Professional Documents
Culture Documents
A:
Introduction:
Text:
1.Recording:
This is the basic function of accounting.It is essentially concerned with not only
ensuring that all business transactions of financial character are recorded but also
that they are recorded in an orderly manner. Transactions of recording is done in
‘Journal’ or subsidiary books.Depends upon the size and nature of the business the
subsidiary books to be maintained.
Interpretation: This is the final function of the accounting. The recorded financial
data is interpreted in a manner that the end-users can make a meaningful judgment
about the financial condition and profitability of the business operations. The data is
also used for preparing the future plans and framing of policies for executing such
plans.
The above definition does not clearly reflect the present role performed by
accounting. A widely accepted definition of the term accounting is given by American
Accounting Association,which is follows:
1.Transactions and events are measured and relevant data are processed and
communicated to the users.
3.There are users of accounts who need economic information. The users of accounts
are investors, employees, lenders, suppliers and creditors, customers, government
and public.
Objective of Accounting:
This information helps the management in ensuring that the assets do not remain
idle or under-utilized.
3.To ascertain the operational profit or loss: Accounting helps in ascertaining the net
profit or loss upon carrying on the business. This is done by maintaining the proper
record of revenues and expenses for a particular period.
4.To ascertain the financial of position of the business: The profit and loss accounts
reflects the performance of the business during a particular period. However, it is
also necessary to know the financial position i.e. where we stand. What we owe and
what we own. The objective is met by Balance Sheet, which shows the state of
affairs of assets and liabilities as on a given date.It serves as barometer for
ascertaining the financial health of the business.
5.To help rational decision-making: Accounting these days has taken upon itself the
task of collection, analysis and reporting of information at the required points of time
to the required level of authority in order to facilitate rational decision-making.
Conclusion:
Accounting information is useful not only for the owners and management but also
useful to Creditors, Employees, Governments and prospective investors. The main
objective of the accounting is to reflect the true and fair picture of profitability and
financial position, which helps management to take corrective actions and future
decisions.
2.Explain the meaning & Significance of the following 1)Dual aspect 2)Consistency 3)
Materiality 4)Full disclosure 5)Cost concept
A)
1)Dual aspect:
This is just like Kirchoff’s second law (current flowing towards a node is equal to that
flowing away from it). Dual aspect means that if an organisation receives money,
someone must have given it to the organisation or entity. Likewise, if you pay out
money someone must have received it. This leads to a method of book-keeping
called double entry book-keeping.
This system is under a simple principle "every debit is having corresponding credit
every credit is having corresponding debit".
Every financial event can be viewed from two perspectives: the effect on an entity’s
resources and on claims against those resources.
Thus at any time accounting equation is
Assets = Liabilities + Capital or alternatively;
Capital = Assets – Liabilities.
For example a owner brings Rs.5, 00,000 in cash as Capital to start the company.
Then Rs,5,00,000 is the Capital and corresponding amount of Rs.5,00,000 will
appear as cash on hand(assets).
2)Consistency:
The accounting rules should not be amended unless there is a fundamental change in
circumstances. When rules/methods are changed it makes it more difficult to
compare historical (previous) accounts with current ones, unless they are re-worked.
The law requires consistency in the accounting policies applied in the preparation of profit and
• any base year in Method A schemes or the 12 months immediately preceding the start
of a Method B Scheme,
• the first profit period, and,
Accounting policies are the specific accounting bases judged by business enterprises
as being, in the opinion of their management, appropriate to their circumstances and
best suited to present fairly their results and financial position. The notes to the
accounts must set out the policies the company has adopted to determine the
amounts to be included in the accounts. It is not acceptable to use alternative
accounting policies for PRP purposes except where specifically allowed by Schedule 8
of ICTA 1988.
Accounting bases are methods developed to apply the fundamental accounting
concepts to financial transactions and items for the purposes of financial accounts,
and in particular to determine,
• The accounting period in which revenues and costs are recognized, and,
• The amounts at which material items are stated in the balance sheet.
Materiality:
Full Disclosure:
In your initial contacts with a prospective financial planner, you’re probably focusing
on many issues: how much do they charge, what services do they provide, what
financial planning credentials do they have, how can they help you? But among the
many key questions you should be asking is one that you may not know to ask: is
the person a registered investment adviser and, if not, are they a Certfied Financial
Planner® professional?
This is a key question because all registered investment advisers (RIAs) must
provide full disclosure about their business practices. An individual or firm must
register with either the federal Securities and Exchange Commission or their state
securities agency as an RIA if they provide investment advice as part their business.
