UNIT 1

Banking Final Accounts

1.1 Introduction :

Bank business in India is governed by the banking Regulation Act 1949, which
came into force from16th March 1949. As per section 2 of this Act, provisions of
companies Act 1956, are also applicable to Banking companies. Bank is a commercial
institution, licensed to accept deposits and acts as a safe custodian of the funds of its
customers, banks are mainly concerned with receiving, collection, transferring, buying,
lending, investing, exchanging, servicing money and claims to money both
domestically and internationally. The principal activities of a bank are operating current
accounts, receiving deposits, and advancing loans.

1.2 Meaning and Definition of Bank :

As per section 5(b) of the Banking Regulation Act 1949, „banking‟ means the
accepting, for the purpose of lending or investment, of deposits of money from the
public repayable on demand or otherwise, and withdrawable by cheque, drafts, order or
otherwise.

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 Section 5(c) of banking Regulation Act defines „banking companies‟ as “any
company which transacts the business of banking in India” However the definition
given by the Act is too narrow. In modern world banking is not restricted merely to
acceptance of deposits and lending Advances. Section 6 of the Act also recognises this
fact and has accordingly laid down that in addition to the usual banking business, a
banking company may carry on any additional business as specified by section 6

1.3 Scope of banking business :

As per the provisions of section 6 of the Banking Regulation Act, 1949 a banking
company may engage in any one of the following forms of business. In addition to the
banking business. These are

1) Borrowing, raising money, advancing money either upon or without security,

dealing in bills of exchange, granting and issue of letter of credit, travellors
cheques and circular notes, selling and dealing in bullion and specie, buying
and selling of foreign exchange including foreign bank notes, dealing in stock,
shares, debenture, purchasing and selling of bonds providing of safe deposit
vaults, the collecting and transmitting of money and securities.

2) Acting as an agent for any Government or local authority or any other person,
acting as an attorney on behalf of customers.

3) Contracting for public and private loans and negotiating and issuing the same.

4) Insuring, guaranteeing, underwriting any issue of any company, corporation or

association and lending of money for the purpose of such issue.

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 5) Carring on and transacting every kind of guarantee and indemnity business.

6) Selling any property which is acquired in satisfaction of claims.

7) Acquiring and holding any property or right in any property against any loans
connected with such security.

8) Undertaking and executing trusts.

9) Establishing and supporting any institution, funds, trusts to benefit employees or

ex-employees of company.

10) The acquisition, construction, maintenance and alteration of any building for the
purpose of the company.

11) Selling, leasing, mortgaging, disposing all or any property and rights of the
company.

12) Doing all such other things as are incidental or conductive to the promotion or
advancement of the business of the company.

13) Any other form of business which the Central Government may, by notification in
the Official Gazette, specify as a form of business.

Restriction on Bank Business -

As per section 8 of the Banking Regulation Act 1949, certain restrictions are laid
down on the business of banking company These are-

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 a) No banking company shall directly or indirectly deal in the buying, selling or
bartering of goods, except in connection with the realisation of security given to
or held by it.

b) No banking company can engage in any trade or buy, sell or barter goods for
others otherwise than in connection with bill of exchange, received for
collection or negotiation or with such of its business.

1.4 Statutory provisions of Banking Regulations Act :

1) Minimum Capital and Reserves

As per the section of 11 (2) of the Banking Regulation Act 1949, the aggregate
value of paid up capital and reserves of a banking company in corporate outside India,
shall not be less than 15 lakhs rupees, and it has a place of business in city of Mumbai
or Calcutta, then it shall not be less than 20 lakhs rupees. It should be noted that such
sum and 20% of the net profit of each year shall be kept deposited with Reserve.
Bank of India is cash or in the form of men cumbered approved securities, or partly in
cash and partly in the form of such securities.

However in case of a banking company which is incorporated in India, the

aggregate value of capital and reserves shall not be less than the stated amount
according to place of business.

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2) Restriction on commission, Brokerage etc. :

No banking company shall pay out directly or indirectly by way of commission,

brokerage in any form in respect of shares issued by it, any amount exceeding 2.5% of
paid up value of shares.

3) Statutory Reserve :

According to section 17 of the banking Regulation Act, 1949, every banking

company incorporated in India shall create a reserve and transfer to it at least 20% of its
annual profit before any dividend is declared.

4) Cash Reserve :Every banking company not being a schedule bank, has to maintain a
cash reserve of at least 3% of the total of its demand and time liabilities in India, as on last
Friday of the Second proceeding fortnight.

5) Restrictions on loans and advances :-

No banking company shall,

i) grant any loans or advances on the security of its own shares.

ii) grant any loan or advances to any of its directors, or any of the firm in which any
of its director is interested as partner, employee or manager.

6) Restriction on Payment of Dividend :

No banking company shall pay any dividend on its shares until all its capitalized
expenses have been completely written off.

7) Books of Accounts :

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 Bank has to adopt a specialized system of book-keeping which will ensure
dimidiated entry of numerous transactions and keep an internal check on the books of
accounts. For this, bank generally maintain a large number of subsidiary and
memorandum books in addition to principal books of accounts.

8)Principal books of accounts :

Cash book and general ledger are the principal books of accounts of any bank. Cash
book records all cash transactions and general ledger contains control accounts of all
subsidiary ledgers and different assets and liabilities account.

8) Final Accounts :

According to section 29 of the Banking Regulation Act, 1949, every banking

company is required to prepare with reference to that year a balance sheet and profit and
loss account on the last working day of the year in the Form „A‟ and Form „B‟
respectively as given in schedule III

1.5 Form of Balance Sheet (Vertical) Third

Schedule (Section - 29)

Form „A‟

Form of Balance Sheet

Balance Sheet of ........................... Bank as on 31-
3-………

Schedule Current Previous

Particulars No. Year Year

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Capital and Liabilities

Capital 1

Reserve and Surplus 2

Deposits 3

Borrowings 4

Other liabilities and provisions 5

Total

(Conted. on next page)

7
 Schedule Current Previous

Particulars No. Year Year

Assets

Cash in hand and Balance with R.B.I. 6

Balance with other banks, money at call

Investments
7
Advances
Fixed Assets
8
Other Assets

Total
9

Contingent Liabilities
10

Bills for collection

11

12

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 1) Capital : It is a first item of Liabilities. It‟s details are given in schedule-1.
Which contain authorized capital, issued, subscribed, called up and paid up capital.

2) Reserves and Surplus : It includes statutory reserves, capital reserves, share

premium, profit and loss account balance. The details of this are given in schedule No.
2

3) Deposits : It contains demand deposits, saving bank deposits / accounts, term

deposits. The details are given in schedule No. 3

4) Borrowings : It includes borrowings from Reserve Bank of India, borrowing from

other banks and institutions and agencies. The details about it are given in schedule
No. 4

5) Other liabilities and provisions : It includes Bills payables, Branch Office

/ interoffice adjustment credit balance, interest outstanding / accrued on deposits,

provision for taxations, Rebate on bills discounted etc. and shown in schedule No. 5

6) Cash in hand and balance with R.B.I. - It includes cash in hand including foreign
currency notes, and balance with Reserve Bank of India. Details are given in Schedule
No. 6

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 7) Balance with other banks, Money at call and short notice - It contains balance
with other banks, money at call and short notice. These are shown in schedule No. 7

8) Investments - Investment in Government securities, other approved securities,

investment in shares / debentures and bonds, gold are shown under this heading. The
details are given in schedule No. 8

9) Advances - It gives details about loans and advances granted by bank. It

includes loans cash credit and overdraft, Term loans, bills purchased and discounted. The
details are given in schedule No. 9

10) Fixed Assets - Premises, Furniture and Fixtures and other fixed assets are
shown under this head. The details are given in schedule No. 10.

