Professional Documents
Culture Documents
The Italian Lucas Pacioli, is recognized as the father of accounting and book keeping. He was the first
person to publish the system of book keeping in 1494 in Venice used by Vatican merchants in his summa de
arithmetical, geometric, proportion et proportionality meaning everything about arithmetic, geometry and
proportion.
He was the first person to describe the system of debit and credits in journal and ledger. Luca Pacioli was
one of the best mathematician of his time and was a close friend of Leonardo Davina. Although Luca Pacioli
did not invent double entry book keeping, his 27 page treatise on book keeping contained the first known
published work on that topic and is said to have laid the foundation for double entry book keeping as it is
practical today. This book was written in vernacular Italian language.
Meaning of accounting
Accounting, as an information system is the process of identifying measuring and communicating the
economic information of an organization to its users who need the information for decision making.
Accounting has been rightly called language of business because accounting terms and concepts are used to
describe the events that make up the existence of business. Accounting performs various functions like
recording, communicating, meeting legal requirements interpreting etc.
Definition of accounting
Accounting is the art of recording, classifying and summarizing in a significant manner and terms of
monetary transaction and events, which are, in part at least, of financial character, and interpreting the results
thereof - American institute of certified public accountants
Characteristic of accounting:-
1. Accounting is an art as well as science. 2. Recording of financial transaction only
3. Recording in terms of money 4. Interpretation of the results 5. Communicating
Book keeping: - book keeping is an art of recording in books of accounts the monetary aspect of commercial
or financial transaction.
Accounting: - accounting starts where book keeping ends. It includes the following activities:-
1. Summarizing the classified transaction in the form of profit and loss a/c and balance sheet analyzing and
interpreting the summarized result. 3. Communication the information to the interested p[arties.
Accountancy: it refers to a systematic knowledge of accounting concerned with the principles and techniques
which are applied in accounting.
Users of accounting information and their needs
i) Internal users a) Director or the partner b) Managers and offers
ii) External users a) owners b) potential investors c) creditors d) lenders e) employees
f) government g) searchers h) public
Limitation of accounting :- a) influenced by personal judgment b) based on accounting concepts and
conventions c) incomplete information d ) omission of qualitative informations f) based on Historical costs
g) affected by window dressing ( practice of manipulating accounts )
Fields of accounting
1. Public of accounting public accounting practice in firms that offer their professional services to
the public.
2. Private accounting - an accountant working for single business is said to be employed in
private accounting.
3. Government accounting A large number accounting are employed in local states central govt. agencies.
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Accounting cycle
Accounting Principles:-
Accounting statements disclose the profitability and solvency of the business to various parties. It is
therefore, necessary that such statement should be prepared according to some standard language
and set rules. These rules are usually called Generally accepted accounting principles (GAAP).
a. Entity concept: Accountants treat a business as distinct from the persons who own it. But according to
law business and the propriety are one and the same.
b. Money Measurement Concept: In accounting, only those business transaction and events which are
of financial nature are recorded.
c. Going concern concept:- The financial statements are normally prepared on the assumption that an
enterprise is a going concern and will continue its operation for the foreseeable future. Business will continue
to run for a long period of time. It is according to this concept that Assets are recorded at the cost price, and
prepaid expenses are shown in assets. Due to this concept outside parties enter into long term contracts; give
loans, allow credit purchases to the enterprise.
d. Consistency concept:- This concept states that accounting principles and methods should remain consist
from one year to another. But the consistency concept should not be taken to mean that it does not allow a
firm to change the accounting methods according to the changed circumstances of the business.
e. Accrual concept:- In accounting, accrual basis is used for recording of transactions. It provides more
appropriate information about the performance of business enterprise as compared to cash basis. Accrual
concept applies equally to revenues and expenses. In accrual concept revenue is recorded when sales are
made or services are rendered and it is immaterial whether cash is not received or not.
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g. Realization concept/Revenue recognition concept:- This concept emphasizes that profit should be
considered only when realized. Revenue is deemed to be realized when the title or ownership of the goods has
been transferred to the purchaser and when he has legally become liable to pay the amount.
h. Dual aspect principle:-Dual aspect principle is the basis for double entry system of bookkeeping.
Every transaction has two aspects. It is according to this principle that the two sides of balance sheet is always
equal.
i. Periodicity concept:- Going concern concept is one of the fundamental accounting assumption.
Normally the accounting period is one year(12 month)
j. Matching concept:- As per this concept, all expenses matched with the revenue of that period should
only be taken into consideration. In determining net profit from business operations, all costs which are
applicable to revenue of the period should be charged against that revenue.
k. Materiality concept: According to this principle, items having insignificant effect or being irrelevant to
the user, need not be disclosed.
l. Principle of full disclosure: - All significant information relating to the business should be
completely disclosed
Contingent liabilities are shown as foot note .
Changes in the method of valuation of stock or for providing depreciation should be shown as
footnote.
Market value of investment should be given as foot note.
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Assets = Liabilities
Outsiders Owners
Classification of Account
CLASSIFICATION OF ACCOUNT :-
(1) Personal accounts: - Personal accounts relate to persons, debtors or creditors. Example would be; the
account of Ram & co., a credit customer or the account of Jhaveri & co., a supplier of goods.
