Professional Documents
Culture Documents
ACCOUNTING.
DEFINITION:
It is the art of recording classifying, and summarizing the business
transactions in the books of accounts, as per prescribed rules, which have financial
impact and finally, final accounts, are prepared to calculate profit/loss and to show
the financial position of the business at the end of year and results of the business
are interpreted to the management for decision making.
Explanation of definition:
RECORDING.
This is the basic function of accounting. Recording means to put the
transactions in writing in the books of accounts which have financial impact.
Recording is done in the book. “Journal”, Journal is the first book of accounting
and this book is further sub-divided into various subsidiary books such as cash
journal, purchases journal, sales journal etc. transactions will be recorded in detail
in the journal, i.e, date, amount, DR and CR etc.
CLASSIFYING:
Classification is the process of grouping of transaction or entries of one
nature at one place. The work of classification is the done in the book termed as
“Ledger”. Account wise record is maintained in ledger. Ledger is prepared from
journal. OR it can be prepared directly from available data/information. It is also
called “T Accounts”
SUMMARIZING:
Summarizing involves the preparation of TRIAL BALANCE and TRIAL
BALANCE is prepared from ledger by taking out debit and credit balance of
different accounts appearing in the Ledger.
FINAL ACCOUNTS.
It includes TRADING & PROFIT AND LOSS ACCOUNT and
BALANCE SHEET. Final accounts are prepared from Trial balance. Trading &
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profit & loss A/C shows profit or loss of the business at the end of year and
BALANCE SHEET shows financial position of the business at the end of year.
Financial impact:
Accounting records only those transactions and events which have financial
impact. Transactions which are not of financial character are not recorded in the
books of accounts.
Interpretation:
This is final function of accounting. Accounting not only creates data
through recording, classifying and summarizing of events but also the recorded
financial data is interpreted to the management for decision making.
Prescribed rules:
Rules and regulation or by laws of accounting or procedures of accounting
normally called “SSAPs” (STATEMENTS OF STANDARD ACCOUNTING
PRACTICES.) May be called as ACCOUNTING STANDARDS.
Terminology.
Business. Any activity carried out for earning of profits is called business but it
must be law full.
Business Transaction. Dealing of the business with other parties for sale or
purchase or goods, payment of wages, rent and rendering of services etc.
Purchases. Buying of goods & services for the business. It has two types.
I. Cash purchase Goods sold & cash is paid on the spot/occasion
II. Credit purchase Goods sold but cash will be received after few
days etc. (Debtors)
Return inwards / Sales return. If goods bought are returned back due to any
reason, it is called return outwards or purchase return.
Sales. Selling of goods & services by the business. It has also two types.
I. Cash sale. Goods sold & cash received on the spot.
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II. Credit sale. Goods purchased but payment will be made after few
days/month. (Creditors)
Return inwards /Sales return. If goods sold are returned back to us due to any
reasons, it is called return inwards or sale return.
Asset. Resources of the business with the help of which business in carried out.
Examples are cash, machinery, furniture, office equipment, vehicle,
lands/building, debtors, stock etc.
Assets has two types:
I. Fixed assets: Those assets which have a long life and are purchased for
the purpose to use them in business. Examples are machinery, furniture,
office equipment, vehicle, lands/ building etc.
II. Those assets which are purchased for the purpose of sale to earn profit.
OR those assets in which frequent changes occurred due to business
transaction. Examples are cash, debtors, stock etc.
Liability. Obligations of the business. Examples are creditors,
bankovedraft, loan, accrued salary etc liability has two types:
I. Current liability: those liabilities which are payable within a year.
Examples are creditors, bankoverdraft, accrued salary etc.
II. Long term liability: those liabilities which are payable after a year.
Examples are loan, debentures etc.
Capital. Investments by the owner in the business. Examples are cash
furniture, computer, machinery etc.
Income. Earning of the business. Examples are sale income, commission
received, discount received.
Expense. Spending of the business. Examples are salary, wages, rent, utility
bills, office expenses. Advertisement, fuel, repair etc.
Drawings. If the owner of the business draws something from the business for
his personal use it is called drawing. Examples are:
• Cash withdrawn
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• Goods withdrawn
• Personal bills paid out of the business cash.
Discount. Reduction in list price of the goods. It has two types.
1. Cash Discount: Allowed by shopkeepers to customers. It may be
Discount allowed (expense) and discount received (income).
2. Trade discount:
• Allowed by one trader to another trader on bulk buying.
• It is not recorded in the books of accounts. It is only shown in invoices.
TYPES OF ACCOUNTS. There are five types of accounts.
1. Asset Cash, furniture, land, vehicles, machinery, debtors, stock.
2. Liability Creditor, bank overdraft, loan, accured salary, rent payable.
3. Capital Investment
4. Income Sale, commission received, discount received.
5. Expense Salary, rent, utility bills, insurance, advertising.
Rules of debit (Dr) & Credit (Cr)
Assets/Expenses Increase Dr
Decrease Cr
Capital/Liability/ Income Increase Cr
Decrease Dr
OR
Assets / Expenses
INCREASE DECREASE
DECREASE INCREASE
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Ledger.
• It is second book of accounting.
• It is prepared from journal or it can also be prepared directly from
transactions or data given. It is also called – T- Form of Accounts
• In ledger, record relating to a particular account is maintained in a classified
form OR Account wise record is kept.
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Trial Balance.
• It is a statement which is prepared form Ledger by taking out Debit and
credit balance different accounts appearing in the ledger.
• If the Dr & Cr sides are equal in trial balance it means that accounting
records prepared/maintained so for is arithmetically accurate.
• From trial balance we prepare final accounts at the end of year i.e. Trading
& profit and loss a/c and Balance sheet.
Format of the trial balance.
Serial Name of Account Debit Credit
No.
£ £
Final accounts .
Finals accounts include the following.
