Difference between income and Revenue

Difference between income and Revenue

There is no difference between gross income and revenue, both term are used interchangeably, however, it is important to remember that net income term is used to describe the profit. The relationship can be understood from the following table

Gross income	= (Equal)	Revenue
Net Income	= (Equal)	Profit

 Where term income is used?

There is some gross inflow where the term income is widely used, interest income, dividend income, royalty income.

Where term revenue is used?

There are some gross cash inflows where term revenue is widely used, revenue from trading activities.

                      

What is Direct Cost

What is Direct Cost?

A cost which can be directly associated to an activity is known as direct cost. Direct cost concept play important role in decision making. Examples of direct cost include the direct labor cost and direct material cost.

What are characteristics of direct cost?

Characteristics of direct cost include the following;

1.    Directly traceable to activity

Direct costs are directly traceable to an activity. For example direct material cost can be traced to product without any difficulty. Similarly directly involved labor in manufacturing can be easily traced to product cost.

2.    Directly allocated to product

Direct cost is directly allocated to product without using any assumption or method of appropriation. While in case of indirect cost management distribute the cost to an activity using some reasonable bases.

3.    Separately classified in accounts

Direct cost is separately classified in the profit and loss account. This classification referred as prime cost, this classification provides useful information for decision making.

What is Goodwill

What is Goodwill?

Goodwill is an intangible asset and normally calculated at the time of disposal or acquisition of business. The sources of goodwill may include management skills, place of business, efficient processes etc. In simple term good will is the price paid above the fair value of net assets.

At what time goodwill calculated?

Goodwill calculated at the time of acquisition. Goodwill may be calculated by adding the non controlling interest with investment and deducting the fair value of net asset of subsidiary.

How goodwill calculated in 100% acquisition

In case of 100% acquisition, Goodwill is calculated by deducting the fair value of net asset from the investment in subsidiary.

Why Goodwill calculated?

Good will shows the price paid over and above the fair value of net assets.

What is consolidation

What is consolidation?

Consolidation is combined reporting of results and financial position of parent company and its subsidiary.

How accounts are consolidated?

The assets and liabilities of parent and subsidiary are added in consolidation, similarly income and expenses are also added up in consolidation. Share capital of parent is reported in consolidated financial statement and consolidated reserve and minority interest is calculated.

What important features of consolidated financial statement?

There are three important features of consolidated financial statement i.e. Goodwill, consolidate reserves and minority interest.

What types of books are maintained for consolidation?

Consolidation is a technique for reporting the combined results of parent and subsidiary and therefore no books of accounts are required for consolidation. The only information require for consolidation is financial statement of parent and subsidiary.

What is purpose of consolidation?

The basic purpose of consolidation is to show the group financial position and performance to the equity holder of the group. The equity holder is not only interested in individual performance of the parent but also the performance of its subsidiary. 

What is subsidiary

What is subsidiary

When a company controlled by another company, then first company known as subsidiary, while another company known as parent company. For example an entity ABC & Co is controlled by another entity XYZ, then entity ABC is subsidiary of XYZ (parent).

How subsidiary is controlled by parent company?

Subsidiary is said to be controlled by the parent, if parent holds more than 50% share, or parent controls the financial policy of subsidiary, or parent can appoint more than 50% director or parent have more than 50% voting rights in board meetings.

Does Subsidiary prepare individual financial statements?

Yes, subsidiary does prepare individual financial statements; subsidiary does not prepare consolidated financial statements.

Does Subsidiary prepare consolidated financial statements?

No, subsidiary does not prepare consolidated financial statement, only parent company prepares consolidate financial statements. Consolidated financial statement is prepared in addition to individual financial statements of parents.

How subsidiary appears in individual accounts of parent?

Subsidiary appears in individual accounts of parent at cost. Subsidiary is reflected as line item under heading of investment in subsidiary.

How subsidiary is reflected in consolidated accounts?

Subsidiary is reflected in consolidated accounts in the form of asset and liabilities i.e. assets and liabilities of parent and subsidiary are combined reported. Similarly the results of subsidiary and parent are also combined.

Does share capital of subsidiary is combined in consolidation?

No, in consolidation share capital of subsidiary is not added with the parent share capital.

What is parent company

What is parent company

When a company controls the company, then the controlling company known as parent company and the company is being controlled.

How parent companies achieve control over subsidiary?

Parent entity can achieve control over subsidiary in number of ways, which includes more than fifty percent share holding or ability to govern the financial policy, or ability to appoint the majority of director, or ability to poll majority votes in board of director meetings.

How parent prepare consolidated accounts?

The investment in subsidiary is reflected in term of asset and liabilities in consolidated financial statement i.e. adding of parent and subsidiary asset and liabilities in consolidated financial statement or accounts.

Does all elements of subsidiary financial statement are combined?

No, only asset and liabilities are combined (added). Share capital of subsidiary and reserve are not added. Subsidiary share capital does not appear in consolidated financial statement.

How many set of account prepared by parent company?

Parent company prepares two set of accounts i.e. individual accounts of parents and consolidated accounts. Consolidated financial statement reflects the group performance.

What is difference between individual accounts and consolidated accounts?

