Demerger refers to corporate strategy in which a company splits into more than one entity. Converse to merger, it is done to operate each of the segments smoothly, dissolve one of the segments to raise capital or to focus on core business.
In most of the cases, demerger takes place when management decides to focus on core business activities. Also, it is used as a mechanism to raise capital by selling off one of the parts of entity. It also simplifies the company structure and is used to expand the operation of segmented part(s).
On 3rd June 2015, Adani Enterprise demerged its Ports, Power and Transmission businesses in Adani Ports and Special Economic Zone Limited, Adani Power Limited and Adani Transmission Limited. The company took the decision to simplify it’s structure and expand operations.
Share capital is the value of total shares issued by a company and is calculated by multiplying the number of issued shares by the par value of each share.
Shares are small units of ownership which give holders, the ownership rights in a company.
Irrespective of the market value of shares, share cap does not change because this value is calculated on the basis of nominal value of share and not on the market price of shares.
The value of share capital is shown on the balance sheet of a company.
Formula for the calculation of share capital:
Let’s suppose on 01/04/2017, XYZ Ltd raised an amount of INR 10,00,000 through its initial public offering by issuing 1,00,000 shares of INR 10 each. On 01/10/2017, market value of each share is INR 13.
Share cap of company XYZ ltd on 01/10/2017 = 1,00,000 × 10 = 10,00,000
Market price of shares doesn’t have an impact on total share cap.
Accounting is totally based on journal entry system. It is very crucial to put any entry at the right side otherwise the results would be fatal. To avoid the entry level mistakes, accountants use three basic rules which are also called ‘golden rules of accounting’.
These 3 golden rules of accounting are as follows:
Debit the receiver, credit the giver
Debit what comes in, credit what goes out
Debit all expenses and losses and credit all income and gains.
Accounting is almost incomplete without these rules.
Relation between golden rules of accounting and types of account:
These rules of accounting are linked with types of accounts used in accounting. Before knowing the relation, it would be better to understand the different types of account.
Cost of Goods Sold (COGS) refers to those costs which are directly associated with production of goods or services. For manufacturing companies, amount of raw materials used in the manufacturing of goods is the cost of goods sold. It does not include any indirect cost like rent, wages, utilities etc.
Formula for the calculation of Cost of Goods Sold (COGS)
Cost of goods sold is calculated by adding opening stock and purchases made during the financial year and then subtracting the amount of closing stock.
Cost of goods sold = (Opening stock + Purchases) – Closing stock
ABC ltd has total stock of INR 1,00,000 on 1st April 2016. During the financial year 2016 to 2017, the company purchased raw material of INR 90,000 and ended up with stock worth of INR 1,10,000 on 31st March 2017.
COGS (for the financial year 2016 – 17) = (1,00,000 + 90,000) – 1,10,000 = INR 80,000
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