Financial planners who hold the CFP certification are also required to disclose
generally the same information as a registered investment adviser. But financial
advisers who work for banks, or who work as insurance agents or stockbrokers, do
not have disclosure requirements, unless they are also CFP® professionals.
Now the SEC is proposing an exception to this RIA rule that consumers should be
aware of. The law currently exempts stockbrokers from registering as advisers if their
investment advice is “solely incidental” to their brokerage services and if they are not
specifically compensated for that investment advice -- unless they have the power of
attorney to buy and sell stocks in a client’s account.
The SEC is proposing that stockbrokers remain exempt even if the client is paying for
the investment advice, such as through portfolio management fees. Before the SEC
proposed the rule, stockbrokers calling themselves a financial planner and who
provided investment advice for a fee would have need to register.
What key disclosures must an RIA make when registering, and why are those
disclosures helpful to consumers? The RIA must spell out this information on either
the federal Form ADV, Part II, or the same information in a customized brochure by
the adviser. Any RIA should provide a copy of the form to you upon request. You also
can request a copy of Part I, which reveals any disciplinary history. Part II covers
numerous items, such as the RIA’s services and fees, types of clients, education
background, business activities, and business affiliations that are helpful information
to the public.
For example, RIAs must disclose whether they buy or sell securities that they
recommend to clients (known as self-dealing), how they are compensated for their
services, whether they are compensated by a third party for client referrals, or what
other business arrangements they have with outside parties. Some of these or other
arrangements may suggest potential conflicts of interest that might compromise the
objectivity of the advice.
Not all conflicts of interest are inherently bad. The key is full disclosure of those
potential conflicts, so consumers can judge for themselves whether the conflicts
could potentially compromise the planner’s objectivity and undermine the trust that
is so vital to an effective financial planning relationship. But unless the planner is a
registered investment adviser or a CFP professional, it's difficult to find out whether
such conflicts exist.
Another key feature of being an RIA is that the adviser must act as a fiduciary -- that
is, the adviser must put the interests of his or her client ahead of the adviser’s own
interests. "Financial planners" who are not registered as such, or who do not work in
a bank or trust department, are not required by law to adhere to this high standard.
RIAs also are not permitted to use client testimonials to help attract new clients.
Ultimately, the result of full disclosure is that consumers can better discern when
they are receiving unbiased advice upon which they can build a deep and trusting
financial planning relationship -- or merely something that looks like financial
planning but isn't.
Cost Concept:
A)
Introduction:
The trial balance is a worksheet on which list of all general ledger accounts and their
debit or credit balance. It is a tool that is used to alert you to errors in your books.
The total debits(A debit is one of the amounts in an accounting entry. At least one
component of every accounting transaction (journal entry) is a debit amount. Debits
increase assets and decrease liabilities and equity. For this reason, debits entered on
the left-hand side (the asset side of the accounting equation) of a two-column
journal or ledger) must equal the total credits(A credit is one of the amounts in a
double-entry accounting system entry. At least one component of every accounting
transaction (journal entry) is a credit amount. Credits increase liabilities and equity
and decrease assets. For this reason, credits entered on the right-hand side (the
liability and equity side of the accounting equation) of a two-column journal or
ledger). If they don't equal, have an error that must be tracked down.
Text :
The Trial Balance is a simple listing of the nominal (otherwise called general ledger)
accounts with the debit balances posted into a debit column and the credit balances
posted into the credit column. Although it looks like an account because it has a
debit column and a credit column, it is not an account but merely a list of account
balances. Simply put, it ensures that for every debit amount there are equal credit
amounts in the nominal or general ledger and vice versa.
Looking beyond the mechanics of the Trial Balance to its' purpose, it plays a key part
in ensuring that for every recorded movement of value there is an explanation of
that value in the nominal or general ledger.
When closing out the books at the end of an accounting period, have to prepare
three trial balances:
When preparing a trial balance, the total debits must equal the total credits. Don't be
discouraged if they don't. Bookkeeping errors happen. Just think of the trial balance
as a tool to find the errors. Use the following steps as a guide to track down the error
or errors.
• Be sure the numbers on the trial balance are the same numbers shown in the
general ledger. Check to see if properly classified amounts as debits or
credits on the trial balance.
• Go back to journals (sales and cash receipts journal, cash disbursements
journal, and general journal). Check that the journal totals were properly
posted to the general ledger. Were the correct amounts posted? Were they
properly classified as debits or credits?