11) Other Assets - It includes advance taxes, stationery and stamps on hand, Branch
adjustment (Dr. bal.), Interest accrued on advances, non banking assets etc. Details are
given in schedule No. 11

12) Contingent Liabilities - It indicate the liabilities which are not provided in
Balance Sheet. It includes liabilities on partly paid shares, claims against bank not
acknowledged as debts; acceptances endorsement and other obligations etc. Details are
given in schedule No. 12

13) Bills for collection - It includes bills receivables received on behalf of

customers for collection. These are shown outside the Balance Sheet.

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1.6 Form of Profit and Loss Account (Vertical)

Form „B‟

Form of Profit and Loss Account

For the year ended on 31-3-…………….

Schedule Current Previous

Particulars No. Year Year

I. Income

Interest earned

Other Income 13

Total 14

II. Expenditure Interest

11
expended Operating
expenses

Provisions and Contingencies

15

Total

(Conted. on next page)

12
 Schedule Current Previous

Particulars No. Year Year

III. Profit/ Loss

Profit /Loss brought forward (op. bal)

Net profit/loss for current year.

Total

IV. Appropriations

20% transfer to Statutory Reserve

Transfer to other reserves

Proposed Dividend/Interium Dividend

Balance carried over to

Balance Sheet.

Total

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 I) Income : It includes interest earned or discount received by bank on advances or
bills discounted, income on Investments, Interest on balance with R.B.I, etc. It is
shown under schedule-13

Other Income : includes commission exchange and brokerage, profit on sale of

investments, profit on revelation of assets, Dividend from subsidiaries. These are
shown in schedule No. 14.

II) Expenditure : These are shown under three different heads viz. interest
expended, operating expenses and provisions. Interest expended includes interest
paid by bank on deposits and borrowings. It is shown under schedule No. 15.
Operating Expenses of bank such as salaries and allowances to staff and
officers, Rent taxes rates, printing & stationery, Advertisement, depreciations on
bank property etc. are shown under schedule -16, Provisions include provision
made for dorebuttul debts, tax provisions and other contingencies.

III) Profit / Loss : It shows the profit or loss balance of last year and current year
Net Profit (i.e. difference between Income and expenditures)

IV) Appropriations : Amount transferred to statutory reserve and other reserves,

proposed dividends are shown under this heading.

.7 Various Schedules :

Schedule No. 1 - Capital

Particulars Current Year Previous Year

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Authorised Capital

............. shares of Rs. .......each

Issued Capital ...................

............. shares of Rs. .......each

Subscribed Capital

............. shares of Rs. .......each ...................

Called up capital

............. shares of Rs. .......each

Less : Calls in arrears ...................

Add : fortified shares

.............

.............

.............

Total ...................

Schedule No. 2 - Reserves & Surplus

As on 31-3-....... Previous
(Current Year)
Particulars Year

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I. Statutory Reserves Opening
Balance Additions during
the year

Deductions during the year

II. Capital Reserves Opening

Balance Additions during
the year

Deductions during the year

III. Shares Premium Opening

Balance Additions during
the year

Deductions during the year

IV. Revenue and other Reserves

Opening Balance Additions

during the year Deductions
during the year

V. Balance in Profit and Loss Account

Total (I+II+III+IV+V)

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 Schedule No. 3 - Deposits

As on 31-3-....... Previous
(Current Year)
Particulars Year

A. I. Demand Deposits

(i) From banks

(ii) From others

II. Savings Bank Deposits

III. Term Deposits

(i) From banks

(ii) From others Total

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 (l+ll+lll)

B. (i) Deposits of branches in India

(ii) Deposits of branches

outside India

Total

Schedule No. 4 - Borrowings

As on 31-3-....... Previous
(Current Year)
Particulars Year

I. Borrowings in India

(i) Reserve Bank of India

(ii) Other banks

(iii) Other institutions and agencies

II. Borrowing outside India

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 Total (I + II)

Secured borrowings included in I & II above

Rs. ..................

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 Schedule No. 5 - Other Liabilities and Provisions

As on 31-3-....... Previous
(Current Year)
Particulars Year

I. Bills payable

II. Inter-office adjustments (net) (cr.)

III. Interest accrued

IV. Others (including provisions)

Total

Schedule No. 6 - Cash & Balances with Reserve Bank of India

As on 31-3-....... Previous
(Current Year)
Particulars Year

Cash in hand

(including foreign currency notes)

Balances with RBI

(i) in Current Account

(ii) in Other Accounts

Total (I + II)

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Schedule No. 7 - Balances with Banks & Money at call & short Notice

As on 31-3-....... Previous

Particulars (Current Year) Year

India

I. Balances with banks

(a) In Current Accounts

(b) In other Deposit Accounts

II. Money at Call and Short Notice

(a) With banks

(b) With other institutions

Total

Outside India

(i) In Current Accounts

(ii) In other Deposit Accounts

(iii) Money at Call and Short Notice

Total

Total Grand Total (I + II)

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 Schedule No. 8 - Investments

As on 31-3-....... Previous
(Current Year)
Particulars Year

Investments in India in

(i) Government securities

(ii) Other approved securities

(iii) Shares

(iv) Debentures and Bonds

(v) Subsidiaries and/or joint ventures

(vi) Others (to be specified)

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 Total

Investments outside India in

(i) Government securities

(including local authorities)

(ii) Subsidiaries and/or joint ventures abroad

(iii) Other investments (to be specified)

Total Grand Total (I+ 11)

Schedule No. 9 - Advances

As on 31-3-....... Previous
(Current Year)
Particulars Year

i) Bills purchased and discounted

ii) Cash credits, overdrafts and loans

repayable on demand

iii) Term loans

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 Total

i) Secured by tangible assets ii)

Covered by Bank/

Government guarantees

iii) Unsecured

Total

(Conted. on next page)

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C.I. Advances in India (i)
Priority Sectors
(ii) Public Sector
(iii) Banks

(iv) Others

II. Advances Outside India

(i) Due from banks

(ii) Due from others

(a) Bills purchased and discounted

(b) Syndicated loans

(c) Others

Total

Total Grand Total (C.I.+ C. II)

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 Schedule No. 10 - Fixed Assets

As on 31-3-....... Previous
(Current Year)
Particulars Year

I. Premises

At cost an on 31st March of the

preceding year

Additions during the year

Deductions during the year
Depreciation to date

II. Other Fixed Assets

(Including furniture & fixtures)

At cost as on 31st March of the

preceding year Additions

during the year Deductions
during the year Depreciation
to date

Total (I + II)

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 Schedule No. 11 - Other Assets

As on 31-3-....... Previous
(Current Year)
Particulars Year

I. Inter-office adjustment (net) II.

Interest accrued

III. Tax paid in advance /tax deducted at

source

IV. Stationery and stamps.

V. Non - banking assets acquired in

satisfaction of claims

VI. Others.

Total

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 Schedule No. 12 - Contingent Liabilities

As on 31-3-....... Previous
(Current Year)
Particulars Year

I. Claims against the bank not

acknowledged as debts

II. Liability for partly paid investments

III. Liability on account of outstanding

forward exchange contracts.