• Trading & profit and loss account.
• Balance sheet.
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Advertising xxx
Repair and maintenance xxx
Bad debts xxx
Depreciation on machinery xxx
Van running cost xxx
Fuel expenses xxx xxx
Net profit / net loss xxx
Financed by.
Capital xxx
Add: Net profit xxx
Less: Drawings xxx xxx
Sales ledger. Personal accounts of debtors are prepared in the sales ledger.
D Poole
19x5 £ 19x5 £
Jan 1 Sale 500 Jan 31 Balance c/d 1445
Jan 29 Sale 945
1445 1445
Feb 1 Balance b/d 1445
D Cock
12
19x5 £ 19x5 £
Jan 12 Sale 425 Jan 31 Balance c/d 425
425
425
Feb 1 Balance b/d 425
General ledger.
Sales a/c
19x5 £ 19x5 £
Jan 31 Balance c/d xxx Jan 31 Total for month xxx
xxx
xxx
Feb 1 Balance b/d xxx
Purchases journal and purchases ledger.
Purchases journal OR purchases day book.
• Only credit purchases of goods are recorded.
• Original document /Source document is purchase invoice.
• Entry Purchase
Creditors (A, G, Z)
Purchases invoice. It shows details of quantity purchased, unit price, total price,
discount and details about the seller and purchase
Format of purchase journal.
Dated Details Invoice No. L Amount
F
19x5 £
Jan 1 B small 014 435
Jna 10 D cross 015 220
Jan 27 M mark 019 425
Jan 29 B small 023 900
13
Sales ledger.
D Poole
19x5 £ 19x5 £
Jan 1 Sale 500 Jan 5 Return Inwards 50
Jan 29 Sale 945 Jan 31 Balance c/d 1395
1445 1445
Feb 1 Balance b/d 1445
T Cock
19x5 £ 19x5 £
Jan 12 Sale 425 Jan 18 Return Inwards 45
425 Jan 31 Balance c/d 380
Feb 1 Balance b/d 425 425
General ledger.
Return inwards a/c
19x5 £ 19x5 £
Jan 31 Total for the month 120 Jan 31 Balance c/d 120
15
120 120
Feb 1 Balance b/d 120
Returns outwards journal /purchase returns journal OR day book.
• Only return outwards / purchase return are recorded in this journal.
• Source document / origina document is debit note.
• Entry Creditor (A, G, Z)
Return outwards
Debit note: A debit note is received from suppliers (creditors) as an
acknowledge for the goods returns to him or for any others allowances /
deductions obtained from suppliers.
Format or Returns outwards journal
Date Details Credit note LF Amount
No.
19x5 £
Jan 7 B Small 214 35
Jan 15 D Cross 245 25
Purchases ledger.
B Small
19x5 £ 19x5 £
Jan 7 Return outwards 35 Jan 1 Purchases 435
Jan 31 Balance c/d 1300 Jan 29 Purchases 900
16
1335 1335
Feb 1 Balance 1300
D Cross
19x5 £ 19x5 £
Jan 15 Return outwards 25 Jan 10 Purchases 220
Jan 31 Balance c/d 195
220 220
Feb 1 Balance b/d 195
General ledger.
Return outwards a/c
19x5 £ 19x5 £
Jan 31 Balance c/d 60 Jan 31 Total for the month 60
60 60
Feb 1 Balance b/d 60
General journal / The journal. All other transaction which cannot be recorded
in any other journals should be recorded in the journal. i.e
• Purchase and sale of fixed asset on credit.
• Correction entries.
• Closing entries
• Bad debts entries.
NOTE: All capital expenditures are placed in the balance sheet and all
revenue expenditures are placed in the trading & profit & loss A/C.
Depreciation
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• It is the gradual decrease in the value of fixed assets except land due to their
usage in the business with the passage of time.
• It is allocation of cost of assets in to an expense over useful life of the
assets.
Factors of depreciation.
• Cost of an asset
• Useful life of the assets
• Scrape value of the assets (Estimated value of asset which can be realized
by sale of asset at end of its useful life.
Depreciation is not charged on
scrape value of asset.
Methods of depreciation
1. Straight line method / original cost method / fixed installment method.
• Formula= cost of asset----scrape value Or % on the cost of asset.
Life of asset
• Depreciation expense will be the same or equal for each year in this
method.
2. Reducing balance method/Diminishing balance method/written down value
method.
• Normally a % is given in the questions.
• Depreciation expense will be the decreased with the passage of time
because depreciation will be calculated on the reduced balance of the asset
in this method.
3. Machine hour method. For machinery, aircraft, ships etc. Depreciation is
calculated on the basis of machine hour worked. Formula for calculation of
depreciation is as under.
Depreciation= Cost of asset * number of hours used in current year
Estimated total hours of
Work during useful life
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Year 1 5/15*30,000=10,000
2 4/15*30,000= 8,000
3 3/15*30,000= 6,000
4 2/15*30,000= 4,000
5 1/15*30,000= 2,000
PARTS EXCHANGE
• This is when the business gives out an old fixed asset and in return gets a
new fixed asset. For example an old car is given in exchange of a new car.
• The value of the asset being given out is decided by a mutual agreement.
This value is called as parts exchange value or trade-in-allowance.
• Accounting treatment is just like treatment of disposal of assets.
DOUBLE ENTRY RECORD FOR DEPRECIATION.
Entry for depreciation.
P&L A/C
Provision for depreciation A/C
• Current year depreciation is shown in P&L A/C & Accumulated
depreciation (Total Depreciation) in Balance Sheet.
Account to be Prepared.
