What should you do after stock market crash heavily due to coronavirus?

Hey guys I am back with the most important discussion regarding stock market crash recently happened due to coronavirus.
Introduction:
Last week the talk of the street was coronavirus It’s because market has taken it seriously, the growing impact of coronavirus in other part of country created an horrible situation. The market is getting tensed regarding production. Many companies have stopped production due to the non availability of raw materials.
Company like hero motocorp - the largest producer of two wheeler made an announcement regarding stoppage of production. The situation is same with other companies also. And the result is we saw heavy selling off in the market last Thursday and Friday and now on Monday.

This made me write this post to help those investors who have invested heavily and now are tensed whether they should square off their holding or buy more on dips.

What should an investor do?

First don’t be panic as the famous investor warren buffet once said “ It is a place where money get transferred from impatient to patient”

If you have invested in the market and worried about the free fall of your stock price, i must tell you that it is a global fall. All the global market is falling and the reason is coronavirus. 
There is one rule in the market that we sell our stock only when our stock is not performing well while others are doing good. Only when our stock is getting problem in selling its product while the competitors are easily selling their products. That’s the situation when we need to worry about the stock and we should think about selling it.

But as we can see no such conditions are there in the market now so why thinking about panic selling?
Why loosing your hard earned money just because everybody is selling.

Before going with the crowd we should remind ourselves that 90% of people in the market loose their money. So who are you following? Those crowd that are loosing their money? No we should think twice before doing this.

Secondly, we should ignore expert advise in the current scenario. Their advise never work. There are some reason why they give advice in news channels and currently i am not  going to deep down further about those reasons .


Now let’s talk about the reason of market fall. 

The culprit is coronavirus. Well this type of incident happened  in the past also. If not exactly coronavirus but somewhat similar fall. We have seen 2008 fall , market had recovered from that  fall and made new high. That time also everyone was having panic selling and lost their money but those who did not sold or even dare to buy at that time has been able to earn handsome money.

If I talk about virus, we have seen swine flue, we have seen bird flue and all virus have disappeared suddenly. And i am sure same thing is going to happen with coronavirus. 

Market forgets everything very quickly soon gone will be the days of fear from coronavirus and world economy will be back in track. 

If i talk about dangerous fall of market in past, world has seen the fall of 1929 even market recovered from that. Fall of world war 2 but market recovered from that also.

What i want you to convince is that if you are long term investor you should not worry about fall instead invest more money into market strategically like 10% of your savings with every heavy fall.

One thing is 100% certain that market is going to recover from its low either sooner or later. 

Warren buffet once said “ money combined with courage can give you handsome return”


Sometimes investors think that we should sell now and will buy after few days when price will be lower yes it’s called bottom fishing but the problem with this strategies is that you don’t have courage to buy later when price will fall because you never know how much is the bottom and you will never dare to re enter in the market and the time you re-enter you end up buying stocks at higher prices then before. That’s psychology we have to accept it. 

Let’s talk about some other reasons of the failure of market.

Banking system in these days also failed to retain the confidence of investors. As we all saw yes bank incident in last week. The growing NPA’s of bank has been a great concern from few years . The lack of proper economic policy in this sector by government also hit hard to the market.

We may favour Narendra Modi’s  BJP government in regard to national defence policies or foreign policies but we must accept the fact that the present government has failed in improving our economy rather I would say it worsened the economical situation.

But I would once again remind you we are investor and investor never gets affected from short term stories our target is 20 years and in 20 years market ought to perform better than any other source of earnings.

Some people hesitate to invest for so long but i want to ask them one question do you sell your newly bought house after one year or six month ? Do you sell your newly bought land in few months ? Do you sell your newly opened shop after 2 months?  If no then why do you make so haste in stock market?  Once an investor realised that they are not only buying stocks but businesses then they start ignoring these news. 

How to buy stocks in this weak market? 

Now if any reader is interested in buying stocks in the market they should be bit careful in stock picking. They should buy stocks which have strong fundamentals. Don’t pick the stocks on the basis of last year or last few quarters numbers. As warren buffet says always take last 5 to 10 years average because in this market every company is giving bad numbers from few quarters but their original value or intrinsic value remain same so always go for average of 5 to 10 years.

Second most important things, in this fallen market be cautious about debt-equity ratios. The larger is the debt the more problem company is going to face if profit is not enough to support increasing interest. 

Third, don’t buy the company whose cash flow from operating activities is poor. In this falling market it is necessary to check this factor because how well company is performing depends upon the cash flows. Company can manipulate  it’s profit but not it’s cash flow from operating activities. 

Fourth is the business model, never have bet on the management of the company cause once a great investor peter lynch said “ always buy the company which can be run by fool management cause sooner or later it will be run by those” 

So that’s all i had to suggest about stock picking techniques apart from that there are lot more points to think about before investing but above three factor are the most important factor to be considered. 

