Accountacy- Theory

Provision:- A provision is amount set aside for the problems, but unsertain,
economic obligations of an enterprise. A provision is an amount that you put iln
aside in your accounts to cover a future liability. When accounting provision are
recognized on the balance sheet and then expensed on the income statement.

Profit and loss appropriation Account:-

It is an account prepared by the partners in order to allocate profit or loss among

the partners. In this account the profit or loss will be ascertained after taken into
accounts the partner adjustments like interst on capital & drawings, salary or
commission to a partner.

Financial Statement Analysis :- is the process of reviewing and analyzing a

company’s financial statement to make better economic decision. These
statements include the income statement, balance sheet, statement of cash flows
and a statement of changes in equity.

Uses of financial statements :-

a) It helps in evaluating the profit earning capacity and financial feasibility of a

business.
b) It helps in assessing the long term solvency of the business.
c) It helps in evaluating the relative financial status of a firm in comparison to
other competitive firms.
d) It assists management in decision making process, drafting various plans
and also in establishing an effective controlling system.

Ration analysis – This technique of financial analysis, it describes the relationship

between various items of Balance Sheet and Income statements.

Uses of ratio analysis :-

1) Ratio analysis helps the management to assess the performance of the

business concern and improve the management functions such as planning,
co-ordination and control.
 2) Some ratio’s are calculated for a number of years. These are working as
guide to the management.
3) The financial strength and weakness of the business concern can be find
out through calculating some ratio.
4) Standard ratio’s can be used for finding variations or deviations.

Sarifice Ratio:- Sacrifice ratio is the ratio is the ratio in which exisiting partners
contribute a part of their share of profits to the incoming partner on account of
admission,
S. R Old ratio – New ratio
Sacrifice ratio is calculated in order to distribute the goodwill that is transferred
among the old partners in their sacrificing ratio

Partnership deed:-
Partnership Deed is a written agreement among the partners of a
partnership firm. It contains agreement on profit sharing ratio, salaries,
commission of partners, intrest provided on partner’s capital & drawings and
intrest on loan given or taken by the partners ect objective of business of the firm.

Realisation Account:- Realisation of a firm all the books of account are used, all
assest are sold and all liabilities all paid of. In order to record the sale of assets &
discharge of liabilities, a nominal account is opened named Realisation account.
The main purpose to open realisation account is to ascertain the profit or loss
dew to the realisation of assets & liabilities.

Trend analysis:- This analysis undertaken the study of trend in the financial
position and the operating performance of a business over a series of succeesive
years. This techniquies a particular year is assuned to be the base year and the
figure of all others years are expressed in percentage times of the base years
figure. Thire trends not only helps in ascerting the operation efficiency and the
financial position of the business but also helps in deleting the problems & in
efficiences.
Profit Sharing Ratio:- Calculation of new profit sharing
Goodwill:- Goodwill is an intangible assest of a firm it is the value of a firm’s
reputation and its good brand name in the market. A firm earns goodwill by its
hard work and there by winning the blind trust and faith of the customers by
fulfilling their demands in both qualitative and quantitative aspects.

Desolution of a partnership firm:- Disolution of partnership firm implies

discontinuation of the business of the partnership firm. According to the section
39 of partnership Act, disolution of partnership between all the partners of a firm
is called disolution of partnership firm.

Disolution involves winding up of business, disposal of the assets and paying off
the labilities and distribution of any surplus or borne of loss by the partners of the
firm.

Revaluation of assets and liabilities :-

At the time of admission of a new partner, it becomes of a new partner, it
becomes very necessary to revalue the assets and liabilities of a partnership firm
or asertaining its true and fair values. This is done because the value of assets and
laibilities may have increased or decreased and consequently their corresponding
figures in the old balance sheet may either be understated or over stated.

Contents of partnership deed :-

1. Name of the firm
2. The names and addresses of all the partners.
3. The nature of the partnership business
4. The profits sharing ratio of partners
5. Rights, duties & liabilities of partners
6. Salary, commission or any other remuneration payable to the partner,
7. The amount of drawings to be made by each partner.
Flucuating capital system:- The capital of partners changed from to year, because
all the adjustments like on capital, drawings, share of profits or loss ect are made
to the capital accounts of the respective partners.
Fixed capital system:- System of maintaing partner’s accounts under which
capital balance reamin fixed year, and adjustments such as salary, intrest on
capital etc are recorded in current account
The following are the ……. Under which the fixed capital of partners may
change,
If any additional capital is introduces by the partner during the year
If any part of capital is permanently withdrawn by the partner from the firm.

Retirment of partner :- A partner is said to be retired from a firm when his

relation with the firm as a partners come to an end.
Due to the retirment of a partners the existing partnership deed comes to an end
in its plance of new partnership deed needs to be formed where by the remaining
partners continue to do thire business in the same name & style in change terms
and conditions

Following ………. For retirements of a partners.

a) Old age of partner
b) Unlawful actives by others partners
c) Lunacy of anyh partner

Gain Ratio:- Gain ratio is the ratio in which remaing partners gain from the share
of profits of the retiring partners in future.

It is required to write off the retiring partner’s share of goodwill to the

continuing partners.

Gain ratio:- New profit sharing ratio – old profit sharing ratio

The purpose of calculating new profit sharing ratio :-

a) To share the future profits of the firm

b) To write off the firm’s goodwill
c) To adjust the remaining partners capital
Public company :- A public company is defined as a company that offers a part of
its ownership in the form of shares, debentures, bonds, securities to the general
public through stock market. There must be atleast seven members to form a
public company.

Minimum Subscription :-

When shares are issued to the general public, the minimum amount that must be
subscribed by the public so that the company can allot shares to the applicants is
termed as minimum subscription.

As per the company Act of 1956, the minimum subscription of share cannot be
less than 90% of the issued amount. If the minimum subscription is not received,
they cannot allot shares to its applicants and it shall immediately refund the
entire applicantion amount receieved to the public.

Debenture :- Debenture is derived from a latin word, ‘debre’ which means to

borrow. A debenture is issued in the form of a certificate under the seal of a
company and containing a contract for the repayment of the principal sum after a
fixed period of time and payment of interest at regularly intervals, generally half
yearly.

Financial statements :- Fianancial statements at the end product of accounting

system, prepared with an intention to judge the financial position of the business.
It consists of income statement and balance sheet.

Analaysis and interpretation :- Analysis and interpretation refers to a systematic

and critical examination of the financial statements.

Comparitive statements :- These statements depict the figures of two or more

accounting years simultaneously that help to access the profitability and financial
position of a business.

Common size statement :- These statements depict the relationship between

various items of financial statements and common items at percentage terms.