1. Asset account (Plant, furniture, motor van)
2. Provision for depreciation A/C
3. Asset disposal A/C
4. P&L A/C ---- Extracts
5. Balance sheet----extracts.
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Assets (Plant)
1995 £ 1995 £
Jan 1 Cash / Bank xxx Dec 31 Balance C/D xxx
Jul 1 Cash / Creditor xxx xxx
xxx
1996 1996
Jan 1 Balance B/D xxx Sep 1 Disposal a/c at (cost) xxx
July 1 Cash xxx Dec 31 Balance C/D xxx
xxx xxx
Provision for depreciation A/C
1995 £ 1995 £
Dec 31 Balance C/D xxx Dec 31 P&L a/c (w-1) xxx
xxx xxx
1996
Sep 30 Disposal a/c xxx 1996
Dec 31 Balanc C/D xxx Jan 1 Balance B/D xxx
xxx Dec 31 P&L a/c (W-2) xxx
xxx
xxx xxx
Provision for discount on debtors a/c
1995 £ 1995 £
Dec 31 Balance C/D xxx Dec 31 P&L a/c xxx
xxx xxx
1996 1996
Dec 1 P&L a/c (decrease) xxx Jan 1 Balance B/D xxx
Dec 31 Balance C/D xxx Dec 31 P&L a/c (Increase) xxx
xxx xxx
P&L A/C --- Extracts
1995
Gross profit NIL
Add: Bad debts recovered xxx
Add: Decrease in provision for doubtful debts xxx
Less Expense
Bad debts xxx
Provision for doubtful debts xxx
Balance sheet---Extracts
1995
Current Assets
Debtors xxx
Less: provision for doubtful debts xxx xxx
Advertising xxx
Carriage outwards xxx
Repair and maintenance xxx
Bad debts xxx
Increase in provision for doubtful debts xxx
Provision for depreciation on machinery xxx
Van running cost xxx
Fuel expenses xxx
Loss on sale of assets xxx xxx
xxx
Less current liabilities. xxx
Creditors xxx
Accrued expenses xxx xxx
BANK STATEMENT. A statement issued by the bank which shows the details of
deposits, withdrawals and balance of the particular bank account at the end of month/ year.
NOTE. The record maintained by the customer (Account Holder) and by the bank
should be equal, if there is any difference , the following can be reasons:.
1. Unpresented cheque. Cheques issued for payment but not presented to bank
for the payment.
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2. Bank lodgments. Cheques deposited for collection but not collected by the bank
so far. (uncredited cheques)
4. Direct Debits. If bank Debit the the account of the customer for the bank charges,
commision charges etc. it is called direct Debit. It is expense/payment of the customer.
5. Direct credit / Credit transfer. If bank Credit the the account of the customer for the
Interest
received, Dividend received or for any other Transfer into customer Account, it is
called direct credit. It is income / receipt of the customer. .
What to do.
I. If Cash book balance has a Dr balance, than balance of bank statement balance
will be CR. And If Cash book has a Cr balance(O/D), than balance of bank
statement balance will be DR.
II. Except the following two transactions all other transactions will be recorded
in the Cash book up date, and these two transactions will be recorded in
the Bank Reconciliation Statement.
1. Unpresented cheque
2. Bank lodgements / uncredited cheque
III. Cash book Dr. balance Cash book Cr. Balance (O/D)
Unpresented cheques + ---
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NOTE: Cash sales, cash purchases, provision for doubtful debts and trade
discount are not recorded in the control accounts.
ERRORS AND SUSPENSE ACCOUNT
Errors has following two types.
• Errors not affecting trial balance agreement
• Errors affecting trial balance agreement
Types of errors not affecting trial balance agreement.
1. Errors omission. If any transaction has taken place but that is not recorded in
the books of accounts.
2. Errors of commission. Amount is correct
Account is wrong
3. Errors of principle. If capital expenditures are treated as Revenue
expenditures and vice versa. It is called errors of principle.
4. Errors of original entry. Original amount is incorrect
Account is correct
5. Complete reversal of entries. Where correct accounts are used but each item
is shown on the wrong side of the account. Fro example, cash received from “D”
recorded as cash paid to “D”
6. Compensating errors. Where two errors of equal amounts, but on the
opposite sides of the accoints, cancel out each other, as illustrated below.
Sale A
50 (Dr) 50(Cr)
Errors and suspense A/C
Errors which affects the agreement of trial balance are the following.
• Incorrect addition in any a/c
• Entry on only one side of a/c i.e Dr. side or Cr side.
• Entering different amount on Dr and Cr sides of an account
Trial Balance
Dr Cr
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NOTE:
1. Sale, discount received or any other income, purchases, expenses if credited
added to profit.
2. Sale, discount received or any other income, purchases, expenses---if
debited--- deducted from profit.
3. Personal accounts (debtors & creditors) assets, liabilities and capital ---- no
effect on profit.
Accounts from incomplete records / single entry system
Definition: It is difficult to define single entry system, however, broadly
speaking, it is a defective double entry system. Under this method, sometimes both
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the aspects of transactions are recorded, sometimes only one aspect is recorded or
sometimes no aspect of transaction is recorded in the books.
In short, single entry system may be defined as a system which does not
strictly conform to the double entry system of book keeping. Under this system
what is found in practice is an intermixture of single entry, double entry and no
entry.
Defects/disadvantages of single entry system. The defects of this system are as
follows.
1. Under this system only partial and incomplete record is kept because
two fold aspects of transactions are generally ignored.
2. As the two fold aspects of every transition are not recorded, a trial
balance cannot be drawn up to test the arithmetical accuracy of the
record.
3. As nominal accounts (income and expenses) are not maintained, a profit
and loss account cannot be prepared.
4. As no real accounts are maintained the preparation of a balance sheet is
not possible.
Mark-up and margin concept.
Mark-up is gross profit expressed as a percentage or fraction of cost of sales.
£
cost price of goods 100
selling price 125
gross profit 25
Gross profit 25
Cost price ×100= 100 ×100= 25% OR ¼
Margin is gross profit expressed as a percentage or fraction of selling price.