In my blog I deliberately used the word “ investor “ because the whole suggestion is for investors not for trader. Investors have emergency fund with them they have very well financial literacy so they don’t require their invested fund every now and then. But investors sometimes get worried about their decision, they are driven by mass selling in the market. My blog tries to bring awareness to those investors to stay invested and not to repent later. 


If you have any queries feel free to write me in below comment box!! 

What is the journal entry for subscription income?

While teaching accounting one of my students asked what is the journal of subscription income?
The question was asked in the context of income and expenditure account which is prepared to find out the surplus or deficit of non profit organisations.
The simple answer of this question could be one line journal entry but on that way the curiosity of “what” would be satisfied but the urge to know “how” would remain in the mind of accounts aspirants. This made me the need to write in details about that “how” part and also “what” part.

So here it is :

First of all, the entry would be :

Bank account dr
 To subscription account

And
Subscription account dr
 To income & expenditure account

Few of the viewers can go from here as they were looking for journal entry only and not have time to go through reason for others plz continue reading:

Reasons:

First of all we need to know what is subscription?

It is a regular payment made by members of an organisation to get some services or to be a part of that organisation . For example the amount we paid to an organisation to receive monthly magazine is  a type of subscription.

Now if we look at that organisation point of view who is providing us magazine and receiving subscription from us, the money it got is their income.
Now income should be credited as we know from “ golden rule of accounting “
That is why subscription is credited
And bank is debited as we know from golden rule of personal account “ debit the receiver credit the giver”
When member is depositing money in the bank account of that organisation, bank is the receiver
Thus our rule hold good here, entry is fully justified.
 Now so far, we have understood the reason behind First entry

Bank account dr
To subscription account

Now one thing should be noted that income and expenditure accounts is a nominal account whose main purpose is to find profit or loss.
So closing entry should be needed

That is why subscription account is debited and income and expenditure account is credited.

Hopefully you all got the answers and your queries are satisfied!!
If you have any doubts plz write in comments box below!

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Accounting For Amalgamation

Today we are going to talk about Amalgamation which is the most important topic for the students of accounting.


Amalgamation-

When two or more than two existing companies join to form a new company we called it as amalgamation. In the process of amalgamation existing companies loose their existence and the new company is created.

Suppose you are running your company (may be limited or private limited) which is in the business of cement manufacturing, you also have the lots of competitor who have the same business. one day you and one of your competitor agrees to merge(join) and form new company. The process is called amalgamation.

Accounting standard 14 and Amalgamation:

AS 14 defines Amalgamation as “Amalgamation means Amalgamation pursuant to the provision of company act 1956 or any other statue which may be applicable to the companies”.  

Amalgamation and Income tax:

Income tax defines Amalgamation as “Merger of one or more companies with another companies or merger of two or more than two company to form one company in such a manner that:

1) All the assets and liabilities of amalgamating companies immediately before the amalgamation become the properties of amalgamated company by the virtue of amalgamation.

2) Shareholder holding at least 3/4^th in the value of shares in the amalgamating companies become the shareholder of amalgamated company by the virtue of amalgamation”.

Transferor company (Amalgamating) and Transferee company (Amalgamated:

Before proceeding further, we need to understand the meaning of these two terms. The company that is transferring its assets and liabilities to another company by the virtue of amalgamation, we called it as transferor company (also called Amalgamating company) and the company in which it is been transferred is called transferee company (also called amalgamated company).

Take an example, X ltd and Y ltd are dissolve and new company XY ltd is formed. Here x ltd and y ltd are transferor company and new company XY ltd is called transferee company.

Now, why  amalgamation is done?

The reason is to gain the market shares in production that is to increase their production capacity and become the leader in their industry. Another reason is to eliminate competition and have the economies of large scale production. Apart from that, widening of product range, market penetration, and enhancement of technical know-how are also some of the reasons.

100 years of stock market shows us that amalgamation can also be created to hide accounting fraud. Sometimes it is seen that whenever any fraud has occurred, there was a frequent acquisition or amalgamation taking place on the part of the company. so these are some points that should be kept in mind by good accountant.



 Amalgamation and Acquisition:

There is a difference between these two terms. Acquisition occurs when one existing company takes over another existing company. Suppose, x ltd purchase y ltd, by paying some payment ( legally called purchase consideration, ) we called it as acquisition. Here x ltd is absorbing Y ltd and thus Y ltd has been dissolved or liquidated. Therefore, shareholders of Y ltd become the shareholders of x ltd.

        In the case of Amalgamation, there must be two or more existing companies that merge into the new company but in the case of acquisition, there can be one existing company that absorbs (yes absorption and acquisition have similar meaning) another existing company.



