 WHAT IS ACCOUNTING

“Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money,
transactions and events, which are, in part at least, of a financial character and interpreting the result thereof”.
 BASIC CONCEPTS OF ACCOUNTING

 Going Concern Concept

In accounting, a business is expected to continue for a fairly long time and carry out its commitments and
obligations. This assumes that the business will not be forced to stop functioning and liquidate its assets at “fire-
sale” prices.
 Historical Concept
Assets should be valued based on their purchase price or the money actually paid for the asset. GAAP requires
that asset should be reported on the Balance Sheet at historical cost.
 Matching Concept
This principle dictates that for every entry of revenue recorded in a given accounting period, an equal expense
entry has to be recorded for correctly calculating profit or loss in a given period.
 Accrual Concept
The revenue is recognized on its realization and not on its actual receipts. Similarly , the cost are recognized
when they are incurred and not when payment is made.
 Materiality concept
All material facts should that can sway the decision of a financial statement user should be recorded in financial
statement. Accountants should record important data and leave out insignificant information.
 Dual Aspect Concept
For every credit, a corresponding debit is made. The recording of a transaction is complete only with this dual
aspect.
 Realization
According to this concept, profit is recognized only when it is earned. An advance or fee paid is not considered
a profit until the goods or services have been delivered to the buyer.
 Conservatism
The convention by which, when two values of a transaction are available, the lower-value transaction is
recorded. By this convention, profit should never be overestimated, and there should always be a provision for
losses.
 Substance over Form
Transaction recorded in the financial statement must reflect their economic substance rather than their legal
form.
 International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) set common rules so that financial statements can be
consistent, transparent and comparable around the world. IFRS are issued by the International Accounting
Standards Board (IASB). They specify how companies must maintain and report their accounts, defining types
of transactions and other events with financial impact. IFRS were established to create a common accounting
language, so that businesses and their financial statements can be consistent and reliable from company to
company and country to country.
IFRS are sometimes confused with International Accounting Standards (IAS), which are the older standards that
IFRS replaced. IAS was issued from 1973 to 2000, and the International Accounting Standards Board (IASB)
replaced the International Accounting Standards Committee (IASC) in 2001.
IFRS are used in at least 120 countries, as of March 2018, including those in the  European Union and many in
Asia and South America, but the U.S uses Generally Accepted Accounting Principles (GAAP).
 Generally Accepted Accounting Principles (GAAP)
The GAAP is a set of principles that companies in the United States must follow when preparing their annual
financial statements. The measures take an authoritative approach to the accounting process so that there will be
minimal or no inconsistency in the financial statements submitted by public companies to the US Securities and
Exchange Commission (SEC). This enables investors to make cross-comparisons of financial statements of
various publicly-traded companies in order to make an educated decision regarding investments.
 IFRS VS GAAP
  A major difference between GAAP and IFRS is that GAAP is rule-based, whereas IFRS is principle-
based.
 One of the key differences between these two accounting standards is the accounting method for
inventory costs. Under IFRS, the LIFO (Last in First out) method of calculating inventory is not
allowed, while under the GAAP, either the LIFO or FIFO (First in First out) method can be used for
estimating inventory.
 Under IFRS, intangible assets are only recognized if they will have a future economic benefit. In such a
way, the asset can be assessed and given a monetary value. GAAP, on the other hand, recognizes
intangible assets at their current fair market value and no additional (future) considerations are made.
 When preparing financial statements based on the GAAP accounting standards, liabilities are classified
into either current or non-current liabilities, depending on the duration allotted for the company to
repay the debts. However, in IFRS, there is no plain distinction between liabilities, so short-term and
long-term liabilities are grouped together.

 FINANCIAL STATEMENTS

1. Income Statement
The income statement is one of the financial statements of an entity that reports three main financial information
of an entity for a specific period of time. Those information included revenues, expenses, and profit or loss for
the period of time.
2. Balance Sheet
Balance Sheet is sometimes called the statement of financial position. It shows the balance of assets, liabilities,
and equity at the end of the period of time.
3. Statement of Changes in Equity
A statement of change in equity is one of the financial statements that show the shareholder contribution, and
movement in equity and equity balance at the end of the accounting period.
4. Statement Of Cash Flow
The statement of cash flow is one of the financial statements that show the movement of the entity’s cash during
the period. This statement help users understand how is the cash movement in the entity.
5. Notes to Financial Statement
This is the mandatory requirement by IFRS that entity has to disclose all information that matters to financial
statements and help users to have a better understanding.

