Accounting Education

What are Accrued Liabilities

2012-02-09T09:43:00.000-08:00

Both outstanding expenses and accrued liabilities are same meaning. When we have taken services but we did not pay the money during accounting period to whom we got the services, at that time, it will become our accrued liabilities. It will be the part of our current liabilities. If there are large number of accrued liabilities in the balance sheet, it will affect liquidity position in future because in future, when we will pay, we have to stop other payments or in case, if we have not any cash money, it may be risky for becoming solvent.

Some companies are very smart, they give the options to its creditor to get company's share. At that time, company's balance sheet will improve because one side, it will decrease company's current liability and second side, company will not face cash crisis. Its latest example, we can see in Iron Eagle Group, Inc. It has converted its accrued liabilities in common shares in Iron Eagle

As per The Wall Street Journal

A number of directors, employees, and a consultant of Iron Eagle have converted their accrued fees and out of pocket expenses owed to them by Iron Eagle into restricted common stock at the market price of $0.25. This had the net result of improving shareholder's equity by $1,246,000.
"Iron Eagle is strongly positioned with its management team, Tru-Val, and strategic plan to take advantage of many factors to the benefit of its shareholders," stated Joseph Antonini, Chairman of the Board of Directors of Iron Eagle and former CEO and Chairman of Kmart and board member of Shell Oil. He further commented, "I am proud to be an Iron Eagle shareholder, and am optimistic about our future for the Company and all of its stakeholders."

Revenue Recognition Tips

2012-02-09T03:10:00.000-08:00

Revenue recognition term is used in financial accounting. It means to show any revenue for comparing it with all expenses of organisation. Time is important when we will recognize any revenue for our accounting purpose. In accrual accounting, we recognize revenue when goods are sold. Receiving of cash of sales will just effect the cash flow not our income position. Like this, when we provide services to other, our revenue from these services will be realized. It may be possible that cash will be obtained after some time. If we did not sell goods but we got money in advance it will not be our revenue under accrual system of accounting. But in cash accounting system, we recognize revenue when cash of sold goods are received. This was the basic of revenue recognition. Now, we are giving some tips which will be helpful to you when you will face the problem whether to show or not to show your revenue in books.

1st Tip : Revenue Recognition Through Sales Invoice

You should follow simple point, when you will send sales invoice to the party, you should enter it in sales voucher. Never wait for delivery reaching to the Godown of party, never wait for getting any cheque or cash.

2nd Tip: Revenue Recognition of Any Intangible Asset's Sales

For example, you sell your copyrights of your newly made lectures CD for 10 years and got lump sum payment of Rs. 5,00,000. The revenue recognition will continue up to the 10 years. You can not make it as one year benefit for comparing your yearly expenses.

3rd Tip : Revenue Recognition Relating to Deferred Revenue

Never do mistake to make advance received money of your future service or future salable product as your revenue. It is your liability and party can get money at any time.

4th Tip : Do accounting Work in different Companies

What is the exact time when a company record revenue may differ from company to company. One company may make rule with good faith of customer. Customer will get stock and will inspect it. After this, sales of goods are recorded in books. Second company may make different rule than first company. So, better is to get the taste of each company what are their old accountant doing regarding this.

5th Tip : Exceptional Of Revenue Recognition

Never deem above basic principle of revenue recognition as fixed rule. Revenue recognition is flexible rule. There are lots of exceptions of this rule. For example, a construction business gets money on the part of completion of his work. So, on the basis of completion of work, he will calculate his revenue instead of completing whole project. Farmer may calculate their revenue on the basis of production because it is sure 100% his production will be bought by govt. at a fixed price. So, measurement of revenue is the production neither the delivery of product nor cash received from the party.

How to Strengthen the Balance Sheet

2012-02-08T09:41:00.000-08:00

Today, I was studying the content, "Guitammer Strengthens Balance Sheet by Over $2.25mil." The Guitammer is a Company who strengthens his balance sheet by getting more equity share capital and converting its debt. Yes, both are powerful way to be strong the balance sheet of company.

1. More Equity More Power in the Balance Sheet

If any company has low equity share capital than expected fund needed for investment, its balance sheet will become weak. But, if company see this weak-point and issue new shares and gets good response from market. It will increase its cash liquidity. With this, working capital will also increase. Company can use it also for paying short term expenses and buy new equipment for completing the projects.

2. More Repay of Loan More Power in Balance Sheet

Second way of strengthening the balance sheet is to repay all long term loan. Loan is just tension for company. More delay for repayment of loan will surely weak to your balance sheet. If you will become unable to repay, you can face liquidation problem. So, if you got high profit from business and repay all your debt, it will increase the power of your balance sheet.

According to Mark Luden, President of Guitammer

"The reduction of debt, increased equity and ensuing improved cash flow, gives us the opportunity to grow our core ButtKicker® brand product business and more importantly, begin to take advantage of the unique opportunities we see for our patented ButtKicker Live®! broadcast technology. The support from our new investors and existing creditors has been very encouraging and continues to validate the strategic path we are on to fundamentally change the world of broadcast sports."

How to Live Better in 2012

2012-02-07T05:33:00.000-08:00

Today, I am thinking about, "How to live better in 2012?", suddenly, I opened my email vinod@svtuition.org. I saw, a user is telling my one mistake. Following are his words

Prof. Vinod Kumar,
I was going through your site to see the formula for Cost of redeemable pref. share capital and found that it is wrongly mentioned. The denominator reads as (M.V - N.P) instead of (M.V + N.P)
But the example explained has the right formula.
Link:
http://www.svtuition.org/2010/04/cost-of-pref-share-capital.html
--
With regards

User

"Most of us know more about HOW TO EARN A LIVING than about HOW TO LIVE."

But in last, he wrote quote. I think, it was for me. So, I replied. I think, following may be helpful for you to live better in 2012.

Thanks Dear User for bringing this mistake in notice. I am indebted lifetime for you for your this voluntary service. Now it has been corrected.

For your written in Quote last,

"Most of us know more about HOW TO EARN A LIVING than about HOW TO LIVE."

It is on you and your thinking, how do you see others? Please stop one minute and think

1) You are writing this because you are seeing this weak point in other.

2) You are writing "most of us" because you want to include in this side

because

a) To slow the wrong effect on other to whom you sent the message.

b) To realize others that they all got wrong education.

