(Study Material) Commerce : Study Material (Accountancy)

Basic Accounting Part-I

Accounting Education
Accounting education is an essential part of our education because without such education , we can not calculate our income , our saving and our financial strength . In general , every person of this world need accounting education for maintaining their personal record . This is also called personal book keeping . But when we study the theoretical concept of accounting education , we find different definitions and rules and regulation for proper accounting .
Now let us start What is Accounting Education ?
Accounting Education is combination of two words .
Accounting education = Accounting + Education

Accounting is not counting but it is science which is helpful for hunting for the results of business. Accounting is recording , analysis and finalisation of large scale business transactions. Accounting introduces all tools and techniques to solve many or almost every problem of businessmen, factories, Corporations and firms relating to maintaining accounts and different financial reports .
Education is way to get knowledge with scientific method .According to Swami Vivekananda the great philosopher said that it makes us self-confident .It is just use of person’s internal powers . After getting education, person gets moral and professional qualities. After getting education any body can do any professional work. All other persons respect because he is well educated.
Accounting Education
Mixer of both words makes accounting education. Accounting education may be defined as that part of education which provide us the knowledge about accounting terms , journal , ledger , final accounts , analysis and interpretation the result of business . Moreover , this education provide all knowledge of cost calculation and control and it gives different tools for analysis the financial statement . It is very helpful for making business planning . In single line , I say , Accounting is brain of Business , with it business becomes mad and there is no chance to develop it . If you are perfect in this field of education you can easily maintain not only your head office accounts but all the accounts of your all branches. You can maintain the accounts not only your business but you will understand every business like agricultural, industrial and any other service sectoral accounts .Here I want to explain service sector, service sector is a sector where services are being provided by service providers. So professional accountant can easily understand the terms subscription, fees, donation, fund, provident fund, allowance, and gratuity.

Objective of Accounting Education
Almighty has sent us on the earth. What is the objective of sending us on earth? If you do not know then you can not say that there is no any objective of sending us on the earth .Because your thinking of your brain is very limited but God is supreme power who knows the aim of your sending on earth. He wants that you will do any work and make whole world beautiful and wonderful. Like this there are so many objectives of accounting education.
•Accounting education helps you proper utilization of your money and capital.
•It will tell you that you are getting high rate of investment or not.
•What is your earning per share .
•It will help you to making planning, policies. Proper accounting education if you will get from our accounting expert , you will become not only accounts manager but also professional Scholar in the field of accounting education. Because today, different concepts, principals of different area are changing. In this changing environment, accountant will have to adjust.
•If you will not get these new and technical knowledge in the field of accounting, then you will fail in the field of accounting .These days duty of accountant is not limited up to voucher entries in computer. But they have to decide proper utilization of the capital and saving non useful expenditures.

Areas of Accounting
Financial Accounting
Financial accounting is relating to record all financial activity. These activities are related to business. Because of area of business is increasing day by day so the area of financial accounting is also increasing. Every day a new type of business is started. So daily accountant invents a new journal entry. Accountant will take the help of financial accounting with new thinking of result. So a new chapter of financial accounting is included by us. r> Cost Accounting
If you want to increase your profit, then start to decrease your cost. What a dialogue, this is not a dialogue but this is the reality of today business. Every day an accountant invents new method of decreasing the cost. All method of calculation of FIFO , LIFO , standard costing , variance calculation and making of cost budget is not the end of cost accounting but this is the starting of cost accounting . Internet cost reduction method is also a new mile stone in this direction.
Management Accounting
One new manager will do work in the field of management accounting. He will utilize accounting information in new way . This is the real definition of management accounting. How to use accounting data and accounting education in the field of management so that we will carry our business at international level. Ratio analysis , fund flow statements, cash flow statements , working capital management , capital budgeting , cost of capital calculation is just starting in this point .
Accounting Education's future is very bright . If you will become expert in this sector of education , then you can get good earning with respect and honour . What does a person want any more except this . He wants money with honour. Both two things , you can get from accounting Education . But becoming expert in accounting education is not so easy. Just learning of some of the principals of accounting , you can not become expert in accounting education .

Today the age of geographical and international business we should need to study contineusly the new concept of accounting education due to changing situation of different new business . Accounting is practical science , it demands your acceptance and your own work in this practical field of education . Some of great Accounting expert are researching the new techniques of accounting . In this technique not only you will able to record but the technique

  • Automatically correct or rectify your accounting mistakes and errors

  • Automatically get the interpretation or comment on your accounting work even passing a single entry . What will effect on financial position and what will effect on profitability of business.

So , All the expert of accounting field should make the future of accounting education more attractive and efficient for new comers of this field .

Definition of Accounting Concepts
Accounting concepts means flow of thoughts of all wise accounting professionals of this world . It can also be interpreted as "process of understanding of accounting to make sense of universal acceptability. "
In other words accounting concepts some normal rules which can be changed but which has come in to existence with so many hard work of accountants in past. These are basics thoughts of an accountant.

Types of Accounting Concepts

To know more about Accounting Concepts are very necessary to learn because without this you can not understand the fundamentals of accounting. There are many concepts which an accountant uses in their accounting working.

1st concept – Separate entity concept

Under this concept the entity of business man is separate from its business. The main reason is that owner is just giver of capital but if he withdraws without any restriction or any control. Business can dissolve within two days. So every transaction related to withdrawing money from business must be recorded by accountant. So this concept gives us basic knowledge while we are recording transactions in our books that we must know that concern has its own entity and our duty is to record every transaction even it is related to owner or not . Businessman's capital is also the liability of business and if he withdraw for personal use , it is known as drawing and it is deducted from his capital . So under this concept , accountant records every cash , goods and usage of fixed assets for personal use of businessman and while he makes balance sheet all these expenses are deducted from businessman's capital .

2nd Concept – Cost Concept

Under this concept we record all assets on their cost not in market value. This concept is very useful for stable recording of accounting .Because if all transaction recording will start on their market value then it create tension to accountant. Because nobody can say what will the price of your fixed asset in next day. So record all assets on their original cost. But time to time depreciation is deducted from this . But we never record all assets on their market price .

3rd Concept – Matching Concept

When I was doing graduate from my college, my respected teacher taught me that matching concept is very important for an accountant. It means we will compare all expenses with the incomes of business. After matching or compare, it will provide you the real result of performance of business. We can say it profit or loss . So If today you want to know profit or loss of your business, let us start match of your business incomes with your business expenses.

4th Concept – Conservatism Concept

This concept is made when accountant thought that it is very important to secure our business. The risk of business is called losses. So it is the basic duty of accountant to secure his business from different losses. For securing Loss he can make different provisions like provision for doubtful debts, provision for depreciation reserve for contingent liabilities.

Definition of Accounting Concept
Concepts are the different thoughts given by expert in respective field. Now we come on accounting concept topic. Accounting concepts are also given by different accounts professional for development of scientific accounting. There are following accounting Concepts:-
1. Accounting Period Concept
According to this concept, every business discloses their result after certain period. That period is called accounting period. The time of this accounting period is one year which started from 1 Jan to 31st Dec. But some companies prefer to adopt the accounting period according to income tax financial period which starts from 1st April and close to next year 31st march. The main motive of making accounting period is that it tells us whether business has given good result or not.
2. Business Entity Concept
According to this concept, every business is separate from his owner of business. If businessman takes some money from business. Then it is just loan given by business to businessman. So, it is very necessary to record all transactions between business and businessman. This concept is very useful in partnership type or company type business because in that type of business we can charge interest on all drawing by partner and get earning from drawing.
3. Cost Concept
According to this concept, every businessman or accountant will enter all assets on cost basis in their books. He has no right to record the assets on their market value because market value is changing day by day. So showing correct position of business, it is very necessary to show all assets on their original cost at which we purchase it but we can deduct depreciation if it is not new asset.
4. Matching Concept
According to this concept, an accountant can get net profit or loss for business after comparison of all incomes and expenses of that business. Without doing this he can not get real profit or loss. So it is duty of accountant to make profit and loss account and show expenses in debit side and incomes in credit side .After this he must compare both side if incomes are more than expenses, it will be net profit or if expenses are more than income then it will be net loss

Definition of Accounting Terminology
Accounting Terminology are such accounting words which are most suitable for describing its category. For example 'book of accounts' is general word and Ledger is proper accounting word for more suitable , so these accounting words are known as accounting terminology . "

It is very necessary for that person who is related to other field like technology or medicine . Suppose if a doctor or engineer want to know the term profitability ratio or know what is financial analysis . If you told them with explaining accounting terminology , he never understand . But if you will tell him basic accounting terms with explanation like what is asset and what is liabilities or what is capital , he easily understand if you give some guidance . Here I am giving some basic accounting terminology for this benefit.

1.Cash = Cash is that liquid part of money with this we can buy material goods .
2.Money = Money may be in cash , bank cheque or any bill of exchange
3.Material = Material means the goods which we use for production
4.Finished product = Finished product means goods which is produced after machining process.
5.Debit = It means , we write any amount on which have our some right ? suppose , Ram account is debit , it means ram gets some money or goods from us , so we have some right on ram means either we can get our money or price of goods . So accounts always given the name debit . In case of asset like furniture account debit means , we are the owner or purchases it from any other person. In case expenses , any expenses are debit because we take some service so we pay .
6.Credit = Credit means reduce some amount if we have to given to other . ? Suppose Bank has to given sham 5000 . This is the liability of Bank when bank paid to customer . Bank will credit the account of customer .
7.Entry = accounting of any transaction with systematical way is called entry
8.Owner's equity = Owner's equity means the claim of owner on the assets of business.
9.Creditor's equity = Creditor's equity means the claim of creditor on the assets of business.
10.Memorandum Account = This is the account which uses just as memory record but not formal account .
11.brought down ( b/d) = It means transfer from previous balance to new page or next day or next month .
12.carried forward = It means transfer of balance to new page or next day starting point of account or next month's starting point of account's balance .
13.Ledger folio= It is the specific number of each account in ledger , the book of accounts .
14.Contra = It is also show in the cash book in the form of C . When cash withdraw from bank or deposit to bank , it is known as contra , after this no need to show in ledger accounts because all dual process of accounting is completed in cash book .
15.goodwill= It means all profits which can count in money which comes from the reputation , quality products or name of company.

Benefits of Accounting Education
1st Benefit
The most important benefit of accounting education is that you will become well educated in the field of accounting. With this you can solve any accounting problem. It is reality that 90% successful businessmen have accounts background. So becoming perfect businessman it is very necessary to learn accounting education.
2nd Benefit
If you have prefect in accounting, you can use your money with effective way. Because you know that what accounts tells you about the current position of your business and how can you change this position with other solution tools of accounting. If you are in the home at accounting, then you will know the inflow and outflow of money and after this you can create the way of changing inflow into outflow and outflow into inflow. This does not mean cheating but it means ability to change fund according to time and place.
3rd Benefit
Accounting Education increases your practical and business maths. Because calculating of profit margin , calculation of cost of goods sold , calculation of balance of different accounts , calculation of different ratios surely increase the calculation ability of any general person.
4th Benefit
Accounting Education gives you the power of estimation about company is under how long in the water of his financial and revenue position. Just apply simple formula you can estimate the financial position of company. That is asset – liabilities = capital if you know and use of this simple formula you can compare two companies. Now you can understand yourself, if you will learn all the matters of accounting, you can easily calculate the length and breathe of financial position of company, after this you can suggest how to make effective structure of company which faces any economy problem.
5th Benefit
It is general saying that a good accountant is always a good manager. He can make good plans for company. Because, pulse rate of company’s financial work is in his hand. All cash inflow and outflow is recorded by him. So if you learn accounting education, you can easily manage your business.

Basic Accounting Part-II

Difference between book keeping and accounting

  1. Book keeping is just record of transaction, but accounting is huge science of recording, classification, analyze and summarizing of business transaction and interpretation of different result.
  2. A book keeper always works under head accountant and book keeper is often said account assistant.
  3. Calculation of tax and filling of tax return is the part of duties of accountant. But, he can take help from book keeper for tracking the total of the incomes of business.
  4. Book keeping is just like machine work in which book keeper passes the vouchers into books but accounting work is fully professional and need high experience for analysis and interpretation of financial statements.
  5. Most difficult part of book keeping work is to reconciliation of bank account with pass book, cash balance with physical cash in hand, stock in books with physical stock in Godown. Most difficult work of accountant is to make final account and analysis of financial statements.

What is accountancy?
Accountancy is the practical form of accounting. In many countries, all accounting courses are done by using word
accountancy courses. I think, accountancy is fully academic term of accounting.
Accountancy is related to making of final accounts and preparing of financial reports which are useful for business,
debtors, creditors, tax authorities and employees. In the British, Professional accountants have made the Consultative
Committee of Accountancy Bodies. CCAB is now a limited company with six members:
The Institute of Chartered Accountants in England and Wales (ICAEW)
The Institute of Chartered Accountants of Scotland (ICAS)
The Institute of Chartered Accountants in Ireland (ICAI)
The Association of Chartered Certified Accountants (ACCA)
The Chartered Institute of Management Accountants (CIMA)
The Chartered Institute of Public Finance and Accountancy (CIPFA)
But, In India, accountancy is just basic introduction of accounting at secondary level and full course completed in graduate with learning of different subjects like financial, cost, management and corporate accounting. Both accountancy and accounting is branch of science and professional accountants use this science for recording, classify, analysis and summarizing of transactions of business and main aim is to provide useful information to interested parties regarding their business.

Definition of Journal
Journal is a day books in which bookkeeper records all the transaction first time . Transaction must be record in this book date wise and journal applies the rules of double entry system . Suppose Ram takes loan of Rs.100000 from his friend. Then what come in is cash and so cash account will be debited and His friend is giver of loan, so his friend’s loan account will be credited in journal.Journal entry will be passed in the journal of Ram
Cash Account Dr. 100000 /
To Friend’s loan Account / 100000
In other words journal is the book of primary entry . Whenever any transaction or event occurs it is recorded in the
first instance in the journal . There are various types of journal.

  1. Purchase day book ? to record transactions relating to credit purchases.
  2. Sales day book ? to record transactions relating to credit sales.
  3. Purchase return book ? to record transactions relating to purchase returns.
  4. Cash book ? to record cash , bank and discount transactions .
  5. Journal Proper ? to record other transactions for which no specific journal is maintained .

All transaction are first recorded in the journal as and when they occur , the record is chronological , as otherwise it would be difficult to maintain the record in an orderly manner. The form of journal is given below :
Date ? particular ? L.F. ? Dr. Amount ? Cr. Amount ?

The columns have been numbered only to make clear the following explanations but otherwise they are not numbered . The

following point should be noted :

  1. In the first column the date of the transaction is entered , the year is written at the top , then month and in the narrow part of the column the particular is entered .
  2. In the second column , the names of the accounts involved are written , first the account to be debited , with the word Dr. written towards the end of the column. In the next line , after leaving little space , the name of the account to be credited is written preceded by the word To ( the modern practice shows inclination towards omitting Dr and To . Then in the next line the explanation for the entry together with necessary details is given , this is called narration.
  3. In the third column the number of the page in the ledger on which the account is written up is entered
  4. In the fourth column , the amounts to be debited to the various accounts concerned is entered .
  5.  In fifth column , the amount to be credited to the various account is entered .

Before one can journalise transactions , one must think on the basis of the rules given above , the effect of the transactions on assets , liabilities , expenses , gains etc. of the firm . In accordance with the effect , the accounts to be debited or credited will be determined . Then the entry will be made in the journal as indicated above .

How can make the journal entries
In the accounting education, making of journal is very important. Because without making journal entries, we can not calculate the result of business in the form of profit and loss account and balance sheet. So please care fully get the education of making journal.

Journal accepts the rules of double entry system. Rule for making journal
Every rule has two parts
•First rule for personal accounts

  1. Who is receiver = Debit
  2. Who is giver = Credit

•2nd Rule for real accounts

  1. What comes in business = Debit
  2. What goes from business = Credit

•3rd Rule for nominal accounts

1.All the expenses and losses = Debit
2.All the incomes and gains = Credit

•Practical example for making journal ?

Suppose Ram purchase goods of Rs. 10000 from Sham @ 10% trade discount on credit. After 15 days. Ram pays full settlement of all money with @ 10% cash discount.
Journal Entries in the books of Ram
Because goods comes in Ram’s business so Purchase account will debit with Rule 2nd and its first part
Because Sham is giver of goods so he is giver and account with his name will be credit with rule 1st and its second
part after this we will pass the journal entry
Purchase account Dr. 9000
To Sham Account 90000
•After 15 days will pass second journal entry in ram books
Sham Account ( He is the receiver ) Dr. 9000
To Cash Account ( it goes out of business ) 8100
To Discount Received ( It is the income of business 900

Trial balance and steps for making trial balance
Definition of Trial balance

Trial balance is the statement which shows the list of balance of all ledger accounts .It is made for checking mathematical error , making of final accounts and maintaining budget of company. Because of it is made on basis of company’s all ledger accounts , so we satisfy about mathematical correctness , if debit balance of this statement is equal to credit balance of this statement .
Steps for making trial balance
1st Step : Making all ledger accounts and the calculate their balance , if any account’s debit side is more than credit balance , its balance will be called debit balance , if the credit balance is more than debit side balance , it is called credit balance .
2nd Step : Make statement in vertical form in which you have show particular for making the list of account and right
side , you have to debit balance and credit balance .
Performa of Trial balance
S. No. ? Particular ? Debit Balance ? Credit balance ?

3rd Step : Debit balance

  1. assets account’s balance
  2. expenses account balance
  3. loss account ‘s balance
  4. investment account balance
  5. drawing account’s balance
  6. Purchase account
  7. Sale return Account

4th Step : Credit balance

  1.  Liabilities account’s balance
  2. Provision account’s balance
  3. Capital account’s balance
  4. Reserve and surplus account’s balance
  5. Sale account
  6. Purchase return account

5th Step : If trial balance is not matched, the difference will be show as suspense account

Important notes

Closing Stock is not shown in trial balance because , it is adjusting item and we can give dual effect on final account. All other items whose account is not made in proper ledger will not shown in trial balance .

Different types of Expenses
In accounting, there are only revenue nature and capital nature expenses. Revenue nature expenses records in profit and loss account while capital nature expenses are recorded in balance sheet.

Revenue expenses are again subpart of direct expenses and indirect expenses
Direct expenses are the main type of expenses which are related to production and purchase of goods. These expenses are

incurred during the purchase of goods and transfer to trading account. I am giving the examples of

Direct expenses:-

  • Wages
  • Freight
  • Carriage
  • Carriage inward
  • Octrai
  • Royalty on production
  • Factory expenses
  • Factory depreciation
  • Fuel , oil and power
  • All other expenses related to purchase of goods

Indirect Expenses

  • Office expenses
  • Sales expenses
  • Advertising
  • Administrative expenses
  • Bad debts
  • Depreciation of office assets
  • Interest on loan
  • All other expenses relating to sale and marketing

Simple income statement
Sales (Net ) XXXX
Less cost of goods sold XXXX
( or merchandising cost) XXXX
Gross profit XXXX
Less operating expenses XXXX
1.office and administrative expenses
2.selling and distribution expenses
3.Financial expenses
Net Income XXXX
Net sales refer to total sales less sales returns and are calculated as follows
Cash sales XXXX
credit sales XXXX
total sales XXXX
less sales return XXXX
Net sales
Cost of goods sold means the cost price or cost of manufacture of the goods or commodities actually sold and is
calculated as follows.
Opening stock XXXX
add purchase less purchase returns XXXX
add direct expenses XXXX
less closing stock XXXX
cost of goods sold XXXX

Basic Accounting Part-III

Bank Reconciliation Statement
Reconciliation of Bank accounts

Reconciling the Company's Bank Accounts with the Banker's Statement is a fundamental and regular task of Accounting. First, there should be the ability to 'check back' the correctness of the reconciliation. This has been done, by marking the 'Bank Date' against the voucher. For instance, if you have issued a cheque on 8th April, which was ultimately cleared by your Bank on 19th April, - you would set the 'Bank Date' for the voucher to be 19th April. This means, that when you next need to 'check back' whether the entry made by you is correct, you will only need to verify the Bank Statement of the 19th. Second, that you should be able to 'recover' the reconciliation as of any date. This is of crucial importance to Auditing. The Bank Reconciliation is one of the pre-requisites of Auditing and verification of the correctness of accounts at the year end. However, it is not a 'real-time' task – in the sense, that it is not done by the auditor's on the first day of the next year. This means, that the reconciliation made on 31st Mar, should be 'viewable' even in August, - by when almost all the cheques would have subsequently been marked as reconciled. This has again been achieved using the concept above.

