Difference between Reserve Capital and Capital Reserve

Reserve capital is the amount of unissued share capital that remains after the company has issued a certain amount of share capital out of its authorised capital.

Capital Reserve represents amount that can not be distributed as cash dividends such as share premium, revaluation surplus, capital redemption fund, etc.

First, you should post different questions in different threads. It can get confusing answering two questions in the same thread.

As to the first question, you need to check out our guidelines about submitting homework questions in the red print at the top of this forum. The "limitations of ratio analysis" is a typical homework question.

As for the second, the right side of the balance sheet is for both liabilities and equity. So I don't refer to it as the "liability" side. It's actually the financing side. The left side is the assets, the resources of the company. The right side is how those assets are financed, by either debt (liabilities) or equity (ownership).

Another way to put it is that all assets have a claim on them by someone. The liabilities are a claim by creditors, and the net value left over is the equity, the claim of the owners. So that right side has to equal the left side.

Can you please explain nature of Prepaid Expenses ? I mean is come under Nominal or Real account?

The necessity of prepaid expenses is brought about by the
PERIOD CONVENTION.

The period convention nominates the period when the accounting year ends.
If the timing of an expense does not fit in exactly with the accounting period, then it is necessary to adjust the accounts in such a way to recognise the
Amount of any part of an expense which is prepaid at balance date.

The examples are many, but the easiest to undersand is RENT ,
INSURANCE, etc.
That part of the expense that covers dates that are after the balance date have to be recognised by proportion and at balance date require an adjustment.
One would term this type of an account a nominal account.
A journal entry is required to adjust for these circumstances.
At the beginning of the following period , this adjustment is then reversed.
I hope this will help.

OK! I'm a bookkeeper and I know what a prepaid expense is but your explanation rolcam confused even me! But it is a nominal account

I agree that it was confusing, and I'm an accountant. It seems the answer more dealt with how to do an adjusting entry than explaining what a prepaid means. However, mommasmom, you're incorrect about the nominal. Prepaids are real accounts. Real accounts are your balance sheet accounts, and since prepaids are assets, that makes them real accounts.

bheemaiah, I have a feeling that may have been a homework question, which we don't do for you. That's because most normal people don't say to "explain the nature of." That sounds like textbook talk. So hopefully you will re-write my explanation in your own words. (I'm more interested in you understanding the concept than how you answer your homework question.)

Remember first that an asset is something of value that the company has, or has claim to. Things like cash and land are easy cause it's easy to see the company owns those things. But it also includes things they have a claim on. Like accounts receivable represents what customers owe to the company, therefore the company has a claim on the customers.

A prepaid is when the company paid something up front. Insurance is indeed a good example and more easily understood than some other examples. If you paid your car insurance up front for six months, the money has gone out, but you don't yet have the coverage. The coverage will be coming to you over a period of six months into the future. So if you paid it at the beginning of January, you still have coverage for January to June coming in the future.

Therefore you have a "claim" on something - you have a right to this future coverage that you've already paid. It's not really here yet cause the time hasn't passed yet.

Therefore it's an asset cause you have a claim on something of value, insurance coverage.

Once the time has passed, the month gone by, then that portion expires. As it expires, it becomes an expense. If the month goes by, you no longer have claim on that portion cause it's gone away, so it's no longer an asset. That's the part that gets into the adjusting entry.

Quote:

---

Originally Posted by morgaine300

I agree that it was confusing, and I'm an accountant. It seems the answer more dealt with how to do an adjusting entry than explaining what a prepaid means. However, mommasmom, you're incorrect about the nominal. Prepaids are real accounts. Real accounts are your balance sheet accounts, and since prepaids are assets, that makes them real accounts.

bheemaiah, I have a feeling that may have been a homework question, which we don't do for you. That's because most normal people don't say to "explain the nature of." That sounds like textbook talk. So hopefully you will re-write my explanation in your own words. (I'm more interested in you understanding the concept than how you answer your homework question.)

Remember first that an asset is something of value that the company has, or has claim to. Things like cash and land are easy cause it's easy to see the company owns those things. But it also includes things they have a claim on. Like accounts receivable represents what customers owe to the company, therefore the company has a claim on the customers.

A prepaid is when the company paid something up front. Insurance is indeed a good example and more easily understood than some other examples. If you paid your car insurance up front for six months, the money has gone out, but you don't yet have the coverage. The coverage will be coming to you over a period of six months into the future. So if you paid it at the beginning of January, you still have coverage for January to June coming in the future.

Therefore you have a "claim" on something - you have a right to this future coverage that you've already paid. It's not really here yet cause the time hasn't passed yet.

Therefore it's an asset cause you have a claim on something of value, insurance coverage.

Once the time has passed, the month gone by, then that portion expires. As it expires, it becomes an expense. If the month goes by, you no longer have claim on that portion cause it's gone away, so it's no longer an asset. That's the part that gets into the adjusting entry.

---

Hi, this is bheemaiah, thank you for your explanation; really I am satisfied with your answer, I know prepaids are assets it’s come under current assets, but I have little bit confusion of it’s come under Nominal or Real, because it’s an expense we have to paid in advance, normally expenses are come under Nominal account, that is the reason I have confused here. Once again thanks for your explanation.

It doesn't turn into an expense until it's consumed/expired. But prepaids themselves are not expenses; they are assets.

What happens to something later is not relevant to where it is now. It's a little like saying I get to record a receivable as cash because I'm going to receive cash in the future - but I don't have it yet so no I can't.

The British authors have classified accounts into three sections:
1. Real - assets and liabilities
2. Personal - receivables, payables and owner's accounts
3. Nominal - income and expenses

If you can under stand these then Prepayments are assets and hence Real accounts

bheemaiah, PLEASE stop using this same thread to ask question after question after question. I didn't realize your last question was tagged onto the end of an old thread or I would have stopped you then.

I just spent a bunch of time scrolling through 5 pages worth of stuff trying to figure out where the new stuff started, and then got nothing but thoroughly confused over like 10 new questions all in one thread, with answers interspersed. No clue what was going on.

DO NOT keep doing this. I don't think you get how totally confusing this is. How is anyone to know what new question you're asking, or what's been answered and what hasn't? How is anyone supposed to follow that mess?

I've moved your other questions out into threads of their own. Post new problems or questions in their own thread.

CONSIDER THIS THREAD CLOSED.