• Go back to each journal again. Look at the totals that were posted to the
general ledger. Do total debits equal total credits in each journal?
• Go back to each journal again. Did foot each column on each page of the
journal? Did it carry forward all column totals to the next page? Did all the
items entered in the "miscellaneous" column get posted to the general ledger?
• Is the difference divisible by nine? If so, it could be a simple transposition
error. For example, writing down 540 instead of 450 results in a difference of
90. Writing down 26 instead of 62 results in a difference of 36. Notice that
both of these differences are divisible by nine. If the difference between
debits and credits is divisible by nine, go back to the journals, looking for the
error. Knowing that it may be the result of transposed numbers should help to
find it.
• Is the difference between debits and credits 1, 100, 1,000, 10,000, etc.? If
so, it is probably an addition or subtraction error.
• Divide the difference by two. Is the resulting number shown on your trial
balance? If so, check to see if you have incorrectly classified the amount as a
debit or credit.
Examples:
After paying the cash out of the safe to the window cleaner credit the Petty Cash
Account in nominal ledger which records the reduction in money in safe but also
need to record the event as an expense for later management information so debit
Cleaning account in the nominal ledger for the same amount.
Pay a cheque (check) to purchase a new computer. Make a record on the credit side
of the Bank Account in nominal ledger to record the reduction of the balance of the
bank account but you also need to make a debit entry for the same value in the
Office Equipment Account to record that the value has now been moved into the
computer (an asset).
Make a sale and get paid by cheque (check) which you bank. You need to record the
amount of the cheque as a debit in the Bank Account in the nominal ledger (because
the Whatever Bank is now more of a debtor) but also need to record the sale for
management information purposes so credit the Sales Account in the nominal ledger
for the same amount.
Conclusion:
Each account in the nominal or general ledger has a debit column and a credit
column (like the bank account). (A ledger is simply a number of accounts collected
together for a specific purpose - other ledgers include the Purchase and Sales
Ledgers.) In the nominal (or general) ledger individual accounts are kept for each
item of expenditure or income, asset or liability that needs to be monitored eg.
electricity account, sales account, premises account, bank account.
A)
Introduction:
However, the balances rarely tally. The difference in two balances would arise
if the all or some of the entries are not recorded.
Usually following are the reasons for the differences between two
balances:
1.Cheques received are entered in the bank book as soon as they are
received. While such cheques may be deposited in the bank on the same or
the next working day, the bank credit the bank account only upon realization
of the proceeds. Thus during the period from receipt of the cheque till
realization of the proceeds in to our accounts, there exists the differences in
the bank balances to the extent of cheques pending for realization.
2.Similarly the bank account in the books of account is credited no sooner the
cheque is issued. Till such cheques are presented for payment and paid by the
bank the balance as per bank statement is not affected.
3.Bank often debit some amount to the account for the various services
rendered by them. The entry for such charges is charged in the books of
account based on the advice received from the bank. Till such time that the
entries are passed in the books of account based on the advice received from
the bank. Till such time that the entries are passed in the books of accounts,
there exists a difference between two balances.
6.Where a bank debits the account for dishonor of a cheque deposited in the
bank, the entry will be passed in the ledger only upon receipt of the
dishonored instrument(cheque) form the bank. Till such time that the entry is
passed that the entry is passed, both the balances do not agree.
While all the above examples show that the differences between two balances
arise mainly on account of time differences in accounting either in the books
of account or by the bank. All such items over a period should get accounted
and should not remain pending for long time. Since through bank account all
receipt and payments are routed, it is absolutely essential to prepare the
bank reconciliation statement on a month to month basis to know that timely
entries are passed and no items remain pending for a long time.
Bank Reconciliation:
Prepare a bank reconciliation after receive the bank statement every month. This is a
very important part of the cash control procedures. It verifies the amount of cash
have in checking account.
The cash balance in the books will never agree with the balance shown on the bank
statement because of the delay in checks and deposits clearing the bank, automatic
bank charges and credits haven't recorded, and errors may have made in books.
After preparing the bank reconciliation, can be comfortable that the account balance
shown on the books is up-to-date.
The cash balance in the books will never agree with the balance shown on the bank
statement because of the delay in checks and deposits clearing the bank, automatic
bank charges and credits haven't recorded, and errors may have made in books.
After preparing the bank reconciliation, can be comfortable that the account balance
shown on the books is up-to-date.
Another important reason to do a bank reconciliation is that it may uncover
irregularities such as employee theft of funds.