Now, read what I think

1. ) It is very easy to see the faults in other. To remove your own faults is difficult. Why do you think people know more about to earn a living. Why are you comparing it with how to live? There are lots of logic behind this. If you want to bring revolution in the world, its starting never from comparing both, its starting from different ways, I can give its some examples

a) There are millions of children who are orphan in the world. We can live better way if we donate our earned a living, our time for them. It may be better than just wasting time for writing weak-points of other.

b) There are millions of animals who are being killed without any crime every day. All are innocence. We should spend our time to care and for their welfare.

c) There are millions of sex workers (Wikipedia's reference) who are providing sex service just for money. With this, all are sending our next generation in hell. We should invest our some earned money and our time for free education to all these sex workers. When they will become educated, they will leave to provide sex service. After this, we will take educational service from them. We will pay for their teaching service from our earned money. Teacher and sex worker are earning money but one is making future of next generation and other is sending society to wrong side.

d) There are millions of people who are using alcoholic drinks and drugs. There are millions of road accidents due to this. We lose millions of human capital due to this evil. We think about this. We should invest our money from what ever resource we get it in awareness for stopping this evil.

e) There are millions of people who buys lottery and waste our nation's money. We should do to stop this.

If you have time to discuss on this matter or you are doing something in this direct, then tell me. It will be helpful for me to learn something from you, how to live better life in my 2012? Sorry, I do not want to live in the line who have just knowledge of earn the money instead of ignorance about how to donate this money for welfare for others.

Thanks and regards

Vinod

We Bought Svtuition.com Website

2012-02-07T02:55:00.000-08:00

Website : http://svtuition.com

On 11/01/2012, we bought Svtuition.com website. Way of buying any website has different procedure than buying of any property. We first give rent of one year of its domain name. After this, we pay one year hosting cost. Only after this, this will become our property. We can resell it to other party like any other product. I did not sell any website, so I do not know its exact way or system. Now, question is, why did I invest my money in next website. Following may its reasons:

1. To Work on Self-Hosting Platform

I am working more than 4 years on google's free hosting platform. Even, I just pay domain name for svtuition.org every year but its hosting fees is nothing. After 4 years, I found some benefits of self-hosting through google search which I can mention below.

a) All 404 error pages will redirect to the home page of self-hosting domain but in dependent hosting, all my 404 error pages goes to blogger account. I am not angry with google on this point. I am happy that I am repaying my hosting fee through this way instead of paying money. But this is the question of our organisation's reputation. So, I have decided that our organisation will pay every cost for working online place.

b) I have also power to design my page myself and upload all files in my C-panel of hosting account. I can upload the pdf and free e-books in my self-hosting account. All these facilities, I can not get in google blogger.com hosting.

2. Great Uses of Word Press Plugins

Sometime, I feel very sad, why did not I buy self-hosting of svtuition 2 years ago. Reason is my ignorance. But thanks to Google, it has given me big free educational resources. By reading it, I found magic effects of word-press plugins which can bring revolution in any organisation's website. I am also thankful to the great programmers who provide us free plugins.

3. Free Education of All Subjects

Many years ago, I opened Sv.Tuition Center in my city. Sv means Swami Vivekananda. Tuition means to teach small batch of students. Accounting was my favorite subject, so, I opened google's free blog, svtuition.blogspot.com. After this, we convert it with custom domain name svtuition.org. But, accounting is just one subject. Now, I want to make one platform of all free education of all subjects. I have already written some contents relating to other subjects but these were without taking self-hosting benefits. It is very easy to make guest writers and lectures in self-hosting. I can also tract their reward through self-hosting.

4. Free Solution of All Subjects

From sometime, I realized that I learned lots of practical things from your problems. It means, I have no right to get any fees for providing any solution. You gave me knowledge in the form of problem, I gave you knowledge in the form of solution. So, exchange is completed. Still, I was giving free solutions relating to accounting, now, I am promoting free solution through category basis in svtuition.com. We can not make category in google blogger platform, same is available only in word press blogging platform. So, I think, more my solution will reach to other persons who are suffering same problem through this.

{Important : Next time, you will find your problem solution, it will be in svtuition.com instead of svtuition.org. So, we will redirect home page solution link to current publishing solution site}

5. Tension Free Examination

I am working more than 10 years in education sector. I know the tension of each student of the world. Examination! Am I right. But in svtuition.com, I will analyze all old papers of each subject and convert all different problems in simple solutions.

6. Work with Your Donation Resource

When my aim is very clear. I want to get knowledge and share to you free of cost. My own needs are very few. To eat food, to live in a home and to fulfill my other basic needs. All other needs are of my organisation. So, I am experimenting my free work with your donation resources.

So, please visit svtuition.com and subscribe it, if you want to learn all subject from me and other guest writers of expert in different subjects. I designed this website by myself. Its all designing almost just like accounting education and I hope, you will feel it as second classroom of accounting education. Following is its screenshot.

More Resources :

We Acquired Discover Bajaj 100 CC Bike
We Acquired New Inverter and Battery
We Acquired New Computer

Accounts Receivable vs Revenue

2012-02-07T01:30:00.000-08:00

Some new accounting students have big doubt between account receivable and revenue. Today, I am clearing your all doubts relating to this. All account receivables will be revenue in all cases. All revenue items may part of accounts receivable or not. Following example will clear this.

1st Case : Account Receivable Accounts of Rent and Rent Revenue

Suppose, we give our place for rent. We receive rent at the end of month. If party does not give us rent at the end of month, it will be our revenue receivable. If this will the end of financial year, we will show this as our revenue in income statement. It means this account receivable is as revenue. We will also show same account receivable as our balance sheet asset.

2nd Case : Account Receivable Account of Customer and Cash Sales Revenue

Suppose, we sell both on cash and credit. Cash sales is an income statement account that reports the amount of cash sales as our revenue. But, see that we do not record sundry debtors or account receivable account in income statement. It is right because sundry debtors are the part of balance sheet assets. But, we included same of credit sales amount already included in cash sales as sales revenue. It means all the account receivable accounts are the part of revenue account as per the accrual method of accounting.

{ Important : At the end of closing year, if account receivable of different incomes are in the trial balance, it means we have completed its adjustment, there is no need to added outstanding income or account receivable of income in revenue account}

Indian Gaap vs IFRS

2012-02-07T00:45:00.000-08:00

1. Presentation of financial statements

Indian GAAP

a) Classification of an item as extraordinary.
b) Format of Financial statement under True and fair view under act.

IFRS

a) True and fair view override.
b) Format not prescribed, only components of F.S determined.
c) Various schedules now be given in the form of notes.
d) comparatives to be given for both numerical and non numerical information.

