equity method for reporting activity under joint ventures; I F R S further breaks down these arrangements into joint ventures and joint operations. Joint ventures would be under the equity method, and joint operations would be under the proportionate consolidation method.

What is Capital

What is Capital Structure ?

Capital Structure is the way companies finance their assets. The funds can originate from only equity, or only debt, or a combination of the two.

How to manage a capital structure ?

1. Clearly define all the company's debts including whether it's a long-term or short term debt payment. Debt comes in the form of bond issues, long-term notes payable.
A capital structure is defined as a mix of a company's long-term debt, short term debt, common equity and preferred equity. A company must know how to successfully manage a capital structure to have a clear definition of its debt to equity ratio. The financial records of all of the company's transaction must be monitored and maintained in an efficient account management  system. Overall, the capital structure is the basis for understanding the impact of the initial investments and expenses of a particular company's business.


How to Calculate Capital Structure ?

Capital structure refers to the sources of your company's financing.Some of the money that keeps your business afloat may have come from loans from the bank, some may have come from equity investors who own a piece of the business and some capital structure of your business in the first step in determining the cost to the company of that capital and being able to minimize that cost.


What is Authorized share capital ?

The maximum value of security's that a company can legally issue. This number is specified in the memorandum of association (or articles of incorporation in the US) when a company is incorporated, but can be changed later with shareholder's  approval. Authorized share capital may be divided into (1) Issued Capital : par value of the shares actually issued. (2) Paid up capital : money received from the shareholders in exchange for shares.(3) Uncalled capital : money remaining unpaid by the shareholders for the shares they have bought. Also called authorized capital, authorized stock, nominal capital, or registered capital.

Definition of "Authorized Share Capital"

The number of stock units that a publicly traded company can issue as stated in its articles of Incorporation, or as agreed upon by shareholder vote. Authorized share capital is often not fully used by management in order to leave room for future issuance of additional stock in case the company needs to raise capital quickly. Another reason to keep shares shares in the company treasury is to retain a controlling interest in the Company.

Also be called " Authorized Stock ", "Authorized Shares" or " Authorized Capital Stock".