Bank Accounts may have a different 'Starting Date' for reconciliation purposes. When you create a Bank Account, you are requested to give an 'Effective Date for Reconciliation' just before the Opening Balance. Normally, this would be the 'Books Beginning from' date itself. However, you could have imported data from a previous version of Tally or from any other system (where the reconciliation process was not available or was different. In that case, you may not wish to reconcile the bank account with your bank statements from the very beginning. Give the date from which you want the reconciliation facility to be activated. Then, previous entries will not appear for reconciliation, but will be taken as a reconciled Opening Balance. A quick experiment with Reconciliation will show you what is meant.

Here is how you go about it:
Bring up the monthly summary of any Bank Book. (You could do this from the Balance Sheet, Trial Balance, or Display/Account Books/Bank Books, and selecting a Bank). Bring you cursor to the first month (typically April), and press Enter. This brings up the Vouchers for the month of April. Since this is a Bank Account, an 'additional' button F5: Reconcile will be visible on the right. Press F5.

The display now becomes an 'Edit' screen in 'Reconciliation' mode. The primary components are:A column for the 'Bankers Date'
The 'Reconciliation' at the bottom of the screen, showing: Balance as per Company Books Amounts not reflected in Bank
Balance as per Bank The Balance as per Company Books reflects your Balance as on the last date (in our example case, 30- Apr). The Amounts not reflected in Bank is the debit and credit sums of all those vouchers whose Bank Date is either BLANK, or GREATER than 30-Apr (i.e. these vouchers have not yet been reflected in the Bank Statement).

The Balance as per Bank is the Nett effect of your Book Balance offset by the amounts not reflected in the Bank – which should equal the balance in the Bank Statement. (Of course, some variation may persist due to entries made in the Bank Statement which you have not yet entered in your Books – but since you WILL definitely enter them, and only then print your reconciliation, it will ultimately reflect the correct balance). You will find, as you mark off the individual vouchers by setting the 'Bank Date', that the Reconciliation at the bottom of screen keeps reflecting those changes instantly. When you are finished, press Ctrl+A (or press Enter as many times as necessary to skip over the unmarked vouchers), and accept the screen. (If your screen has a largish number of vouchers it may take some time to complete the acceptance – be patient).

The next time you come for reconciliation, you will be presented only with those vouchers which remain unreconciled. Thus, the task keeps becoming simpler.
Making of Bank reconciliation statement by yourself Bank reconciliation statement tells the reason why your cash books bank column is not matching with your bank pass book .

Free accounting knowledge
Free is only one word which is use every person when he or she search from google.com. So It is duty of every webmaster
to write the word in his website . So I am writing this article of free accounting knowledge .
There are 2 points if you wish to get this free accounting knowledge .
1.You must have save you energy and money
2. Your aim is to get knowledge and then next it also give to another without any cost.
It may be noted that the American institute of certified public accounts , in 1941 defined accounting as the
specialised art of recording , classifying and summarizing in a significant manner transaction terms of money which are
of a financial character and interpreting the result . In the course of the time the definition has become broader to
include imparting economic information to permit informed judgements and decisions .
Economic events have been defined as happenings of consequence to a business entity
Basic terms in accounting

•Financial Statements
Two basic financial statements are prepared by an enterprise one is profit and loss statement and other is balance sheet
•Accounting Equation
Three components of a balance sheet can be stated in the form of following basic accounting equation
Assets = liabilities + capital
This equation tells at the glance that the resources of this enterprise total and these assets are financed by two source
also known as outsiders claims and owner equity.
•Business Transactions
It can be a purchase of goods , collection of money , payment to creditors for goods and expenses . An event to be a
transaction must possess the quality of economic substance , relate to business and affect the economic results .
These are economic resources of an enterprise
fixed assets are assets held on a long term basis , such as land , building , machinery and plant etc.
Current assets are assets held on a short term basis such as debtors bills receivables , stock , cash and bank etc.
These are the obligations or debts that the enterprise must pay in money or services at sometime in the future . They
represent creditors , claims against assets of the firms.

Relationship of accounting with other field
Accounting is very close relationship with maths , economics ,statistics , business study and other area. Different formula used in financial , cost and management accounting can be satisfied on the basis of maths . In accounting , we records only economical transaction related to money or money's worth And our govt. policies effects on our financial accounts . Suppose if central govt. changes the rate of depreciation then our net profit and financial position will effect from this point . So we should necessary to understand the relationship of accounting with other field for better knowing accounting . Accounting , maths , economics and business study all makes good structure of a good economy . Because if one field is not fully developed , its side-effect surely
will be on other fields . Suppose if an statistics have to collect previous year market sales data but accounting of market is very poor so he will have to collect wrong data and different economic decision will be wrong . We can understand all field just as different parts of body , if one part is weak other surely effected from it .

Accounting cycle
Sometime , you read this term in any book about accounting cycle , But you would not research of this term . Actually accounting cycle is very simple term .It means that all the activities in accounting will absorb in first point and then it make accounting cycle .This term is very useful for an accountant because an accountant is man who maintain accounts .
Suppose Ram purchases goods from any company this transaction when comes in the front of an accountant , he records it after this he see its result on his final accounts but in last automatically it support to completing the whole accounting cycle . In other words any financial transaction is the beginning point of accounting cycle and an accountant must give importance to each transaction of business.

Depreciation and effect on final account
Depreciation is just decrease the value of any fixed asset.When you will use it ,then the value of fixed asset will be decreased . So calculating of net profit and correct financial position , it is the duty of accountant to show it in profit and loss account . Rates of depreciation may differ according to the nature of fixed asset some assets’ depreciation rate is low and other is high because high decreasing value due to expiry. In balance sheet ,we deduct depreciation from fixed asset .After deducting we can calculate net value of fixed asset which can be show in balancesheet .
Depreciation account can also be made by accountant but every year it must send to profit and loss account because this is nominal account . Different law like income tax law and corporate law fix this depreciation rate so we must see the reference of
depreciation rate from these laws but calculating correct amount of depreciation . Also , account manager should decide when a fixed asset will buy . For replacement purpose , it is duty of accountant and account manager to calculate and transfer and written off depreciation every year from fixed asset .Some business entity makes also provision for depreciation .The Balance as per Bank is the Nett effect of your Book Balance offset by the amounts not reflected in the Bank – which should equal the balance in the Bank Statement. (Of course, some variation may persist due to entries made in the Bank Statement which you have not yet entered in your Books – but since you WILL definitely enter them, and only then print your reconciliation, it will ultimately reflect the correct balance). You will find, as you mark off the individual vouchers by setting the 'Bank Date', that the Reconciliation at the bottom of screen keeps reflecting those changes instantly. When you are finished, press Ctrl+A (or press Enter as many times as necessary to skip


It is a gradual deterioration or decrease in the value of asset after using that asset in our day to day work or after spending of time. In this world, everything is perishable, so making true profit and calculates true value of any asset at present time, it is very necessary to depreciate on fixed asset and deduct from it.



If you are doing business or linked with any business, you know that prices are always up and down due to changing in the condition of business environment. Fast changing in market prices is called fluctuation. It is not called depreciation because, it is not related to use of fixed asset. Fluctuation can also increase the price of fixed asset but after deducting depreciation, value of fixed assets will be decreased. Fluctuation is fully ignored and there is no accounting treatment. But we show depreciation as a loss of business.


When new fixed assets’ quality, efficiency and capacity decrease the value and usability of old fixed assets, then it is called obsolescence of old fixed assets.The main example, we can look in different machines or technical equipment especially in medical field. Every new equipment decreases the value of previous equipment. Because of it is not related to the nature and use of fixed asset, so it is also not depreciation. Obsolescence is not important in field of accounting but it is important in technology research and marketing of product.

How to make fixed asset account under fixed installment method

Before making of fixed asset account, we must know following journal entries :-

1. For providing depreciation on asset at the end of the year

Depreciation account Debit
Fixed asset account credit

2nd For transferring of depreciation to profit and loss account

Profit and loss account debit
Depreciation account credit

In this method fixed asset account is very simple T shaped. There is not fixed Proforma for making fixed asset account

Methods of providing depreciation

There are many methods of calculation of depreciation . No one apply on the all assets , because , different assets have different nature and according to management policy and effect of laws specially tax laws , different methods are used for providing depreciation . There are 10 methods of calculation of depreciation . Out of which approximate 5 are the most important and it should be learned .
1st method of providing depreciation
Fixed installment method
Fixed installment method is that method , in which we calculate fixed rate of depreciation and then with this rate we
deduct every year from fixed asset .
Original cost of asset - scrape value of asset
Depreciation = ___________________________________
Effective working life of asset
For example Satifsan purchased an asset of $ 20000 and he can use it for 4 years and after four year its scrape value
will be $ 4000 . Calculate depreciation with fixed installment method
Depreciation = 20000- 4000/4 = $ 4000
Rate of depreciation = 4000/20000X 100 = 20%
every year we provide $ 4000 and deduct from original cost of fixed asset . So its other name is original cost method or straight line method of providing depreciation .
Benefits of this method
1. It is easy to calculate
2. It show zero value of fixed asset at the end of its life .
3. It divides all weight of total depreciation equally in all period of life of asset .
4. After providing depreciation , balance will shows correct value of fixed asset .
Disadvantage of this method
1. After showing zero value of expiry of fixed asset in books , but it is possible that asset is in good position .
Then what provision will show in books , this method does not tell to accountant .
2. Some assets ' value will increase after spending of time at there we can not use this on that assets .
3. There is no provision in this method for buying new asset after scrap of old assets .

Basic Accounting Part-IV


What is provision of depreciation account?
Provision of depreciation account is the account of provision of depreciation. First of all we should understand provision of depreciation .Provision of depreciation is the collected value of all depreciation .With making of this account we are not credited depreciation in asset account. But transfer every year depreciation to provision of depreciation account. Every year we adopt this procedure and when assets are sold we will transfer sold assets ‘total depreciation to credit side of asset account. For calculating correct profit or loss on fixed asset. This provision uses with any method of calculating depreciation.
There are following feature of provision for depreciation account
•Fixed asset is made on its original cost and every year depreciation is not transfer to fixed asset account.
•Provision of depreciation account is Conglomerated value of all old depreciation.
•Entry of depreciation will change also
Depreciation account Debit
Provision for depreciation account credit
•This system can be used both in straight line and diminishing method of providing depreciation.
•Calculation of loss on sale is very important where is provision of depreciation account is kept.
Which we can calculate with following way
Cost of sale of fixed asset XXXX
Less total depreciation up to the date
Of sale XXXX
Written Down Value of sold asset XXXX
Less Sale price XXXX
Loss on sale of Asset XXXX
•This loss will show in the credit side of asset account
•At the sale total depreciation on of sold asset from its purchasing will transfer from provision of depreciation account to fixed asset account , its journal entry will Provision for depreciation account Debit
To fixed asset Account Credit
Diminishing balance method of providing depreciation
Diminishing balance method of providing depreciation is very important from accounting point of view. In this method,
accountant calculates depreciation on the asset from which he deducts all previous depreciation from asset. So, every year amount of depreciation will go down.
For example Suppose we purchase a machinery at $ 50000 and if we fix 10 % depreciation on machinery with diminishing balance method, then first year depreciation will $ 5000 , next year will calculate depreciation $ 50000 - $ 5000 = $ 45000 X 10 % =$ 4500
Third year depreciation will apply on $ 45000 - $ 4500 = $ 40500
So, we calculate depreciation on written down value of asset so , its other name is written down method or reducing
value method .
Now we are seeing the value of depreciation is decreasing
Ist year = $ 5000
2nd year = $4500
3rd year = $ 4050
Benefit or advantages of this method
1.This is also very easy method.
2.This is very scientific method and provides logic that which asset is abolish due to spending of time at that portion
of depreciation is not included in asset.
3.Income tax officer prefers this method for assessment of business and professional income.
If we buy any asset after first year, we need not to calculate depreciation from beginning.
Disadvantages of this method
1.In this method we also ignore interest on capital which is used for purchasing such asset.
2.All new and old assets are mixed with each other, for an auditor, it is so difficult to differ among them.
3.It is difficult to calculate optimum rate of depreciation
But we can use following formula for calculating depreciation in W.D.V. method.
R = 1 – ( S/C) 1/n
R = rate of depreciation
S = S is scrape value
n = n is the working life of an asset
c = c is cost of asset
Reserves are accounting terms. In general, it is saving of money, but in accounting terminology , it has different meaning.
According to accounting technician, “ Reserves are that funds which withdraw from general or special profit of business and keep it in safe pocket of company. This sum is used when any loss happens in business. "
Accounting Experts always in favor to keep some money or retain some fund for future losses, because future is uncertain and for increasing working capital of business, accountant should retain some money out of total profit before distribution it to shareholders. It is shown in profit and loss appropriation account. Indian company law has fixed it and in other countries , their company laws fix it and from time to time change it due to changing businessenvironment.

Types of Reserves
There are two main types of reserves which I am explaining with following way :-
1. Open reserves
Open reserves may be defined all reserves which shows in the balance sheet. Every person or public can know such reserves of company. Those reserves provide full information to shareholders about which amount has gone to reserves or why they are not getting all amount of dividend. This type can also divide in sub parts

a) Capital reserves
Capital reserves are main type of open reserves. It is not created out of profit of company. This reserve is not used for distributing the dividend to shareholders of company. The main sources of these reserves are following:-

  1. profit earned prior to incorporation
  2. Premium on the issue of shares and debentures.
  3. Profit on reissue of forfeited shares
  4. Profit set aside for the purpose of redemption of preference shares.
  5. Profit on sale of undertaking or part of it.
  6. Surplus on revaluation of assets and liabilities.

b) Revenue reserves

Revenue reserves are that part of open reserves which are created out of profit of company. It is showed in profit and
loss appropriation account .It can be used for dividend to shareholders. There are following benefits of revenue reserves:

  1. Extension of business
  2. Set off unknown losses of business.
  3. Used to create strength in the financial position of business.
  4. To make stability in the dividend rate.

These revenue reserves can also divide into two parts.
i) general reserves
ii ) Specific reserves = Specific reserves includes dividend equalization reserve, debenture redemption reserve , staff reserve. Investment fluctuation reserve, taxation reserve and contingency reserves.

2. Secret Reserves

Secret reserves may be defined as that type of reserves which is not shown in final account of company. Means it has neither been shown in profit and loss appropriation account nor in balance sheet. These reserves can easy created by showing less value of assets and more value of liabilities in balance sheet. If a company has created such secret reserves for the benefits of company, it will be surely strong his financial position. These secrete reserves can be created by following ways:

  • Showing heavy depreciation value
  • Showing the less value of goodwill and closing stock of business.
  • Secrete of sale value of business.
  • Showing heavy liabilities which is not of company.
  • Showing capital expenses as revenue expenses.
  • Grouping of free reserves with creditors.
  • Current asset not shown in balance sheet.

Calculation the credit purchase

  1. Write creditor account on any excel sheet with making two sides one side is debit and other side is credit.
  2. Write your business's creditors opening balance in credit side with giving by balance b/d name.
  3. Write the amount that you have given to your creditors in the current year in the debit side of creditor account.
  4. Write closing balance of your creditors in the end of this year ( this amount shows unpaid amount which is payable to your creditor at the end of this year ) in the debit side of this account
  5. You will see that debit side is more than credit side of this account , the difference will be credit purchase and it should be written in the credit side of this account
  6. Now you are seeing your credit purchase .

This credit purchase is very necessary when you will calculate the net consumption of your stock
because for calculating net consumption for stock , we always add purchase in the opening stock and deduct closing stock . This net consumption will show in profit and loss account or income and expenditure account .

Difference between revenue and capital items
Revenue item
If any item of business which does not create any asset of business that type of items are called revenue items, suppose we pay rent but rent can not create any fixed asset so this is revenue item and it must show in profit and loss account , but if we have a special fund for building , this fund create long term asset up to that period this will show as fixed liabilities . This is not revenue item .
There is also major difference is that revenue items benefit is related to current year but capital items' benefits are related more than one year. If advertisement's expense is 100 Rupees and its benefit can only related to current year then this is revenue item .
But if we expand Rs. 9000000 lakh on advertisement and its estimated benefit is for 10 years then this will be the capital item.
All revenue item will show in profit and loss account
And all capital items will shown in balance sheet or financial statement .
Capital loss
Capital loss may be defined as the loss relating to sale of any fixed asset or any other financial loss like premium given on repayment of debentures or bonds, or discount on issue of shares and debentures. Capital loss may explain with many other examples:
Ist Example
Suppose, if any machine’s book value is $ 50000 and sell it on $ 40000 and $ 10000 is loss on sale of machinery, this is called capital loss.
2nd Example
Suppose, if a company has 100 debentures of other company and each debenture is of $ 100 but these debentures are sold at $ 80 per debenture, so company is getting loss on sale of debenture of $ 2000. This is capital loss in profit and loss account of company, we can not show any capital loss. In other words these losses can not be debited in Profit and loss account of company. These all losses will show in assets side of balance sheet of company. After this, it is written off by dividing number of fixed years and transferring to profit and loss account. If you know what is mean of written off , then , I can also explain it , written off means that part of any expenses or loss which is transferred from balance sheet to profit and loss account for closing the account of loss or expenses , specially capital losses .

Revenue losses
Revenue losses include all losses which happen due to operating any business activity. It includes cash discount on sale, depreciation, loss due to falling of market prices. So, these losses will show in the debit side of profit and loss account of company. It is deemed that when we start the different activities of our business , many losses are happen , so it should be closed by transferring all these losses to profit and loss account .

Feature of revenue expenditures

There are following main features or characteristics of revenue expenditures . These features are very useful for your decision to adding any expenses in profit and loss account .
1. General operating expenses
Any expenses which is related general operation of business that all expenses will be revenue expenditures and will be debited in profit and loss account
2. Expenses related to short period
These type of expenses are related to short period, means benefit of these expenses is less than one year.
3. Expenses for maintaining the stability of fixed assets
These expenses’ main feature is that these expenses is useful for maintaining the stability or efficiency of fixed assets,
4. Recurring Nature
One of most important feature of these expenses that these expenses are recurring nature. In other words these expenses happen Again and again in general business activities. For example , expenses for giving refreshment is revenue expenditure because almost daily , these type of expenses is paid by company .
5. Helpful for maintaining the profit of business
These type of expenditure is useful for maintaining the profit of business , but also above features should include in the expenses which I have mentioned in above points because capital expenditure will also helpful for maintaining the
profit and you will then confused revenue and capital expenditure’s difference .

What are basic rules for making difference between capital and revenue expenditure

Ist Rule

All expenses which are done for getting any fixed asset must be capital expenditure. For example, expenses of carriage and freight for getting fixed assets are also capital expenditure and will include in the total cost of fixed assets.

2nd Rule

All expenses which are done for increasing the size or improvement in fixed assets must be capital expenditure.

3rd Rule

All expenses which are done for getting share capital or long term loan must be capital expenditure.

4th Rule

Look also nature of business , if business is relating to general goods sale -purchase transaction then above three rules will applicable but , if nature of business shows dealing in above transaction , then above transaction becomes revenue expenditure .

5th Rule

Legal judgments is also so important for taking decision , Like Income tax law 1961 has provided some rule regarding assessment of business and profession . These rules also give good guidance for making difference between revenue and capital expenditures.