IV. guarantees given on behalf of constituents

(a) In India

(b) Outside India

V. Acceptances, endorsements and, other

obligations

VI. Other items for which the bank is

contingently liable

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 Total

Schedule No. 13 - Interest Earned

As on 31-3-....... Previous
(Current Year)
Particulars Year

Interest /discount on advances/bills

Income on investments

Interest on balances with

Reserve Bank of India and

other inter-bank funds

Others

Total

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 Schedule No. 14 - Other Income

As on 31-3-....... Previous
(Current Year)
Particulars Year

Commission, exchange and brokerage

Profit on sale f investments

Less : Loss on sale of investments

Profit on revaluation of investments

Less : Loss on revaluation of

investments

Profit on sale of land,

buildings and other assets

Less : Loss on sale of land, buildings

and other assets

Profit on exchange transactions

Less : Loss on exchange transactions

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 Income earned by way of dividends etc.
from subsidiaries / companies and/or joint
ventures abroad/in India Miscellaneous
Income

Total

Schedule No. 15 - Interest Expended

As on 31-3-....... Previous
(Current Year)
Particulars Year

Interest on deposits

Interest on Reserve Bank of India /

Inter - bank borrowings Others

Total

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 Schedule No. 16 - Operating Expenses

As on 31-3-....... Previous
(Current Year)
Particulars Year

I. Payment to and provisions

for employees

II. Rent, taxes and lighting

III. Printing & Stationery

IV. Advertisement & Publicity

V. Depreciation on bank‟s property

VI. Directors fees,

allowances and expenses

VII. Auditors fees and expenses

(including branch auditors

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 fees and expenses)

VIII. Law charges

IX. Postages, telegrams, telephones etc. X.

Repairs and maintenance

XI. Insurance

XII. Other expenditure

Total

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 UNIT- 2
FARM ACCOUNTING

2.0 Objective

After studying this unit you will be able to understand –

• The objectives of farm accounting.

• The book keeping and preparation of financial statements for farm transactions.

• The special features of depreciation on fixed assets.

2.1 Introduction

Agriculture activity is a predominant activity in India. In the recent years,

Commercial farming has been assuming great importance, particularly in States like
Punjab, Tamil Nadu, Andhra Pradesh and Haryana. Farming activities now
comprises not only of growing crops but also include animal husbandry (rearing of
livestock), poultry farming, sericulture (silkworm breeding), pisciculture (rearing of fish),
floriculture (growing flowers) etc. As a result of this development, 'farm
accounting' has attracted great attention.

2.2 Subject Matter

2.2.1 Meaning of farm accounting

In the recent years, commercial farming has been assuming great importance.
Agriculture activity is a predominant activity in India. Farming activity includes animal
husbandry, poultry farming, sericulture, pisciculture etc. Corporate entities are
entering in the farming business in a big way. Therefore, the Institute of Cost and
Works Accountant of India issued a booklet, explaining how the farm books should be

35
kept and how the profit or loss arising from the farming operations should be
ascertained.

Features of farm Accounting : While preparing the farm accounts, one should be guarded
about the peculiar features of farm accounting. Some of the features of farm
transactions are given below:

1. The farm business is family type. It is confined to the family. The farmer keeps a
single bank business and for his private purposes.

2. Part of the produce and products of the farm are consumed by the family.

3. The farmer and his family members may work on the farm without receiving any
specified wages.

4. Farming activities are not confined to raising crops alone. Besides raising
crops, the farmers, engage themselves in other farming activities like poultry,
dairying, pig production, rearing fish, growing flowers etc.

5. Inventory valuation of standing crops, cattle, poultry, etc., is the most difficult
one.

6. Agriculture operations on a farm are subject to natural calamities such as pests,

diseases, floods, weather conditions etc. and variations in Governments
policies, market prices of inputs, like, fertilizers, seeds, chemicals.

7. Most of the small farmers are illiterate and they cannot afford the expense of
employing someone to maintain the accounts.

8. Even big farmers are not aware of accounting techniques which can prove
useful for managerial decisions.

9. The collection of statistical data is done in a conventional manner.

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10. Agriculture sector in India is unorganized and dominated by small farmers. The
average size of holding land is very small etc.

Objectives of Farm Accounting

Following are the objectives of maintaining farm accounts;

1. To ascertain the financial position of the farming operations at any time.

2. To provide acceptable accounting records which can form the basis for
securing finance from financial institutions.

3. To understand the Crop-wise performance so that the profitable and

unprofitable activities can be segregated.

4. To provide reliable and useful information for assessment of agriculture income tax.

5. To have better control over farming activities.

6. To provide useful information for claiming compensation from government or

insurance companies in case of loss suffered due to natural calamities etc.

Accounting for farms :

There are four types of transactions relating to farm activities i.e. Cash, Credit,
exchange and national. The cash and credit transactions are recorded as usual. The
exchange transactions, in the nature of barter, are normally recorded at opportunity cost
that is the price in the open market. Notional transactions means the transactions
which take place between the members of owner's family and the farm.

The performance of each crop shall be found out separately to understand the
profitability of crops. The direct cost clearly identifiable with a crop shall be charged
accordingly. The common cost should be suitable allocated on some accepted basis.

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Books of Accounts :

Following books of accounts are maintained under farm accounting :

1. Cash Book for recording cash transactions. Analytical column cash book is
prepared.

2. Debtors and Creditors Register to record credit transactions.

3. Stock Register is prepared for recording opening, purchase, sale and stock
remained at the end.

4. Fixed Assets Register which contains the details of cost of asset, depreciation on it
and closing balance.

5. Loan Register is prepared for recording loan amount and interest on it.

6. Register for National Transactions is prepared to record the transactions

between farm and farm household.

7. Cost analysis Register for keeping record of each farming activity to know the
profit of each activity etc.

Cost and Revenues:

Expenses and incomes associated with farming activities, other than agriculture
activities are given below.

Farming Activities Cost/Expenses Revenues/Incomes

Poultry Chicken feed, hay, packing, Sale of eggs, chickens,

boxes, cost of shed, medicines, broilers, hens, sale of
salaries and wages. manures.

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Dairy Cattle feed, hay, cost of Sale of milk, milk
cultivation of feed crop, products, calves, dairy
insecticides, salaries and wages, cattle and slaughtered
cost of maintaining milk cattle
processing facilities

Fisheries Cost of seed and water, fish feed, Sale of fish

cost of tanks, catching expenses

depreciation on assets, salaries
and wages

Preparation of Final Accounts :Farm final accounts can be prepared according to any
of the two methods i.e. Single entry method and Double entry method.

Single Entry Method : Under this method two statements are prepared one in the
beginning of the year and another at the end of the accounting year. The excess of
assets over liabilities is considered as a net worth of the business and the profit or loss
made by business during a period can be ascertained by comparing the net worth of
the business on two dates after making the adjusting entries of drawings, introduction of
additional capital etc.

