Accounting Notes

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ACCOUNTING.
DEFINITION:
It is the art of recording classifying, and summarizing the business
transactions in the books of accounts, as per prescribed rules, which have financial
impact and finally, final accounts, are prepared to calculate profit/loss and to show
the financial position of the business at the end of year and results of the business
are interpreted to the management for decision making.
Explanation of definition:
RECORDING.
This is the basic function of accounting. Recording means to put the

transactions in writing in the books of accounts which have financial impact.
Recording is done in the book. Journal, Journal is the first book of accounting
and this book is further sub-divided into various subsidiary books such as cash
journal, purchases journal, sales journal etc. transactions will be recorded in detail
in the journal, i.e, date, amount, DR and CR etc.
CLASSIFYING:
Classification is the process of grouping of transaction or entries of one
nature at one place. The work of classification is the done in the book termed as
Ledger. Account wise record is maintained in ledger. Ledger is prepared from
journal. OR it can be prepared directly from available data/information. It is also
called T Accounts
SUMMARIZING:
Summarizing involves the preparation of TRIAL BALANCE and TRIAL
BALANCE is prepared from ledger by taking out debit and credit balance of
different accounts appearing in the Ledger.
FINAL ACCOUNTS.
It includes TRADING & PROFIT AND LOSS ACCOUNT and
BALANCE SHEET. Final accounts are prepared from Trial balance. Trading &
profit & loss A/C shows profit or loss of the business at the end of year and
BALANCE SHEET shows financial position of the business at the end of year.
Financial impact:
Accounting records only those transactions and events which have financial
impact. Transactions which are not of financial character are not recorded in the
books of accounts.
Interpretation:
This is final function of accounting. Accounting not only creates data
through recording, classifying and summarizing of events but also the recorded
financial data is interpreted to the management for decision making.
Prescribed rules:
Rules and regulation or by laws of accounting or procedures of accounting
normally called SSAPs (STATEMENTS OF STANDARD ACCOUNTING
PRACTICES.) May be called as ACCOUNTING STANDARDS.
Terminology.
Business.
Any activity carried out for earning of profits is called business but it
must be law full.

Business Transaction. Dealing of the business with other parties for sale or
purchase or goods, payment of wages, rent and rendering of services etc.
Purchases. Buying of goods & services for the business. It has two types.
I.
Cash purchase
Goods sold & cash is paid on the spot/occasion
II.
Credit purchase
Goods sold but cash will be received after few
days etc. (Debtors)

Return inwards / Sales return. If goods bought are returned back due to any
reason, it is called return outwards or purchase return.
Sales. Selling of goods & services by the business. It has also two types.
I.
Cash sale.
Goods sold & cash received on the spot.
II.
Credit sale. Goods purchased but payment will be made after few
days/month. (Creditors)
Return inwards /Sales return.
If goods sold are returned back to us due to any
reasons, it is called return inwards or sale return.

Asset. Resources of the business with the help of which business in carried out.
Examples
are
cash,
machinery,
furniture,
office
equipment,
vehicle,
lands/building, debtors, stock etc.

Assets has two types:
Fixed assets: Those assets which have a long life and are purchased for
I.
the purpose to use them in business. Examples are machinery, furniture,

office equipment, vehicle, lands/ building etc.
II.
Those assets which are purchased for the purpose of sale to earn profit.
OR those assets in which frequent changes occurred due to business
transaction. Examples are cash, debtors, stock etc.
Liability.
Obligations of the business.
Examples
are
creditors,
bankovedraft, loan, accrued salary etc liability has two types:

I.
Current liability:
those liabilities which are payable within a year.
Examples are creditors, bankoverdraft, accrued salary etc.

II.
Long term liability: those liabilities which are payable after a year.
Examples are loan, debentures etc.

Capital.
Investments by the owner in the business. Examples are cash
furniture, computer, machinery etc.

Income.
Earning of the business.
Examples are sale income, commission
received, discount received.

Expense.
Spending of the business. Examples are salary, wages, rent, utility
bills, office expenses. Advertisement, fuel, repair etc.

Drawings.
If the owner of the business draws something from the business for
his personal use it is called drawing. Examples are:

Cash withdrawn
Goods withdrawn
Personal bills paid out of the business cash.

Discount. Reduction in list price of the goods. It has two types.
1. Cash Discount:
Allowed by shopkeepers to customers. It may be
Discount allowed (expense) and discount received (income).

2. Trade discount:
Allowed by one trader to another trader on bulk buying.
It is not recorded in the books of accounts. It is only shown in invoices.

TYPES OF ACCOUNTS.
There are five types of accounts.
1. Asset
Cash, furniture, land, vehicles, machinery, debtors, stock.
2. Liability
Creditor, bank overdraft, loan, accured salary, rent payable.
3. Capital
Investment
4. Income
Sale, commission received, discount received.
5. Expense
Salary, rent, utility bills, insurance, advertising.
Rules of debit (Dr) & Credit (Cr)

Assets/Expenses
Capital/Liability/ Income
Increase
Dr
Decrease
Cr
Increase
Cr
Decrease
Dr
OR
Assets / Expenses
INCREASE
DECREASE
Capital / Liability/ Income

DECREASE
INCREASE
Note: Normally expenses are Debited and incomes are credited.

How to apply the rules of Dr & Cr.
Look at the transaction and trace two or more A/C in that transaction.
What is type of these accounts?

Apply the rules of Dr & Cr and entry should be completed.
Double entry system of accounting.
DEBIT MUST HAVE CREDIT FOR
THE EQUAL AMOUNT.

Journal.
Journal is the first book of accounting n which business transaction are
recorded chronologically (day by day or date-wise) in detail as per prescribed
procedure/format.
Source documents to record transactions in journal are the invoice / bills
etc.
Format of the journal
Date
Detail
1995
Purchases
Jan. 1
Cash
L.F Debit
Credit
XXX
Goods purchased for cash

XXX
Ledger.
It is second book of accounting.
It is prepared from journal or it can also be prepared directly from

transactions or data given. It is also called T- Form of Accounts
In ledger, record relating to a particular account is maintained in a classified

form OR Account wise record is kept.
Format of ---T. A/C.

Dr Side
Cash A/C
Cr. Side
19x5
19x5
Trial Balance.
It is a statement which is prepared form Ledger by taking out Debit and
credit balance different accounts appearing in the ledger.
If the Dr & Cr sides are equal in trial balance it means that accounting
records prepared/maintained so for is arithmetically accurate.
From trial balance we prepare final accounts at the end of year i.e. Trading
& profit and loss a/c and Balance sheet.
Format of the trial balance.

Serial
Name of Account
Debit
Credit
No.
Final accounts .
Finals accounts include the following.
Trading & profit and loss account.
Balance sheet.
Trading and profit & loss A/C
It shows gross profit or gross loss and net profit or net loss of the business
at the end of year respectively.
In T & P & L a/c income and expenses are shown.
Balance sheet.
It shows financial position of the business on a particular date.
Assets liabilities & capital are shown in balance sheet.
TRADING AND PROFT AND LOSS A/C FOR THE YEAR ENDED DED. 31, 19X5
Sale
xxx
Less: Return inwards/sale returns
xxx
Net sales
xxx
Less: cost of goods sold.

Opening stock
xxx
Add: Purchases
xxx
Less: Return outwards/purchase return
xxx
Add: Carriage inwards
xxx
xx
Less: Closing stock
xxx
xxx
xxx
Gross profit
xxx
Add: Discount received / rent received
xxx
Net profit
xxx
Less: Expenses
xxx
Rent
xxx
Salaries
xxx
Wages
xxx
Insurance
xxx
Advertising
xxx
Repair and maintenance
xxx
Bad debts
xxx
Depreciation on machinery
xxx
Van running cost
xxx
Fuel expenses
xxx
xxx
Net profit / net loss
xxx
Balance sheet as at December 31, 19X5
Fixed Assets.
Cost
Dep.
N.B.V
Plant and machinery
xxx
xxx
xxx
Building
xxx
xxx
xxx
Motor van
xxx
xxx
xxx
Furniture and fitting
xxx
xxx
xxx
xxx
Current assets.
Closing stock
xxx
Debtors
xxx
Cash in hand
xxx
Cash at bank / bank
xxx
Less: Current liabilities.