What is deferred revenue expenditure?
As a matter of fact , deferred revenue expenditure is capital expenditure . Because , it has both quality of revenue
and capital items, so it is deemed as deferred revenue expenditure.
Heavy advertisement expenses , because this is for promotion of sale so, it is revenue expenses but because amount is too large so it is also capital expenditure. Now, it will include in deferred revenue expenditure. If we fix the target of getting benefit for this advertisement is 10 years and advertising cost $ 500000. Now $ 500000 is divided by 10 years and we get $ 50000 and it will show as revenue expenses in profit and loss account and balance amount of $ 450000 will show in balance sheet. Every year one tenth part of Original and total advertising expenses will go to profit and loss account. This deferred revenue account will close in 10th year when there will not be any balance for showing as asset in balance sheet .

There are also other deferred revenue expenditures like underwriting commission, discount on issue of shares and debentures , brokerage paid on purchase of shares and debentures, research expenses and development expenses

Definition of Drawing

We use drawing many times in financial accounting .Drawing here means any amount withdraw from business for personal use. Not only cash but if we withdraw any product from business or any asset of business for personal use that will be drawing.
It surely reduces the capital of any business. So business man must record drawing in his books so that accountant can calculate correct profit or loss of business man .Some accounting terms, Intangible assets
This is the asset which is not visible but we can feel them . The main examples of these assets are goodwill, patent, trade marks

Factitious Assets

If any asset which has no any market price that asset is called factitious assets .This is showed as expenses of capital expenditure . The main example of these factitious assets are Preliminary expenses , discount on issue of shares and debenture
1. cost of goods sold =opening stock + purchase +direct expenses - closing stock
2. Gross profit = sale price - cost of goods sold
3. Net profit = Gross profit - Indirect expenses
4. Commission on net profit before charging such commission
= Net profit before charging X Rate/100+Rate

Definition of Goodwill
Goodwill is an intangible asset which makes any organisation with his good name , by selling quality product , by selling product at less price .Goodwill can be earned by speaking sweat words to customer . An expert can tell about the correct value of Goodwill
but in general IT is the excess of super profit over general profit .or If any concern is gaining more profit than his general rate of return then it means it is generating Goodwill .Goodwill can not generate with in night but for generating goodwill any firm can take 10 to 20 years . Which is called long period is suitable for generating goodwill .
If you are selling your old firm you can also demand the value of goodwill with total cost of your asset . If you thinkthat Firm or company name is saleable in market .
Personal accounting means recording of domestic expenses and income . It is very necessary that to record your income and expenses. Because without recording your personal accounting , you can not make your domestic budget. If you are living in any noble family , it is you duty to complete your all expenses with your limited income , so make estimation of all monthly expenses . This estimation can be done if you have recorded early months expenses . So it is your duty to record your personal expenses. Recording of personal income and expenses is very easy . Just keep a Note book in you pocket and after spending any expenses you must record your expenses. After month you will see what is your total expenses and where did you expand it. On this base you can make you family budget. If you can not keep note book then you can record your expenses in excel sheet. In each night you can record full day expenses in different things like juice , ice-cream , wheat , petrol , dresses , fees , charity etc. After month total them you can get you monthly recorded expenses after one year you can your yearly real expenses . It is not necessary that all year we have to do same expenses but we can estimate our yearly expenses.

The theme of accounting education.
In beginning

I think that India is inventor of all basic rules of accounting because , In India all commercial activities are started . So Need of recording transaction is the first preference of India. All records kept in Sanskrit language. Accounting system is so scientific , no body can cheat in this accounting system. So there is not need of auditing the accounting in that time. Different countries visitors and businessmen came in India and took all knowledge of accounting and went to their country. So India is the first accounting Education giver
In the Middle
In middle of accounting education theme, we will take different scientist in whole world who gave their contribution for accounting education. I am giving giving their name and other detail Luca Pacioli (1445 - 1517) Luca Pacioli also known as Friar Luca dal Borgo, is credited for the "birth" of accountancy. His Summa de arithmetica, geometrica, proportioni et proportionalita (Summa on arithmetic, geometry, proportions and proportionality, Venice 1494), was a textbook for use in the abbaco schools of northern Italy, where the sons of merchants and craftsmen were educated. It was a compendium of the mathematical knowledge of his time, and includes the first printed description of the method of keeping accounts that Venetian merchants used at that time, known as the double-entry accounting system. Although Pacioli codified rather than invented this system, he is widely regarded as the "Father of Accounting". The system he published included most of the accounting cycle as we know it today. He described the use of journals and ledgers, and warned that a person should not go to sleep at night until the debits equalled the credits. His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses — the account categories that are reported on an organisation's balance sheet and income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. His treatise also touches on a wide range of related topics from accounting ethics to cost accounting. John Mellis of Southwark, England had written his book in 1588 in which he wrote basic principals of accounting , which used in modern accounting. Richard Dafforne accountant There are so many accountant who contribute their time and energy to make accounting upto date.

In the End
In the end of this theme , I can tell you one thing that 100 billion people works daily in the field of accounting. From making of family budget to making of national and world project budget , accounting is used as scientific source of data , on the basis all future planning have been done by different people in whole world. If you are thinking that just passing the voucher entries and making final account is accounting , then you are wrong. Theme of accounting is in system not in doing just clerk work. Passing the voucher entry is clerk work. But If you are become real accountant in real sense . Then make your businessmen's all plans and budget by doing all analysis of finance statement. So that you will succeed in reducing every cost of business and increasing all incomes of business. All management accounting is nothing but proper utilization of financial accounting .

Accounting As an Information System
It is true that accounting is an information system. It is system in which an accountant gets all financial reports .These reports can be received by accountant if he takes all the steps of accounting procedure. There are following in points which show that accounting is an perfect accounting system? Accounting gives us profit and loss account and balance sheet , on these two reports , we get the information of revenue position and our financial position? Because in accounting , there is the facility of calculate cash flow statement and fund flow statement , so it provides us the information about our inflow and out flow of funds and cash? Accounting is an equipment in the hand of accountant and manager , with this equipment they can make their all future plannings, future budget .With accounting , they can easily estimate , is there suitable to invest money or not under there accounting reports.

Difference between Loan and Advance
Many accountants think that loan and advance is almost same . Both means when a person borrows the money from other, it is called loan or advance . But , If you will deep study of this , then you found many differences between loan and advances .
Loan means debt for personal or business purposes in which loan taker is responsible to return his taken money with interest .
Advance is to get money from those , which have our mutual relationship .

•Employee can get salary in advance from his employer
Advance transaction will arise due to relationship between employer and employee .
•Debtor can give advance money for purchasing any future goods from his supplier or creditor . or Supplier can demand
advance money for passing his order .
Rohan has to buy of Goods $ 50000 in 5/5/2009 but he pay to Sham $ 50000 in advance in 5/3/2009 .
Loan is just Contract between Lender and borrower in which they fix their terms and condition .
What is rate of interest on loan , what is the installment amount , when installment of loan will given , What penalty
will be levied if , installment is not given at proper time and many more conditions they can fix .
But in advance , term and condition is fix on their relationship , a good relationship with employer , you can get
advance salary with 0% interest rate .
Sometime Imprest cash and call in advance is also deemed advance but these are not loan items .
IASB publishes his new amendments .According to this now IASB will gets public comments to clarify the requirements in
IAS and IFRIC 9 reassessment of Financial Instruments.Now any one can also read Financial instruments project page
print-friendly version of the press release.
The proposals are set out in an exposure draft Embedded Derivatives, on which the IASB invites comments by 21 January
2009. The exposure draft is available on the Website www.iasb.org.
Accounting Education means that education which teaches recording and maintaining books of accounts . This education came in existence after mathematics and Economics science . In the point of facts , if It should be said that above education is the base of accounting education . Above Education are very helpful for getting accounting Education . In accounting education , we learn what is way of recording our different transactions. With this education , we can calculate our business's result relating to different transactions and events . It is not easy to find to reward or return on investment made by businessman .

Suppose , A company whose sale is 6 Billion $ ( 6 X 1000000000000 $ ) and it has spread in 120 countries and if you are said to calculate the profit or loss of a company . Then , you will feel giddy . But ,if you learn accounting education , you will feel reposal and easement to calculate above profit or loss. This accounting education is also helpful for determination of tax because , if we learn to record all transactions in the books and on this base we can calculate correct value of tax and become responsible businessman of this nation. All tax officers or assessing officers confess the accounts of professional accountants who are expert in accounting education. Success of business is fully under accounting's thumb . It is impossible to develop business without accounting data and effective use of them for business plannings . For analysis of different statement is also depend on cost and management accounting which are subbranches of accounting . One of magistral feature of accounting is that this education is encumbrance on brain . All work is done in this education with fully scientific method of accounting . After spending of time , all other educations forget but accounting education is always young and challenging position in the brain of accountant . Accountant does their work with new power . It is the reason that as accountant's experience increases , by the way amounts to higher posts of administration .
It is true that getting of any education is no so simple and you have to face several difficulties . Like other education accounting education is not so easy . It is the way of complexities and Complications but student should do hard practice and try to understand accounting terminology . After this student can solve every problem of accounting .

Corporate Accounting Part-I

1st Maintaining the accounts relating to issue, forfeiture and reissue of shares.
When we issue share first time, it is the duty of accountant to records all the transactions relating to issue of share must be recorded in the books of company. The process of issue is completed the following way.
getting the application money with application
getting the allotment money when shares are allotted to shareholders
getting the final amount in the form of IST, second and final calls.
So when any amount we receive, it must be recorded by accountant of company. If we are refunding the amount then also its record must be kept in company books.
In company accounts, the accountant can face the problems of forfeiture of shares and reissue of forfeited shares. Many inexperienced accountant do 90% mistake in passing the voucher entries relating to forfeiture and reissue of shares. This is broad concept and I will write full tutorial on forfeiture and reissue shares. Today I am concentrating our all area of company accounts.

2nd Maintaining the debentures Accounts

Debenture is just loan which is taken by any company, so it is the duty of the accountant to record relating to issue and repayment of debentures.

3rd Maintaining the accounts of Bonus Shares
Bonus shares are the shares to existing shareholder. When company thing that it is according to the company policies, then company can issue the bonus shares. So record of bonus is all very necessary in company accounting.

4th Maintaining the accounts of Right shares

Right shares can also issue to existing shareholder on the proportion of their existing shares .These shares are also very important from recording point of view.

5th Maintaining regular accounts
Regular accounts means to pass the voucher entries related to purchase, sale, expenses, and losses, incomes of company or on the behalf of company. The recording way is equal to the recording way of sole trade or firm’s transactions.

6th Maintaining the final accounts of Company
Maintaining the final accounts of company is very necessary because company laws of different countries have given strict provision for making and publishing the final accounts of company. There the final statement is made in final accounts of company by accountants of company.
Profit and loss account
This account is equal to the profit and loss account of other organization.
Profit and loss appropriation account
It is very compulsory to make profit and loss appropriation account. In company level business , shareholder is differ from management or directors , so what is the dividend and what amount of profit and loss reserves in company will write in the debit side of this account. Other thing I will discuss in next articles.
Balance Sheet
This sheet shows the assets and liabilities of company. Company must show his contingent liabilities in the footnote in the below of this balance sheet.

7th Calculation of Managerial Commission
From accounting point of view, it is very necessary to calculate commission of different full time and part time directors of company. Different countries’ company laws can make the rules and regulations regarding these commissions, so you must know the current rates of such commission if you have the responsibility of making the company accounts.The area of expenses and incomes of company is so wide, so thinking of company accountant must be so wide.

8th Dividend and Interest Calculation
Company account’s main part is to calculate the dividend and interest and then record. There are different types of dividend which is issue by company but interest is given on loan and debentures issued by company.

9th Corporate tax
Current rules and regulations relating to corporate tax depend on the finance bill and budget , so before calculation and recording of corporate tax.

Meaning of Bonus shares
Bonus means premium or gift which is paid normally in cash
Bonus shares
Bonus shares mean a gift or premium in form of stock by a company to its shareholders . It may be stated as extra dividend to share holder in a joint stock co. from surplus profits in the legal context a bonus share is neither dividend nor a gift . It is governed by regulations of the company law that it can neither be declared like a dividend nor gifted away . .

Source of bonus shares
The bonus shares can be issue out of profit or reserve which have been earned by the company these are profit or reserve which are free for the purpose of dividend and as specified in company act . but it can not view , those reserve and surpluses which are not earned by company that is which are existing due to revaluation of assets etc.

  • Profit and loss account
  • general reserve
  • revenue reserve
  • free reserves
  • dividend equalization fund
  • capital reserve
  • sinking fund
  • debenture redemption reserve only after redemption
  • development rebate reserve
  • allowance after expiry of 8 years
  • capital redemption reserve
  • share premium or security premium if received in cash

Bonus is an accounting term , it means a premium or gift which is paid normally in cash.

Bonus shares
Bonus shares means a gift or premium in the form of stock by company to its shareholders . It may be stated as extra dividend to shared holder in a joint stock company from surplus profit s in the legal context a bonus share is neither dividend nor a gift . It is governed by regulations of the company law that it can neither be declared like a dividend nor gifted away.
" issue of bonus shares in liew of dividend is not allowed ."

Source of bonus shares
The bonus shares can be issue out of profit or reserve which have been earned by the company over the previous years .Normally these are profit or reserve which are free for the purpose of dividend and as specified in company act. but it can not views those reserve and surpluses which are not earned by company that is which are existing due to revaluation of assets etc.

•Profit and loss account
•general reserves
•revenue reserves
•free reserves
•dividend equalization fund
•capital reserves
•sinking fund or debenture redemption reserve only after redemption
•Development rebate reserve /allowance after 8 years
•Capital redemption reserve
•Shares premium or security premium if received in cash

Corporate Accounting Part-II

SEBI Guidlines for determining maximum quantom of bonus issue

First test
Residual reserve test As per this guidline the residual reserve after the proposal of capitalisation ( bonus issu) should be at least 40% of increased paid up capital

5 Free reserve - 2 paid up capital before the bonus issue= -----------------------------------------------7

2nd test
Profitability requirement test
As per this guidline 30% of average amount of profit before tax in the previous three year should yield a rate of dividend of expended capital base of the company at 10%
= 3 average profit - existing share capital

3rd test
Maximum limit requirement
This test indicates teh maximum amount which can be utilised for issue shares capital at one time shall not exceed the total amount of paid up equity capital of the company
Amount of bonus < total existing quity paid up capital
To determine a maximum amount of bonus which can be decleared the test mention above will be apply . Firstly the first two test will be consider the amount of bonus will be restricted upto the lower amount but this amount will not exceed the existing paid up capital of the company .
In brief the following steps should be consider for the purpose of bonus
1. Bonus shares not permitted in less existing partly paid up shres are converted into fully paid up shares
2. Bonus can not exist teh paid up equity capital of the company
3. The balance of residual reserve must not less than 40% of increased capital
4. 30% of average profit before tax of previous 3 year must yield 10% dividend on the increased capital

Accounting treatment of bonus shares
I am giving the full detail of accounting treatment of bonus shares step by step
1st case
When the partly paid up shares are converted into fully paid up shares through bonus issue
For providing the amoutn of bonus out of reserve , then the following journal entry will pass

  • Capital reserve account debit
  • general reserve account debit
  • revenue reserve account debit
  • free reserve account debit
  • dividend equalization fund account debit
  • profit and loss account debit
  • Bonus to equity shareholders account credit
  • For amount due on final call of shares ( Existing shares unpaid amount
  • Share final call account debit
  • Share capital account credit
  • For adjustment of final call amount out of profit
  • Bonus to shareholder account debit
  • share final call account credit

2nd case
When new fully paid up bonus shares are issued
a) for providing amount of bonus

  • Capital reserve account debit
  • share premium account debit
  • capital redemption reserve account debit
  • other general reserve account debit
  • Profit and loss account debit
  • bonus to shareholder account credit

b) for issue of bonus

  • Bonus to equity shareholder account debit
  • equity share capital account credit

Calculation the value of bonus shares
Steps for calculation the value of bonus shares
1st step
Take the basis of bonus issue for the purpose of determining for purpose of total amount of bonus basis of bonus issue.
(a) To convert the existing partly paid up shares into fully paid up shares
Numbers of existing equity shares X unpaid amount
b) To determine the number of bonus shares

Bonus shares numbers Total no. of issued shares= __________ X ___________Basis issue numbers
c) Amount of new bonus shares= no. of bonus shares X issue price

Steps of capital budgeting process
Capital budgeting is process of selecting best long term investment project . Capital budgeting is long term planning for making and financing proposed capital out laying

Steps for capital budgeting process
Ist step
Identification involved in capital budgeting proposals
2nd step
Screening the proposal
3rd step
Evaluation of various proposals
4th step
Fixing the priorities
5th step
Final approval and planning the capital expenditure
6th step
Implementing the proposal
7th step
Performance review

Terms used in Corporate Accounting

  • Corporate or Company

Corporate or company is the synonym. Company means association of person which do any business for earning profit. But it must register and formed under any company law of any country. Because company is an artificial person and do work with separate entity. Company has its own charter and internal article of association.

  • Shares

This is main term of corporate accounting. When we divide total capital of company into parts then each part is called share. Suppose, if you have 100000 capitals and if you divide into 1000 parts. Then it means company has 1000 shares of 100 rupees each.

  • Preference Shares

Preference shares are the main type of shares if company issues that type of shares, then the share holder of these types of shares has the benefit that they can get part of profit with fixed rate and before giving the part of profit to equity shareholders. In the end of company, these shares are get preference of their repayment.

  • Equity Shares

Equity Shares are the shares which are differ from preference shares. The shareholder of these shares has no preference relating getting dividend or any repayment. They are real owner of company and have the right to give the vote.

  • Dividend

Dividend is that part of profit which distribute among shareholder. Its other name is divisible profit. Dividend may be given by cash or through bonus or any other type.

  • Debenture

Debenture is just paper which is given by company when company takes loan from public. It is issued under company seal. In this paper company accepts that he will repay the loan taken by him after certain period with given rate of interest.

  • Redemption

Redemption is technical term in corporate accounting .It means repayment of loan taken by company. When company issued debenture then company also writes the mode of redemption of debenture. There are different ways of redemption of debenture. The best way is to create sinking fund and keep some part of profit in it as annual installment. So that company can pay his taken loan without any tension.

  • General Reserve

General reserve is the part of retained profit. It is very compulsory to make general reserve in company for payment of contingent liabilities or for development of company. Every finance bill has right to amend or change the rate of % in general reserve. This part is not issued as dividend

Accounting Treatment of issue of shares on premium and discount
Some time a company can decide to issue of shares on premium or on discount. In both situations we must know the basic concept before doing any accounting treatment.
Issue of shares on premium
Issue of shares on premium means that if company wants to get more money of each share. Then the company can demand premium with the face value or nominal value of shares. This is called issue of shares on premium. Suppose if the face value of shares is RS.100 Company can issue of his 10000 @ Rs. 105 it means company is also demanding RS. 5 per share as premium. According to new amendments in Company law 1956, Company must open security premium account, if co. issue shares on premium. All money which got with name of premium will transfer to security premium account . The following entry will passed in the books of company

1.For the due of share Allotment money

  • Shares Allotment Account Debit xxxx ( with the total amount )
  • Shares Capital Account Credit xxxx ( With the face value of shares)
  • Security Premium Account Credit xxxx( With the amount of premium)

2. For Allotment money Received

  • Bank Account Debit xxxx ( face value + Premium )
  • To Share Allotment Account xxxx

If company has demanded the premium with his call money from share holders , then on the place share allotment account we must write share call account , all other journal entry will be same.
According to Section 78 , We will use this fund according to guidelines of law.