Double Entry method : Under this method farm account is prepared by

following the principles of double entry system. This accounts is debited with
opening stock and the relevant expenses incurred and credited with the sale
proceeds and closing stock. The difference between debit and credit is show profit or
loss. For every farm activity a separate columns are provided. The profit or loss of each
activity is transferred to Balance Sheet.

Illustration 1 :

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 From the information given below prepare a 'Crop Account' to ascertain the
gross profit made by this section of the farm :

Opening Stocks: Rs.

Grains 8,000

Seeds 600

Fertilizers 3,000

Purchases :

Seeds 8,200
Fertilizers 32,000
Sale of grain
Grain distributed as wages 3,000
Wages paid in cash 3,700
Grains used by the proprietor 4,300
Grains consumed by the live stock section 2,700
Solution :

Dr. Crop Account Cr.

Particulars Rs. Particulars Rs.

To Opening Stock By Sales of Grain 32,000

Grains 8,000 Wages 3,300

Seeds

40
 Fertilizers 600 (Grains distributed)
Drawings
4,300
Grains used by the P
3,000
Live stock section
consumed) 2,700

Closing Stock :
11,600 roprietor)
Grains (grains

Seeds
To Purchases :
Seeds
Fertilizers Fertilizers

3,700
1,800

300
8,200
To Wages :
Cash
400
Grains 10,000

4,400

To Repairs and Maintena To

Depreciation Farm Ma To
3,700
Crop Insurance

To Profit from Crops

3,300

41
 nce 7,000
chinery

1,900

2,500

600

13,100

46,700 46,700

Illustration 2 :

From the following information, prepare "Crop Account" to find out the profit made by
the crop section of the farm.

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Opening Stocks : .
Grain 2,600

Seeds 600

Fertilizers 400

Purchases:

Seeds 400

Fertilizers 600

Wages paid in cash 3,500

Wages paid in kind by given grain 2,500
Sale of grain 25,400
Grain consumed by the proprietor 600
Grain consumed by the live stock section 2,400
Depreciation on farm machinery 1,000
Repairs and maintenance of farm machinery 2,000

Closing Stock

Grain 2,000
Seeds 400
Fertilizers 600

Dr. Crop Account Cr.

Particulars Rs. Particulars Rs.

43
To Opening Stock By Sales of Grain 25,000

Grains 2,600 By Wages in kind (contra) 2,500

Seeds By Grain consumed by
Fertilizers
live stock section
600

2,400
By Grain consumed by the
400
To Purchases : proprietor (Drawings)
Seeds 3,600
By Closing Stocks:
600

400

Fertilizers 600 Grain 2,000

1,000 Seeds 400

3,000

Fertilizers 600

To Wages :
In Cash
3,500
In Kind

2,500

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 To Depreciation

6,000

To Repairs and Maintena nce

1,000

To Crop profit transferred to

Profit and Loss A/c
2,000

20,300

33,900 33,900

Illustration 3 :

From the following information prepare Cattle Account to ascertain the profit made by
the cattle division.

No. Value

Rs.
Opening Stock of live stock 100 2,00,000

Closing stock of live stock 118 2,42,000

Opening stock of cattle food 4,000

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Closing stock of cattle food 5,000

Purchases of cattle during the year 180 3,70,000

Sales of cattle during the year 175 4,38,000

Sales of carcasses 5 1,000

Purchases of cattle food 40,000

Wages of rearing cattle 10,000

Crop worth Rs. 11,000 grown in the farm was used for feeding the cattle. Out of the calves
born 4 died and their carcasses realised Rs. 100.

Solution :

Dr. Cattle Account Cr.

46
 Amount Amount

Particulars No Rs. Particulars No. Rs.

To Opening Stock By Sale of Cattle 175 4,38,000

of live stock 100 2,00,000 By Sales of carcasses 5 1,000

To Purchase of cattle 180 3,70,000 By Sales of carcasses of

calves
4 100
By Closing stock of
To Calves born (Bal. fig.) 22 ---
live stock
To Cattle food :

Opening Stock 4,000

118 2,42,000

Purchases 40,000

44,000

Less Closing stock 5,000

39,000
To Wages for rearing cattle

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To Crop Account-Crop 10,000
grown in the farm used
for feeding cattle

To Net profit transferred to 11,000

General profit and Loss
Account

51,000

302 6,81,100 302 6,81,100

Illustration 5 :

From the following Trial Balance extracted from the books of Suraj Farms draw up the final
accounts for the year ended 31st March, 2015 and the Balance Sheet as

on the date :

Debit Balances Rs. Credit Balances Rs.

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Stock on 1-4-2014 Sales

Live stock 1,50,000 Live Stock 48,000

Paddy
2,12,000
Cattle feed
Fertilizers 60,000 Paddy 1,57,000
Seeds
4,17,000
Purchases : Live Milk
11,000
Stock Cattle
feed 26,000
Fertilizers 5,000 Sundry Creditors
2,29,000
Seeds Outstanding expenses
Capital Account 4,000
Sundry Debtors
3,000

4,41,800
Repairs and Maintenance
equipments

Farm equipments 30,000

Crop expenses 60,000

1,11,800
Live stock expenses 16,000
General expenses
Cash in hand 21,000
5,800

49
Cash at Bank

12,000

Land of Farm

1,50,000

50,400

12,500

11,700

7,300

8,500

2,75,000

8,89,200 8,89,200

Additional Information :

1. Closing stock as on 31-03-2015

Live stock Rs. 1,32,000; Paddy Rs. 30,000; Cattle feed Rs. 6,000; Fertilizers

50
 Rs. 3,500; Seeds Rs. 2,700.

2. The consumption of the farm output by the proprietor: Milk etc.,

Rs. 6,000, paddy Rs9,500

3. Provide 10% depreciation on Farm Equipments and 2% on Land and Buildings.

Solution :

Trading and Profit and Loss Account

Dr. for the year ended 31-03-2015 Cr.

Particulars Rs. Rs. Particulars Rs. Rs.

To Opening Stock By Sale of Cattle

Live stock 1,50,000 Live stock 48,000

Paddy
Cattle feed
Fertilizers 60,000 Paddy 2,12,000
Seeds
4,17,000

11,000 Milk 1,57,000

To Purchase 5,000
2,29,000
Live stock
By Produce consumed
Cattle feed
by proprietary
Fertilizers 3,000
Seeds Milk

6,000

51
 Paddy

To Crop expenses 30,000 9,500 15,500

To Live stock expenses 60,000 By Closing Stock :

Live stock
Paddy
To Gross Profit 16,000 1,32,000
Cattle feed
1,11,800
5,800 30,000
Fertilizers
To General expenses
Repairs and Main.
50,400 6,000
Depreciation Seeds

From Equipments
12,500 3,500

Land & Buildings By Gross Profit

2,03,000 2,700
1,74,200

To Net Profit 6,06,700 6,06,700

11,700 2,03,000

12,000

52
15,000 20,500

5,500 1,58,800

2,03,000 2,03,000

53
 Balance Sheet

as on 31-03-2015

Particulars Rs. Amt. Particulars Rs. Amt.