Creditors
xxx
Bank overdraft
xxx
xxx
Working capital
xxx
Capital employed
xxx
Financed by.
Capital
xxx
Add: Net profit
xxx
Less: Drawings
xxx
xxx
BOOKS OF ORIGINAL OR PRIME ENTRIES OR DAY BOOKS OR SUB

DIVISION OF JOURNAL.
1.
Cash journal / cash book. Only cash and bank transactions are recorded
2.
Sale journal.Only credit sale of goods are recorded.
3.
Purchase journal. Only credit purchases of goods are recorded.
4.
Return inward / sale return journal.
Only return inward or sale return
is recorded.
5.
Return outward / purchase return journal.
Only return outwards /
purchase return are recorded.

6.
General journal / The journal. All other transactions which cannot be

recorded in above journals should be recorded in the journal. i.e
Purchase and sale of fixed asset on credit.
Correction entries.
Entries of writing off bad debts.
Closing entries.
Types of ledger.
1.
There are three types of ledgers.
Sale ledger. Personal accounts of debtors are recorded in the sale ledger.
Debtors arises from the credit sale.
2.
Purchase ledger.
Personal accounts of creditors are recorded in the
purchase ledger. Creditors arises from credit purchase.

3.
General ledger.
All other accounts i.e Assets a/c, liabilities a/c,
incomes a/c, expenses a/c, capital a/c, sale a/c, purchase a/c, return inward
a/c, return outward a/c, etc. are recorded in the General ledger.
10
Cash book OR cash journal OR cash day book.
Only cash and bank transactions are recorded in the cash book.
Cash transactions have two types.

1.
Cash and cheque received will be recorded on the Debit side.
2.
Cash and cheque paid will be recorded on the credit side.
Types of cash book.

1.
There are two types of the cash book.
Two column cash book.
In two column cash book, cash and bank
columns are created on the debit as well as on the credit side of the cash
book.
2.
Three column cash book. In three column cash book, cash, bank and
discount columns (discount allowed on the debit side and discount received
on the credit side) are created on the debit as well as on the credit side of
the cash book.
Contra entries.
Contra entries are recorded on DR as well as on CR sides of
cash book. There are two contra entries in the cash book.
When cash is deposited in to the bank.

Bamk
Cash
When cash is withdrawn from the bank for business use.

Cash
Bank
Format of the Three column cash book.
Date
Details
LF
Dist.
Cash
Bank
Date
Allowed
19x
5
Details L Dist.
F
19x5
Cash
Bank
Received
11
Sale journal & sale ledger.

Sales journal OR Sales day book.
Only credit sales are recorded in the sale journal.
Source document/original document is sale invoice.

Entry
Debtor (x,y,z)
Sale.
Sale invoice. It shows details of quantity sold, unit price, total price, discount and
detail about seller and purchaser. It has a consecutive serial number.
Format of sales journal.
Date
Details
Invoice
LF Amount
No.
19x5
Jan 1
D Poole
051
500
Jan 12
T Cock
052
425
Jan 25
M Nelson
053
750
Jan 29
D Poole
054
945
2620
Total transferred to SALE a/c in the

GENERAL LEDGER.
Sales ledger. Personal accounts of debtors are prepared in the sales ledger.
D Poole
19x5
19x5
Jan 31
Jan 1
Sale
500
Jan 29
Sale
945
1445
Feb 1
Balance b/d
1445
D Cock
Balance c/d
1445
1445
12
19x5
Jan 12
Sale
19x5
425
Jan 31
Balance c/d
425
425
425
Feb 1
Balance b/d
General ledger.
425
Sales a/c
19x5
Jan 31
Balance c/d
19x5
xxx
Jan 31
Total for month
xxx
xxx
xxx
Feb 1
Balance b/d
xxx
Purchases journal and purchases ledger.

Purchases journal OR purchases day book.
Only credit purchases of goods are recorded.
Original document /Source document is purchase invoice.
Entry
Purchase
Creditors (A, G, Z)
Purchases invoice. It shows details of quantity purchased, unit price, total price,
discount and details about the seller and purchase
Format of purchase journal.
Dated
Details
Invoice No.
L Amount
F
19x5
Jan 1
B small
014
435
Jna 10
D cross
015
220
Jan 27
M mark
019
425
Jan 29
B small
023
900
13
Total transferred to purchase a/c in

the General ledger.
1980
Purchase ledger. Purchase accounts of creditors are maintained in the purchase
ledger.
B small
19x5
Jan 31 Balance c/d
19x5
1335
Jan 1
Purchases
435
1335
Jan 10
Purchase
900
1335
Feb. 1
D Cross
19x5
Jan 31
Balance c/d
19x5
220
Jan 10
Balance
1335
Purchase
220
220
220
Feb 1
Balance b/d
220
General ledger.
Purchases a/c
19x5
Jan 31 Total for month
19x5
1980
Jan 31
Balance c/d
1980
1980
1980
Feb 1 Balance b/d

1980
Returns inwards journal / Sales retruns journal OR day book.
Only Return inwards or sale returns are recorded in this journal.
Source document/ original document is Credit Note.
Entry
Return inwards
Debtors (A,G,Z)
Credit note: A credit note is sent to customers (Debtors) as an acknowledge of

returns inwards/ any others allowances/deductions agreed with customers.
14
Format of the returns inwards journal.

Date
Details
Credit note
LF Amount
No.
19x5
Jan 5
D poole
71
50
Jan 18 T cock
72
45
Jan 28 M Nelson
73
25
Total transferred to return inwards A/C in
120
the GENERAL LEDGER.

Sales ledger.
D Poole
19x5
19x5
Jan 1
Sale
500
Jan 5
Return Inwards
Jan 29
Sale
945
Jan 31
Balance c/d
1445
Feb 1
Balance b/d
50
1395
1445
1445
T Cock
19x5
Jan 12
Feb 1
Sale
Balance b/d
19x5
425
Jan 18
425
Jan 31
Return Inwards
Balance c/d
425
45
380
425
General ledger.
Return inwards a/c
19x5
Jan 31
Total for the month 120
19x5
Jan 31
Balance c/d
120
15
120
120
Feb 1
Balance b/d
120
Returns outwards journal /purchase returns journal OR day book.
Only return outwards / purchase return are recorded in this journal.
Source document / origina document is debit note.
Entry
Creditor (A, G, Z)
Return outwards
Debit note:
A debit note is received from suppliers (creditors) as an
acknowledge for the goods returns to him or for any others allowances /
deductions obtained from suppliers.
Format or Returns outwards journal
Date
Details
Credit note
LF Amount
No.
19x5
Jan 7
B Small
214
35
Jan 15 D Cross
245
25
Total transferred to return outwards A/C in
60
the GENERAL LEDGER.
Purchases ledger.
B Small
19x5
Jan 7
Return outwards
Jan 31
Balance c/d
19x5
35
Jan 1
Purchases
435
Jan 29
Purchases
900
1300
16
1335
1335
Feb 1
D Cross
19x5
Jan 15
Return outwards
Jan 31
Balance c/d
19x5
25
Jan 10
Balance
1300
Purchases
220
195
220
220
Feb 1
Balance b/d
195
General ledger.
Return outwards a/c
19x5
Jan 31
Balance c/d
19x5
60
Jan 31
Total for the month
60
60
60
Feb 1
Balance b/d
60
General journal / The journal. All other transaction which cannot be recorded
in any other journals should be recorded in the journal. i.e
Purchase and sale of fixed asset on credit.
Correction entries.
Closing entries
Bad debts entries.
Format of the journal.

Date
Details
LF
1995
Jan 1
Machinery
Beta Ltd.
Purchased Machinery on credit.
Debit
Credit
xxx
xxx
17
CAPITAL AND REVENUE EXPENDITURE

Expenditure means spending of money for the business. It has two types.
CAPITAL EXPENDITURE.
That expenditure which is beneficial to the
business for a long period of time or for more than one accounting period is called
capital expenditure.
OR
Capital expenditure is made when a business spends money for
a.
Purchase of fixed assets
b.
Addition to the value of existing fixed assets.