Gross profit 25
selling price ×100= 125 ×100= 20% OR 1/5
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Building xxx
Motor van xxx
Furniture xxx
Closing stock xxx
Debtor’s xxx
Cash in hand xxx
Cash at bank xxx
Prepayments xxx xxx
CURRENT ASSETS.
Closing stock xxx
Debtors xxx
Cash in hand xxx
Cash at bank xxx
Prepayment xxx xxx
CURRENT LIABILITIES
Creditors xxx
Bank overdraft xxx
Accrued expenses xxx xxx
Working capital xxx
Capital employed xxx
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FINANCED BY.
Capital xxx
Add: profit (Loss) ?
?
Less drawing xxx ?
SECOND METHOD-CONVERSION INTO DOUBLE ENTRY:-
Conversion of books from single entry to double entry is possible, when
missing figures are calculated from the available records and FINAL ACCOUNTS
are prepared to calculate profit/loss.
Missing figures can be calculated as follows.
Sales ledger controls a/c OR total debtors a/c
• Opening debtors
• Closing debtors
• Credit sales
• Cash /cheques received from debtors
Purchase ledger controls a/c. OR total creditors a/c
• Opening creditors
• Closing creditors
• Credit purchases
• Cash / cheques paid to creditors.
Cash / Bank a/c
• Opening balance
• Closing balance
• Drawings
Sports facilities etc. These organizations arc called N.G.O. Examples are
Libraries, Sports club, Social club, Social societies etc.
Accounts maintained during the year:
1. Receipts & Payment a/c. (Cash book)
It is just like cash book. Any cash/ cheque received is recorded on the debit side
and any cash /
cheque paid is recorded on the credit side.
Sale £ £
Less cost of goods sold xxx
Opening stock xxx
Add purchases (see note) xxx
Add carriage inwards xxx
Less return outwards /purchase return xxx
xxx
Less closing stock xxx xxx
Gross profit xxx
Add any other income xxx
xxx
Less expenses xxx
Bar salaries xxx
Bar wages xxx xxx
NOTE: For calculation of bar purchases, always creditors a/c may be prepared
19x5 19x5
Dec 31 cash / bank xxx Jan 1 Balance b/d xxx
Dec 31 balance c/d xxx Dec 31 Purchases (Bal. Fifure) xxx
xxx xxx
Surplus/Deficiency xxx
Surplus: Excess of income over expenditures
Deficiency: Excess of expenditures over income
Subscription account
19x5 19x5
Jan 1 Balance b/d Opening (Arrears/Due) xxx Jan 1 Balance b/d opening (in advance) xxx
Dec 31 Refund xxx
Dec 31 Income & Expenditure a/c xxx Dec 31 Bank xxx
Dec 31 Balance c/d closing (in advance) xxx Dec 31 Balance c/d Closing (Arrears/Due)xxx
xxx xxx
BALANCE SHEET—EXTRACTS.
FINANCED BY.
Capital fund/ accumulated fund xxx
Add surplus / deficiency xxx xxx
If capital fund / accumulated fund is not given, it can be calculated as:
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• Direct labour cost. Cost of that labour which is directly engaged in the production
of a product. For example labour directly engaged for conversion of wood into furniture
as per design.
• Indirect labour cost. Cost of that labour which is engaged for the help of direct
labour in the production of a product. For example store man, security guard, -cleaner
sand other helping labour.
3. Factory overhead. All indirect manufacturing costs of a product. Examples includes:
• Indirect material cost
• Indirect labour cost
• Deprecation of factory machinery/building.
• Rent of factory building
• Fuel expenses |
• Utility bills of factory
• Repair and maintenance of factory
• Insurance of factory machinery/ building
Stocks in the manufacturing business. There are three types of stocks in
manufacturing |
Business. -|
1. Raw material stock
2. Work in progress (incomplete goods)
3. Finished goods (Goods ready for sale)
Accounts to be prepared.
• Manufacturing a/c
• Trading & Profit and loss a/c
• Balance sheet
Manufacturing account
£ £
Opening stock of raw material xxx
Add purchase of raw material xxx
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Total factory cost= direct material cost + direct labour cost + FOH
DEPARTMENTAL ACCOUNTS:
If a business has different departments, then at the end of year trading &
profit & loss a/c is prepared department wise in columns form in this type of
business expenses has two types.
• Direct expense: All direct expense are charged to the particular
department.
• Common expense: These expenses are allocated/distributed among
the department on certain basis given in the question or equally.
Examples of these expenses are:
Rent utility bills salaries expense insurance
Advertising fuel expenses repair and maintenance
• For example, there are three department i.e A,B, V. Rent of £ 50,000 is
distributed in the ratio of 2:2:1 in the following way.
A2/5= 50,000*2/5=20,000
B2/5= 50,000*2/5=20,000
C2/5= 50,000*2/5=20,000
• For example repair is £30,000 and is distributed equally in the following
way.
A 10,000
B 10,000
C 10,000
• For example repair is £30,000 and is distributed in the following way on %
basis. A 50%, B20%, C 30%.
A (30,000*50%) 15,000
B (30,000*20%) 6,000
C (30,000*30%) 9,000
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Partnership Account.
Partnership.
When two or more than two persons carry out business for earning profit it is
called partnership.
Partnership agreement /Deed (from book)
Main points of consideration in partnership.
1. Capital contribution.
Amount invested by the each partner in the business.
A £ 50,000
B £ 100,000
C £ 70,000
2. Profit or loss sharing ratio.
It must be agreed among the partners and it can be on following basis.
• On the basic of capital
• Equally
• % basic, A.40%, B.40%, C.20%
• Proportion A B C
2 2 1
2/5 2/5 1/5
3. Interest on drawing.
Income of business
Expense of partners
4. Interest on capital.
Expense of business
Income of partners
5. Salary/Bonus/Commission of partners
Expense of business
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Income of partners
Accounts to be prepared
1. Trading & profit & loss appropriation a/c
2. Partners current a/c (Represented a/c of partners)
3. Balance sheet
T & P & L Appropriation A/C.