 ELEMENTS OF FINANCIAL STATEMENTS

 Assets
 Liabilities
 Equity
 Revenue
 Expenses

CONCEPTUAL FRAMEWORK
The Accounting Conceptual Framework (ACF) is a set of accounting objectives and fundamentals, developed
by the International Accounting Standards Board (IASB) to ensure uniformity in interpretation across various
accounting methodologies.
Conceptual Framework is a guiding principles that will be followed to make International Accounting Standards
(IAS)
 Qualitative Characteristics of Financial Statement
The following are all characteristics of financial statement:
 Faithfull Representation
Faithful representation is the concept that financial statements be produced that accurately reflect the condition
of a business. Financial statements that faithfully represent these aspects of a business should be Complete,
Error free and Unbiased For example, if a company reports in its balance sheet that it had $1,200,000 of
accounts receivable as of the end of June, then that amount should indeed have been present on that date. The
faithful representation concept should extend to all parts of the financial statements, including the results of
operations, financial position, and cash flows of the reporting entity.
 Relevance
The information must be relevant to the needs of the users, which is the case when the information influences
their economic decisions. This may involve reporting particularly relevant information, or information whose
omission or misstatement could influence the economic decisions of users.
 Timeliness
All the information in the financial statements must be provided within a relevant span of time. The disclosures
must not be excessively late or delayed so that while making their economic decisions the users of these
statements possess all the relevant and up-to-date knowledge. Although this characteristic may take more
resources but still it is a vital characteristic as delayed information makes any corrective reactions irrelevant.
 Comparable
The financial statements must be prepared in such a way that they are comparable with prior year financial
statements and with the financial statement of other companies. This characteristic of financial statements is
very important to maintain, as it makes sure that the performance of the company could be monitored and
compared. This characteristic is maintained by adopting accounting policies and standards that are applied are
consistent from period to period and between different jurisdictions. This enables the users of the financial
statements to identify and plot trends and patterns in the data provided, which makes their decision making
easier.
 Understandable
The information must be readily understandable to users of the financial statements. This means that
information must be clearly presented, with additional information supplied in the supporting footnotes as
needed to assist in clarification.
 Verifiable
A company's accounting results are verifiable when they're reproducible, so that, given the same data and
assumptions, an independent accountant can produce the same result the company did. Say your business lists a
piece of equipment as an asset worth $10,000. If you told an outside accountant how much the equipment
originally cost, how old it is, and what schedule you used to depreciate the equipment, that accountant should
come up with the same figure. If not, the result isn't verifiable.

Importance of Conceptual Framework

Conceptual framework plays an important role in the development of accounting standards. A conceptual
framework forms a theoretical basis for determining how transactions should be measured and reported – how
they are presented or communicated to users. They provide users and preparers of financial statements an
understanding of accounting practices and standards based on a common ideology.
Benefits of a conceptual framework for financial reporting include:
 Establishing precise definitions that facilitate discussion of accounting issues;
 Providing guidance to accounting standard setters when developing and reviewing financial reporting
rules;
 Helping to ensure that accounting standards are internally consistent;
 Helping preparers and auditors to resolve financial reporting problems in the absence of an accounting
standard; and
 Helping to limit the volume of accounting standards by providing an overarching theory of accounting
that can be applied to specific reporting problems.  
Without a conceptual framework, accounting standards would be developed in a random, haphazard way to
deal with issues as they arise. As a result, these standards would be inconsistent with each other or legislation.
CASH FLOW STATEMENT
A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company
receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay
for business activities and investments during a given period. 
A company's financial statements offer investors and analysts a portrait of all the transactions that go through
the business, where every transaction contributes to its success. The cash flow statement is believed to be the
most intuitive of all the financial statements because it follows the cash made by the business in three main ways
—through operations, investment, and financing. The sum of these three segments is called net cash flow.
 Features of Cash Flow Statement

 Cash from operations

Cash from operations is the cash generated from every day business activities.
 Cash from Investing
 Cash from Investing is the cash which is used for the investment purpose in assets, as well as the proceeds from
the sale of other businesses, equipment or other long term assets.
 Cash from Financing
Cash from Financing is the cash which is paid or received for issuing or borrowing the funds. This also includes
dividend paid
 Net increase or decrease in cash
Increase in cash from previous year are written normally and the decrease in cash are written in brackets ().

