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Accounting is catted the language of business. The basic function of any language is to serye as a means of communication and accounting serves this function. Every individual performs some kind of economic activity and in att activities and at[ commercial organizations which invotves money and other economic resources, accounting is required to account for these resources. ln other words, wherever money is involved, accounting is required.

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DEFINITIONAND FUNCTIONSOFACCOUNTING:

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fneAmerican lnstitute of Certified PubticAccountants

(AICPA) has formutated the fottowing definition of Accounting; "Accounting is the art of recording, ctassifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at teast, of a financial character and interpreting the results thereof. "

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ACCOU NTANCY. ACCOU NTI NG AN D BOOK-KEEPI NG:

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Accountancy refers to a systematic knowledge of accounting. lt exptains on how to prepare the books of accounts and how to summarize the accounting information and communicate it to the end users. A..ornting refers to actual process of preparing and presenting the financial statements. lt covers the activities of recordine, classifying, summari-ing,analv-ingjnteroreting and finalty rommunicating the interpreted information to the end users. Book-keeping is the part of accounting and is concerned with rscording-ar maintaining books of accounts which is a routine activity. It covers the activities of identifyinq the transactions and events, measuring, classif\{inq and summarizing the accorrnting
data.

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L Accounting measures past performance and depicts its current financia[ position
2. Accounting hetps in forecasting future performance using past data 3. Accounting provides retevant information to the users for decision making

4. Accounting hetps in comparison and evatuation of business resutts

5. Accounting hetps in identifying the weak area of the business operation 6. Accounting provides the necessary information to the government authorities.

, .::.r, sUB-FtELDS

oF ACCoUNTTNG:

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1. Financial Accounting: It is the original form of accounting. lt is mainty concerned with the preparation of financial Statements for the end users. lt basicatty hetps in determination of the net result of an accounting period and the financial position of the business.

2. llanagement Accounting: lt is concerned with internal reporting to the managers of a business. lt ascertainment and cost controt. lt hetps management in ptanning, control and decision making.

inctudes cost

S. Cost'Accounting: lt is concerned with the process of accounting and controtling cost of a product. lt basicatty serves the
purpose of ascertaining and contro[ting cosl of a product, operation or function. 4. Human Resources Accounting: lt is concerned with identifying, quantifying and reporting the totat investments made in human resources of a business entity. However, such investments are presentty are not recorded under conventional

accounting practice.

5. Sociat Responsibility Accounting: it is concerned with the process of identifying, measuring and communicating the social effects of business decisions. lt is accounting for socia[ responsibitity aspect of business.
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LIMITATIONS OF ACCOUNTING:

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, lgnores Quolitotive element:Since the accounting is concerned with the monetary matters onty, the qualitative factors tike toyatty and skitts of the personne[, pubtic retations etc. are ignored. 2. Estimation: Accounting reports only the estimated periodic results and not the true results since the true resutts can be
1

depicted onty on winding up of the enterprise.

3. Not free from bias: Certain accounting estimates depend upon the personal judgment of the enterprise. For exampte, choice of method of depreciation, vatuation of inventory etc. Hence, the anatysis of the financial statements is not free
from bias.
God doesn'f require us to succeed; he only

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Fundamentals of Accounting

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4. lgnores the price level

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into account. 5. Window dressing: When the management decides to enter wrong figures to artificiatty inftate or deflate the financial results, then such income statements faits to provide a true and fiir vlew of the finaniiat position of the enterprise. . 6. Conflict; There are occasions when accounting principtes conftict with each other and hence it becomes difficutt in
preparing financiaI statements.

changes: Fixed assets are recorded at historical cost and not at the.replacement vatue which is often higher"than the vatue stated in batance sheet. This can not be compared untess the price [eve[ changes are taken

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BASIC ACCOUNTING TERMS:

l.

Entity: An entity means an economic unit that performs economic activities.

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2. Event: An event is a happening of consequences to an entity. 3. Transaction: lt is an economic event involving money or money's worth. 4. voucher: lt is a document which serves as an evidence of a transaction. 5' Entry: Entry is the record made in the books of account in respect of transactions and events. lt
vouchers.

is passed with the hetp of

6' lssets: Assets are probabte future economic benefits to be received by the company as a result of past transactions or events. Assets may be broadty classified in to current assets and fixed assets. 7' Liabilities: Liabitities are probable future sacrifices of economic benefits and refer to the financiat obtigation of an enterprise other than owner's fund. Liabitities may be broadty ctassified into current tiabitities and long Lrm tiabitities. 8' Capital: lt refers to the amount invested by the owners of the enterprise. Capitat can also be the excess of assets over external tiabitities. lt is also known as the owner's equity or net worth of the enterprise. 9' Stock: lt refers to tangibte property hetd for sate in the ordinary course of business or for consumption in the production of goods or seryices for sale. lt inctudes stock of raw-materiat, iemi-finished goods and finished goods. 10' Debtors: Debtor refers to a person from whoni the amounts are due for goods sold or services rendered on credit basis. I I ' Creditors: creditor refers to the person to whom the amounts are due for goods purchased or seryices rendered on credit terms. 12. lncome: lncome is increase in economic benefits during an accounting period.
Expenses are outftows, uses of assets, or the incurrence of tiabitities from detivering goods or services as part of normal business operations. 14' Revenues: Revenues are inflows, enhancements of assets or reduction of tiabitities from detivering goods or seryices as a part of normaI business operations.

13' Expenses:

15' Net profit: Net profit means the excess of income over expenses. lt witt resutt in increase in owner's equity. 16' Net loss; Net loss means excess of expenses over revenue. lt witt result in decrease in
owner,s equity.
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SYSTEM OF ACCOUNTING:

No entry is made when a payment or receipt is merely due. 2' llercantile system: lt is a system in which accounting entries are made on the basis of amounts having become due for payment or receipt. lt is also termed as accrual system of accounting
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1' Cash system: lt is a system in which accounting entries are made onty when cash is received or paid.

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SINGLE ENTRY SYSTEM OF BOOK.KEEPING: An

as single entry. It is a system under which for some of the transactions both the aspects are recorded, for some onty one aspect is recorded and for some none of the aspect is recorded.
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incomplete doubte entry can be termed

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oouale rxrRy sysrrm or soox xErprNc: o Doubte entry system of book-keeping refers to a system of accounting
of every transaction are recorded

under which both the aspects (i.e. debit and credit)

EveU debit has equal amount of credit

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"*.- ACCOUNTING PROCESS. CONCEPTS. CONVENTIONS & PRINCIPLES tffie INTRODUCTION: , A*r*,i.g p"nciptes may be defined as those rutes of action or conduct which are adopted by the accountants universatty
while recording accounting transactions

o Accounting principles must satisfy the fotlowing conditions;

They shoutd be based on real assumptions

o They must be simpte, understandable and exptanatory o They must be fotlowed consistentty o They shoutd be informationa[ for the users.
Effi#l ACCOUNTING CONCEPTS: o Accounting concepts define the assumptions on the basis of which the financial statements of a business entity are prepared

o The following are important accounting concepts;

SEPARATE ENT]TY CONCEPT:

o According to this concept, a business is treated as a separate entity that is distinct from its owner(s) o The concept of separate entity is appticabte to atl forms of business organizations
GOING CONCERN CONCEPT:

o lt is also known as continuity

assumption

o The financial statements are normatty prepared on the assumption that an enterprise is a going concern and witt continue
in operation for the foreseeable future

o lt is assumed that the enterprise

scale of its operations.
MONEY MEASUREMENT CONCEPT:

has neither the intention nor the necessity of tiquidation or of curtailing materiatty the

Accot'ding to this concept, only those transactions which are capable of being expressed in terms of money are included in the accounting records

ln other words, the information which cannot be expressed in terms of money is not inctuded in the books of accounts.

COST CONCEPT

o According to this concept, the vatue of an asset is to be determined on the

DUAL ASPECT CONCEPT:

basis of historicat cost

i.e. acquisition cost.

o This is the basic concept of accounting according to which every business transaction has a duat effect o As the name impties, the entry made for each transaction is composed of two parts one for the debit and the other for the
credit.
ACCOUNTING PERIOD CONCEPT:

n According to this concept, the economic tife of an enterprise is artificiatty sptit into periodicat intervals which are known
as accounting periods

o At the end of each accounting period income statement and position statement is prepared to show the performance
position

and

o This is also known as periodicity assumption or time period assumption.

MATCHING CONCEPT:

n The term'matching'means appropriate association of retated revenues and expenses o According to this concept, the expenses incurred in one accounting period shoutd be matched with the revenues
recognized in that period.

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REALIZATION CONCEPT

tr According to this concept revenue is recognized onty when a sale is made j: i|,t,i9EqlqQsqrptete ontv when the property on goods passes to the buyer and he becomes tegatty tiabte to " :1!:

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ACCOUNTING CONVENTIONS:

o The following are the important accounting conventions;

CONVENTION OF CONSERVATISM,
tr

ions emerge out of accounting practices adapted by various entities over a period of time These conventions are derived by usage and practice and do not have universa[ apptication

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The principte of "Provjde for atl expected losses but never for anticipated profits', appties here This is also known as prudence prirrcipte Vatuation of inventories is done at cost or market price which ever is tower, by fottowing conservatism.

CONVENTION OF FULL DISCLOSURE:

T-

a According to this principle, the financiaI statement should disclose att retiabte and retevant information which are
necessary for the users

o The disctosure shoutd be futt and adequate so that

the, users of the financial statements can make correct assessment about the financia[ performance and position of the enterprise.

CONVENTION OF CONSISTENCY:

//'

o According to this principte, the accounting poticies adopted by the enterprise shoutd be fottowed consistentty from one
period to another

A change in an accounting poticy shoutd be made only in certain exceptional circumstances.

CONVENTION OF tutATERtALtTy:

7
users

of the financial statements, should be disctosed in the financial statemet o The materiatity principte requires that the items or events having an insignificant economic effect or not being retevant to the usei's need not be disclosed.

o According to the materiatity principle, atl retevant items, the knowtedge of which might influence the decision of the

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N ol,urNtAt Accou Ntt t tc lssurrlploNs: o There are three fundamental accounting assumptions;

It is assumed that these fundamental accounting assumptions are fol[owed in the preparation of financial statements. lf any of the above mentioned assumption is not fottowed then this fact shoutd be specificatty disctosed.
VALUATION PRINCIPLES:
HISTORICA.L COST

n lt means acquisition

principte of historical cost

prfce" A[[ fixed assets are recorded at the actual purchase price or acquisition price by fotlowing the

o Liabilities are recorded at an amount of proceeds

CURRENT COST

received in exchange of the obtigation.

tr Current cost is the cost that would be incurred at the present time to reptace an asset o Assets are carried out at the amount of cash or cash equivalent that woutd have to be paid if the
currentty

same asset was acquired

Liabitities are carried out at the undiscounted amount of cash or cash equivatent that would be required to settle the obligation currentty.

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REALIZABLE VALUE:

Realizabte vatue is the amount of cash or cash equivatent that could currentty be obtained by setting the asset in an orderly disposal

o Liabitities

are carried at settlement values, i.e. the undiscounted amount of cash or cash equivatent to be paid.

PRESENT VALUE:

Present vatue is the present discounted value of the future net cash inftows that the asset is expected to generate in the normal course of business

o Liabitities

are carried at the present discounted vatue of future net cash outflows that are expected to settte the liabitities in the normat course of business.

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ACCOUNT:

An account is a summary of the retevant transactions retating to a particular head tr The individual record of a person (persona[ account) or thing (rea[ account) or an expense (nominal account) is called an

account

o Traditional[y the accounts are ctassified as personal, real and nominal accounts o Accounts are also classified into assets, [iabitities, capital, revenue and expenses o An account records the amount and effect of a transaction.

.:

NOTE:

o At year end nominal accounts are ctosed by transferring to profit and loss account

o Rea[ accounts

and personal accounts are not ctosed. They are balanced.

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oEsrrAN
is originated from the terms "Debito" and "Credito" as used by Luca pacioti

o The terms debit and credit

o Basicatty, debit means to enter an amount of a transaction on the left side and credit means right side of an account o Debit in retation to Assets accounts and Expenses accounts represent an increase a Debit in relation to Liabitities accounts, capital accounts and revenue accounts represent decrease o Credit in relation to Assets accounts and Expenses accounts represents a decrelse
Credit in retation to Liabitities accounts, capita[ accounts and revenue accounts represents an increase.

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COmeN nUUS Of ACCOUHINC:

P.eisonal Acr0unts

Debit the receiver and crredit the giver Debit What,comqs,in,and rcrefli! wha! gos,out

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CLASSIFICATION OF ACCOUNTS ACCORDING TO ACCOUNTING EQUATION APPROACH:

ASSETS ACCOUNTS:

Assets accounts retate to tangibte or intangibte real assets

o Examples of Asset account inctude tand, buitding, furniture, cash, goodwilt,

patent etc.

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LIABILITIES ACCOUNTS:

Liabitities accounts relate to the financial obligation of the enterprise

Examples of liabitities account inctude creditors, loans, outstanding expenses etc.

CAPITAL ACCOUNTS:

o Capita[ accounts retate to the accounts of the owners of the enterprises o Examples of capital accounts inctude capital account, drawings account etc.
REVENUE ACCOUNTS:

o o

Revenue accounts.relate to the amount charged for goods sold or services rendered
Examptes

of revenue accounts inctude sates account, discount account, interest received account etc.

EXPENSES ACCOUNTS:

o Expenses account retate to the amount incurred or lost in the process of earning revenue o Examptes of expense account includes purchases account, discount altowed account, interest
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JOURNAL:

paid account etc.

o Transactions are first recorded in Journa[ to show which account shoutd be debited and which account is to o Transactions are recorded in the Journal in chronological order o Journal is atso calted a subsidiary book or a book of primary entry o The process of recording a transaction in the journat. is catted journatising o The format of a Journal is as fotlows;
Date
Particulars

be credited

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Crddit

NOTE:

o Journal entries can be singte entry or compound entry o Singte entry means onty two accounts are involved in the transaction, one for debit and the other for the credit aspect o Compound entry means more than two accounts are invotved in the transactions and is recorded by means of singte entry. rl1,f,,
POSTTNG:

Posting is the process of transferring the transaction recorded in journal to the concerned ledger may be done daity, weekly or monthty depending upon the nature and volume of transactions.

account

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LEDGER:

o
o

A Ledger is a principal book which contains atl the accounts to which the transaction are transferred for the book

of

originat entry

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o

A [edger is atso known as book of fina[ entry

lt provides comptete information about alt accounts in one book

of financial statements
The format of journa[ is as fottows:
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o lt serves the basis for preparation

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tr Subsidiary books are also known as special journals tr Subsidiary books refer to journats meant for specific transactions of similar nature tr The formats and number of specia[ journals vary depending the requirements of the
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i,:;: CASH BoOK:

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o

Cash book is a special journal which is used

for recording atl

cash receipts and cash payments

tr Cash book can be of various types; E Singte column cash book o Cash book with discount cotumn (doubte cotumn cash book) tr Cash book with bank and discount column (Tripte column cash book) tr Petty cash book

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SINGLE COLUMN CASH BOOK:

o Singte cotumn cash book is the simptest fprm of cash book which o Singte column cash book has one dtfi#".otumn on each side

records a[[ cash transactions

o A[t cash receipts are recorded on the debit side and atl cash payments are recorded on the credit side of the cash book

o The excess of debit side over credit side represents cash batance of the'enterprise o The format of single column cash book is as fottows;
Date Particulars
L.F.

"

C=ash

book is both su

Amount (Rs.)

Date

Partieulars

L.F.

rArRount,{Rs.r}

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o

Double cotumn cash book records a[[ cash transaction along with discount At[ cash receipts and discount altowed is recorded on the debit side and atl cash payments and discount received is recorded on the credit side

The total of discount cotumns is transferred to profit and [oss account o The excess of debit side over credit side of the cash column represents cash batance of the enterprise o The format of double cotumn cash book is as fotlows;

Date

Particulars

L.F.

Discount

Amount (Rs.)

Date

Paniculars.

L.F;

Discor:nt

Amount (Rs.}

i{ri+llifi TRtpLE colur,rx clsH eoorc o lt is the most exhaustive cash book with cash, bank and discount columns on both the sides o At[ cash receipts, bank receipts and discount attowed is recorded on the debit side of the cash book o At[ cash payments, bank payments and discount received is recorded on the credit side

o lt serves the purpose of cash

account and bank account

o The format of triple column cash book is as fotlows;

Date
Par:ticular:s L.F. DiscoUnt Cash
,

Bailk.

Date

Particulars

L.F. Discount

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CONTM ENTRY:

a lt is an entry v&affects both sides of Cash Book q contra Entry t#place in Double column or Triple cotumn

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cash Book.

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. PETWCASH BOG
o PettY cash bodia subsidiary book used for recording the payment petty of cash expenses o Petty cash bodlray be maintained in imprest system or non imprest system o The balancs ;nur petty cash book shows the petty cash in hand which
sheet.
IMPREST CASH

witt be shown on the asset side of the Batance

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STSTEIA:

o Under imprestEtem, the chief cashier makes the reimbursement of the amount spent by the petty cashier. o Under imprestg*em the cash batance at the end witt be same as in the beginning o lt saves time inpmting smatl items to ledger accounts
a There are lessdnnces of defalcation of lash
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NON IMPREST SygIErl 0F PETTY CASH:

o At[ the heads ofexpenses are totated periodicatty and posted to the respective [edger accounts.