Meaning of Issue of shares at discount :-
It means that company demands less amount than face value of shares .This less amount is called discount on issue of shares .
Journal entry of discount on issue of shares
When we receive allotment by giving discount on issue of share
1 Amount due of allotment
Share Allotment Account Debit xxxx( face value of allotment – discount)
Discount on issue of share account Debit xxxx( amount of discount)
To Share capital account
2. When allotment money actually received
Bank account debit xxx( face value of allotment –discount)
To share allotment account

Accounting treatment of issue of share for purchasing an fixed asset

In the situation when company want to buy any fixed asset , then company can issue shares to supplier of fixed asset .
At this time company pass the following journal entries :-

For purchasing fixed on credit

Fixed asset account debit xxx
Creditor account credit xxx
For issue of shares
Creditor account Debit xxx
Share Capital Account credit xxx
In case if company issue in premium or on discount to the suppliers of fixed asset . Then we first calculate the number of shares for doing any accounting treatment for this

In case of issue at premium

Numbers of shares
Value of Fixed asset= -----------------------Value of per share (Face value + premium)

In case if issue of shares at discount

Numbers of shares

Value of Fixed asset= ------------------------Value of per share (Face value – Discount per share)
After this the following journal entry will pass
Suppose xy company purchase the machinery of RS. 90000 by issue of shares at discount of shares of 10% if face value of share is RS.10
Journal entries
Machinery account debit 90000
Creditor account credit 90000
2 for issue shares to creditors at discount
No. of shares =90000/9 = 10000
Amount of discount =RS.10000

Creditor account Debit 90000
Discount on issue of share account debit 10000
Share capital account credit 100000
Suppose xy company purchase the machinery of RS. 120000 by issue of shares at Premium of shares of 20% if face value of share is RS.10
Journal entries
Machinery account debit 120000
Creditor account credit 120000
2 for issue shares to creditors at discount
No. of shares =120000/12 = 10000
Amount of Premium =RS.20000

Creditor account Debit 120000
Share capital account credit 100000
Security premium account credit 20000

Adjustment in company’s balance sheet for call in arrear
When a company makes the balance sheet after first time issue of shares. There may be the case of call in arrear.
In my earlier article, I have already explained call in arrear and call in advance. In this article, I want to explain, how you will do the adjustment in balance sheet for call in arrear. Call in arrear must be deduct from Called up capital
Called up Capital = Capital demanded at the time of Application + Allotment + and calls money
Less call in arrear = at the time of allotment and due date of call money
After deducting, it we can easily calculate paid up capital

Accounting Treatment of Call in arrear and call in advance
Call in Arrear
Call in arrear means company has demanded his due amount of allotment or call money but .But if shareholder does not pay his allotment money on due date it deems as call in arrear , this is the asset of company and it must deduct from call up capital for calculation paid up capital. If there is no any rule the company has right to get 5% interest on call in arrear.
Journal Entries for call in arrear in the books of company
1st journal entry will write at the time of due but not received the allotment money from share holder
Call in Arrear Account Debit xxxx
To Share Allotment Account xxxx
2nd When call in Arrear received from shareholder
Bank Account Debit xxxx
To Call in arrear Account xxxx
3rd journal entry is related to company’s interest received on due amount of call in arrear. This is the income of company:-

Bank Account Debit xxxx
To Interest on Call in Arrear xxxx

Call in Advance
Call in advance means that company did not call the allotment or calls but shareholder gives the call money in advance form .So this is the liability of company . Company is liable to pay 6% interest on call in advance to shareholder
Journal Entry for call in Advance
1st journal entry will pass for adjustment of advance money of allotment received at the time of application
Share Allotment Account Debit xxxx
To Call in Advance xxxx
2nd Journal entry will pass for when the amount of allotment due
Call in Advance Account Debit xxxx
To Share Allotment Account xxxx
3rd Journal Entry for paying the interest on call in advance to shareholder
Interest on call in advance Account Dr. xxxx
To Bank Account xxxx

Definition of share forfeitures
Share forfeitures means cancel the power of share holder if he does not pay his call money when company demands for this .Company will give 14 days notice, after 14 days if shareholder did not pay then company will forfeit his shares and cut off his name from the register of shareholder. Company will not pay his received fund from shareholder.
Deep accounting treatment is divided in following parts

1st situation
Simple accounting treatment
In this situation shares issue at part and there is no pro-rata situation. So the following entry will pass

Share capital Account Debit (called up amount of forfeited shares
Share forfeited Account Credit (Amount received of forfeited shares)
Share call in arrear Account Credit (Amount did not receive of forfeited shares)

2nd Situation
When shares issue on discount and premium
Dear friend if shares are issue on premium or on discount, then if we did not receive the premium, then we write in journal entry otherwise we will not show security premium account in share forfeiture journal entry

Share capital Account Debit (called up amount of forfeited shares)
Security premium account Debit (If premium is not received from share holder)

Share forfeited Account Credit (Amount received of forfeited shares)
Share Allotment Account Credit (If allotment money is not received)
Share call in arrear Account Credit (Amount did not receive of forfeited shares)

In case shares are issued on discount
Share Capital Account Debit
Share Forfeiture Account Credit
Share Allotment Account Credit
Share call in arrear account credit
Discount on issue of shares account credit

3rd situation
When shares issue pro-rata base
In case there is also difficulty to calculate the net amount of allotment received in case some amount is not received and same person we have adjust some amount of share application.
Calculate the net amount of allotment received
Total amount of allotment money due xxxxxx
Less Adjustment with application
Money xxxxxx
Less Amount not received
As forfeited shares

Less (-) xxxx
Perportion in
Not received amount
Of adjusted application
Money which is
We received in advance

Total not receive allotment= ------------------------------- x Total adjustment of application money
Total Allotment money

Net amount not received
In the form of allotment xxxxxxx (-) xxxx

______________________________ ____________

Net Amount received in the form of
Allotment xxxxx

The following journal entry will passed
Share capital account Debit (Called up capital)
Share forfeiture Account Credit (Total Amount received of forfeited shares)
Share Allotment Account Credit (Net amount not received in the form of allotment, for calculation of this amount you must understand and use above formula)
Share Call in Arrear Credit (if you are not received any call money of share forfeited)

4th situation
When shares fully reissue
Reissue means sale to any other person after forfeiting from previous share holder.
In this situation we can reissue of share in discount or premium. For doing this we have to pass the following journal entry
Bank Account Debit
Discount on issue of shares Debit
Share forfeiture account Debit (Discount on reissue of shares)
Share capital account Credit (Face value of reissue of shares)
Security premium Account Credit (If shares reissue at premium

So difference between amount received from forfeiture and discount on reissue share will go to capital reserve account and following entry will passed

Share forfeited account Debit
Capital reserve account credit
This capital reserve account will show in liability side of balance sheet of company.

5th situation
When Shares partly reissue
It is most difficult situation when you will see the question paper and you found the sum where is pro-rata situation , then share holder did not pay and then these forfeited shares party reissue to another share holder because
Above 4 situations will cover but in the 4th situation’s last journal entry will pass after making forfeiture account in working note because only the amount go to capital reserve which is sold or reissue gain other will go to balance of share forfeiture account upto that date until we reissue all shares.
Share forfeiture Account
Credit Side of this account
By share capital Account 2000
Suppose we get 100 shares forfeiture money received
Rs,20 per share
________ _
Debit Side of this account
To share capital account 250
Suppose we have reissue of 50 shares at reissue discount Rs.5

To capital Reserve account
We will calculate this amount after deducting the proportion of of this gain according to sold shares
2000 x 50/100 – 250 = 750
To balance C/d 1000

Then following journal entry will pass
Share forfeiture account Debit 750
To capital Reserve Account Credit 750

Corporate Accounting Part-III

Accounting treatment of Issue of debenture
For rendering the accounting treatment of issue of debenture, you should know debenture and what is use of debenture in any corporate. Debenture is just long term loan which is taken by company. For this company issue debentures. This is just like a paper on which company has written that company is taking loan from debenture holder with given term. Company has to decide the rate of interest and repayment amount and time of repayment of debenture. These terms must be written in debenture paper at the time of issue of debenture. There are many type of debenture which can be issued by company. It may convertible or non convertible. It means that company converts debenture in to share if company issued convertible debenture but if company issued non convertible, company has no right to convert debentures into shares. Company can also redeemable and non redeemable debenture .It means that company repays the full amount of debenture holder after some time if company has issued redeemable debentures but if company issued non redeemable debentures, company will not repay in his life time. These debentures only will redeem after the winding up of company.
Because of this is important transaction relating to company, so it is very necessary to record in the books of company. Let us start the accounting treatment of issue of debenture.
A – Issue of Debenture at Par
1st journal Entry
When company receives application money of debentures
Bank account Debit
Debenture Application Account Credit
2nd Journal Entry
When company accepts the applications
Debenture Application Account Debit
Debenture Account Credit
3rd Journal Entry
When Allotment money of debenture due
Debenture Allotment Account Debit
Debenture Account Credit
4th Journal Entry
When Allotment money of debenture received
Bank Account Debit
Debenture Allotment Account Credit
5th Journal Entry
When Call money of debenture is payable
Debenture Calls Account Debit
Debenture Account Credit
6th Journal Entry
When Call money of debenture is received
Bank Account Debit
Debenture Calls Account Credit

B- When Company issue of debenture at premium
If premium is receivable with application money
1st Journal Entry
When amount of application received with premium
Bank Account Debit
Debenture Application account Credit
2nd Journal Entry
Debenture Application Account Debit
Debenture Account Credit
Security premium Account credit
If premium receivable on allotment then
Debenture Allotment account debit
Debenture Account Credit
Security Premium Account Credit
And allotment money received with premium
Bank account Debit
Debenture Allotment Account Credit
When Debenture Issued At discount
Debenture Allotment Account Debit
Discount on Issue of Debenture Account Debit
Debenture Allotment Account Credit
When discounted amount of debenture is received
Bank Account Debit
Debenture Allotment Account Credit

Redemption of Debenture and method of redemption
Redemption of Debenture means repayment at the maturity of debenture. Because earlier we told that debentures are long term loan so it is very necessary to redeem the debentures.

1st Method
Lumbsum method
It means when company repay the Lumbsum amount to debenture holder . There following sub method of this method
A) Without Provision
According to Company law , if you have to redeem without any provision , it is necessary to make reserve of debenture redemption reserve with 50% of total amount of debenture so that company can easily repay the debenture without any provision at the time of redemption the following journal entry will pass.
Debenture Account Debit
Debenture holder Account Credit
1st journal Entry
Profit and loss Appropriation Account Debit
Debenture Redemption Reserve Account Credit
2nd Journal Entry
Debenture holder Account Debit
Bank Account Credit
3rd Journal Entry
Debenture redemption Reserve account Debit
General Reserve Account Credit

Sinking Fund – Method of redemption of Debenture
This is very important method of redemption of debenture. Sinking fund means take one part of profit for repayment of debenture. This is calculated with sinking fund table. This is invested in such scheme which gives us Lumbsum amount so that we can easily repay the debenture without any tension. This is very popular and scientific method of redemption of debenture. In this method we open the sinking fund and sinking fund investment account. Sinking fund’s other name is also Debenture Redemption Fund Account. The following accounting treatment is done by the accountant of company when the company follow this method .

In the end of first year

1st journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit

2nd Journal Entry for invest the sinking fund
Sinking fund investment Account Debit
Bank Account Credit
In the end of next years but not end last year

3rd Journal Entry for receiving interest on investment
Bank Account Debit
Interest on sinking fund investment Account Credit

4th Journal Entry for transferring interest to sinking fund
Interest on Sinking fund investment account Debit
Sinking fund Account Credit

5th Journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit

6th Journal Entry for invest the sinking fund
Sinking fund investment Account Debit
Bank Account Credit
At the end of last year
Bank Account Debit
Interest on sinking fund investment Account Credit

7th Journal Entry for transferring interest to sinking fund
Interest on Sinking fund investment account Debit
Sinking fund Account Credit

8th Journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit

9th Journal Entry for receiving the money from sale of investment
Bank account Debit
Sinking fund investment account Credit

10th journal entry for any profit on sale
Sinking Fund investment Account Debit
Sinking fund account Credit

11th journal entry for repayment to debenture holders
Debenture Account debit
Bank account credit

12th Journal entry for balance of sinking fund transferred to general reserve account
Sinking fund account debit
General reserve account credit

Accounting Treatment of Provision for Income Tax
Before writing this article , I have studied deeply several books of accounting . Actually this type of provision is needed in Corporate type business . Because in the sole trade and partnership firm there is no treatment of provision for income tax and income tax paid because above two type business level , it is the duty of business man to pay income tax personally . So in above situation if he take any fund from business for paying income tax , it is deemed as drawing or other words we can say that his capital will reduce if you pick some amount for paying any income tax . No other treatment is done in sole trade or partner ship

Now In Case of Company or Corporate
I am giving you full detail of accounting treatment , if you have to do this type of work in any company .

Ist Step
Understanding the meaning of Company . I have already read on it see .
2nd Step
Understanding the meaning of provision of Income tax

In India , we all company pay income tax of previous year income . Means what we earn in last year we have to pay tax on next year that is called assessment year. But Under the law of Income tax , all company have to pay tax in advance .
So without actual earning we starts to estimate earning .
For Example
Suppose company can guess that it will earn RS. 5 crore in this year .
So on this advance guess company make his reserve or provision of income , it may be the 5% or 10% or 15% or 30% on his estimated income. This is called provision for income tax .
Now company Make the voucher entry of this provision by providing amount from profit and loss account
Profit and loss account Debit
Provision for income tax account Credit
After provision or estimated income tax , company submit his advance income tax return to income tax department ,
then pass the following entry
Advance Income tax account debit
Bank Account credit
After one year when income tax department calculate the real income tax by providing the real income position of company in previous year .

•Adjustment of actual income tax with provision
Actual income tax will adjust with provision of income tax by passing following adjustment entry
Provision for income tax account Debit
Income tax Account ( Actual after assessment ) credit

•We must calculate the difference between actual paid tax and ( advance + tds )
If advance and tds is more than actual tax , then income tax department return your excess tax paid
At this time two general entries will pass
1st transfer advance tax and tds to income tax account
Income tax account debit
Advance tax account Credit
Tds account Credit
2nd journal entry will pass for return the amount
Bank account debit
Income tax account credit
If advance and tds is less than actual tax , then income tax department demand more tax from you , and you will pay by following journal entry
1st transfer advance tax and tds to income tax account
Income tax account debit
Advance tax account Credit
Tds account Credit
2nd journal entry will pass for return the amount

Recent Trends in published accounts

Indian Company law 1956's section 210 , 216, and 217 binds board of directors of company to show profit and loss account and balance sheet of company and auditor's report's copies in annual general meeting of Company . All these reports are called annual reports of company . It is also compulsory for company to publish both in print and now in website also . These reports show the performance of company to public .
These days many companies are using charts and graphs for publishing their final accounts . Because , it is attractive and gives good impression to customers and interested people of company . Many charts are so popular and be successful for comparison of financial data of company .

•Due to advancement of Internet technology you can make charts and Graphs of production cost , sale , income and expenses classification and distribution of income into dividend and tax and present in website of Company .
For learning point of view I have made some chart of company's data . all these reports are made in excel or in online with Docs spreadsheet.

Cost Accounting Part-I


At what rate will we calculate closing stock ?
Accounting is very interesting subject .Simplicity is not the feature of accounting . Different complex problems , you will face in the field of accounting . Today , I am telling you about valuation of stock .Because businessmen buy different stock at different time at different cost . But when we will show our closing stock , we will face this problem . There have many rates at which we charge our cost of closing stock but I am giving you solution of this problem very simply
Suppose Rajpura alcon company buys raw material of wire at different cost but we this company records closing stock of this raw material , this company can use first in first out method for calculation of closing stock . This method is also called fifo . It means that the stock which bought first , it sent for sale first so last stock cost will the rate for calculating closing stock. There is another method last in first out or average cost method . I always suggests businessmen and accountant to use average cost method for calculating closing stock.

Introduction of Inventory Management
Inventory management is main duty of an accountant of any company . He is responsible both quantity and monetary record of all the material in which company deals . We know that trader buys the goods and sometime he returns to his suppliers . He also sells the goods and some time his customers return him his goods . So , Inventory will convert from buying to selling step by step. Accountant have to give the reports

  1. What is total amount and quantity of goods purchased and sold of different kind .
  2. What is value and quantity of total closing stock

Quotation is just proposal for sale : It is not sale but offer of sale given by seller to the buyer of goods . When any company want to buy with minimum cost he publish tender for that buying if any body sends offer for sale with his selling rates , discount rate , delivery time and other such term and condition then that statement is called Quotation .
We can divide terms and condition of quotation in following way

•Prices , releases and set off
•Term and method of payment
•Contingencies and force majeure
•Legal compliance
•Warranty conditions
•Patent conditions
•Termination and cancellation
•Inspection , size and Tolerance
•Release of Information

Delivery Note and Invoice
Delivery note is issued when goods physically delivered by seller to buyer. Its other name is delivery challan. But Invoice is just description of credit sale .
Accountant can prepare both Invoice -cum - Delivery note at the time of delivery.
There for to complete the sale transaction , the seller

•Delivers goods against order or without order (where order does not exist)
•Prepares delivery note or sales invoice ( Bill-cum- delivery note )
•Prepares sales invoice linking the delivery note where sales invoice was not prepared at the time of delivery.

Debit Note
When A business organisation purchases the goods from other business organisation . Some goods out of them can be rejected by a business organisation to other . At this time for recording the purchase return , there is two method of making the voucher of this record .

Ist Method:
We wait our supplier , when he accepts our rejected goods and send us credit note . This credit note will be the debit note for our purchase return entry. With this purchase return entry our stock will reduce with the amount of goods return outward and We make voucher Entry in Debit Note in tally 9

2nd Method: In this we issue the debit note with return goods and pass the voucher entry of purchase return in debit note.
Steps of voucher entry in tally 9
1st Step: Yes the feature of debit and credit note
2nd Step:Create the Ledger of Purchase return under the head of purchase
3rd Step: Pass the voucher entry of purchase return in debit note voucher of tally 9

Credit Note
When A business organisation sells the goods to other business organisation . Some goods out of them can be rejected by other business organisation . At this time for recording the sale return , there is two method of making the voucher of this record .

Ist Method: We wait our customer , when he send us Debit note . This Debit note will be the Credit note for our Sale return entry. With this Sale return entry our stock will increase with the amount of goods return inward.
and We make voucher Entry in Credit Note in tally 9

2nd Method: In this we issue the credit note as we accept rejected goods and pass the voucher entry of Sale return in Credit note. Steps of voucher entry in tally 9
1st Step: Yes the feature of debit and credit note
2nd Step: Create the Ledger of Sale return under the head of Sale
3rd Step: Pass the voucher entry of Sale return in Credit note voucher of tally 9

Cost Accounting Part-II

Definition of Labour Cost and main reasons of increasing labour cost

Labour is very important part of production . Its cost is very important in total cost of production . So we should know what is meaning of labour cost .
Labour cost means all amount which direct or indirect is given to labourer or employee for his work for production .
In labour cost we include two type cost relating to labour
Ist type - Monetary cost of labour
In monetary cost of labour includes

  1. Basic wages/salary of employee
  2. Dearness allowance
  3. Provident fund
  4. Employee state Insurance ( ESI)
  5. Employee's share in profit of business
  6. Pension of employee
  7. Gratuity and other monetary benefits

2nd Type - Non monetary labour cost

  1. Free food facility to labourers
  2. Subsidised housing facility
  3. free educational facility to employee's children

Main Reasons of Increasing labour cost
It is the duty of cost accountant to reduce the cost of labour so that cost of production will reduce and businessmen can sell their products at lower price. So he must know what exact reasons beyond increasing labour cost .
Ist Reason

  • Increasing labour turnover
  • Increasing idle time
  • Forgery names in wage sheet

Affect of Business Activities on Stock Calculation
There are many business activities and events which affect the quantity and value of stock.
1st Affect: When company buys the material , it increase the quantity and value of stock.
2nd Affect: When company returns the goods to supplier , it reduces quantity and value of stock.
3rd Affect: When company sells the goods to buyers then it reduces quantities and value of stock.
4th Affect: When our customers returns us the goods at this time our quantity and value of stock will increase .
5th Affect: Today is most important effect is the effect of of inflation and deflation . It affect only on the value of stock . But there
                    is no change the value of stock.
6th Affect: There are different method of calculating of stock can affect the value of stock . Calculating the value of stock with
                    FIFO will differ the calculated stock with LIFO method .

