Demerger – Meaning & Purpose

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.

Purpose:

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).

Example:

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 – Meaning & Formula

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:

Share capital formula

Example:

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.

House Rent Allowance (HRA) – Meaning and Taxability

Meaning of House Rent Allowance (HRA):

House Rent Allowance

House rent allowance (HRA) is a pay component, employees receive from their employer to pay house related expenditure.

Taxability of HRA:

Every employee in India is entitled to claim HRA exemption if below mentioned conditions are met:

  • He/ she lives in a rented house &
  • Receives HRA as a pay component.

Exemption on HRA is arrived based on least of following three conditions:

  1. Actual HRA received.
  2. 40% (non – metro city) or 50% (metro city) of salary.
  3. Rent paid in excess of 10% of salary.

Salary here includes Basic salary and DA (If part of pay component)

Example of HRA exemption:

Sunil works in XYZ Ltd. He lives in a rented house in Mumbai for which he pays Rs. 5000 as rent. Following are the pay components of Sunil’s salary:

Basic 10,000
Dearness Allowance 2000
House Rent Allowance 3500
Conveyance 2500
Medical Allowance 900
Special Allowance 1000

 

Calculate the amount of HRA exemption for Sunil.

HRA Exemption for Sunil shall be least of following conditions:

  1. Actual HRA received:

3500

  1. 50% of salary (Basic + DA) as sunil lives in metro city:

(12,000 x 50)/100 = 6000

  1. Rent paid in excess of 10% of salary (Basic + DA):

5000 – 10% (12000) = 3800

So, amount for HRA exemption shall be 3500.

Golden rules of accounting

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:

  1. Debit the receiver, credit the giver
  2. Debit what comes in, credit what goes out
  3. 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.

Types of account:

There are three types of account as follows:

  1. Personal account
  2. Real account
  3. Nominal account

Now it would be easier to under the relationship between these two:

The very first rule i.e. debit the receiver and credit the giver, applies for all personal accounts.

The second rule i.e. debit what comes in and credit what goes out, applies for real accounts.

Last golden rule of accounting i.e. debit all expenses & losses and credit all income & gains, applies for nominal accounts.

Example:

Purchased furniture for 5,000 in cash

Account Type Rule
Furniture A/c Real Debit what comes in
Cash A/c Real Credit what goes out

Journal Entry:

Account Debit/ Credit Amount
Furniture A/c Debit 5000
Cash A/c Credit 5000

Goods sold for 3,000 on credit to XYZ Ltd

Account Type Rule
XYZ Ltd A/c Personal Debit the receiver
Sales A/c Nominal Credit all income & gains

Journal Entry:

Account Debit/ Credit Amount
XYZ Ltd A/c Debit 3000
Sales A/c Credit 3000

Electricity bill paid for 800

Account Type Rule
Expenses A/c Nominal Debit all expenses & losses
Cash A/c Real Credit what goes out

Journal Entry:

Account Debit/ Credit Amount
Expenses A/c Debit 800
Cash A/c Credit 800

 

 

Cost of Goods Sold (COGS) – Meaning & Formula

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.

The value of cost of goods sold is used in the calculation of gross profit, operating profit and net profit.

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

Example:

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