Under.non'impot system, the chief cashier may hand over the cash to the petty cashier equal to or less than or more than the amootactuatty spent by the petty cashier o The petty cashEr may or may not have the same cash balance as at the
beginning

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PURCHASE

Boot(

o Purchase bookis a subsidiary book in which credit purchase goods of is recorded o cash purchaseofgoods is recorded in cash book and not in purchase book o Purchases of assets are recorded in journal proper and not in purchase book o Purchases are recorded in the purchases book at net of trade discount o Periodicatty, the totat of purchase book is transferred to purchases
account

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q sales book is a subsidiary book in which credit sales of goods is recorded o Cash sale of goods is recorded in cash book and not sates book
Sates of assets are recorded in journa[ proper and not in sates book

. o sales are recorded in the sates book at net of trade/quantity o Periodicatly, the total of sates book is transferred to sates
PURCHASE RETURNS BOOK:

discount

account

o Purchase return book is a subsidiary book which is used for recording return of goods purchased o Return of goods purchased on cash witt not be recorded in the purchase returns book o Return of any asset witl also not be recorded in the purchase returns book o lbesntricr..ii.nll on the basis of d"hit

on credit

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,urn,,Pade

nnt", issuqd to the suppliers or credit note received

Periodically, the total of purchase returns book is transferred to purchase returns account

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BOOK: Isri:i ".1r"'1' SALES RETURNS o Sales return book is a subsidiary book which is used to record the return of goods sotd on credit o Return of goods sotd on cash wit[ not be recorded in the sates returns book

tr Return of any asset sotd witt atso not be recorded in the sales returns book basis of credit note issued to the customers or debit note received o The entries in
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periodicatty the totat of sates returns book is transferred to sales returns account

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BrLLS RECEIVABLE BOOK:

o Bitts receivabte book is a subsidiary book which is used to record the details of bitts receivable o lndividuat amounts are daity posted to the credit of the accounts of individual debtor from whom the bitts o lts batance is posted to bitts receivabte account
Any error in B/R book witl effect B/R account.

are received

ir,$.ii-jf{$' BILLS PAYABLE BOOK:

o Bitts payabte

s
o

book is a subsidiary book which is used to record the detaits of bitts payabte lndividual amounts are daity posted to the debit of individua[ creditor's account lts batance is posted to Bitts payable book

tr Any error in B/P book witl effect B/P account.

,,,ADVA@

o Facilitates

division of work

o Attows internal check of the system

o Better utitisation of skitts

o Time saved in journatising and posting tr Systematic approach

o Chances
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of errors are minimal

JOURNAL PROPER:

o Journa[ proper

is a residuary book in which those transaction are recorded which cannot be recorded in any other subsidiary book Entries retating to the foltowing transactions are generally recorded in journal proper;

o OPening entries o Ctosing entries o Rectification entries

o Adjusting entries

o Entries on dishonour of bitts o Misceltaneous entries

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MEANING OF TRIAL BALANCE

a Trial Balance is a statement that shows the balance of a[[ accounts in the tedger inctuding cash and bank book n Trial Balance is a statement and not an account o lrial Balance is prepared as on a particutar
date and not for a particutar period. iiEffi$l

o To ascertain the arithm"tr.ur u.or*y or the tedger accounts o To help in locating errors o To facilitate the preparation of financial statements.

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LtMlTATtoNs oF TRTAL BALANCE

s A taltied Trial Balance in not a conclusive proof of the accuracy of books of accounts o There are some errors that do not reftect in the triat batance.

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Balance Method: the accounts inctuding cash and bank are incorporated in the Triat Balance o Trial Balance under this method can be prepared only when att the [edger actounts are balanced
Under this method, the totat amount of debit items and credit items in each tedger accounts are incorporated in the Triat Balance batance under this method can be prepared immediatety after the comptetion of posting to the tedger.
(

under this method, the batance of att

Total amount method:

o Trial

.'

TYPES OF ERRORS

ERRORS OF OMISSION:

q This type of error arises when a transaction is comptetely or partialty omitted to be recorded in the books of accounts. s Errors of omission may be ctassified as under:
.

Error of complete omission:

o This error arises when any transaction is not recorded in the books of accounts at at[; or the transaction is recorded in the journal but not posted in the tedger. This error does not arreit tne trial batance. Error of partial omission: o An error of omission other than an error of comptete omission is catled an error of partiat omissioh. This error affects the triaI batance.

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of commission may be classified as fottows; Error of recording:

rnnon or co,,lmrssroN: o This error arises due to wrong recording wrong posting, wrong balancing, ,

wrong carry forward, wrong totating etc., Errors

o This error arises when any transaction is incorrectty recorded in the o This error does not affect the triat batance o These errors may bS of the fottowing types;

books of originat entry

Error of casting: This error arises when a mistak$is committed in totating. Th[L error affects the triat balance.

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Error in" carrying forward: This error arises when a mistake is committed in carrying forward a total of one page to the neit page. Tliis error affects the

tria[ batance Error of Posting:

This error arises when information recorded in the books of original entry are incorrectty entered in the ledger. This error may or may not affect the tria[ batance.
.:

ERROR OF PRINCIPLE:

o This error arises when the transaction is recorded ignoring the distinction between the Capital item and revenue item
ln other words, this error invotves an incorrect altocation of expenditure or receipt between Capitat and Revenue E This error does not affect the trial balance For exampte- if Freight paid for bringing a new machinery is posted to Freight A/c, this error wi[[ increase the figure of freight and reduce the figure of depreciation Note: The costs incurred on the acquisition, instaltation and commjssioning of a fixed asset up to the point the fixed asset is ready for use represent capitat expenditures.

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.ts COMPENSATING ERRORS:

tr These errors arises when two or more errors are committed in

and credit of the accounts involved is nuttified.

such a way that the net effect of these errors on the debit

tr ln order words, compensating errors refer to such a group of errors wherein the effect of one error is compensated
effect of other error

by the

o These errors does not affect the agreement of the trial balance but may or may not affect the figure of net profit.
Rectification of Errors not affecting the trial balance: The various errors which do not affect the Triat Balance include the fottowing; o Error of comotete omission " Error of recording in the books of original entry tr Error of posting invotving the posting to wrong account on correct side with correct amount o Error of principte

/'s

Jp"(

tr Compensating errors
These errors are rectified by passing a journal entry giving the appropriate debit and credit to the respective accounts which were affected by the error.

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Fundamentals of Accounting
Vqt uaiii;

;t tiv;;u;ry^ -

ii!;I melNruo or

rNvrNrorurs:

lnventories are assetsa) Hetd for sate in the ordinary course of business, or b) ln the process of production for such sate, or

"iiiin

c) In the form of materials or supplies to be consumed,in the production process or in the rendering of services. ln other words, an inventory consists of raw materials, work in progress, finished goods, stores and spares.

lirii

IMPORTANCE qF INVENTORY VALUATION: o. To estimate correct gross

profit

o lt hetps in determining
o o
D

the true income earned by the enterprise during a particular period

When the opening stock is overslalgd,-ngu

witt be understated and vicestock of the current year is overstated and hence

tr o

income of current year is unders#aRd+iee=ve+sa To determine the correct financial position of the business
For future decision making by the management

BASIS OF INVENTORY VALUATION:

lnventories shoutd be vatued at COST or NET REALISABLE VALUE whichever is lower. The cost represents an appropriate combination of; a) Cost of purchase consisting of purchase price inctuding duties and taxes, freight inwards and other expenses directty attributabte to the acquisition b) Cost of conversion inctudes costs which are specificatty attributable to units of production i.e. direct labour, direct expenses, sub contract charges etc c) Costs other than production overheads are sometimes incurred to bring inventory to their present location and condition, which are to be inctuded in the cost of inventory. For exampte, expenditure incurred for designing a product for a specific
customer.

Historicil cost of inventory

:::r

= Cost,of purchase + cost of conversion + other costs.

ii:ii

EXCLUSION FROM COST OF INVENTORY:

a) Abnormat amounts of wasted materiats, [abour or other production costs b) Storage costs, untess those cost are necessary in the production process prior to.further production stage c) Administration costs

d) Setting & Distribution costs,

e) lnterest Cost
REQUIREMENT OF ACCOUNTING STANDARD 2 ON VALUATION OF INVENTORIES:

1. lnventories shoutd be vatued either at cost or net reatizable vatue, which ever is tower 2. Cost of inventories shoutd comprise atl costs incurred for bringing inventories to their present tocation and condition 3. Net reatizabte vatue is the estimated setting price less atl estimated cost of completion and atl estimated cost necessary to
make the sate

4. Specific identification method shoutd used where the goods are not ordinarity interchangeabte or have been segregated for
specific projects 5. Weighted average cost or FlF0 method to be used in cases where the goods are ordinarily interchangeabte 6. Disclose the accounting poticies adopted. lt inctudes the cost formuta used, total carrying amount of inventories and its classification.

100 Pages to SUCCESS

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INVENTORY RECORD SYSTEMS:

Periodic inventory system:

I
I

o Periodic inventory system is a method of ascertaining the vatue of inventory by taking an actual physica[ count s At[ the inventory items on hand are physicatty counted at a particular date on which the value of inventory is required
o This system is also called physicat inventory system o The cost of goods sotd is determined by using the formula;
l'.:t:::',, .' .:irrr ii-' i,::'::::'.ii.ir

Costofgoodssotd=openinginventory+Purchases.ClosingStock

,',.,r :.
-

PERPETUAL INVENTORY SYSTEM:

tr Perpetual inventory system is a system of recording inventory batances after each receipt and issue o With perpetual inventory system, the inventory record for each item of inventory is updated for each purchase and each
sate as they occur

'

o In other words; the perpetual inventory system keeps a running record of inventory balances o ln order to assure accuracy, physicat stock shoutd be checked and compared with the recorded
tr Under this system, cost of goods issued is directly determined and stock of
of stock ledger.

balances

goods is taken as residual figure with the hetp

METHODS OF INVENTORY VALUATION

lnventory not ordinarily

interchangeable

lnventory ordinarily
interchangeabte

Latest

Purchase Price Method

Note: Base Stock Method, Standard Cost Method and Latest Purchase Price Method is not covered in

CPT.

l::,:;irtrr;ii.

SPECIFIC IDENTIFICATION METHOD

o Specific identification method is based on actual physicat flow of goods tr Specific identification is usualty used for physicatty large or high value items
o
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As per AS 2, this method shoutd be used for inventories of items that are not ordinarily interchangeable.

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F|RST tN FTRST OUT METHOD (FtFO)

o The FIFO method is based on the assumption that the goods which are received first are issued first o The ending inventory consists of the [atest lots and is valued at the price of tatest purchase o The ending inventory is stated in the batance sheet at a value nearer to the current market price n ln periods of rising prices, higher income is reported since otd costs are matched with current revenues o ln periods of fatting prices, lower income is reported since otd costs (which are higher than the current costs) are
.

matched

with current revenue

o This method is easy to operate if prices of material do not fluctuate very frequentty.

lf you only do what you.know you can do- you

never do very

much.

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LAST rN FTRST OUT (L|FO)

Stock ledger under FIFO method i'r..1;lisu$iJi.

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The LIFO method is based on the assumption that the goods which are received last are issued first o The ending inventory consists of eartiest lots and is vatued at the price paid for such lots o The ending inventory is understated in the batance sheet at old costs o ln periods of rising prices lower income is reported since current costs (which are higher than the old costs) are matched

ivith current revenues

ln periods of fatting prices higher income is reported since current costs (which are lower than the otd costs) are matched

with current revenues o The vatue of ctosing stock does not indicate current market price because it represents cost of earlier purchases.
Format: Stock ledger under LIFO method

Quantity

Rate:

Amount Qr.rantity 'Rate

:Amount QuantiWl

Rate

ffiount

ir;i'liir,

lvrmcr
o

pntcr merHoo

o Average price for computing vatue of closing stock is a very simpte approach o The closing stock quantity is then muttiptied with such average price to determine the vatue of ctosing stock n This method averages out the effect of price ftuctuations o The ctosing stock is then vatued according to the price determined.
ADJUSTED SELLING PRICE METHOD

Under this method, at[ various prices are added and then divided by the number of price to get the average price

s o

This method is calted retail inventory method

is widety used in retail business where individuat cost of att the items are not readily avaitabte

o This method

Under this method cost of inventory:- Sales - Gross profit Cost of Purchase = Cost of goods Purchased - Trade Discount + Taxes + Packing and transportation cost.

iffit

wErcHTEp AVEMGE pRtcE METHop

o Under this method each issue of goods consists of the due proportion of eartier lot and is vatued o COGS = No. of units sotd x weighted average price per unit o Ctosing stock = No. of units in stock x weighted average price per unit u Weighted average price = Tota[ cost of goods avaitabte
Totat No. of units avaitabte for the sate
VALUE OF CLOSING STOCK USING EOUATION

at weighted average cost

o Direct txpenses.= Freightrinyy.l6 and wages' o Ptease do not consider freight outward

o Gross profit = Sales - Cost of goods sotd (COGS) o f ,oQ$ = Opening itock + Purchases + A[ convbrsions

Costs + ,Direct, expenses' . 'Closing stock

o Average stock = (Opening stock +'Ctosing stock)/Z,

100 Pages to SUCCESS

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Meaning of Bank Reconciliation statement:o Bank reconciliation statement is a statement which reconcites the bank batance as per cash book with batance as per bank pass book, by showing atl causes of difference between the two. o lt is a statement prepared by the bank customer i.e. account holder. o lt is prepared as on a particutar date. o lt shows the causes and amount of disagreement. There are four kinds of balances:Causes

for disagreement between cash book and pass book:o Timing difference of recording bank transactions
holder

o Errors in cash book committed by the account c Errors in pass book committed by bank.
Cash book and bank book comparison:-

(debit) Cash book (credit) Pass book (credit) Pass book (debit)
Cash Book

Cash book favourabte batance Cash book unfavourable batance

Pass Pass

book favourabte balance book unfavourabte batance

* lnftow of cash * Income

* * *
favourabte batance cheque deposited issued cheque dishonoured

* out ftow of cash * expenses * overdraft batance * cheques issued * cheque deposited
dishonoured

* out ftow of cash * expenses * overdraft batance * cheques issued * cheque deposited
dishonoured

* *
* * *

lnftow of cash
lncome favourabte batance cheque deposited issued cheque
dishcinoured

Various reasons for difference in the balances:o Cheques issued but not yet presented for payment o Cheques deposited but not yet coltected by bank o Bank charges and interest on overdraft not recorded in cash book tr Interest credited by bank not recorded in cash book o Amount directty deposited into bank by a customer

o Direct payments made by the bank o Dishonour of bi[[ discounted with the bank n Bilts cottected by bank not recorded in cash book o Errors committed in the pass book by the banker tr Errors committed in the cash book by the A/c hotder.

Format of Bank reconciliation statement:- When balance as per Cash Book is taken as base.
Pgrticulars
.Oefai{i.,

Amgurrt
xxx

A.

Bank Batance as per Cash Book

Pass book.

B. Add:- Alt those items that contribute to higher batance in

(a) Cheques deposited into the bank but not recorded in Cash Book (b) Cheques issued but not yet presented for payment (c) lnterest attowed in Pass Book onty (d) Bilts Receivabte directty cottected by bank (e) Direct payment by a customer into bank but not recorded in Cash Book (f)'Cheques issued' returned on technica[ grounds (g) A wrong credit given by bank in Pass Book

xxx xxx xxx xxx xxx

XXX

xxx

C.

Less:- Transactions having the effect of tower batance in Pass Book: (a) Cheques received and recorded 'in Bank Column but not yet sent to bank for cottection (b) Cheques deposited but not yet cottected by bank (c) Bank charges, lnterest on overdraft debited in Pass Book only

(d) lnsurance Premium paid directty by bank under standing advice (e) Cheques deposited for cotlection, returned dishonoured and recorded in Pass Book onty (f) Discounted Bitts dishonoured but not recorded in Cash Book (g) Awrong debit given by bank in Pass Book

xxx xxx xxx xxx xxx xxx xxx xxx

D.

Batance

a! per

Pass Book

xxx

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Furidamentals of Accounting

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CAPITALEXPENDITURE:

o o o
o

Capital expenditure are those expenditure which contributes to the revenue earning capacity of a business for more than one accounting period Capital expenditure may represent acquisition of any tangible or intangibte fixed assets for enduring future benefits Caoita[ exoenditure is eenerattyjehiledlAlhe respective asset on the asset side expenditure is genera

o Money spent to reduce working expenses o Legal fees paid for acquisition of a property
tr Amount spent for reptacement of worn out part of machine o Expenses for obtaining a license for running the cinema o Amount spent for construction of temporary huts, which were necessary for construction of cinema house o Purchase of goodwitt o Cost of rings and pistons to increase efficiency o Expenditure incurred on foreign tour for purchase of machinery insurance and freight on machinery purchased, customs duty, wages on erection, instatlation expenses and trial run expenses before the asset is put to use o Purchase of live stock by a farmer is a capital expenditure.
. :: ..