Included in such amounts should be those spent on:
Bringing them into the business.
Legal costs of buying buildings.
Carriage inwards on machinery bought.
Any other cost needed to get the fixed assets ready for use or cost
incurred on the business for increasing its earning capacity.
REVENUE EXPENDITURE.
That expenditure
which is beneficial to the
business for one accounting period or less than this is called revenue expenditure.
OR any expenditure made for running of day to day business is called revenue
expenditure.
Examples are payment of the rent, wages, salaries, advertising, insurance, utility
bills of the business etc.
NOTE:
All capital expenditures are placed in the balance sheet and all
revenue expenditures are placed in the trading & profit & loss A/C.
Depreciation
18
It is the gradual decrease in the value of fixed assets except land due to their
usage in the business with the passage of time.
It is allocation of cost of assets in to an expense over useful life of the

assets.
Factors of depreciation.
Cost of an asset
Useful life of the assets
Scrape value of the assets (Estimated value of asset which can be realized
by sale of asset at end of its useful life.
Depreciation is not charged on
scrape value of
asset.
Methods of depreciation
1. Straight line method / original cost method / fixed installment method.
Formula=
cost of asset----scrape value
Or % on the cost of asset.
Life of asset
Depreciation expense will be the same or equal for each year in this
method.
2. Reducing balance method/Diminishing balance method/written down value

method.
Normally a % is given in the questions.
Depreciation expense will be the decreased with the passage of time

because depreciation will be calculated on the reduced balance of the asset
in this method.
3. Machine hour method. For machinery, aircraft, ships etc. Depreciation is

calculated on the basis of machine hour worked. Formula for calculation of
depreciation is as under.
Depreciation=
Cost of asset
* number of hours used in current year
Estimated total hours of

Work during useful life
19
4. Sum of year digits method.
For various assets, depreciation is calculated
with this method. For example: cost of asset is 30,000. and estimated life is 5
years.
First of all sum (total) of years is made as: 1+2+3+4+5=15 and last fraction will be
used to calculated depreciation for first year and son on in the following way.
Year 1
5/15*30,000=10,000
4/15*30,000= 8,000
3/15*30,000= 6,000
2/15*30,000= 4,000
1/15*30,000= 2,000
PARTS EXCHANGE
This is when the business gives out an old fixed asset and in return gets a
new fixed asset. For example an old car is given in exchange of a new car.
The value of the asset being given out is decided by a mutual agreement.
This value is called as parts exchange value or trade-in-allowance.
Accounting treatment is just like treatment of disposal of assets.
DOUBLE ENTRY RECORD FOR DEPRECIATION.

Entry for depreciation.
P&L A/C
Provision for depreciation A/C
Current year depreciation is shown in P&L A/C & Accumulated

depreciation (Total Depreciation) in Balance Sheet.
Account to be Prepared.
1.
Asset account
(Plant, furniture, motor van)
2.
3.
Asset disposal A/C
4.
P&L A/C ---- Extracts
5.
Balance sheet----extracts.
20
Assets (Plant)
1995
Jan 1
Cash / Bank
xxx
Jul 1
Cash / Creditor
xxx
1995
Dec 31
Balance C/D
xxx
xxx
xxx
1996
Jan 1
1996
Balance B/D
July 1 Cash
xxx
Sep 1
Disposal a/c at (cost) xxx
xxx
Dec 31
Balance C/D
xxx
1995
Dec 31 Balance C/D
xxx
xxx
xxx
1995
Dec 31
P&L a/c (w-1)
xxx
xxx
xxx
1996
Sep 30 Disposal a/c
xxx
1996
Dec 31 Balanc C/D
xxx
Jan 1
xxx
Dec 31 P&L a/c (W-2)
Balance B/D
xxx
xxx
xxx
Asset Disposal A/C

1996
1996
Sep 1
Asset
xxx
Sep 1
Provision for Dep
xxx
Sep 1
P&L a/c (Profit)
xxx
Sep 1
Cash/parts exchange value xxx
xxx
Sep 1
P&L a/c (Loss)
xxx
xxx
P&L A/C ---- Extracts.

1995
Gross profit
NIL
21
Add: profit on disposal (if any)
xxx
xxx
Less expense
Provision for depreciation
xxx
Loss on disposal of asset (if any)
xxx
Balance sheet-----Extracts.
Cost
Depreciation
N.B.V. (Net Book Value)
1995
plant
xxx
xxx
xxx
xxx
(xxx)
xxx
1996
plant
Note: In balance sheet only balance C/D will be taken from asset a/c and
provision for depreciation a/c for each year.
Annual depreciation:
Cost of asset *Rate of depreciation
Rate of depreciation:
Annual depreciation *100

Cost of assets
Scrap value: Cost---Accumulated depreciation (Annual depreciation * useful life

Useful life:
CostScrape value
Annual Depreciation
Bad debts, bad debts recovered, provision for doubtful debts and
provision for discount on debtors.
Debtors.
It is current asset of the business. It arises from credit sales.
Entry
Debtor (x)
Sale
Bad debts.
That amount of debtors which are not received to the business
due to any reason. It is an expense (loss) of the business.

Entry.
Bad debts
Debtor (x)
22
At the end of year bad debt will be closed to P&L A/C

P&L A/C
Bad debts
Bad debts recovered (income). If amount of bad debts written off

previously is received to the business it is called bad debts recovered.
Accounting treatment of bad debts recovered.
Entry for reinstatement of debtor a/c

Debtor
Bad debts recovered.
Entry for cash received.
Cash
Debtor
At the end of year bad debt recovered will be closed to P&L a/c
Bad debts recovered
P&L a/c
Provision for doubtful debts.
For first time creation of provision OR for increase in provision.

Entry
P&L a/c
Provision for doubtful debts
NOTE:
First time creation of provision for doubtful debts OR for increase in
provision for doubtful devbts is an expense and should be charged to the P&L a/c
under the heading of expenses.
For decrease in provision
P&L a/c
NOTE:
Decrease in provision for doubtful debts may be considered as
income (saving ) and should be added to the gross profit.
23
Provision for discount on debtor.

Debtors
10,000
Less 5% provision for doubtful debts
500
9,500
Less 10% provision for discount
950
8550
Accounts to be prepared.
Bad debts a/c
Bad debts recovered a/c
Provision for bad debts a/c
Provision for discount on debtors a/c
P&L --- Extracts
Balance sheet----Extracts.
Bad debts a/c
______________________________________________________________
1995
1995
Dec 31 Various debtors
xxx
Dec 31
P&L a/c
xxx
1996
Dec 31 various debtor/x
xxx
xxx
1996
xxx
Dec 31
P&L a/c
xxx
xxx
xxx
Bad debts recovered a/c

1995
1995
Dec 31 Balance C/D
xxx
Dec 31 P&L a/c (w-1)
xxx
xxx
1996
xxx
1996
Dec 31 P&L a/c (decrease)
xxx
Jan 1 Balance B/D
xxx
Dec 31 Balance C/D
xxx
Dec 31 P&L a/c (Increase) xxx
24
xxx
xxx
Provision for discount on debtors a/c

1995
1995
Dec 31 Balance C/D
xxx
Dec 31
P&L a/c
xxx
xxx
xxx
1996
1996
Dec 1 P&L a/c (decrease)
xxx
Jan 1 Balance B/D
xxx
Dec 31 Balance C/D
xxx
Dec 31 P&L a/c (Increase) xxx
xxx
xxx
P&L A/C --- Extracts

1995
Gross profit
NIL
Add: Bad debts recovered
xxx
Add: Decrease in provision for doubtful debts
xxx
Less Expense
Bad debts
xxx
xxx
Balance sheet---Extracts
1995
Current Assets
Debtors
xxx
Less: provision for doubtful debts
xxx
xxx
Other adjustments for final accounts

Adjustments. If business transaction falls within two accounting periods that
transaction needs to be adjusted at the end of current year.
Accounting period means a period of twelve months.
Assume accounting period ends on Dec. 31, 1995 and on Sep 1. Paid rent
for a year 500 PM, this transaction has two parts on Dec 31, 1995
25
1995 Sep
to
Dec (expired)
1996 Jan
August (prepaid or unexpired)
NOTE: Every adjustments has double effect on the final accounts.

