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Jhimmi Singh (Querist)
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25 September 2016 how to calculate average capital employed when opening balance of general reserve and profit and loss given whether to use such info for calculating profit and applying 1/2 profit formula or calculating opening capital and then doing average

Jhimmi Singh

Jhimmi Singh (Querist)
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25 September 2016 one more q whether to do average of profit before tax or after tax

ACA Anurag

ACA Anurag (Expert)
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26 September 2016 Dear Jhimmi, Send us your all query via PM will try to solve it all

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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14 July 2024 Calculating average capital employed involves determining the average amount of funds invested in a business over a specific period. Here’s how you can approach it, considering the factors you mentioned:

### Average Capital Employed Calculation:

1. **Opening Capital Employed:**
- Typically, the opening capital employed is calculated as the sum of equity capital, reserves (including general reserve), and long-term borrowings.
- It can be calculated as:
```
Opening Capital Employed = Equity Capital + Reserves + Long-term Borrowings
```
- **Equity Capital:** The initial investment made by the owners/shareholders.
- **Reserves:** Accumulated profits retained in the business, including the opening balance of the general reserve.
- **Long-term Borrowings:** Loans or debts with a maturity period exceeding one year.

2. **Average Capital Employed:**
- To find the average capital employed, you typically calculate the average of the opening and closing capital employed for the period:
```
Average Capital Employed = (Opening Capital Employed + Closing Capital Employed) / 2
```
- **Closing Capital Employed:** Calculated similarly to opening capital employed at the end of the period.

3. **Profit Consideration:**
- Regarding the profit to use in the formula:
- **Profit Before Tax (PBT):** This is usually used to calculate the return on capital employed (ROCE) because it reflects the operating performance of the business before accounting for taxes.
- **Average Profit Before Tax:** You would calculate the average PBT over the period to use in the ROCE formula.
```
Average PBT = (PBT at beginning of period + PBT at end of period) / 2
```

4. **1/2 Profit Formula (for Return on Capital Employed):**
- Return on Capital Employed (ROCE) is often calculated using the formula:
```
ROCE = (Profit Before Tax / Average Capital Employed) * 100
```
- Here, average capital employed is derived as discussed above.

### Example Approach:

Let's say you have the following details:
- Opening Capital Employed: ₹1,000,000
- Closing Capital Employed: ₹1,200,000
- Profit Before Tax (PBT) for the year: ₹200,000

To calculate average capital employed:
```
Average Capital Employed =
= 1,100,000
```

To calculate average PBT:
```
Average PBT = (PBT at beginning + PBT at end) / 2
= (PBT for the year + PBT for the year) / 2

= 200,000
```

Then, using the average capital employed and average PBT, you can calculate ROCE.

### Conclusion:

- **Calculation Approach:** Use the average of opening and closing capital employed for the period.
- **Profit for ROCE:** Use profit before tax (PBT) to calculate ROCE.

This method provides a standardized way to evaluate the efficiency of capital utilization over a specific period, taking into account fluctuations in capital and profitability. Adjustments may be necessary based on specific reporting requirements or additional factors relevant to your business context.