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REVENUE EXPENDITURE:

n o tr COUnt u Following expenses are considered as revenue expendtf[iE:-o lnterest on long term toan on an asset, after the asset is put to use o Repairs and maintenance charges on machinery (without increase in efficiency) o Legal expenses incurred to defend a suit claiming that the firm's factory site betongs to the ptaintiff o Loss on sate of machine up to the original cost o lmported goods confiscated by the custom authorities
o Compensation paid to emptoyees who were retrenched tr lmport duty on purchase of materia[.
.,"ti:," l

Revenue expense is incurred to generate revenue for a particutar accounting period. lt is an expenditure incurred to maintain the productivity or earning capacity of a business lt is the expenditure incurred to carry out operating activities in the normal course of business lt does not yietd benefit beyond one accounting period

,14

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DEFERRED REVENUE EXPENDITURE:

o o o

Deferred revenue expenditure is the expenditure for which the payment has been made or tiabitity has been incurred but which is carried forward on the presumption that it witt be of benefit over a subsequent period or periods lt refers to that expenditure that is for the time being deferred from being charged against income Such expenditure shatl be written off over a period of 3 to 7 years

'expenditureisshownontheassetsideoftheBa[ancesheetunderthehead
o Heivy advertising

expdnditure for taunch of a product is an exampte for deferred revenue expenditure as the benefit of the same witl last for more than one accounting period.
CAPITAL.RECEIPTS REVENUE RECEIPTS

i.i:

Capitat receipts refer to those receipts which are not revenue in nature

Receipts which are obtain in the course of normal business activities are known as revenue receipts Revenue Receipts are recorded to trading/profit and
Loss

A/t.

Examples of capital receipts inctude receipt on sate of fixed asset, raising capital etc. C.apitat receiPt is a

Examptes of Revenue Receipts include Sate of goods,

interest received and commission received etc.

and [oss account.

100 Pages to SUCCESS

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rlNANClAL srArEMENrs: enterPrise

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I

u Generally the financial statements have two parts viz. Position statement and lncome Statement o Batance sheet is the financial position statement which shows the financiat position of an enterprise

as on a

particular

date position statement atso inctudes cash ftow statement, fund ftow statement and vatue added statement o Trading, profit and loss account is the income statement which shows the financiat performance of business during an accounting Period o The trading, profit and loss account and the Balance sheet can be presented either in Horizontat Form or Verticat form'

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TMDING AccouNT tr Trading account is a statement which shows the result of buying and setting goods in form of gross profit/ gross toss o Gross profit is the difference between setling price and cost of goods sotd Debit side of a trading account inctudes items such as opening stock, purchases and atl direct expenses

o Credit side of a trading account inctudes items such as sates and closing stock o The gross profit or loss from trading account is transferred to profit and loss account. ....-I
PROFIT AND LOSS ACCOUNT:

o profit and loss account is a statement which shows the financial result of a business o Profit and loss account is prepared to ascertain net profit or loss of the business o Net profit is the difference between gross profit and a[[ expenses

during an accounting period

tr Debit side of a profit side inctudes atl administrative, financing, selling and distribution expenses The net profit derived from profit and loss account is transferred to the capital account of the proprietor.

r ,: ',-{;r, BALANCE SHEET: o Batance sheet is onty a statement

'

and not an account

as at a certain date

I .

E Balance sheet is "a statement which sets out the assets and tiabitities of a firm or an institution " lt is generatty prepared on a particular date i.e., last day of financia[ year tr lt is prepared after the preparation of Trading, profit and toss account

o The assets side of the Batance sheet includes fixed assets, investments, and current assets o The tiabitities side of the Batance sheet inctudes capitat account, long term tiabitities and current tiabitities o A balance sheet is a summary of batances of Personal and real accot nts which have not been ctosed by transferring to trading, profit and loss account.

.'r

,'+:,+ SfOUfXCf Of ICCOUXT|NG CYCtf: tr Recording the transactions in the journa[ or primary books o Preparing ledger accounts on the basis of journat or posting to ledger o Preparation of triat batance to know the arithmetical accuracy o preparation of Trading, profit and loss account, also known as income statement for the period concerned, o Preparation of Batance sheet to show the financiat position at the end of accounting period.

and

giz"rt

witl do more than knowledse.

100 Pages to SUCCESS

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o Manufacturing account is prepared by an enterprise engaged in manufacturing activities tr lt is prepared to ascertain the cost of goods manufactured during the year

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o lt is ctosed by transferring the balance to the debit of trading account o lt does not show the opening and ctosing stock of finished goods.

t
I

.,1.

GoNTTNGENTASSETS:

o Contingent

asset is an asset, the existence, value and ownership of which depends upon the occurrence or non-occurrence

.
'iii

of specific event in future

Contingent assets a

CONTINGENT LIABILITIES:

a Contingent tiabitity

is not an actual liabitity are disctosed by way of a note on the face of the BatanCe sheet.
,

E Contingent tiabitity may become an actua[ liabitity on the happening of some uncertain future event

o Contingent liabitities

i:iiilt:

PROVISION:

t
h4

o Provision means and inctudes-o Any amount written off

Any amount retained by way of providing for depreciation, renewal or diminution in value of assets o Any provision for known tiabitity, for which amount cannot be determined with substantia[ accuracy

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o lt is created for a particutar purpose and can be used onty for that particular purpose o lt is a charge aqainst the profit o Examptes of provisions inctudes, provision for tax, provision for doubtfut debts, depreciation etc.

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RESERVE:

o Profit retained in the business not in the nature of'provision'is o lt is an appropriation out of profits of the business

regarded as reserve

l i

lt can be utitised for distribution of dividends to the share hotders o An exampte of reserye inctudes general reserye, contingency reserve, worker's welfare reserve etc.
IMPORTANT ADJ USTMENTS:
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period
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CLOSING STOCK:

o Ctosing stock is the cost of unsold goods tying at the end of accounting o The ctosing stock is vatued at cost or market price which ever is lower o Ctosing stock appears on the credit side of trading account
o 'Closing stock appears on the asset side of the Batance sheet o The fotlowing journal entry is passed to record ctosing stock.
Date Ctosing stock Account To Trading Account
(Being ctosing stock recorded)

Particulars
Dr.

L.F

Debit'

Credit

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oursmNorxG exprNsr:

o Outstanding expenses refer to those expenses which have been incurred but not paid during the current accounting period a Outstanding expense is added to the respective expense account and is debited to trading profit and loss account

o lt is shown on the tiabitity side of the batance sheet under the head 'current liabitities' o lf the outstanding expense atready appears in the trial balance, it does not ca[[ for any adjustment
o The fottowing journal entry is passed to record outstanding expenses.

100 Pages to SUCCESS

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Respective expenses account

To Outstanding expenses A/c
(Being outstanding expenses recorded)

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PnePruo exPrNses: prepaid expenses refer to those expenses which have been paid in the current accounting period but the benefit of which wi[[ accrue in the subsequent account periods

'

tr Prepaid expenses are deducted from the respective expense account tr Prepaid expenses are shown on the asset side of the batance sheet under the head 'current

assets'

The fottowing journa[ entry is passed to record prepaid expenses

Prepaid expenses Account To Respective expenses A/c

(Being prepaid expenses recorded)

Dr.

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ACCRUED INCOME:

o Accrued income refers to that income which has been earned but not received during the current accounting period o Accrued income is added to the concerned income of the credit side o lt is shown in the asset side of the Batance sheet under the head'current assets' o The foltowing journal entry is passed to record accrued income.
:,Date:.

Particulars Accrued income Account

To Respective income A/c (Being accrued income recorded)
Dr.

L.F

Debit

Credit

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INCOME RECEIVED IN ADVANCE:

u lt refers to that income which has been received but not reeeivediuring the current accounting o It is deducted from the concerned income o It is shown on the tiabitities side of the batance sheet under the head current tiabitities
n The fotlowing journal entry is passed to record income received in advance
Date
Respective income To Unaccrued income A/c

ea"*d

period

Particulars

IL.F,.

Debit

Creditl

Account

Dr.

(Being income ieceived in advance recorded)

t:iliriit:l

BAD DEBTS: o Bad Debts refers to a debt which has become irrecoverable

u lt refers to the amount

o
1

due from customers which coutd not be recovered

debt is debited to profit and loss account o lt is shown on the asset side of balance sheet by way of deduction from the 'debtors' o The fottowing journa[ entry is passed to record bad debts
A bad

,Date
Bad debts Account To Debtor's Aic (Being bad debts recorded)

Particulars
Dr.

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Debit

Credit

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It is debited to profit and

o
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[oss account

The fottowing journa[ entry is passed to record

i::rffL,":|T_1":,r

side of batance sheet as a deduction from sundry debtors

i l

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o lt refers to the provision created to provide for o lt is catcutated after deducting

lt is debited to profit and
loss account

discount tikety to be qttowed on good debtors additionat bad debts and the provision of doubtfut debts from sundry debtors

o lt appears on the assets side of batance sheet as a deduction o The fotlowing journal entry passed
is

to record

pe@

expenses

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,,QOODS

lf

USED OTHER SALE: goods are sent out for some other purpose, then the foltowing journal entries are passed:

TH

lf the goods are eiven as donation:

Donation A/c
To purchases A/c
(Being goods given as donation recorded)

lf ggods are distributed

Advertisement

A/c

as

free samoles:
Dr.

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To Purchases A/c
(Being free sampte distributed recorded)

Cencerned asset A/c

To Purchase A/c
{Being goods used for personat use recorded)

Repairs and maintenance

To Purchases A/c

A/c

Dr.

(Being goods used for repairs recorded)

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o Fixed assets are used in business to derive benefits for more than one accounting period o since fixed assets are used to generate periodic revenrje, an appropriate proportion n

of the cost of fixed assets, which is betieved to be used or expired for generation of periodic revenue,'needs to ie charged as cost Such an appropriate proportion of the cost of fixed asse[s is termed as depreciation.

Meaning:

Depreciation is a measure of wearing out, consumption or other loss of the vatue of depreciabte assets. It may arise due to the foltowing reasons;

o Use of assets o Effluxion of time o Obsolescence of assets, through market

Factors affecting the amount of depreciation:

De4or-*'*-H< "4J

=-

\or technotogy

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o Historical cost: cost of depreciabte asset represents the cost o Useful life of the asset:

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A*.1'E D</L x

o Depreciable Amount:

inctuding experience with simitar type of assets scrap / residual value: Estimated residua[ vatue of a depreciable asset implies the vatue expected to be realized on its sate or exchange on the expiry of its usefut [ife.
Depreciabte amount of an asset is its historica[ cost less the estimated residual value. For exampte the cost of the asset is 10,000 and the estimated residual vatue is i,ooo, tn.n the depreciabte amount is (10,000 - 2,000) = 8,000 which witt be attocated over the useful life of the asset.

for additions to or improvements thereof which are of capitat nature useful tife is either the period over which a depreciabte asset is expected to be used by the enterprise; or the number of production or similar units expected to be obtained from the use of the asset by the enterprise' Determination of useful tife is a matter of estimation and is normatty based on various factors

incurred on its acquisition, instattation, commissioning and

if

o Depreciation formula:

I EIIOj_S
sTMicHT

OF PROVtptNG pEPR
LtNE METHOD OF DEPREC|AT|ON (SLM):

o An equal amount of depreciation is written off every year during the useful life of an asset n The cost of asset wi[[ reduce to nit (zero) or to its residual vatue at the end of its usefut life o This method is atso known as fixed instatlment
method

Formula:

originat cost method

Expqcted useful tite'of the asset

REDUCING BALANCE METHOD OF DEPRECIATION:

I
I

nate of Depreciation = Amount of Depreciation OriginatCost

o A fixed percentage of the diminishing vatue of the asset is written off each year o The rate of depreciation remains constant whereas the amount of depreciation goes on decreasing o This method is also known as written down vatue method o The value of asset can never be extinguished as in straight tine method o This method is togicat in the sense that

as the asset goes otder; the amount of depreciation also goes on decreasing.

Live as if you were to die tomorrow. Leorn as you were to live

if

forever.

fj11$gg-gntals I;t;it ;;;i o t i; ; A:;;; iii;ti;;A "

of Accounting

il i:iiii jl i;iiillt+l

SUM OF YEARS OF DIGIT IIIETHOD:

are given betow: Step 1: Calculate the 'sum of years, as under Sum of years = n(n+1112, where 'n'= useful life of the asset step 2: catcutate the rate of depreciation for various years up to the usefu[ life as under For first year = nth year / Sum of years digit X 1OO = For second year = (n-1)th year / Sum of years digit X 1OO

o This method is in the pattern of diminishing batance method o The amount of depreciation to be charged to the profit and loss account under this method goes on decreasing o The steps involved in working of this method

_%

For third year = (n-2)th year / Sum of years digit X 100 = For nth ledr = 1/ Sum of years digit X 100 =

Step 3: Catculate the amount of depreciation as under: Amount of depreciation = (ori$inal cost less estimated

_%

_% _%
=

scrap vatue) X Respective

rate

of depreciation for the given year.

rr..i,'.

ANNUITyMETHoD:

o lt assumes
o o

o Amount of depreciation

This method takes into account the interest on the amount invested in the purchase of thb asset that the amount invested in acquiring the asset, if invested etsewhere, would have earned interest which must be reckoned as part as cost of using the asset The amount required to be written off every year is calcutated with the hetp of annuity tabte This method is usually emptoyed for providing depreciation on [easehotd property

= Depreciabte amount X annuity factor

iN.J.i

i.!ii SINKING FUND METHOD:

sinking fund atso known as depreciation fund or reserye is estabtished for the purpose of accumutating rvr rrrL Pu sufficient funds to reptace the asset at the end of its useful

o An amount equa[ to the annual depreciation of the asset is charged against the profits every year and accumutated in the form of depreciation fund
cash is withdrawn from the business and invested outside the business in securities which are readity convertibte into cash n At the time of replacement of asset, the investments are reatized and the available money is used in reptacing the asset.

[ife

o An equivalent amount of

+:1,iffi{' IIACHlNE

HOUR METHOD:

concerned machine worked a The machine hour rate is catculated after estimating the total number of hours that the machine would work o This method is also known as service hour method

Under this method, depreciation is catcutated on the basis of hours that the

'
o

:1ff::i:lmethod,
Formula:

depreciation is provided by means of a fixed rate per hour calculated by taking total useful hours into

Amount of depreciation

Actual hours worked?Iring the year X Rate per hour

I, Enlilil(

IotUTt0lll
ttlURE'.

Fundamentals of Accounting

Eonneding Y0U to Y0UR

PRODUCTION UNIT METHOD:

this method depreciation is catculated by comparing annua[ production with the estimated total production o This method is appticabte to machines producing products of uniform specifications

o Under

a Formuta:

Amount of depreciation
DEPLETION METHOD:

Actual production X Rate @Agqd@ per unit.

s
o

This method is used for depreciating waste assets like mines, quarries, oil we[[s etc The depreciation rate is calculated by dividing the cost of the asset by the estimated quantity of product tikety to be avaitabte

s Annual depreciation witt be equal to quantity extracted muttiptied by rate per unit o This method is atso known as productive output method o The catcutation for depreciation is done in the same manner as that of production unit
CHANGE IN METHOD OF DEPRECIATION:

method

o According to Accounting Standard 6 issued by lCAl, the depreciation method selected shoutd be apptied consistently o A change in method of providing depreciation to another can be made onty in the fottowing cases o Adoption of new method is required by taw / accounting standard ' o Change is necessary for better presentation of financiat statements o When the method of providing depreciation is changed, depreciation shoutd be recatcutated in accordance with the new
method from the date of asset coming into use

o The deficiency or surptus arising from retrospective re-computation shoutd be adjusted in the book of accounts by passing
an adjusting entry

o ln case the change in method resutts in deficiency, the deficiency shoutd be charged to profit and loss account o ln case the change in method resutts in surptus, the surplus shoutd be credited to profit and [oss account o Such a change shoutd be'treated as a change in accounting poticy and its effect shoutd be quantified and disctosed.
.'| l&ffiEl REVISION OF ESTII,iAIED USEFUL LIFE OF DEPRECIABLE ASSET l ffi*, o ln case the useful tife of the asset is changed, the unamortized amount shoutd be charged to asset over the revised remaining estimated useful life of the asset o Such revision shoutd be treated as change in accounting estimate and shoutd be disctosed in the financial statements

lncase of revatuation of depreciabte asset, the depreciation should be charged on the revatued amount on the basis of the remaining estimated useful life of the asset.

,&WE.

DISCLOSURE REOUIREAAENTS:

o lf anY depreciable o

asset is disposed of, discarded, demotished or destroyed, the net surptus or deficiency, should be disclosed separatety
used and the rate of depreciation charged.

if material

o The disctosure shoutd also include, the method of depreciation

Detaits regarding historica[ cost, tota[ depreciation and accumulated depreciation should be disctosed separatety

JO

O better to learn lote thon never.