 Objectives of Cash Flow Statement

 To show the impact of operating, financing and investing activities on cash resources.
 To explain the causes of cash balances changes.
 To report about the cash inflows and cash outflows of the firms operating, financing and investing
activities.
 To determine the financial need of the firm.
 To help in forecasting the future cash flows.

 Importance of Cash Flow Statement

 Cash flow statement is useful in making both internal and external financing and investment decisions
such as repayment of short-term debts and long- term debt, project expansion etc.
 Cash flow statement helps the management in evaluating its ability to meet its obligation such as
payment of interest, taxes, dividend, repayment of bank loan, payment to creditors etc.
 Cash flow statement summarizes the performance of organization on a cash basis, after furnishing the
important cash activities.
 It is useful in making appraisal of various capital investment projects, so that their viability and
profitability can be determined.
 Cash flow statement helps in explaining the anomaly of poor cash position and substaintial profit.
Example 1 (Direct Method)
The following information relates to EMERSON CORPORATION
Cash sales 67 000
Cash collected from customers 52000
Cash paid to employees 25000
Cash purchases 41000
Cash paid to suppliers 9000
Cash expenses 6000
Required: Calculate the Cash generated from operating activities using the Direct Method.
Solution:

Cash from operating Activities

Cash sales 67,000
Cash collected from customers 52.000

Total cash received 119,000

Cash purchases 41,000

Cash paid to suppliers 9,000
Cash expenses 6,000
Cash paid to employees 25,000

Total cash paid 81,000

Cash generated 38,000

Example 2 (Indirect Method)

Cardinal Limited
Statement of financial position as at 31 December 2012 & 2011
Assets 2012 2011
Cash 100,800 57,100
Inventory 66,100 95,800
Trade Receivables 69,700 51,600
Prepaid expenses 4,300 6,200
Property plant & Equipment 126,300 115,000
Property Plant & Equipment acumm depreciation ( 28,600 ) (10,700 )
Total assets 338,600 315,000

Equity & Liabilities

Equity
Trade payables 26,100 32,300
Wages Payable 7,500 17,000
Taxation 2,100 3,800
Notes Payable 46,000 71,000
Share capital 232,000 183,000
Retained Earnings 24,900 7,900
Total Equity & Liabilities 338,600 315,000

Cardinal Limited
Statement of Income
For the year ended 31 December 2012
Sales 672,000
Less CGS (410,000)
Gross profit 262,000
Operating Expenses
Other expenses 66,600
Depreciation expenses 57,800
Total operating expenses (124,400)
137,600
Gain on sale of equipment 2,400
Income before taxes 140,000
Less income tax expense 56,000
Net Income 84,000
a) A 25000 notes payable is retired at its carrying ( book value) in exchange for cash.
b) The only changes affected retained earnings are not income & cash dividend paid
c) New equipment is required for 60,100 cash
d) Received cash for the sale of equipment of that had cost 48,800, yielding a 2400 gain
e) Prepaid expenses and Wages payable relate to other expenses on the income statement
f) All purchases and sales of merchandise inventory are on credit

Cardinal Limited
Statement of Cash Flow
For the year ended December 31, 2012
Cash Flow from Operating Activities
Profit before tax 140,000
Adjustment for non-cash items:
Depreciation 57,800
Gain on sale of equipment (2400)
Changes in working Capital
Increase in accounts receivable (18,100)
Decrease in inventory 29,700
Decrease in prepaid expenses 1,900
Decrease in accounts payables (6,200)
Decrease in wages payable (9,500)
 53,200
Cash generated from operating activities 193,200
Less tax paid (57,700)
Net cash generated from operating activities 135,500

Cash flow from investing activities

Cash received from sale of PP&E 11,300
Cash paid for Equipment (60,100)
Net cash used by financing investing activities (48,800)