(a) Natural personal accounts: It relates to transaction of human being like ram, Rita Etc.
(b) Artificial (legal) personal account: For business purpose, business entities are treated to have
separate entity. They are recognized as persons in the eyes of law for dealing with other persons. For example:
government, companies (private or limited), clubs, co- operative societies, institutions, universities, bank a/c,
firm etc.
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ACCOUNTING STANDARDS
These are written statements issued from time to time by institutions of accounting professionals
specifying uniform rules or practices for drawing the financial statement.
Following are the list of these standards:-
A.S. I =Disclosure of Accounting Policies
A.S. II = Valuation of Inventories or stock
A.S. III = Cash flow statement
A.S. IV = Contingencies and events occuring after the B/S date
A.S. V =Net profit or loss for the period
A.S. VI = Depreciation accounting
A.S. VII = Construction contracts
A.S. IX = Revenue recognition
A.S. X = Accounting for fixed assets
A.S. XIII =Accounting for investments
A.S. XIV =Amalgamation
A.S. XIX =Lease
A.S. XX = Earning Per share
A.S. XXI = Consolidated financial statement
A.S. XXII =Accounting for taxes on income
A.S. XXVI = Intangible assets
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Journal
It is one of the basic books of original entry.
In it transactions are recorded in chorological order.
Journal is sub divided into a no. of sub journals known as special purpose subsidiary books or Books
of original entry.
Prior to recording in journal the transaction may also be recorded in a rough book called waste
book or memorandum book.
Compound entry: A journal recording the transactions involving more than two accounts is
called compound entry.
Waste book: - prior to recording in journal, transactions are recorded in a rough book or memorandum book
Journal has 5 columns
Ledger has 8 columns
Debit Note: - When we return goods to a supplier, we prepare a debit note, of send it to supplier with
returned good.
Credit Note; - when goods are received back from a customer, a credit note is send to him.
Voucher, Cash memo, Invoice: - These are source documents.
Discount
SUBSIDIARY BOOKS:
Cash book: Records only cash transactions
Purchase book: record only credit purchases
Sales book: records only credit sales
Purchase return book: all purchase returns
Sales Return book: all sales returns
Bills receivable book:
Bills payable book
Journal proper: for the transactions which do not find any place in the above books.
Balances of accounts:
Assets = Debit balance
Liabilities = Credit balance
Expenses = Credit balance
Income = Credit balance
Capital = Credit balance
WHERE SHOULD THESE BE RECORDED
Increase in Revenue = Credit side
Decrease in expenses = Debit side
Decrease in Revenue = Credit side
Increase in Expenses = Debit side
Introduced fresh capital = Credit side
LEDGER
Ledger is a book which contains all the accounts of business enterprise. It is also called principle book
in this all accounts are opened on a separate page. Trial Balance is prepared with the help of ledger
balances which help in accounting arithmetic accuracy of account.
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CONTRA ENTRY :-Entries which are recorded at both side of on the same date,
Eg.: Cash deposited into Bank, Cash withdrawn from Bank.
Discount column of cash book is only totaled and not balanced.
The form which is filled for deposing cash or cheque in bank is called pay in slop.
Bearer cheque := payment of such a cheque is made on the counter of the bank either to
that person whose name written or to the bearer of the cheque.
Order cheque :- In cash a cheque payment will be made only to the person whose name is writer
on the cheque.
TRIAL BALANCE
If the total of debit side of T/B equal to credits side, it means the books are arithmetical accounts and there is
no error in posting and balancing in ledger.
It is prepared to obtain a summary of ledger accounts.
It is a statement, not a A/c
It does not appear in actual books of A/c in financial statement
It is just a working paper.
OBJECTIVE OF PREPARINNG THE TRIAL BALANCE
(i) Trial balance enables one to establish whether the posting and other accounting processes have
been carried out without committing arithmetical errors. In other words, the trial balance helps to
establish arithmetical accuracy of the books.
(ii) Financial statements are normally prepared on the basis of agreed trial balance; otherwise the work
may be cumbersome. Preparation of financial statements, therefore, is the second objective.
(iii) The trial balance serves as a summary of what is not a contained in the ledger; the ledger may
have to be seen only when details are required in respect of an account.
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Accounting Terms
ASSETS:- Anything which is in the possession or is the property of a business including the amount due
from others, is called assets. Resources must be owned by business it must be owned by businessand it must
be acquired at a measurable money cost.
Current Assets:- assets which are meant for sale or which can be easily converted into cash within
one year. These assets are also called active assets, floating assets, short lived assets
Eg. Cash in hand, Bank, B/R, debtors, Stock, prepaid exp. Etc.
Stock and investment are shown in the balance sheet at cost or realizable value whichever is less.
Fixed Assets: Assets which are held for continuous use in the business for the purpose of
production of goods and services. These are not meant for resale.
Eg. Loan, Building, machinery, goodwill, patents etc.
Liquid Assets ;- Assets which are either in the form of cash or can be converted into cash
Eg. B/R, cash, cash at Bank, short term investment debtors.
Note :- Prepaid expenses of stock are not liquid assets.