Conclusion:
2)Cheque had been issued for Rs.5,000, out of which cheques worth
Rs.4,000/- only were presented for payment.
A)
This is expenditure on items which you expect to last for more than one year. There
is no legal definition of capital expenditure. It includes not only equipment bought during
your accounting year but items which you owned prior to becoming a freelance artist and
now use in your business.
The following are the points, which is distinguishes the expenditure between capital and
revenue.
1.The capital expenditure is incurred either for acquiring a new asset or for improving the
existing assets, while revenue expenditure is incurred either for maintaining the existing
fixed assets or for meeting the routine, expenses of the business.
2.Capital Expenditure increases the earning capacity of the business, while revenue
expenditure does not do so, It generally helps in maintaining the existing capacity of the
business.
3.The benefits of capital expenditure are available over a period of time, while benefit of
revenue expenditure is restricted only to accounting period in question.
The example for showing the difference between capital expenditure and revenue
expenditure
The difference between these depends in part on the size of your business. If, for
example, you make sales of 5000 a year, then capital expenditure would probably be
expenditure on items lasting more than one year and costing over £25. If you are making
sales of £20,000 a year, then you might treat anything costing under £100 as revenue
expenditure to be written off in the year it is purchased - even if it will last for longer. You
would then claim capital allowances on anything costing over £100. There are no hard
and fast rules. It is recommended that you disclose your chosen policy to the Inland
Revenue for approval.
The reason why it's so important to distinguish between capital and ordinary day-to-day
running costs is because of the way in which you obtain tax relief on the expenditure. On
revenue expenditure you will usually obtain a deduction of 100% of the cost in your
accounts. For capital expenditure you claim capital allowances. In most cases these
amount to 25% of the cost of the item in the first year, and in following years 25% of the
remaining balance having deducted previous claims. The capital allowances are
deducted from your profit when you work out your tax.
• TV and video if used in research - but business proportion only (but note
for a video/film/media artist these would count as tools specific to your
trade)
• stereo or radio if you need music to work - but business proportion only
(but note again for some artists these may be tools specific to your trade -
so the whole cost can be offset for business use
• heater other than central heating
• drying racks and heaters to dry fabrics
• answerphone, fax, telephone and security systems
• exhibition equipment, table, stands and display items, frames
• fridge, kettle
• photocopier
• stock of reference books and materials.
Capital allowances:
This is complicated and there are detailed rules depending on the type of asset involved.
If you have an accountant they will deal with this for you. If you don't read your self-
assessment forms carefully and check with other artists how they have filled in that part
of their tax return.
Capital receipts are defined as the proceeds of property sales. However, such sums
will be treated as received when they become payable to the authority, rather than,
as now, when actually paid. This change is simply part of the general approach of
bringing definitions in line with accounting practice and will have no practical
implications. There is power to vary this definition by regulations and it is likely that
the repayment of certain loans made for capital expenditure will be, as now, defined
as capital receipts.
Example for capital receipt is Rs.12,000 have been received towards sale of the fixed
assets. Thus the entire amount of Rs.12,000 is capital receipts, but the amount of
capital profit is only Rs.2000/-.
Long-term borrowing will continue to be available only for capital expenditure
purposes. The requirement for authorities to balance their revenue budgets prevents
the use of long-term borrowing to fund revenue expenditure, though the new
system, like the present one, will confer limited capacity to borrow short-term for
revenue needs in the interests of cash-flow management.
Example for revenue receipt is goods costing Rs.25000, are sold for Rs.30000/- and
the cash of Rs.30000 is received. The revenue receipts is Rs.30000/- but the
revenue profit is only Rs.5000/-
1.Capital receipts are normally of non-recurring nature whereas revenue receipts are
normally of recurring nature.
2.Revenue receipts are obtained in the course of normal trading operations. The
receipts, which are not revenue, are regarded as capital receipts.
3.Revenue receipts are directly credited to the income statement where as capital
receipts are not directly credited to the income statement.
4.Capital receipts are normally not available for payment as profit to the owner of
the business whereas the revenue receipts net of revenue expenses and expired
portions of capital expenditures/deferred revenue expenditure is available for
distribution to the owners of the business.