Cash flow from financing activities

Cash received from issuance of shares 49,000
Notes (25,000)
Dividends paid (67,000)
Net cash used by financing activities (43,000)
Net increase in Cash 43,700
Cash balance at beginning of the period 57,100
Cash balance at the end of the year 100,800
Working -1 Taxation
Particulars Dr Particulars Cr
Cash paid 57,700 Balance b\f 3,800
Balance c\f 2,100 To SOCI 56000
59,800 59,800

Borrowing Cost

IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition,
construction or production of a 'qualifying asset' (one that necessarily takes a substantial period of
time to get ready for its intended use or sale) are included in the cost of the asset. Other borrowing costs are
recognized as an expense.
IAS 23 was reissued in March 2007 and applies to annual periods beginning on or after 1 January 2009.
Qualifying Asset
A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. That
could be property, plant, and equipment and investment property during the construction period, intangible
assets during the development period, or "made-to-order" inventories.
Recognition
 An entity shall capitalize borrowing cost when it is probable that they will result in future economic
benefits to the entity and the cost can be measured reliably
 An entity shall recognize other borrowing costs as an expense in the period in which it is incurred.

Borrowing Cost Eligible For Capitalization

Borrowing cost directly attributable of acquisition, construction or production of Qualifying asset

are capitalized as part of cost, when probable that they will results in future benefit.
IAS 23 specifically mentions 3 types of borrowing costs that can be capitalized:
a) Interest expenses (refer to the effective interest method under IFRS 9/IAS 39);
b) Finance charges on finance leases under IAS 17; and
c) Exchange differences on borrowings in foreign currencies, but only those representing the
adjustment to interest costs.
However, IAS 23 is pretty silent on some types of expenses and there are doubts whether they are
borrowing costs or not, for example:
a) Interest cost on derivatives used to manage interest rate risk on borrowings;
b) Dividends payable on preference shares (or other types of shares classified as liabilities);
 c) Gains or losses arising from early repayment of borrowings, etc.
Here again, we need to apply our knowledge from other IFRS standards and sometimes, make a
judgment, too.
Commencement Of Capitalization

The commencement date for capitalization is the date when entity first meets ALL of the following conditions:
a) It incurs expenditure for the asset.
b) It incurs Borrowing costs.
c) Activities necessary to prepare the asset have started.

Suspension of Capitalization

An entity shall suspend capitalization:

a) During extended period in which it suspends active development of a qualifying asset.

b) holding partially completed assets.
An entity shall not suspend capitalization:
a) when a temporary delay is necessary.
b) entity carries out substantial technical and administrative work.

Cessation of Capitalization

a) Capitalization of borrowing cost should cease when the asset is substantially complete, even though
routine administrative work might still continue.
b) when an entity completes the construction of a qualifying asset in parts, the entity will cease
capitalization when it completes substantially all activities, even construction continues on the other
parts.
Example 1 : Expensing Borrowing Cost

Radiance Limited raised a loan of 200,000 on 30 June 2012

Radiance has not made any capital repayments during 2012
The loan has an effective interest rate of 10%
The loan was used to finance the construction of a factory plant
The factory plant was not considered to be a qualifying asset
Required: Journalize the interest in Radiance Limiteds book for the year ended 31 december 2012
Solution:
Debit Credit
Finance cost 200,000 × 10% ×6/12 10,000
Bank/Liability 10,000

Example 2: Capitalizing of Borrowing Cost

LINDE Limited incurred 50,000 interest during the year on a loan that was specifically raised to finance the
construction of a building, a qualifying asset
 The loan was raised on 1 January 2012.
 Construction began on 1 January 2012 and related construction cost were incurred from this date.
Required : Journalize the interest in LINDE Limiteds book for the year ended 31 December 2012.
Solution
Comments: interest must be recognized as a part of the cost of qualifying asset. Interest is recognized as a part
of the asset from th time that all criteria for capitalization are met. All criteria for capitalization are met on 1
January 2012
 Activities start on January 31 January 2012
 Construction cost are being incurred rom 1 January 2012
  The loan was raised on 1 January 2015 and thus interest is being incurred from this date.
Thus, assuming the basic recognition criteria are also met , all interest from this date must be capitalized to
qualifying asset.

