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Layyah Campus: Advance Accounting
Layyah Campus: Advance Accounting
Lahore
Layyah Campus
B.com
Course Outline
Advance Accounting
CH#01 Departmental account
CH#02 Contract account
CH#03 Hire-purchase accounts
CH#04 Ratio Analyses
CH#05 Companies Accounts
Recommended book:
Advance Accounting by SOHAIL AFZAL
Advance Accounting by M A GHANI
Advance Accounting by MUKAR G
Advance Accounting
INDEX
Audit of Accounts
Circulation of Accounts Filing
of Accounts Director's Report
Formation of Company
Promotion Stage
Incorporate Stage
Raising of Share Capital
Trading or Business Commencement Certificate
Memorandum of Association
Clause or Particulars of Memorandum
Article of Association
Meaning
Content of Article
Amalgamation
Absorption
Reconstruction
Difference between Amalgamation, Absorption and Reconstruction
Royalty
Minimum Rent or Dead Rent
Short Working
Interim Dividend
Marge or Merger of Companies
JOINT VENTURE
Definition: A joint venture is a temporary partnership of two or more persons engaged in any
particular business adventure of enterprise of short or seasonal duration. It may in connection
with spectacular in shares underwriting of share and debentures of new company or any other
similar temporary or seasonal business enterprise. As the parties to a joint venture does business
in union with other, they also share profit & loss between themselves in some agreed proportion.
Advantages: The advantages of joint venture enterprise are that perhaps one party may buy
goods at a much cheaper rate, but has no capital; a sound person may perhaps advance the
requisite capital but has no business. While a third individual is a good salesman and can sell the
goods readily at a margin. In case to, combine their energy and work for a mutual gain.
Joint Venture
Consignment
Parties: In joint venture parties to the In Consignment parties to the agreement
agreement are known as co venture.
known as Consignment and the Consignee.
Compensation: Co ventures are the parties in
the venture and share profit or loss of the
venture.
Relation: Each co venture is a principal as
well as an agent of the other co venture.
Termination: Relation of co ventures comes
to an end when venture is completed.
Investment: Co ventures usually contribute
towards the capital of the venture in the form
of money or material.
Rights: Co ventures enjoy equal rights as
partners.
Ownership: Co venture are the owners of
their venture.
Account Sales: Co venture are the relevant in
formation no regular repent are submitted.
There are two ways in which joint venture account can be kept e.g.
1. Where no separate books are kept and record joint venture transactions.
2. Where a separate set of books is kept to record the transaction.
No Separate Book: When it is not possible to maintain a separate set of books for joint
venture transaction cash party will use his ordinary business books for recording such
transactions. Each party will open a joint venture account and the account of other parties in his
books. Suppose A and B enter into a joint venture then B will open in his books a joint
venture account and the account of A.
Separate Books: The method considered so per in value the maintenance of accounts in
respect of the joint venture in the book of the parties to the joint venture transactions can
however, is recorded in a completely separate set of books under this method a separate joint
books account is opened. The amount contributed by each partner as his share of his investment
in the joint venture is deposited in a joint bank account. Accounts of the parties concerned are
also open in a separate set of books.
CONSIGNMENT
The word consignment can be generally defined as the act of sending quality of goods by
the manufacturers and the producer of one country or place to their agents in another place at the
sick of principals for the purpose of sale.
Explanation: Goods to send are known as a consignment the sender of the goods is called the
consignor. Generally the manufacturers or the producer are the consigner. The person to whom
goods are forwarded for the purpose of sale is known as the consignee.
Goods sent on consignment dont become the pro party of the consignee. He has
not bought them. The ownership remains with the sender or the consignor. If goods are
destroyed, the consignee is not at all responsible. The loss will fall on the consignor. The
consignee tries to sell the goods according to the instructions of the consignor. When the goods
have been sold, he shall deduct his expenses, commission etc from the sale proceeds and the
balance is remitted to the consignor. The relation between consignor and consignee is that of
principal & agent. The consignor is the principal and the consignee is the agent.
Consignment
Legal owner ship: In case of a
consignment of goods, the legal
ownership of the goods is not transferred
to the consignee.
Relationship: In case of consignment,
the relation between consignor and the
consignee is that of a principal and an
agent.
Risks:
In case of consignment, risk
attached to the consignor till the
consignee sells the goods consigned.
Return of Goods: In case of
consignment account sale, returns of
goods are possible if the goods are not
sold by the consignee.
Account sale: In case of consignment,
account sale is required to submit
periodically by the consignor to the
consignee.
Sale
In case of a sale of goods the legal ownership is
transferred to the purchaser of goods.
When the parts of goods remain unsold at the case of financial period
When all the goods sent on consignment have not been sold and party of goods
remain useless at the case of financial period the value of unsold useless goods in hands of the
consignee must be ascertained and the profit or loss should be find out by taking this stock into
account, for this purpose we will create stock on consignment account and this entry will passed.
Why branch accounts are maintained: L.C Crapper calls branch accounts Departments
conducted at a distance and William Pickles regards a branch as A section of business
segregated physically from the main section.
Several big business establishments have their branches scaled far and near. In a
legal and expended business several branches of business in the other city are necessary, where
it is essential that complete record be kept of the transactions relating to each branch, so that the
head office prepare such accounts. Such records show the working results and each individual
branch as well as the business as a whole.
It is thus possible for the management to see which of the branches are working
profitably and which requires also attention in order to secure better results. The question of
branchs entrails is an important one which requires that the proper books of accounts and cash
at record of all transaction be kept at head office in case of dependent branches and in case of
independent branches.
Proper record of stock should be kept on the branch. All types of goods supplied
from the head office should be recorded separately showing quantity, saleable price and the
goods sold each day.
In case of credit sale, the record of each customer should be maintained in
separate account to avoid buss as by reason of bad debts, the branch must furnish details as to
the amount and age of the debts so that arrangement for collection may be made without loss of
time.