2. Inventories

Indian Gaap

a) AS 2 applicability/non applicability held by commodity brokers/service providers

IFRS

a) This standard is not applicable to inventories by commodity brokers.
b) Measures of such inventories at Future value - cost of sell.
c) Measurement principles for service provider inventory
d) Measurement principles for inventories acquired on deferred settlements terms.

3. Statement of cash flow

Indian GAAP

a) Cash flows from extraordinary activities
b) Bank overdrafts as financing activities
c) Dividend paid is always classified as finance activity

IFRS

a) Bank overdrafts as cash equivalents
b) There is no guidance for classifying cash flows arising due to Dividend & Interest. They may be classified as Operating, Financial or Investing activities.

4. Accounting Policies, Changes in Accounting Estimates and Errors

Indian GAAP

a) Treatment of retrospective application of change in accounting policy.
b) Inclusion of prior period items in determination of current year profit.

IFRS

a) Comparatives need to be restated for a) and b) of above.
b) Impending changes disclosures

5. Income Tax

Indian GAAP

a) Timing differences or income based approach

IFRS

a) Temporary differences or tax base assets and liabilities approach

6. Property, plant and equipment

Indian GAAP

a) Using revaluation for recouping depreciation
b) change in method of depreciation as change in accounting policy
c) Depreciation rates under schedule XIV

IFRS

a) Revaluation reserves can not be used for recouping depreciation.
b) Change in method of depreciation is change of accounting estimate.
c) Depreciation rates based on useful life.
d) Component accounting

7. Revenue

Indian GAAP

a) Service revenue to be recognised either on % of completion method or completed contract method

IFRS

a) Measuring revenue at fair value along with discounting
b) REPO arrangements accounting
c) Service revenue to be recognized only on % of completion method
d) Barter transactions

8. Government Grants

Indian GAAP

a) Refund of govt. grand as being extraordinary
b) Recognizing cumulative additional depreciation on refund of grant over remaining useful life of asset

IFRS

a) Refund of Govt. Grant as being ordinary
b) Recognizing cumulative additional depreciation on refund of grant as an expense

9. Effect of changes in foreign exchange rates

Indian GAAP

a) The two dimensional concept of foreign currency and presentation currency

IFRS

a) The three dimensional concept of functional currency, foreign currency and presentation currency.

More Resources :

GAAP Vs IFRS

IAS Vs IFRS

Lottery is Good or Bad

2012-02-06T09:19:00.000-08:00

Today, I met my one of old friend after 14 years. We did 10+2 (commerce) together in 1998. I was happy to see one of my old friend. We discussed and shared different things. I asked his work. I found that he is doing Lottery Business. Now, I felt very sad to see my friend in wrong company. I made him to understand that Lottery is so bad and you are wasting my society's time and money in this. Now, debate was started between me and him. Following is its story and you can get idea which is good and which is bad.

1. My Friend : Lottery is Good because it makes rich to society. With this, we are doing social work through this business. Who can see just Rs. 500 Note all time in pocket. We give chance to make it Rs. 5 Crore. So, you can not say our business bad.

2. Mr. Vinod ( Means I as your author) : Lottery is so bad because it never makes rich to society. Dear friend I and you did 10+2 commerce together. You also know accounting and simple math. If there are 10 numbers and 1 number has chance as win number. Its probability will be just 10% not 50%. Not just uneducated but educated go to gambling due to greed. But this greed is very harmful for society also. Suppose, a person earn Rs. 200. He wants to earn Rs. 200,000. Due to this, he lost his Rs. 200 in lottery. His family does not eat food in that day. His children do not go to school. He becomes poor. So, I am against this evil. It is my advice to stop this business. You should start tuition business. Even you are 10+2, you can easily teach upto 5 class. You can earn sufficient amount by providing tuitions upto 5 class. Teaching is noble profession. Your taught students will become engineers, doctors and judges. They will promote our nation.

Moreover, I can see Rs. 500 only in my pocket because all these Rs. 500 is from my hard work. I do not waste it in lottery. Earning of Lottery is for me as Forbidden earning.

Now, I tell the story of a person to whom, I know personally. He was very good person. One day, some person gave him the taste of lottery. This lottery was of Rs. 100. Win price was Rs. 1 Crore. His lottery did not gain any prize. It means, it was his lose of money. He felt very sad because this was his hard earned money. He wanted to get back his Rs. 100. He bought the lottery of Rs. 10,000. But there was not any prize in these lotteries. Now, his loss was Rs. 10,100. He was again sad. Now, he buys the lottery of Rs. 1,00,000. But there was nothing return in these lotteries. Now, he started to sell his all things, he becomes beggar. Now, he demand Rs. 1 by going door to door and again he buys lottery with this money. You can imagine the end story of the person who gets the taste of lottery. So, it is my personal request, never buy lottery and never do lottery business.

5 Notable Points of Balance Sheet of Tata Motors

2012-02-05T21:33:00.000-08:00

Tata Motor is the part of Tata Group and a public company whose total assets are $ 23.131 billions. It is also Indian Multinational Corporation in automotive industry. It means, it is doing business at international level with the help of its subsidiaries. So, it makes consolidated balance sheet. Total assets and liabilities of this company and its subsidiary company are added in consolidated balance sheet.

Today, we studied its consolidated balance sheet and we found following 5 notable points which should be known by all.

1. Revaluation Reserves

On 31st march 2011, Tata motors consolidated balance sheet was showing 144.63 Cr. as revolution reserves. Revaluation reserves is made when we revalue our some assets. If our assets are more than its book value, we will gain the revaluation reserve fund. It is also different from regular depreciation. Consolidated balance sheet of Tata Motors was showing it as source of fund. It means, if Tata Motors sells same asset, at that time, this fund may be liquidated.

2. Capital Work in Process

We have already explained capital work in process in Balance Sheet of Company Example. Like NTPC, Tata Motors is also doing work in big project in which it has invested its capital but still that projects are not completed. So, capital work in progress is investment of uncompleted projects. So, Tata Motors was showing it Rs. 11,728.86 Cr. as the part of application of funds in its balance sheet.

3. Market Value of Quoted Investments

Actually, it is not showing in the balance sheet, it is showing in the footnote. It means marketing value of investment which are showing in balance sheet on its historical cost. We see that every day share market and mutual fund market rates will be different. So, our investment in it will also be different. So, to show market value of quoted investments in the note form will guide to investors before taking any decision.