Waste Assets :- Those assets which vanish through being Consumption, such as coalmines, oil
wells, patents and trademarks, leasehold properties as these assets get exhausted with the lapse of time.
Tangible Assets:- those assets which can be seen and touched. These have physical
existence. Eg land, building, plant, stock, cash etc.
Intangible Assets:- These assets do not have physical existence and can not be seen and touched.
Eg Goodwill, Patent(know how), Trademark, Prepaid expenses.
Liabilities:- If refers to the amount, which the firm owes to its outsiders, except the amount it owes to
its owners. Liabilities = Assets capital
Fixed Liabilities current Liabilities
Long term loans short term liabilities (Creditors, bills payable
O/S expenses, uncured income)
Expenditure :- Any disbursement of cash or transfer of property or incurring liability for the purpose
of acquiring assets, goods or service is called expenditure. There are two types of expenditure-
Capital expenditure and Revenue Expenditure
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Deferred Revenue Expenditure :- There are certain expenditure which are revenue in nature, but
the benefit of this is likely to be derived over a no. of years. (Generally 3 to 7 years)
Eg. Advertisement expenses, Dr. Bal. of P/L A/c , Preliminary expenses
Stock :- This should be shown at cost price or market value, which over is less. Following things not
included in the list of stock
Goods which have been sold, but remain undelivered
Goods purchased and received, but havent recorded in books,
Following things are included in the list of stock
Goods sent to customer on sale or return basic
Goods sent to agents for sale but remain unsold with then
MARSHALLING OF ASSETS :- it is an arrangement of various assets and liab. in a proper order.It can
be done in two ways :-
(1) in order of liquidity eg. Sole preparing partnership.
(2) In order of performance e.g. joint stock companies.
PROVISION:- It is created to meet a known liability. Creation of provision is a legal necessity. Provisions
have to be provided for even if there is no profit. Thus, provision is a charge against profits. Examples are
Provision for bad and doubtful debts
Provision for depreciation
Provision for repairs and renewals
Provision for taxation
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RESERVE:- It is created to meet an unknown liability. Creation of reserve is discretionary. It can be created
only if adequate profits have been earned. Thus, reserve is an appropriation of profit. The objective of
maintaining reserve is to strengthen the financial position of the business. It is shown in liability side under
the head reserve and surplus.
Type of Reserve
1. Revenue Reserve (a. general Reserve b. Specific reserve)
1.Revenue Reserve:- These reserve come into existence out of profits which have been earned in the course
of day to day business operations. Therefore the revenue reserve represents undistributed profits and as such
is available for the distribution of dividends.
A. General Reserve:- the businessman do not withdraw the entire profits from the business but
retain a part of it in the business to meet unforeseen future uncertainties.
B. Specific Reserve:- Such a reserve is created for a specific purpose and can be utilized only for
that purpose.
e.g. 1) Divided Equalization Reserve 2) Reserve for replacement of asset 3) Investment Fluctuation Fund
2. Capital reserve:- Capital profits are also earned in the business from many sources. The reserves created
out of such capital profits are known as Capital reserve. Such reserves are not available for distribution as
cash dividend among the shareholders of a company.
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DEPRECIATION
Depreciation has been defined as the diminution in the utility or value of an assets, due to natural wear and
tear, exhaustion of the subject-matter, effluxion of time accident, obsolescence or similar causes.Depreciation
is a gradual Or permanent decrease in the value of any fixed assets from any cause
By constant use
By expiry of time
By expiry of legal rights
By accident
By depletion
By new technology
By permanent fall in market price
AMORTIZATION :- Decrease in the value of any intangible assets, just like depreciation. It decreases
only the book value of any assets not the market value.
Any expenses shown in debit side of P/L A/C it is a charge against profit. It reduces the profit and the taxable
amount.
Depreciation is a non cash expense. it doesnt involve any cash outflow.
Depreciation is not a process of valuation of assets to its effective span of live.
Scrap value :- It is the estimated sale value of the assets at the end of its useful life. It is also called as
Residual value/breakup value. salvage value = scrap value
Straight line Method :- According to this method, an equal amount is written off every year during
the working life of an asset so as to reduce the cost of the asset to nil or its residual value at the end
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e.g. Anil Ltd. Purchased a machinery for Rs. 90,000 spend Rs. 6,000 on its carriage of Rs. 4000 on its
erection. On date of purchase estimated life was 10 years. scrap value was Rs. 20,000.
Yearly Depreciation= ((90000+6000+4000)-20000)/10 = 8000
Dep 8000
Now Rate of dep. =
=100 100=8
Cost 100000
60,000
Rate of Depreciation=. 100 15.87
12,6000
Written down value Method :- Under this method, the value of any assets goes on diminishing
year after year. It is also called- Diminishing bal. method or Reducing installment method.
Under this system, a fixed percentage of the diminishing value of the asset is written off each year so as to
reduce the asset to its breakup value at the end of its life, repairs and small renewals being charged to revenue.
(i) Equal dep. Encharged every years (i) Dep goes on decreasing energy year
(ii) Dep. Is changed on original cost of Assets (ii) Dep. Is changed on balanced on
Balanced.
