Business concerns are liable to pay income tax on their profits under the income tax act 1961. Income tax on profit is treated as charge against profits of the accounting year. Since the actual amount payable will be known long after the preparation of the profit and loss account, the liability for taxes has to be estimated and provided for on that basis. The estimated amount of tax liability is debited to profit and loss account and credited to provision for taxation account, when profit of the business are assessed and the actual tax liability is determined. Provision for taxation
account is debited with the amount of tax as assessed and the bank account (if tax has been paid) or advance payment of tax account(if tax has been paid in advance) is credited with the concerned amount. If he actual liability of tax is more or less than the provision made in the previous year the difference should be adjusted through profit and loss appropriation account. Suppose in 2002the provision for taxation stood at Rs 165000 and liability for 2002 comes to only Rs 129000 then Rs36000 should be credited to the profit and loss account( by debit to the provision for taxation account t.Many business concern allow cash discount to their debtors who make prompt payment. But nobody knows how many debtors will avail this incentive and what will be amount of discount. Therefore, generally a provision is made on the basis of past experience to meet out this loss. The procedure is the same as for provision for bad debt. First the profit & loss account is debited and the provision for discount account credited. This account is carried forward to the next year. Next year, the actual discounts allowed will be debited to this account and not to the profit & loss account. This profit & loss account will be debited to make up the required balance each year. But the provision required to be debited to make up the required balance each year. But the provision required to be maintained for discounts should be calculated on total debtor minus the provision for bad debts since those who turn bad will earn discount.In addition to writing off debts known to be bad, it is useful to make provision for overdue accounts, the recovery of which is doubtful. Such provision is known as provision for bad and doubtful debts. This provision is generally made on the basis of some percentage of the total debtors appearing in the trial balance. The percentage is fixed on the basis of past experience.
The provision for bad debts is meant to meet a possible loss and the amount of the actual loss is uncertain. These two characteristics indicate the nature of provision. It is in the nature of a loss that it has to be debited to the profit and loss account, otherwise the amount of the profit will be inflated.
REVENUE RESERVES VS CAPITAL RESERVE
i) It is crated out of business profits.
It ois created out of Capital profit.
ii) It can be used for distribution on dividend without any pre-condition.
It can be used for distribution on dividend only if the company satisfies certain prescribed by the companies Act.
iii) It is created for strengthening the financial position and meeting the unforeseen contingencies or some specific purposes.
It is created for meeting capital losses or to be used for purposes specified by the companies Act.
GENERAL RESERVE VS SPECIFIC RESERVE
General reserve is the amount that is set aside out of profit which is not created for any future
Contingency or expansion of the business. Such reserves strengthen the financial position of the business.
Special reserve is that reserve which is created for specific purpose and can be utilized only for the purpose. For example, dividend equalization reserve is a specific reserve because it is created to maintain steady rate of dividend. Thus this reserve will be utilized to keep the dividend up in the year which the profits are insufficient. Debenture redemption fund , capital redemption reserve, development reserve etc are other example s of reserves.
Depreciation Vs Amortization – amortization refers to writing off proportionate value of the intangibles such as good will, copy right, patent etc while depreciation refers to the writing off of the expired cost of the tangible assets like machinery, building , furniture etc.
Cause of depreciation –
i) Wear &tear- wear and tear is an important cause of depreciation in the case of tangible fixed assets. It is mainly due to use of the assets.
ii) Efflux of time- Some assets have a definite life period like a lease, on the expiry of the life the assets will cease to exist. Other assets like plant and machinery may not have a definite life in their case the life is
estimated.iii) Obsolescence- If a better machine comes to the market, the old machines may have to be scrapped even though they are capable of being run physically. It is a reduction in usefulness of the asset.
RESERVE VS PROVISION
i) Appropriation or charge
It is an appropriation of profit.
It is a charge against profit.
ii) Financial Position
It is created to strengthen the financial position and to meet unforeseen liabilities or losses.
It is made to meet known liability or contingency. If the amount is not determined.
iii) Charge
It is debited to profit and loss appropriation account.
It is debited to profit and loss account.
iv) Investment
It is invested ,may be outside the business.
It is not invested.
v) Distribution
Unutilized part can be distributed as dividend.
It can not be used for distribution as dividend. It reduces net profit.
vi) Prudence
It is created as matter of prudence out of profit.
It is made out of legal necessity.
Depreciation Vs Depletion – The term depletion is used in respect of the extraction of natural resources like quarries, mines etc, that reduces the availability of quantity of the material or asset . Depreciation refers to a reduction in the value of all kinds of fixed assets arising from their wear and tear.
Depreciation Vs Obsolescence- obsolescence refers to decrease in usefulness caused on account of the assets becoming out of date old fashioned etc. Depreciation as stated earlier, is a loss in value of an asset generally arising on accounts of wear & tear. The fact remains that obsolescence is regarded as one of the cause of depreciation.
Under this method a certain sum is advanced to the petty cashier for a particular period say for a week in order to met the different petty expenses for the week. At the end of the week the amount actually spent by the petty cashier is to be re-imbursed by the general. Head/ chief cashier to restore the sum advanced in order to meet the expenses for the next week. In short, the sum which is given by the head cashier is meant for making up the imprest amount. This system is known as imprest system.
Advantages of imprest system-
1) The petty cashier is not allowed to draw cash from the general cashier as and when he desires and as such defalcation of cash can be minimized since there is no unnecessary accumulation of cash in his hand.
2) The petty cashier must have to satisfy about the expenses during the previous period to a responsible person and hence strict supervision and control over his activities is exercised.
3) The petty cashier is to keep the imprest amount of cash which helps to check petty cash in hand as and when necessary.
4) Since the petty cashier must have to submit his account to the general cashier before his further drawings , accounts are always kept up-to-date.
TRADING ACCOUNT VS MANUFACTURING ACCOUNT
i) Objective
The object of preparing a trading a/c is to ascertain gross profit or gross loss.
Manufacturing a/c is prepared to work out the cost of goods produced or manufactured.
ii) Balance
The balance of the trading a/c i.e. gross profit or gross loss is transferred to the profit and loss account.
The balance of manufacturing a/c i.e. the cost of goods manufactured is transferred to the trading a/c.
iii) Sale of scrap
The sale of scrap is not shown in the trading account.
The sale of scrap is shown in the manufacturing a/c.
iv) Stock
The opening and closing balance of the finished gods are shown in the trading a/c.
The opening and closing balance of raw material and semi- finished gods i.e. work-in- progress appear in the manufacturing a/c.