100 Pages to SUCCESS

Fa

Fundamentals of Accounting rt n e rcfr u nflj:fu

trffi

;i

;;;ia i;

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[ornEBtino

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DEFtNtrtoN: According to Section 4 of the lndian Partnership Act, 1932, the term partnership is "the retation between two or more persons who have agreed to share the profits of a business carried on by att or any of them acting for a[t."
tiE
:

*4

#]HffiEI

ESSENTIAL ELEMENTS oF PARTNERSHIP:

o At least two competent persons

tr Agreement

o Business s Sharing of profits

o Mutual Agency
$f

@!

NATURE oF PARTNERSHIP:

firm has no separate [ega[ entity except under section 2(3) of the lncome Tax Act, 1961. Thus, firm itsetf cannot enter into a contract for partnership though their partners can o According to section 11 of the Companies Act, 1956, the maximum timit of partners in case of partnership for a banking business is 10 and in case of other partnership is 20. ,,-

A partnership

PARTNERSHlP DEED:

tr A partnership is formed by an agreement and such agreement may be in oral or in writing o A document which contains the terms of partnership as agreed among the partners is catted partnership deed o The deed is required to be signed by att the partners and is required to be duty stamped as per lndian stamp Act,
Act

1889

o The partnership deed must not contain any term which is in contravention with the provisions of the lndian Partnership o The terms taid down in Partnership deed may
be varied by the consent of att the partners

ifffiE

lN THE ABSENCE oF DEED, THE FoLL0wlNG PRovlsloxi or *te tNollN plRrxeRsHrpacrlns lpptrclgtr: o No remuneration is to be allowed to any of the partner. [Sec 13(a)] o Profits and tosses are to be shared equalty. [Sec 13(b)] o No interest to be a[towed on capital. [Sec 13(c)] o lnterest @ 6% is payable on advances / loans. [Sec 13(d)] o No interest to be charged on drawings. [Sec 13(e)]

x*

$iffi$frffitri

METHopS oF iMtNrAtNtNG cAptrALACCouNrs oF pARTNERS:

FLUCTUATING CAPIAL METHOD:

Under ftuctuating capital method onty one account for each partner is maintained and att the transactions in retation to

the partners are recorded in such account'

o Since att the

transactions are recorded in the same ledger account, the batance of'capitat account under this method

keeps on ftuctuating.

t{lLtmilt}l( I0lljil0[l
[onrnstins YIIJ ro
YoUR rU]lJRE...

Fundamentals of Accounting

i;n

n e

rcfr

trW u ntyT;;tr;;ffi i
is maintained

FIXED CAPITAL METHOD:

o Under fixed capitat method two accounts narnety capitat account and current account for each partner tr Introduction and withdrawal of capital is recorded in the capital account

o Transactions relating to interest on capitat, drawings, remuneration to a partner etc are recorded in the current account

o fhe batance of capital remains constant and that of current account keeps on ftuctuating.

*WA

oN DMWINGS: o Drawings mean the amount withdrawn in cash or in kind for personal purposes o Drawings may be against profits or against capital
TNTEREST

o lnterest o lnterest

on drawings is to be charged from the partners onty when the partnership agreement provides for the same on drawings is to be catcutated with reference to the time period for which the money was withdrawn. The various situations are discussed under:

Note: Average period shoutd be used onty when the amount of drawing is uniform and the time intervat between two consecutive drawings is uniform.
ACCOUNTING TREATMENT

o lnterest
o

on drawings is a gain to the firm and hence is credited to Profit & Loss Appropriation account

On the other hand, interest on drawings is a loss to the partners and hence is debited to his capitat account

$*ffiEi

turrnrsr ox cmrar-:
o o o o

lf the partnership agreement is sitent, no interest on capital witt be attowed lf the partnership deed provides for interest on capital then interest witt be provided if there are sufficient profits ln case of loss no interest on capital witt be attowed ln case profit before interest-is less than the interest, then profit witt be distributed in the ratio of interest on capital of
each partner
Ptease provide for interest on capital even

tr

tt
E

if it reserves in toss if it is specificatty provided in partnership deed lnterest on capital is a loss to the firm and is debited to Profit and loss appropriation account lnterest is payabte to the partners and hence partner's capitat account is credited with the amount of interest.

y/

where his influence stops. "r"rrity;

ateacner oiff"rr,

he

con never

tell

t{?

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,EffiEi nenuNenmoN ro
tr tr

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Remuneration to. a partner is payabte onty if the partnership agreement provides for the same Remuneration courd be in the form of salary commission or any other mode Remuneration payabte to a partner is considered as appropriation of profits and not a charge against profit Remuneration to a partner should be debited to profit and loss appropriation account and n'ot profit and loss account of the company

lf the commission

is to be calcutated as a fixed percentage net profit before charging such commission, then commission = Rate of commission X Net profit befor! .orrirrron
100

ffi#ffi

lf the commission is to be catculated

as a fixed percentage net profit after charging ---" YYrrrrr -"'p such commission, then commission = Rate of commission x Net profit before

commission

Rate of commission + 100.

iffi$i
tr

Profit and loss appropriation account is an extension of profit and loss account The main intention of preparing Profit and Loss Appropriation Account is to show the distribution of profits among the partners Profit and loss appropriation account is credited with the net profits b/d from the profit and loss account and interest on drawings

tr tr

Profit and loss appropriation account is debited with interest on capitats and remuneration to a partner The batance of Profit and loss appropriation account is transferred to the capital accounts ot,i"

ounn"rr.

w,

to a partner o The guarantee may be provided by one or some or att the partners in the existing prorit J.ring ratio or in some agreed llrg rcruo rn agr ratio

o Guarantee of minimum profits to a partner

refers to the minimum guaranteed profits

o lf the guarantee is given by att the partners in the existing profit sharing ratio, it is known o lf the actuat share of profit to.a guaranteed partner
o
by the guaranteeing partners in the agreed ratio The fottowing journat entry is passed to record

as firm

grur.r,""

is less than the amount guaranteed, then the deficiency shatt be borne

the deficiency, if any

ffiHi GOODWLL:

o Goodwill o Goodwill

is the value of reputation of a firm in respect of profits expected in future over and above the .rormal rate of

o Various methods of vatuation o Super profit

method method

o Adjustment with regard to goodwitt is to be done when there is reconstitution of partnership firm rsr t'r!r Jrrrl o Goodwitl is not a fictitious asset o Average profit method
o Annuity method
of goodMtt are as under:

is regarded as an intangible asset of the firm

o Capitalisation

100 Pages to SUCCESS

ltl

L{trtr}il

lt( I0tljTt0}tl
ttllunt.-

connecting YolJ to Yo[|R

Fundamentals of Accounting Portnership Acaunts- Fundome ntdls

o o
o

Under this method, the profits of the past few years are averaged and adjusted for any expected change in future Under this method, the average future maintainabte profits are multiptied by a certain number of year's purchase
To

find out the average profits, either simpte average or weighted average may be employed o White catcutating the average profits, any abnorma[ gain or abnormat loss should be excluded.
SUPER PROFIT METHOD:

bwr, o Goodwitt l.
,t

I I

o o

under this method is ascertained by muttiptying the super profits by certain number of year's purchase Super Profit = Average profits - Normal profits Normal rate of return on the capitat emptoyed is compared with the actual average profits to find out the super profits.

&#!i
ri ,*

ANNUITY METHOD:

!
.1

Under annuity method, time vatue of money is considered o Time vatue of money is the difference between vatue of money at tg (Present date) and value of money at t1 (i.e. future

i
{
{ !

date)

o present

yatue factor is apptied to the expected future profits to find out the present vatue of future profits.
METHOD :

IfrffigI CAPITALISATION
,i

I i
i r

o Goodwitt under this method is ascertained by deducting the actual capital employed by the capitalized value of business o Under this method, the vatue of whote business is determined by apptying normal rate of return , Goodwil[ = Capitatised vatue of business ' Capital emptoyed (net assets)
RECONSTITUTION OF A PARTNERSHIP FIRM:

filffifii

Any change in the existing agreement of partnership amounts to reconstitution of a partnership firm

o There are five occasions when a reconstitution of a partnership takes place o Change in profit sharing ratio between the existing partners n Admission of a new partner

o s

Retirement of an existing partner Death of a partner

o Amatgamation of two partnership firms o The partners whose shares have been decreased as a result of change are known as sacrificing partners o The ratio in which the partners have agreed to sacrifice their shares in profit in favour of other partners is known
sacrifice ratio

as

o Sacrifice ratio = Otd profit share - New profit

oThepartnerswrrofchangeareknownasgainingpartners
o The ratio in which the partners have agreed to gain their shares in profit from the other partner is known as gain ratio o Gain ratio = New orofit share - Otd orofit share o The new ratio in which att the partners share the future profits and tosses is known as new profit sharing ratio.

share

The best teachers teoch from the heart, not from

100 Pages to

SUCCESS

the book.

Jl,

r.IfllltIil(

oLlJTloill

*ffi*,

INTRODUCTION:

A person may be

admitted as a new partner with the consent of att the existing partners or in accordance with the

agreement

New partner is admitted either for increasing the partnership capitat or for streigthening the management of the firm

o Admission of a partner is one of the modes of reconstitution of partnership firm

\zffii

s The incoming partner, after admission gets the right to share assets of the firm and to share the o When a new partner is admitted, he acquires his share in profits,from the otd partners
sacrificing

profits of the firm

o The ratio in which the otd partners have agreed to sacrifice their share in profit in favour of new partner is called

ratio

o
ffi$l

Untess specificatty given,

it

is assumed that the otd partners sacrifice in the otd

profit sharing ratio.

ADJUSTIT{ENT FOR GOODWI LL:

o o o o

The gaining partners must compensate to the sacrificing partner When a new partner is admitted to the partnership firm, new partners witt gain in future profits The new partner who gains by acquiring the right to share future profits must compensate to the sacrificing partners The amount of compensation should be equa[ to the proportionate amount of firm's goodwitt.

wi*:

ACCOUNTING TREATMENT OF GOODWILL:

o o

When the incoming partner pays his share of goodwitt privatety to the sacrificing partners, no entry is passed in the book of accounts When the incoming partner brings in his share of firm's goodwitt in cash, then the fotlowing'entries are passed in the books of accounts of the firm:

Date For writing off the existing value of goodwill appearing in the books

of accounts:
Otd partner's capitat To Goodwitt A/c

account

Dr.

(Being the book value of goodwitt transferred to otd partners in otd profit sharing ratio)

For recording the cash boueht in bv the incoming partner towards goodwill:
Cash

/ BankA/c

Dr.

To GoodwillAic

(Being amount bought in towards goodwitt recorded)

For transferring the goodwill to the sacrificing partners:

GoodwittA/c

Dr.

To Sacrificing partner's capital A/c (Being goodwitl transferred to sacrificing partners capital account in sacrificing ratio)

For recording withdrawal of goodwill: Sacrificing partner's capital A/c Dr.

To Cash

/bankA/c

(Being amount withdrawn by the sacrificing partners recorded)

tr

lf the amount of goodwitt is bought in kind, then the asset bought in is recorded by debiting such asset account lf the incoming partner does not bring his share of firm's goodwitt then the amount of goodwitt is recorded by adjustment in
the capital accounts. The fotlowing journal entry is passed;

I am indebted to my father teacher for living well.

for living, but to my

]lI

u$il[( t0lljil0ilr
fonnectins
Y0U

Fundamentals of Accounting

ts Y0llR tlJIllR[-.

-** A6issi;;;i;V;ffier

ffigl

REVALUATIoN oF ASSETS AND LIABILITIES:

o At the time of admission of a partner, atl

o tr
E E

assets and tiabitities of the firm shoutd be revatued

Revatuation account is prepared to find out the profit or [oss on revaluation The profit or loss on revaluation betongs to the old partners

profit sharing ratio Such profit or loss on revaluation shoutd be transferred to the capitat accounts of otd partners in old
Revatuation account is a nominal account Revaluation account is credited with att increase in value of assets, decrease in vatue of tiabitities & unrecorded assets Revatuation account is debited with att decrease in vatue of assets, increase in value of tiabitities &, unrecorded tiabitities

tr
E

Revaluation Expenses

To be

' ,'

borne bJ Firm

Paid by Firm

Paid by

Paid by

Partner

Firm

Paid by Partner

J
Revatuation A/c Dr.
To Bank

.l
Revatuation A/c Dr. To Partner's Capital A/c

.l
Partnels Capitat A/c
To Bank
Dr.

.t
No Entry

It's.easy to make a buck. lt's moke a difference.

a lot tougher to

100 Pages to SUCCESS

Il, t{flIiltil( f0Lufl0}tf

[onnmtins
YotJ to Y0|JR

ttmjRl_

with the agreement between them o firm s The business of the firm continues even if a partner retires o Retiring partner continues to be tiabte to the third party unless he discharges himsetf by notation o Retiring partner continues to be tiabte to the third party untit pubtic noticl n,, ,",,r"rent is given. "r $ffi#i xrwpnoRrsnmrxc naro: s rhe ratio in which the r:emaining partners decide

tr

A partner may retire with the consent of att the partners or in accordance Retirement of a partner resurts in reconstitution of a partnership

t?

"

Y,ij*iffificatly

given,

it

to share the future profits and losses is known as new profit sharing ratio presurned that the continuing partners is acquire the otd partners share in the otd profit

o Unless specificalty given, the remaining partneii continue to share the future profits in the otd ratio o The ratio in which continuing partners acquire the outgoing partners share is calted gaining ratio ------- i o Gain Ratio = New profit share _ Otd profit share o Untess specificatty given, the continuing partners
gain in otd profit sharing ,r !J

ratio.
r urrv,

|#
.

iffiE o when an existing partner retires from the firm, the continuing partners witt gain in future profits rr vr rrJ o The gaining partners shoutd compensate to the retiring partners o Hence the outgoing partner witt be compensated
goodwilt

by the incoming partner with the proportionate amount of

firm,s

gi

o outgoing

partner's share of goodwitt = vatue of firm's goodwiu X share of retiring partner

iffia
assets and tiabitities of the firm shoutd be, revalued Revaluation account is prepared to find out the profit or toss on revatuation o The profit or loss on revatuation betongs to ail the partners o such profit or loss on revatuation should be transferred to the capitat accounts of atl partners in old profit sharing ratio o Revaluation account is a nominal account o Revatuation account is credited with att increase in value of assets and decrease in value of (iabitities o Revaluation account is debited with att decrease in vatue of assets and increase in value of tiabitities are oasseO to record increase and decrease in vatue of assets and tiabitities same as in case of admission :?TXX[T,es

o At the time of retirement of a partner, all

"

b{1
"elliL

$ffi$,
tr
E

tr

The amount due to the retiring partner shoutd be settted in the manner prescribed in the partnership deed The amount due to the retiring partner is either paid instantty or is paid in various instatlments as per the agreement ln the absence of agreement, the retiring partner is

E&

o Either interest @ 6% per annum, or s share of profit which has been earned

entitted to receive

by using the amount due to him.

fl

, L[0tlt ltt(

I0ttlTt

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Fundamentals

of

connecting Y0tl ro Y0|JR FfluRt...

INTRODUCTION:

o Consignment means the process of sending goods by one person to another s The receiver of the goods is to sett those goods on behatf of the person who has sent it o The person who sends the goods is known as consignor and the person to whom the goods are sent
]\

is catted consignee.

ima ,!