A firm which has branches would like to know the profit or loss made by at each
branch can be ascertained easily.
The above facts indicates that the branch accounts serve most important purpose
on which the success and failure of whole business depends.
BRANCH ACCOUNTING
Introduction
Large business entities open up branches in
diversified geographic segments such as towns and
cities and even in different countries. Segmenting
their business geographically facilitate the business
to market its products/services over a large
territory and thus increase its profits. Here we must
make this distinction that departments are business
segments whereas, branches are geographic segments.
A branch may be defined as a segment of an enterprise
that is geographically separated from the rest of the
entity, controlled by a head office, and generally
carrying on the same or substantially same activities
as of the entity.
Classification of Branches
Foreign branch
Domestic branch
Independent
Dependent
.
Accounting Entries in the Books of Head Office
1. for opening balances of assets at the branch
Branch a/c
Branch assets a/c (individual accounts)
2. for opening balances of liabilities at the branch
Branch liabilities a/c (individual accounts)
Branch a/c
3. For goods sent to the branch
Branch a/c
Goods sent to branch a/c
4. for return of goods by the branch
Goods sent to branch a/c
Branch a/c
5. For remittance of cash or cheque to the branch
Branch a/c
Cash/Bank a/c
6. For cash or cheque received from the branch
Cash/Bank a/c
Branch a/c
Questions
Questions
Questions
1
0
Incase of profit
Branch a/c
Profit & loss a/c
Incase of loss
Profit & loss a/c
Branch a/c
1
1
Questions
1
Opening stock at invoice price
(1 Jan, 2008) Rs.
2
3,000
Goods sent to branch at invoice price Rs. 24,000
Remittance from branch Rs. 25,000
Cash paid by the head office for sundry expenses Rs.
4,500
Return from the branch invoice price Rs. 150
Closing stock at invoice price Rs. 8,000
1
the goods sold by the branch
to its customer and
3
goods returned by the branch customers. Rest of the
information (even opening and closing balances) in
branch stock a/c is recorded at pro-forma invoice
price.
Branch Debtors Account
Branch debtors a/c is maintained in the traditional
manner to record transactions in between branch and
its credit customers.
Branch Expense Account
The purpose of maintaining this account is nothing
but to compile all branch expenses at one place. This
will include all types of expenses i.e. cash based
expenses and receivables based expenses.
Branch Adjustment Account
Branch adjustment a/c replaces the branch income
statement (profit & loss a/c). This is the account in
which all expenses and losses are closed along with
the margin that is a difference between cost and the
selling price. This difference is split into two; one
is termed as surplus that comes from the branch
stock a/c representing the difference between selling
price and pro-forma invoice price, the second is
termed as loading that represents the difference
between pro-forma invoice price and cost. This
loading is calculated on opening and closing stock
balances and also on the net of the goods sent
branch.
1
a/c instead this second effect
is recorded into the
4
goods sent to branch a/c which after adjustment of
the loading is finally closed into the purchases a/c.
Branch Stock Reserve Account
This is contra to branch stock account. In this
account opening and closing balance of loading on
branch stock is maintained.
Credit
xxx
xxx
xxx
xxx
xxx
xxx
xxx
(8)
(9)
1 Allowed To
For Bad Debts/ discount
xxx
5
Branch Debtors
Branch expense Account (Dr)
Branch Debtors Account (Cr)
For Shortage/ Shrinkage in Branch Stock
Branch Adjustment Account (Dr)
xxx
xxx
xxx
x xxx
x
x
(11)
xx
x
xxx
xx
x
xxx
xx
x
xxx
xx
x
xxx
xx
x
xxx
xx
x
xxx
(12)
(13)
(14)
(15)
(16)
1
6
Branch Stock
(Goods Sent)
(At Invoice)
Jef(14)
Jef(1)
Jef(15)
Questions
Questions
6,000
2,400
3,000
60,000
72,000
57,600
1,400
300
5,000
12,000
1
part of stock remains unsold
at the branch, which
8
includes an element of profit that could not be
realized by the head office. Such unrealized profit
is reversed in the books of head office by recording
this accounting entry:
Income Statement a/c Dr. (Wholesale price less cost
price)
Stock Reserve a/c Cr.
In the balance sheet the branch stock is shown at
cost i.e. after deducting stock reserves.
Questions
White limited has retail branch at Gujranwala. Goods
are sold on 60% profit on cost. The wholesaler price
is cost pus 40%. Goods are invoiced from Calcutta
head office to Gujranwala branch at wholesale price.
From the following particulars, ascertain the profit
made at head office and branch for the year ended
31.12.2007. You are required to calculate the profit
of head office and the profit of branch also.
Particulars
Head office
Branch (Rs.)
(Rs.)
Stock on
175,000
---------1.1.2007
1,050,000
---------Purchases
378,000
---------Goods sent
56,000
7,000
(invoice price)
1,071,000
350,000
Expenses
420,000
63,000
(Selling)
Sales
Stock on
INDEPENDENT BRANCH
Steps involved in preparing accounts of independent
branch
Reconciliation
Adjustment
Incorporation
Reconciliation
1
Reconciliation of the balance
of head office account
9
appearing in the books of Branch with the balance of
branch account appearing in the books of head office
Reasons of Difference
The two balances might be different because of
following reasons:
1. Cash in transit
2. Goods in transit
3. Mistake committed by either party
NOTE: Accounting entry for reconciliation will be
passed in the books of either partyAccounting Entries
Cash in transit
Cash in transit A/C
Branch A/C or Head office A/C
Goods in transit
Goods in transit A/C
Branch A/C or Head office A/C
Mistakes
Account to be rectified
Branch A/C or Head office A/C
Branch A/C or Head office A/C
Account to be rectified
Adjustments on the books of both parties
Certain information are required to be adjusted in
the books of both the parties (head office and
branch). These include:
1. Allocation of head office expense
2. Depreciation on branch assets
3. Inter branch transfers
Accounting Entries
Books of head office
Allocation of head office expense
2
Branch A/C
0
Specific Expense A/C
Depreciation of branch assets
Branch A/C
Provision for depreciation A/C
Inter branch transfers
Receiving Branch A/C
Transferring Branch A/C
Books of branch
Allocation of head office expense
Specific Expense A/C
Head office A/C
Depreciation of branch assets
Depreciation Expense A/C
Head office A/C
BRANCH ACCOUNTING
(Incorporation of branch)
Questions
The following is the Trial Balance of Murree Branch
as on 31st December, 2007.