£ £
Net profit xxx
Add interest on drawings A xxx xxx
B xxx xxx
xxx
Less interest on capital A xxx xxx
B xxx xxx
xxx
Less salary/Bonus A xxx xxx
B xxx xxx
Less Good will written off (if any) xxx
xxx
Less Share of profit. A xxx xxx
(As per ratio) B xxx xxx
When above mentioned partnership changes take place, the following two issues
should be properly treated in the books of accounts
I. Revaluation of assets
II. Goodwill
Revaluation of assets
On a change in the partnership business , assets are revalued and increase or
decrease in the value of assets are recorded in a revaluation account and profit
or loss on revaluation account will be transferred to capital account of partners.
(Profit on credit side of capital a/c and loss on debit side of capital a/c)
Entries for revaluation of assets
Nature of transaction Details Debit Credit
1. Increase in value Assets a/c xxx
of asset Revoluation a/c xxx
2. Decrease in Revoluation a/c xxx
values of assets Asset a/c xxx
3. Provisions for Provision of xxx
depreciation on depreciation xxx
revalued asset Revaluation a/c
4. Profit on Revaluation a/c xxx
revoluation Capital a/c of partner xxx
5. Loss on Capital a/c of partner xxx
revoluation Revaluation xxx
a/c
After1-3 Revaluation a/c will be prepared in the following format.
Revaluation a/c
19x5 19x5
Jan31 Decreasein assets xxx Jan 31 Increase in assets xxx
B xxx
C (if loss) xxx
xxx
If Cr side is greater than Dr side, there is profit on revolution a/c and vice
versa.
Profit or loss on revaluation a/c will be distributed among partner in old ratios.
Good-will :Reputation of business among the customers or good image/good
name of
Business among by customers.
Calculation of good-will :
Purchaser price /purchase consideration xxx
Less: Net wroth /value of business xxx
Good-will xxx
Net wroth /value of business Assets---Liabilities (Takeover)
Treatment of goodwill on a change in a partnership
Goodwill should be valued and the following accounting entries are made in
partnership books.
Nature of transaction Details Debit Credit
A. If goodwill Goodwill xxx xxx
is to be
retained Partner’s capital a/c(old
/shown ratio)
/opened in Capital a/c credited and
the books. goodwill shown in B/sheet
under fixed assets
/shown
/opened in II Capital a/c
the books. (including new ratio)
Goodwill a/c
xxx
OR xxx
Capital a/c (including new
partner /new ratio)
Partner capital a/c (old
ratio)
(In B situation goodwill may be adjusted as illustrated below)
Assume goodwill is 50,000 and old ratio is equal between A &B. On
admission of C, new ratio is 2/5,2/5&1/5.
Partner Old ratio New ratios
A 25,000 20,000
B 25,000 20,000
C ______ 10,000
With old ratios capital a/c of old partner will be credited and with new ratios
capital a/c of all partner (including new)will be debited.
Capital Account of partners
19x5 A B C 19X5 A B C
Loss on revaluation xxx xxx Balance b/d xxx xxx
a/c Profit on xxx xxx
revaluation a/c xxx
Goodwill (new xxx xxx xxx Bank (new ____-
ratio) partner capital) xxx xxx
xxx xxx xxx Goodwill (old
Balance c/d ratio)-A
Goodwill (old xxx xxx
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ratio-B)
Profit or loss on revaluation account and goodwill treatment is always shown
in partner capital account .
Format of the balance sheet.
On amalgations the following accounting procedure will be observed .
For each firm
1.Partner,s capital accounts will be adjusted for the following
For goodwill __ as already done
Profits of losses on revaluation of assets ___as already done
Current accounts of partners are closed to capital accounts.
Assets taken over by partner should be debited to their capital accounts at the
agreed values
Profit or loss on disposal of assets should be transferred to capital accounts in the
partner old profit sharing ratios.
Adjustments of capital account balance for new firm by the introduction or
withdrawal of cash.
2. The adjusted balance sheets may be prepared.
Capital Account of partner
19×5 A B C 19×5 A B C
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Current a/c (if any) - - xxx Balance b/d xxx xxx xxx
Loss on revolution a/c xxx xxx xxx Current a/c xxx xxx ---
Profit on revolution a/c xxx xxx xxx
Loss on sale of assets (
if any) xxx xxx xxx
Profit on sale of assets ( if xxx xxx xxx
Good will ( new ratio) any)
–B xxx xxx xxx
Car ( taken over by Good will( old ratio)- A xxx xxx ---
partner) --- --- xxx
Dissolution of partnerships
Partnership assets are sold out profits or losses on realization are apportioned to
the partner’s capital accounts in their profit sharing ratio. The balance of cash is
56
used to pay creditors and expenses of dissolution and finally to repay the balance
on their capital accounts to the partners.
Note:
Unrecorded goodwill and assets revaluation are not relevant in this topic.
Transfer the balances on the partner’s current accounts to their capital accounts as
current accounts are no more required as business is ended.
Accounts to be prepared on dissolution
1. Realization account
2. Capital a/c of partners
3. Bank
First of all open a realization account to record the sale of assets and proceed to
make the accounting entries in the following order.
Nature of transaction Details Debit Credit
1. Transfer of asset at to Realization a/c Xxx
realization a/c(All fixed Asset a/c Xxx
asset and stock at
NBV) Bank (cash ) Realization Xxx
2. Proceeds of sale of a/c Xxx Xxx
assets Capital a/c of partner
3. Assets taken over by concerned Xxx
partner (at valuation) Realization Xxx
4. Cost /Expenses of a/c Xxx
dissolution Realization a/c
Bank a/c Xxx Xxx
5. Payment of creditors Xxx
and discount received Creditors a/c Xxx
from creditors. Bank Xxx Xxx
Realization a/c Xxx
6. Cash received from
57
Note : Bank a/c , Debtors , creditors , loan should be dealt directly in bank a/c.