In individual accounts investment in subsidiary appears at cost, when in consolidated accounts, this investment is reflected in assets and liabilities. The reserves are also adjusted in the consolidation.

What are advantages of journal entry

What are advantages of journal entry

The transaction is recorded in the books of account with the help of journal entry, and then those transactions are processed for the preparation of financial statements. Therefore if there is no journal entry, then there is accounting. Journal entry provides bases for the classification and further processing of transactions.

What is purpose of Journal Entry

What is purpose of Journal Entry

Journal entry is language of accounting, the transaction are recorded in the books of account with the help of journal entry. Every transaction has two aspects i.e. debit and credit. The recording of transaction in term of debit and credit is known as journal entry.

Format of journal entry

For example journal entry for credit sales is given as under.

Date	Particulars	Dr.	Cr.
	Account receivable a/c	$ 10,000
	Sales a/c		$ 10,000

The simplest format of journal entry contains the four column i.e. date, particular, debit and credit.

Purchases Journal Entry

Purchases Journal Entry

Purchases are debited and cash or account payable is credited. Purchases can either be on cash or credit .For example ABC & co purchased $ 10,000 raw material from XYZ, then the journal entry would be as under

Cash Purchases Journal Entry

If cash was paid immediately for purchases, then entry would be as under.

Date	Particulars	Dr.	Cr.
	Purchases	$ 10,000
	Cash		$ 10,000

Credit purchases Journal Entry

If payment is differed for purchases, then entry would be as under

Date	Particulars	Dr.	Cr.
	Purchases	$ 10,000
	Account payable		$ 10,000

Sales Journal Entry

Sales Journal Entry

Sales are credited being income for the organization and cash or account receivable is debit. For example ABC & Co made sales of $ 50,000 to a customer. Then journal entries would be as under

Cash Sales Journal Entry

If sales are made on cash, then the entry would be as under

Date	Particulars	Dr.	Cr.
	Cash a/c	$ 10,000
	Sales a/c		$ 10,000

Credit Sales Journal Entry

If sales are made on credit, then the entry would be as under

Date	Particulars	Dr.	Cr.
	Account receivable a/c	$ 10,000
	Sales a/c		$ 10,000

What is borrowing Cost

What is borrowing Cost?

Borrowing cost is primarily the interest cost incurred for the borrowing of funds. For example if entity borrows $ 100,000 and interest rate is 10%, then borrowing cost for the organization is $ 10,000.

What is Journal entry for borrowing Cost?

Borrowing cost recognized as expense in the books of account. The journal entry of above example would be as under.

Date	Particulars	Dr	Cr.
	Borrowing Cost	10,000
	Cash		10,000

What are tangible assets

What are tangible assets?

The assets can be classified in term of tangibility i.e. Tangible assets and non tangible .Tangible assets are those assets which can be touched. Examples of tangible assets include land, plant & machinery and vehicles.

What Tangible assets are important?

The tangible assets are important for the organization, because it support the main operations of the business. In case of manufacturing industry it is impossible to manufacture the Goods without tangible assets i.e. plant & machinery.

How tangible asset are initially measured?

Tangible assets are initially measured at cost. Cost of tangible asset included purchase price, cost incurred for making asset available for use and dismantling cost.

What are ready to use cost?

The costs incurred to make the asset ready for use includes installation cost, professional fees, and cost of testing the asset.

What is purchase cost of tangible asset?

Purchase cost of tangible asset includes the purchase price, duties paid on the purchase, transportation of tangible assets.

What are dismantling cost?

Dismantling cost includes the cost of removing the assets and cost of restoring the site.

Goodwill formula Example

Goodwill formula Example

Goodwill formula is (cost of investment + fair value of NCI)- Fair value of net assets.  Fair value of NCI can be calculated by two methods i.e. proportionate of net asset or fair value of NCI by market price of subsidiary shares.

Goodwill Formula Example

LG & Co purchased 80% share of TV & Co for 180,000, fair value of net asset is 200,000 and fair value of non controlling asset is 30,000. Calculate good will under fair value of net asset and fair value of NCI.

Solution

a.    Fair value NCI method

Fair value of the NIC is given therefore the Goodwill can be as under

Cost of investment	180,000
Fair value of NCI	30,000
Total	210,000
Less : Fair value of net asset	(200,000)
Goodwill	10,000

b.    Net Asset method

Cost of investment	180,000
Fair value of NCI as proportion net asset ( 20% x 200,000)	40,000
Total	220,000
Less : Fair value of net asset	(200,000)
Goodwill	20,000

Goodwill formula

Goodwill formula

Goodwill can be calculated by adding cost investment to the non controlling interest and deducting the fair value of subsidiary net asset.

Good will = Cost of investment + Fair value of NCI – Fair value of net asset

Goodwill formula Example

A&A Company acquired an entity 70% by paying $ 120,000. Fair value of NCI is 35,000. Calculate the Goodwill, where fair value of net asset is 140,000.

Cost of investment	120,000
Fair value of NCI	35,000
Total ( 120,000+ 35,000)	155,000
Fair value of net asset	(140,000)
Goodwill	15,000

Important to remember that total value of net asset is deducted, because the NCI fair value has already added to the cost of investment.