Particulars
Dr.
Cr.
Particular Dr.
Cr.
(Rs.) (Rs.)
s
(Rs.) (Rs.)
Lahore head
3,240 138,000 Debtors
3,700 1,850
office
6,000 6,000
Creditors
1,960
97,800
Rent
1,470
Stock 1st Jan.
19,000
Sundry
1,780
2007
4,500
office
6,000
Purchases
expenses
400
Goods received
Cash at
from H O
bank
Sales
Furniture
Goods supplied
Depreciati
to head office /
on on
Sales to H O
Furniture
Salaries
145,850
145,850
DEPARTMENTAL ACCOUNTS
A
2
to be divided, but the criteria
for identifying the
2
departments in an examination question is always the
separate sales/work done revenue. Each department is
considered as a profit centre, though none of the
department is separated geographically from the rest
of the departments. This type of organizational
subdivision creates a need for internal information
about the operating results (profitability) of each
department. Based upon the departmental knowledge of
profitability and growth rate, the management takes
certain decisions e.g. pricing, costing, sales
promotion, closure etc.
Separately identified
2
promotion, selling commissions,
research and
3
development cost etc.
Basis
Expenses
Sales/Work-done Revenue Selling and
distribution
expenses
After sales service
Discount allowed
Carriage/freight
outward
Bad debts
Selling commissions
Advertisement
Number of Employees
Salaries and wages
Staff welfare
Canteen/cafeteria facility
Group insurance
3
Area Occupied
Building rent
Building depreciation
Building insurance
Building repair and
maintenance
Air conditioning and
heating
Property tax
Inter-com
4
Purchases of
Carriage/freight inward
goods/raw material Import duties
Custom tax
Receiving and handling
cost
Discount received (income)
4
Specific ratio or sales
ratio
Un-allocable
2
tax expense is being charged
before subtracting
5
certain expenses.
2
Sales
7
Less Cost of goods sold
Gross profit
Less Operating expenses
Salaries & Wages
Rent, rates & taxes
Repair & renewal
Lighting & heating
Profit from operations
Add Other incomes
Profit before tax
Less Income tax
Net profit/Profit after tax
Less General expenses
Net profit of the business
Q.NO.1
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Jewellery
Rs.
Clothing
Rs.
2,000
Hairdressi
ng
Rs.
1,500
Opening stock
(1/1/2008)
Purchases
Closing stock
(31/12/2008)
Sales and work
done
Staff salaries
11,000
3,000
3,000
2,500
15,000
4,000
18,000
9,000
27,000
2,800
5,000
6,000
3,000
2
Rent 3,500
8
Repair expenses 4,800
Air conditioning & lighting 2,000
General expenses 1,200
Receiving Departments
Y
(Rs)
----
Z
(Rs)
----
X
(Rs)
----
Y
(Rs)
400
Z
(Rs)
----
500
----
500
----
----
----
300
----
300
----
Y)
April
30
(from
X to
Z)
Total
200
----
----
600
500
300
2
9
----
----
200
500
700
200
X
Rupees
250,000
Y
Rupees
75,000
1,000,000
20,000
1,200,000
300,000
150,000
50,000
Other Information:
3
0
ESSENTIALS OF PARTNERSHIP
The law governing partnership is contained in the
Partnership Act, 1932. Section 4 of the Act defines
partnership as the relation between persons who have
agreed to share the profits of a business carried on
by all or any of them acting for all.
The following are the essential elements of
partnership:
1. There must be an agreement entered into by all the
persons concerned.
2. The agreement must be to share the profits of a
business.
3. The business must be carried on by all or any of
them acting for all.
All these elements must be present before a
partnership can come into existence. If any of them
is not present, there cannot be formed a partnership.
Questions
Net Profit
Interest on
capital
Partner
salary
16,000
(16,000)
Profit
sharing
A 16,000
x3/5
B 16,000 x
2/5
43,600
---10,000
3
---1
20,000
70,000
(30,000)
24,000
----
(24,000)
9,600
6,400
16,000
24,600
---
ESSENTIALS OF PARTNERSHIP
Partnership agreement:
Partnership is the result of an agreement. The
agreement among the partners that sets out the terms
on which they have agreed to form a partnership is
called partnership agreement. It may be in writing or
by words of mouth or be implied from the course of
conduct of the parties. It is desirable to have the
partnership agreement in writing to avoid future
disputes. The document in writing containing the
various terms and conditions as to the relationship
of the partners to each other is called the
partnership deed. The following clauses are
normally included in partnership agreement.
1. Name under which business of the firm is to be
carried on.
2. Nature of partnership business.
3. The capital of the firm and the proportion in
which it is to be contributed by each partner.
4. Ratio in which profits and losses are to be
shared by partners.
3 is to be allowed on the
5. Rate at which interest
2
capital and charged on the drawings.
1. Fluctuating Capital.
3
3
2. Fixed Capital.
The concept of fluctuating and fixed capital can be
understood with the help of example discussed in
the last lesson`s solved question.