(iii) Rate of dep is kept low in comparising to WDV. (iii) Rate of dep. is high as comparison
to st. line
(iv) It is not approved by income tax authority (iv) It is approved by income tax
Authority
(v) It is suitable for assets in which repair charges are less (v) it is not suitable for assets where repair
expenses are more
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SINKING FUND METHOD:- If a large sum of money is required for replacement of an asset at the end
of its effective life, it may not be advisable to leave in the amount of depreciation set apart annually, for it
may or may not be available in the form of the readily realizable assets to the concern at the time it is
required.
NON OPERATING EXPENSES
Lost Due to theft
Finance charges related to long term debts
Loss on sale of assets
Charities and donations
CONSIGNMENT :- Whenever goods are sent for the purpose of sale to an agent, the goods sent are called
goods sent on consignment
Consignor Consignee
(Owner) (agent)
DEL CREDE COMMISSION - The extra commission given to the consignee for recovery of all debts
(amount due ) is known as del crede commission.
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3 parties 2 parties
Drawer payee
Drawer maker
payee
Bills of Exchange: - According to Negotiable Instrument Act,1881 A BOE is an instrument in writing,
containing an unconditional order, signed by the drawer directing to pay a certain sum of money only to or to
the the order of a certain person or the bearer of the instrument.
Features:
1. Must be in writing
2. Must be an unconditional order
3. Amount must be definite
4. The date of payment must be specific one
5. Must be signed by the drawer (maker) of the bill and accepted by the drawee of the bill.
Drawer:- Seller , creditor, writer or maker of the bill
Drawee:- Buyer, acceptor or debtor
Payee :- who actually receives the amount (money). The drawer or a third party
Note ; - A bill is called draft before it is accepted
Promissory Note : - (P.N) According to Negotiable Instrument Act, 1881 A promissory note is an
instrument in writing, containing on unconditional undertaking signed by the maker, to pay a certain sum of
money to or to the order of certain person.
BOE :- in case of local bill only one copy is prepared, but in case of fourign bill, 3 copies are prepared
P.N. :- only 1 copy is prepared either foreign or local bill
BOE:- no need to fixed stamps on the bills payable on demand. But otherwise its necessary
P.N . Stamps have to be fixed in any case.
BOE :- the liability of the drawer is secondary
P.N. :- The liability of the maker is primary
BOE:- it is an order to make payment
P.N. It is a promise to make payment
BOE:- It is drawn by Creditor and has 3 parties
P.N.:- it is drawn by the debtor and has 2 parties
Due date : - The date on which the payment of the bill becomes due is called due date or maturity date. 3
days of grace is added to calculated maturity / due date .
Public holiday before 1 day
Emergency holiday after 1 day
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INCOMPLETE RECORDS:- Accounting records which are not prepared in accordance with the
principle of double entry system, is known as incomplete records. In this only those books are maintained
which are essential (Some subsidiary books and some ledger accounts)
Any accounting records which fall short of complete double entry are called incomplete records or single
entry system.
Features:-
1. Maintenance of cash book and personal A/c only
2. Dependent on original vouchers.
3. Lack of uniformity (differs from firm to firm)
4. Suitable only for sole traders or partnership firms
5. Preparations of final A/c is possible only after converting the available information
into entry records and ascertaining the missing figures.
6. The figures of assets and liabilities will be based merely on estimates.
7. In this system of accounting instead of B/s, statement of affairs is purposed
8. This system is not a well proof of Arithmetical accuracy as trial balance is not prepared.
1. Closing Stock:- The amount of goods unsold at the end of the year is called closing stock. It is valued at
cost Price Or realizable Value, whichever is lower.
2. Outstanding Expenses :- These are the expenses which have been incurred during the year but have been
left unpaid on the date of preparation of final a/c. Outstanding Expenses on the one hand, will be added to
the concerned expenses on the debit side of trading or profit and loss a/c and will be shown in liabilities
side of balance sheet.
3. Prepaid Expenses:- These are the expenses which have been paid in advance for the next year during the
current year. Prepaid expenses will be deducted from the concerned expenses on the debt side of trading
and profit & loss a/c and Also shown in assets side of balance sheet.
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5. Accrued income or income Receivable:- Certain items of income such as interest on securities, rent etc.
are earned during the current year but have not been actually received by the end of the current year.
Income will be shown in credit side of profit & loss a/c and shown in liabilities side of balance sheet.
6. Unearned income or income received in advance: It may also happen that the certain income is
received in the current year but whole amount of it does not belong to the current year. Such income is
deducted from the concerned income on the credit side of profit & loss a/c and shown in liabilities side of
balance sheet.
7. Interest on capital:- In order to ascertain the true efficiency of the business, interest at a normal rate is
charged on the capital invested by the proprietor. Interest on capital is charged on debit side of profit & loss
a/c and will added to capital.
8. Interest on drawing :- Proprietor withdraw cash or goods for personal use. Such withdrawals are
termed as drawings. Interest on drawing is a gain to the business hence credited to profit & loss a/c and
deducted from capital on the liability side of the balance sheet.
9. Interest on loan:- loan appears on the credit side of trail balance it means that amount has been
borrowed from some person or bank etc. Loan is liability hence interest added in concerned loan which is
shown liability side of balance sheet.