Amalgamation and External Reconstruction:



External Reconstruction takes place when new company is formed to take over an existing company. When x ltd is wounded up and with its assets and liabilities a new company Y ltd is formed,, the process is called external reconstruction. With these examples, it is clear that amalgamation and external reconstruction has some difference.

Purchase consideration:

Purchase consideration is the total payment made by transferee company to the transferor company for the assets and liabilities taken over by it. If X ltd acquires all the assets and liabilities of Y ltd and because of that total payment given to Y ltd is $100,000 then this amount is called purchase consideration. So in short, purchase consideration is the total payment that is made to purchase the business. Purchase consideration can be in the form of shares, other securities or in the form of cash or assets.

 Accounting for Amalgamation as per AS 14:

Accounting standard- 14 deals with accounting for amalgamation. The standard says that amalgamation can be of two types.

1) Amalgamation in the nature of merger.

2)Amalgamation in the nature of purchase.

There are some criteria which must be followed to regard amalgamation in the nature of merger.

1) All the assets and liabilities of transferor company become after amalgamation, the assets and liabilities of transferee company.

2) Not less than 90% of the shareholder of transferor company become after amalgamation, the shareholder of transferee company.

3) All the assets and liabilities of transferor company are transferred at book value.

4) There should be an intention of transferee company to run the existing business of transferor company after amalgamation.

5) Purchase consideration given to the shareholder of transferor company should be in shares except some cash can be given for fraction of shares.

All the five conditions mentioned above must be satisfied otherwise, it would be regarded as Amalgamation in the nature of purchase.

Accounting in the case of amalgamation in the nature of Merger:

Pooling of interest method is used in accounting for amalgamation in the case of merger. Under this method, transferee company does not make any changes to the asset and liabilities of transferor company. That is, they are not taken at their revalued amount but are taken at the book value. All the reserves should also be transferred whether it is capital reserve, general reserves or statutory reserves. All the five conditions stated above apply to this method.

We must note that the difference between purchase consideration and the share capital will be adjusted with the Reserves of the transferor company.

Let us take an example, take a look at the following Balance sheet of transferor company:

Liabilities		Amount
Share capital		1,00,000
Reserves and surplus		80000
Debenture		60000
Creditors		40000
Total		280000
Assets		Amount
Land & Building		115000
Plant and Machinery		85000
Debtors		20000
Stock		50000
Cash		10000
Total		280000

Suppose, the purchase consideration given by the transferee company is $120000, then the journal Entries in the books of transferee company would be:

Particular	Amount	Amount
Land &Building a/c             Dr	115000
Plant & Machinery a/c       Dr	85000
Debtors                                    Dr	20000
Stock                                          Dr	50000
Cash                                           Dr	10000
To, Creditors		40000
To, Debenture		60000
To, Reserve and surplus (80000-20000)		60000
To, purchase Consideration		120000

Here in the above balance sheet we can see that the difference between share capital and purchase consideration is adjusted with reserve and surplus.

Accounting in the case of Amalgamation in the nature of purchase:

Purchase method is used to account for amalgamation in the nature of purchase. Under this method, all the assets and liabilities of transferor company is taken at the revalued amount and not on the book value. The adjustment should be made either on the goodwill or with capital reserve. Suppose, If net asset (that is excess of asset over liability) is more than purchase consideration then the difference will be recorded in capital reserve account. On the other hand, if purchase consideration is more than the net asset then the difference will be recorded in goodwill account.

In the purchase method, not all the liabilities are recorded in the books of transferee company, only the outside liabilities are recorded. Similarly, fictitious assets are not recorded in the books of the transferor company.

Take an example, Following is the balance sheet of transferor company:

Liabilities		Amount
Share capital		1,00,000
Reserves and surplus		80000
Debenture		60000
Creditors		40000
Total		280000
Assets		Amount
Land & Building		115000
Plant and Machinery		85000
Debtors		20000
Stock		50000
Cash		10000
Total		280000

 

Suppose also that Land and building is revalued at 150000 and Debtors at 50000; and purchase consideration discharged is $250000

Then the journal entries in the book of transferee company would be:

Particular	Amount	Amount
Land &Building a/c             Dr	150000
Plant & Machinery a/c       Dr	85000
Debtors                                 Dr	50000
Stock                                      Dr	50000
Cash                                        Dr	10000
Goodwill                                Dr	5000
To, Creditors		40000
To, Debenture		60000
To, purchase Consideration		250000

 

Here we can see that the excess purchase consideration (250000) over net asset (245000) is adjusted with Goodwill.

 So that was all about amalgamation hope you have understood a lot on this concept. if you have any queries relating to this matter, write me on the comment box below.