Manager's commission on net profit - class-XI

A joint venture is typically formed for a specific project or purpose and is temporary in nature. It is not a going concern, which is a concept applied to businesses intended to operate indefinitely.

Final accounts consist mainly of trading, profiit and loss account along with balance sheet. Manufacturing is generally prepared when the business is about manufacturing any product and it shows every information related to manufacturing.

Final accounting is the last step of accountancy in any business. It involves three series of steps or three accounts, Trading account, Profit and Loss account and then Balance sheet. This order must remain same under any situation.

Conditions for Issue of Shares at Discount

1. In order to issue the shares at a price less than the face value, the company has to get permission from the relevant authority. For seeking permission, they should call and upon a general meeting and discuss and authorize the matter in that meeting.
2. There is a cap on the rate of discount. A company cannot issue any shares at more than 10% discount.
3. The company should issue the shares within 60 days of receiving permission from the relevant authority. In certain cases, the company can extend this time frame after getting permission in the permission.
4. The company cannot issue these shares before passing of 1 year from the date of commencement of business.
5. The shares must belong to the same class of shares which are already available in the market. For example, if the has previously issued Equity shares then this time also, the company has to issue Equity shares only.
6. Also, the company has to acquire the sanction by the Central Government after getting approval from the general meeting.

First, calculate the adjusted debtors: 40,600 - 600 (bad debt) = 40,000. The provision for discount is calculated on the remaining balance after the provision for bad debts. Provision for bad debts = 5% of 40,000 = 2,000. Remaining debtors = 40,000 - 2,000 = 38,000. Provision for discount = 2% of 38,000 = 760.

 Interest on Capital has the following two effects on final accounts: It is an expense of the business, therefore; it will be recorded on the debit side of Profit and Loss Account. On the other hand, it is an income of the owner, therefore; it will be added in the Capital Account in Balance Sheet.

Commission payable = 10% on Net Profit (after charging the commission)

If Net Profit is Rs. 100, Commission payable = Rs. 10

Thus profit before charging the commission = 100 + 10 = 110

Of Rs. 110, Rs. 10 is commission payable and the balance Rs. 110- Rs. 10 = Rs. 100 is the profit, left after charging the commission.

Here Rs. 2.200 is equal to 110%

Therefore 10% = 2,200/110 x 10 =Rs. 200

The manager of the business is sometimes given the commission on the net
profit of the company. The percentage of the commission is applied on the
profit either before charging such commission or after charging such commission.

Commission on net profit before charging such commission

An early payment discount (also called a prompt payment or cash discount) is a reduction in an invoice balance when it's paid before the due date. 

A provision is not a form of saving, even though it is an amount that is put aside for a future cost or obligation. Provisions resulting impact is a reduction in the company's equity. When accounting, provisions are recognized on the balance sheet and then expensed on the income statement.

The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the commission is applied on the profit either before charging such commission or after charging such commission.

Provision for bad debts = 10% of 5000 = 500. Net debtors = 5000 - 500 = 4500. Provision for discount = 5% of 4500 = 225.

Interest on capital = 100000 * 10 / 100

Interest on capital is a charge on the profits of a firm and it decreases the net available profit for appropriation.

Interest on capital is to be calculated on the capitals at the beginning for the relevant period. If there is any additional capital introduced or capital withdrawn during the year, it will cause change in the capitals and interest is to be calculated proportionately on the changed capitals for the relevant period.

Interest on capital = Amount of capital x Rate of interest per annum x Period of interest

Journal entries for Interest on Capital: 

Manager's commission is an operating expense just as any other expense like salary, rent etc. Manager's commission paid is shown on the debit side of the profit and loss account as it is an expense for the company.

The Outstanding Expense A/c appears on the liability side of the Balance Sheet. While preparing the Trading and Profit and Loss A/c we need to add the amount of outstanding expense to that particular expense.

Interest on capital is a charge on the profits of a firm and it is debited to the P&L account to recognise as an expense (and a charge on the profits).

Commission = (65,000 * 11) / (100 + 11) = 715,000 / 111 = 6,441.44. Net profit after commission = 65,000 - 6,441.44 = 58,558.56. Rounding to the nearest whole number gives 58,559. Option A is the closest.

Bad debts to be charged = Actual bad debts + New provision - Old provision. New provision = 5% of 80,000 = 4,000. Total charge = 19,000 + 4,000 - 20,000 = 3,000.

Wages paid in cash is an expense that reduces the net profit, which in turn reduces the owner's capital. The other options involve asset or liability changes that do not affect capital directly.

Commission = 11% of 65,000 = 7,150. Since it is 'before' charging, we use the simple percentage.