10. Bad debts:- Person to whom goods have been sold on credit are known as Debtors. Sometimes due
to dishonesty, death, or in solvency of a debtor full amount recovered from him. Amount which is not
recovered is termed as bad debts. It is shown in debit side of P/L a/c and deducted from debtors in balance
sheet.
11. provision for bad & doubtful Debts :- After deducting the amount of actual bad debts from the
debtor, the list of debtor at the end of the year may include some debts which either bad or doubtful. The
amount of provision for bad and doubtful debts is shown in P/L a/c and deducted from debtors a/c on the
assets side on balance sheet.
12. Provision for discount on debtor: - If the business to allow cash discount to those debtor from
whom the payment is received promptly or within a fixed period. Discount thus allowed will be an expense
of the business and is therefore debited to P/L a/c and deducted from debtors in balance sheet.
13. Mangers commission on net profit :- Sometimes , in addition the salary the manager is entitled to
a commission on the net profit in the business. It will be recorded on the debit side of P/L a/c because it is
business expenses and shown in liability side of balance sheet as an outstanding expenses.
PARTNERSHIP
Characteristics:-
1. Minimum No. of partners 2
2. Maximum no. of partners as per companies act 2013 by (section 466) 50
(partnership Act does not specify the maximum no. of partners.)
3. Partnership comes into existence by an Agreement oral/written and not by the operation of law.
(HUF comes into existing by operation of law not by an agreement)
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Rights of partners :-
1. Every partner has right to share profit and loss with other partners in an agreed ratio
2. Every partner has the right to take part in conduct of business
3. Every partner has the right to inspect and have a copy of books of accounts.
4. To disallow the admission of a new partner
5. Every partner is the joint owner of partnership property
6. If a partners incurs any expenditure Or pays payment on behalf of the firm, he has right to
be compensated by the firm.
7. If a partner has given a loan to firm he has a right to take interest on loan at an agreed
percentage if it is not given it will be 6% p.a.
8. Every partner has a right to a retire from firm after giving a proper notice
E.g. Calculate Int. On capital of A$B. the capital on 1st April A = 1,00,000/- B = 2,50,000/-
After 4 months A brings additional Capital Rs. 50,000 but at end of 8 months, he withdraws Rs. 30,000.
while B, at the end of 5 months withdraws Rs. 80,000 and at the end of nine months reduce his capital to
R.s 1,50,000. Rate of int. 8% p.a.
E.g. Calculate Interest on capital of x,y, z. If capitals in starting were Rs. 1,20,000, Rs. 1,40,000 Rs.
1,60,000 Rate of int. 10%. X keeps drawing Rs. 20,000, every 4 months while Y introduces Rs. 10,000
every quarter.
E.g. A,B,C started business a business in partnership. A brings Rs. 50,000 for whole year, B introduce Rs.,
40,000 at first and increased it to Rs. 46,000 at end of 4 months but withdraws Rs. 16000 at end of 9
months. C introduces Rs. 80,000 at first but withdraw Rs. 20,000 at the end of 5 months.
Interest on monthly drawing whenever partner withdraw same amount every month or same
amount in every installment, the following formula can be used
Average period = time left after first drawn + time left after last withdrawn
2
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11.5 +0.5
Case II, when drawing are made in middle of month 2 =6 months
11 +O
Case III, when drawing are made at end of every months 5.5 months 2
12+3
Case 4 when same amount is withdrawn at the beginning of each quarter 2 months
9+0
Case 5 when same amount is withdrawn at the end of each quarter 2 4.5 months
10+ 2
Case 6 when same amount is withdrawn in the middle of each quarter
6 months
2
1 100 1
E.g. cal. Int. on drawing of Mr. x. @ 33 3 = 3 = 3 If He withdraws Rs. 8000 in
DISSOLUTION
Indian Partnership Act makes a distinction between dissolution of partnership and dissolution of partnership
firm. Dissolution of partnership means termination of the old partnership agreement and a reconstruction of
partnership may or may not result into closing down of the business as the remaining partners may agree to a
carry on the business under a new agreement.
Dissolution of partnership firm means that the firm closes down its business and comes to an end. On the
dissolution of the firm, the assets of the firm the sold and liabilities are paid off and out of the remaining
amount, the account of partners are settled.
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DISSOLUTION OF PARTNERSHIP
The partnership is deemed to have been dissolved in any of the following cases:
(a) In case of change in profit-sharing ratio of the existing partners
(b) In case of admission of a new partner
(c) In case of retirement of a partner
(d) In case of expulsion of a partner
(e) In case of death of a partner
(f) In case of insolvency of a partner
(g) In case of expiry of period of partnership
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As the main purpose is not to earn profit so they do not prepare trading or profit of loss A/c
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SOURCES OF INCOME
Membership fees.
Subscriptions
Govt. donations
Financial assistant from government of India
Life membership fee
There income & expenditure A/c is just like profit and loss A/c and it is a Nominal A/c
but it shows surplus or deficit instead of profit or loss.
In the B/s of NPO, there exists a capital fund and not a capital a/c
Receipts and payment A/c is also a Real a/c
Financial Statement of NPOs
(1) Receipts and payment A/c
(2) Income of expenditure A/c
(3) Balance sheet
1) Subscription:- It is main source of income of non- profit entity. It will be appearing on the debit side of
receipt & payment a/c and out of it the subscription belonging to current year will be posted to credit side of
I/E a/c.