4. Foreign Currency Monetary items translation difference Account

Foreign currency monetary items translation difference account represent the amount if any company convert foreign transaction from foreign currency into presentation currency. You know the exchange rates are changing from time to time. It was the time when one dollar's value is Rs. 39. Now, it is Rs. 48. Now, we study it with following example.

5. Deferred Tax Liabilities

Tata Motors showed Rs. 2,096 Cr. as deferred tax liabilities. It means there is difference between actual tax which is calculated by Tata Motors and by Income tax authorities. So, more tax will have to be paid. For study more detail of this concept, you can read at here.

How to Understand Balance Sheet Statement

2012-02-04T19:54:00.000-08:00

To understand balance sheet statement means to understand each item of balance sheet. Balance sheet is not just list of assets and liabilities but there are lots of adjustments of depreciation, provisions, funds and reserves in it. As a common man, you should understand all these things step by step. You should also understand that all assets and liabilities are not fixed but they are flexible on the basis of getting and repayment of liabilities and sales and purchase of assets. Today, we teach to the common man who do not know the balance sheet.

1. Just search on the images of google, you find the proforma of balance sheet. Right side heading will be Assets and left side heading will be liabilities. We write all assets in right side and all liabilities in left side.

2. All assets are divided in sub-parts. Fixed assets and current assets and intangible assets. Cash in the bank, accounts receivable, petty cash funds, inventory, prepaid expenses and outstanding incomes are current assets. Prepaid expenses are paid in advance but we did not get services. So, it is our current assets because we have to take benefit from this asset. Prepaid expenses may be fixed asset, if we have to get the service more than one year. Like advance payment for machinery maintenance for 10 years.

Land, building, plant, machinery, vehicle, furniture and other equipment are main fixed assets. We take its benefits more than one year.

Intangible assets are those which we can not touch. We can just feel. If your online business will be successful, its goodwill value will increase. You will get the price of its goodwill when you sell your online business to next party. So, goodwill is intangible asset. Like this, there are lots of intangible assets which we have to show in the assets side of balance sheet.

Important Note:

a) Some business organisation may have also different investments, so we write in assets side of balance sheet

b) We have to deduct depreciation from fixed assets and provision for bad debts from sundry debtors.

3. After understanding all assets, we have to understand different liabilities. Liabilities are also fixed and current. We can also say long term liabilities and short term liabilities. Short-term liabilities may include accounts payable, payroll taxes payable, sales taxes payable, Bill payables, customer deposits on work in process, or security deposits made to your business, outstanding expenses and advance incomes.

Long term loan will be our fixed liabilities. Loan from bank, issue of debentures and deposit of public may include in it.

4. Equity or capital is the excess of all assets over outside liabilities. We include our net profit in it. We deduct drawing from it. If you are doing company type business. This value will show the equity share capital and pref. share capital. We will make separate heading of reserves and surplus for showing our old reserve and current year profits in liability side of balance sheet.

Important Note:

a) We make profit and loss appropriation account for showing current year reserve and retained earning in reserve and surplus of balance sheet of company.

b) We also show all types of capital (like authorized capital, called up and paid up) in balance sheet of company. But only paid up capital will be the part of total liabilities of balance sheet.

What are Standard Accounting Principles

2012-02-03T04:12:00.000-08:00

Standard accounting principles are those unique set of high quality, understandable, enforceable and globally accepted accounting rules which can follow by all organization of different countries. When we study accounting principles of different countries, we find many differences in these. For example Chinese accounting principles are different from USA accounting principles because china industry was based on sole owner. USA industry is based on corporations. But now, china is also moving to corporation.

As per Chinaorbit

Chinese Accounting Standards (CAS) were largely replaced by the International Financial Reporting Standards (IFRS), to bring China more in line with the rest of the world.
Modern accounting needs to be able to analyse the financial health of a company in order to correctly allocate funds and other resources to its various departments. The Chinese system on the other hand, was, initially, simply a compilation of the assets owned by a particular company, with no measure of profit and loss. Moreover, there was no recording of the debts of a company, giving managers an extremely difficult task of running a profitable firm, as they were unable to determine from where the firm is losing money.

So, for comparing accounting reports of two or more companies of two or more countries, it is very necessary to follow standard accounting principles.

IFRS foundation is working in this area. It has made international financial reporting standards which are usable in more than 113 countries from 27 Aug. 2008.

Benefits of Standard Accounting Principles

1. If all organizations use same standard accounting principles, it is very benefited for investors who study the financial reports of different business organization before investing their money. They can easily compare without any problem.

2. Companies can work at international level without any accounting problems.

3. The industry would be able to raise capital from foreign markets at lower cost if it can create confidence in the minds of foreign investors that their financial statements comply with globally accepted accounting standards.

What is Modified Internal Rate of Return

2012-02-03T01:45:00.000-08:00

Modified internal rate of return or MIRR is the improvement in IRR. One of the weak point of IRR’s assumption that we reinvest past cash flow at internal rate of return. But this is not true assumption. Reinvestment should be at cost of capital. But in MIRR, we assume that all cash flow will be reinvested at cost of capital. So, MIRR is more realistic than IRR. With modified internal rate of return, we can evaluate the project better way.

Abraham A., who is responsible for writing Think and Done, shares its correct definition

MIRR value is always unique given that we have at least one negative and one positive net cash flow. The modified internal rate of return is a geometric average of the compounded future value of positive cash flows over the discounted present value of negative cash flows. MIRR is calculated by first finding the future value of positive cash flows (net benefits) and present value of costs (net costs). The final calculation calculates the geometric mean or geometric average for these future and present values. MIRR calculation uses a closed form MIRR formula that always produces results given that at least one of the cash flows is positive and at least one of the cash flows is negative.

Formula of MIRR as per Wikipedia

Explanation of Modified Internal Rate of Return Through Examples

1. As per the given example of investopedia, MIRR will be 16.91%

=sqrt($266.52/195) -1 = 16.91% MIRR which will be more realistic than IRR of 18.66% because cost of capital is just 12%

{ Important : If you are interested to know whether past cash flow is reinvested at IRR, you should study the comment of Joseph Todd at CFO.Com on the written content Internal Rate of Return: A Cautionary Tale}

How to Manage Accounts of Rice Bran Business

2012-02-02T05:37:00.000-08:00

In rice bran business, businessman buys rice bran and then produces the its oil. This oil is sold in domestic market. Scrap of this is also used for feed of animals. So, its accounts are mainly related to record of its buying, to record of production of oil and then to record of its real sales. Except this, we also manage the payroll and vehicles accounts in this business. So, following steps will be helpful to understand the managing system of accounts of rice bran business.