Financial Accounting Part-I

Outstanding expenses and its accounting treatment
Some people are coming from non medical and medical in field of accounting . There can easily learn tally and some basic rules of accounting From any coaching institute but they do not know the accounting treatment of outstanding expenses in book of accounts . Then I am training of this point at this time .First of all I am telling you that outstanding expenses are those expenses which are payable but not paid , so it is our duty to record it at the closing of financial year .Dear friends according to the accounting principals any expenses paid or payble is the expenses of business , so when we makes profit and loss account of business , it must be added in paid expense and you can make journal entry in tally
Expenses account dr. xxxxx
To outstanding expense account xxxxx
This entry automatically adjust your final account , you need not change your final accounts in tally . This is facility to you in using tally.

Adjustments of Final accounts
Name of items
Adjustment entry
Effect on trading and profit and loss account
Effect on balance sheet

1. Closing stock
Closing stock account dr. xxx
To trading account xxx
Closing stock will write in the credit side of trading account
It will show as asset in the final account

2. outstanding expenses or expenses payable or expenses due but not paid
Expenses account dr. xxx
To outstanding exp. xxx
Outstanding expenses will add in expenses . if it is direct it will go to trading account’s debit side , if it is indirect nature then it will go to the debit side of profit and loss account
It will be the current liability so it will go to the liability side of balance sheet.

3. advance expenses
Advance expenses a/c dr. xxx
To expenses account xxx
It will deduct from respective expenses paid .
It will be the current asset so it will go to assets side of balance sheet

4. income receivable
Outstanding income account dr. xxx
To income account xxx
It will add in the income and go to credit side of profit and loss account
It will show as asset in the assets side of balance sheet

5. income received in advance
Income account dr. xxx
To advance income account xxx
It will deduct from the income received
It will shown as liability in the liabilities side of balance sheet

6 Goods use for personal use
Drawing account dr. xxx
To purchase account
It will deduct from purchase in the debit side of trading account
= purchase –drawing in goods
It will deduct from capital in the liabilities side of balance sheet
=capital- drawing in goods

7. Destroyed of goods
loss by fire or accident account Dr. xxx
To trading
If there is no insurance
It will also go to profit and loss account
Profit and loss account dr. xxx
To loss by fire / accident
It will shown in credit side of trading account
And also in profit and loss account’s debit side
It will not go to balance sheet

8. Depreciation
Depreciation account dr. xxx
To respective asset account xxxx
It will go to the debit side of profit and loss account
It will deduct from fixed asset . Because it decrease the value of asset
=fixed asset - depreciation

9. provisional for doubtful debts
If you have make any provision for doubt ful debts the its journal entry will passed
Provision for doubtful debt account dr. xxx
To Bad debts account xxx
( New bad debts which is not shown in trial balance will transfer to provision for doubtful debt account )
Net value of provision for doubtful debt account transfer to profit and loss account’s debit side
=total bad debt + closing balance or provision of doubtful debt or this year provision - opening balance of provision for doubtful debts
Deduct from debtor
= debtor – new bad debts – this year provision or closing balance of provision for bad debts

10. Commission to manager
Commission account dr. xxx
To outstanding commission
It will shown in the debit side of profit and loss account as o/s commission to manager
If it charge on the amount after charging such commission then we will calculate
= profit before commission X Rate/ 100+rate
It will shown as liability

Accounting Treatment of Provision for doubtful debts
Before doing accounting treatment of provision for doubtful debts , you must know the complete definition of provision . In accounting , it is a reserve that is against loss due to non payment of debtors . In case debtor does not give us our amount . Then if we have make provision or reserve for this , we can easily purchase new goods but if we have no money due to every year bad debts then we can become insolvent . So with our work experience we should make our provision on our debtors with some % on debtor .
Now you are ready for doing the accounting treatment of provision for doubtful debts .
First of pass the journal entry of actual bad debts .
Entry for recording actual bad debt which did not record in books of business
1. Bad debts account Dr. xxxxx
To Sundry Debtors Account xxxxxx
Entry for transferring bad debts to provision for bad debts Account
2. Provision for bad debts account Dr. xxxxxx
To Bad Debts account xxxxx
Transfer of provision for bad debts account to profit and loss account
3. Profit and loss account Dr. xxxxxx
To Provision for bad debts account xxxxx
It is not necessary that provision for doubtful debt account will go only to the debit side of this account but it may go to the credit side . It will decide after making provision for doubtful debt account . Which is very easy to make . I am showing you this account . After study of this account you can easily make this account and take the benefits of this provision .

Manufacturing accounting
Manufacturing accounting means accounting relating to production or manufacturing. All accounting can divide also manufacturing and non manufacturing. Accounting up to converting raw material to finished product includes in manufacturing accounting. We specially open manufacturer account for recording all items regarding production. In manufacture account we record direct material cost, labor cost and production overhead cost. Manufacture account is helpful to find out the value of cost of production which transfers to trading account. It is also part of financial statement.
Manufacturing account starts opening balance of raw material in its debit side. Amount of purchase of raw material are also debited in this account and direct labour charges and other manufacturing overheads like, depreciation of plant, lighting of plant and factories other expenses will transfer to debit side of manufacturing account. In the credit side of manufacturing account we shows closing balance of raw material and work in progress and scrap sale. The difference of both sides is the cost of production which transfers to trading account’s debit side. Manufacturing account is also helpful for finding the value of gross profit because gross profit is difference between cost of sale and sale value but cost of sale can not be calculated without finding the value of cost of production .So, factory accountant records every transaction relating to factory and one these voucher entry basis we find manufacture or manufacturing account.

How can I make the accounts of NGO and Charitable societies.
To make the accounts of ngo and charitable societies is very simple . In charitable societies we have to make receipt and payment account . This is just like cash account .But cash account can not be made in non profit organization .Debit side of receipt and payment account is receipt of cash. Ngo can receipt cash in the form of subscription , interest ,general donation , rent received and entrance fees etc. Ngo can also pay certain expenses like salaries , printing & stationery expenses and other purchasing of fixed and current asset . This must show in the credit side of receipt and payment account .After doing this , accountant can calculate balance of cash at the end time of accounting period . It is also duty to collect other information like outstanding and advance income and expenditure :-for calculating net excess of income over expenses of ngo and charitable societies . There is given a procedure to calculate above
Showing the amount of expenses in income and expenses account
Current year Expenses paid xxxxxxxxxx
Add outstanding expenses upto the end of current year xxxxxxxxxx
Less Previous year outstanding expenses xxxxxxxxxx
Less current year advance expenses xxxxxxxxxx
Add previous year advance expenses xxxxxxxxxx
Expense for showing income & expenses account = xxxxxxxxxxx_________________________________________________________

Statement showing of income in income and expenses account
Current year Income received in cash xxxxxxxxxx
Add receivable income upto the end of current year xxxxxxxxxx
Less Previous year receivable income xxxxxxxxxx
Less current year advance income xxxxxxxxxx
Add previous year advance income xxxxxxxxxx
Income for showing income & expenses account = xxxxxxxxxxx

Accounts for Sports Club
Making the accounts of Sport clubs or trust or society is very easy but you should know the way of maintaining it . First of all when you are making the accounts you must classify all the item in to capital and revenue nature . If expenses are in cash , so it must show in receipt and payment accounts , here do not see any nature because this account show all receipt of cash and bank from any source for business . Even if we get money through other person's credit card , then it will be deemed cash receipt . After this you can easily make income and expenditure account . This account shows net income or loss from club , so only all expenses which belongs to this year will send in expenses side of this account .It is not necessary that these are in cash it may also payable also .

Accounting for Temple
It is very easy to make the accounts of temple . A temple is religious place. So recording of donation from devotee is very necessary. Devotee may be monthly or annual member. A seal of Of temple must be on the receipt and continually it records in the books of accounts .It is also necessary to record all the expenses related to langur, rent, lighting, and electricity, building repair and other smangum expenses. For this temple accountant should make the income and expenditure account and receipt and payment account. If it is registered under charitable trust , then to make accounts of such temple is very useful for keep the faith of devotee. Because fraud in temple fund can decrease the number of devotee in that temple

Partnership accounting
1.For division of profit or loss from partnership
2.for division of properties in case of dissolution of partnership
In partnership accounts you must open profit and loss appropriation account . It is accounts in which accountant can adjust salary , interest on capital and interest on drawing and also new division of profit or loss . So it is necessary to make this account . At the time of admission , partnership accounts can be change .
Because Capital accounts will change because , old partner sacrify for new partner so it is the duty to new partner to give some part of goodwill in cash of any other way . So that other partner can credit it in their capital accounts .

Partnership accounting basics
In the partnership accounting , all the final accounts are same as sole trade business final accounts . But main difference in these accounts are that In partner ship accounting , we make one extra account that is called profit and loss appropriation account which is used for calculating net share of profit or loss of different partner of a firm.

•This account is opened with credit balance of net profit ,
•In the debit side , we show interest on capital , salary and commission of partners and
•in credit side we shows interest on drawing , after adjusting these items , we transfer net profit to partners capital accounts in their profit sharing ratio
•In Absence of any partner ship deed Partner will divide profit or loss equally
•No interest on capital is given
•No interest on drawing is given
•No salary to any partner Interest on loan given by any partner is 6% annual.

Practical Problem of Partner ship accounting
Suppose A and B are the partners . They do not have any partnership agreement . How will you solve the following disputes among them ?
a) A spent twice the time that B devoted to business .A claims that he should get a salary of Rs. 3000 per month for extra time spent Ans. No Salary will be given in the absence of any agreement .
b)B has provided a capital of Rs. 50000 where as A has provided only Rs. 10000 as capital . A however has provided Rs. 20000 as loan to firm . What interest if any will be given to A and B ?Ans. Only interest on loan @6% will be given
c) A wants to introduce his son Sunil into his business . B objects to it .
Ans. No new partner will be admitted
d) B wants that profit should be distributed in ratio of capital but A wants that it should be distributed equally
Ans.Profit should be shared equally in the absence of any agreement .

Calculation of interest on drawing in partner ship accounting
There are four latest method apply , if any body withdraws any fund or cash for personal use from his firm .
1.If any partner withdraws every month in the first day the he will pay to firm @ given rate for 6.5 months
2.If any partner withdraws every month in the middle of month , he will pay interest on drawing @ given rate for 6 months
3.If any partner withdraws every month in the end of month , he will pay interest on drawing @ given rate for 5.5 months
4.If any partner does not withdraw every month then his withdrawing month usage product will be calculated
suppose if he withdraw Rs.5000 in first of march then he will calculate product of
5000X10 =50000
after calculating product he calculate his payable interest on drawing @ given rate
= amount of product X R/100 X 1/12

Accounting treatment of partnership accounts at the time of admission
Admission of a New partner
Without permission , a new partner can not enter in any firm but with the acceptance of all partner , a new partner has come in partnership firm , then it is the duty of existing partner to sacrifice his share for giving share to new partner .It is the duty of new partner to give his own capital and share of goodwill to partnership firm

Accounting treatment on the time of Admission of new partner
Calculating New and sacrificing ratio
It is necessary to calculate new and sacrifice ratio at the time of admission of a new partner because all the journal entries like profit sharing of new firm and goodwill division is on base of calculated new and sacrifice ratio respectively .
Calculate the profit or loss on the revaluation of assets and liabilities .
It is necessary to calculate profit or loss on the revaluation of assets and liabilities at the time of admission . This profit or loss must be divide between old partner in old ratio . Because this is the result of the hard work of old partner only .
Calculate the share of Goodwill which will have to take from new partner
There are many method of calculating and accounting treatment of goodwill . But these days goodwill name has been changed with premium . and It has been brought in business by new partner is very famous treatment . This premium is divided by old partner in their sacrifice ratio . It means their share will transfer to their capital account .

Capital Adjustment
Some time all partner can decide to maintain their new capital . If any partner’s share will less than accepted portion then , that partner will give fresh capital in cash form or any partner who has given more capital from accepted capital , that partner can withdraw this excess in cash form .

Making of provision for bad debts accounts
Before making of provision of bad debts accounts , you must understand the concept of provision , reserve etc. Because without understanding these you cannot understand the concept of making of provision of bad debts accounts .

Meaning of provision or reserve
When we start our business , we faces certain losses like bad debts , depreciation or discount so if we do not keep some part of our cash or profit in cash form in business pocket , we can face the problem of lack of money for operational requirement , so we take future planning and after scientific estimation we makes provision of reserve of our losses on the certain percentage of loss it may be 5% or 10% or 15 % . This is called provision or reserve of loss .

•Making of this account is very easy
•It will open with opening balance of provision for bad debts
•it will show in credit side of this account .
•In the debit side we will write actual bad debt of trail balance and outside
•in the debit side also writing new provision of bad debts with writing to balance c/d
•Balancing figure will be the amount of provision transferring to profit and loss account as loss written off .

Financial Accounting Part-II

Rectification of errors
Rectification of errors is very tough work . It is main duty of chartered accountant of any country . A lot of errors can be done by accountant . So C.A. audits the full accounts and if he see any error , his duty to see that why it happen and how can rectify this so that profit or loss or financial position do not affect of this happenings .To day my main aim is not write just article on this topic but actually , I want to give you simple way to correct your accounts error forever .Read following lines very seriously and concentrately
1. first of find out your error and mistake from accounts
2. write what is the mistake or incorrect journal entry or incorrect accounts .This error may affect one account or two account note it .
3. Write correct journal entry or make correct account in rough page
4. in rough page , you will also have to do treatment of your mistake.Suppose you wrote 1000Rs. as sake instead of RS.2000 sale which was correct .Its wrong is journal entry is
cash account Dr. 1000
To Sale account 1000.
In rough paper you should also write correct journal entry
Cash account Dr. 2000
To sale account 2000
Then now your are analyst you should see that 1000 is less in both side so for making the correctness pass another
journal entry of 1000 Rs.
Cash account Dr. 1000
To Sale Account 1000
This entry is called rectify entry .

Simple method of rectification of error
I am writing very simple method for correcting the mistakes and error in books of accounts
All work must be done on rough paper or notepad .There are the part of working notes .

Ist step
What is the mistake or error .
Write it as wrong record of ledger accounts or wrong journal entry .
2nd step
What should be the correct entry or what should record which is correct according to the nature of error of accounting
Write it in second step
3rd step
Best rectification of error or write the rectification entry in such a way so that difference will be auto correct .
I take an example
XYZ co. purchased machinery of $ 5000 but by mistake this amount was debited in purchase account .
Ist step
Wrong entry
Purchase account debit $ 5000
Cash Account Credit $ 5000
2nd step
Correct entry
Machinery Account Debit $ 5000
Cash Account Credit $ 5000
3rd Step
Rectification of error entry
Machinery account Debit $ 5000
Purchase account Credit $ 5000

Proforma of Balance Sheet

Balance sheet is main part of financial statement . This is necessary to make it . Making of balance sheet is very easy
but you must know the rule of making balance sheet . In Right side we will have to show all assets and in the left side
we will have to show all liabilities .

Method of calculating goodwill
Correct calculation of goodwill is very difficult work. But with using correct formulae of specific method , you can
easily calculate goodwill . There are four methods to calculate goodwill .
Ist Method
Average profit method
In this method, we calculate previous year’s profits average and then we multiply it with number of purchase years.
2nd Method
Super profit method
In this method, we calculate normal profit with normal rate on investment. Then we calculate super profit with
following formula.
Super profit = average profit / actual profit – normal profit
Goodwill = super profit X No. of purchase years
3rd Method
Capitalization method
In this method, we calculate capital employed with following formula
Capital employed = average profit or normal profit X 100/ Rate
Goodwill = capital employed – Net Assets
4th Method
Annuity Method
In this method we first of all calculate annuity . Annuity means annual value . These day , accountant are using
different annuity tables for calculating annuity , after this they can easy calculate goodwill with following formula .
Goodwill = Super profit X Annuity

Revaluation account
This account is very useful for calculating the profit or loss when partners decides to reconstruct their partnership firm . When a new partner comes in firm or exit from firm , making of this account is very necessary , I am giving the proforma of this account
Revaluation account
Dr. side
To Asset ( decrease in the amount of certain asset )
To Liabilities ( increase in the amount of any certain liabilities )
To Liabilities ( if any liability have but not recorded in books )
To transfer of profit to partner in old ratio
(if credit side is more than debit side )
Cr. Side
By Asset ( increase in the amount of certain asset )
By Liabilities ( Decrease in the amount of any certain liabilities )
By Asset ( if any asset have but not recorded in books )
By transfer of profit to partner in old ratio
(if debit side is more than credit side )

Revaluation account
This account is very useful for calculating the profit or loss when partners decides to reconstruct their partnership firm . When a new partner comes in firm or exit from firm , making of this account is very necessary , I am giving the proforma of this account

Capital Adjustment
When two or more partner decides to change their capital according to their profit and loss ratio , then it is necessary to make capital adjustment in the form of cash .

For Example: Suppose one partner A who invested Rs. 100000 and other partner B invested Rs 200000 . If they decides to divide their capital in their profit sharing ratio and suppose their profit and loss sharing ratio is 1:1 then we calculate total capital first that is Rs.300000 and if we divide into ½ and ½ , it will be 150000 and150000 to A and B. so A will invest more 50000 Rupees and B will withdraw Rs . 50000 because his old capital excess Rs.50000 from his new capital .
Then the journal entry will pass in the books of account
Cash account Debit
A partner’s capital account Credit
B partner’s capital account Debit
Cash Account Credit

How can You calculate new and sacrifice ratio at the time of admission of new partner
Calculation of new and sacrifice ratio at the time of admission of new partner is very easy. If you want to calculate new profit sharing ratio, you should only calculate the difference between old and sacrifice ratio .Sacrifice ratio means total sacrifice of old partner for new partner.
It is given by old partner to new partner so if you want to calculate new profit sharing ratio, you just deduct this from old profit sharing ratio. But in different situation, partner can make condition at the time of admission, and fix his surrender share for new partner from his share then we first calculate sacrifice ratio and then calculate new profit sharing ratio.
For example Ram and sham are the two partners with profit sharing ratio are 3:2. Sita enters in this partner ship. Both after that sita will take ¼ as new share, If agree that Ram will give 20% of his share and balance will give by Sham then we will calculate both new and sacrifice profit sharing ratio as bellow way.
Solution :-
Ram’s sacrifice = 3/5X20% =0.12
Sham’s sacrifice =1/5-0.12 = 0.08
New profit share of Ram = 3/5 -0.12 = 0.48
New profit share of Sham = 2/5 – 0.08 = 0.32
New profit share of Sita = 1/5 = 0.20

Accounting treatment of goodwill at the time of admission
When a new partner enters in partnership firm, the old partner sacrifices his share for him , so it is the duty of new partner to give goodwill in cash or in any other way to old partner . There are following method with this new partner give his share of goodwill to old partners .
1st method
Private distribution of goodwill
Under this method , new partner gives his share of goodwill to old partners personally .So there is no need to record
it to the books of firm . No journal entry will pass .
2nd method
Goodwill is given in cash form by new partner
Under this method , old partner bring his share of goodwill in cash form in the firm and it is taken by old partner in
their sacrifice ratio . For this following journal entry pass in the books of firm
Cash / Bank Account Debit xxxxxxxxx
To Goodwill / Premium Account xxxxxxxxxx
Goodwill account debit xxxxxxxx ( share of new partner’s goodwill )
To old partner’s capital account xxxxxxx ( divide in sacrifice ratio )
3rd method
when new partner bring goodwill in cash in business and taken by old partner and then withdraw by old partner
Above two entries will pass as same as in second method but third new entry will pass
Old partner’s capital account Debit xxxxxxxxxxx
To cash / bank account xxxxxxxx
4th method
when new partner do not bring goodwill in cash form
If new partner do not bring goodwill in cash in firm , then following entry will pass for the adjustment of goodwill .
New partner’s capital account debit xxxxxxxx (share of goodwill )
To old partner’s capital account xxxxxxxxx (division in sacrifice ratio)
5th method
If partial in cash form of goodwill
Part of cash goodwill
Cash account dr. xxxxxx
To goodwill / premium account xxxxxxxx
Goodwill account debit ( cash goodwill) xxxxxxxxx
New partner account debit ( not in cash goodwill ) xxxx
To old partner capital account in sacrifice ratio xxxxxxx
6th method
If goodwill already exits in balance sheet of old partner , then it must be transfer to old partner’s capital account in old ratio . Other method is same above from 1 to 5 method .
Entry passed for transferring of old goodwill
Old partner’s capital account debit xxxxxxx
To goodwill xxxxxxx
7th method
If new partner brings other asset as goodwill of his share of goodwill . Then following entry will pass
Asset account debit xxxxxx
To goodwill account xxxxxxxx
Goodwill account debit xxxxxxxxx
To old partner’s capital account in sacrifice ratio xxxxxxxxxx

Adjustment of capital at the time of admission of new partner
When a new partner in partnership firm , he and other partner can agree for the capital adjustment on the basis of new profit sharing ratio and new partner’s capital as base . In such condition , we first calculate total capital on the basis of new partner’s capital. "
Suppose Vinod is new partner in the firm of vijay and rajesh with 3:2 and their capital are Rs. 10000 and Rs. 30000 but Vinod will ¼ share . He brings Rs. 10000 as capital . If all the partner agree to adjust their capital according to new profit sharing ratio , then calculate who invest more capital in cash form or who withdraw his excess capital
Total capital = 10000 X 4/1 =40000
Vijay’s new capital = 40000 X 9/20 = 18000
Rajesh’s new capital = 40000 X 4/20 = 8000
Vijay brings his external capital in cash because now he needs = 18000-10000 = 8000
But Rajesh withdraw his
excess capital = 30000-8000 = 22000

Difference between memorandum revaluation account and revaluation account
In the partnership accounting, at the time of retirement or admission, we either make revaluation account or make memorandum revaluation account but we should know the main difference between both
1.In memorandum revaluation account we make reciprocal entries in same account for covering double record system but in
   revaluation account we make only one side record.
2.In memorandum revaluation system of accounting, we can not change the value of assets or liabilities outside because all the
    procedure of double record is completed in memorandum revaluation account.
3.In memorandum revaluation account , first we divide profit or loss on revaluation is in old profit sharing ratio among all partners
   but after reciprocal entries recording we divide partner in new profit sharing ratio but in revaluation account we only divides in
   old profit sharing ratio
4.Making of memorandum revaluation account is not necessary but making of revaluation account is very necessary .