Debit Credit
Finance cost 50,000×12/12 50,000
Bank/Liability 50,000
Interest on the loan incurred first expensed
Building cost 50,000
Finance Cost 50,000
Interest on the loan capitalized to the cost of building

Example 3: Commencement of Capitalization

Sitara chemicals Limited borrowed 2000,000 on 30 June 2012 in order to construct a building in which to store
its goods. The building material were only available on 31 August 2012, from which point Sitara Limited began
construction. The building is considered to be a qualifying Asset.
Required: Discuss when Sitara Limited may begin Capitalizing the interest incurred.
Discussion: All three criteria must be met before the entity may begin capitalization.
 From 30 June 2015, Sitara chemicals Limited borrowed Fund and may began incurring borrowing cost,
but had not yet met the other two critera. i.e activities had not begun and construction cost were not yet
being incurred.
 On 31st august 2015,Sitara Chemicals incurred the cost of acquiring the construction materials and
began construction, thus fulfilling the remaining two criteria.
 Dawdle must begin capitalizing from 31 August 2012.

Example 4: Commencement of Capitalization

Bawany Products Limited incurred 200,000 interest for the year ended 31 December 2012 on a loan of 2000,000
raised on 1 january 2012.
The loan was raised specifically to finance the construction of a building , a qualifying asset.
Construction began on 1 February 2012 and was not yet complete at 31 December 2012
Required : Show the related journals in the Bawanys limited books for the year ended 31 December 2015
Solution :

Debit Credit
Bank 2000,0000
Loan Payable 2000,000
Receipts of Cash from loan raised
Finance cost 50,000×12/12 50,000
Bank/Liability 50,000
Interest on the loan incurred first expensed
Building cost 50,000
Finance Cost 50,000
Interest on the loan capitalized to the cost of building

Example 4: Cessation of Capitalization

YIPEE Limited began Construction of flats on 1 January 2012
The block of flats is to be leased out to tenants in the future.
On 30 September 2012, The building of block was complete but no tenants could be found
On 15 November 2012, after lowering the rentals, the entire building was successfully lented out to tenants
Interest of 100,000 was incurred during the 12 month period ended 31 December 2012
Solution :

Debit Credit
Finance cost 100,000
Bank/Liability 100,000
Interest on the loan incurred first expensed
Building cost 100,000×9/12 75,000
Finance Cost 75,000
Interest on the loan capitalized to the cost of building
Statement of Changes in equity
The statement of changes in equity is a reconciliation of the beginning and ending balances in a
company’s equity during a reporting period. It is not considered an essential part of the
monthly financial statements, and so is the most likely of all the financial statements not to be issued.
However, it is a common part of the annual financial statements. The statement starts with the
beginning equity balance, and then adds or subtracts such items as profits and dividend payments to
arrive at the ending ending balance. The general calculation structure of the statement is:

Beginning equity + Net income – Dividends +/- Other changes = Ending equity

To prepare the statement, follow these steps:

1. Create separate accounts in the general ledger for each type of equity. Thus, there are different
accounts for the par value of stock, additional paid-in capital, and retained earnings. Each of
these accounts is represented by a separate column in the statement.
2. Transfer every transaction within each equity account to a spreadsheet, and identify it in the
spreadsheet.
3. Aggregate the transactions within the spreadsheet into similar types, and transfer them to
separate line items in the statement of changes in equity.
4. Complete the statement, and verify that the beginning and ending balances in it match the general
ledger, and that the aggregated line items within it add up to the ending balances for all columns.

Example 1

ABC Company started the year 2019 with $100,000 capital. During the year, the owner made $10,000
additional contributions and $20,000 total withdrawals. The Statement of Owner's Equity would look like this:
ABC Company
Statement of Owner's Equity
For the Year Ended December 31, 2019
Strauss, Capital – beginning $100,000
Add: owners Contributions  $10,000  
Net Income  $57,100
Total   $167,100
Less: Drawings $20,000
Owners capital   $147,100

Example 2
Kingslee partnership established in 2018. The partners king, Lee and Stewards have January 1, 2019 outstanding
capital balances of 21,700, 38,000 and 22,000. Kings contributed 10,000 during 2019. Lee and stewards
contributed 8000 and 8,500. Drawing account balances are as follows : Kings 8000, Lee 12,000, Stewards
10,000.
The partnership reported 2019 net income of 62000. According to the partnership agreement the partnersprofit
sharing sharing ratios are 30, 40 and 30% for King, Lee and Stewards.
Prepare Statement of Changes in Equity for the year 2019