10.Under what headings, followings item will be classified.
a. Preliminary Expenses
b. Unclaimed dividend
c. Bills receivable
d. Loose tools
e. Share premium Account
A)
Preliminary Expenses:
(ii) After the commencement of his business in connection with the extension of
his industrial undertaking or in connection with his setting up a new
industrial unit, the assessee shall, in accordance with and subject to the provisions
of this section, be allowed a deduction of an amount equal to one-tenth of such
expenditure for each of the ten successive previous years beginning with the
previous year in which the business commences or, as the case may be, the previous
year in which the extension of the industrial undertaking is completed or the new
industrial unit commences production or operation.
Provided that where an assessee incurs after the 31st day of March, 1998, any
expenditure specified in sub-section (2), the provisions of this sub-section shall have
effect as if for the words "an amount equal to one-tenth of such expenditure for each
of the ten successive previous years", the words "an amount equal to one-fifth of
such expenditure for each of the five successive previous years" had been
substituted.
(2) The expenditure referred to in sub-section (1) shall be the expenditure specified
in any one or more of the following clauses, namely :-
(iii) Conducting market survey or any other survey necessary for the business of
the assessee;
(b) Legal charges for drafting any agreement between the assessee and any other
person for any purpose relating to the setting up or conduct of the business of the
assessee;
(c) Where the assessee is a company, also expenditure - (i) By way of legal charges
for drafting the Memorandum and Articles of Association of the company;
(iii) By way of fees for registering the company under the provisions of the
Companies Act, 1956 (1 of 1956);
(iv) In connection with the issue, for public subscription, of shares in or debentures
of the company, being underwriting commission, brokerage and charges for drafting,
typing, printing and advertisement of the prospectus;
(d) Such other items of expenditure (not being expenditure eligible for any allowance
or deduction under any other provision of this Act) as may be prescribed.
(3) Where the aggregate amount of the expenditure referred to in sub-section (2)
exceeds an amount calculated at two and one-half per cent - (a) Of the cost of the
project, or
(b) Where the assessee is an Indian company, at the option of the company, of the
capital employed in the business of the company, the excess shall be ignored for the
purpose of computing the deduction allowable under sub-section (1).
B)
Unclaimed dividend:
1. Send a written request including the bankruptcy case number, the debtor's name
and the amount of monies due to you. If you represent a business, your letter should
be written on company letterhead.
2. State the reason you are claiming this money and why you believe you are
untitled to it.
3. Include legible copies of supporting documentation, such as the original proof of
claim, correspondence from the court, a copy of an original, un cashed cheque etc.
If, because of death, you are not the original entitled party, please include a copy of
the death certificate and will which states that you are the one and only entitled heir.
If your business changed as a result of a merger or buyout, please include
supporting documents which show that the assets involved are now due to you.
4. Positive identification (copy of current driver's license or passport and copy of your
social security card). If you represent a business, include a copy of a business card
which reflects your title.
5. If you have relocated since you initially filed your claim with the court, please list
your prior address(es) as well as your current residence and telephone number.
6. Close your request with a statement that the information you are giving is "true
and correct under penalty of perjury."
7. Notarize your request.
8. If you are an individual, include a cashier check in the amount of $20.00, made
payable to Clerk of the Court. If you represent a business, a company check is
acceptable.
9. If you are an agent acting on behalf of the entitled party, you must include a
power of attorney. If you are an attorney, please include an appropriate motion and
order in pleading format.
C:
Bills Receivable:
Accounts receivable represent sales that have not yet been collected as cash. Have
to sell merchandise or services in exchange for a customer's promise to pay at a
certain time in the future. If business normally extends credit to its customers, then
the payment of accounts receivable is likely to be the single most important source
of cash inflows. In the worst case scenario, unpaid accounts receivable will leave the
business without the necessary cash to pay its own bills. More commonly, late-paying
or slow-paying customers will create cash shortages, leaving the business without
the cash necessary to cover its own cash outflow obligations.
Accounts receivable also represent an investment. That is, the money tied up in
accounts receivable is not available for paying bills, paying back loans, or expanding
the business. The payoff from an investment in accounts receivable doesn't occur
until customers pay their bills. The idea of accounts receivable as an investment is an
important concept to understand is to consider the impact of accounts receivable on
cash flow.
The following analysis tools can be used to help determine the effect your business's
accounts receivable is having on the cash flow:
Loose Tools:
E)
A company can issue its shares at a premium (i . e for a value higher than the face
value of the shares) whether for cash or for consideration other cash. The power to
issue shares at a premium need not be given by the articles of association. According
to section 78, such premium has to be transferred to share premium a/c, which can
be applied only for the following purposes:
3.For writing off the expenses of or the commission paid or discount allowed, on
issue of shares or debentures of the company and