Accounting treatment at the time of retirement
In any partnership firm when a partner retires from a firm it is the duty of remaining partner to give him his share because he has to spend his remaining life . So at this time accounting treatment is very necessary in the books of firm.
Tips for easy recording these transactions

•Calculate new profit sharing ratio and calculate gaining ratio by deducting new profit sharing ratio from old ratio .
•Calculate profit or loss on revaluation of assets and liabilities and transfer it to retiring partner's capital account .
•Calculate the goodwill share of retiring partner and transfer to retiring partner's capital account ( credit side with his share)
•Calculate joint life policy share and transfer to retiring partner's capital account
•Calculate General reserve share and transfer to retiring partner's capital account
•In his debit side we will transfer his drawing and interest on his drawing after this we can give his capital after

above adjustment in cash form or after this his amount will deemed as loan to firm . Firm will liable to give 6% interest to retiring partner . Make and retiring partner and calculate his total amount and give him .That is called accounting treatment of retirement of a partner .

Dead partner’s executer account
This is very simple account and it is open when Firm has to pay deceased partner’s executors. In this account first of all we calculate payable amount then we calculate per year installment of executors then include total interest in this amount every year.
I am trying to make you understand with an example suppose firm has to pay RS 100000 to the executor of dead partner B
in four installment with 10% rate of interest . For this we divide Rs 100000 by 4 and it will Rs. 25000 every year but
first year we include
1st installment Rs. 25000 + interest of Rs. 100000 X 10% =35000
2nd installment Rs. 25000+ interest of Rs. 75000 x 10% =32500
and same procedure for 3rd and 4th year . This is the easy method of given amount to executor of deceased partner

Financial Accounting Part-III

Accounting treatment at the time of Dissolution of Firm
You must know the definition of dissolution of firm before completing the accounting treatment at the time of dissolution .
Dissolution is the end of firm and its work . In other words , after dissolution , firm will not continue same business with same partners because there are so many causes of dissolution of firm . Dissolution may be with or without interfere of court . When faith among partners have completely ended or partners are continuing illegal business or all the partners became insolvent then court may order to dissolute the firm and distribute firms asset among the creditors of firm .
At this time for proper allocation of assets among liabilities , it is very necessary to treatment each and every accounting elements .
1st step
Making the account of Realisation.
· In the debit side of this account we will transfer all current and fixed assets at book value except cash and bank account.
· In the credit side of this account we will transfer all the liabilities except general reserve and capital accounts
· In the debit side of this account we will show the all the amount of payment of creditors in cash or if any partner
  take over any liabilities .
· In the credit side of this account we will show the amount received after sale of the assets or name of partner’s capital account if
  he takes over any particular asset.
· In the debit side of this account we will also show the expenses of realization of assets .
· The difference of this account will profit or loss which will transfer to capital accounts of partners in their profit and loss sharing
2nd step
Making of capital accounts
After this capital accounts of partner will be made . This account will open with opening balance of their capital. In the credit side we will transfer general reserve share , profit share of realization account this account show the new amount that will be paid to each partner after dissolution .
3rd step
Making of cash or bank account. This will the last account which will make at the time of dissolution because at the time of dissolution , it is necessary to make this account . This account shows receipt and payment of cash or bank at the end of business. There must not a balance at the end of business in this account . If the debit side of this account is equal to the credit side of this account , you are made proper this account .

Accounting Treatment of Assets and liabilities taken by partner at the time of dissolution
When a partner agree to pay the liabilities or take over any asset then firm will make the realisation account and respective partner who take over the asset will credit in realisation account and if he agree to pay the liabilities then his account will debit in realisation account . For this we will pass the journal entry.

1. For take over the assets Partner's capital account Dr. ( Who take over the assets)
    To realisation account ( With accepted amount)
2. For paying any liability by any partner at the time of dissolution
    Realisation account Dr. ( accepted pay the amount)
    To Partner's capital Account( Who pays the amount of liability)

Explanation the scheme of Gradual realisation of assets and Piecemeal distribution
Generally we see that a long time is spent on realisation of assets after dissolution of firm . But we can distribute it in installment basis . When any part of assets sells and we get the amount that amount is called gradual realisation and its piecemeal distribution is done with following method.

1) First of all we pay all realisation expenses out of series realisation of assets
2) After this we pay outside liabilities like trade creditors , B/P out of this realisation of assets.
3) After this we repay the loan of partner .
4) In end we repay the partner's capital out of this realisation of assets

Accounting procedure for Convertion of a partnership into Limited Company
These days , partnership firms are converting into limited companies for getting the benefit of limited liabilities . At this time firms book is closed just like dissolution of firms . In the books of firms , the following journal entries are passed :

1) For closing the accounts of assets
    Realisation account Debit
    Assets Account Credit ( At book value )
2) For sale of assets and amount received
    Cash /Bank Account Debit
    Assets Account Credit
    Realisation Account Credit

3) For closing the account of liabilities
    Liabilities Account Debit
    Realisation Account Credit

4) For Payment of liabilities
    Realisation Account Debit ( Loss of payment )
    Liabilities Account Debit
   Cash / Bank account credit

5 ) For Assets and liabilities are taken over by new company

New Company Account Debit ( Purchase price = Agreed value of assets - agreed value of liabilities )
Realisation account Credit

6) For Payment of expenses of realisation

a) If pay by partner Realisation Account Debit
Cash / Bank Account Credit
b) If pay by new company
New company Account Debit
Cash /Bank account Credit

7) Closing of Realisation account

If profit
Realisation account Debit
partner's capital Account Credit

8 ) Receipt of purchase price

Cash / Bank /Shares / Debentures Account Debit
Purchasing company Account Credit

9 ) On distribution of shares / debenture and cash from purchasing company

Partner's capital account Debit ( dividing in adjusted capital ratio )
Cash/Bank/ Shares /Debenture Account
After journal entry , you can transfer into ledger for making realisation account , company account , partner's capitalaccount

Amalgamation of Firms
When two or more firms merge into one firm and makes a new firm , then this is called amalgamation of firms . For accounting point of view this definition is so important because if one firm purchases other firm , then this is not called amalgamation but if both firms decide to join or integrate then this is called amalgamation .
For Example
Suppose A and B firm decide to close their business and start the business with the name of AB firm after joining with each other then this is called amalgamation of A and B firm.

Steps for closing the accounts of old firm at the time of amalgamation of firms
When two firm amalgamate with each other , at this time we treat following accounting in the books of old firms so that all doubt solves .
Revaluation of Assets and Liabilities
All entries same as at the time of admission and retirement
Transferring reserve to old partners capital account into their old ratio
treatment of Goodwill
We evaluate the goodwill according to the condition of agreement and then goodwill will open with agreed value in the books
Treatment of Assets and liabilities not taken by new firm
If assets and liabilities are not taken by new firm , then these item will transfer to the capital accounts of partners of old firm and we close these accounts
A -Treatment of assets and liabilities taken by new firm (In the books of old partners)
a) For closing the account of assets
New Firms Account Debit
Assets Account Credit ( at revalued value)
b) For closing the accounts of liabilities
Liabilities Account Debit
New Firm Account Credit
Closing the accounts of partners capital
Partner's capital account Debit
New Firms Account Credit
B - In the books of new firm
Assets Account Debit
Liabilities Account Credit
Partner's capital Account Credit

Accounting of jewellery business
There is boom in jewellery business . Due to increasing the value of gold jewellery business is giving high rate of return to business man . Because of my background is related to this business so , I am writing and telling you the technique of how to make and maintain the accounts of jewellery business .It is very simple to record of jewellery business but it is very harmful to make any mistake in these type of accounts .

Because 10 gram’s quantity’s value is approximately Rs. 10000 so be careful while doing the accounts of jewellery business .
When we purchase gold , it will our raw material . So it will deal as stock , it should valued on cost . Then you should regular passing the voucher entry of purchasing of gold . in cash book if you purchase on cash , if you purchase on credit , then your duty is also to maintain the accounts of your creditors also . Because this is our current liabilities , we should know how much amount , we will have to pay to our creditors . In manual accounting , we just make journal or day book , ledger after this we should find out our profit or loss from manufacturing , trading and profit and loss account after this we also must make balance sheet .

Steps for maintaining branch accounting
a) In that type of branches, it is necessary to make bank account in the name of head office so that amount got from cash sale can be deposited in head office bank account. b) All miscellaneous expenses is given by head office accountant to branch accountant on impress or advance system of

cash book.
c) All salaries, rent, advertising and other expenses must be paid by head office.
d) Head office can send goods to branch on cost price or invoice price.
e) It is necessary for branch to make the list of debtors if branch has all to sell the goods on credit .It is duty of branch accountant 
    to send branch debtors list to head office weekly or monthly.
f) These branches can make memorandums in different registers.
On these memorandums and registers head office can make branch account
For making branch account in head office, we open each branch account in head office with given branch name.

Accounting treatment of web-publishing profession
If you have your own website , web blog , or any blog and you are earning more than tax limit in India . I am providing you the full tutorial of accounting treatment of web publishing profession . For this I am making income and expenditure account ( In vertical form ) which is accepted by Income tax department.

Income and Expenditure Account of Swami Vivekanand Online Publishing Institute ( For Example ) As on 31st March 2009
1.Earning from web publishing ( there is no need to mention AdSense publishing or any other source XXXXX
2.E-buy earning XXXXX
3.Donation by youre online visitors XXXXX
4.Earning from direct space give for advertisement XXXXX
5.Link sharing Income XXXXX
6.Earning from direct Sale on your website XXXXX
7.Earning from selling the brand of blog or website XXXXX
8.Earning from e-news letters XXXXX
9.Earning from other printing newspaper or journal for publishing in their printing press XXXXX
10.Earning from selling of Image of your site XXXXX
11.Other earnings XXXXX

Total Earning from web publishing profession XXXXX

Less Expenses and Losses of web publishing
1.Internet -broadband rent / Charges XXXXX
2.Salaries of employees XXXXX
3.Electricity bill XXXXX
4.Depreciation of Computer /Laptop XXXXX
5.Depreciation of your own building or rent of building XXXXX
6.Repair of computer XXXXX
7.Website domain hire charges XXXXX
8.Web designing expenses XXXXX
9.Image purchasing cost XXXXX
10.Link sharing expenses XXXXX
11.Advertisement of website XXXXX
12.Bank Charges for transfer of your earning in your bank account XXXXX
13.Travelling Expenses for getting latest news for your website XXXXX
14.Hire expenses for getting news or article from others XXXXX
15.Hire expenses of brand logo XXXX
16.Cost of goods sold online XXXXX
17.Stationery expenses XXXXX
18.Office Expenses XXXXX
19.Advertising Expenses XXXXX
20.Other related expenses XXXXX

Net Income from web publishing XXXXX

taxable under the head of business and profession income
You must keep different proof , like photo copy of earning cheques , bill of Internet rent , or electricity and bank statement when you have to return of income tax for web publishing work

Financial Accounting Part-IV

Accounting Treatment of Employees Provident Fund
Employees provident fund is the fund which is created for the social security and retirement benefits for theemployees. Different Countries organizations are created this for the benefits of employees. Employees' Provident Fund Organisation of India EPFO , India Established in 1952 consequent to the enactment of the Employees' Provident Funds and Miscellaneous
Provisions Act, 1952. The head office of the Organisation is in New Delhi. [1].
Presently, the following three schemes are in operation under the Act:
1. Enrolment: An employee is eligible for membership from the day he joins the covered establishment.
•If the employee’s emoluments exceed Rs. 6,500/- per month, he has the option to join the Scheme(s) with the consent of  employer.
•Declare previous employment details, if any, in Form No. 11 to the employer. On becoming a member of the Schemes file details in Form No. 2 ( family particulars/ nominations) through the employer.
•Rate of contribution payable by a member shall be @ 12% of his emoluments. A member can contribute statutorily over and above the prescribed rate.
•In provident fund includes three scheme
•The Employees Provident Fund Scheme, 1952
•The Employees Family Pension Scheme, 1971
•The Employees Deposit-Linked Insurance Scheme, 1976

6.Calculation of Provident Fund from Basic Salary
Both Employer and employee give their share in this fund . Currently employee gives 12% of his basic salary in this employee provident fund .
Employer is also responsible for contribution in employees provident fund for the benefit of employees .
•The rate are given following on basic salary .
3.67% Provident Fund (A/c 1) + 8.33% Pension (A/c 10) + 1.10% Admin Charges onPF (A/c 2) + 0.50% EDLI (A/c 21) + 0.01%
Admin Charges on EDLI (A/c 22)
Total employee’s provident fund
Now total is equal to = Employee’s contribution + Employer’s contribution
Total provident fund = 13.61% on basic salary
Pension (8.33% or 541/- which ever less)

7. Regular activities:
employer is responsible for given information and following forms
•Time of joining:- Form
•Employee should fill, at the time of joining, nomination & Declaration form.
•Form 2, includes the following· Name of the employee· Parent/spouse name· Date of Birth· Sex· Marital Status· AC No·
Address· Names, address, relation, Share for each etc Also for changing nominee names Form 2 is used. His eligibility
begins on the date of joining the firm.
Submitted along with form-5. Withdrawers/Dead :
•Form 10c (pension) &
•19 PFForm 19 is used for withdrawing PF amount. Employee and parent/spouse name, name of the establishment, Ac no, Reasons for leaving service, Contribution for current financial year etc.
•Form 10 is used for pension withdrawal.
•Form 19: Employee should fill, all information like Bank a/c, name, DOJ…with signature and then Employer like present year contributions, DOR…for PF Fund – Due date: After 60 Daysof Resignation)
•Transfer :- Form 13Form 13 is used for transferring an employee AC from one company to another. Both employer and
employee have to specify his name, PF AC no, Position etc and submitted with a covering letter (consolidated list of
employees). Photocopy of the above is kept in PF file for transfer.4. Employee register 3A, 65. For advance : Form 316.
In case of employee expired / dead :
•Process detailsForm 10 D (For claiming benefits under Pension)Employee should fill like Expired/late employee name,
nomination name, details, Nomination Bank a/c…for monthly Pension
•Form 20 (For Claiming EPF Contributions)Employee should fill like Expired/late employee name, nomination name,
details,Nomination Bank a/c…for withdrawal of PF Fund (Incase of Death of a member
•Form 5 IF (For Claiming EDLI benefits, nominee will get benefit)EDLI for death case, nominee will get benefit.7.
•Form 9 (Register of employers - Application for review filed under)Monthly Remittance / Challans:1. Challans every
month before 15th (4 copies/ quadruplicate)2. All A/c (A/c Nos-1,2,10,21&22)3. To Bank4. both employer & employee
contribution· Account group no eg Ma mu 1246 (state-first two alphabets /city/acc no: of the company)· Month· Total
number of subscribers· Total wages due for each account (wages on which calculations are done)· Each accounts totals
(consolidated amount with employer and employee share)· Name of the establishment and address· Name and signature of
the depositor· Name of the bank, mode and date of remittance etc
•Challan is submitted tp PF office along with form-12A every month.Monthly returns:1. Form 12 A, with all information
and employees list of contribution before 25th2. With Form 5 (new joiners list) , form 10 (resigned employees list),
challans copy3. Information about last month employees, new & resigned employees & this month staff.Form 5· Name of the
establishment and address· Month· Code no: of the factory· A c no:· Name of new employees· Fathers or Husband name in
case of married women· Date of birth· Sex· Date of joining the fund· Total period of previous services as on the date
of joining the fund Form 10· Name of the establishment and address· Month· Code no: of the establishment· A c no:· Name
of member who is leaving· Fathers or Husband name in case of married women· Date of leaving service· Reasons for
leaving service· Signature of authorized officer and stamp of the establishment Cross checking the above is done with
the salary statement which includes the number and name all current employees.Form 12 A:· Name of the establishment and
address· Currency period and month (April yr to march yr)· Statutory rate of contribution (12%)· Group code (NA for
unexampled establishment. Establishment having more than 1000 have to keep a PF trust and have to specify the group
code)· Total wages due for each account (wages on which calculations are done)· Amount of contribution and amount
remitted (consolidated amount with employer and employee share)· Date of remittance· Total number of subscribers for
the current month.· Name and address of the bank in which the amount is remitted.· Details of subscribers for E.P.F,
PF, EDLI--No of subscribers as per last month--No of new subscribers (vide Form 5)--No of subscribers left service
(vide Form 10)--Total no of subscribers (After adding and subtracting the new and retired employees with,the number
should tally with monthly list of employees)Cross checking the above is done with the salary statement.
Annul returns:
•Form 3 A (Individual Computation sheet)
•2. Form 6 A (Consolidated Annual Contribution Statement)
•3. before 30th April every yearForm 6A:· Currency period and month (April yr to march yr)· Name of the establishment
and address· Code no: of the establishment· No: of member voluntary contributing at a higher rate· AC No of each
employee followed by their name, annual salary, annual contribution, employer contribution, refund of advance, rate of
voluntary contribution.· This grand total should tally with all form 12 A and challans totals.
•Form 3A: RegisterThis form is filled up for each employee stating his each monthly salary, contribution, Employer
share, Refund of advance, No of days/period of non contributing service, if any (eg. unauthorised leave). If the
employee is resigned during that financial year then the date of leaving service and reasons for leaving service should
be specified in this form. Using Form 3A, form 6 A is filled up and crosschecking is done with all challans and 12 A
forms.* Muster Roll * Wage Register * Inspection Book * Cash Book, Voucher & Ledger * PF work sheet Forms:Form 3:
Contribution Cards - Individual Computation sheet contains all PF amts month-wise.
•Form 3 A: Contribution Cards – Form
•Form 4: Contribution card for employees other than monthly paid employees - Form Form 5 A: Return of Ownership to be
sent to the Regional Commissioner - Form Form 6: Return of the Contribution Cards sent to the Commissioner on the
expiry of the period of currency – FormForm 6 A: Consolidated Annual Contribution Statement - Consolidated Computation
Sheet,contains total employees list, there total half yearly information.
•Form 6 is top sheet and 6A is attachments.
•Form 9: Register of employees - Application for review filed under.Register 3: Individual Computation, there Gross
salary, Basic, DA, attendance, PF, Pension Information maintains month-wise.
•Form 3 is top sheet and 3A is attachments

Accounting Treatment of Provident Fund: Provident Fund Calculator
For calculation , you must fill the following form
1.Enter current age
2.Enter retirement age
3.Enter current EPF balance
4.Enter monthly basic pay
5.Enter monthly dearness allowance
6.Enter (%)contribution to EPF
7.Enter expected (%)salary hike

What is Investment ?
Investment are those assets of businessman by which he earn dividend , interest , rent or profit due to increase the value of investment .Current stock is not called investment because businessman purchases them for selling, in other words, the do businessof that stock.
Generally businessman invests money in property and building so, these are the basic investments.According to Accounting Standard 13 “Investment is the assets held by enterprise for earning income by way of dividends, interest and rent."
Types of Investment
Investment may be short term or long term.
We can also include shares, debentures, and bonds and mutual funds of other company, if we purchase them for the
purpose of earning of interest or dividend from them.
Type of Business
1. Commodity business: - These are general type of business which deal in products but invests his extra money in different property, shares and bonds.
2. Financial business: - If any business which deal in the trading of shares, or debentures or any other fixed property. Then his work is to purchase and sale of such product and earn profit from them. This is special case .
According to AS -13 , at this time , these products will deem as his stock item not investment .
Com- Interest Investment
When a businessman buys investment include its cost and accrued interest . Then this investment is called com-interest investment. So it is the duty of accountant to separate both .
Calculation of accrued interest = face value of security purchase X period( months )

12 X 100
Calculation of cost of investment = ( Quotation price X No. of security purchase ) – Accrued interest as per calculated
Ex- Interest Investment
When businessman buys investment on its cost and gives accrued interest amount extra to the seller .
Nominal Value
Nominal Value is face value of security . This is so important in investment accounting . Because interest is calculated on nominal value of security .