Advance Financial Accounting (FIN-611)VU
Fluctuating Capital:
Particulars
Drawings
Balance c/f
30,00012
3,600
30,000211 Opening
,400
capital
b/fProfit
110,0004
3,600
215,0002
6,400
153,600
241,400
153,600
241,400
Owners
A
Capital
Current
123,600
B
Capital
Current
211,400
335,000
Particular A
s
Questions
Questions
Questions
Questions
Questions
3
partnership and the profit
sharing ratio is agreed
7
at 3/8 : 3/8: 2/8 respectively. Calculate the
sacrifice ratio of old partners
Questions
If:
Increase
Decrease
Increase
Increase
in
in
in
in
3
Pass the necessary journal
entries for the above
8
information and prepare the revaluation account
Goodwill
3
9
4
Goodwill Raised Scenario-1
0
Journal Entry
Goodwill A/c 135,000
As capital A/c 81,000
Bs capital A/c 54000
Working
As share = 135,000 x 3/5 = 81,000
Bs share = 135,000 x 2/5 = 54,000
Important Note
Following should be taken in to account when doing
the above treatment for goodwill:
1. If goodwill already appears in the Balance Sheet
which is equal to full value of goodwill so
calculated, then no entry is required to be passed.
2. If goodwill already appears in the Balance Sheet
which is less than the full value of goodwill then
goodwill is to be raised for the balance (full value
of goodwill calculated less goodwill already
appearing in the Balance sheet)
4
3. If goodwill already appears
in the Balance sheet
1
which is more than the full value of goodwill, then
excess goodwill is to be written off. The journal
entry will be as under:
4
Journal Entry (Goodwill raised)
2
Goodwill A/c 135,000
As capital A/c 81,000
Bs capital A/c 54000
Journal Entry (Goodwill raised & written off )
As capital A/c 67,500
Bs capital A/c 45,000
Cs capital A/c 22,500
Goodwill A/c 135,000
As benefit
Old ratio (Cr) 81,000
New ratio (Dr) 67,500
(Cr) 13,500
Bs benefit
Old ratio (Cr) 54,000
New ratio (Dr) 45,000
(Cr) 9,000
As benefit + Bs benefit
13,500 + 9,000 = Rs. 22,500
Cs share = 22,500
Cs share = 135,000 x 1/6 = Rs. 22,500
Goodwill Brought in Cash Scenario-3
When the required amount of premium for goodwill is
brought in by the incoming partner and the money is
retained in the business to increase the cash
resources:
In this situation, premium for goodwill is to be
shared by the old partners in the sacrificing ratio.
The sacrificing ratio is to be calculated by
deducting the new ratio from the old ratio for each
partner. It should be noted that when the profit
sharing ratio between the old partners does not
change as between themselves, this old profit sharing
ratio is their sacrificing ratio.
Goodwill brought in cash
Bank A/c 22,500
Cs premium for goodwill A/c 22,500
Distribution of goodwill (sacrifice ratio)
Cs premium for goodwill A/c 22,500
As capital A/c 13,500
Bs capital A/c 9,000
Questions
Laiquee, Imran and Ishtiaq are in partnership. They
shared profit in the ratio 2:5:3. It is decided to
admit Amir. Amir will bring Rs. 4,000 cash into the
business for capital. It is agreed that goodwill was
worth Rs. 10,000, but that is not to be brought into
business record. The new profit sharing ratio is to
be 3:4:2:1.
The balance sheet before Amir was introduced as a new
partner was as follow:
Assets (Rs.)
Building
8,000
Machinery
3,000
Stock
2,000
Cash
2,500
15,500
Less Creditors 3,500
Net Assets
12,000
Capital (Rs.)
Laiquee
3,000
Imran
5,000
Ishtiaq
4,000
12,000
Questions
Two partners A & B were sharing profit ratio 3:2. A
gets salary of Rs. 2,800 per annum. After six months,
C was admitted as a new partner and shared profit
1/5. According to new profit sharing ratio, A and B
will get equal share. The new profit ratio is 2:2:1.
C will also get salary Rs. 2,400 per annum.
Total sales Rs. 160,000
Sales of first six months Rs. 96,000
Sales of next six months Rs. 64,000
Required: Distribute Rs. 19,000 profit among
partners.
Retirement of Partner
Issues Relating to Retiring Partner
Step 1. Calculation of goodwill
Step 2. Revaluation of goodwill/raise the goodwill
Step 3. Revaluation of net assets
Step 4. Preparation of partner's capital account
Step 5.Transfer of retiring partners capital account
into his loan account
Step 6. Make part payment or full payment of his loan
account (depending upon the cash availability)
Step 7. Prepare post retirement balance sheet
4
Let us understand the accounting
treatment by
6
retiring Laiquee (Solved Question # 1):
Total Profit Distribution:
Transfer capital account to loan account
Retiring partner capital A/c
Retiring partner Loan A/c
Transfer Laiquees capital account to loan account
Laiquees capital A/c 5,260
Laiquees loan A/c 5,260
Part payment of Laiquee loan
Laiquees loan A/c 2,000
Cash A/c 2,000
Hire
Purchase
Definition: The hire purchase system is a system under which the purchase is paid in number of
installments as soon as the contract is entered into and the first installment is paid the
hire purchaser acquires position (not the owner ship) of the goods. After the payment of the final
installment the hire purchaser becomes the full fledged owner of the goods. So long as he
does not become the owner, the installments paid by him are considered to be the payments
for hire. In case the hire purchaser fails to pay any particular installment, the seller or vendor
can take away the goods, and the installments already paid become forfeited. Thus, the
essential features of a hire purchase system are
a.
The position of goods (not the owner ship) is transferred to the hire purchaser
the goods remains the property of seller until the buyer as paid the entire installments.
If default is made by the hire purchaser in payments, the seller can take away the
goods.
b.
c. The hire purchaser is responsible for keeping the goods in good condition so long as
they remain the property of the seller.
d. As the seller retains the ownership of goods he must get them insured against loss or
damage.