1. First on T&P&L a/c
2. Second on Balance sheet.
Types of adjustments.
1. Prepaid expenses
(asset)
That expense which has been incurred but paid in advance.

Effect:1. Deducted from concerned a/c in T&P&L a/c. (5000-500)
2. Shown as current asset in balance sheet.
2. Accured expenses/Owing/Outstanding.
That expense which has been incurred but still not paid.
Effect:1. Added to concerned a/c in T&P&L a/c (8000+2000)
2. Shown as current liability in balance sheet.
3. Depreciation.
Effect: 1. Shown as an expense in T&P&L a/c under the heading of expenses
(Only current year dep. Given in adjustments)
2. Deducted from concerned fixed asset in balance sheet. (Dep. Given I trial
balance + current year dep.)
4. Provision for doubtful debts.
Effect. 1. If increase shown as an expense in T&P&L a/c under the heading of
expenses. If decrease: Added to gross profit.
2. Deducted from debtor in balance sheet.
5. Closing stock.
Effect. 1. Shown in COGS in Trading a/c.
2. Show as current asset in the balance sheet.
6. Goods for own use. It means that if owner of the business takes goods for his
personal use. (drawing)
Effect.1. Deducted from purchases in trading a/c. (150,000-10,000)
26
2. Added to drawing in the balance sheet.

7. Treatment of insurance claim.
Insurance claim on account of loss due to
theft or fire to stock is an adjustment and will be treated in final accounts as

follows.
1.
Added to gross profit.
2.
Shown in current assets in balance sheet as Insurance claim for damaged

stock
TRADING AND PROFIT AND LOSS ACCOUNT INCLUDING ADJUSTMENT
Sale
xxx
Less: Return inwards/sale returns
xxx
Net Sales
xxx

Opening stock
xxx
Add: purchases
xxx
Less: Return outwards/purchase return
xxx
Add: Carriage inwards (See Note-1)
xxx
xxx
Less: closing stock
xxx
xxx
xxx
Gross profit
xxx
Add: Discount received/rent received
xxx
Add: Decrease provision for doubtful debts
xxx
Add: profit on disposal of asset or any other income
xxx
xxx
Less: expenses
Rent (10,000-2,000)
xxx
Salaries / wages (15,000+5,000)
xxx
Insurance
xxx
27
Advertising
xxx
Carriage outwards
xxx
xxx
Bad debts
xxx
Increase in provision for doubtful debts
xxx
Provision for depreciation on machinery
xxx
Van running cost
xxx
Fuel expenses
xxx
Loss on sale of assets
xxx
xxx
Net profit/Net loss

Note-1
xxx
Freight charges / insurance on imported goods

Wages and testing expenses
Wages for preparing goods for sale
BALANCE SHEET AS AT DECEMBER 31, 19X5
Fixed assets.
Cost
Dep.
B.B.V
Plant and machinery
xxx
xxx
xxx
Building
xxx
xxx
xxx
Motor van
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Current assets.
Closing stock
xxx
Debtors
xxx
Less: provision for doubtful debts
(xxx)
xxx
Cash in hand
xxx
Cash at bank
xxx
Prepayment
xxx
28
xxx
Less current liabilities.
xxx
Creditors
xxx
Accrued expenses
xxx
xxx
Working capital
xxx
Capital employed
xxx
Financed by
Capital
xxx
Add net profit
xxx
Less drawings
xxx
xxx
Add long term liabilities
xxx
Loans
xxx
Debentures
xxx
xxx
BANK RECONCILIATION STATEMENT

BANK STATEMENT. A statement issued by the bank which shows the details of
deposits, withdrawals and balance of the particular bank account at the end of month/ year.
ACCOUNT HOLDER RECORD. That record which is maintained by the customer
(Account Holder) and this record is normally maintained in a portion of Checque book.
NOTE. The record maintained by the customer (Account Holder) and by the bank
should be equal, if there is any difference , the following can be reasons:.
Reasons of difference between customer record and bank record.
1. Unpresented cheque.
for the payment.
Cheques issued for payment but not presented to bank
29
2. Bank lodgments. Cheques deposited for collection but not collected by the bank
so far. (uncredited cheques)
3. Standing order If on instructions of the customer, bank makes regular payments
for the school fee, bills, Subscription etc. and charged (Debit) to the Account of the
customer, it is called Standing order. It is expense/payment of the customer
4. Direct Debits. If bank Debit the the account of the customer for the bank charges,
commision charges etc. it is called direct Debit. It is expense/payment of the customer.
5. Direct credit / Credit transfer. If bank Credit the the account of the customer for the
Interest
received, Dividend received or for any other Transfer into customer Account, it is
called direct credit. It is income / receipt of the customer.
.
6. Errors. Will be treated as per situation of errors.
What to do.
1. Cash book up date.
2. Bank reconciliation statement.
Rules for preparation of cahs book up date and bank reconciliation statement
I. If Cash book balance has a Dr balance, than balance of bank statement balance
will be CR. And If Cash book has a Cr balance(O/D), than balance of bank
statement balance will be DR.
II. Except the following two transactions all other transactions will be recorded
in the Cash book up date, and these two transactions will be recorded in
the Bank Reconciliation Statement.
1. Unpresented cheque
2. Bank lodgements / uncredited cheque
III.
Cash book Dr. balance
Unpresented cheques +
Cash book Cr. Balance (O/D)

---
30
Bank lodgments
---
Format of cash book up-date (DR. Balance)

1995
1995
Jan 1
Balance b/d
xxx
Jan 8
Bank charges
xxx
Jan 5
Credit transfer
xxx
Jan 15
Bank commission
xxx
Jan 12 Dividend received
xxx
Jan 25
Standing orders
xxx
Jan 17 Direct credit
xxx
Jan 28
Direct debit
xxx
xxx
Jan 31
Balance c/d
xxx
xxx
BANK RECONCILIATION STATEMENT
Balance as per cash book (Dr)
xxx
Add: Unpresented cheques
xxx
Xxx
Less bank lodgements / uncredited cheques

Balance as per bank statement (Cr)
xxx
xxx
Format of the cash book up date (overdraft) (Cr. Balance)

1995
1995
xxx
Jan 1
Bank b/d (O/D)
xxx
Jan 12 Direct credit
xxx
Jan 8
Bank charges
xxx
Jan 23 Dividend received
xxx
Jan 15
Bank commission
xxx
Jan 25 Balance c/d
xxx
Jan 18
Standing orders
xxx
xxx
Jan 29 Direct debit
Jan 7
Credit transfer
xxx
xxx
Format of bank reconciliation statement
31
Balance as per cash book, O/D (Cr)
xxx
Less: unpresented cheques
xxx
Xxx
Add bank lodgements/uncredited cheques
xxx
Balance as per bank statement (Dr)
xxx
Control accounts.
Sale ledger control a/c total debtors a/c
1995
Jan 1
Balance b/d
1995
xxx Jan 1
Bank b/d (if any)
xxx
Jan 5 Credit sales /sale journal
xxx
Jan 4
Cash /Bank
xxx
Jan 8 Dishonoured cheques
xxx
Jan 8
Return inwards
xxx
Jan 13 Refund to customers
xxx
Jan 14
Discontent allowed
xxx
Jan 17 Interest on overdue debtors xxx
Jan 22
Bad debit w/off
xxx
Jan 25 Bad debts recovered
xxx
Jan 25
Set off (Purchase ledger)xxx
Jan 31 Balance c/d (if any)
xxx
Jan 28
Cash (from bad debts)

Recovered)
xxx
Jan 31
xxx
Balance c/d
xxx
xxx
Purchase ledgers controls account/Total creditors a/c.