Interest on drawings is income for the business, so it is credited to the Profit and Loss account. It is then added to the drawings account, which reduces the capital.

Commission = 5% of 8,400 = 420. Since it is 'before' deducting the commission, use the simple percentage.

Commission = 5% on profit

Commission = (Profit * Rate) / (100 + Rate) = (3,30,000 * 10) / 110 = 30,000.

Provision for discount on debtors is calculated on the amount expected to be collected from debtors, which is after accounting for bad debts and the provision for bad debts.

The adjustment entry for manager's commission is to debit the Profit and Loss account (as it is an expense) and credit the Commission Payable account (as it is a liability).

Let X be the debtors before adjustments. After bad debt: X - 400. After bad debt provision (5%): (X - 400) * 0.95. After discount provision (2.5%): (X - 400) * 0.95 * 0.975 = 18,525. (X - 400) * 0.92625 = 18,525. X - 400 = 20,000. X = 20,400.

Debtors = 24,000 - 1,000 (mutual set-off) = 23,000. Provision for bad debts = 5% of 23,000 = 1,150. Net = 23,000 - 1,150 = 21,850. Provision for discount = 2% of 21,850 = 437. Final = 21,850 - 437 = 21,413.

Commission = (1,89,000 * 5) / 105 = 9,45,000 / 105 = 9,000.

Commission = (2,20,000 * 10) / 110 = 22,00,000 / 110 = 20,000.

The closing capital is calculated as Opening Capital + Net Profit (after commission) - Drawings. The net profit after commission is calculated by dividing the profit before commission by (1 + rate/100), which is 6,62,900 / 1.05 = 6,31,333. Adding this to the opening capital (14,00,000) and subtracting drawings (5,000) results in 20,26,333.

The commission is 10% of the net profit before charging such commission. Therefore, 10% of 2,20,000 is 22,000.

Let G be the General Manager commission and S be the Sales Manager commission. G = 0.10 * (1,65,920 - G - S) and S = 0.05 * (1,65,920 - G - S). Solving these simultaneous equations leads to G = 14,428 and S = 7,214.

Capital is defined as total assets minus total liabilities. Fictitious assets are not part of the standard accounting equation for capital.

First, subtract the provision for bad debts (5% of 25,000 = 1,250), leaving 23,750. Then, calculate the discount on the remaining amount (2% of 23,750 = 475). Subtracting this gives 23,275.

Conservatism:
This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. As per this convention the accountants follow the rule 'anticipate no profit but provide for all possible losses'. Examples Making provisions for Bad Debts, Making General Reserve, Valuing the stock at lower of cost or market value etc.

The commission is calculated as (Profit * Rate) / (100 + Rate). Here, (1,320 * 10) / 110 = 120.

Capital Employed is
the total amount of investment made for running the business.

Interest is paid half-yearly on June 30 and December 31. From January 1 to March 31, there are 3 months of accrued interest. Interest = 20,00,000 * 14% * (3/12) = 70,000.

As per question,

Calculation of debtors

It implies Rs 7,000 from Vinod + Rs 9,000 from Sudhir + debtors balance at Rs.72,000 (Dr.) = Rs 88000

Calculation of creditors

It implies pay Rs.8,000 to Vinod + pay Rs.8,000 to Sudhir + creditors balance at Rs.39,000(Cr.) = Rs 55,000

A reserve for discount on creditors reduces the liability (creditors) and increases the owner's equity (profit/gain).

This is a duplicate of question 455630. The General Manager's commission is 14,428.

A provision for discount on debtors reduces the asset (debtors) and reduces owner's equity (as it is an expense).

Net debtors = 55,200 - 200 (bad debts) = 55,000. Provision for doubtful debts = 5% of 55,000 = 2,750. Debtors after provision = 55,000 - 2,750 = 52,250. Provision for discount = 2% of 52,250 = 1,045.

Commission = (Profit * Rate) / (100 + Rate) = (4,40,000 * 10) / 110 = 40,000.

The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the commission is applied on the profit either before charging such commission or after charging such commission. In the absence of any such information, it is assumed that the commission is allowed as a percentage of the net profit before charging such commission.

The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the commission is applied on the profit either before charging such commission or after charging such commission.  In the absence of any such information, it is assumed that commission is allowed as a percentage of the net profit before charging such commission.

The total provision required is 5% of 80,000 = 4,000. Since the existing provision is 24,000 and actual bad debts were 20,000, the remaining provision is 4,000. No additional charge is needed.

Commission = (65,000 * 11) / 111 = 6,441.44, which rounds to 6,441.

Commission = 11% of 65,000 = 7,150. Net profit after commission = 65,000 - 7,150 = 57,850.