FEATURES:

j
J

!
1

:)

o The relationship between consignor & consignee is that of principat and agent o Onty the possession of goods is transferred and not the ownership o Consignee is entitted to reimbursement of att the expenses incurred by him on behatf of the consignor which witt atso be

o s

mentioned in the agreement Consignee gets the remuneration for the services rendered in the form of commission The profit or loss on sale of goods sent on consignment betongs to the consignor.

il#f, lcB. ; 'i i

PnO'fORilA INVOICE:

tr

o lt contain.sthe

A Pro-forma invoice is a document prepared by the consignor which is sent to consignee atong with the goods detaits with regard to the quantity of goods sent, rates at which the goods are sent and other various terms and condition for sending the goods on consignment.

fffifii comnsstox:

o Remuneration paid by the consignor to the consignee is catted commission o Such commission is paid in lieu of services rendered by the consignee in form of setting the goods c Theoreticatly there are three types of commission o Ordinary commission catcutated and paid as a fixed percentage on gross sates made by the consignee o Det-credere Commission an extra commission paid by the consignor to the consignee for bearing the loss on account of bad debts, if any, arising out of credit sate made by the consignee o Over-riding Commission an extra commission paid by the consignor to the consignee for extra efforts by
consignee by way of promoting sales at higher price than specified or selting more quantities than what was expected.

the

j
i
. I

Effi$i ACCOUNT SALES:

:

s An account sate is a statement prepared and sent by the consignee to the o lt contain detaits with regard to the quantity of goods received,
sent and the batance payabte to the consignor.

consignor

sales made, expenses incurred, commission, amount

lffi6i

txvorce pmcemo

o Cost price is the price at which the goods are purchased / manufactured by the consignor o lnvoice price is the price which is mentioned in the Pro-forma invoice, higher than the cost price o Selting price is the price at which the consignee goods
setts the

lolorxc:

A go.od teacher is tike a candle to light the way for others.

it

consumes

itseff

11

Ltrtrliltil( f0luTl0ltl

lnvoice P+ice - Cost price = Loading

o When the goods are sent at invoice price, to ascertain correct profit /

tr

loss on consignment, the items recorded at invoice price shoutd be brought down to cost price For this purpose, the loading included in various items tike opening stock, goods sent on consignment, goods returned by consignee and closing stock shoutd be eliminated by passing the necessary adjusting entries in the books of consignor onty.

i,ffi;

ACCOUNTTNG TREATMENT lN THE BOOKS OF THE CONSTGNOR:

o Consignor atong with his books of accounts prepares an account catted consignment account o Consignment account is nominal in nature o Consignment account is debited with the cost of goods consigned, expenses incurred by the consignor,
conslgnee

and expenses of the

n lt is credited with sale proceeds, abnormal [oss, ctosing stock and the cost of goods returned by the consignee o Excess or credit over the debit side totat witt result in profit and such profit is transferred to profit & [oss accounl rf
consignor.

the fr?e

iffi$

lccouNrNc rRelr ,rexr tx rHe sooxs or rxe coNscNre:

No entry is passed in the books of consignee for the fottowing;

o tr

Receipt of goods from the consignor

Expenses incurred by the consignor

o Abnorfial

normal toss in his godown or in transit

o Bi[[ receivabte discounted by the consignor

o o

Return of goods by the consignee

Unsotd stock tying

with him.

ffi$ vnlumox or closlxc srocx:

o o
The principte is that stock shoutd be vatued at cost or net realizable value whichever is lower Cost price for this purpose means the purchase price plus expenses which are incurred to bring the goods to their present location and condition (whether incurred by consignor or consignee) (Total basic cost of consignment + Proportionate direct exp.) X Qty of ctosing stock (Totat quantity of goods sent - quantity of normal toss).

ffit

vALUATION OF LOSS:

o Loss can be normal or abnormal depending upon the nature and cause of loss o Normal loss is due to inherent nature of the goods and is generatty unavoidabte o Normal loss occurs due to factors such as evaporations, moisture, shrinkage and leakage etc. on the other hand abnormal loss is avoidabte which may be due to reasons tike theft, fire, accident eti. normat loss is generatty non-insurabte as the
same cannot be avoided.

fffi$l lccbuxlxc rnrmmrxr or NoRmal loss:

o

Normal loss being loss due inherent nature of goods and being unavoidabte is not separatety vatued lt is treated as a part of cost by inftating the cost per unit. No separate journal entry is passed to account for such [oss. l_oss:

iffil

lccouxflxc rnelrMrNr or ffixoRi{Al

o Abnormal loss does not occur on account of inherent nature of the goods o lt is not treated as part of the cost. lt is calculated in the same manner as the value of unsotd stock o The fo[lowing Journal entry is passed to record for such a [oss:
1.

On Abnormal loss:

Profit and loss Account

lnsurance Company Account To Consignment Account

Dr. Dr.

With ir-recovered [oss) (Ctaim admitted by iniurance Co.) (With Totat Loss)

50000
1

00000
1

50000

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,/ ," who opens o school door, closes a prison.

I ' r.r{ilil|r( I0LUTl0ltl

Fundamentals of Accounting

Connecring Y0ll to Y0ljR IUIURE-

ffiffi;;Tor7;irtffintiffi

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I*{EANING

oF JOINT

VENTURE

o Joint venture may be described

the use of the firm partnership ka+r,aan rr,a ar mnra nar( as a temporary -^-t-^--L:^ between two or more persons without

name, for a timited PurPose profits persons agree to undertake a particutar venture and to share the ln other words, under Joint venture, two or more
and losses thereof in an agreed ratio or co'venturers' have so agreed to undertake a Joint venture are known as Joint venturers

I il;;;;ho

;;;;,;

r",t

oo

for this purpose' atiloint venture transactions are recorded in a separate set of books maintained

a separate setof books: Generatty the fottowing accounts are opened in nature are used to record their deatings with the Joint Business and to a) co-venturer,s Accounts which are personal in

ascertain the amount due to/from them is used to catcutate the profit/toss on Joint venture b) Joint venture Account which is nominal in nature and to record cash and bank transactions' c) Joint BankAccount which is Rea[ account in nature, used

Eachco-ventureropens..JointVenturelnvestmentAccountintheirrespectivebooksofaccounts.

Method-2: Recording ln The Books Of One Co'venturer Only:' the venturer along with under this method, att joint venture transactions are recorded by one of
Generalty fottowing accounts are opened under this method: a) Joint venture Account to ascertain profit/toss on Joint venture

his own books of accounts'

transactions effected by other co-venturer/(s) and b) personal accounts of other co-venturer/(s) to record the Joint venture to ascertain the amount due to/from other co'venturer/(s)'

Note:

o For accounting
o

-1..--- -^---):--.+,a6. recording transactions' purposes, the venturer who maintains the book of accounts is referred as Yenturer and the ventuier not recording transactions is known as'Otherco'venturer' is transferred to the profit and loss The share of profit or [oss on Joint venture of the venturer recording transactions

o The other co-venture/s share of profit or loss is transferred to the other co-venturer's capitat account stock by the venturer recording transactions then purchases accountshoutd be gooo, ur" supptied out of " wn.rnn" iitrre suppty-is?.oaii.ortown else sates account shoutd be credited if the suppty is made at setting price' price credited

account

ilethod-3: i{emsrandum Joint Venture Account Method'o Under memorandum Joint venture account method, the co-venturer
him in retation to Joint Venture

records only those transactions which are affected by

A/c is opened to record att joint venture transactions o Onty one account by name, "Joint Venture with u Each co-venturer sends a statement to the other co:venturer with regard to his transactions with joint venture business o Each co-venturer with the hetp of the statement prepares a Memorandum Joint ventureAccount to find out the profit or
loss on joint venture o The profit or [oss on Joint venture is recorded by passing a journat entry in the

book of each co'venturer

o Each co-venturer
Note:

setttes the batance of Joint Venture with

A/c either by paying or receiving cash'

o Transactions affected by the other co-venturer is not recorded o Transactions not invotving cash are not recorded in the books of either party'

tlthst the teacher is, is more important thon what he teaches.

W;

Fundamentals of Accounting

.t{,Itrfl}ilI}t( [Luil0flf
lonnecting
Y0U m Y0UR

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BILL OF EXCHANGE: A bitt of exchange is an instrument in writing

o Containing an unconditional order, o Signed by the drawer a Directing a certain person o To pay a certain sum of money o Only to or to the order of certain person

o The person who draws the bitt is catted drawer. ln other words, he is the person who grants credit o The person who is directed to pay is catled drawee. ln other words, he is the person to whom credit is granted o The person to whom the payment is to be made is catted the payee. The payee may be a third party of the drawer himsetf o The instrumgnt must bear the necessary stamp under the lndian
stamp Act, 1g99.

or to the bearer of the instrument

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PROMISSORY NOTE:

"A Promissory Note is an instrument in writing o not being a bank-note or a currency note o Containing an unconditional undertaking

o lt may be payable on demand or after a definite period of time o lt cannot be payabte to bearer (Sec.3,l of the RBI Act, 1934)

o The parties to a promissory note i.e. maker and the payee, must be certain o The persons who makes the promise to pay, is known as maker o The promise to pay must be definite and unconditional

o Signed by the maker o To pay a certain sum of money o Onty to, or to the order of, a certain person, or to the bearer of

the instrument
i:';tffi

i'itt&

\ i:#

Thedat9,wtiichc-ijme5after.auding.ihreeda}S.totheduedateofa.bi.tti'.iiffi

i4
BILLAFTER DATE

Note: A promissory note or bilt of exchange is a time instrument when it is expressed to be payabte after onaspecificda'teoraftersightoronthehappeningofeventwhichiscertaintohappen.

a specified period or

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100 Pages to SUCCESS

I would thank you from the bottom of my heart, but for you my heort has no bottom

tl, tIflIiltlt( I0uTl0ffi

YOUhYOIJR FUruRI...

*- -,= rll9gTglltrqf 4ccpugg Bills of

Exchange

aiiFffiiss;nl

Note

When the bitt is made payabte on a

specific date.
When the bittis made payabte at the stated number of months after date.

That specific date witt be the due date. That date on which the term of the bitt shatt expire Mtt be the due date. Note: The term shall expire on that day of the month which corresponds with the day on which the bitt is dated. lf the month in which,the period terminates has no corresponding day, the period shatl be deemed to expire on the tast day ofiuch a m6nth. That date which comes after adding stated number of aayi to tire date of the bitt, shatt be the due date. Note: The date of bitt is exctuded.
The preceding business day

When the bitt is made payabte at a stated number of days after date. When the due date is a public hotiday. When the due date is an unforeseen hotiday.

will be the due date.

The next working day witt be the due date.

o The term of a Bitt after sight commences from the date of acceptance of the bitt whereas the term of a bitt after date of

o Pubtic o
f;lffi$i

drawing a bitt commences from the date of drawing a bitt. hotiday inctude the foltowing;

o A[[

Sundays

tr 26th January (Repubtic day)

30th September (half year), and

o 15th August (tndependence o lstApril (Bank Hotidays)

Day)

RETIREMENT oF A BILL

o Retirement of a bitt means making the payment of a bitt before the date of maturity o Discount at the time of retirement of a bitt is an income for the
i$m$i
RENEwAL

drawee and is an expense for the payee.

oFA BILL
bitt and drawing a fresh bitt for another period on a request from the

o Renewal of a bitt means cancettation of originat

drawee

o The interest for the extended period is either paid in cash or included in the amount of the new bitt.

:ret

NoING

cHARGEs

o The amount of noting charges shoutd be borne by the party responsible for dishonour

o Noting charges is the fees charges by the notary pubtic o Noting means recording the fact of dishonour by the

Notary pubtic

$ffifli lccomiloofirox

gll_l_s

o They are drawn and accepted to meet the financial needs of drawer or drawee or. both for a temporary period o The proceeds of the bitt discounted are taken by the drawer and drawee in an agreed ratio o The discount charges on such bitl shoutd be borne in the proportion of share of proceeds o There is no debtor creditor retationship between parties.
the

o Accommodation bitts refer to those bitts which are drawn, accepted or endorsed without any consideration

Effi$t accouNilNc

rN

rHr sooxs or srLlen

The selter of the goods witt pass the fottowing entries in the books of accounts:

l,l, ttrmilt}t( fitlJTl0ill

Conneding Y0lJ ro Y0tlR FlllURL..

Th" bill rrhi.h ir ."."ir"d fro, th" d"bto. ..n b" de.lt in th" follo*ing thr"e w.ysi 1. lt coutd be hetd tit[ maturity 2. lt can be discounted with a banker 3. lt can be endorsed to a creditor
1' lf the bitt is held titt matu.rity, on the maturity date, the bitt might be honoured or it might get dishonoured accordingly
the entries witt be passes;
:::.::tin',

and

j
Dr.

silit;

Cash

Account

To Bitls receivable Account (Being cash received on honour of bitt on the maturity date)

lf the bill is dishonoured:

Sundry debtors To Bitts receivabte

Account

Dr.

(Being bitt dishonoured returned back to the sundry debtor)

lf the bitt is discounted with the banker, the fottowing entry is passed to record for discounting the bitt:

iiii#
For discounting the bill:
Cash

iiE#.i:,i#E!&

Discount

Account Account

Dr. Dr.

To Bitts receivable account

(Being cash received on discounting the bitt and discount charges recorded)

the Dill is honoured. th" banker will eet back the monev and henc"

t
lf the bill is dishonoured:
Debtors

Account

Dr.

To Bank Account (Being the discounted bitt dishonoured recorded)

lf the bitt is endorsed to a creditor; the fottowing entry is passed to record the endorsement of bitt:

A teacher is a compass that octivotes the magnets of curiosity, knowledge, and wisdom in the pipits.

]{,

LI$}il}t(

I0LUnoill

[orn8dins YIIII b Y0llR flIruRL-

MEANING:

a new " Wn.n within a specified period of time them

product is introduced into the market, goods are sent on approval basis with the option to retain or return

o These transaction takes ptace between the wholesaler and retailer o According to section 24 of the Sate of Goods Act, 1930, where the goods are sotd on sate or return basis, the property in
goods shall be transferred to the buyer in the fotlowing cases:

o When the buyer signifies.his acceptance to the seller o When the buyer does any act for adopting the goods, like consumption of
buyer etc.

goods by the buyer, further sale of goods by the

o Where he does not signifies his approvat or acceptance, but retains the goods beyond the time fixed for the return of goods, or beyond a reasonable time, if no time is fixed o Before the due date it is assumed that the customer is not sure about the transfer of ownership o The customer is not tiabte to pay for it when the goods are sent to him o This type of sate is governed by Sate of Goods Act, 1930.
ACCOUNTING TREATMENT

There are three ways of accounting based on the fottowing three situations:

Sate of Goods on Approval on Return Basis

Accounting treatment when the business sehds goods

Sates or Return Journal is prepared

with four main cotumns

Teaching is not a lost ort, but the regard for it is a lost tradition.

W
ffiii$ffi$j

Fundamentals of Accounting

oRDINARY sALE rrtErHoP:.

This method is fottowed when there are very few transactions in retation to goods sent on approval is not yet expired, the originat entry

tr Tren$actions lrcre are treated as ordinary sale and the same entry as for sates is passed E lf at year end, goods are stitt tying with the customer and the specified time period
for sates is cancelled

'

tying with customers is recorded at cost or market price whichever is [ower tr When the stock is retained by the customei no entry is passed as the sate is already recorded o The fotlowing journal entries are passed to record the transactions under this method:

o Stock

When the goods are sent on approval: Sundry debtors Dr. To Sales account

account

When the goods are rejected within the specified time:

Sates

Account

Dr.

To Sundry debtors account

When the goods are acceoted at a price higher than agreed price: Sundry debtors Dr.

account

Io

Sates Account

To Sundry

debtors account

At the vear end. when the goods are ly,ng with the custorer and the specified tiine limit is not yet expired. the followingtwo entries are passed: a) For reversing the sates atready recorded:
Sales

Account

Dr.

To Sundry

debtors

b) For recording the stock lying with the customers: Stock with customer account Dr.
To Trading

Account

Note: Stock lying with the customer witt be recorded at cost prlce anA not at setting

prici

fff$ffi$i MULIcoLUMN JoURNAL METHop: o This method is used when the goods are sent on approval frequentty o Multicotumn sales or return journal is prepared mainty with the fottowing columns; o Goods sent on approval o Goods returned

o Goods approved o Balance

o When approval from customer is received, journal entry for: sates passed is in the a When the goods are stit[ lying with customer, such stock is recorded
books of accounts

at cost or market price whichever is lower.

Ii[ffi$

SEPAMTE pAy BooK MErHop:

o separate day book method is used when the transactions with regard to goods sent on approval are numerous o Under this method, the fottowing books are maintained o Sale on approval day book o Sate on approval inward day book o Sate on approval ledger.

often take for granted the very things that most deserve our gratitude.
Vle

l{, tttrilfl}t( {0tut0}tl Cdnneding Y0ll t Y0|JR ItlruRL-

Fundamentals of'Accounting Company

i4EAXING-8EA!8^{PAM

o The word "Company" is derived from two Latin words

'bread'

'Com' and 'Panis'where 'Com' means'together'and iPanis' means

Thus company means an association of persons for some common purpose or object

E A company is an incorporated association which is an artificial person created by taw, having a corporate and legal personatity distinct and separate from its members, perpetua[ succession and common sea[.
TYPES OF COMPANIES: STATUTORY COMPANIES:i.

Companies which operate under the special act passed by the State Legislature or Partiament are called statutory Companies

o For exampte, Life lnsurance Corporation 0f lndia, lnstitute of Chartered Accountants of lndia, Reserve Bank Of lndia etc o Such companies are not required to use the word "Limited" with their name.
GOVERNMENT COMPANY: o 'A Government

company means any company, in which not less than 5'l% of the paid up share capital is hetd by the Central Government, or by any State government or Governments, or partty by the Central Government and partty by one or more
State Governments a company which is a subsidiary of Government Company.

o lt inctudes
#al

FOREIGN COMPANY:

o Aforeign company is one that is incorporated outside lndia but

COT\{PANY

has a ptace of business or business operations in lndia.

ffil*i HOLDING

AND SUBS! DIARY COMPANY:

o n

deemed to be a hotding company if the other company is its subsidiary A company becomes a subsidiary when the other company controts 51% or more of its paid up share capital, has a right to appoint Board of Directors, or is a subsidiary of another subsidiary company.
A company is

wei

REGISTERED COMPANY:

A company

that is registered under the companies Act, 1956 is catled as a Registered Company.

ffi$i r-lmlreo Ltlslt-lry coi{plxy:

o ln a company timited o ln a company timited

by shares, the tiabitity of members is timited to the unpaid value of the shares by guarantee, the tiability of members'is timited to such amount as the members may undertake to contribute to the assets of the company in the event Mnding up.

ffi$i uxt-llllreo LlAalLffi coi{plXY: o A company in which the tiabitity of sharehotders is not restricted only to the value unpaid on shares is known
company.

as unlimited

S$i lrsrEb cor,rplNy:

o
A listed company is a pubtic company which has any of its securities tisted in any recognised stock exchange.