Sundry Creditors 26,000 Cash in hand 7,300

Outstanding exp. 4,400 Cash in Bank 8,500

Capital A/c Sundry Debtors
4,41,800
Closing Stocks :
Less : Produce consumed
Live Stock Paddy 21,000

15,500 Cattle feed

Fertilizers
4,26,300
Seeds
Add : Net Profit
1,32,000
Farm equipments
1,58,800
Less : Depreciation

5,85,100 Land & Buildings 30,000

Less : Depreciation

54
 6,000

3,500

1,74,200

2,700

1,50,000

1,35,000
15,000

2,75,000

2,69,500
5,500

6,15,500 6,15,500

55
 UNIT 3
Final Accounts of Life Insurance Business

The insurance companies are required to prepare their financial statements i. e. Revenue
Account, Profit and Loss Account and Balance Sheet according to the Insurance Regulatory
and Development Authority (Preparation of Financial Statements and Auditors‟ Report of
Insurance Companies) Regulations, 2002.

Insurers carrying on Life Insurance Business should comply with the requirements of
Schedule A of the Regulations which among other things, gives the following Forms:
Revenue Account – Form A – RA

Profit and Loss Account – Form A – PL

Balance Sheet – Form A-BS

Insurers doing General Insurance Business should comply with requirements of

Schedule B of the Regulations which among other things, gives the following Forms:
Revenue Account – Form B – RA

Profit and Loss Account – From B – PL

Balance Sheet – From B – BS

In both cases, Revenue Account and Balance Sheet are given in summary form. There are 15
Schedules in each case, the first four schedules relate to Revenue Account and the remaining
eleven schedules relate to Balance Sheet which give details of the summary heads. In both
Schedules A and B, Profit and Loss Appropriation Account is dispensed with and
appropriations are accommodated in the Profit and Loss Account.

Life Insurance Business:

The chief peculiarity of the life insurance business is that the life insurance contracts are for a
long term and that, on a particular date, the future implications of a contract must be
considered before profit can be ascertained. Under an annuity contract, the life insurance
56
office does not receive any amount after the initial payment but has to go on paying till the
annuitant dies.

On a particular date, therefore, there is a liability in respect of future payments to be made.

Under a life insurance policy, also, there is liability because against a policy, the premiums
expected to be received in future will generally be much less than the amount payable by way
of the claim. Suppose, A took out a policy for Rs 10,000 on 5th July, 1987 for twenty years,
the premium being Rs 500 per annum.

On 31st March, 2003, the life insurance company is faced with the position that only four
premiums (in 2003-04, 2004-05, 2005-06, 2006-07) can be expected, amounting in all to Rs
2,000. The company will have to pay Rs 10,000 latest, on 5th July, 2008.

There is a gap of Rs 8,000 In terms of 31st March, 2003 the gap is slightly less because of
interest. The possibility of A‟s death must be kept in mind because death means stoppage of
payment of premium and hastening the payment of the claim leading to loss of interest.

The chief point to remember is that in respect of policies already issued and still in force,
there is a deficiency of claims that are expected to arise over premiums that are expected to
be received. This deficiency is known as “net liability”. A company cannot be said to have
made profits unless it has reserves equal to the net liability.

The calculation is made only by actuaries, mathematicians well versed in the intricacies of
life insurance. The valuation has to be got done by the insurance company every year.

In case of life insurance, Revenue Account (Policyholders‟ Account), Profit and Loss
Account (Shareholders‟ Account) and Balance Sheet are prepared as per Form A-RA, Form
A-PL and Form A-BS respectively.

57
58
59
60
61
62
63
64
65
66
The under-mentioned balances form part of the Trial Balance of the All People’s
Assurance Co. Ltd., as on 31st March, 2012:—
Amount of Life Assurance Fund at the beginning of the year, Rs 14,70,562 thousand; claims
by death Rs 76,980 thousand; claims by maturity, Rs 56,420 thousand; premiums, Rs
2,10,572 thousand; expenses of management, Rs 19,890 thousand; commission, Rs 26,541
thousand; consideration for annuities granted Rs 10,712 thousand; interests, dividends and
67
rents, Rs 52,461 thousand; income tax paid on profits Rs 13,060 thousand; surrenders, Rs
21,860 thousand; annuities, Rs 29,420 thousand; bonus paid in cash, Rs 9,450 thousand;
bonus paid in reduction of premiums, Rs 2,500 thousand; preliminary expenses balance, 1600
thousand; claims admitted but not paid at the end of year, Rs 10,034 thousand; annuities due
but not paid, Rs 2,380 thousand; capital paid up, Rs 14,00,000 thousand; Government
securities, 124,90,890 thousand; Sundry Fixed Assets, Rs 4,19,110 thousand.

Prepare Revenue Account and the Balance Sheet after taking into account the
following:—

68
69
70
Illustration 2:The following balances appeared in the books of the Happy Life-
Assurance Co. Ltd, as on 31st March, 2012:

71
72
73
74
75
Final Accounts of General Insurance Business
In this article we will discuss about the Final Accounts of General Insurance
Business along with solved illustrations.
Insurance other than life insurance is called general insurance. Fire insurance against loss of
property due to fire and marine insurance against loss of cargo, freight and ship are examples
of general insurance

Reserve for Unexpired Risks:

An insurance company issues general insurance policies throughout the accounting year.
Premium is received at the time of issue of the policy. But the period for which the policy is
issued may cover part of the current accounting year and a part of the next accounting year.

It means the company may be required to pay for losses which may take place next year in
respect of at least some of the policies issued in the current accounting year. It is therefore,
wrong to consider the premium received in an accounting year to be income of the insurance
company without taking into account a reserve for unexpired risks.

Schedule II B of the Insurance Regulatory and Development Authority (Assets, Liabilities

and Solvency Margin of Insurance) Regulation 2000 lays down that the reserve for unexpired
risks, shall be, in respect of:

(i) Fire business, 50 per cent,

(ii) Miscellaneous business, 50 per cent

(iii) Marine business 50 per cent

To ascertain the amount of surplus for which a general insurance company can take credit in
respect of a particular type of general insurance business, in the relevant Revenue Account,
net premium earned is adjusted for Reserve for Unexpired Risks as in the beginning and as at
the end of the accounting year concerned.

Illustration 3:From the following figures taken from the books of New Asia Insurance
Co. Ltd. doing fire underwriting business, prepare final accounts for the year 11-2012

76
77
Illustration 3:From the following figures taken from the books of New Asia Insurance
Co. Ltd. doing fire underwriting business, prepare final accounts for the year 11-2012:

78
79
80
81
82
 UNIT 4
Accounting for Price Level Changes OR Inflation Accounting
Introduction

Conventional or historical cost accounting assumes that money has stable value. But in
reality, value of money varies from time to time as a result of changes in the general level of
prices. Prices of goods and services change over the time. The change in price as a result of
various economic and social forces brings about a change in the purchasing power of money.

Accounting is known as the language of business. The basic objective if accounting is to

prepare financial statements in such a way that they give a true and fair view of business.
Income statement should disclose the true profit or loss made by the business during a
particular period where as balance sheet must show a true and fair view of the financial
position of the business on a particular date.

The recording of business transactions under the assumption that monetary unit is stable is
called historical cost accounting (HCA). Under HCA, assets are recorded by the business at
the price at which they are acquired and there will be no change in their values even if the
market values of such assets change.

Likewise, liabilities are recorded at the amounts contracted for and such amounts are not
revised to compensate for changes in the price level Under HCA, it is assumed that money
has stable value. But in reality, the value of money varies from time to time. The historical
accounting system does not consider the impact of price level change on financial statements.
Therefore, accounting for price level changes has been emerged as new accounting system.