Journal Entries of transactions relating to investment
1. When investment is purchased interest date
     Investment account Debit ( Quoted price + brokerage ) X No. of investment
     bank account Credit
2. When interest or dividend is received after purchase
     Bank Account Debit
     Investment Account Credit
3. When investment is sold at interest date
    Bank Account debit
    investment account Credit
4. For transfer of interest or dividend to profit and loss account at the end of year ( but there is no need to enter
    this entry in tally 9 because tally 9 automatically transfer to profit and loss account ) Interest account or dividend account debit
Profit and loss account credit
5. Pass the journal entry of profit on sale of investment in manual or tally 9 both Investment Account Debit Profit and loss account Credit
6. At end of year show investment at cost price or market price which is less as asset in balance sheet ( but need no do in tally 9)
On 1st jan 2008 S.P. Ltd purchase 1000 15 % debentures of Reliance Ltd. Of Rs. 100 each @ Rs. 96 each . On 1st july
2008 , ½ of debentures were sold at Rs. 99 each . Debenture interest is payable half yearly on 30th june and 31st
December . Pass voucher entries in tally 9
Working notes
1) Interest on 30th june 2008 will be received 15% on Rs 100000 for 6 months interest = Rs. 100000 X 15/100 X 6/12 =
Rs. 7500
2) ½ of debentures were sold @ Rs. 99 . Therefore sale proceeds will be Rs. 99 X 500 = Rs. 49500
3) Interest on 31st December 2008 will be received @ 15% on Rs. 50000 for 6 months . Interest = Rs. 50000 X 15/100 X
6/12 = Rs. 3750
4) profit on sale of investment = 49500-48000 = Rs. 1500
For recording above transaction in tally 9
1) First of all create S.P. Ltd in tally 9
2) Activate interest calculation in feature F11
3) Create ledger of 15 Debenture in reliance Co. account under investment account , bank account under bank account , Interest account under indirect income .
4) Pass the voucher entry of purchasing investment in payment voucher, sale of investment in receipt voucher and
interest received on investment is in receipt voucher and profit on sale of investment transfer to profit and loss
account in journal voucher .

Insurance is the contract in which Mercantilist pays minimum amount of premium to insurance company, and shift his burden of risk of loss on the head of insurance company. Insurance company incurred the loss of Mercantilist if it is under the policy of insurance. Generally Mercantilist does the insurance of many risks like fire of shop or office or plant, fire of stock and loss of profit.
If Godown or office caught fire. Suppose fire to Godown and insurance company’s special evaluator can easily evaluate the loss of building due to fire. But it is most difficult to calculate loss of stock or loss of profit. Only accounting professionals can solve this problem with scientific rules and regulations of accounting.

Calculation the value of stock lost due to fire

Statement Form – Ist way
Particular Amount
Stock in the beginning of the year xxxx
Add : purchase from the beginning of accounting
Year to the date of fire (+) xxxx
Less : cost of goods sold from the beginning of
Accounting year to the date of fire (-) XXXX
Value of stock on the date of fire XXXXX
Less : Stock of Salvaged or saved from fire (-) XXXX
Value of stock lost due to fire XXXXX
You can make memorandum trading accounting - 2nd Way
“Memorandum trading account is not part of final account but it is just part of working notes for calculating the net
value of stock due to fire.”
Remembering pin -point
1. From both above two methods we must need to calculate gross profit rate. There are following way to calculate gross
profit of business. There are following way to calculate gross profit of business
i) Average of old year gross profit method
ii) Previous gross profit method
G.P. Rate = Previous year Gross profit / Sale of previous year X 100
2. Average Clause
“ Average clause means insurance company will pay only insurance in the proportion of actual loss . Before this rule businessman used to take insurance policy below the actual amount of his asset. So , Now under this method his claim will be reduced . "

Formula of Calculating of Claim of loss of stock =
Amount of policy X stock destroyed
Stock on the date of fire
Suppose, xyz Co. got the insurance policy of $ 10000 but his stock value is $ 20000 and actual loss is $ 5000. Now we
will calculate claim under average clause
Claim accept = 5000 X 10000/ 20000 = $2500
3. Some time, information of opening stock , purchase and sale is not give by businessmen , so calculating correct value of loss due to fire it is very necessary to make total debtor account , total creditor account and previous year trading account .

Procedure of calculating loss of profit
Many commerce students are confused about how to calculate loss of profit. They know that businessman can take loss of profit, due to dislocation of business after fire to concern . It can also take with fire insurance policy. But for getting claim , the businessman want to calculate exact loss of net profit from the date of fire to that day in which business becomes normal .

Steps of calculating loss of profit
Ist step

Calculate gross profit ratio:-
As the starting point of this procedure you have to determine the value of gross profit because loss of profit is easy to calculate by multiplying Gross profit with short of sale in that disturbance period .
Net profit xxxx
Add Insured standing
Charges of lass year (+) xxxx
Gross profit of last year xxxx
Gross profit ratio = Gross profit / sale of last year X 100

2nd step
Calculate shortage in sale due to loss of fire
Actual sale of same period of loss xxxx
Add any increase in thrend of sale (+)xxxx
Less actual sale in dislocation period (-) xxxx
Shortage of sale in dislocation period xxxx

3rd step
Calculation of loss of profit
Loss of profit = shortage of sale X G.P. rate / 100

4th Step
Total amount for claim of loss of profit
Loss of gross profit xxxx
Add increase in cost of working (+) xxxx
Less saving in standing charges
Amount of claim xxxx

5th step
Apply average clause
Amount of claim = policy value / amount to be insured
Important notes

1. We will use of only less rate from following rates for calculating correct amount of loss pf profit
Net profit + Insured standing charges of last accounting year
-------------------------------------------------------------------------- X 100
Sale for the last accounting year

Policy value / sale of 12 months immediately proceeding fire as adjusted for trend .

2. The Indemnity period or dislocation period which will small, that period will be fixed for calculation of claim .
3. We will calculate loss of sale on the base of future trend of sale.
4. Insured standing charges means all expenses which are mentioned in the policy of loss of profit. Businessman wants

to get these expenses in the case of mishappening. We can make its list
•Traveling expenses
•Rent, rate and taxes not related with profit of business
•Interest on debentures and loans.
•Auditors fee
•Salaries of permanent staff
•Directors’ fee
•Salaries of permanent staff
•Wages of skilled workers
•All not described expenses must not more than 5% of described standing expenses .
Explanation with example
From the following information, find out the claim under loss of profit policy :-
2007 – net profit for the year $ 10000
2007- Standing charges insured $ 6000
$ sales for 2007 $ 160000
Date of fire 1.1.2008
Period of dislocation 3 months
Sales from 1.12007 to 31.3.2007 $ 54000
Sales from 1.1.2008 to 31.3.2008 $ 19400
Indemnity period 6 months
Policy subject to average clause $ 11000
Trend in annual sales 10% increase
Ist step
Calculation of gross profit ratio
Net profit + Insured standing charges of last yea
----------------------------------------------------------- X 100
Sale of last year
---------------------- X 100
= 10%

2nd step
Shortage of sale
Last year’s sale from 1.12007 to 31.3.2007 $ 54000
Add 10% for upward trend $ 5400
$ 59400
Less actual sale during dislocation period $ 19400
Shortage of sale $ 40000

3rd step
Calculate of loss of profit
Loss of sale X G.P. rate /100
40000 X 10/100 = 4000

4th step
Total amount for claim of loss of profit
Loss of gross profit 4000
Add increase in cost of working (+) nil
Less saving in standing charges nil
Amount of claim $4000

5th step
Average clause
Since the policy is subject to average clause, it is necessary to find out whether expected profit of the current year
was fully insured or not .
Expected sale for current year
Last year sale $ 160000
Add :Increase in current year 10% = $ 16000
Total sale of current year = 176000
Profit rate 10%
The profit of current year = 176000 X 10% = $17600
But we take the policy of $ 11000
This is a case of under insurance. It means insurance company pays $ 110 of every $ 176 loss
Claim = insurance policy / insurable profit X profit lost
= 11000 / 17600 X 4000 = $ 2500
So , amount of claim would be $ 2500

Voucher Entry of Insurance Claim in Tally 9
" Record of Claim of insurance is special type transaction and only when we record when actual claim we get . In this
we should make new group of sundry insurance under prime group of current asset after this we should create ledger of
insurance company and other ledger one time . " When claim relating to fixed assets is admitted
Insurance company a/c ( Under Sundry Insurance account ) Debit
Particular fixed asset account ( under Fixed asset ) Credit
* Above voucher entries means insurance company is receiver , he has taken our burden of loss And if loss happen , it
mean we sent of fixed asset to insurance company means fixed asset goes out , so it will be credit .
When the claim relates to stock in trade
Insurance company account ( under Sundry insurance account ) Debit
To stock destroyed account or damaged account Credit
Above voucher entries means insurance company is receiver , he has taken our burden of loss of stock
And if loss happens , it mean we sent of goods to insurance company means goods goes out , so it will be credit .When claim relates to loss of profit.
Insurance company account(under sundry insurance account ) Debit
Profit and loss account Credit When insurance claim amount is received
Bank account ( Under bank account ) Debit
Insurance company account ( Under sundry insurance ) credit
This entry means that we are receiver of cash and bank is our representative . So , this account Will debit in voucher
entry and Insurance company is giver of claim amount and this entry is simply passed under the rules of double entry .

Management Accounting Part-I

Cash Flow Statement

When we compare two or more years total cash flow may be in three type of activities (i)In operating activities from one financial year to another financial year we can get cash from selling of goods , receiving the money or any other operating activities or we can outflow of cash in B/p , creditors or any buying of goods . So different can be said as net flow of operating activities .
(ii) Investing activities
You know very well that with two years any company can buy or sell any assets buying of fixed assets is outflow and selling any asset is inflow of cash difference of both is net cash flow from investing activities .
(iii) Financial activities
Financial activities are related to buying and selling of shares and debentures .Selling of shares and debenture is inflow of cash and opposite if company buys shares of other company , this is called outflow of shares .
After calculating all net inflow and this is called flow of cash and statement making for this is called cash flow statement .
Benefit is it only for cash management who wants to make different planning . An account manager easily calculate what is the real cash flow position . Company’s overall flow of cash is favorable or not . Some time cash book shows good current cash balance but a good account manager should investigate the overall flow of cash before buying high funded assets . This decision should be taken after complete analyzing of cash flow statement . Cash flow statement shows more outflow than inflow this is unbalanced situation .So be careful .

Q: Define inflation accounting or price level accounting ? what are the main method of price level accounting ? What are its main advantages and disadvantages ?

Ans :Inflation accounting is recording ,classifying and summarizing of all transaction on current or market cost and update recording amount according to time and changes .In price level accounting ,the value of money is changed , our balance sheet ‘s figure unit also changed .

Method of price level /Inflation accounting :-

1.Current purchasing power accounting

According to current purchasing power method , we calculate current cost with following method
I:  Take current price index
II : Calculate

Current value of asset= Value of asset (Actual basis ) X Current index / previous price index

For example

Record value of Rs. 40000 machine on inflation accounting basis if 2005 index 100 and 2006 price index =200
=40000x 200/180 =80000
Machine 80000

2. current cost accounting

In the current cost accounting following point must take in mind :-

  1. Value of fixed asset will be take on current cost not historical cost basis
  2. Stock will be taken on market cost basis
  3. Transfer of difference between historical cost and current cost of asset to revaluation reserve account
  4. Calculate current operating profit

3. Replacement cost accounting method

This method is just improvement of current purchasing price method .In replacement cost accounting , we calculate current value basis of respective asset price index
Suppose book value of machinery is 300000and price index of machinery is 2005 is 100 and 2006 is 300 then book value of furniture Rs. 200000 price index of furniture 2005=200 and 2006=400
Current value of machinery =300000x 300/100
Current value of furniture =200000x400/200
1. Current value accounting method
2. In current value accounting method , we take all asset of business in balance sheet on their current value

Definition of current ratio
This ratio is a relationship of current asset and current liabilities . It states the business current position to pay the current liabilities in time as when due .There are two components of this ratio:

Current assets

  1. Cash in hand
  2. Cash at bank
  3. Marketable securities
  4. Sundry debtors
  5. Bills receivable
  6. Stock in trade
  7. Prepaid exp.

Current liabilities

  1. Sundry creditors
  2. Bill payable
  3. Outstanding bill
  4. Bank overdraft

current ratio = current assets /current liabilities

Importance of Calculating Average Collection period and Average Payment period
Average collection period and and Average payment period is basic test of the business's good or bad activity or operation . This is the main part of financial analysis to calculate these type of ratio . Even a small business man want to time in which he gets his debt from his debtors in whole year . He also wants to know at what period he pays his creditors .

•These two ratios are the good symbol for calculating the efficiency and capacity of any type of organisation

•These two ratios are the good symbol for making good planning for increase or decrease working capital efficiently . Because working capital is more effected from sundry debtors and sundry creditors.
Lets start for calculating these two ratios

1.Average Collection Period
12 months or 365 days= __________________Debtors Turnover ratio

Because it is based on debtors turnover ratio . So we should also know debtor turnover ratio

Net Credit Sale= _______________Average Debtors amount

Average debtors amount is equal to sum of opening and closing debtors and after divide 2 , we can calculate the average debtors amount.

2. Average Payment Period
12 months or 365 days= __________________Creditors Turnover ratio
Because it is based on Creditors turnover ratio . So we should also know Creditors turnover ratio

Net credit Purchase= _______________Average Creditors amount
Average Creditors amount is equal to sum of opening and closing Creditors and after divide 2 , we can calculate the average Creditors amount.

What are Profitability Ratios
Profitability ratios are so important , because of these ratios , we can take several decision for improving our business concern . These ratios tells us the basic relationship between profit and net sale . What amount of return we have receive on the basis of our sale . Is it good or not . If this is not good then what should we do in the improve actions of company.
There following main profitability ratios which is calculated in any company type of business.

1.Gross profitability ratio = Gross profit / Net Sale X 100
2.Operating Ratio = Operating Cost / Net Sale X 100
3.Operating Profit ratio = Operating Profit / Net Sale X 100
4.Net Profit ratio = Net profit / Net Sale X 100
5.Rate on Investment = Net profit before interest and tax / Capital Employed X 100
6.Earning Per Share (EPS)
Net profit after interest , tax and pref. dividend= ____________________________________ X 100
Numbers of equity shares
7. Dividend Per Share (DPS ) Price Earning Ratio
Dividend on equity shares= ____________________________________ X 100
Numbers of equity shares
8. Price Earning Ratio = current market price of share / earning per share

Management Accounting Part-II

Responsibitlity Accounting
Some business organisation are now adopting responsibility accounting in their management section , though adopting
advance computer and internet facility they are setting each and every person's responsibility .
So you should know about responsibility accounting .
Responsibility accounting is system of control where responsibility is a signed of control on cost . The proper authority is given to person so that they are given to persons so that they are able to keep up their performance . "In other words , the responsibility accounting is that type of management accounting that collects and reports both planed actual accounting informations in the terms of responsibility centers."
Types of responsibility center

1. Cost center

The cost center relates to that segment in which the managers are responsible for incurring the cost. But there have no responsibility of revenue. It is also known as expenses center.

2. Profit Center
When a responsibility center gets revenue from output then it is known as profit center. The difference between revenue earned and cost incurred will be the amount of profit .

3.Investment Center
An investment centre is an entry segment in which a manager can control not only revenue or cost but also investments . In this , the manager who is given the responsibility of investment center is under obligation for proper utilisation of assets .

Steps of responsibility accounting

  1. The organisation should be divide
  2. Making of Responsibility Center
  3. Making of targets or set the targets in different centers
  4. Count actual performance
  5. Analysis of performance
  6. Timely improved action.

Definition of working Capital and benefits of its analysis
As an accountant, you must know working the working capital and benefits of its analysis. Dear working capital means excess of current asset over current liabilities. In other word. If your current assets are more than your current liabilities. These more current assets are known as working capital. For doing your business with better way, the business must have working capital every time. If you have more current assets than your current Liabilities , it means you can buy your stock of business , you can pay your creditors . All time when your investor or any body who want to give you loan will see you working capital . If your liquid capital is non , nobody will give you any debt or goods on credit . So it is the duty of accountant of business . To make some working capital so that your business will grow with the help of loan and debt. For this I am giving some tips. Each time when you pass the voucher entry in tally or any other computer accounting software , then see what is the position of your working capital.
If you see that there is no working capital, when current assets are equal to current liabilities , or current liabilities are more than current assets this will be very serious position when working capital is in negative. At this time, you must sell some fixed assets so that you can keep your working capital position in positive. Never give goods on credit to any body who has not good dealing with you

Financial accounting, cost accounting and management accounting are interrelated because without co-ordination and co-operation with each other, we will never succeed in achieving the objectives of business. Financial accounting provides different financial statements. On these statements we calculate different cost, like cost of material, cost of labour, and cost of overheads. On the basis we calculate cost of goods sold and then we include our profit margin in it and the ascertain our product price. In management accounting, financial and cost accounting supply different useful accounting information. On these accounting data manager makes the plans of business. Organize different works. Even standard costing and budgeting is very useful toots for controlling the organization. In a business the requirement of funds has to be carefully estimated. Certain funds are required for long term purpose investment in fixed assets etc. A careful estimation of such funds depends different ratio analysis which tells us that what is rate on capital employed, if this rate is very high then we can get more fund for more production and for more production give more money. Even financial management is also part of management accounting. If system of financial accounting will complete with good way and rules and regulation, then other system of cost accounting and management accounting will gives good result.