S$i unllsreo col,rplNy:

o An untisted company is one whose securities are not tisted on any recognised stock exchange for trading.

There are three good reasons to be June, July, and August.

teocher -

ll,

HIItlt(

IotlJfl0ltl

ErfffiE

PRIVATECoMPANY:

A private company means a company which has a minimum paid up capitat of one takh or such higher amount as may be

prescribed, and by its artictes, o Restrict the right to transfer its shares, and o Limits the number of its members to 50, and

o Prohibits invitation to the public to subscribe for any shares in or debentures of the company tr Prohibits any invitation or acceptance of deposits frorn persons other than its members, directors or retatives.

ffi,8ffii

PUELIc coMPANY:

W
or higher

o lt means a company, which o ls not a private company and has a minimum paid up capitat of Rs.500000 o ls a private company but a subsidiary of pubtic company
ffiiffiffifi,

'

sHARE cAPtrAL:

o Total capital of the company

o "Share means a share in share capital of the company" o Share capitat of a company is divided into fottowing categories:-

is divided into small units of a fixed amount. Each unit is catted share

ffi1

.eapiqairitnatnomirtat 1It is atways less than the authorised capitat s

ih._

w
;hi.m

CAPITAL
SUBSCRIBED SHAEE CAPITAL

lt is shown in,the Balance sheet at nominal vatue. that part of

issued capitai,

n Subscr:ibed capitat is

ffi
tr*
.ornyony

CALLED.UP SHARE CAPITAL PAID UP SHARE CAPITAL UNCALLED CAPITAL

p Paid uP capital is that part of catted up capitat which has been paid up by the share hotders.
tr lt is that part of subscribed capital which has not be'en catted up uy oThecompanymayca[[suchuncalledcapitatany.time..

i:ffi
RESERVE'CAPITAL

fii$ffi$, CAPITAL

RESERVE:

o Capital reseryes are those amounts which are not regarded as free for distribution by way of dividend o lt is mandatory to create capitat reserye incase of forfeiture of shares a lt is shown under the head "Reserves & Surplus" on the tiabitities side of Batance Sheet o lt can be used to write off capitat [osses o Capital reserves inctude profits prior to incorporation, premium on issue of
forfeited shares etc.

iffi

shares or debentures, profit on reissue of

i%

i?a

TYPES OF SHARES

1ffi

100 Pagei to SUCCESS

1tl
ij
i: 1I?

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l{,

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YIU

I0Lffi0il1
Y0tln HIIURE-

ffi
, ,

Fundamentals of Accounting

ffitu,tu"
ii,.rpti",

preferencg shares are no13n which the arrears of dividends ...ur,]t:". , year, the arrears of dividend sha[['be paid in subsequent that in case no dividend is dectared in any particutar
shares are shown in the Batance sheet as cr5ntingent tiabititY'

preference o Tha u*a.r, of dividend on cumutative

NON.CUMULATIVE
PREFERENCE SHARES:

Years

not shares are those on which tlre arrears of dividend do r', fi*"r*tative preference association provision in the articles of
I

accumutate as per the express

I
i
I i

o lt impties that in ."r.

exPires.

r- -^-^:..^ -.,-] dividend for that year to receive such no dividend is dectared in any particular year, the right

FIi
:

o participating preference

preferential rights, atso carry one or more shares are those shares which, in addition to two basic

i I

i
i
l

of the fottowing additionat rights: to equity share hotders o A right to participate in the surptus profit at a stiputated rate after paying dividend on winding up of o A right to participate in the surplus assets of the company after repayment to equity sharehotders

the comPanY.

kn
i

o Non-participating Preference shares are those which are not participating o untess specificatty given, preference shares are non'participating.

shares

sHlnes: ffil nroermlgLr pnerenExceshares are those which are redeemabte as per the- _--..:-:--- of the companies Act ., provisions I-" o preference
1

, r .
{ffili "*"

n"d"emabte preference shares redeemabte after 6 According to section go(5A), no company can issue irredeemabte preference shares or the expiry of twenty years from the date of issue o ln other words, at[ preference shares are to be redeemed within a maximum period of 20 years' sHanrs: xoN-nEpEEl,tAsl-E (lnReoErMAsLq regarding redemption Th"te shares do not carry any arrangement or preference shares o According to section g0(5A), no company timited by shares sha[[ issue irredeemabte- preference shares redeemabt" after the expiry of 20 years from the date of issue.

pnerenexce

I
l#*ti itBlE}
t ,i

CONVERTIBLE PREFERENCE SHARES:

e convertible preference

convert them into equity shares at shares are those shares, the hotder of which has the right to their option according to the terms and conditions of the issue.

ffili '
,
)

xoN.coxvERflsl-E pnEreRrxcr sHmrs: converted into tr Non-convertibt" p,."r"r"n.e shares are those, the hotder of which is not conferred the right to get his shares
equity shares

o Untess
rssue

specificatty given, preference shares are non'convertibte.

{ffili

i. ,

or

tthan cash Shares can be issued either fbr cash or for consideration othe shares may be issued either at par or premium or at discount various instatlments lssue price of the shares may be either paid in tump sum or in cannot be tels than 5% of face value of shares' arrnrrtino r^ rh. aomnanies Act. the aootication money

sn$es'

s
tr tr

Teaching is the profession thdt teaches all the

other professions.

f;

undamentah of Accounting
Accounts-lssue o

il,

t{$}tl[(
Eonnrctins Y0l,l

Iotuil0il{
h
Y0UR

HIruIL.

iffiffi

ttllN|MUM

SU BSCRIPTTON:

o o

tr lf the minimum subscription is not

has

A public company cannot make atlotment of shares untess the minimum subscription is received As per sEBl guidetines, a company must receive a minimum of 90% subscription

n' '3: I
it

to be refunded

received within 60 days from the ctosure of issue, then the apptication money received
less than 25% of the issue price.

o The minimum apptication money to be received atong with the apptication shatt not be
6ffiffir
OVER SUBSCRIPTION:

o Shares o

are said to be over'subscribed when the number of shares apptied by the pubtic is more than the number of shares offered by the company Foltowing are the atternatives avaitable in case of over subscription: o Some applications might be rejected in futt and the other would be attotted in futt o A[[ the appticants may be attotted shares on pro-rata basis o Any combination of the above two.

r#ffi$i UNDER SUBSCRIPTION:

a Shares

offered by the company

are said to be under subscribed when the number of shares apptied by the pubtic is less than the number of shares

A company can proceed with atlotment onty if the minimum subscription as per the sEBl guidetines is received by the company. @1W
i@:*ffi

gffigl

ISSUE OF SHARES AT PAR:

o The fotlowing journal entry is passed for

Date

o Face value = Nominal value of shares which are issued by the company o lssue Price = Price at which the shares are issued to the pubtic o lf lssue price = Face vatue, then the shares are said to be issued par at o For example, if a share of Rs.10 face value is issued at Rs.10,
issue of shares
,

then it is said to have been issued at par

at par:

,Pqrticulars
Dr.

'r.F

Debit

Credit

For receiot of application money:

Bank

A/c

To Share Application A/c money received atong with applications recorded) {Being

rur AcsePrance

oT apDltcattons:

Share Apptication Dr. To Share Capitat A/c (Being apptication money transferred to capitaI account)

A/c

For recording allotment money due: Share atlotment To Share capital A/c

A/c

:r+,EH

Dr.

(Bei,'rg money due on atlotment recorded)

For receipt of allotment money

Bank

A/c

dui:
Dr.

To Share Attotment A/c receipt of altotment money recorded) _{9!!rg

rur reserqtngrne call mongy due:

Share catt A/c To Share Capitat A/c
(Being money due on call recorded) Dr.

rur recelPr or calt money: Bank A/c

To Share call A/c (Being receipt of ca[[ money recorded)

Dr.

100 Pages to succESS

Appreciotion is a wonderful thing. lt makes whot is excellent in others belong to us as well.

llr,tlnllillt(
lonneEtins Y0lJ

t0

Lut0ltl
tl[l]RE-.

Y0llR

Company.Acauqts:lssue of

--

fyn{qry!"-e.lgF,gfj*.q!,n!ins
Shqr. es

tr tr tr
E E

Face vatue = Nominal vatue of shares which are issued by the company lssue Price = Price at which the shares are issued to the pubtic

lf

lssue price > Face vatue, then the shares are said to be issued at premium

For exampte,

if

a share of Rs.10 face value is issued at Rsr12, then

it is said to have been issued at a premium

The excess price received over the face value is referred to as "securities Premiumi' Securities premium is to be credited to a separate account catted "Securities Premium Account" The premium on issue of shares is a capital receipt and not a revenue receipt There is no ceiting on the maximum amount ofpremium to be cottected by the company Securities premium can be utilised onty for any of the fotlowing purposes: o To issue futty paid bonus shares to its members

tr
tr
E

o To write off pretiminary expenses of the company o io write-off expenses in retation to issue of shares or debentures of the company o To provide for premium payabte on redemption of preference shares and debentures of the company.
i
ENTRIES: mirreai JOURNAL

Att entries are same except entry number 3 which is as fattows; :;ETE.,.
,ElF,,

,tri,-.ss;

For recording the allotment money due: Dr. Share Atlotment

A/c

To Share Capitat
To

A/c

Securities Premium A/c

(Being money due on attotment atong with premium recorded)

"&1&ffi%:

rssuE oF sHAREs AT prscouNT:

o
E tr

Face vatue = Nominal value of shares which are issued by the company lssue Price = Price at which the shares are issued to the public

lf lssue price < Face vatue, then the shares are said to be
For example,

issued at discount

tr
tr

if

a share of Rs.10 face vatue is issued at Rs.9, then

it

is said to have been issued at a discount

The discount on issue of shares is treated as capital loss and is debited to a separate account catted "Discount on issue of shares Account" Conditions to be futfitted for issue of shares at discount:

'

o The share must belong to a class atready issued o The issue must be authorised by an ordinary resotution of the company o The sanction of Central Government is to be obtained o The maximum rate of discount shoutd not exceed 10% o At teast one year must have etapsed since the date on which the company was entitted to commence o The issue must be made within 2 months from the date of receipt of sanction.

business

Fundanientals of Aaabunting

aoniaiW
iffigj

ll,

t$Ilil[(
Sonnectins YlllJ

f0tljfl0ilr
tr
YoUR

flllllR[-

JOURNAL ENTRT At[ entries are same except entry number 3 which is as fottows;

tffii#j+
For recording the allotment money due along with discount: Share Atlotment Dr. Discount on issue of shares Dr.

rii

tE;

A/c

A/c

To Share Capital A/c (Being money due on atlotment after deducting discount r:ecorded)
Grfll

Etgt

ffiEi

CALLS IN ARREARS:

i6l

o lnterest on catts in arrears is chargeabte as specified in the artictes a lf the artictes of association are silent regarding interest on catls in arrears, then Tabte-A
the rate of interest cannot exceed
IN ADVANCE:
5%

o Catts in arrears refer to the amount calted up by the company which has not yet been paid by the sharehotder n The amount of catts in arrears is shown in the Batance sheet Ly *.y or oeauction from'thl ..tt.a-up .upt,.iper annum.
shatt be appticabte as per which
@tt*a

ffiEr CALLS

o Catts in advance refer to the amount paid by shareholder in excess of amount due from him o calts in advance are shown as a separate item under the head ,,share capita[,, o lnterest on calts in advance is payabte as specified in the articles o lf the artictes are sitent, Tabte A shatt be apptied which gives an option to pay interest @ 6% per annum o lnterest on catls in advance is payabte irrespective of profitabitity of the company o outstanding interest on calls in advance appears on the tiabitity side of the Batance
tiabitities".

sheet under the head,,current

ffifii

o
o

ISSUE OF SHARES FOR CONSIDEMTION OTHER THAN CASH:

If the company issues futty paid shares instead of making payment to supptier, then such shares are regarded as issue of' shares for consideration other.than cash
These shares shoutd.be shown separately in the Batance sheet as issued for consideration other than cash lf the shares are issued in exchange of an asset, then the asset account shoutd be debited and the share capital account shoutd be credited

o o

lf the shares are issued to the promoters of a company, then goodwitt account shoutd be debited.
DatC:,

rtir:.i

u:r

For issue of shares in exchange of an asset:

Asset

A/c

Dr.

To Share capita[ A/c

(Being purchase of asset and issue of shares for consideration other than cash recorded

When shares are issued to promoters: Goodwitl Dr. To Share capital A/c

A/c

(Being shares fssued to promoters for consideration other than cash recorded)

100 Pages to SUCCESS

Good teaching is one-fourth preparotion ond

three-fourths pure

theotre.

lt, E0llillt( fiLtlTt0]tl

'

ConneainsY0ll

u Y[un nirunt...

" .fynq.a,ryrg?!9lsof Aqgrunliq$ Company Accounts-lssue of Shares,

RGHT SHARES:

E Right is first option to buy a security at specified price during a specified period o Right shares are the first offered to the existing sharehotders of the company

o lssue of right shares'serves two purposes o lt preserves the power of contro[ of the present shareholders o lt prevents loss to the existing sharehotder on account of ditution in the value of their stake o Accounting entries of right shares is same as that of issue of shares for cash.
PR E FERENTIAL

hotding

ALLOTI,TENT

o There are three methods of expanding the share capitat by an existing company

1,,.,

s By fresh issue of shares to the existing sharehotder in proportion to shares hetd by them (right shares or bonus shares) o By making an offer, inviting the pubtic in general to subscribe shares, which is generalty known as lnitiat Pubtic Offer (lPO)
o
By making an butk altotment to an individual, Companies, Venture Capitatistic or any other person thr,ough a fresh issue

of

shares, this process of bulk attotment is known as PreferentialAtlotment.

. ALTERNATION OF SHARE CAPITAL SUBDIVISION AND CONSOI-IDATION OF STOCKS lf authorized by its Artictes, a company may, in a general meeting, decide to sub-divide or consotidate the shares into those of a smatter or higher denomination than that fixed by Memorandum of Association, so- long as'the proportion between the paid up and unpaid amount, if any, on other shares continues to be same as it was in case of origina[ shares.
CONVERSION OF FULLY PAID SHARES INTO STOCKAND STOCK INTO SHARES:

o Stock is consotidation of shares into one divisibte unit o When it is impossible of the share capital to be one share, any amount of stock may be transferred

o ln practice, o Upon the

n
A

however, companies restrict the transfer of stock of muttiples of , say '100. A company can convert its futty paid

shares into stock as per section 94(c) of Companies Act, 1956

company converting its shares into stock, the accounting entries merety record the transfer from share capital

to stock account separate stock register is started in which detaits of member's hotding are entered and annual return is modified
accordingty.

Accounlqnl meels Consultqnl...

A mon londs on q bolloon in the middle of o deserl. Not knowing his where oboul he looks qround. Atong wolks qnolher guy ond so ou? mon osks, "Excuse me, cqn you tell me where I om?" "Sute," soys lhe olher one. "Longilude 23'45, Lqlitude 34'12".

"Oh," soys the bolloon mon, "you musl be qn occounlqnl"

"Yes, t om, how did you know?"

"Well, you iust gove me q 100% colect but 20070 irrelevqnl informqtion.','

t'l see, ttsoys lhe occounlonl, ttond you musl be o consultqnl.

"You ore right, how did you know?"

'As long os you're up in the oir, you seem-lo know where you're going, bul qs soon os you
gel down lo eorlh, you're losl.tt

No

duty is more urgent thon that of returning

thonks.

Il, t$$t||t(,I0tlJTt0ltl
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FORFEITURE OF SHARES:

o when

a sharehotder faits to pay the money due on allotment, the company may forfeit the amount already received on such shares

o Forfeiture means cancettation of attotment for

non-payment of amount due by a sharehotder

s'At least 14 days notice shoutd be given before the shares are being forfeited o 0n forfeiture, the forfeited shares become the property ofthe company o Be carefut with the foltowing three numbers white passing entries for forfeiture of shares; o Amount catled-up (i.e. amount that is credited to share capitat)
o Amount already received in respect of those shares
E Amount due but not received in respeet of those shares.
ffiff

Forfeiture must be done in accordance with the artictes of the company

in respect of forfeited shares

o The fol[owing journat entry is passed to record forfeiture;

o Share capitat account witl be debited with the catted-up vatue of forfeited shares o Share ca[[ account witt be credited with the amount catted but not paid by the sharehotder o shares forfeiture account witt be credited with the amount already

received in respect of those shares

l'*'

I I
i

51i t.a

Note: The balance of share forfeiture account is shown as an addition to total paid up capitat under the head share capital on the tiabitities side of the batance sheet.
&Ei FoRFEITURE OF sHAREs wHtCH WERE tSSUEp AT pISCOUNT o when shares were issued at discount, "Discount on issue of shares A/c" was debited. Therefore at the time of forfeiture of such shares, the same account witt be credited to cancel it

o Share capitat account witt be debited with the catted-up value of forfeited shares o Discount on issue of shares account witt be credited with the amount of discount o Share ca[[ account witt be credited with the amount catted but not paid by the sharehotder o shares forfeiture :ciount witt be credited with the amount atready received in respect of those o The foltowing journal entry is passed to record forfeiture:

/
shares

The only people with whom you should try even are those who hove helped you.

to get

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FUTURE...