After making entries 1-6 realization a/c will be prepared and profit or loss
on realization a/c will be transferred to partner’s capital account on basis of
existing ratios.
Dissolution of partnerships
Partnership assets are sold out profits or losses on realization are apportioned to
the partner’s capital accounts in their profit sharing ratio. The balance of cash is
used to pay credit and expenses of dissolution and finally to repay the balance on
their capital account to the partners.
Note:
• Unrecorded goodwill and asset revelation are not relevant in this topic.
58
Note: Bank a/c debtors Creditors loans should be dealt directly in bank a/c.
After making entries 1-6 Realization a/c will be prepared or loss on Realization a/c
will be transferred to partner capital account on basis of existing ratios.
Realization Account
19×5 19×5
xxx Dec 3 Bank (Sale of assets) xxx
Dec 31 Plant xxx
Machinery xxx Partner’s capital a/c
Stock (asset takeover) xxx
Dec 31 Debtors( Dist. Allowed/ bad debts) xxx
Creditor( Dist. Received) xxx
Dec 31 Bank ( dissolution expenses) xxx
Dec 31 Capital: A xxx
Dec 31 Capital: A xxx B xxx
B xxx xxx
xxx
19×5 A B C 19×5 A B C
Current a/c ( if any) - - xxx
Loss on Realization a/c xxx xxx Balance b/d xxx xxx xxx
Realization a/c – car xxx Current a/c xxx xxx ----
Profit on realization xxx xxx xxx
a/c
Bank ( balancing figure) xxx xxx Bank (balancing
60
figure)
xxx xxx xxx xxx xxx xxx
Bank Account
19x5 19x5
Dec 31 Balance b/d Dec 31 Balance b/d (if any-O/D) xxx
xxx Creditors (cash paid)
Dec 31 Realization a/c (sale of assets xxx xxx
Dec 31 Debtors (cash received) xxx Loan a/c xxx
Realization a/c-dissolution exp
Dec 31 Capital: C xxx xxx
B xxx
xxx
xxx
Sale of partnership to limited company OR Conversion of partnership into
limited company
A partnership may be sold to an existing limited company or the partners
may from a limited company and sell the partnership business to it in order to
obtain the benefits of limited liability. In either case it makes no difference to the
entries required in the partnership books.
The limited company may pay for the partnership business in cash or by
issuing shares (Ordinary & Preference) and possibly to the partners or by a
combination of cash, shares and debentures.
Accounting entries of the dissolution of a partnership still apply but the procedure
which follower after the is modified as follows.
Nature of Transaction Details Debit Credit
Distribution of shares, debentures and cash to the partners as per direction in the
question.
Note: In the absence of any directions in the question, where the partners are to
continue as directors of the limited company, receiving salaries and shares of
profits, us the following procedure:
Partner’s salaries
A ward the partners, director’s salaries equal to their partnership a loan
which will be transferred to the limited company. Where rate of interest on the
debentures is different from that paid on the loan the amount of the debentures
62
allocated to the partner must be such as will give him the same amount of interest
each ear as he received from the partnership.
Interest rate of loan
Formula to convert loan into debenture: Amount of loan X
……………………………
Interest rate of
Debenture
Partnership shares of profit
Preserve the partners’ profit sharing ratio by allocation ordinary shares in their
respective capital/profit sharing ratio so that the balance on the capital account
of the partner with the lowest capital/profit sharing ratio is satisfied in fully by his
allocation of ordinary shares. Satisfy any balances remaining on partners’ capital
accounts with preference shares (or cash).
Accounts to be prepared
1. Realization Account
2. Limited Company Account
3. Capital Account of Partners
Steps to prepare Realization Account:
1. Transfer all assets on Dr. side of Realization Account:
2. Transfer all liabilities on Cr side of Realization Account. (Taken over)
3. Purchase price on Fr side of Realization Account
4. Calculate profit or loss on Realization Account
Realization Account
19x5 19x5
Dec 31 Plant Dec 31 Creditors xxx
xxx
Machinery Co. LTD xxx
xxx
Stock
63
B
xxx
Xxx
CO. LTD
Realization xxx Ordinary shares xxx
10% Preference shares xxx
8% Debenture xxx
xxx xxx
Current a/c (if any) ….. ….. xx Balance b/d xxx xxx xxx
x
Loss on Realization a/c xxx xxx Current a/c xxx xxx …..
xx
Ordinary shares xxx xxx x Profit on realization a/c xxx xxx xxx
….
.
___ ___
65
xxx xxx
8% Debenture
___ ___
xxx xxx
Loan A/C
___ ___
xxx xxx
£ £
Sale xxx
Less :Returned /sale returns xxx
Net sales xxx
Less: cost of goods sold.
Opening stock xxx
Add: purchases xxx
Add; carriage inward xxx
Less: Returned outwards/ purchases return xxx
xxx
Less closing stock xxx xxx
Less: Appropriation
Transfer to general reserve
Interim dividend : Preference shares xxx
Ordinary shares xxx
Proposed Dividend : Preference shares xxx
Ordinary shares xxx xxx
Retained profit for the year xxx
Add: Retained profit of last year (if any) xxx
Reserves
71
xxx xxx
Bank Account
Application &allotment xxx Application & allotment xxx
Application& allotment xxx Balance c/d xxx
Call xxx
xxx xxx
Application and allotment account
Ordinary Share Capital a/c xxx Bank (application money) xxx
Share Premium a/c xxx Bank (allotment money) xxx
Bank (Refund) xxx
First or Second call Account
Ordinary Capital /Share premium a/c xxx Bank xxx
Xx x
x xx
BONUS SHARES
Company reserves belong to the ordinary shareholders. Director of a
company may transfer with the agreement of the shareholders some of the balance
on the reserves to the Ordinary share capital account. The directors will then issue
to the ordinary shareholders additional share certificate equal to the amount of the
reserves transferred in proportion to the shares they already hold. These new
shares are known as bonus shares because the shareholders do not pay any
additional cash for them .An issue of bonus shares is also known as a scrip issue.