2) Life membership fees:- In order to become the member of an organization for the whole of the life
some members pay the fee in lump sum once in their life time. It is capital receipt shown in liability side of
balance sheet.
3) Endowment Fund: - It is fund arising from a gift the income which devoted for specific purpose. It
should be shown in liability side of separate items.
4) Entrance fees: - It is received from the new member apart from the amount of annual subscription. Its
paid by each member only once it is received fairly regularly every year should be treated as revenue income.
A) Specific donation:- When donation received is to be utilized for specific purpose i.e. donation for
building, donation for providing swimming pool, it is capitalized and shown in liability side of balance sheet.
B) General donation:-
6) Legacy: - It is amount which a nonprofit entity receives as per WILL of deceased person. It appears in
debit side of receipt and payments a/c and shown in liability side of balance sheet.
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GOODWILL: Goodwill is the value of a firm in respect of profit expected in future over and above the
normal rate of profits. The implication of the term over and above is that there is always a certain normal
rate of profit earned by similar firms in the same locality a) when the profit sharing ratio amongst the
partner is changed; b) when a new partner is admitted ; c) when a partner retires or dies; and d) when the
business is dissolved or sold.
Valuation of Goodwill:-
Methods:-
1. Average profit Method
2. Super profit Method
3. Capitalization method
Capitalization method :-
100
(i) Capitalization Of Average profit method :- Average profit Rate
Goodwill = capitalized value actual capital of the firm
100
(ii) Capitalization Of super profit method;- goodwill = super profit rate
COMPANY
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(A company is an artificial person created by law having separate entity with perpetual succession and a
common seal :- Prof. HANEY )
2. Artificial person: It is an artificial legal person enjoying same rights and owing same obligation
as natural person.
3. Separate Legal Entity. A company is separate and distinct from the persons who constitute it.
4. Limited Liability: The liability of its members is limited to the unpaid value of the shares held by
them or guarantee given by them.
5. Separate Property: Company is entitled to own and hold property as distinct from its members.
6. Transferability of Shares: Shares of the company are freely transferable which makes the life of
the company independent of the lives of its members.
7. Common seal : Common seal is the official signature of the company because a company signs
like a natural person.
8. Company may sue and be sued in its own name: One of the consequences of separate legal
entity is that a company may sue and be sued in its own name.
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3. Registered Companies: The companies registered under the companies Act, 1956 or the earlier
Companies Act.
(a) Companies limited by Share: The companies in which the liability of the members are
limited by the memorandum to the amount, if any, unpaid on the share respectively held by them. It is
further divided into three categories i.e. public co., private co., and one person co.
(b) Companies limited by Guarantee : The companies in which the liability of the members are
limited to such amount as they may respectively undertake by the memorandum to contribute to the
assets of the company in the event of being its wound up.
(c
) Unlimited Companies: The companies in which the liability of the members is not limited at all.
These type of companies are permitted in India but do not exist.
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ONE PERSON COMPANY:- A one person company means a private limited company with
only one person as its member. (sec- 2(62))
Members- Natural Persons, Indian citizen and resident in India can be a member of OPC. The term
Resident of India means a person who has stayed in India for a period of not less than 182 days
immediately preceding one calender year.
CONVERSION: An OPC cannot convert itself into public or private co. unless a period of 2 years
has expired from the date of its incorporation and conversion is mandatory when the paid up share
capital is increased beyond 50,00,000.
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Promoters
1. Who is a Promoter?
As such promoter has not been defined anywhere in the companies Act, 1956. But in the company
Promoters stand in a fiduciary relationship with the company and to its shareholders. Promoter
should not make an affair or an unreasonable use of his position.
Prospectus
1. What is the meaning and definition of prospectus section 2(36) of the companies Act
defines a prospectus.
A prospectus means:- Any document described or issued as a prospectus and includes any notice,
circular, advertisement, or other documents inviting offer from the public for the subscription of
shares or debentures in a company A Prospectus is not merely an advertisement. A document shall be
called a prospectus if it satisfies two things.
1. It invites subscription to shares or debentures or invites deposits 2. The aforesaid invitation is made
to the public
Rules relating to Prospectus: Prospectus should be in written form 2. Prospectus must be 3. It
must be registered 3. It must be registered 3. It must be issued within 90 days of registration,
otherwise the registration is cancelled after 90 days of registration, if it is not issue during the 90
days.
ALLOTMENT OF SHARES
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FORFEITURE OF SHARES
Accounting entries :-
Share capital A/c Dr. (number of share forfeited called at value of share)
Security premium reserve a/c Dr. ( if the premium has not received )
To Share allotment reserve a/c ( amount not received on allotment )
To Share discount a/c ( if the discount given taken back )
To Share call a/c ( Amount not received on call )
To Share forfeiture a/c (Amount received on application, allotment, calls)
2. Good faith: The director of the company must exercise the power to forfeit share in good faith.
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3. Proper notice: Before forfeiting the shares, notice must be served to the company on the defaulting
shareholders in account of the unpaid call along with the interest which has been accrued.