Its the system, under which the4purchase price has to pay by the purchaser in
7
a number of periodical installments which easily resembles the hire purchase system, is
called installments purchase system.
Hire Purchase
Installment Purchase
The purchaser obtains the possession of the In this case of the purchaser becomes owner
goods and begins to use the units but of goods. The contract is enter into and he
legally he does not become the owner of obtains the delivery of it and begins to use.
the corollas units until he pays the final
installment.
In the vender system the vender can not relike to position of goods for he is no longer
their owner. All that he can do is to use the
purchases for the balance as to exercise an
unpaid sellers loan the amount of paid
installment can not be forfeited as deduction
of goods sold. In other words seller can only
COMPANY ACCOUNTS
4
Following are the salient features
that make a
8
limited liability company different from other
business entities.
1) Separate legal entity
Unlike sole proprietorship and Partnership
organizations the Company style of business is an
incorporated organization that enjoys a separate
legal entity. It means that from the legal point of
view company and owners of the company are two
different persons.
This concept is often confused with the Business
entity concept which is merely an accounting concept
and is used to record financial information of an
entity. Whereas, Separate legal entity signifies
that a company has a legal status and it can sue and
can be sued in its own name.
2) Limited liabilities
Owners of a Company style of business enjoy an
advantage that if a company runs into financial
difficulties, they cannot be forced to make further
contributions to the company. Even they are not asked
to make good any financial losses suffered by the
company.
Liabilities of the owners of a company are limited to
the amount of paid up share capital (amount
contributed by them). Maximum risk exposed to an
owner of a company is the loss of contributed capital
money.
3) Board of directors
Management affairs of a company are run by a board of
directors that is elected or appointed by the owners.
The board of directors runs the company on behalf of
its owners, in a way it can be said that directors
act like stewards.
Directors are responsible for decision making, for
running day to day business affairs, for managing
financial issues.
4) Sources of finance
Like other business organizations a company also gets
its finances from owners and lenders but the circle
of its owners and lenders is very large.
4
5) Capital from owners
9
At the time of its incorporation the company makes an
estimate of the total amount of capital that will be
required in the business. This capital is split into
shares and hence is known as share capital. People
(investors) who want to become owner of the company
contribute in the share capital. Contributors of the
share capital are known as share holders or members
of the company. A limited liability company is
jointly owned by its members.
6) Borrowings from lenders
Large business projects are undertaken by the company
style of business which need huge amount of finance.
Such financial requirements are often cannot be met
with the contributed share capital alone. For this
purpose a company borrows finances from the financial
institutions (like Banks etc.) and also a company can
borrow from public in general by issuing
loan/debenture certificates. Holders of these
certificates are known as debenture holders.
7) Legal formalities
Company style of business entity undertakes huge
ventures that involve contracts with suppliers,
customers, lender and so many other concerns. Also it
has large number of share holders. This might create
certain difficulties to the management and to the
related parties as well. Therefore incorporation of
Limited Liability Company requires certain legal
formalities and is tied up in more tight regulations
to run the entity, which are not required to be
abided by the sole proprietorship and partnership
style of business entities.
8) Reporting requirements
As a limited liabilities company is involved in
transactions with a huge number of stake holders,
therefore its directors are required to publish and
circulate financial statements with regular intervals
which may be a quarter, six months or a year,
depending upon the nature of the company.
Finances of a Limited Liability Company
A company gathers its finances from two sources:
1. Owned Equity
5
0
2. Borrowed Equity
1) Owned Equity
Owned equity comprises of:
a) Equity share capital (contributed by the member)
b) Reserves (realized/unrealized profits)
i. Capital Reserves
Share premium (unrealized profit)
Revaluation reserve (unrealized profit)
Capital redemption reserve (realized profit)
.
Share premium
Companies having strong background often issue their
shares at a price that is more than the nominal
(face) value. Excess of the issue price over the
nominal value is known as share premium.
Note: Remember one very important tip; share capital
a/c always credits with its nominal (face) value
only, any excess received as resources will be
credited to the share premium a/c.
Questions
Rafi Ltd Co issues 100,000 ordinary share capital @
Rs 10 each with a premium @ Rs 7 per share.
Record the above transaction in the books of
accounts.
COMPANY ACCOUNTS (Cont.)
Components of financial statements
5
As per International Accounting
Standards there are
1
five components of financial statements:
1.
2.
3.
4.
5.
Balance Sheet
Income Statement
Statement of Changes in Equity
Cash Flow Statement
Notes
5
Loan from financial institutions
***
2
Finance lease liability *** ***
Capital Employed
Questions
1,923
489
12
267
450
534
123
3,000
500
5
Share premium
3
Retained profits: 1 September 2004
23,090
250
1,132
23,090
Questions
2,967
132
23
110
1,978
756
423
3,000
5
Four million ordinary shares
of 50
4
paisa each
Share premium
Retained profits: 1st April 2005
45,050
2,000
300
3,598
45,050
holder.
5
5
b. In case of winding up the company, the preference share holders have prior
right in regard to repayment of capital.
c. A fix rate of dividend is paid on preference share capital.
3. Deferred Share: Is also called Founders Share were use to be issued to the promoters
of the claims of all other share holders had been not the deferred share holders.
Kinds of Debentures:
The debentures can be classified the basis of the terms and condition of their
issue by the company.
1. Ordinary or Naked Debentures: The debentures, which are issued without any
security for repayment, are known as Ordinary or Naked Debentures.
2. Mortgage Debentures: Mortgage Debenture is one, which is secured by a mortgage
on the real property of the company.
3. Redeemable Debentures: The debentures, which are repayable at the state time, are
called Redeemable Debentures.
4. Irredeemable Debenture: A debenture, which is not payable during the life time of
the issuing company, is called Irredeemable Debenture.