The accounting entries for issue of Bonus Shares are:
Share Premium
Profit & loss a/c
74
In this method first of all capital Redemption Reserve will be created from
General reserves. Shares may be redeemed at a premium, the premium on
redemption may charges to share premium account only if:
1 The shares to be redeemed were originally issued at a premium and
2 The shares are to be redeemed out of the proceeds of a new issue of
shares.
The accounting enteries for Redemption of shares are:
1. For creation of Capital Redemption Reserve
General Reserve
Profit &loss a/c
Capital Redemption Reserve a/c
2. For redemption of shares &payment of cash
Redemabe Preference shares a/c
Premium on redemption of shares a/c
Profit &loss a/c
Cash a/c
3 For capitalization of Capital Redemption Reserve
Capital Redemption Reserve a/c
Ordinary Share Capital Account
Effect of redemption of preference shares on Balance Sheet:
I Redeemable preference shares capital will be decreased
Share Premium a/c will be decreased (if needed)
II Cash will be decreased
Debentures
A debenture is a document containing details of a loan obtained by a
company. The loan may be secured on the assets of the company. Debenture
carries a fixed rate of interest.
Debenture is usually redeemable on or before a specified date.
Debenture holders are Creditors, not owners of the company as shareholders are.
78
Debenture should always be shown as long term liabilities (amounts falling due
after one year)
Redemption Of Debentures----Same like redemption of preference shares
II Cash be decreased
Share Premium a/c OR Profit & loss a/c will be decreased (if needed)
Cash flow statement for the year ended 31December 19-3
1. Net cash inflow (outflow) from operating activities (W-1)
xxx
2. Returns on investments and servicing of finance
Interest received xxx
Interest paid xxx
Drawing (if any) xxx
Net cash inflow (outflow) from ROI & SOF xxx
3. Taxation paid (Previous year) xxx
4. Investing activities/Capital expenditure
Purchase of tangible fixed assets xxx
Sale of plant and machinery xxx
Net cash inflow (outflow) from investing activities xxx
5. Payments of Divends
Interim divided paid xxx
Proposed dividend (previous year) xxx
Net cash inflow (outflow) before financing activities xxx
6. Financing activities
Issue of Ordinary /Preference share capital xxx
Sale of debenture of goes getting loans xxx
79
Accounting Ratio:
Accounting ratios are calculated from Trading & profit & loss account and
Balance sheet.
It is the relationships among figure appearing in the final accounts of a
listed Company. It can be expressed in terms of %, proportion or in times. It is
normally used for analysis and decision making purpose.
Types of Ratio. There are main four types of ratio.
1. Profitability ratio
2. Financial ratio
3. Investment ratio
4. Utilization of ratio
1. Profitability ratio
I. Gross profit ratio = Gross profit*100
Sale
II.Net profit ratio = Net profit*100
Sale
III. ROCE
(Return on capital employed ) =Profit before interest &Tax*100
Capital employed
IV. Return on Equity = Profit before tax & after preference divided *100
Ordinary share capital +Reserve
Current liabilities
Standard ratio:1:1
III. Stock Turnover ratio = Cost of goods sold = Times
Average stock
Average stock Opening stock + closing stock
2
IV. Debtors ratios. Average number of days in which debtors pay to the
business.
V. Creditor Creditor * 365 = xxx days.
Credit Purchase
Investment ratios
1. Gearing ratio = Fixed cost capital * 100
Total capital
Note: Fixed cost capital includes long term loan, preference shares and
bank overdraft.
Total Capital: Ordinary share capital + Reserves + Fixed cost capital.
II. Earning per share. ( EPS) Earning for ordinary.
Number of ordinary shares
Note : Earning means profits after tax and divided on preference shares.
III. Price earning ratio (PER) Market price of share
EPS
IV. Dividend covers Profit available to pay ordinary dividend
Ordinary divined.
V. Dividend yield Declared rate of dividend* Nominal value of share
Market price of shares
VI. Earning Yield I. Dividend yield ×dividend cover.
II. Earnings
Market price per shares * Number of
shares
82
:To provide requisite data and service as a guide to price fixing of products
manufactured or services rendered.
:To ascertain the profitability of each product and advice the management as to
how these profits can be maximized.
:To revel sources for economy by installing and implementing a system of cost
control for materials , labour and overheads.
:To present and interpret data for management planning ,decision –making and
control .
:To help in the preparation of budgets and implementation of budgetary control.
:To organize an effective information system so that different levels of
management may get the required information at the right time in right from for
carrying out their individual responsibilities in an efficient manner.
:To guide management in the formulation and implementation of incentive bonus
plans based on productivity and cost saving.
:To supply useful data to the management to take various financial decisions such
as introduction of new products, replacement of lab our by machine etc.
:To organize the internal audit systems to ensure effective working of different
departments.
: To provide specialized services of cost audit in order to prevent the errors and
frauds and to facilitate prompt and reliable information to the management.
Broadly speaking , the above objective can be –regrouped under the following
three heads :
1. Ascertainment and analysis of cost and income by product, function and
responsibility.
2. Accumulation and utilization of cost for control purpose to have the minimum
possible cost consistent with maintenance of quality. This objective is achieved
through fixation of targets, ascertainment of actual and targets and reporting
deviations to the management for decisions making.