4. A clear notice of 14 days must be given for the payment of the unpaid call.
5. If the payments of the amount are not made within the period mentioned in the notice, the share against the
call will be in the position to be forfeited.
6. Resolution of the board: The directors have the power to pass resolution for forfeiting shares, if the
defaulting shareholder is unable to pay the amount due within the specified time. The forfeiture becomes
invalid if resolution is not passed.
DEBENTURES
WHAT IS DEBENTURE?
Meaning Debenture means a document which acknowledges the loan made to the company and providing for
the payment of interest on the sum borrowed, until the debenture is redeemed, that is repayment of the
principle sum.
Definition : section 2(12) of the companies Act defines it as Debentures includes debenture stock, bonds and
may other securities of a company whether constituting a charge on the companys assets or not.
Characteristics of debentures:-
1. Debenture is a movable property. 2. It is issued by the company
3. It is in the form of certificate in debtness. 4. It usually satisfies the date of redemption.
5. It generally creates a charge on the undertaking of the company
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2. Unsecured or Naked Debenture:- Debentures which are issued without any charge on the assets of the
company are called secured debenture. The holders of these debentures do not have any security for the
repayment of principal or interest thereon.
3. Redeemable Debenture :- The debentures which are issued for a specified period of time are
redeemable debentures On expiry of the specified time the company has the right to pay back the debenture
holders and have its properties releases from mortgage or charge.
4. Perpetual Debenture: A debenture which has no clause as to the payment of which contains a clause
that it shall not be paid back is called perpetual debentures.
5. Bearer Debenture: - The debentures which are transferred by mere delivery and no stamp duty is
payable on the transfer is called bearer debentures.
6. Registered Debenture :- The debenture which are payable to the person whose names appear in the
register of Debenture holder is called registered debentures.
What is meant by Redemption of debenture?
Discharging or extinguishing the liability on account of debenture and in reference with the terms of
redemption states in the debenture trust deed is called redemption of debentures.
A company has to keep in mind the following three aspects regarding redemption that it :-
1. The time of redemption
2. The amount to be paid
3. The source from which redemption will have be carried out.
What is Dividend ?
The earning and profit of the company which is not retained in the business but is distributed among the
members is known as divided.
In case of a company which is a going concern, it ordinary means the portion of the company which is
allocated to the holders of shares in the company.
In case of winding up it means a division of the realized assets among the contributories and creditors
according to their respective right.
When debentures are purchased at a price higher than the nominal value of debenture
(a) On purchase of debentures Own Debentures A/c Dr [With nominal value ]
To Bank A/c
(b) On cancellation of own debentures X% Debenture A/c Dr [With nominal Value]
Loss on Cancellation of Own [with excess of cost over nominal
Debentures A/c value ]
To Own Debentures A/c Dr [With purchased price ]
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1. Cash flows from operating Activities :- These are revenue generating activities :-
1. Cash receipts from sale of goods rending of securities
2. Cash recepts from fee, royalties commission and other revenues
3. Cash payment to suppliers for goods securities
4. Cash payments to employee salaries, wages etc.
5. Cash receipts and payments of insurance enterprise for premium claims on unities other policy benefit
6. Cash payments of income tax.
2. Cash flows from investing Activities:- These include :- Purchase and sale of long term assets,
such as land building etc. not purchased for resale
1. Cash payments to purchase of fixed assets
2. Cash receipts from sale of fixed assets
3. Cash payments to acquire share, debentures of other enterprise
4. Cash receipts from sale of share, of debenture of other enterprise
5. Cash advances and loans made to third party (In case of financial enterprise these will be treated as
operating activities)
6. Cash received from repayments of loans advances made to third party
7. Cash receipts from elements of dividend.
3. Cash flows from financial activities:-
1. Cash receipts from issuing shares debentures loans, bonds notes of other short long terms borrowing
2. Cash repayments of amount borrowed by buy back of equity share
3. Redemption of preference shares of debentures
Non cash items:- These are added back
1. Depreciation
2. Amortization intangible fictitious assets, (goods will written off preliminary expenses discount issue
of debenture
3. Transfer of resources 4. Loss on sale of fixed assets
5. Equation of provision 6. Profit on sale of fixed assets
7. Non trading income.
Meaning and concept of financial analysis:- The term financial analysis also known as analysis and
interpretation of financial statements , refers to the process of determining financial strengths and weaknesses
of the firm by establishing strategic relationship between the items of the balance sheet, profit and loss
account and other operative data. Analysing financial statements is a process of evaluating the relationship
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Types of analysis:-
According to the material used it may be termed as (1) External and (2) Internal analysis.
1. External analysis is made by those who do not have access to the detailed records of the company. Such
analysis depends entirely upon published financial statements. The users in this category include investors,
creditors etc.
The position of the external analysis has been improved in recent times owing to the governmental regulations
requiring business undertaking to make detailed information to the public audited accounts.
2.Internal analysis is conducted by those who have access to the books of accounts and other related
information from the records of the company. Such analysis is conducted by the executives themselves or
by government and court agencies who assume special power by virtue of some enactments.