5. Registered Debentures: A Registered Debenture id issued in the name of owner of
the debenture.
6. Bearer Debentures: The Bearer Debentures, which does not show the name of
owner the Bond.
7. Equipment Trust Debenture: The debentures, which are issued of raise funds for
Share
1. Share Capital:
The companys
ordinance defines shares as a share in
capital of the company.
2. Rights: The share holder receives
dividends when the company earns the
profit. They suffer financially when it
suffers losses.
3. Voting: A share holder is entitled to vote
at the companys general meeting.
4. Owner of the Company: The share
holders except the Preference Share holders
are the owner of the company.
5. Return of the Capital: The share holders
are allowed to sale the share a will to other
person but they are not paid back capital.
6. Management:
The share holder
manages the offers of the company through
the created representatives called Board of
Directors.
7. Payment at the Winding up: In case the
company is wind up the share holder has a
secondary claim of the return of money on
the purchased shares.
8. Islamic Sprits: The dividend paid to the
share holders depends upon the profit of the
company. There is no fixed rate of return on
the shares of the company. As much they
are Islamic in character.
Debenture
A debenture is a certificate indebtedness
Issued under the scale of the company.
The right of debenture is to receive money at a
fixed rate of interest. They can earn whit the
profit or loss of company.
The debenture holder has no rights of voting at
any meeting of the company.
The debentures are the creditors of the company
and as such they have no claim on the
ownership of the company.
The company gives an undertaking to payback
the capital along with the interest a stated time
to the debenture.
The debenture holders are not entitled to
interfere in the management and the
administration of the company as they are not
the owner of the company.
On winding up of the company, the first
propriety is to payback the money to the
debenture holder.
The company has to pay fixed rate of interest to
the bond holders whether the company makes
any profit or suffer the loss, which is basically
against the Islam.
1. Redemption in Installment:
A company may redeem its debenture in installment as per the term of the issue of
the debenture. The term may be in any of the following forms.
5
a. Redemption of fixed sum of debenture:
7
The term of issued may provide that as a form of particular the company
will be redeeming debenture of a fix amount. The decision about the holders
whose money has to be return on be taking lottery methods or drawing a lot
method.
2. Redemption by Conversion:
In some case converting them into new share redeems debenture or debentures
the term of issue may give the option to convert into share or debenture can be issued at
per at premium or at discount. In case the new debentures are issued at premium,
premium account is credited and discount account is debited.
5
8
Under this method the company may take an insurance policy for redemption of
debentures in place of purchasing investment. The policy will be required data.
The amount of premium will have to be paid in the beginning of the year. The
question of getting interest does not arise at all and therefore, there will be no
entry for interest.
shares to be issued by accompany. A right simply means an option to buy certain securities at a
certain specified period. A limited company having a share capital may increase its share capital
by issuing new shares.
Definition:
Share so effected to the existing shareholders are called right shares as the
existing shareholders of a public company have a first right of allotment of further shares. The
offer of such shares to the existing shareholders is known as Privatized Subscription or Right
Issue.
Advantages of Right Issue
Following are the specific advantages of this legal right to the existing share
holders:
1. It ensures equitable distribution of share without disturbing the established equilibrium
of shareholders. The contract of the company remains in the hand of the existing
shareholders.
2. There is more certainty of the share being sold to the existing share holder at lower price
then market price.
3. The expenses to be incurred if share is offered to the public are avoided.
4. It prevents the directors to issue new shares to their relatives and friends at lower price,
on the other ensures that should get more controlling rights in the company. It better
images of the company and stimulates response from share holders and the investment
market.
5
9
Introduction & Definition:
The term bonus means an extra dividend paid to shareholders in a joint stock
company from surplus profit, when a company has accumulated a large fund out of profit much
be on it needs the directors may divided to distribute a point of it amongst the shareholders in
form of bonus. Bonus can be paid either in cash or in the form of share. Cash bonus is paid by
the company when it has large accumulated profit as well as cash to pay dividend. May a time a
company is not in a position or because its adverse effects on the capital of the company. In
such conditions, the free shares are issued, known as Bonus. Shares become permanently put of
its issued share capital.
From Companys view point:
(a) As no cash is distributed liquidity isnt imposed.
(b) The profit is permanently detail in the business by capitalizing the facilities
expansion of business by employing such capital profit in the business.
(c) The capital of the company as per its balance sheet will be more realization
then it would be otherwise.
From Shareholders view point:
(a) The shareholders can receive dividend on the increased share holding.
(b) The shareholders receive profit without in any way affecting the companys
cash position, they can release cash by the sale of these shares in the market if
they so desire.
(c) The shareholders stand to gain, since receipt of bonus share dividend results
in tax advantages them to compare to cash dividend.
Under section 233 of the companys ordinance it has been made compulsory to
prepare final account and present it at every annual meeting, section 233 reveals the following
points in this regard.
1. Laying accounts before General Meeting:
6
Under section 233 (1) of companys
ordinance the Directors of every company
0
are required to lay before the company in Annual General Meeting a Balance Sheet, Profit and
Loss account or in the case of a company not trading for profit an Income and Expenditure
account for the period. The first account must be presented at some date not later then the
eighteen months after the incorporation of the company, subsequently once at least in every
calendar year.
2. Audit of account:
Under section 233 (3) the Balance Sheet and the Profit and Loss account or
Income and Expenditure account shall be audited. The Auditor of the company and the
Auditors Report shall be attached.
3. Circulation of accounts:
Under section 233 (4) every company shall be send a copy of such Balance Sheet
and Profit and Loss account or Income and Expenditure account so audited together with a
copy of the auditors report and the Directors Report to the registered address of the every
member of the company at last 21 days before the meeting at which such accounts and
reports are to be presented.