1995
1995
Jan 1
Balance b/d (if any)
xxx
Jan 1
Bank b/d
Jan 4
Cash / Bank
xxx
Jan 5
Credit purchases/purchase journal xxx
Jan 10 Return outwards
xxx
Jan 11
Refund to suppliers
xxx
Jan 16 Discount received
xxx
Jan 17
Interest on overdue accounts
xxx
Jan 20 Set off (slaes ledger)
xxx
Jan 31
Balance c/d (if any)
xxx
Jan 31 Balance c/d
xxx
xxx
xxx
xxx
32
NOTE: Cash sales, cash purchases, provision for doubtful debts and trade
discount are not recorded in the control accounts.
ERRORS AND SUSPENSE ACCOUNT
Errors has following two types.
Errors not affecting trial balance agreement
Errors affecting trial balance agreement
Types of errors not affecting trial balance agreement.

1. Errors omission. If any transaction has taken place but that is not recorded in
the books of accounts.
2. Errors of commission.
Amount is correct
Account is wrong
3. Errors of principle.
If capital expenditures are treated as Revenue
expenditures and vice versa. It is called errors of principle.

4. Errors of original entry. Original amount is incorrect
Account is correct
5. Complete reversal of entries.
Where correct accounts are used but each item
is shown on the wrong side of the account. Fro example, cash received from D
recorded as cash paid to D
6. Compensating errors.
Where two errors of equal amounts, but on the
opposite sides of the accoints, cancel out each other, as illustrated below.
Sale
50 (Dr)
50(Cr)
Errors and suspense A/C

Errors which affects the agreement of trial balance are the following.
Incorrect addition in any a/c
Entry on only one side of a/c i.e Dr. side or Cr side.
Entering different amount on Dr and Cr sides of an account

Trial Balance
Dr
Cr
33
Total so for
50000
Suspense a/c
48000
2000
50000
50000
Suspense a/c
It is an account opened at the time of need for the time being and deleted
from books of accounts when errors have been located and corrected in the record.
What to do.
Journal entries including suspense entries.
Suspense a/c
Revised profit statement.
Revised profit statement.
Net profit before correction of errors
xxx
Add: increase in sale / discount received and other income
xxx
Decrease in purchases/expenses
Less: Decrease in sale / discount received any other income
Decrease in purchases /expenses
Corrected net profit
xxx
(xxx)
(xxx)
xxx
NOTE:
1.
Sale, discount received or any other income, purchases, expenses if credited

added to profit.
2.
Sale, discount received or any other income, purchases, expenses---if

debited--- deducted from profit.
3.
Personal accounts (debtors & creditors) assets, liabilities and capital ---- no
effect on profit.
Accounts from incomplete records / single entry system

Definition:
It is difficult to define single entry system, however, broadly
speaking, it is a defective double entry system. Under this method, sometimes both
34
the aspects of transactions are recorded, sometimes only one aspect is recorded or
sometimes no aspect of transaction is recorded in the books.
In short, single entry system may be defined as a system which does not
strictly conform to the double entry system of book keeping. Under this system
what is found in practice is an intermixture of single entry, double entry and no
entry.
Defects/disadvantages of single entry system.
The defects of this system are as
follows.
1.
Under this system only partial and incomplete record is kept because
two fold aspects of transactions are generally ignored.
2.
As the two fold aspects of every transition are not recorded, a trial
balance cannot be drawn up to test the arithmetical accuracy of the
record.
3.
As nominal accounts (income and expenses) are not maintained, a profit

and loss account cannot be prepared.
4.
As no real accounts are maintained the preparation of a balance sheet is

not possible.
Mark-up and margin concept.

Mark-up is gross profit expressed as a percentage or fraction of cost of sales.
cost price of goods
100
selling price
125
gross profit
25
Gross profit
Cost price
25
100=
100
100= 25% OR
Margin is gross profit expressed as a percentage or fraction of selling price.

Gross profit
25
selling price 100=
125
100= 20% OR
1/5
35
Conversion of mark up into margin

If mark up =1/3, margin will be
OR
2/7
OR
1/5
OR
2/3
3+1
Conversion of mark up into margin
If margin = 1/6, mark up will be
1
6-1
If margin = 2/5, mark up will be
2
5-2
Ascertainment of profit and loss:The following two methods are available to calculate profits when the
accounting records of a trader are not maintained properly.
First Method-
Comparison of opening and closing capitals (Statement of
affairs)
In this method the STATEMENT OF PROFIT / LOSS is prepared in the
following format.
STATEMENT OF PROFIT / LOSS
Closing capital
xxx
Less: opening capital
xxx
Less: additional capital
xxx
Add: drawings
xxx
xxx
NOTE:
If capital is not given, it can be calculated as follows.
Opening capital=
Opening assets---opening liabilities
Closing capital=
closing assets--- closing liabilities
STATEMENT OF PROFIT /LOSS FOR THE YEAR ENDED ON DECEMBER

31. 19X5 CAPITAL AS AT DECEMBER 31, 19X5
Assets.
(closing)
Plant and machinery
xxx
36
Building
xxx
Motor van
xxx
Furniture
xxx
Closing stock
xxx
Debtors
xxx
Cash in hand
xxx
Cash at bank
xxx
Prepayments
xxx
Less liabilities.
xxx
(Closing)
Creditors
xxx
Bank overdraft
xxx
Accrued expenses
xxx
xxx
Less capital as at January 1, 19x5

Assets (Opening)
Plant and machinery
xxx
Building
xxx
Motor van
xxx
Furniture
xxx
Closing stock
xxx
Debtors
xxx
Cash in hand
xxx
Cash at bank
xxx
Prepayments
xxx
Less liabilities (Opening)
Creditors
xxx
xxx
xxx
37
Bank overdraft
xxx
Accrued expenses
xxx
xxx
xxx
Less additional capital
xxx
Add drawing
xxx
Profit (Loss)
xxx
PROFIT CAN BE CALCULATED BY PREPARATION OF STATEMENT OF

AFFAIRS AS ILLUSTRATED BELOW:
Format of statement of affairs.
Fixed assets.
Cost
Dep.
N.B.V
Plant and machinery
xxx
xxx
xxx
Building
xxx
xxx
xxx
Motor van
xxx
xxx
xxx
xxx
xxx
xxx
CURRENT ASSETS.
Closing stock
xxx
Debtors
xxx
Cash in hand
xxx
Cash at bank
xxx
Prepayment
xxx
xxx
CURRENT LIABILITIES
Creditors
xxx
Bank overdraft
xxx
Accrued expenses
xxx
xxx
Working capital
xxx
Capital employed
xxx
38
FINANCED BY.
Capital
xxx
Add: profit (Loss)
?
?
Less drawing
xxx
SECOND METHOD-CONVERSION INTO DOUBLE ENTRY:Conversion of books from single entry to double entry is possible, when
missing figures are calculated from the available records and FINAL ACCOUNTS
are prepared to calculate profit/loss.
Missing figures can be calculated as follows.
Sales ledger controls a/c OR total debtors a/c
Opening debtors
Closing debtors
Credit sales
Cash /cheques received from debtors
Purchase ledger controls a/c. OR total creditors a/c

Opening creditors
Closing creditors
Credit purchases
Cash / cheques paid to creditors.
Cash / Bank a/c
Opening balance
Closing balance
Drawings
Receipts & Payment a/c and Income & Expenditure a/c,

Non Trading organization / business,
Objective of this organization is not to earn profit, but to serve the community in
different areas, Education in far away areas, Health facilities, Recreation facilities,
39
Sports facilities etc. These organizations arc called N.G.O. Examples are
Libraries, Sports club, Social club, Social societies etc.
Accounts maintained during the year:
1. Receipts & Payment a/c.
(Cash book)
It is just like cash book. Any cash/ cheque received is recorded on the debit side
and any cash /
cheque paid is recorded on the credit side.
Sources of Receipts/ Incomes.
Subscription income.
t Donations income.
Li fc membership fee.
Registration fee.
Sale of old newspapers/books.
Any other income.
Ancillary ActivitiesNon trading organizations often engage in activities which
are ancillary to their main object in order to increase their income; and these activities
includes sale of old newspapers, old equipments and publications and specially provide
Bar facilities, Provision of refreshment and rallies scheme. For this purpose a
separate Trading a/c should be prepared and profit or loss on this account will be
transferred to Income & Expenditure a/c.
Treatment of special items

Some times items like Donations, Life membership may be treated as per instruction
given in. the question. Normally they arc treated as income of the organization.
Accounts to be prepared at the end of year.
1. Bar .Trading a/c.
2. Income & expenditure a/c
3. Balance Sheet
FORMAT OF BAR TRADING ACCOUNT
40
Sale
Less cost of goods sold
xxx
Opening stock
xxx
Add purchases (see note)
xxx
Add carriage inwards
xxx
Less return outwards /purchase return
xxx
xxx
Less closing stock
xxx
xxx
Gross profit
xxx
Add any other income
xxx
xxx
Less expenses
xxx
Bar salaries
xxx
Bar wages
xxx
Net profit/Net loss
xxx
xxx
NOTE: For calculation of bar purchases, always creditors a/c may be prepared
19x5
19x5
Dec 31 cash / bank
xxx
Jan 1
Balance b/d
Dec 31 balance c/d
xxx
Dec 31 Purchases (Bal. Fifure) xxx
xxx
xxx
FORMAT OF INCOME & EXPENDITURES ACCOUNT.