1. To Manage Purchase Accounts of Rice Bran

When you buy the rice bran, you have to record of its exact quantity and price. Bran weight will be different from vehicle weight. We have to record just total purchase quantity of rice bran. Purchaser pays the freight charges. So, it should also record in payment vouchers.

2. To Manage Lab Accounts

Lab accounts shows total quantity which is consumed for testing. Testing is done for calculating the estimating idea for production of oil from rice bran.

3. To Manage Production of Oil and Sales Accounts

Production manager records the production cost of oil and supplies information to accounting department. Accounting department records it. If there is any sales of oil, it is recorded by accountant.

4. To Manage Other Accounts

Except above management, accountant has to manage other accounts like tax accounts, cash book, payroll accounts and profit and loss account and balance sheet.

{Important: Tally solution Co. recently published slide show for educating this concept in tally, please download and watch it at here.}

Cash Burning

2012-02-01T20:11:00.000-08:00

In accounting, cash burning does not mean to take fire and to burn the cash currency. Cash burning means to spend cash out of capital before getting it from earning or revenue. We can measure the level of cash burning through checking of our cash outflows. These cash outflow may be used for making of new product, buying of machinery and buying of raw material and other expenses etc. We say it as cash burning because if our produced products or bought products or our bought services will not generate any income, it will be the loss of our capital and time.

Burn Rate Vs Return Rate

Burn rate tells the per month payment of cash for various expenses when we start a new business. For example, a person makes partnership firm for selling the small family products. For this, he has to invest money in the form of raw material, shops, vehicles and other expenses in new partnership. If we calculate it and find per month cash expenses, it will our burn rate.

Return rate is the rate of return on total investment. If you get money from other, you will tell the return rate not burn rate. But it is the duty of investor to estimate the burn rate before investing the money. Past cash flow statements may help to find burn rate in which you are investing your money. Dharmesh Shah suggested in Onstartups , if you see that company is burning your cash with high burning rate, you should start using smaller bills.

What is Cost of Service

2012-01-31T18:47:00.000-08:00

We can easily understand the cost of goods sold. It is just excess of cost of opening stock, purchase and direct expenses over the cost of closing stock. But to understand cost of service is little difficult than cost of goods sold. There are two main reason of it.

1. In service sector, we are not producing any product. So, there is not any question of opening stock and closing stock.

2. Sometime, we hire other service for providing service to next level. At that time whether we will treat it as raw material for next service or not. If yes, then it will also be opening stock and closing stock service. We have to calculate it.

Ok, today, we are trying to explain the meaning of cost of service.

"Cost of service is the cost which we want to get for providing any service. Without this, no one can give service to other."

I take my not-profit-organisation's example:

We are providing free educational services to the world without taking anything from public directly. But our services are not free in real sense. Because it has cost. Without getting it, we can not live. I can include following cost of our service

Cost of Service of Our Not-for- Profit Organisation

= Internet Cost + Computer Depreciation + Computer Repair + Building Depreciation + Building Repair + Employees' Salary + Employees' Welfare Cost + Lighting Expenses + Stationery + Printing Cost + Printer Depreciation + Vehicle Depreciation + Vehicle Repair + Volunteer' Cost ( for basic need like my food, cloth and home expenses) + Hosting and Domain Name Cost + Computer Software Cost + Other Welfare Activities Cost + Service Tax + VAT

Important Points

(A) Cost of Service is just cost for providing specific service in good condition and with quality. There will not include any profit in it.

(B) Any Not-for-Profit Organisation gets cost of service through donation, through sponsor ship advertisement, through fund from other business. These organisations do not get any profit on service. But any Profit-Making Organisation does not sell their service on cost. Services are sold profit. Following will its formula

Sale Price of Service = Cost of Service + Profit

How to Get Loan with No Interest

2012-01-29T00:25:00.000-08:00

Sometime, you may need money in emergency. You want to get loan but you may not be interested to pay interest on that money. For example, you want to do help for your friend's father's medical treatment. At that time, you can take loan from your business funds. You need not pay interest on your own business's fund. But you should take this loan for humanity. I think, we should give everything for helping helpless.

Now, second question is, what fund of your business, you can use as loan. Following is the list of fund which can be used as loan from your business with no interest.

1. Building Depreciation Fund
2. Other Depreciation Fund
3. Employees' Salaries Fund
4. Employees' Accident Relief Fund
5. Repair Fund
6. Donation Fund

For example, you get Rs. 5,00,000 as loan from all above fund. Now, you have to refund all these fund on the monthly basis. You have to fix the Instalment because all fund will also be your responsibility. So, check the risk level before taking any fund. For example, you have to replace your inverter battery next day, you need not take depreciation fund of battery. This is interest free loan, so please never misuse my this idea for bad projects.

Types of Greed

2012-01-26T10:02:00.000-08:00

Today, I am telling types of different greed on the basis of my past experience.

1. Greed due to Lack of Money

When a person lives in lack of money and sees more money, greed may come in the mind of that person. For example, you are poor and you see big money on the road. You think, if I take this money, I can live enjoyable life. This is the first type of greed.

2. Greed due to Habit of Taking Drugs

All those who take drugs, are greedy because they can not live without drugs. They can tell a lie for getting money for buying drugs. They can easily become dishonest for getting money for drugs. Some person can do also bad work for drugs. One day, I was coming to my home. A Nokia mobile handset was in my hand. I was checking my mobile because a call was not going. Suddenly, I saw that a person had tried to snatch my mobile but he failed. They ran because I was on foot and they were on bike. After running these guys, I thought that they were greedy because they needed money for drugs. So, from that day, I decided to fight against all type of drugs. I want to see my country free from all drugs. This is also a biggest reason of greed of our Indians. We can take the example of Indian corrupt political leaders. In the time of votes, they buy the votes from public giving the greed of alcohol drink. This is very bad.