Kingslee Partnership
 Statement of Owner's Equity
For the Year Ended December 31, 2019

Kings Capital Lees Capital Stewards Capital Total

Balance at 1 January 2019 21,700 38,000 22,000 81,700
Add:
Partners contribution 10,000 8,000 8,500 26,500
Net income 18,600 24,800 18,600 62,000
Less :
Drawings (8,000) (12,000) (10,000) (30,000)
Balance at December 31 2019 42,300 58,800 39,100 140,200

Example 3

ABC corporation was established in 2015. The corporation issued 20,000 (10 par value) shares of stock at an
issue price of 20 per share. On July 15, 2016. Corporation issued 2000 new shares at an issue price of 25 per
share.

The corporation reported 99,000 and 85.000 in 2015 & 2016, respectively. Dividends of 2.10 per share were
declared and distributed to share holders on February 1,2016. There were no dividends distributed on the first
year of operations of the cooperation

ABC Corporation
Statement of Owner's Equity
For the year ended December 31,2016

Capital Additional Retained Total

Stock Paid in Capital Earnings
Balance at 1 January, 2016 200,000 200,000 99,000 4,99,000
Add:
Issuance of Shares 20,000 30,000 50,000
Net income 85,000 85,000
Less :
Dividends (42,000) (42,000)
220,000 230,000 142,000 592,000

Computations :
Capital stock, January 1 2016
Number of stocks issued at January 1, 2016 20,000
Par value 10
Capital stock, January 1 2016 200,000

Additional Paid in Capital, January 1, 2016

Number of stocks issued at January 1, 2016 20,000
Issue price in excess of par value(20-10) 10
200,000
Capital Stock Issuance
Number of stocks issued at July 1, 2016 2,000
Par value 10
Capital Stock Issuance 20,000

Additional Paid in Capital,issuance

Number of stocks issued at July 1, 2016 2000
Issue price in excess of par value(25-10) 15
Additional Paid in Capital issuance 30,000

Dividends
Number of stocks issued on February 1, 2016 20,000
Dividends Per Share 2.10
Dividends for 2016 42,000

Ratio Analysis
Ratio analysis is used to evaluate relationships among financial statement items. The ratios are used
to identify trends over time for one company or to compare two or more companies at one point in
time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity,
profitability, and solvency.
Financial Ratios at AS level maybe classified into three types:
 Profitability ratios
 Liquidity ratios
 Activity ratios
Different ratios under these three groups are as follows.

Gross Profit Ratio = Gross sales/ Net Sales Revenue × 100

Mark Up Ratio = Gross pofit/cost of sales × 100\
Operating Expense Ratio = operating exp/net sales × 100
Return on asset = operating profit/total asset × 100
Return on equity = net profit/capital provided by equity holders
Inventory turn over rate = cost of sales/average inventory
Non-current assets turn over = net sales / net book value of non current assets
Current ratio = current assets/current liabilities
Working capital ratio = current assets/current liabilities
Trade receivables turn over ratio = trade receivables/net credit sales × 365
Trade payables turn over ratio = trade payables/net credit purchases × 365
Earning per share = profit after tax & preference dividend/no of ordinary shares
Price earning ratio = market price per share/ earnings per share
Dividends per share = total ordinary dividend/ no of ordinary shares
Dividend yield ratio = ordinary dividend per share/market price per share
Dividend cover ratio = profit after tax & preference dividend/dividend attributable to osh
Gearing ratio = preference shares + long term debts /Capital provided by equity holder