INCOME.
Subscription income (W-1)
xxx
Donations income
xxx
Life membership fee.
xxx
Registration fee.
xxx
xxx
41
Sale of old newspapers/books.
xxx
Profit on bar trading a/c or any other income
xxx
xxx
LESS: EXPENDITURES.
Rent
xxx
Salaries / wages
xxx
Insurance
xxx
Advertising
xxx
xxx
Bad debts
xxx
xxx
Fuel expenses
xxx
Loss on bar trading a/c or any other loss xxx
xxx
Surplus/Deficiency
xxx
Surplus:
Excess of income over expenditures
Deficiency: Excess of expenditures over income

Subscription account
19x5
19x5
Jan 1 Balance b/d Opening (Arrears/Due) xxx
Jan 1 Balance b/d opening (in advance) xxx
Dec 31 Refund
xxx
Dec 31 Income & Expenditure a/c
xxx
Dec 31 Bank
xxx
Dec 31 Balance c/d closing (in advance) xxx
Dec 31 Balance c/d Closing (Arrears/Due)xxx
xxx
xxx
BALANCE SHEETEXTRACTS.
FINANCED BY.
Capital fund/ accumulated fund
xxx
Add surplus / deficiency
xxx
xxx
If capital fund / accumulated fund is not given, it can be calculated as:
42
Opening assets-opening liabilities in the following format.

Opening assets.
Plant and machinery
xxx
Building
xxx
Motor van
xxx
xxx
Closing stock
xxx
Debtors
xxx
Cash in hand
xxx
Cash at bank
xxx
Prepayment
xxx
xxx
Less Opening liabilities:

Creditors
xxx
Bank overdraft
xxx
Accrued expenses
xxx
Capital fund / accumulated fund
xxx
xxx
Manufacturing Accounts. It is prepared by Manufacturing business which are

engaged in the Production of certain goods. It shows the costs of the Production of
goods, i.e. cost of materials, labours and factory overheads. It is an? expense/ cost account.
Manufacturing cost/Elements of cost: . There are following three elements of costs.
1. Material cost. Material costs has following two types.
Direct material cost. Cost of that material which is basic requirement/need for
the production of a product. For example wood for furniture making.
Indirect material cost. Cost of that material which is helping element for the
completion of a product. For example paint or glue or steel-bar used in furniture making.
2. Labour cost.
Labour costs has following two types.
43
Direct labour cost. Cost of that labour which is directly engaged in the production
of a product. For example labour directly engaged for conversion of wood into furniture
as per design.
Indirect labour cost. Cost of that labour which is engaged for the help of direct
labour in the production of a product. For example store man, security guard, -cleaner
sand other helping labour.
3. Factory overhead. All indirect manufacturing costs of a product. Examples includes:
Indirect material cost
Indirect labour cost
Deprecation of factory machinery/building.
Rent of factory building
Fuel expenses
Utility bills of factory

Repair and maintenance of factory
Insurance of factory machinery/ building
Stocks in the manufacturing business.
manufacturing
Business.
There are three types of stocks in
-|
1. Raw material stock

2. Work in progress (incomplete goods)
3. Finished goods (Goods ready for sale)
Manufacturing a/c
Trading & Profit and loss a/c
Balance sheet
Manufacturing account
Opening stock of raw material
xxx
Add purchase of raw material
xxx
44
Less return outwards/ P/Return
xxx
Add carriage inwards
xxx
xxx
Less closing stock of raw material
xxx
xxx
Cost of raw material used
xxx
Add direct labor cost / direct wages / factory wages /mft. Wages
xxx
Add direct expense (if any) (Royalty)
xxx
Prime cost
xxx
Add F.O.H
xxx
xxx
xxx
Depreciation of factory machinery/building
xxx
xxx
Fuel expenses
xxx
xxx
xxx
Loose tools expenses
xxx
Insurance of factory machinery /building
xxx
xxx
Total factory cost
xxx
Add W.I.P Opening stock
xxx
xxx
Less W.I.P closing stock
xxx
Production cost of goods completed
xxx
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 19X5
Sale
xxx
Less return inwards /sale returns
xxx
Net sale
xxx
45
Less cost of goods sold

Opening stock of finished goods
xxx
xxx
Less closing stock of finished goods
xxx
xxx
Gross profit
xxx
Add discount received / rent received
xxx
Xxx
Less: expenses
Rent
xxx
Salaries
xxx
Wages
xxx
Insurance
xxx
Advertising
xxx
Carriage outwards
xxx
xxx
Bad debts
xxx
Provision for bad debts
xxx
Van running cost
xxx
Fuel expenses
xxx
Net profit / Net loss
xxx
xxx
Balance sheet
Current assets
Stock of raw material (closing)
xxx
Work in progress
(closing)
xxx
Finished goods
(closing)
xxx
Per unit cost=
total cost of production

Number of units produced
Prime cost=
direct material cost + direct labour cost
Conversion cost=
direct labour cost + FOH
46
Total factory cost= direct material cost + direct labour cost + FOH
DEPARTMENTAL ACCOUNTS:
If a business has different departments, then at the end of year trading &
profit & loss a/c is prepared department wise in columns form in this type of
business expenses has two types.
Direct expense:
All direct expense are charged to the particular
department.
Common expense: These expenses are allocated/distributed among

the department on certain basis given in the question or equally.
Examples of these expenses are:
Rent
utility bills
Advertising fuel expenses
salaries expense
insurance
repair and maintenance
For example, there are three department i.e A,B, V. Rent of 50,000 is
distributed in the ratio of 2:2:1 in the following way.
A2/5=
50,000*2/5=20,000
B2/5=
50,000*2/5=20,000
C2/5=
50,000*2/5=20,000
For example repair is 30,000 and is distributed equally in the following

way.
10,000
10,000
10,000
For example repair is 30,000 and is distributed in the following way on %

basis. A 50%, B20%, C 30%.
(30,000*50%)
15,000
(30,000*20%)
6,000
(30,000*30%)
9,000
47
DEPARTMENTAL TRADING & PROFIT & LOSS ACCOUNT

A Deptt
Sale
B Deptt.
xxx
Total
xxx
xxx

Opening stock
xxx
xxx
xxx
Add: purchases
xxx
xxx
xxx
Add: carriage inwards/tpt.expenses.
xxx
xxx
xxx
Less: return outwards/purchase return
xxx
xxx
xxx
Less: Closing stock
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Gross profit
xxx
xxx
xxx
Add: discount received/rent received
xxx
xxx
xxx
xxx
xxx
xxx
Less expenses
xxx
xxx
xxx
Rent
xxx
xxx
xxx
Salaries
xxx
xxx
xxx
Wages
xxx
xxx
xxx
Insurance
xxx
xxx
xxx
Advertising
xxx
xxx
xxx
xxx
xxx
xxx
Bad debts
xxx
xxx
xxx
xxx
xxx
xxx
Van running cost
xxx
xxx
xxx
Fuel expenses
xxx
xxx
xxx
Net profit/net loss
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
48
NOTE: For all departments one balance sheet will be prepared.