3. Greed due to Criminal Plan

Some person may give greed due to complete their criminal plan. One of its truthful story happened yesterday with me. India's one state name is Rajasthan. Yesterday, I got call from a person who is living in Rajasthan. He wanted to sell me 8 Kgs Gold on half price. I asked him, how did he get my telephone no. He told that he got from his friend. You know, this telephone no., I have mentioned for solving your accounting problem not for spam. I told him, I am teacher and I have not enough money to pay 1/2 price of 8 kgs. I also requested him to donate me 10 gram for my samdarshi orphan home. Very few person knows that I am collecting money for opening my Samdarshi Orphan home where orphan children will live and get free education without any problem. He was ready but he did not want to send it in my home. He gave me greed that he will give me 50 gram free gold, if I will go to their village. After this, I can buy whole 8 kgs Gold on half rate. Now, after closing his call, I thought following point

a) How did he get my telephone no. - Through net, through any other way.

b) He did not give me his home address. It means, he wanted to fulfill his criminal plan. When I will capture in his given greed, I will go to his village. I will call him. He will capture me. After this, he can blackmail to my family for getting money. So, next time when he talked with me. I told, wrong no.!

Non Performing Assets in India

2012-01-25T19:02:00.000-08:00

If we check overall position of non performing assets in India, it will be directly related to non performing assets of public sector banks, private sector banks, foreign banks and advances to weaker section banks whose published report is given on official site of RBI. Almost all the banks have non performing assets. It means, banks had given loan and advances to businessmen, companies and organisation but still they could not get from them. This issue directly affects the Indian economy adversely . It is estimated that gross NPV of total advances will be 6.33%, it was just 2.33% of total advances in march 2011.

So, RBI has recently taken following steps to control NPA risk of banking sector business. All these steps are admirable.

1. Once an asset is classified as a non-performing one, banks are required to set aside 70% of the amount.

2. Closer supervision on the asset quality.

1. The RBI has issued guidelines to banks for classification of assets into four categories for watching NPA closely.

a) Standard assets:

These are loans which do not have any problem are less risk.

b) Substandard assets:

These are assets which come under the category of NPA for a period of less then 12 months.

c) Doubtful assets:

These are NPA exceeding 12 months

d) Loss assets:

These NPA which are identified as unreliable by internal inspector of bank or auditors or by RBI.

3. One time settlement / compromise scheme

4. Lok adalats

5. Debt Recovery Tribunals

6. Securitization and reconstruction of financial assets and enforcement of Security Interest Act 2002.

7. Corporate Reconstruction Companies

8. Credit information on defaulters and role of credit information bureaus

9. Strengthening of Legal Norm

10. Aligning of prudential norms with

11. international standards

Related : RBI's Balance Sheet Analysis

How to Make Consolidated Income Statement - Part 2

2012-01-23T22:00:00.000-08:00

Yesterday, we had explained basic steps of making consolidated income statement. Today, we will clear these basic steps through an example.

The trial balance of H Ltd and S Ltd are given below as on 31-3-2010

	H Ltd.		S Ltd.
	Dr.	Cr.	Dr.	Cr.
Equity share capital (Rs. 10)		10,00,000		4,00,000
6% Pref. share capital (Rs. 10)		-		1,00,000
Fixed Assets less depreciation up to 31-3-2009	5,50,000		3,50,000
Sales including 200000 sales by H Ltd to S ltd		12,00,000		10,00,000
Cost of goods sold	960,000		8,00,000
stock 31-3-2010	120,000		90,000
debtors and creditors	2,00,000	1,30,000	1,60,000	60,000
general expenses 32000 shares in S ltd.	4,00,000
interim dividend paid
preference			3000
equity			20,000
Dividend received		16000
profit and loss account ( 31-3-2009		76,000		48,000
Bank	62,000		65,000
	24,22,000	24,22,000	16,08,000	16,08,000

1) Shares were purchased on 1-4-2008

2) S Ltd has paid and provided Rs. 20,000 dividend for 2007-2008 and
46000 for 2008-2009. The net profit for 2008-2009 was 74,000

3)H ltd. proposed 80,000 fir 2009-2010 and S ltd provided for final dividend
of 3000 as preference dividend and 20,000 equity dividend

4) Goods sold by H ltd to S ltd were at 20% profit on sales price. Closing
stock of S Ltd includes 20,000 such stocks.

5) Depreciation is charged @ 10% p.a. on reducing balance method. There is no
addition in 2009. Fixed assets of S Ltd were valued at 10,000 in excess, but not adjustment has
been made in books. Provision for additional depreciation is to be made only to the extent to
holdings of H ltd.

Prepare consolidated trading and profit and loss account and p/l appropriation account for the year
ended 31st march 2010.

Working notes :

1. Calculation of extra depreciation on fixed assets

Amount written up on 1-4-2008 ================ 10,000
Less depreciation 10% depreciation ( 10,000 X 10/100) = 1000
-------------------------------------------------------------------
Book value on 1-4-2009 ==================== 9000
10% Depreciation 2009-2010 ================= 900
Holding company's share of depreciation 900 X 4/5 = 720

2. Calculation of capital reserve

Profit and loss account balance of S ltd on 31-3-2009 = 48000
Less : Profit of S ltd for 2008-2009 = 74000
Less : Dividend for 2008-2009      = 46000
--------------------------------------------
====================== 28000 ======== - 28000
----------------------------------------------------------------
Profit and loss balance on 1-4-2008 ===========     20000
============================================
Share of holding company 20,000 X 4/5 ========= 16000

3. Calculation of Share of Minority interest in Net Profit of S ltd

Sales --------------------10,00,000
Less cost of goods sold    8,00,000
------------------------------------------
Gross profit -------------- 2,00,000
Less general exp. ------- 1,20,000
Less depreciation ------ 35,000
=============================
current Net profit ------------- 45,000
Old profit ---------- ---------- 48,000
=============================
Total profit ------------------ 93,000
Less interim dividend ------- 23000 ( Pref. + equity)
Less proposed dividend ----23000 ( Pref. + equity)
========================================
Balance of net profit ------ 47000
==========================================
Share of Minority interest in Net Profit of S ltd 47000 X 1/5
= 9400

