Net assets is the difference of total assets and total liabilities of a firm.
The accountant of XYX Ltd comes with the below figure.
Total assets of company = INR 10,00,000
Total liabilities of company = INR 7,00,000
Management asks to calculate the net assets. He follows the order and makes his calculation as given below:
Net Assets = 10,00,000 – 7,00,000 = INR 3,00,000
An underlying asset is the financial asset upon which a derivative’s price is based.
Often stocks, bonds, commodities, currencies, interest rates and market indexes are considered as underlying assets.
Chattel mortgage is debt instrument in which loan is extended to borrower on movable property.
Usually land and buildings are used as mortgage however when personal movable properties like appliances, car, jewelry, etc. are used rather than non movable properties, it is called a chattel mortgage.
Strike price is the fixed price at which holder of a call option can buy the underlying asset irrespective of its market price until the expiration of contract.
For a put option holder, it is the price at which underlying assets can be sold until the expiration of contract.
The strike price is determined at the time of entering into a derivative contract.
In a call option, if it remains lesser than the spot price (market price), the holder can exercise the option to earn profit.
On the other hand, in a put option, the holder of the option can earn profit only if strike price is more than the market price.
On 1st January 2018, Mr A entered into a derivative contract to buy 100 shares of company XYZ Ltd at a strike price of INR 85. The expiration date of contract is 3 months i.e. 31st March 2018. On 1st of January the market price was INR 82.
In the month of February, market price increased from INR 82 to 97. Mr A has the right to purchase the 100 shares of XYZ ltd at a price of INR 85 or Mr A can wait for further hike in share price till the expiration of contract.
In the month of February, market price increased from INR 82 to 97. Mr A has the right to purchase 100 shares of XYZ ltd at a price of INR 85 or Mr A can wait for further hike in price till the expiration of contract.
Accrued income is the income which has been earned but has not yet been received. This earned income falls under this category only if the company has right to receive this income. Accrued income is recorded for the period for which it is accrued and not for the period in which invoice is raised or payment is received.
For example, XYZ ltd holds a contract with ABC ltd to provide accounting solutions for the accounting year 2016 – 2017. As per the terms of agreement, invoice will be raised in accounting period 2017 – 18 and payment shall be made after that.
As the company XYZ ltd is providing its services throughout the year, the portion of income thus generated will be recorded for the period 2016 – 2017 and not for 2017 – 18 (in which invoice is raised).
Companies which use cash basis accounting do not use this term as they record the transaction when cash is received.
Accrued income is considered as current asset for a company (if the payment is expected to be received within a year) and is recorded on assets side of a balance sheet.