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o
o

Redeemable preference shares are those shares which are redeemabte by the company in accordance with the iiovisions of Sec.80 and Sec.80A of the Companies Act, 1 956 Redemption of preference shares means discharge of tiabitity on account of preference shares by making repayment to the preference share holders

o A company timited by shares can issue redeemable preference shares, if authorised by its artictes o After the commencement of the Companies (Amendment)Act, 1996,

o
i:iilJtffifir

a company can not issue any preference share, which is irredeemable or is redeemabte after the expiry of a period of twenty years from the date of issue ln other words, if a company issues preference shares, it has to be redeemed within a maximum period of 20 years.

o According to Section 80 of the

o o o
o

Companies Act, the redemption of preference shares are subject to fottowing conditions;

Preference shares can be redeemed onty redeemed

if they are futty paid up. lt means partly paid up preference

shares cannot be

Preference shares can be redeemed onty either out of divisibte profits of out of fresh issue of shares made for the purpose of redemption
Premium if any payabte on redemption of preference shares must be provided out of either securities premium account or rr rrrr'sr'r urs\ profits When preference shares are redeemed out of divisible profits, an amount equal to the nomina[ vatue of shares so redeemed must be transferred to Capitat Redemption Reserve (CRR), out of divisibte profits.

Free Reserve includes:

1 - Profit &

Free Reserve does not includes:

1- Security Premium

Loss

A/c

2- General Reserve 3- Reserve Fund 4- Contingency Reserve 5- Dividend Equatization Reserve 6- Workmen's compensating fund or reserye 7- Workmen's accident fund or reserye

2- Capitat Reserve 3- Profit prior to incorporation 4- Pre Acquisition 5- Forfeited shares Account 6- Provident Fund 7- lnvestment ftuctuation atlowance 8- Development rebate reserye

Fund

/ Reserve

tr
E
El

Ft.eshissueofsharesforthepUrposeofredemptioncanbeeitheratp",,p.uffi
The capitat redemption reserve account can be used for issue of futty paid up bonus shares to the company Divisibte profit means profits avaitabte for distribution as dividend Divisibte profits inctude gelerat reserye, profit and loss account, reserye fund, workman's compensation fund etc. The proceeds from issue of debentures cannot be used for redemption of preference shares.

ACCOUNTING PROCEDURE:

The fottowing journa[ entries are passed for redemption of preference shares

100 Pages to SUCCESS

Fundamentals of Accounting

shares were issued at a premium, "Securities premium

A/c" was credited. Therefore at the time of forfeiture of

such

it l;,, '.,shares, .E lf the premium is atready received by the company, it

the same account witl be debited to cancet
o o
tr

cannot be cancetted even if the shares are forfeited in future

Share capitat account witt be debited with the catted-up vatue of forfeited shares Securities premium A/c witt be debited with the amount of premium (if not received by the company) Share catl account witt be credited with the amount cal[ed but not paid by the sharehotder Shares

o
E

forfeiture account witt be credited with the amount atready received in respect of those

shares

The fottowing journal entry is passed to reco;'d forfeiture:

For recording forfeiture of shares which are issued at premium:

Share Capital Securities Premium
To Share catls

A/c

Dr.

A/c

Dr.

To Forfeited shares A/c

A/c

NOTE: Futty paid up shares can be forfeited for reatisation of debts of the sharehotder if the articles of the company specificalty provide for the same.

i:ffie l'"o

nrlssuE oF FORFEITED

SHARES:

t I

tr A company can re-issue forfeited shares in accordance with the provisions contained in the articles o The forfeited shares can be re-issued at a discount but the maximum discount shoutd not exceed the amount available in share forfeiture account

s When shares are re-issued at a [oss,'then such loss shoutd be debited to share forfeitureA/c o lf the toss on re-issue is [ess than the amount forfeited, then the excess shoutd be transferred to Capitat Reserve Account

o When only a portion of

reserye Account. t

lf the shares are re-issued at a price more than face vatue, then the excess shoutd be credited to securities premium A/c shares are re-issued, then profit made on re-issue of such shares onty must be transferred to capital

' i :

i ,&i

tr Bank account wil.t be debited with the amount received on re-issue o Shares forfeiture account witt be debited with the amount of loss on re-issue o Share capital account witt be credited with the paid-up vatue of shares re-issued o Capita[ reserye account is credited with the batance left over in the shares forfeiture account.
The fottowing Journal entries are passed to record re-issue:

AccouNTrNG

ENTRTES:

,':Pa*iitriers
On re-issue of shares which were originallv issued at par:
Bank

'l"rF,.

Ecbtt,

A/c

Dr.

Shares

forfeiture

A/c

Dr.

To Share capital A/c (Being receipt of money on re-issue and loss on re-issue recorded)

On re-issue of shares which were orisinallv issued at discount:

Bank A/c Shares

' Discount in issue of shares A/c

forfditure A/c
To Share capital A/c

Dr. Dr. Dr.

(Being receipt of money on re-issue of shares which were issued at discount and
toss on re-issue recorded.)

For transferring the balance in Share forfeiture Account:

Shares forfeiture To Capital Reserve A/c

A/c

Dr.

(Being batance of shares forfeiture account transferred to capitat reserve account)

l've

met ongels wearing the disguise of ordinory peopte living ordinary lives.
seen and

il
ifl

!i

]t;

fro,
H

$i

100 Pages to SUCCESS

Ir

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FW

tundamentals of Accounting

::!i:81:ti:jr.<i

For issue of shares at par for the purpose of redemption:

BankAccount
To Share

Dr.

capital A/c

(Being shares issued at par for the purpose of redemption)

For issue of share at premium for the ourpose of redemption:

Bank Account
To Share
Dr.

capitat A/c To Securities premium account

(Being shares issued at premium for the purpose of redemption)

For issue of shares at discount for the purpose of redemption:

BankAccount

Dr.

Discount on issue of shares A/c Dr.

To Share capital A/c
(Being shares issued at discount for the purpose of redemption)

For transferring the preference share caoital to preference share holders account (lf thq preference shares are redeemable at par): Preference share capital A/c Dr.
To Preference share holders A/c
(Being money due to preference share hotders towards preference capital recorded)

For transferring the preference share capital to preference share holders account (lf the oreferenee shares are redeemable at oremium): Preference share capital A/c Dr. Premium on redemption of preference shares A/c Dr. To Preference share hotders A/c
(Being money due to preference share hotders towards preference capitat atong with premium payabte

recorded)
Dr.

For adjustment of premium on redembtion of preference shares:

Profit and loss Securities premium

account A/c

Dr. !

To Premium on redemption of preference shares (Being premium on redemption of preference shares written off to securities premium and profit and loss account)

For transferring nominal value of shares redeemed to capital redemption reserve account: Profit and loss account Dr. To Capital Redemption Reserve A/c (Being transfer to CRR recorded)

EAWE I

EEDeilproN

or panrl. clrlffi o Preference shares can be redeemed onty if they are futty paid up o lf the probtem state/that it is decided to redeem preference shares
o

which are partly called up, it should be assumed that the final catl on those share are made and received before the redemption lf a probtem has both partty paid up preference shares and futty paid up preference shares, then onty futty paid up preference shares wilt be redeemed.

REDEMPTION OF FULLY CALLED UP BUT PARTLY PAID UP PREFERENCE SHARES:

s lf there are catts in arrears, then such arrears shoutd be either received by the company or such shares must be forfeited o lf a[[ catts in arrears are regeived, then they become futty piid up and hence the company can proceed with redemption u lf the shares are forfeited, the usual entries for forfeiture are passed before the redemption.

il, ua$tlt( I0tljTt0ltl

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FuTURE...

{ffiHi lNrRopucnoN: o Debentures are the source of obtaining long term finance for a company o Debenture is a document acknowledging '-"' debt taken by u.orr.n, n Debentures are fixed interest bearing security o Interest on debentures is paid irrespective of the profits of the company o Debentures may or may not create a charge on the assets of the company "r-"' o Debentures carry no voting rights
KINDS OF DEBENTURES:

REGISTERED DEBENTURES:

"
o

Hrff:ltJs:illll

are pavable to the person whose name appear in the register of debenture hotders is carted

o The registered debentures can be transferred

BEARER DEBENTURES:

Registered debentures are not treated as'negotiabte instrument,

as shares

o Bearer

o The names of the debenture horders do not appear in the register of the company 'o
No stamp duty is paid on transfer of such bearer debentures
SECURED DEBENTURES:

debentures are transferabte by mere detivery

o The debentures which create some charge on the property of the company are ca[led secured debentures o The charge may be a fixed charge
or a ftoating charge
UNSECURED DEBENTURES:

o The debentures which do not create any charge on the property of the company are calted unsecured debentures o The hotders of thei: debentures are like ordinary unsecured creditors of the company
REDEEIT{ABLE DEBENTU RES:

n Usuatly redeemabte debentures o Redemption can happen either

IRREDEEITIABLE DEBENTURES:

o The debentures which are issued for

a specific period of time are called redeemable debentures are redeemed after a period of 5 to 7 years

at par or at a premium

o These debentures are atso catted perpetual debentures o These debentures are repaid onty at the time of tiquidation of the company
CONVERTIBLE

either fulty convertibte or partty convertible o The non convertibte part should be redeemed after the expiry of the period

o convertible debentures aie those which are convertible into shares after o The convertibte debentures can be

DEBENTURES:

.
the expiry of a certain period

o First mortgage debentures are payable first out of the property o second mortgage debentures are payabte

charged

after satisfying the first mortgage debentures

100 Pages to SUCCESS

,lI?

ttr$$illt( f0luil0ltl
[onnertins
Y0lJ to YllUR

lyr-9gIeg3l:_ojlegg*I'-ls
lssue

flJruRL..

of Debentures

n The procedure for issue of debentures is exactly the same as in the case of shares except for the term "Debentures" substituted for the word "Share" and the percentage of interest is prefixed to the "term debentures"

is

o Debentures can be issued for cash or for consideration other than

cash

Debentures can be issued either at par, premium or at discount o The issue price of the debentures can be cotlected either in lumpsum or in various instaltments o Redemption of debentures means discharge of tiabitity on account of debentures by making payment to debenture holders

Debentures can be redeemed either at par or at premium but never at discount

OEBENTU RES ISSU ED AT PAR AND REDEEiIABLE AT PAR:

o lssue Price = Face Vatue o Redemption Price = Face Vatue o For example, debentures of face

vatue Rs.10 are issued at Rs.'10 and redeemable at Rs.'10 JOURNAL ENTRIES

Particulars For receipt of application monev:

Bank

rEetitir

Account

Dr.

To Debentures Apptication A/c

(being apptications for debentures received) For transferring application money to Debentures A./c: Dr. Debenture Apptication X % DebenturesA/c To (being apptication money transferred to debentures A/c)

A/c

For money due on allotment: Debenture Atlotment

A/c

Dr.

ToX%DebenturesA/c (being money due towards atlotment recorded)

For receipt of allotment money: ',
Bank

A/c

Dr.

To Debentures Atlotment A/c (being amount due on attotment received)

For money due on calls:

Debenture Catt
To X %

A/c

Dr.

DebenturesA/c (being money due on calts recorded) Receipt of call money due:
Bank

A/c

Dr.

To Debenture Catt A/c

(being amount due on catts received)

NOTE:
1

2. 3.

Debenture apptication account is a representative personal account of appticants who have apptied for debentures Debenture atlotment account is a representative personal account of allottees to whom debentures have been attotted
Unless specificatty given in the question, excess apptication money received over and above due on atlotment shoutd be

refunded.

We make a living by what we get, we make o life by what we give.

I{,

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o lssue Price > Face Vatue o Redemption price = Face Vatue o For example, debentures of face o Journal Entries

vatue Rs.10 are issued at Rs.12 and redeemabte at Rs.10

Al[ entries are same except entry No.3 which is as fotlows-

NOTE:
1

' The

excess amount received over and above the face vatue is regarded as premium and is recorded in a separate account calted "securities premium,, Account ,,Reseryes

2' Such securities premium account appears on the tiabitity side of the batance sheet under the head 3' unless specificalty given it is to be assumed that the premium is cottected
on attotment stage.
'i',Tffi,A

and surplus,,

o lssue Price < Face Value o Redemption price = Face Value o For example, debentures of face value Rs.10 are issued at Rs.9 and redeemabte at Rs.10 o Journal Entries
At[ entries are same except entry No.3 which is as fottows

tw

For money due on allotment: Debenture Attotment

A/c

Dr.

Discount on issued of Debentures A/c Dr.

ToX%DebenturesA/c
(being money due towards attotment recorded atong with discount on
.issue

of debentures)

NOTE:

1' The excess of face vatue over the issue price is regarded as discount and is recorded in a separate account catted "Discount on issue of Debentures Account,, 2. There is no restriction on issue of debentures at discount 3. There is no maximum timit for discount on debentures

4' such discount is written off to securities premium account profit or and loss account 5' Discount on issue of debentures shoutd be written off before the redemption of debentures 6' The unwritten portion of discount on issue of debentures appears
"MisceItaneous expenditure

on the asset side of the balance sheet under the head

7. Unless specificatty given, discount shoutd be recorded at attotment stage

100 Pages to SUCCESS

Live os if your were to die tomorrow. Learn os you ytere to live forever.

if

lt, LttrIltI|t( I0tljil0il1

[unnactins Y0l, r0 YlllR [tlTlln!...

Price = Face Vatue

ion Price > Face Vatue

For exampte, debentures of face vatue Rs.10 are issued at Rs.10 and redeemabte at Rs.12 fhe premium payabte at the time of redemption is a loss and such toss is recorded at the time of issue of debentures

o Such loss is debited to a separate account called "Loss on issue of debentures Account" o Such loss is to be written of to securities premium or profit and loss account o The unwritten off batance is shown on the asset side of the balance sheet under the head Miscetlaneous Expenditure" o premium payable on redemption on redemption is credited to a separate account called "Debenture redemption premium
account"

o This account appears on the tiabitity side of the balance sheet under the head "Secured Loans"
At[ entries are same except entry No.3 which is as fottows-

'Dehiti, For money due on allotment: Debenture Atlotment

Loss on issue To X %

A/c

Dr.

of Debentures AlcDr.

DebenturesA/c

To Debenture redemption premium A/c (being money due towards atlotment recorded atong with loss on issue of Debentures)

ffiE.

oEaeNTURES ISSUED AT DISCOUNT BUT REDEEMABLE AT PREMIUM:

o lssue Price < Face Vatue s Redemption Price > Face Vatue o For example, debentures of face o Discount

vatue Rs.10 are issued at Rs.9 and redeemabte at Rs.12

loss is recorded at the time of issue of debentures

o The premium payable at the time of redemption is a loss and such

on issue of debentures is atso a capital toss

o The total [oss i.e. on issue and on redemption shoutd be debited to a separate account called "Loss on issue of debentures" o At[ entries are same except for entry no.3 which is as fottows;
Date For money due on allotment: Debenture Attotment
Loss on issue

Particulars

L.F

Debit

Credit

A/c

Dr. Dr.

of Debentures A/c ToX%DebenturesA/c

To Debenture redemption premium A/c (being money due towards allotment recorded atong with foss on issue of Debentures)

I#El

OrgrNrURrS tSSUeo

lr

pRei{tUl eur nrorrMAglr

ff pnrl tUi t
Rs.1 1

lssue Price > Face Value > Face Vatue

tr Redemption Price

o For example, o Premium

debentures of face vatue Rs.',l0 are issued at

and redeemable at Rs.12

o The premium payable at the time of redemption

is a toss and such loss is recorded at the time of issue of debentures

on issue of debentures is a capital gain and is to be credited to securities premium account

o The loss on issue and on redemption shoutd be debited to a separate account catted "Loss on issue of debentures" o At[ entries are same except for entry no.3 which is as foltows;

to live life backword. Lookahead, that is where your luture lies.

Nobody gefs

100 Pages to

SUCCESS

I, u0llilil(

f0tljTt0ilf

Sqnneering YolJ r0 Y[uR [IJTURE...

:ilil|t";$ffi:li::lH;11.:iHXfJ;,?::J;:,"
lf the debentures
irl+f

or debentures as a subsidiary or secondary security asainsr the roan in

No journal entry is passed in the books of accounts for issue of debentures as col[ateral security. are issued as collateral security then such fact shoutd be disctosed as a note in Barance sheet.

Like shares, debentures can also be issued for consideration othei than cash Debentures can be issued for consideration of any asset The fo[owing two journal entries are passed in the books of accounts:

Asset

A/c
A/c

Dr.

To Vendor Account

(Being purchase of asset from the vendor recorded.) For issue of debentures at par:

VendorAccount . To X % Debentures account.

Dr.

(Being debentures issued to the vendor at par)

#i
Discount on issue of debentures represents capita[ loss and shoutd be written off over the tife of the debentures. Foltowing journal entry is passed to write off the discount: Date

Particulars

L.F

Debit

Credit

Profit and toss rrurrr ane (oss account

account

Dr.