Consolidated Trading and profit and loss account and P/L Appropriation account

		Total			total
To cost of goods sold HLtd 960000 + S Ltd 8,00,000 -------------------- ============1760,000 Less internal transfer 2,00,000 ---------------------------- ============1560,000		15,60,000	By Sales HLtd 12,00,000 + S Ltd 10,00,000 -------------------------------- ================22,00,000 Less internal transfer 2,00,000 ------------------------------------ ================20,00,000		20,00,000
To Gross profit c/d		4,40,000
		20,00,000			20,00,000
To General Expenses			By Gross Profit b/d		4,40,000
H Ltd	130,000		By Dividend Received
S Ltd	1,20,000		H Ltd	16,00,000
	250,000	2,50,000	Less received from S ltd	- 16,00,000	Nil
			By Dividend Proposed
			H Ltd	16,000
			Less proposed from S ltd	- 16,000	Nil
To Depreciation
H Ltd	55000
S ltd	35000
	90000	90,000
To Net Profit C/d		1,00,000
		4,40,000			4,40,000
To interim dividend			By Balance B/d		1,24,000
Pref.			By Net Profit B/d		1,00,000
H Ltd	Nil
S ltd	3000	3,000
Equity
H Ltd	Nil
S Ltd	20,000
total	20,000
Less internal transfer	-16,000
Net	4,000	4,000
To Proposed Divided
Pref.
H ltd	Nil
S ltd	3,000	3,000
Equity
H ltd	80,000
S ltd	20,000
total	1,00,000
Less internal transfer	-16,000
Net	84000	84,000
To balance C/d		1,30,000
		2,40,000			2,40,000
To Share of Minority interest in Net Profit of Sltd		9400	By Balance B/d		1,30,000
To stock reserve 20,000 X 20/100 X 4/5		3200
To capital reserve		16,000
To extra depreciation on value written off 9000 X 10/100 X 4/5		720
To Balance C/d		1,00680
		1,30,000			1,30,000

How to Make Consolidated Income Statement

2012-01-22T22:28:00.000-08:00

To make consolidated income statement is not difficult. But before this, you should understand the meaning of consolidated income statement. Consolidated income statement is important financial statement which is made by parent company in which it shows the result of his company and his subsidiary companies. For example A Ltd is the parent company and B Ltd is the subsidiary company. If A ltd joins his profit and loss account with the profit and loss account of B Ltd, then a new profit and loss account will become. This will be consolidated income statement. It is also called consolidated statements of operations or consolidated statements of earnings.

Now, we are ready to teach the steps to make consolidated income statement. Following are its main steps:

1st Step : Eliminate Internal Transfer of Stock

When stock is transferred from holding company to subsidiary company or reverse, at that time, we will eliminate this by following adjustment.

a) If goods are purchased by subsidiary company from holding company of $ 100,000

We will deduct $ 1,00,000 from the purchase of subsidiary company's purchase in the consolidated income statement. We also deduct $ 1,00,000 from the total sales of holding company in consolidated income statement.

b) If goods are sold by subsidiary company to holding company of $ 1,00,000

We will deduct $ 1,00,000 from sales of subsidiary company and purchase of holding company company.

2nd Step : Eliminate Common Expenses and Revenue

Because we have to show consolidated income statement for knowing net profit from the business outside from parent and subsidiary company. So, we will not show any revenue which have been gained from subsidiary or parent company. For example, parent company gets interest on given loan to subsidiary company, it will not show in consolidated income statement. Like this, we will not show the dividend on the shares purchased of subsidiary company in consolidated income statement. We also will not show the expenses which are incurred by holding company for subsidiary company or reverse.

3rd Step : Making of Reserve for Unrealized Profit on Unsold Stock

When any holding company sells the goods to its subsidiary company or reverse, we eliminate it on the basis of first step. But there will be still unsold goods in credit side consolidated trading and profit and loss account. It means there will be the profit margin of parent or subsidiary company in it. One party's sales will be second party's purchase. Unsold stock will be the part of this stock. So, we have to cancel this profit by creating reserve for unrealized profit on unsold stock. We will show this account in the debit side of consolidated income statement or consolidated trading and profit and loss account.

4th Step : Mix the Outside Incomes and expenses

For example, parent company paid salary to employees of $ 10000 and subsidiary company paid the salary to employees $ 5000. We will show the expense of total salary in consolidated income statement as $ 15000. Like this, we consolidate all outside both parties incomes.

5th Step: Calculate the Minority interest's Part of Net profit

We will also calculate the minority interest's part of net profit. For example minority interest are 1/5 in subsidiary company. Total net profit is $ 1,00,000. We have calculate the minority interest's net profit as $ 20,000. This $ 20,000 will be debited in the consolidated income statement.

Opportunity Cost of Capital

2012-01-20T17:38:00.000-08:00

One of the doubtful concept in finance is opportunity cost of capital. If opportunity word is not attached with cost of capital, we can easily explain cost of capital. By attaching opportunity word with cost of capital, its meaning becomes totally different which we define following way:

Opportunity cost of capital is rate of return on our capital which we get on the investment in one of best alternative. For example, we have made building of $ 10,00,000. It is our capital. We can use it for our business or for renting business. Both way, we can get benefit from this capital. If we give our this capital on rent, we have to sacrifice its use from our business. Our tenant will pay its cost of capital in the form of rent. But if we use this capital for our business, we will not get rent. At that time, our business will pay opportunity cost of capital for sacrificing rent in following way:

1st : We need not take the building on the rent because we have own. With this, we can save per month rent of building. With this, we can increase our per month net profit.

2nd : We can charge depreciation on our building. There will not decrease in cash which we earned from business. We will also not give tax on such depreciation because it is deductible from total incomes like rent of business building. So, it will be helpful to generate reserve from profit.

If we calculate both benefit in % form, it will be opportunity cost of our capital. Following table will explain it more deeply.

Nature of Capital	Actual Cost of Capital	Opportunity Cost of Capital
1. We borrow $ 1,00,000 on 10% interest	$ 10,000	-
2.If we get $ 1,00,000 through issue of share capital @ 10% rate of dividend	$ 10,000	-
3. If we invest own capital $ 2,00,000 without any rate	-	$ 20,000
4. If get building on the rent of $ 20,000 per month	$ 20,000	-
5. If we buy same building of $ 2,00,000 and charge depreciation with 10% p.a.	-	$ 20000 (Depreciation) + $ 20,000(tax benefit )
Total	$ 40,000	$ 60,000

What are Ponzi Schemes

2012-01-20T06:01:00.000-08:00

Ponzi schemes are those scam investment schemes in which return are given on the basis of money which are paid by new investors instead of earning of any profit. For example, you have been offered double return on your every new investment. First year, one investor invested $ 50,000. You have to pay $ 100,000. In second year another investor invested $ 1,00,000. You paid $ 1,00,000 with double return to first investor from the investment money of second investor. With this, first investor will feel happy and he will tell his friends. His friends will also invest their big money in your fraudulent project. You are doing nothing. You just pay the payment with double amount if any old investor demands. All such investment schemes are called Ponzi Schemes.