Partnership Account.
Partnership.
When two or more than two persons carry out business for earning profit it is
called partnership.
Partnership agreement /Deed
(from book)
Main points of consideration in partnership.

1. Capital contribution.
Amount invested by the each partner in the business.
A
50,000
100,000
70,000
2. Profit or loss sharing ratio.

It must be agreed among the partners and it can be on following basis.
On the basic of capital
Equally
% basic, A.40%, B.40%, C.20%
Proportion
2/5
2/5
1/5
3. Interest on drawing.
Income of business
Expense of partners
4. Interest on capital.
Expense of business
Income of partners
5.
Salary/Bonus/Commission of partners
Expense of business
49
Income of partners
Accounts to be prepared
1. Trading & profit & loss appropriation a/c
2. Partners current a/c (Represented a/c of partners)
3. Balance sheet
T & P & L Appropriation A/C.
Net profit
xxx
Add interest on drawings A
xxx
xxx
xxx
xxx
xxx
Less interest on capital
xxx
xxx
xxx
xxx
xxx
Less salary/Bonus
xxx
xxx
xxx
xxx
Less Good will written off (if any)
xxx
xxx
Less Share of profit.
xxx
xxx
(As per ratio)
xxx
xxx
PARTNERS CURRENT A/C

A
Balance b/d (if any)
xxx
xxx
Balance b/d
xxx
xxx
Drawings
xxx
xxx
Interest on capital
xxx
xxx
Interest on drawing
xxx
xxx
Salary/Bonus
xxx
xxx
Balance c/d
xxx
xxx
Share of profit
xxx
xxx
Interest on loans
xxx
xxx
50
xxx
xxx
Xxx
Partners current A/C can also prepared in column form as under.

A
Balance b/d (Opening balance)
xxx
xxx
Add interest on capital
xxx
xxx
Add salary / Bonus
xxx
xxx
Add interest on loans
xxx
xxx
xxx
xxx
Less Drawing
xxx
xxx
Less interest on drawing
xxx
xxx
Balance c/d
xxx
xxx
xxx
xxx
xxx
xxx
Balance sheet-extracts.
Finance by
Capital
Current A/C
Add: Long term liabilities.
Loan
Partnership Changes.
The partnership changes includes the following

1.
Admission of a new partner
2.
Retirement or death of and existing partner
3.
Changes in profit & loss sharing ratio among the existing partner
xxx
51
When above mentioned partnership changes take place, the following two issues
should be properly treated in the books of accounts
I.
Revaluation of assets
II.
Goodwill
Revaluation of assets
On a change in the partnership business , assets are revalued and increase or
decrease in the value of assets are recorded in a revaluation account and profit
or loss on revaluation account will be transferred to capital account of partners.
(Profit on credit side of capital a/c and loss on debit side of capital a/c)
Entries for revaluation of assets
Nature of transaction
1. Increase in value
of asset
Details
Assets a/c
Debit
xxx
Revoluation a/c
2. Decrease in
Revoluation a/c
values of assets
xxx
xxx
Asset a/c
3. Provisions for
xxx
Provision of
depreciation on
xxx
depreciation
revalued asset
Credit
xxx
Revaluation a/c
4. Profit on
Revaluation a/c
revoluation
xxx
Capital a/c of partner
5. Loss on
revoluation
xxx
xxx
Revaluation
xxx
a/c
After1-3 Revaluation a/c will be prepared in the following format.
Revaluation a/c
19x5
19x5
Jan31 Decreasein assets

Jan31
Capital a/c
xxx
xxx
Jan 31
Increase in assets
xxx
Jan 31
Capital a/c
xxx
52
xxx
(if loss)
xxx
xxx
If Cr side is greater than Dr side, there is profit on revolution a/c and vice
versa.
Profit or loss on revaluation a/c will be distributed among partner in old ratios.
Good-will :Reputation of business among the customers or good image/good
name of
Business among by customers.
Calculation of good-will :
Purchaser price /purchase consideration
xxx
Less: Net wroth /value of business
xxx
Good-will
xxx
Net wroth /value of business
Assets---Liabilities
(Takeover)
Treatment of goodwill on a change in a partnership

Goodwill should be valued and the following accounting entries are made in
partnership books.
A. If goodwill
Details
Goodwill
Debit
xxx
Credit
xxx
is to be
retained
Partners capital a/c(old
/shown
ratio)
/opened in
Capital a/c credited and
the books.
goodwill shown in B/sheet

under fixed assets
B. If goodwill
I. Good will
is not to be
Partners capital a/c (old
retained
ratio)
xxx
xxx
xxx
xxx
53
/shown
/opened in
II Capital a/c
the books.
(including new ratio)

Goodwill a/c
xxx
OR
xxx
Capital a/c (including new

partner /new ratio)
Partner capital a/c (old
ratio)
(In B situation goodwill may be adjusted as illustrated below)
Assume goodwill is 50,000 and old ratio is equal between A &B. On
admission of C, new ratio is 2/5,2/5&1/5.
Partner
Old ratio
New ratios
25,000
20,000
25,000
20,000
______
10,000
With old ratios capital a/c of old partner will be credited and with new ratios
capital a/c of all partner (including new)will be debited.
Capital Account of partners
19x5
A
Loss on revaluation xxx
B
xxx
a/c
19X5
Balance b/d
A
xxx
B
xxx
Profit on
xxx
xxx
revaluation a/c
Goodwill (new
xxx
xxx
ratio)
xxx
Balance c/d
xxx
xxx
xxx Bank (new

partner capital)
____xxx
xxx
xxx
xxx
xxx Goodwill (old

ratio)-A
Goodwill (old
54
ratio-B)
Profit or loss on revaluation account and goodwill treatment is always shown
in partner capital account .
Format of the balance sheet.
On amalgations the following accounting procedure will be observed .
For each firm
1.Partner,s capital accounts will be adjusted for the following
For goodwill __ as already done
Profits of losses on revaluation of assets ___as already done
Current accounts of partners are closed to capital accounts.
Assets taken over by partner should be debited to their capital accounts at the
agreed values
Profit or loss on disposal of assets should be transferred to capital accounts in the
partner old profit sharing ratios.
Adjustments of capital account balance for new firm by the introduction or
withdrawal of cash.
2. The adjusted balance sheets may be prepared.
Capital Account of partner
195
195
55
Current a/c (if any)
Loss on revolution a/c
xxx
xxx
xxx
Balance b/d
xxx
xxx
xxx
xxx
xxx
---
Profit on revolution a/c
xxx
xxx
xxx
Profit on sale of assets ( if
xxx
xxx
xxx
Good will( old ratio)- A
xxx
xxx
---
Good will ( old ratio) B
xxx
xxx
---
Bank ( Balancing figures)
---
---
xxx
xxx
xxx
xxx
xxx Current a/c
Loss on sale of assets (

if any)
xxx
xxx
xxx
Good will ( new ratio)

B
any)
xxx
xxx
xxx
Car ( taken over by

partner)
---
---
xxx
Bank ( balancing
figures)
xxx
xxx
--
Balance c/d
Given to partners
xxx
xxx
Taken from partners

x
xx
xxx
xxx
xxx
Dissolution of partnerships
Partnership assets are sold out profits or losses on realization are apportioned to
the partners capital accounts in their profit sharing ratio. The balance of cash is
56
used to pay creditors and expenses of dissolution and finally to repay the balance
on their capital accounts to the partners.
Note:
Unrecorded goodwill and assets revaluation are not relevant in this topic.
Transfer the balances on the partners current accounts to their capital accounts as
current accounts are no more required as business is ended.
Accounts to be prepared on dissolution
1.
Realization account
2.
Capital a/c of partners
3.
Bank
First of all open a realization account to record the sale of assets and proceed to
make the accounting entries in the following order.
1. Transfer of asset at to
Details
Realization a/c
realization a/c(All fixed
Debit
Xxx
Asset a/c
Credit
Xxx
asset and stock at