Meaning

83
The general tendency in changes of prices of goods and services over a time is called price
level. The rise in general price level is called inflation.

During the period of inflation, purchasing power of money declines. The fall in the general
price level is called deflation. During the period of deflation, purchasing power of money
increases. Price level change means increase or decrease in the purchasing power of money
over a period of time.

The accounting which considers price level changes is called accounting for price level
changes. Accounting for price level changes is a system of maintaining accounts in which all
items in financial statements are recorded at current values. This system of accounting
ascertains profit or loss and presents financial position of the business on the basis of current
prices. Accounting for price level changes is also called inflation accounting.

Price Level Accounting

In view of the above, it has been increasingly felt that the accountant will be failing in his
duties if he continues to remain content with the time honored and traditional system of
accounting by historical cost. He should move with the time and evolve a suitable system of
accounting to deal with the changing price levels.
Price level accounting may, therefore, be defined as that technique of accounting by which
the financial statements are restated to reflect changes in the general price level. Such
changes, as stated earlier, may be either inflationary or deflationary. Of course, inflation has
come to stay and, therefore, price level accounting is more concerned with inflationary
tendencies.

Inflation Accounting
It will not be out of place here to define the term inflation accounting. According to the
American Institute of Certified Public Accountants, .Inflation accounting is a system of
accounting which purports to record as a built-in mechanism all economic events in terms of
current cost.. Thus, inflation accounting is a system of maintaining the accounts just like
historical accounting. The difference lies in the process of matching-cost against revenue. In
historical accounting cost represents historical cost wherein inflation accounting it represents
the cost prevailing at the reporting date or time. .This matching process in inflation
accounting should be automatic and inbuilt in the system itself and not ad hoc in nature
dealing only with some economic and financial events. la other words, it will be wrong to
equate replacement cost accounting with inflation accounting.
Types of Prices

1. General Price Changes

84
General price-level changes reflect the value of the monetary unit over time. The total supply
of money and the total supply of goods and services in the economy fluctuate, but not usually
at the same rate. This disparity leads to inflation or deflation, changing the value of the
monetary unit. Changes in commodity prices or a discrepancy between total supply and
demand of goods and services can also lead to general price changes.
2. Specific Price Changes
Specific price change is the change in the price of a particular commodity, or the change in its
exchange value. Specific price changes are caused by some factors specific to the commodity
3. Relative Price Changes
Normally speaking, prices of different goods and services do not move in sync with each
other, much less in the same direction. A relative price change is defined as the change in the
price of a specific commodity as compared to an index such as the Consumer Price Index.
For example, if the Consumer Price Index increased by 10% over last year and car insurance
doubled in the Maritimes, we can say that the relative price increase in car insurance is
approximately 82%.

Limitations of Conventional Financial Statements

(i) Fall to disclose current worth of the enterprise. The financial statements prepared under
the conventional system are merely statements of historical facts. They do show the true
current worth of the enterprise.
(ii) Contains non-comparable Items. The financial statements contain items which
comparable since they are usually a composite of historical and current costs.
(iii) Creates problems at the time of replacement. According to the conventional method,
depreciation is charged on the historical cost of the asset. Problems, may, therefore, arise
when the asset has to be replaced and larger funds are required on account of inflationary
conditions.
(iv) Mixes holding and operating gains. In conventional accounting, gains on account of
holding the inventories may be mixed up with the operating gains.

Methods of Accounting for Changing Prices

The following are the generally accepted methods of accounting for price level changes:
1. Current Purchasing Power Method or General Purchasing Power Method (CPP or GPP
Method).
2. Current Cost Accounting Method (CCA Method).
3. Hybrid Method, i.e., a mixture of CPP and CCA methods.

Current Purchasing Power Method

The method of current purchasing power was evolved by the Institute of Chartered
Accountants of England and Wales by issue of the Provisional Statement of Standard
85
Accounting Practice No. 7 (SSAP-7) entitled, .Accounting for Changes in the Purchasing
Power of Money., in May 1974.
According to this method all items in the financial statements are to be restated for changes in
the general price level. For this purpose, any approved price index is used to convert the
various items of the balance sheet and the profit and loss account.

Preparation of the financial statements according to CPP Method The following steps are
taken in preparing the financial statements.
(i) Conversion factor.
(ii) Mid-period conversion
(iii) Monetary and non-monetary items
(iv) Gain or loss on monetary items
(v) Cost of Sales and Inventories

Determination of Profit
The profit under CPP Method can be determined in two ways:
Net change method This method is based on the normal accounting principle that profit is the
change in equity during an accounting period. In order to determine this change the following
steps are taken:
(a) Opening balance sheet prepared under historical cost accounting method is converted
into CPP terms as at the end of the year. This is done by application of proper
conversion factors to both monetary as well as non-monetary items. Equity share
capital is also converted. The difference in the balance sheet is taken as reserves.
Alternatively, the equity share capital may not be converted and the difference in
balance sheet be taken as equity.
(b) Closing balance sheet prepared under historical cost accounting is also converted. Of
course, monetary items are not restated, as explained earlier. The difference between
the two sides of the balance sheet is put as Reserves after converting the equity
capital. Alternatively, the equity capital may not be restated in CPP terms and the
balance be taken as equity.
(c) Profit is equivalent to net change in Reserves (where equity capital has also been
converted) at net change in Equity (where equity capital has not been restated).

Conversion or restatement of income statement method In case of this method, the income
statement prepared on historical cost basis is restated in CPP terms generally on the
following basis:
(a) Sales and operating expenses are converted at the average rate applicable for the year.
(b) Cost of sales is converted as per cost flow assumption (FIFO or UFO) as explained in the
preceding pages.
86
(c) Fixed assets are converted on the basis of the indices prevailing on the dates they were
purchases. The same applies to depreciation,
(d) Taxes and dividends paid are converted on the basis of indices that were prevalent on the
dates they were paid.
(e) Gain or loss on account of monetary items should be calculated and stated separately in
Restated Income Statement to arrive at the overall figure of profit or loss.

Criticism of the CPP Method

The Current Purchasing Power Method contained in SSAP-7 did not find favour with a large
number of accountants, economists, and Government authorities on account of the following
reasons:
(1) CPP Method is based on Index Nos. which is statistical averages. The method cannot,
therefore, be applied with precision to individual firms.
(2) The selection of a suitable price index is a difficult task, since there are various price
indices characterizing different price situations.
(3) The method deals with changes in the general price level and not with changes in prices
of individual items, except in so far as individual prices happened to move in step with
general price index.

Current Cost Accounting Method

In view of the general complaint that CPP method is not adequate for reporting price level
changes, the U.K. Government appointed a committee under the chairmanship of Sir Francis
Sandilands. The report of the committee was published in September, 1975 and SSAP-7 was
withdrawn. In its report, the committee recommended the adoption of current cost accounting
system as a method for correcting the deficiencies of the historical cost accounting which
fails to provide sufficient information as required by the users of accounts. The current cost
accounting system has been extensively studied and debated. It has now been finalized by the
issue of Statement of Standard Accounting Practice-16 (SSAP-16) in March, 1980, by the
Accounting Committee of U.K.
Meaning The method requires each item of financial statements to be restated in terms of the
current value of the item. No cognizance is taken of changes in the general purchasing power
of money. Assets are shown in terms of what such assets would currently cost.