Leverage analysis is the part of management accounting. This is the duty of finance manager to use the technique for making ideal structure of capital. Leverage analysis is the best technique of finance manager. With this technique he can make wonderful structure of capital. For doing leverage analysis he has to calculate three leverage Ist leverage – Operating Leverage

Operational leverage is calculate by following formula
Operational leverage =% change in Earning before interest and tax______________________% Change in Sales
Analysis of operating leverage of a firm is very useful to the financial manager. It tells the impact of changes in

sales on operating income. A firm having higher Degree of operating leverage can experience a magnified effect on

E.B.I.T. for even a small change in sales level. Higher D.O.L. can dramatically increase the operating profit. But if

there is decline in sales level, E.B.I.T. may be wiped out and a loss may be operated.
2nd leverage - Financial Leverage

Financial leverage can be calculate with following formula

% change in Earning per share= ____________________________% change in Earning before interest and tax

Financial leverage helps the finance manager in designing the appropriate capital structure. One of the objectives of planning an appropriate capital structure is to maximize the return on equity shareholders’ funds or maximize the earning per share.
Financial leverage is doubled edged sword. On the one hand it increase earning per share and on the other hand it increase financial risk. A high financial leverage means high fixed financial costs and high financial risk i.e. as the debt component in capital structure increases , the financial leverage increases and at the same time the financial risk also increase . So the finance manager therefore is required to trade off i.e. has to bring a balance between risk and return for determining the appropriate amount of debt in the capital structure of a firm. Thus the analysis of financial leverage is most important tool in the hands of finance managers who are engaged in financing the capital structure of business firms, keeping in view the objectives of their firm.

3rd leverage – Combined leverage
The combined leverage measures the effect of a % change in sales on % change in Earning per share.
Combined leverage = operating leverage X financial leverage
Combined leverage= % change in E.B.I.T. % change in E.P.S.
________________ X ___________________

% change in sales % change in E.B.I.T.

The ratio of contribution to earning before tax , given by combined leverage shows the combined effect of financial and operating leverage . A high operating and high financial leverage combination is very risky. If the company is producing and selling at a high level , it will make extremely high profit for its shareholders. But even a small fall in the level of operations would result in a tremendous fall in earning per share. A company must , therefore maintain a proper balance between these two leverage.

Comparative financial statement
This is main tool of financial analysis. This type of analysis is useful when the accounting data of two periods is given. Generally two statements are prepared
i) Comparative balance sheet
ii) Comparative income statement
The figures of two periods are taken in their respective columns and increase or decrease after which percentage is taking into account previous year as base year. After showing the increase or decrease the interpretation in form of comment is also to be specified. However the various comparative statements are to be prepared as follow.
i) Comparative balance sheet:-
To analysis the financial statement as per the technique of comparative statement analysis the first one is the comparative balance sheet for preparation comparative balance sheet with following steps :
Ist step: Take the given balance sheet of two period in years
2nd step: Make the difference of each item of balance sheet in the vertical or horizontal form determining the increase or
                decrease ( in absolute figure)
3rd Step Make the % of increasing or decreasing ( Previous year as base year)
4th step Interpretation (Comments)
a) Long term financial position
b) Working capital position
c) profitability position
d) Overall financial position
ii) Comparative Income Statements
The income statement shows results of operation of business .The comparative income statement indicate the variation with different item which are to be recorded in income statement .Over a particular period of time that is one year. It shows the amount of gross profit, operating profit and net profit. However a comparative income statement is to be prepared in following form.
Interpretation or Comments can be given? On the increasing sale or cost of sale increasing or decreasing? Operating expenses and incomes affecting the amount of profit or loss? Overall profitability position

Making of Cash flow Statement with both direct and indirect methods.
In good question of making cash flow statement , the examiner must give you two year balance sheet of company , a profit and loss account and some additional information for making cash flow statement . With above three basic information you can easily make cash flow statement with direct or indirect method . Here we are taking one practical question , then we solve it both direct method and indirect method. This question can be asked in CA , ICWA , MCA ,MCOM and MBA exams

The following is the abstract of balance sheet of Software securities ltd for the year 2005 and 2006


  1. Provision for depreciation 2005 –Rs. 108000 and 2006 –RS. 396000
  2. Retained earning 244800 370800
  3. 9% debenture 270000 198000
  4. Account payable 72000 41400
  5. Expense payable 0 18000


  1. Land 2005 - Rs. 126000 and 2006 - Rs. 81000
  2. Building 360000 360000
  3. Accumulated depreciation
  4. On building 19800 37800
    Equipment 122400 347400
    Accumulated depreciation on equipement 18000 50400
  5. Stock in hand 10800 97200
  6. Account receivable 36000 122400\
  7. Cash in hand 66600 97200
  8. Preliminary expenses 10800 7200

Question gives you also income statement of software securities ltd

Sales 1602000
less cost of sale 837000
less operating exp. 397800
less interest exp. 21600
loss on sale of equipments 3600
Net income before tax 342000
provision of tax 117000
Net Income after tax 225000
Additional information
1. Operating expenses include depreciation of rs. 59400 and charges from preliminary expenses of rs. 3600
2. Land was sold at its book value
3. cash dividend paid for the year 2006 amounted to rs. 27000 and fully paid bonus shares were given in the ratio of 2 shares for every 3shares held.
4. Interest expenses was paid in cash.
5. Equipment with a cost of rs .298800 was purchased for cash .Equipment with a cost of rs . 73800 ( book value rs. 64800) was sold for rs. 61200
6. Debenture for rs. 18000 were redeemed for cash and for rs.54000 were redeemed by converting into equity shares at par value.
7.Equity shares of rs. 162000 were issued for cash at par.
8. Income tax paid during the year amounted to rs. 117000 Prepare cash flow statement with direct method indirect method Cash flow statement with direct method

Particularv Amount Amount
A- Category

Cash flow from operating
Inflow of cash
Cash sale & amount from debtors
= sale + opening bal. of debtors -
closing balance of debtors
= 1602000+36000-122400= (+) 1515600
Any other operating income (+) nil

Cash outflow
1. Cash purchase and amount paid to creditors
= Cost of goods sold +opening creditors
-closing creditors =
= 837000+72000-41400= (-) 867600

2. Cash operating Expenses

Operating expenses as per profit and
Loss account -depreciation - preliminary exp.
- Outstanding expense closing
= 397800 - 59400 -3600 -18000 = (-) 316800
Out flow of stock
+ opening stock (-) 86400
-closing stock =10800-97200

Less income tax paid (-) 117000
127800 127800

B- Category
Cash flow from investing activity
Inflow of cash
1. sale of equipment (+) 298800
2.sale of land (+)45000
Less Cash outflow
1 cash paid for purchase of equipment (-) 298800
192600 192600

C- Category
Cash flow of financing activity
Cash inflow
1. Issue of new shares (+) 162000
Less Cash outflow
1. Cash paid for redemption of deb. (-) 18000
2. Dividend paid (-) 27000
3. Interest Paid (-) 21600

95400 95400

Add opening cash balance + 66600

Closing balance of cash 97200

Cash flow statement with Indirect method
Particularly Amount
Cash flow of operating activity
1st Point
Net Profit before taxation and extraordinary
Items 342000

2nd Point
Add for non cash and non operating expenses
And losses
1. Depreciation 59400
2. Preliminary expenses written off 3600
3. Discount on issue of shares and deb. w/o nil
4. Goodwill written off nil
5. Patent and trade marks written off nil
6. Interest on borrowing and deb. 3600
7. Loss on sale of fixed assets 21600

3rd Point
Less non –cash and non operating incomes (-) nil
1. Dividend income(For non financial co.)
2. Rental income
3. Profit on sale of fixed asset


4th Point ( Ist point +2nd Point -3rd Point ) 430200

Adjustment of working capital changes

5th Point
Add Decrease in current assets and increase in
Current liabilities (+) nil
1. Decrease in stock
2. Decrease in debtors
3. Decrease in accrued income
4. Decrease in prepaid expenses
5. Increase in creditors
6. Increase in bill payables
7. increase in outstanding expenses (+) 18000
8. Increase in advance incomes
9. Increase in provision for doubtfull debts

6th Point
Less increase in current assets and decrease in (-)

Current liabilities
1. Increase in stock 86400
2. Increase in debtors 86400
3. increase in accrued incomes nil
4. increase in prepaid expenses nil
5. decrease in creditors 30600
6. Decrease in bill payables nil
7. decrease in outstanding expenses nil
8. decrease in advance incomes nil
9. Decrease in provision for d/d nil


Less income tax paid (-) 117000
127800 127800

B- Category
Cash flow from investing activity
Inflow of cash
1. sale of equipment (+) 298800
2.sale of land (+)45000
Less Cash outflow
1 cash paid for purchase of equipment (-) 298800
192600 192600

C- Category
Cash flow of financing activity
Cash inflow
1. Issue of new shares (+) 162000
Less Cash outflow
1. Cash paid for redemption of deb. (-) 18000
2. Dividend paid (-) 27000
3. Interest Paid (-) 21600

95400 95400

Add opening cash balance + 66600

Closing balance of cash 97200

Management Accounting Part-III

The indirect method for calculating cash flow statement
Indirect method
Cash flow statement
A-cash flow from operating activity + B- Cash flow from investing activity + C- cash flow from financing activity +
opening balance of cash book = Closing balance of cash book
A- category regarding cash flow from operating activity is different from direct method , other part is as same as
direct method
According to indirect method when we calculate cash flow statement, we will care 8 points. The main aim is to calculate
cash net profit or loss for operating activity like sale and purchase of goods. Now I am explaining all 8 points deeply
1st Point
Taking the net profit as per profit and loss account. This is (+) item. This is the base for calculating cash net
profit. Other 7 points are the just games of (+) and (-)
2nd point
Now we add all non cash and non operating expenses and losses in Ist point.
I want to tell you why we will (+) it in net profit. The answer is that because when we made of profit and loss account
we had deducted these non cash and non operating expenses in our profit and loss account. Now our duty is to add them .
Now I am telling about these expenses and losses
1) Depreciation
2) Preliminary expenses written off
3) Discount on issue of shares and deb. w/o
4) Goodwill written off
5) Patent and trade marks written off
6) Interest on borrowing and deb.
7) Loss on sale of fixed assets

One more question you can ask to me
Why non operating expenses are added in net profit?
Because it is true that these expenses in cash but we deems as cash outflow from financing activity or investing
activity so there is no need to adjust in operation.
3rd Point
After adding 2nd point items , we must deduct 3rd point items. It means that all non cash or non operating income must
be deducted from net profit for calculating cash net profit. In this , we can include
1) Dividend income (For non financial co.)
2) Rental income
3) Profit on sale of fixed asset
4th point
= Ist point + 2nd point – 3rd point

5th point
Now we add decrease in current assets because it must increase the cash inflow and also add increase in current


  1. Decrease in stock
  2. Decrease in debtors
  3. Decrease in accrued income
  4. Decrease in prepaid expenses
  5. Increase in creditors
  6. Increase in bill payables
  7. Increase in outstanding expenses
  8. Increase in advance income
  9. Increase in provision for doubtful debts

6th point
Increase in current assets and decrease in current liabilities must be deducted

  1. Increase in stock
  2. Increase in debtors
  3. Increase in accrued incomes
  4. Increase in prepaid expenses
  5. Decrease in creditors
  6. Decrease in bill payables
  7. Decrease in outstanding expenses
  8. Decrease in advance incomes
  9. Decrease in provision for d/d

General hint
· Increase in current assets means cash outflow so deduct
· Decrease in current liabilities is also cash outflow so deduct
· Decrease in current assets means cash inflow so add
· Increase in current liabilities is also cash inflow so add

7th point
Total cash flow from operating activity
= 4th point + 5th point – 6th point
8th point
Deduct income tax paid from 7th point. After this you can get net cash flow from operating activity. All other B and C category as same as first method.

Definition of Securitisation

Securitisation is the process of getting cash on the basis of different security notes and papers .Even some company issues shares or debenture for getting fixed assets , this is also securitisation . In simple english securitisation create the relationship of company with outer world in which company gets fund for doing work .

Benefit of Securitisation

  1. Increase the rate of return
  2. Raise of fund or finance through securitisation when other source are not supported .
  3. I take one example explaining the third benefit

suppose a person want to purchase a building for giving it rent , if he purchases with his cash then all risk of fund is his own . But if he takes loan to make building then he becomes issuer of finance so from earning of building , he can pay the debt of building .

Factors to provide Loans:

1st Financial factors

a) Rate of Return

It is the duty of account manager to find the rate of return. Select all those party which want to give us high rate on our investment in the form of loan.

b) Risk Factor

Before giving credit to company, we also see our risk factor. i) personal risk- dishonesty , corruption ii) trade risk– see previous profit and loss account iii) Debt equity ratio iv) Income interest ratio

c) Security

Before giving credit or loan account manager have to see what asset of business , businessman want to give as security for getting loan .

d) Marginal of requirement

Before giving loan or credit , it is the duty of bank's account manager under govt. policies that he must see difference between security and loan Suppose Security $ 10000 – Loan $ 8000 = Marginal requirement $2000 If our providing loan is less than the value of asset which we have received in the form of security , then this is good .

2nd Non- financial factors

1. Social factors

Through social responsibility accounting, account manager is also check, whether providing of loan at low rate is benefited for social popularity or not.

2. Political factors

Account manager also check political and tax policies regarding providing of loan.

How to prepare Fund Flow statement

Before preparing of fund flow statement, you must know different accounting terms in fund flow statement. Academic need to learn the fund flow statement

1. AS – 3 units 1.

Accounting standard 3 units 1 of Institute of Chartered Accountant of India explains preparation and presentation of statement of changes in financial position or fund flow statement.

2. UGC – NET – Commerce

If you want to clear UGC –NET in commerce subject, you should also learn fund flow statement. Because it includes in paper 11 and paper 111 A syllabus in the form of fund flow analysis.

3. Graduate / Post Graduate Classes

Fund flow statement is full subject in B.Com. , B.B.A., B.C.A. and M.Com. , M.B.A., M.C.A. classes . For succeeding in these classes, you should know the whole system of fund flow statement.

4. Helpful in Practical business environment

Fund flow statement is very helpful for solving following practical problems of business. Why are current assets are decreasing, even there are high profit?

  1. Why did Company not issue dividend, even company has obtained profit?
  2. What happened with net profit, where did it go?
  3. What did Company do with the fund received from selling of shares and debentures?
  4. What are main sources of company to repay his debts?

So, above questions’ answer can be given after making fund flow statements.

Definition of Fund

Fund means working capital. If current assets of company is more than current liability of business, it is called working capital and working capital’s other name is Fund.
Fund = Working capital = Current assets – Current liability

Definition of Flow of Fund

Flow of fund means movement of fund. I take the example of air; we can feel its movement or flow of air. Same thing is happen with fund, due to the activity of business fund is transfer from one asset to another assets. If fixed assets are converted into current asset or fixed liability is converted into current liabilities, these are the flow of fund. But if current assets are changed with current assets or current assets are changed into current liabilities, then, there is no flow of fund because there is no change working capital. Suppose, we get the money from debtor, this is not flow of fund because, working capital is not changed. Both items of current assets and when current assets change into current assets, there will not be change in working capital.
Flow of Fund = Fixed asset changes into current asset or current asset changes into fixed assets


Fixed liability changes into current liability or current liability changes into fixed liability.

Definition of fund flow statement

Fund flow statement is a statement which shows the inflow and out flow of funds between two dates of balance sheet. So, it is known as the statement of changes in financial position. We all know that balance sheet shows our financial position and inflow and outflow of fund affects it. So, in company level business, it is very necessary to prepare fund flow statement to know what the sources are and what are applications of fund between two dates of balance sheet.

Generally, it is prepare after getting two year balance sheet.

According to Prof. Anthony, “The funds flow statement describes the sources from which additional funds were derived and the use of which these funds were put.” Fund flow statements are known with different names

Statement of source and uses of funds Or summary of financial operations Movement of working capital statement Or Fund received and distributed statement Or Fund generated and expended statement.

Steps for making Fund flow statement

First Step

Making of statement of Changes of Working Capital

For making of fund flow statement. It is very necessary to make statement of changes of working capital. Because net increase in working capital is use of fund and net decrease in working capital is source of fund. So, it is duty of accountant to make statement of changes of working capital. Making of statement of changes working capital is very easy and simple.

We take two balance sheets, one is current year balance sheet and other is previous year balance sheet. Then we separate current assets and current liabilities.

If current assets are more than previous year current assets, it means increase in working capital.
If current assets are less than previous year current assets, it means decrease in working capital. Because,

relationship between current assets and working capital is positive and if any changes in current assets, working capital will change in same direction.

If current liabilities are more than previous year current liabilities, it means decrease in working capital.
If current liabilities are less than previous year current liabilities, it means increase in working capital.

Relationship between working capital and current liabilities are inverse.

Statement or schedule of changes in working capital

Particular--------------- ? previous year ? Current year ? Effect on working capital
-----------------------------------------------------------? Increase ? Decrease
Current Assets

  • Cash in hand
  • Bills receivable
  • Sundry debtors
  • Temporary investments
  • Stocks / inventories
  • Prepaid expenses
  • Accrued incomes

Total current assets----------- ?xxxx ? xxxxx?
----------------------------------------------------------------------- -----------------

Current liabilities

  • Bills payables
  • Sundry creditors
  • Bank overdraft
  • Short term advances
  • Dividends payables
  • Provision for taxation

Total current Liabilities ----------?xxxx ?xxxx ?
------------------------------------------------------------------ -------------------
Working capital

Net increase or decrease in working capital =Increase in working capital – Decrease in working capital

2nd Step

Statement showing the fund from operation

Because is the source of fund and will show in fund flow statement’s source side. So before making fund flow statement,we must make statement showing the fund from operation.Operation means business activity and fund from operation means profit from business activity. So, you will easy understand that profit from business activity between two accounting period must be the source of fund.

Statement of fund from operations
Closing balance of profit and loss account or retained earning as
Given in the Balance sheet
Add non –fund and non operating items which have been already
Debited to profit and loss account
1. depreciation
2. amortization of fictitious and intangible assets

  • Goodwill
  • Patents
  • Trade marks
  • Preliminary expenses
  • Discount on issue of shares

3. Appropriation of retained earning such as

  • Transfer to general reserve
  • Dividend equalization fund
  • Transfer to sinking fund
  • Contingency reserve etc.

4. Loss on sale of any non current or fixed assets such as

  • Loss on sale of land and building
  • Loss on sale of machinery
  • Loss on sale of furniture
  • Loss on sale of long term investments

5. Dividends including

  • Interim dividend
  • Proposed dividend

(If it is an appropriation of profit and not taken as current liability)

6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account


Total ( A)-------------------------------------------------------> ? XXXXX ?
Less Non –Fund or non operating items which have already been credited to profit and loss account

1. Profit or gain from the sale of non current / fixed assets such as

  • Profit on sale of land and building
  • Profit on sale of plant and machinery
  • Profit on sale of long term investment etc.

2. Appreciation in the value of fixed assets such as increase in the value of land if it has been credited to profit and loss account
3. Dividends received
4. excess provision retransferred to profit and loss account or written back .
5. any other non operating item which has been credited to profit and loss account
6. opening balance of profit and loss account or retained earnings as given in the balance sheet
Total ( B)--------------------------------------------------------------> ? XXXXX ?
Funds received from operation or business activities = total ( A) – Total ( B)

You can make also above statement in t shape adjusted profit and loss account form .

3rd Step

Fund flow statement

-------------------------------------------------------------------> ? Amount ?

A ) Source of funds

1. Fund from operation ( balance of second step )
2. Issue of shares capital
3. Issue of debentures
4. Raising of long term loans
5. Receipts from partly paid shares , called up
6. Amount received from sales of non current or fixed assets
7. Non trading receipts such as dividend received
8. Sale of investments ( Long term )
9. Decrease in working capital as per schedule of changes in working capital
total -------------------------------------------------------------> ? XXXXX ?
Applications or uses of funds

1. Funds lost in operations ( Balance negative in second step )
2. Redemption of preference share capital
3. Redemption of debentures
4. Repayment of long term loans
5. Purchase of long term loans
6. Purchase of long term investments
7. Non trading payments
8. Payment of tax
9. Payment of dividends
10. Increase in working capital ( As per positive balance of ist step )
total --------------------------------------------------------> ? XXXXX ?