4. Filing of Accounts:
Under section 233 (5) every listed company shall also dispatch simultaneously
five copies of each account and report to the authority, the Registrar and the Stock Exchange
on which its quoted a non listed public company has however to file three copies of such
accounts along with Auditors and Directors Report with the Registrar of joint stock
companies only.
5. Directors Report:
Under section 236 the Directors Report is a point of companys annual accounts.
This report shall contain the usual information regarding the efforts of the company its
operations etc. However it shall also contain the full information and explanation with
regards to any reservation, observation, qualification or adverse remarks made by the
auditors in their report on the account of the company.
The procedure for the formation of a joint stock company may be divided into
four stages as follows.
1. Promotion Stage:
First of all the idea of forming a company must be conceived either a person or a
group of person who are called promoters. A person doing the necessaries floatation work
of a company is called the promoter. Promoters are experts in company formation work.
They may detail investigation to find out whether the idea is really profitable. They also to
decide about the total amount of capital required to start and to run the business. They have
to prepare the necessary documents required to gain the incorporation certificate.
2. Incorporate Stage:
A company is incorporated when it gets certificate of incorporation from the
registrar of the companies. For this purpose following documents are to be filled by
promoters of the company (i) Memorandum of Association (ii) Article of Association (iii)
Notice and Address of head office (iv) List of directors (v) Consent of directors in written
(vi) Directors contract of qualification to purchase shares (vii) Statutory declaration of
fulfillment of legal conditions of incorporations.
The documents (iv, v and vi) are not required for private companies. If the
registrar is satisfied in all matters he shall issue the certificate of incorporation. The
certificate is the conduce evidence that all the requirements in respect of registration have
been compiled with, and now private company can start its business.
3. Raising of Share Capital:
After the Incorporation of the public company, the directors will file a copy of
the prospectus with the registrar. It is an invitation to the public for subscription. Investors
can get the prospectus and application form free of charge from the companys bankers.
They will submit the application along with the companies and directors will, and then
precedes the allotment of the shares to the applications.
4. Trading or Business Commencement Certificate:
A public company through incorporation can not begin its business unless it gets
the Trading certificate. This will be issued by the registrar of the following declarations are
filled by the company with the registrar.
a. Declaration by the company that the minimum subscription amounts as per prospectus
is satisfied.
b. Declaration by the company that all the directors have taken up and paid for their
qualification shares.
c. Declaration by the company those all legal requirements precedent to commencement
of business has taken up and paid for their qualification shares.
Meaning:
association. The Article of association is the regular ions or by laws governs internal
organization and conduct of a company.
The article of association describes the process of the directors the made and
from in which changes in internal regulation of the company make from time to time be made.
The article of association being subordinate to the memorandum of association can not go
beyond the limit set by it.
Content of Article:
The main content of the Article of Association are as under:
1. Amount of share capital issue, transmission of share.
2. Rights of share holders regarding, voting, dividend and return of capital.
3. Rates regarding issuance of shares and debentures.
4. Procedure as well as regulation in respect of marking calls on shares.
5. Manner of transfer of shares.
6. Rates regarding appointment of directors, managing directors, agents, secretaries and
treasures.
7. Number qualification, remuneration, powers and liabilities of directors.
8. Declaration of dividend.
9. Convincing and conduct of meeting with reference to notice quorum, poll, promo,
resolution etc.
10. Rates regarding the forfeited and surrender of shares.
11. Matters relating to accountant audit.
12. Rates regarding the winding up the company.
13
When an existing company takes over the business of their existing company it
knows as the absorption. The company bought over goes into liquidation. The absorbed
company will have no further separate existing.
Absorption does not involve the formation of a new company but it does require
the winding up of an existing company whose business is being purchased.
Absorption
Amalgamation
The
creditors
of
the
absorbed
company
may
either be paid or purchasing
company may take over the
liabilities.
Definition:
Reconstruction
exchange for a certain amount calculated with reference to the quantity or sold much on amount
is known as Royalty.
Explanation:
There are some person who posses an exclusive right over a mine in his territory.
A patent holder has the exclusive right to produce things according to the patent. An author
requires a copy right in his book and is alone authorized to print and sell it. This right can be
exercised by its possessors or it can be sold to some person in exchange of definite amount
which is known as royalty.
In these cases, the person who surrender the right is known loser (land lord) and
the person who take it known as lassie.
Short working
When the Royalty is less then the dead rent, the difference is called Short
Working. It can easily be defined at the excess of dead rent over the royalty, usually it is only
during the course of a couple of initial years that short working take place.
Interim Dividend
An interim dividend is a dividend declared before the close of a financial year of
a company either out of accumulated profit brought forward from past years or anticipated profit
of the ear rent year. In other words interim dividend is a dividend declared at any time between
two ordinary general meetings. Interim dividend is only a payment on account of the whole
dividend for the years.
Before dividing on interim dividend the director must be careful to see that the
profit already made sufficient, justify the payment of an interim dividend and interim financial
account should be prepared which all would provision is respect of outstanding liabilities for
expenses, depreciation etc share made although the account may disclose large profits.
***
***
***
Less:
Drawings (during the year)
(**)
***
Questions
Questions
2
Questions
3 Jehan Zeb is a dealer who has not kept proper books
of account. At 31 August 2006 his state of affairs
was as follows:
Particulars
Rs.
Cash
115
Bank Balance
2,209
Fixtures
4,000
Stock
16,74
0
Debtors
11,89
0
Creditors
9,052
3,000
Questions
Ali and Bilal are partners in a firm sharing profits
and losses in the proportion of 3:2. They keep their
books on the single entry system. On 31 December,
2006, the following Statement of Affairs was
extracted from their books:
Liabilities
Rs.
Assets
Rs.