Adjustments/previsions In order to achieve the objectives stated above, the following

adjustments/provisions are usually made.
Revaluation Adjustment. The fixed assets are shown at their .Value to the business. But not
at their depreciated original cost. Value to the business means the amount which the company

87
would lose, if it were deprived of the assets. It may be defined in any one of the following
ways;
(a) Net current replacement value: This refers to the money now required to buy a new
asset of the same type as an existing one less an amount of depreciation that
recognizes the fact that the true replacement of the asset would not be a new asset but
an asset which has the same remaining useful life as the existing asset.
(b) Net realizable value: This is the value which is represented by the net cash proceeds if
the existing asset is sold now.
(c) Economic/recoverable value: This refers to the present value of net income that will
be earned for using the existing assets during the rest of its life.
The difference between the value of fixed assets under Current Cost Accounting System
and Historical Cost Accounting System is transferred to a capital reserve styled as
.Current Cost Accounting Reserve.
Depreciation Adjustment. The charge to the profit and loss account for depreciation should
be equal to the value of the fixed assets consumed during the period. When the fixed assets
are valued on the basis of their net current replacement cost the charge should be based on
such cost. A suitable depreciation adjustment is, therefore, required in historical cost profit to
determine the current cost profit.
1. On the basis of total replacement cost of the asset
2. On the basis of average current cost of assets

Backlog Depreciation When the Fixed Assets are revalued every year there will also be
shortfall of depreciation representing the effect of price rise during the year on the
accumulated depreciation till date. This shortfall is called .Back-log Depreciation. Which is
the amount needed to uplift the accumulated depreciation to a figure needed to cover the total
depreciation provision based on the replacement cost at the year end. This backlog
depreciation arising out of current cost is charged against the Current Cost Accounting
Reserve and credited to the Provision for Depreciation Account.

Cost of sales adjustment (COSA) CCA method is based on this important principle that
current cost must be matched against current revenue for determining the operating profit or
loss. The amount of sales is the current revenue and hence no adjustment is required in its
figure. However, items which enter into the computation of cost of sales such as, raw
materials consumed or finished goods sold, have to be taken at the present value at which
these would have to be replaced if consumed or sold. The difference in values is termed as
cost of sales adjustment which is debited, before deriving the operating profit to Profit and
Loss Account and credited to Current Cost Accounting Reserve Account.

88
Monetary working capital adjustment (MWCA) Due to increase in prices, additional
monetary working capital is required for efficient and profitable operation of the enterprise.
The term monetary working capital refers to the aggregate of accounts receivable and
prepayments less accounts payable and accruals. Current cost accounting ensures this through
the medium of a .Monetary Working Capital Adjustment. The additional net monetary
working capital required purely on account of increase in the price levels (and not on account
of increase in scale of operations) is provided for by charging to the Profit and Loss Account
with such increase and crediting the Current accounting Reserve.

Gearing adjustment Finally, under the Current Cost System, there is also a .Gearing
Adjustment.. This is necessary because a part of the net operating assets are financed by
borrowings which are to be repaid in the same monetary amount irrespective of changes in
prices. The other adjustments referred to in sub-paragraphs (ii) to (iv) above, and which cover
the impact of price changes on the assets for the purpose of determining the profits, must,
therefore, be appropriately reduced to reflect the net adjustment as applicable only to
shareholders Funds. This is done by adding back a proportionate amount calculated as a
Gearing Adjustment.

Evaluation of CCA System

1. It does not provide adequately for backlog depreciation

2. Fails to provide funds for replacement of new types of assets
3. Inadequate gearing adjustment
4. Ignores gains or losses on monetary items
5. Variations in accounting methods

Hybrid Method
Recently some authorities have suggested another method which is essentially a compromise
formula between CPP method and CCA method. According to this method the adjustments of
fixed assets and inventories are to be made with reference to specific indices in place of a
general index as is the case under CPP method. Besides this, purchasing power gains and
losses in respect of monetary items are also considered which are ignored under CCA
method. Advocates of this method argue that by combining these two methods, the
advantages of both can be obtained.
The method, on the face, appears to be a satisfactory compromise formula but its acceptance
may prove difficult because of theoretical objections against such a compromise. Moreover,
the method is also subject to the limitations of both CCA and CCP methods.
The method is still in its evolutionary stage and suggestions varying in nature and
implications would continue to be made in the coming years. It will take a long time before a
89
set of well defined procedures and guidelines is developed. The method cannot, therefore, be
recommended for practical application at the present moment.

India and Price Level Accounting

The problem of price level changes and its impact on the financial statements has assumed
considerable importance in the last few decades. As a matter of the fact the very need for
method of accounting to take cognizance of changing prices has been often questioned. The
choice of an appropriate method has been widely debated. Keeping in view these facts, the
Institute of Chartered Accountants of India issued in September 1982 a Guidance Note on
Accounting for Changing Prices in the hope that it will stimulate thought and encourage a
wider use of the method of accounting for price level changes.
The most relevant aspects of the Guidance Note are as follows:
(i) The adoption of a system of accounting for changing prices would require a
considerable amount of time, money and specialized skills. Also the various
techniques are still in the process of development. However, in view of the
importance of the subject, it is recommended that enterprises, particularly the
large enterprises, may develop the necessary systems to prepare and present this
information.
(ii) Out of the various methods of accounting for changing prices, the Current Cost
Accounting Method seems to be most appropriate in the context of the economic
environment in India. The periodic revaluations of fixed assets and the adoption of
LIFO formula for inventory valuation are partial responses to the problem of
accounting for changing prices.
(iii) Adequate data base has presently not been developed in India for accounting for
changing prices. Every enterprise, therefore, may have to select the price indices
depending on its own circumstances.
(iv) Considering the importance of the information regarding the impact of changing
prices it is recommended that while the primary financial statements should
continue to be prepared and presented on the historical cost basis, supplementary
information reflecting the effects of changing prices may also be provided in the
financial statements on a voluntary basis, at least by large enterprises.
(v) Apart from its utility in external reporting, accounting for changing prices may
also provide useful information for internal management purposes. Accounting
information system is designed primarily to provide relevant information to
various levels of management with a view to assist in managerial decision
making, control and evaluation.
(vi) In countries like the United Kingdom, there have been some reforms in the tax
structure in the wake of introduction of accounting for changing prices.
90
UNIT 5
INVESTMENT ACCOUNTING

INTRODUCTION:

91
An individual or an organization does investment out of savings or out of surplus finance
available and not required for a specific period. If extra money is with us and it is kept idle, it
will not increase or appreciate. On the other hand, if that money is used to keep it in fixed
deposit or acquire securities, it will increase on a maturity date due to income earned. It may
also appreciate due to increase in price of securities. Investment is parting money today in
anticipation of getting more money in future.

According to AS-13 investments are assets held for earning income by way of dividends,
Interest, and rentals, for capital appreciation or for other benefits to the investing enterprise.
While ding investments, three factors are t be considered, which are:

a) Liquidity
b) Security
c) Profitability.
Liquidity is characteristic of inc\vestments to get it converted into cash, whenever required.
Security means safety of funds. If one wants more security and liquidity then he has to be
satisfied with less profitability. Risk and reward go hand in hand. If you want more profits i.e.
reward, then you should be ready to bear risk and sacrifice to certain extent security and
liquidity.