(b) On the basis of modus operandi
1. Horizontal analysis if the financial statements are reviewed for a number of years the analysis is known as
horizontal analysis. It is also known as dynamic analysis as it is based on data from year to year, rather than
on one date or period of time as a whole
2. Vertical analysis is that type of analysis where financial statements are reviewed of one period (year) only.
It is also termed as static analysis.
(c) According to objectives
1. Long term analysis. This analysis is made in order to study the long term financial stability, solvency
and liquidity as well as profitability earning capacity of a business concern.
2. Short term analysis. This is made to determine the short term solvency, stability and liquidity as well as
earning capacity of the business. The purpose of this analysis is to know whether in the short run a business
concern will have adequate funds readily available to meet its short term requirements and sufficient
borrowing capacity to meet contingencies in the near future.
(3) Debenture holders and institutional creditors (long term) are interested
(a) To evaluate the worth of assets available as security
(b) To study the capital structure and to find out the proportion of equity to debt
(c) To study the cash flow capacity of the unit for ensuring timely repayments of interest and loan.
(4) Government is likely to be interested
(a) To find out the performance of the unit
(b) To judge the health of the industry
(c) To assess taxpaying capacity
(d) To know how far the unit is discharging its social responsibility, and how far it is contributing towards the
achievement of national goals.
Accounting Ratio
Accounting ratio is the third chapter of unit third analysis of financial statements. To gain mastery in solving
the questions from this chapter various formula of different types of ratios i.e. liquidity, solvency, profitability
and activity should be known.
1. Ratio Analysis : - it is a technique which involves regrouping of data by application of arithmetical
relationships. It is the most important and powerful tool for measuring performance of a business enterprises.
2. Liquidity Ratios :- (Short-term Solvency)
Current Assets
(i) Current Ratio or Working Capital Ratio = Current Liabilities
Current Assets = Current Investment + Inventories (Excluding stores and spare and loss tools) + Trade
Receivables (Net of provision for doubtful debts) + Cash and Cash Equivalents + Short-terms Loans and
Advances + Other Current Assets
Current Liabilities :- Short-term Borrowings + Trade Payables + Other Current Liabilities + Short-term
Provisions
Liquid AssetsQuick Assets
(ii) Liquid Ratio or Quick Ratio or Acid Test Ratio = Current Liabiliteis
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Debt :- Long-term Borrowings (i.e. debentures, mortgage, public deposits) + Long-term Provisions
Shareholders Funds = Share capital + Reserves and Surplus
Or Non current Assets (Tangible assets + Intangible assets + Non-Current investments + Long-term loans and
Advances + Working Capital Non Current Liabilities (Long-term borrowings + Long term provisions
Working Capital = Current Assets Current Liabilities
Total Assets
(ii) Total Assets to Debt Ratio = Longterm Debts
Total Assets = Non-current Assets (Tangible assets + Intangible assets + Non-current investments + Long-
term loans and advances) + Current Assets [Current investments + Inventories (Including stores and spares
and loose tools) + Trade receivables + Cash and cash equivalents + Short-term loans and advances] + Other
Current Assets
Debt = Long-term Borrowing + Long term Provisions
Proprieto r ' s FundsShareholder s ' Funds
(iii) Proprietary Ratio = Total Assets
Shareholders Funds = Share Capital + Reserves and Surplus Total Assets as per Total Assets to Debt Ratio.
Net Profit before InterestTax
(iv) Interest Coverage Ratio = Interest = .. Times
4. Activity/Performance/Turnover Ratios
Cost of Revenue
(i) Inventory Turnover Ratios = Operationsi . e . ,Cost of Goods Sold
Time
Average Inventory
Cost of Revenue from Operations = Operations Inventory (Excluding stores and spares and loose tools) +
Net Purchase + Direct Expenses Closing Inventory (Excluding stores and spares and loose tools)
Revenue
Operation(Net Credit sales)
Average Trade Receivbles
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365
=Number of Days
Debt Collection Period or Average Collection Period = '
Debtor s Turnover Ratio
12
=Number of Months
Debtors Turnover Ratio
Revenue
(iv) Working capital Turnover Ratio = Operations( Net sales)
=Number of
Working Capital
Revenue
(ii) Operation Ratio (Operating cost ratio) = Operting Cost
Opertions (Net sales) 100
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Revenue
(iii) Operating Profit Ratio = Operating Profit
Operations(Net sales) 100
Operating Profit = Net Profit (before tax ) + Non-Operating Expenses Non operating Income
Or Gross profit + Operating Income Operating Expenses
Non-operating Expenses = Interest on Long-Term Borrowings + Loss on sale of Fixed Assets or Non current
Assets
Non operating Income = Interest Received on Investments + Profit on sale of Fixed Assets or Non current
Assets
Revenue
(iv) Net Profit Ratio = Net Profit
Operations(Net Sales) 100
Capital Employed Liabilities Approach: Share Capital + Reserve and Surplus + Long term Borrowings +
Long-term Provision
Assets Approach Non-current Assets (Tangible assets + Intangible assets) + Non-Current Investments + Long-
term Loans and Advances + working Capital
Working Capital = Current Assets Current Liabilities (Assume that all non current investments are trade investments).
(Interest on non-trade investments should be deducted from profit before interest, tax and divided).
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