Working Capital Cycle

Inventory turnover + Trade Receivables – Trade Payables

Example 1
ABC Company
Statement of financial position
As on 31 December 2012
Assets Rs Liabilities Rs
Land and buildings 1,40,000 Share capital 200,000
Plant & machinery 3,50,000 Profit & loss account 30,000
Stock 200,000 General reserve 40,000
Sundry debtors 100,000 12& debentures 420,000
 Bills receivable 10,000 Sundry creditors 100,000
Cash at bank 40,000 Bills payable 50,000
840,000 840,000
Required :
a) Current Ratio
b) Quick Ratio
c) Inventory to Working Capital
d) Gearing Ratio
e) Current Assets to Fixed Assets
Solution:
a) Current Ratio = Current Assets/ Current Liabilities
= 350,000/150,000
= 2.33.1
b) Quick Ratio = Liquid Assets/ Liquid Liabilities
= 150,000/150,000
= 1:1
c) Inventory Working Capital = Inventory/ working capital
= 200,000/200,000
= 1:1

d) Working Capital = Current Assets – Current Liabilities

= 3,50,000-150,000
= 200,000

e) Gearing Ratio = Fixed interest bearing securities/Equity share capital

= 420,000/200,000
= 2.1:1
f) Current Assets to Fixed Assets Ratio = Current assets/Fixed assets
= 350,000/4,90,000
= 0.71:1
Example 2 :
A company has capital of Rs 20,00,000. Its turnover is 3 times the capital & the margin on sales is 6%.
What is the Return on investment ?
Solution :
Capital Turn Over Ratio = Sales/Capital
3 = Sales/2,000,000
Sales = 6,000,000
Gross Profit = 6% of 6,000,000
= 360,000
Rate of Return on investment = Gross Profit/Investment
= 360,000/2,000,000
= 18%

Partnership
A partnership is a business that two or more individuals own and operate together. Unlike other business
structures, there are multiple types of partnership you can establish.
The relationship between the partners, type of ownership, and duties of each partner are typically outlined in
a partnership agreement. Depending on the amount of participation in the partnership, partners may be liable for
business debts.
There are four types of business partnerships:

 LLC partnership (also known as a multi-member LLC)

 Limited liability partnership (LLP)
 Limited partnership (LP)
 General partnership (GP)
Characteristics of a partnership

 Association of individuals
 Mutual agency
 Limited life
 Unlimited liability
 Co-ownership of property

Advantages of Partnership

 two heads (or more) are better than one

 your business is easy to establish and start-up costs are low
 more capital is available for the business
 you’ll have greater borrowing capacity
 high-calibre employees can be made partners
 there is opportunity for income splitting, an advantage of particular importance due to resultant tax
savings
 partners’ business affairs are private
 there is limited external regulation
 it’s easy to change your legal structure later if circumstances change.

Disadvantages of Partnership
 he liability of the partners for the debts of the business is unlimited
 each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for
their share of the partnership debts as well as being liable for all the debts
 there is a risk of disagreements and friction among partners and management
 each partner is an agent of the partnership and is liable for actions by other partners
 if partners join or leave, you will probably have to value all the partnership assets and this can be
costly.

Partnership Agreement
A written document that includes :

 Names and capital contributions of the partners

 Rights and duties of partners.
 Basis for sharing net income or net loss.
 Provision for withdrawals of assets.
 Procedures for submitting disputes to arbitration.
 Procedures for the withdrawal or addition of a partner.
 Rights and duties of surviving partners in the event of a partner’s death.

Forming a Partnership
 Initial investment
recorded at the fair market value of the assets at the date of their transfer to the partnership
values assigned must be agreed to by all of the partners
 Once partnership has been formed
accounting is similar to accounting for transactions of any other type of business organization

Example 1:
A,B and C are partners in a firm with capitals of Rs 40,000 and 20,000 respectively. They share profit and losses
as : (1) Up to Rs 10,000 in the ratio of 4:3:3 (2) Above Rs 10,000 equally.
The net profit of the Firm for the year ended 31 December, 2002 amounted to Rs 40,200 and drawins of the
partners were : A – Rs 6,000 B- Rs 5,000 C- Rs 3,000.

You are required to prepare the Profit & loss Appropriation Account for the year ended 31 December 2002 and
capital accounts for the partner assuming (a)partners capital are fixed ; and (b) Partners capital are fluctuating ,
after considering the following adjustments:

a. Interest on partners capital are to be paid @ 10% pa

b. Interest on drawing to be charged @ of 5% pa
c. A to receive salary of 5,000 pa
d. B and C get commission @ 10% each on the profit

Solution:

Dr Profit & Loss Appropriation Account for the year ended 31st December,
2002. Cr