The objective of doing investment may be earn fixed periodical income or to earn profits
after selling at higher price.

TYPES OF INVESTMENTS:

Investments

On the basis
of period of
Holding - Long term and Current Securities/Investments

On the basis of nature of investments - Variable Earning Investment & Fixed Earning
Investment

92
ACCOUNTING FOR THE PURPOSE OF DIVIDEND EARNING SECURITIES
Accounting for purchase of dividend earning securities i.e. either Equity shares or preference
shares or unit‟s f Mutual fund:

DIVIDEND RECEIVED:

In case of these investments, dividend is paid out of the profits. The dividend is, therefore,
uncertain. Investments purchased are always cum-dividend. The full price cum dividend is
debited t Investment Account. Later, if dividend is received, then t is divided into two parts
as:

A] Pre-acquisition period dividend and

B] Post-acquisition period dividend.

Pre-acquisition dividend is treated as capital receipt and credited to Investment

Account. Post-acquisition period dividend is a revenue receipt and credited to Dividend
Account.

BONUS SHARES:

An inventory of equity shares may receive. Bonus shares for which shareholders do
not make any payment. These shares are received because of existing holdings. The investor
will record the receipt of Bonus shares on the debit side of investment account in the number
f shares or face value column only. This will reduce the cost of existing holding. As per
Income Tax Act, in case of sale of bonus shares, the full sale proceeds are treated as capital
gains.

RIGHTS SHARES SUBSCRIBED AND SALE OF RIGHTS: Right shares represent the
offer given by the company to existing shareholder to subscribe shares at specific price. If the
shareholder decides they can pay the amount the company will allot the shares

93
In case they decide not to accept the shares, they may ignore the same or if possible, may
dispose the offer of a consideration; the amount received is credited to profit and loss account
as per AS-13.

If an investor is entitled to subscribe for further shares at concessional price, he may

subscribe or he may transfer / sale his right to another person. The consideration received
for sale of rights is credited to profit and loss account.

CONVERSION OF DEBENTURES INTO EQUITIES SHARES:

1. Close the Debentures account.

2. Transfer the balance on debenture account to newly opened share account.
3. Record the interest on debenture up to the date of conversion in income column on
credit side of debenture account.

VALUATION OF INVESTMENTS:

At the end of accounting year the valuation of the investments is to be done appropriately. In
case of current or short term investments, they are valued at cost or at market value,
whichever is lower. The cost of investment at the end of the year is calculated on average
basis or on first in first out basis.

PROCEDURE OF RECORDING SHARES:

1. Record opening balance:

(a) Face value in N.V. column.
(b) Cost in capital column.
2. Purchase of shares;
(a) Record N.V. in N.V. column.
(b) Record cost in capital column.
3. Bonus shares:
(a) Record N.V. in N.V. column.
(b) Do not enter anything in cost column.
4. Rights shares:
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 (a) Record N.V. in N.V. column.
(b) Record cost in capital column.
5. Dividend received:
(a) Record pre-acquisition dividend in capital column.
(b) Record post-acquisition dividend in dividend column.
6. Sale of shares:
(a) Record N.V. in N.V. column.
(b) Record amount received in capital column.
7. Loss on sale:
(a) Record loss on sale in capital column on Credit side.
8. Profit on sale;
(a) Record profit on sale in capital column on Debit side.
9. Balance;
(a) Record closing balance, N.V. in N.V. column and cost in capital column.
10. Loss on valuation:
(a) Record loss on valuation of shares in hand in capital column on Credit side.
11. Balance on dividend account:
(a) Transfer balance on dividend account to Profit And Loss Account on Debit side of
Investment Account.

Example

A purchased on 1st march, 5% Bat debenture stock at 90 cum -interest, interest being payable
on 31st march and 30th Sept. each year, stamp and expenses on purchase amounted to and
brokerage at 2% was charged on cost. Interest for the half-year was received on due date. On
1st Sept., of the stock was sold at 90 ex-interest less brokerage at 2%. On 30th Sept., stock
was purchased at 91 ex-interest plus brokerage at 2% and charges On 1st Dec., stock was
sold at 94 cum interest less brokerage 2%. The market price of stock on 31st Dec. was 91%.
Show the Investment Account for the year ended 31st Dec., marking all calculation in
months.

Solution

Working Notes
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* Before making investment account, I am explaining what is given in the question. Question
is so simple. A has purchased Bat Debentures two times. It means these are his investment.
So, in the investment account, his buying of debenture will be debit. But remember, we have
to show it on cost. If there is any cum interest investment, we will deduct interest from that
investment and we will show only cost for balance sheet purpose. We will credit sale
amount of debenture.

1st Point : We will calculate value of interest which has been added in 1st march investment
= 24000 X 5% X 5 month/ 12 months =

We also add brokerage and stamp because buyer's cost will increase but interest will deduct,
net cost of 1st march purchasing = (24000 X 90/100 + 432 + 20 ) - 500 =

2nd Point : We received half year interest on our investment of 24000 = 24000 X 5% X 6 /
12 =

3rd Point : Calculation of interest on 1st Sept investment = 10000 X 5% X 5/12 =

4th Point : We will not deduct interest on 1st Sept investment sale, because investment is ex-
interest. For calculating cost, we only deduct brokerage because it is not our expenses.

= 10000 X 92 purchased price / 100 nominal price - 184 = 9016

5th Point : Calculation of interest on 30th Sept investment purchased = 8000 X 5% X 6/12 =
200

6th Point : We will not deduct interest on 30th Sept investment purchase, because it is ex-
interest. For calculating cost, we only add brokerage

= 8000 X 91/100 + 146 + 10 = 7436

7th Point : We will calculate 6 months interest on balance amount of nominal investment =
24000 + 8000 - 10000 = 22000 X 5% X 6/12 = 550

8th Point : Calculation of interest on nominal value of 1st Dec. sale of investment = 6000 X
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5% X 2 months/ 12 months = 50

9th Point : For calculating the cost of sale of 1st Dec. investment, we will deduct cum
interest and brokerage from nominal value

= 6000 X 94/100 - 50 - 113 = 5477

10th Point : All brokerage will calculate on market price of deb. for example in 9th point we
will calculate brokerage

= 6000 X 94 market price/ nominal price X 2% = 113

11th Point : Our accounts are closed in end of Dec. As per accrual system of accounting, we
will calculate interest of three months from 1st Oct to 31st Dec. on the balance nominal
amount of investment = (24000 +8000 - 10000 - 6000) = 16000 X 5% X 3 /12 =

12th Point : Valuation of investment at the year end on average cost basis.

Nominal value of investment purchase up to the year end = 24000 + 8000 = 32000

Purchase price of investment up to the year end = 21552 +7436 =28988

If nominal price is 32000, then purchase price of investment is 28988

If nominal price is 1, then purchase price of investment is 28988/ 32000

If nominal price of closing investment is then cost price of closing investment = 28988 /
32000 X 16000 = 14494

13th Point : In 5% bat debenture stock investment account, we made investment and interest
account together. So, credit side, we show interest received. It is not credit side of investment
account but credit side of interest account. because when we receive interest, we pass
following entry

Bank account Dr.XXXX

Interest Account Cr. XXXX

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5% Bat Debenture Stock ( Investment ) Account

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