To Discount on issue of debentures (being discount on issue of debentures written off)

r;1ltu,

INTEREST ON DEBENTURES:

lnterest on debentures is the charge against the profits of the company and is payable irrespective of the profitabitity of the company.
lnterest on debentures is catculated at a fixed rate of interest on the face vatue and not on the issue price. company shoutd also deduct income tax at the specified rate rrom tie gross amount of interest payabte.

100 Pages to

SUCCESS

ll, L{flIlt ll( tottIil 0[l

I

Solved Prohlems

BILLS OF EXCHANGE

Calculation of Due Date & Date of Maturity:

Find out the due date and date of maturity for the following bills:

29t01t2008
31 t01
29

03t02/2008 31t01/2008 02t02t2008 14t06t2008

30 days 1 month after diite

2
3

t2008

/01 t2008

2 months 2 months 3 months 60 days after sight

1 month after sight 30 days

4
5

12t06t2008

6 7
8 9 10

27t06/2008 28t09t2008 20t12t2008

15t02/2009 10/01t2009 r--.--..._ 15t02t2009

28t06/2008
04t10t7008

23/12t2008
,t?

18t02t2009 t01t2009 18t02t2009

one demand on presentment

The last two bills were demanded on22/02/2009.

Note:

The term of bitl after sight commences from the date of acceptance
Unless specificatty given,

o o

it

is always assumed as "Bil[ after date"

Date of maturity = Due date + 3 grace days

Solution:
s.N,q,

Date of Drawing

Due Date

29/01/2008
31t01t2008

2
3

28t02t2008 29/02/2008 29/03/2008

12t08t2008
27

0z/03t2008
03/03/2008

29t01t2008
12/06/2008

31t03t2008
14/08t2008

(1" April hotiday)

(15'h

4
5

August)

t06/2008 28t09t2008
27

/09t2008

03/12t2008 23t01t2009 16t03t2009 22/02t2009 22t02t2009

29t09t2008 06t12t2008 25/01t2009

19t03/2009 22/02t2009

(30'n September)

7
8

70t12t2008
15102/2009

(26'n January)

9
10

10/01t7009 15/02/2009

22t02/2009

unless you

Life is like riding o bicycle. You don't foll off plon to stop peddling.

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Bitts receivabtes directly cottected by Oant< Direct payment by a customer into the bank but not recorded in cash Book Bank pass
A A

Cheques deposited but not yet cottected by bank

,s

ar J-t--f{arch z00gl
3,000

4,000
1400 400
800

charges debited in Book onty wrong credit given by bank in pass Book

wrong debit given by bank in pass Book lnterest atlowed in pass Book onty

lnsurance Premium paid directty by bank under standing advice

7,600 200
1,000

.,
)Dare a Bank Reronciti:rinn

(+r+^-^^+ ^-

-t .,*l]-l-]l]]-

lf the balance as per Cash Book was Rs.400 iii) lf an overdraft as per Cash Book was Rs.400

i)

lf the batance as per pass Book was Rs.400 iv) lf an overdraft as per pass Book was

ii)

ffi

5,000

Rs.400

hen balance as per Cash Book is taken as base.

Balance as per Cash Book

Add:

A,

Bank charges debited in pass book onty lnsurance premium paid directty by bank under standing advice A wrong debit given by Bank in pass Book

Direct payment by a customer into bank but not recorded in cash Book Less: Transoctions hoving the effect of lower balance as per pass Book Cheque deposited but not yet co[tected iy bank

Cheque issued but not yet presented for payment lnterest allowed in pass book onty Bitts receivabte directty co[ected by bank A wrong credit given by bank in pasi Book

those items which contributes to

higher barance

in pass book.
5,000 200 4,000
800

1,400

3,000
400

1,000

7,600

Overdraft as per pass book

Bank Reconeiliation statement as at 31.3.200g when balance as per Pass Book is taken as base

Partirr rl:r<

Batance as per pass Book

Amount

Amount
400

Add: Transactions hoving the effect of rower borance as per pass Book Cheque deposited
lnsurance premium paid directty by bank under standing
Bank charges debited in pass book onty

but not yet co[ected-Uy nant

j,000
20a 4,000
800

A wrong debit given by Bank in pass Book

advice

\\

contrib.utes to a hisher batancein "J poss aool Cheque issued but not yet presented for payment lnterest altowed in pass book only Bills receivabte directty cottected by bank A wrong credit given by bank in pasi Book Direct payment by a customer into bank but not recorded in Cash Book

f::,:,1.::::r^,r:::"y!:!

1.400

11,400
3,000
400

1,000

7,600 12000
1000

Balance as per pass book

It is not tength of life,

but depth

of tife.

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Fundamentals of Accounting

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Bank Reconciliation Statement as at 31.3.2008 when overdraft as per Cash Book is taken as base

Bank Reconciliation Statement as at

3 'l . 3

.2008 when overdraft as per Pass Book is taken as base

Overdraft as per Pass Book:

400

Add: Transactions having the effect of lower balonce as per Poss Book Cheque deposited but not yet cottected by bank Bank charges debited in pass book only lnsurance premium paid directty by bank under standing advice A wrong debit given by Bank in Pass Book

5,000
200

4,000
800

All those items which contributes to o higher balance in pass book. Cheque issued but not yet presented for payment lnterest atlowed in pass book onty Bitts receivabte directty collected by bank Awrong credit given by bank in Pass Book Direct payment by a customer into bank but not recorded in Cash Book
I-ess:

1,400

11,400
3,000
400

1,000

7,600
1

2000 1000

Balance as per pass book

PARTNERSHIP ACCOUNTS

Calculation of Ratios:
X, Y and Z are sharing profits and losses in the ratio of 5 : 3 : 2. Catculate the new profit sharing ratio and the sacrificing ratio in each of the fo[towing atternative cases:

I lf 2l lf 3l lf 4] lf 5l lf 6] lf 7] lf 8l lf 9l lf
1

Z acquires Z acquires

1 1

/ 1 0'h share

from Y

/10'n share equatty from X and Y

Z's share is increased by 1 /10'h share by acquiring from X Z's share is increased to 3/1C'h by acquiring from Y

X,Y and Z decide to share future profits & losses in the ratio of 5 : 2 : 3 X,Y and Z decide to share future profits & losses in the ratio of 2 : 3 :
5

X,Y and Z decide to share future profits & losses in the ratio of 2 : 1 :7 X,Y and Z decide to share future profits & losses equatly X,Y and Z decide that the future profit sharing ratio between Y and Z shatt be the same as existing between X and

Y.

The trogedy of life is not thot it ends so soon, but that we wait so long to begin it.

solved

Igl$glgl'_glA.cou iroilEis
Solution Cose (o)

nting

Their existing shares

Share acquirid by Z from

5t10
5/ 10
X

Their new shares

Case (b)

Share sacrificed by y=1 /10

3t10 2/10 -1 110 +1 /10 2t10 3/ 10 3/10 2/10 '1120 +1/10 5/20 6/20

YZ

Their existing shares llruf" acquired by Z from X and y Their new shares
Case (c)

5t10
-1t20 9/20

YZ

SacrificingRatioofX&y= 1 :1
Their existing shares Share acquired by Z from y Their new shares Share sacrificed by X=1 / 1 0
Share acquired by Z =New Share Otd share =

ftc

Case (d)

5/10 3/10 2t10 -1/10 +1t10 4/10 3/10 3/10

3/10 Z/10 = 1 /10

Xyz

Their existing shares

Share

Their new shares New profit sharing Ratio of X,y and Z = 5 : 2 : 3 Share y=1 sacrificed.by
Cose (e) / 10

acquirid by Z from y

5/10 3/10 _ -1 /10 5t10 2/10 5/10 3/10 5/10 2/10

1/10

Xy

2t10
+1/10 3/10

Their existing shares Their new shares

Z gains by
1

Xy

10rh

share & y sacrifices 1 /,t0,n share.

2/10 3t10
-1/10

Case (f)

Their existing shares Their new shares

Z gains bv 3/10,n share & X sacrifices 3/10,n share. Cose (g)

5/10 2/10
3/10

Xy

3/10 3/10

2/10
5/10 -3/10
z

Their existing shares Their new shares

XY 5/10 3t10 z/5 1/5 Xy 5/10 1/3

'1,\r^ ,l!^l!.
3/10 1/3

2t10

gains by 2/10'h share & X sacrifices 1/10'h share y & sacrifrceJ case (h)Z

2t5
-2/10 z

Their existing shares Their new shares

2/10
1/3 -4/30

case

(i)

I.tilt;rtil';o='rtlT"'
Ratioof y & Z shoutd be

Z sains bv 4/30'n share & X sacririces =5:3

rijiPrn.rJ."o

"t i,t'i[ :l1,.r: IJfi':"T 51o,1"1.g New Ratio of X,yand :3:

Z=

or

60% orX's

share, Z's share shourd arso be

60%

or y,s share.

or 25 : 15 : 9
5/

Their existing shares Their new shares

Z sacrifices by gl490 and X gains by

5/490& y gains 3/490

-5/490 -3/490 8/4go

25/49 15t4s

Xyz 10 3/10

2/10
g/4g

3\--r,
c_

y
7(U ,I/
l-f ),/r

100 pages to SUCCESS

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ACCOUNTING FOR CONSIGNMENT:

Calculation of Commission: sent 500 units costing Rs.2000 each to Mr. Y of Bangalore. The goods were to be sotd so as to yietd a gross profit of 2}yoon sates. Mr. Y Sotd 300 units @ 3200 each on credit and 150 units @ Rs. 3000 for cash. Calculate commission payable to Mr. Y in each of the fottowing cases:

'Mr. X

a)Mr. Y is entitted for a commission of Rs.100 per unit b)Mr. Y is entitled to an ordinary commission of 5%
c) Mr. Y is entitted to an ordinary commission of 5% and det-credere commission of 2% d) Mr. Y is entitled to an ordinary commission of 5% and det-credere commission of 2/o and overriding commission any surptus realized commission of 20% of any surptus realized

of

Z0%

of

e) Mr. Y is entitted to an ordinary commission of 5% and det-credere commission of 2% oncredit sates and overriding

f) Mr. Y is entitted to a commission of Rs.100 per unit sotd ptus one forth of gross sate proceeds less total commission thereon exceeded a sum calcutated at specified selting price.
1) Calculation of

total sales:

a) Credit Sates 300,units x 3,200 b) Cash Sates 150 units x 3,000

Total

Sates

= 9,60,000 = 4.50.000
14,10.000

2) Calculation of specified selling price: Cost price

Profit

= Rs.2,000 = 20% on sates

Specified setling price = ? Use the formula CP+P=5P71P

2,000+0.20x=x .'. x-0.20x=2,000

0.80 x = 2,000 2.000

lT 0.80

= Rs. 2,500

.'. specified selling price = Rs. 2,500

3) Calculation of sales at specified selling price: Qty. of good sotd = 1 50 + 300 = 450
S.S.P. = Rs.2,500

.'.

sates at specified setting price = 11,25,000 (450 x 2,500)

4) Calculation of Surplus: Surplus = Actual sale proceeds-sates at specified setling price = 14,10,000*11,25,000
= Rs.2,85,000

playing those you hold weil.

Life consists not in holding good cards but in

I
i

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a)

Commission

= Rs.100 per unit = Rs.100 x 450 (Totat units) = Rs.45,000

b)

Ordinary commission = 5% = 14,10,A00 x5%

= Rs.70,500

c)

Ordinary comm. 14,10,000x5%=70,500 Del-credere comm.= 14,10,000 x2% = ZI.2OO Total =

comm.

98.700

d)

Ordinary

Overriding cotnm..
(20%

Det-credere comm. = U,|O',OOO

comm. = 14,10,000
=

iii

5%

= 70,500 = ZA,ZOO
1.55.700

of

surplus)

= 0.20 x 2,g5,000 = 57.000

e)

Ordinary comm.

Del-credere comm. (cr.sales) Overriding comm.

= 14,10,000 x

5yo = 10,500 9,60,000 xZ% = 19,200 = 57.000

1.46.700

f)

Let the total commission be X

X=TC

=FC+V(116;
= Rs.100 x 450 + VC

1(

"7if.'
:

ii
a

cr r!"i't{:r'-",.

1.25x X

+ = I =1!,900 +% (14,10,000_rrlzs,ooot 1:,ggg ve ''--'evvI (2,85,000q) I 45,000 +71,250 X =

ic
:.i

fl'' t;1. ,'i

r;.r {.r , ll.'' ; at

f fi f\-.r.i. I r
1

- .25x = 1,16,250 = 1,16,250/1.25 =Rs.93,000

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Preparation of consignment account and consignee's account in the books if consignor:

between x
o-r

aangarore and

yor

expenses Rs. 2000 Consignee sotd 1000 units at Rs. 25 per unit for castr and 3500 units @ Rs.30 on credit Commission payabte 5% (inctuding det-credere commission of 2%) Mr. Y remitted the batance due to Mr. X,

o Expenses incurred by consignor towards freight, insurance etc. Rs. 5000 o Expenses incurred by consignee as fottows; o Unloading charges Rs.1000 o Clearingcharges Rs. 1500 o Carriage inwards Rs. 500 tr Entry tax Rs. 2000 o Storage tsoo "rpenrei'-{i o Administration expenses Rs. 1500 o Selling and distribution

Bhopar

lffi::I|il':JilToTil',i,lffi['J:ffx::,xl',".?:1rff,

consignment, prease prepare consignmentA/c. Do not use

lSreat. man

secret of success,rs fo go through who neyer gets used up.

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Fundamentals of Accounting

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Consignment's A/c

Cr.

ii.fii';ii!il!!ji,i
iTo Goods sent on consignment
1,00000 By B's A/c (Sate Proceed)

1,30,000 11,000

:"

Bank (Expenses of Consignor)

5,000
10,000

"

Closing Stock

" B's A/c (ExPenses) " B's A/c (Commission) 5% on 1,30,000/" Profit transferred to P&LA/c
Total

6,500
1

9,500

1,41,000

1,4'1,000

Working Note'1: Calcutation of Total Sates A credit sates (3,500 x 30) = 1,05,000 25.000 B cash sates (1,000 x 25)

Tota[ Sales

= 1.30.000

Working Note-2:
Valuation of Ctosing Stock Quantity of Stock = 5,000-4,500 = 500 units These 500 units witl have the following three components: a) Basic Cost (500 x 20) b) Proportionate Exp. of Consignor = 10000

(5000/5000x500)
c) Proportionate Expenses of Consignee

= =

500 500

(s000/5000x500)

Total value of Stock = 1 1000

Thumb rule: Att those expenses which are incurred up to and untit the goods have reached consignee's godown shoutd be considered for the purpose of vatuation of closing stock and abnorma[ loss. ln other words, expenses incurred after the goods have reached consignee's godown should not be considered.
Untess

specificatty given atl expenses in relation to consignment whether paid by consignor or by consignee shoutd be borne by

consignor.

Dr.

Consignee's A/c
,Particulars Amount
't,30,000
By Consignment

Cr,

Particulars

Amount
1

To Consignment Ai

c (Goods sotd)

A/c

(Expenses)

0,000 6,500

" "
Total 1,30,000

Consignment Ai c (Commission)
Batance

'1,13,500

Total

1,30,000

Life is a greot big convas, and you should throw all the paint on it you can.

100 Pages to SUCCESS

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A and B enter into Joint venture sharing profits and [osses equatty. purchased A 500 kg of rice @ Rs. 50 per kg. B purchased 1000 kg of wheat @ Rs. 60 per kg' A sotd 1000 kg of wheat o'ns. 7o per kg and B sotd 400 kg of rice @ 60 per kg. The unsotd goods were taken away B at the cost.

Joint ventures: (calculation of profit on Joint venture and preparation of co-venturer's personal account)

Find out the profit on Joint venture anffbalance of co-venturer,s personal account. when ever there is a question on calculation of profit on Joint venture, please prepare
Dr.

Joint venture account

Joint Venture
'Amsunt

A./c

Partisutars
By A's

To A's

A/c (Purchases)

(500x50)

" B'sA/c (Purchases) (1000x60) " Profit (7,000+7,000)

)r

25,000 60,000 14,000

A/c

(Sates) (1000x70)

" B's A/c (Sates) (400x60) " B's A/c (Unsotd goods taken away) I

70,000

24,000
(

5,000

Total
Dr.

99,000
A's A/c

99,000

Cr

'Flrticularsr,
To

Particulars
70,000
By

Joint VentureA/c (Sates)

Joint Venture A/c (purchases)

" Joint Venture A/c (profit) " Balance

Total
Dr.

25,000 7,000 38,000

70,000
B's A/c

Total

70,000

Cr.

Particulars
To

Amount 24,000
5,000 38,000

Particulars
By Joint Venture

Amount
60,000 7,000

Joint Venture A/c (Sates) Joint Venture A/c (Goods taken away)
Balance

" "

A/c (purchases)

"

Joint Venture A/c (profit)

IEffi

Total

67,000

Total

67,000

AttT'Hf,Bf,S

? o

And in the end, it's not the years in your count. lt's the life in your yeors.

tife that