Particulars Rs Particulars Rs
To interest on capital A/c By profit & loss A/c 40,200
(A Rs 5000, B Rs 4000, C Rs 2,000) 11,000
To partners salary A/c: A 5,000 By interest on drawings A/c 150
A-5%on Rs 6,000 for 6 months 125
B-5%on Rs 5,000 for 6 months 75
C-5%on Rs 6000 for 5 months
To commission A/c :
(B Rs 4,020, C Rs 4,020) 8,040
To share of profit A/c
(A Rs 6.170 B Rs 5,170 C Rs 5,170) 16,510
40,550 40,550

a. Fixed Capital Method

Partners capital Accounts
Date Particulars A B C Date Particulars A B C
31.12.2002 To 50,000 40,000 20,000 1.1.2002 By 50,000 40,000 20,000
balance balance
c/d b/d

Partners Current Accounts

Date Particula A B C Date Particula A B C
rs rs
31.12.2002 Drawing 6,000 5,000 3,000 31.1.200 Interest on 5,000 4,000 2,000
A/c 2 capital
Interest on 150 125 75 Partners 5,000
drawings salary
Balance 10,020 8,065 8,115 Commissio 4,020 4,020
c/d n A/c
Sharing of 6,170 5,170 5,170
profit
16,160 13,190 11,190 16,170 13,190 11,190

b. Fluctuating Method
 Partners capital Accounts
Date Particula A B C Date Particula A B C
rs rs
31.12.2002 Drawing 6,000 5,000 3,000 1.1.2002 Balance 50,000 40,000 20,000
A/c b/d
Interest on 150 125 75 31.12.200 Interest on 5,000 4,000 2,000
drawings 2 capital
Balance 60,020 48,065 28,115 Partners 5,000
c/d salary
Commissio 4,020 4,020
n A/c
Share of 6,170 5,170 5,170
profits
16,170 53,190 31,190 16,170 53,190 31,190

Working Note :
1. Profit is shared as under :
Up to Rs 10,000 (4:3:3)
Above Rs 10,000 Rs 6,510(1:1:1)
Share of Profit
A B C
4,000 3,000 3,000
2,170 2,170 2,170
6,170 5,170 5,170

Provisions
Provisions in Accounting are an amount set aside to cover a probable future expense, or reduction in
the value of an asset. Examples of provisions include accruals, asset impairments, bad debts,
depreciation, doubtful debts, guarantees (product warranties), income taxes, inventory obsolescence,
pension, restructuring liabilities and sales allowances.
Often provision amounts need to be estimated. In financial reporting, provisions are recorded as a
current liability on the balance sheet and then matched to the appropriate expense account on the
income statement.
Why Provisions Are Created
Provisions are important because they account for certain company expenses, and payments for them, in the
same year. This makes the company’s financial statements more accurate.
Provisions are not a form of savings. Because the expense is ‘probable’, the amount set aside is expected to be
spent.
Provision Is Not A Reserve
A Provision is not a reserve
A reserve, or reserve fund, is money allocated from profit for a specific purpose.
A provision is funds allocated for a specific expense.
A reserve fund is typically highly liquid, so that funds can be accessed immediately, like from a savings
account. An example of an entity using a reserve fund would be a Homeowners’ Association. They could have a
reserve fund for unscheduled repairs. They don’t know exactly what these repairs will be for, or the precise
costs associated with them, but they do know that repairs will be required at some point. The dues the
homeowners pay will keep the fund filled up, and interest will be earned.
An example of a provision could be a car company setting aside money for warranty repairs for the last quarter
of the year. The provisional amount will be estimated based on past warranty expenses, related to car sales. But
that’s all the money will be used for – warranties.
Examples of Provisions
 Accruals
 Asset impairments
 Bad debts
  Depreciation
 Doubtful debts
 Guarantees (product warranties)
 Income taxes
 Inventory obsolescence
 Pension
 Restructuring Liabilities
 Sales allowances

Tax Provision

Tax provisions are an amount set aside specifically to pay a company’s income taxes.In order to calculate the
tax amount owing, a business needs to adjust its gross income by the amount of tax deductions it is claiming.
Tax deductions can include meals, interest expenses, depreciation allowances, holiday parties and more. For
more on small business tax deductions, check out this article on Business Deductions: Trump Tax Plan
Explained.
Once the calculations are done, the total tax amount the company determines it owes can be allocated for on its
books in a provision, known as a “tax provision”.