3. Providing useful data to the management for decisions making .
84
Cost classification
Cost classification is the process of grouping costs according to their common
characteristics. The important ways of classification are:
1. By Nature of Element 2. By Functions
3. As Direct and Indirect 4. By Variability
5. By controllability 6. By Capital or Revenue
7. By Time 8. According to Planning and control
Now few classification will be discussed in detail.
By Nature or Element. According to this classification, the costs are divided into
three categories i.e. (elements of product cost)
I Materials: Material cost has following two types.
Direct materials cost. Cost of that material which is basic requirement /need
for the production of a product . For example wood for Furniture making.
Indirect materials cost. Cost of that material which is helping element for
the completion.
II Labour cost has following two types
Direct labour cost . Cost of that labour which is directly engaged for
conversion of wood into furniture’s as per design.
Indirect labour cost. Cost of that labour which is engaged for the help of
direct labour in the production of a product . For example store man, security
guard, cleaners, and other helping labour.
III FOII :All indirect manufacturing cost of products. Example includes:
Indirect material cost
Indirect labour cost
Deprecation of factory machinery /building
Rent of factory building
Fuel expenses
Utility bills of factory
85
iii. Semi- variable Cost are those which are party fixed and partly variable.
For example telephone expenses include a fixed portion of monthly charge plus
variable charge according to calls; thus total telephone are semi- variable.
Manufacturing Accounts. It is prepared by Manufacturing businesses
which are engaged in the production of certain goods. It show the cost of the
production of goods i.e. cost of materials labors and factory overheads. It is and
expense/ cost account.
Manufacturing cost/ Elements of cost.
1. Material cost. Material costs has followings two types.
• Direct material cost. cost of that material which is basic
requirement/ need for the production of a product. For example wood for furniture
making.
• Indirect material cost. Cost of that material which is helping
element foot the completion of a product. For example paint or glue or steel- bar
used in furniture making.
2. Labor cost. Labor cost has following two types.
• Direct labor cost. Cost of that labor which is directly engaged in
the production of a product. For example labor directly engaged for
conversion of wood into furniture as per design.
• Indirect labor cost. Cost of that labour which is engaged for the
help of direct labour in the production of a product. For example
store men security guard cleaner sand other helping labour.
3. Factory overhead. All indirect manufacturing costs of a product.
Example includes:
• Indirect material cost
• Indirect labour cost.
• Deprecation of factory machinery/ building.
87
.
96
3. Losses/gains:
I. Normal loss -5%,10%
II. Abnormal loss-controllable loss
III. Abnormal gain : 100-105=5 units
Normal loss: Some loss of material may be expected in the course of
processing .This may result from spolage , evaporation or other wastage.
Experience will show what percentage of wastage may be expected under normal
conditions and this is regarded as normal wastage inherent in the process. The
cost of such waste will be borne by good production /output.
Abnormal losses and grains: Any wastage in excess of normal is treated as
abnormal loss and written off to profit and loss account via abnormal loss
account .
Calculations of per unit cost:
There are two ways to calculate per unit cost in process costing.
1. Calculations of per unit cost If closing WIP is not existed in the
questions:
Total cost ---sale recovery of normal loss units
GOODS UNITS
Good units: All units will be considered good units except normal
loss units
II. If closing WIP is existed in the questions per unit cost will be calculated
by preparation of analysis of equivalent units of production in the
Following format
Cost elements Finished Good +Abnormal WIP Total Total P.U
Loss-abnormal gain Units units cost Cost
Material
Labour 1500 400 1900 8000 4.22
FOH 1500 320 1820 7500 4.11
1500 200 1700 6000 3.52
100
11.85
STEPS
1. Normal loss units
2. Finished Good /WIP
3. Abnormal Loss/Gain.
Process Account-I
Direct Material Cost xxx Normal Loss (note-i) Xxx Xxx
Additional Mat. Cost if any xxx Finished goods Xxx Xxx
Direct labour cost xxx
Direct expenses xxx
FOH xxx Abnormal loss Xxx Xxx
Abnormal Gain xxx xxx WIP(Balancing figure) Xxx Xxx
3. production budget
4. Master budget
Project trading and profit & Loss a/c
Project balance sheet
Cash budget
Cash budget
III. Receipts schedule
IV. Payment schedule.
V. Cash budget
Format of cash budget
Receipts January February March
Cash sale xxx xxx xxx
Received from debtors xxx xxx xxx
Sale of fixed assets xxx xxx xxx
Loan obtained xxx xxx xxx
Any other cash received xxx xxx xxx
xxx xxx xxx
Payments
Cash purchased xxx xxx xxx
Paid to creditors xxx xxx xxx
Expenses paid xxx xxx xxx
Drawings xxx xxx -
Purchased of fixed assets xxx xxx -
Loan repaid - xxx -
Any other cash paid - - xxx
xxx xxx xxx
Actual cost
Material xxx
Labour xxx
FOH xxx
Variance Analysis
Material Variance
1. Total material cost variance OR overall material variance
standard cost of material –actual cost of material
(St.Qty x. price)-(Actual Qtyx actual price)
2. Material price variance
standard price –actual price x actual Qty purchased or used
3 Material usage /Quantity varience .
(Standard quantity –actual quantity ) x standard price
Labour variance
1. Total labour cost variance OR Overall labour variance
Standard labour cost---Actual hours cost.
3. Labour Rate /wages varience
Standard Rate –Actual rate x Actual hours worked.
4. Labour Efficienvy Variance
Standard hours allowed –actual hours worked x standard rate
Sale Variance
1. Total sale variance OR overall sale variance
Standard sale price- actual sale price
(standard sale quantity x standard sale price)-(Actual sale quantity x
actual sale price)
2. Sale price variance
Standard sale price-actual sale price x actual quantity sold
3. Sale Volume variance
Standard sale quantity –actual sale quantity x standard sale price
105
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