Capital
Accounts
Ali
Bilal
25,000
30,
20,000
Stock
20,
25,000
Sundry Debtors
35,
30,000
Cash at Bank
15,
Loan- Bilal
Sundry
Creditors
1,00,000
1,00,000
a) Cash Book
i. Cash Account
e) Year-end adjustments
i. Closing stock
v. Disposal of Assets
Other Income
Cash based income Cash Book receipts side
Adjusted with:
Accrued incomes S O A-opening/Year-end Adjustments
Unearned incomes S O A-opening/Year-end Adjustments
Incomes against payables
Discounts Creditors accounts Dr side
Incomes against fixed assets
Gain on disposal S O A-opening/Cash Book receipts
Net profit Result
Name of the Organization
Balance Sheet
As on December 31 20x7
Source of Information Rs.
Assets
Fixed Assets S O A-opening
Addition Cash Book payment side
Disposal Year-end Adjustments
Depreciation Year-end Adjustments
Investments S O A-opening
Addition Cash Book payment side
Disposal Year-end Adjustments
Current Assets
Stocks Year-end Adjustments
Debtors Debtors Account
Prepaid expenses Year-end Adjustments
Accrue incomes Year-end Adjustments
Bank Cash Book (Bank Account)
Cash Cash Book (Cash Account)
Total Result
Owners Equity
Opening balance S O A-opening
Fresh capital Cash Book receipts side
Net profit Income Statement
Drawings Cash Book payment side
Liabilities
Loans
Further loan taken Cash Book receipts side
Repayment of loan Cash Book payment side
Current liabilities
Creditors Creditors Account
Accrued expenses Year-end Adjustments
Unearned incomes Year-end Adjustments
Bank overdraft Cash Book
Total Result
Receipts
Amount
Payment
Rs.
Opening balance
xxx
xxx
xxx
Cash Book
Statement of Affairs as on opening date
Opening Assets xxx
Opening Liabilities (xxx)
Owners Equity xxx
Debit (Dr.) and Credit (Cr.) Rules:
Debit (Dr.) group
Assets Increase Dr.
Expenses Decrease Cr.
a). Depreciation
b). Loss on disposal of an assets
Cash Based Expenses:
Expenses paid in cash during the year xxx
Less Opening balance of Accrued expenses xxx
Add Closing balance of Accrued expenses xxx
Add Opening balance of prepaid expenses xxx
Less Closing balance of prepaid expenses xxx
xxx
Provision for Doubtful Debts
Amount
Payment
Amount
Rs.
Opening balance
b/f
Cash sales
Received from
Debtors
Rs.
1,500
2,000
12,000
800
25,000
Electricity bill
500
10,000
Drawings
15,000
Paid to creditors
24,000
Closing balance
c/f
6,200
48,500
48,500
Debtors Account
Particulars
Amount
Rs.
Particulars
Amount
Rs.
Opening
balance b/f
8,000
22,000
Credit sales
Cash received
from debtors
Discount
allowed
Bad debts
25,000
200
300
4,500
Closing
balance c/f
30,000
30,000
SINGLE ENTRY
CALCULATION OF MISSING INFORMATION
As we have already learned that a medium sized entity
will not be preparing its books of accounts based on
double entry book keeping system rather it will be
maintaining following set of records in order to
prepare its financial statements:
a) Cash Book
i. Cash Account
e) Year-end adjustments
i. Closing stock
v. Disposal of Assets
Questions
From the following information, find out the credit
sales:
Rupees
Opening balance of Debtors 12,000
Returns Inward 5,000
Cash received from debtors 45,000
Discount allowed 3,000
Questions
From the following cash transactions ascertain the
amount of cash sales:
Rupees
Opening Cash balance 5,000
Opening Bank balance 10,000
Cash collected from Debtors 20,000
Commission received 5,000
Payment to Creditors 10,000
Cash purchases 20,000
Closing Cash balance 10,000
Closing Bank balance 15,000
Questions
From the following information, find out the Credit
purchases:
Rupees
Opening Creditors 7,600
Cash paid to Creditors 20,000
Questions
From the following information, calculate opening
stock:
Rupees
Purchases 20,000
Sales 30,000
Closing Stocks 10,000
Gross profit 20% of Sales
SINGLE ENTRY
CALCULATION OF MARKUP AND MARGIN
Cost Structure
Cost structure stands for the percentage structure of
Sales Revenue, Cost of Goods Sold and Gross profit.
Through cost structure percentage of gross profit is
determined over the cost of goods sold and over the
sales revenue. It can be expressed in equation like
this:
Sales Revenue Sales
Less Cost of Goods Sold or COGS
Gross profit
Markup rate
6,000
Solvency Ratios
Solvency is a measure of the long-term financial viability of a business which means its
ability to pay off its long-term obligations such as bank loans, bonds payable, etc..
Information about solvency is critical for banks, employees, owners, bond holders,
institutional investors, government, etc.. Key solvency ratios are debt to equity ratio, debt to
capital ratio, debt to assets ratio, times interest earned ratio, fixed charge coverage ratio, etc.
Profitability Ratios
Profitability is the ability of a business to earn profit for its owners. While liquidity ratios and
solvency ratios are relationships that explain the financial position of a business profitability
ratios are relationships that explain the financial performance of a business. Key profitability
ratios include net profit margin, gross profit margin, operating profit margin, return on assets,
return on capital, return on equity, etc.
Activity ratios
Activity ratios explain the level of efficiency of a business. Key activity ratios include
inventory turnover, days sales in inventory, accounts receivable turnover, days sales in
receivables, etc.
Performance ratios include cash flows to revenue ratio, cash flows per share ratio, cash return
on assets, etc. and they aim at determining the quality of earnings.
Coverage Ratios
Coverage ratios are supplementary to solvency and liquidity ratios and measure the risk
inherent in lending to the business in long-term. They include debt coverage ratio, interest
coverage ratio (also known as times interest earned), reinvestment ratio, etc.
HEAD OF DEPARTMENT
SYED KHIZER ABBAS
CAMPUS DIRECTOR
DR.RASHID IRSHAD CH.