First Ponzi Scheme was started by Charles Ponzi. He promised to give 100% profit within 90 days through exchange of international reply coupons (IRC).

Not just charles ponzi, but there are lots of big cheaters who have cheated the public through these ponzi schemes. You can read all cheaters in the wikipedia's list of ponzi schemes.

Name of Investor	Time of Investment
	1	2	3	4	5
X	100,000	2,00,000	4,00,000	8,00,000	16,00,0000 No payment ( Collapse of the scheme)
Y	-	1,00,000	2,00,000 (Payment)	-	-
Z	-	-	3,00,000	6,00,000	-
A	-	-	-	5,00,000	10,00,000 No payment ( Collapse of the scheme)

Actual Investment	1,00,000	3,00,000	1,00,000	6,00,000	Party is 9 - 2- 11 or disappears

Total Worth	1,00,000	3,00,000	7,00,000	19,00,000	Nil

Celebration of 4 Years after Birth of Accounting Education

2012-01-19T00:42:00.000-08:00

Today, we are celebrating of 4 years after the birth date of Accounting Education. First of all, we are thankful to you that you have given us the opportunity for providing service to you. We started our not-for-profit organisation in 19th Jan. 2008 whose aim is to provide free education of accounting and finance. In these 4 years, we have achieved our following targets.

1. We have published 2000+ accounting and finance notes which can any student download without paying any tuition fees.

2. We have published 400+ video lectures in youtube svtuition channel which any student can see and download free of cost.

3. More than 25,00,000 students from more than 193 countries got benefit from our free education.

4. Every day more than 5000 students of world get free education from our not-for-profit organisation.

5. We have also provided more than 200 solutions of Accountants' problems. We did not take any service fees for providing solution.

6. As a founder of this not-for-profit organisation, I got several offers of joining as accountant or finance manager in big companies of the world. But, I did not accept these offers because I feel satisfy in this not-for-profit organisation. I prefer your love for me than big salary in big companies.

7. Our all online service will also be free in future. We will also provide VCD and CD lectures at cost for different classes in villages on cost for offline purpose.

8. In future, we will increase our quality of providing free education.

9. In future, we will start free offline seminars on different issues of accounting for your personal help in different cities of India and abroad.

10. I hope, in future, your faith in this organisation will be same as past. Your faith, your trust and your appreciation for our work will give us power to do work in this direction.

Again Thanks for your valuable Time for our organisation

{ If you want to participate in this celebration, you can call me at 01762-500250 (India), +91-1762-500250 (International}

from Vinod Kumar

After-tax Cost of Debt Definition

2012-01-16T22:08:00.000-08:00

After-tax cost of debt means calculating the rate of interest after deducting tax rate from total interest rate. Actually we calculate cost of debt before the tax because interest is our operating charges and it is deducted from our total revenue for tax purpose. So, there is no need to calculate after-tax cost of debt. But some good finance managers recommend calculating after-tax cost of debt because with this, we can estimate our total tax saving, if we get money through debt instead of shares or stock.

For example ABC Company has issued 10000 shares and debentures with the price of $ 10 each. Cost of debt is 10% and cost of equity share capital is also 10%. Suppose, corporate income tax rate is 25%. After tax cost of debt will be

= 10/100 X 75/100 = 7.5%

But in case cost of equity share capital, we have estimated (not fixed) to pay 10%. By this way, we save 2.5% tax money if we get loan through debenture. This is $ 2500 which we can reinvest in good project. Otherwise, our $ 2500 will go to Govt. account. So, to calculate this rate and on this rate we can estimate our tax saving.

Non Operating Expense Examples

2012-01-15T18:18:00.000-08:00

Non operating expenses are those which are not related with the operation of business. Every businessman can do specific commercial activities. A business can not produce and sell of furniture and financial activities. All the activities which a businessman does for getting commercial benefits in his field will be his operating business. Its all expenses will be his operating expenses. But sometime, he gets also commercial benefits for the activities which are not related to his operation. All expenses which are not related to his operation will be his non operating expenses.

Now, we are ready to explain non operating expense examples.

1st : If You are Doing Business in Product Market

For example, you are doing the business of buying and selling the product of knife as whole seller. You buy knives at maximum quantity at very low price directly from manufacturer and sell at high quantity and at higher price to retailers. Your all business expenses are relating to this.

(A) Suppose, you have more business space which you want to give it to other party on rent. To give your space on rent and getting rent is your non operating business. For this, you can pay following non-operating expenses:

a) Repair of extra space.
b) Property tax on that space.
c) Supervisor's salary for caring that space.

(B) Suppose, you have earned good money in your business of selling knife. You want to invest it in financial market like buying of shares and getting its dividend. For this, you have paid following expenses.

a) Demat Account Opening Fees.
b) Paying of Broker fees.
c) Loss on selling shares at low prices ( *Loss is also expenses because this expense is paid in current time but our capital is reduced due to any loss like reducing of capital due to paying of expenses).
d) Bank Charges for collecting your dividend automatically.

(C) Suppose, you want to invest in construction business. For this, you become partner of sham. You are sleeping partner. You invest only small money for its operating expenses and get 5% share of profit or loss. At that time, following will be his non operating expenses

a) Your invested small money expenses will be your non operating expenses

b) If same partnership suffers loss, at that time, you will get 5% loss. Excess of your loss over your invested small money is also your non operating expense.

2nd : If You are Doing Business in Financial Market

In financial market, you buy and sell the shares, debentures and other financial market like mutual funds and hedge funds. This is your business. You may also be financial company, bank and other financial organisation which collects money at low rate of interest and gives it at higher rate of interest. At that time, following will be your non operating expenses

(a) Suppose, you buy some space and sell it at profit. Paying the expenses for buying this will be your non operating expenses.

(b) Suppose, you contract with other party for doing business of buying and selling of product. All its expenses will be your non-operating expenses.

3rd : If You are Doing Business in Service Market

Suppose, you are CA. Your work is to provide the audit service to companies. But due to this profession, you can estimate the idea of profit in different companies. You contract with your wife. Your wife started business in higher profit industry like producing of soft drinks. You are paying its all operating expenses and getting earning from this business. These all operating expenses in soft drinks will be non operating expenses of your audit service business.

Important

1. To knowing the difference between operating expenses and non operating expenses will be helpful for comparison by calculating operating expense ratio and non operating expense ratio. Our total sales will now divide into two parts. One is for paying operating expenses and other for paying non operating expenses.

2. From calculating taxable net profit, we deduct only operating expenses from our total business expenses.