NBV)
2. Proceeds of sale of
assets
3. Assets taken over by
Bank (cash )
a/c
dissolution
Xxx
Xxx
concerned
Xxx
Realization
Xxx
a/c
Xxx
Realization a/c
Bank a/c
Xxx
5. Payment of creditors
and discount received
from creditors.
Xxx
Xxx
Creditors a/c
Bank
Realization a/c
6. Cash received from
Xxx
partner (at valuation)

4. Cost /Expenses of
Realization
Xxx
Xxx
Xxx
Xxx
57
debaters and for bad
Bank
debts and discount
Realization a/c
allowed
7. Credit balance on
Xxx
Debtors a/c
Realization a/c
realization a/c (profit )
Xxx
Xxx
Partner capital a/c

Xxx
8. Debit balance on
Partner ,s capital a/c
realization a/c (profit)

9. Repayment of partner
Xxx
Realization a/c
Partner loan a/c
loan to firm
Xxx
xxx
Bank
xxx
10. Repayment of partners
Partner capital a/c
capital debit balance on
Bank
partners capital
Note : Bank a/c , Debtors , creditors , loan should be dealt directly in bank a/c.
After making entries 1-6 realization a/c will be prepared and profit or loss
on realization a/c will be transferred to partners capital account on basis of
existing ratios.
Dissolution of partnerships
Partnership assets are sold out profits or losses on realization are apportioned to
the partners capital accounts in their profit sharing ratio. The balance of cash is
used to pay credit and expenses of dissolution and finally to repay the balance on
their capital account to the partners.
Note:
Unrecorded goodwill and asset revelation are not relevant in this topic.
58
Transfer the balance on the partner, s current account to their capital

accounts as current accounts are no more required as business is ended.
Accounts to be prepared on dissolution
Realization accounts
1. Capital a/c of partners
2. Bank
First of all open a Realization account to record the sale of assets and proceed
to make the Accounting entries in the following order.
Details
1. Transfer of assets at to realization a/c( all Realization a/c
fixed assets and stock at NBV)
Debit Credit
xxx
Asset a/c
xxx
Realization a/c xxx
xxx
2.
Proceeds of sale of assets
3.
Assets taken over by partner( at valuation)
Bank ( cash)
4.
Cost / Expenses of dissolution
Capital a/c of partner concerned
5.
Payment
of
creditors
and
discount
Realization a/c
xxx
xxx
Bank account
xxx
xxx
xxx
xxx
received from creditors

6.
Cash received from debtors and for bad Realization a/c

debts and discount allowed.
7.
Credit balance on realization a/c ( Profit)
8.
Debit balance on Realization a/c ( Loss0)
9.
Repayment of partners loan to firm.
Creditors a/c
Bank Realization
a/c
10. Repayment of partners capitals debits

balance on partners capital a/c
xxx
xxx
Bank Realization a/c
xxx
xxx
Debtors a/c
xxx
Realization a/c
xxx
Partner capital a/c
Partner capital a/c

Partner loan a/c
xxx
Realization a/c
Bank
xxx
xxx
xxx
59
Partner capital a/c
xxx
Bank
xxx
Note: Bank a/c debtors Creditors loans should be dealt directly in bank a/c.
After making entries 1-6 Realization a/c will be prepared or loss on Realization a/c
will be transferred to partner capital account on basis of existing ratios.
Realization Account
195
195
xxx
Dec 3 Bank (Sale of assets)
Dec 31 Plant
xxx
Machinery
xxx
Stock
Dec 31 Debtors( Dist. Allowed/ bad debts)
Dec 31 Bank ( dissolution expenses)
Dec 31 Capital:
xxx
Partners capital a/c

(asset takeover)
xxx
Creditor( Dist. Received)
xxx
Dec 31 Capital:
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
195
Current a/c ( if any)
A
-
Loss on Realization a/c
xxx
Realization a/c car
xxx
B
-
C
xxx
195
xxx
Balance b/d
xxx
xxx
xxx
Current a/c
xxx
xxx
----
Profit on realization
xxx
xxx
xxx
a/c
Bank ( balancing figure)
xxx
xxx
Bank (balancing
60
figure)
xxx
xxx xxx
Bank Account
19x5
xxx
xxx
xxx
19x5
Dec 31
Balance b/d
Dec 31 Balance b/d (if any-O/D) xxx
xxx
Creditors (cash paid)
Dec 31 Realization a/c (sale of assets
xxx
Dec 31 Debtors (cash received)
xxx
xxx
Loan a/c
xxx
Realization a/c-dissolution exp

Dec 31 Capital:
xxx
xxx
Dec 31
Capital:
xxx
xxx
xxx
xxx
Sale of partnership to limited company OR Conversion of partnership into
limited company
A partnership may be sold to an existing limited company or the partners
may from a limited company and sell the partnership business to it in order to
obtain the benefits of limited liability. In either case it makes no difference to the
entries required in the partnership books.
The limited company may pay for the partnership business in cash or by
issuing shares (Ordinary & Preference) and possibly to the partners or by a
combination of cash, shares and debentures.
Accounting entries of the dissolution of a partnership still apply but the procedure
which follower after the is modified as follows.
Nature of Transaction
Details
Debit
1. Purchase consideration
LTD Co. a/c
xxx
Credit
61
Realization a/c
2. Payment in cash
Bank
xxx
xxx
LTD Co. a/c
3. Payment in preference shares
Preference shares in LTD
xxx
xxx
LTD Co. a/c

4. Payment in ordinary shares
Ordinary shares in LTD
xxx
xxx
LTD Co. a/c
5. Payment in debenture
Debenture in LTD
xxx
xxx
LTD Co. a/c

6. Closure of partners capital a/c
Partners capital a/c
xxx
xxx
LTD Co. a/c
Distribution of shares, debentures and cash to the partners as per direction in the
question.
Note: In the absence of any directions in the question, where the partners are to
continue as directors of the limited company, receiving salaries and shares of
profits, us the following procedure:
Partners salaries
A ward the partners, directors salaries equal to their partnership a loan
which will be transferred to the limited company. Where rate of interest on the
debentures is different from that paid on the loan the amount of the debentures
xxx
62
allocated to the partner must be such as will give him the same amount of interest
each ear as he received from the partnership.
Interest rate of loan
Formula to convert loan into debenture: Amount
of
loan
Interest
rate
of
Debenture
Partnership shares of profit
Preserve the partners profit sharing ratio by allocation ordinary shares in their
respective capital/profit sharing ratio so that the balance on the capital account
of the partner with the lowest capital/profit sharing ratio is satisfied in fully by his
allocation of ordinary shares. Satisfy any balances remaining on partners capital
accounts with preference shares (or cash).
Accounts to be prepared
1.
Realization Account
2.
Limited Company Account
3.
Capital Account of Partners
Steps to prepare Realization Account:

1.
Transfer all assets on Dr. side of Realization Account:
2.
Transfer all liabilities on Cr side of Realization Account. (Taken over)
3.
Purchase price on Fr side of Realization Account
4.
Calculate profit or loss on Realization Account

Realization Account
19x5
19x5
Dec 31
Plant
Dec 31
Creditors
xxx
Co. LTD
xxx
xxx
Machinery
xxx
Stock
63
xxx
Dec 31
Capital:
xxx
Debtors
xxx
B
Bank
xxx
xxx
Dec 31
Capital:
xxx
B
xxx
Xxx
CO. LTD
Realization
xxx
Ordinary shares
xxx
10% Preference shares
xxx
8% Debenture
xxx
xxx
xxx
Partners capital account

A
64
Current a/c (if any)
..
..
xx
Balance b/d
xxx
xxx
xxx
Current a/c
xxx
xxx
..
x
Loss on Realization a/c
xxx
xxx
xx
Ordinary shares
xxx
xxx
Profit on realization a/c
xxx
xxx
xxx
Preference shares
xxx
..
xx
Loan
xxx
xxx
xxx
xxx
(Balancing figure)
Debenture
x
xxx
..
xx
x
.
.
xxx
xxx
xx
x
Ordinary shares
CO. LTD
xxx
Capital:
xxx
xxx
xxx
___
___
xxx
10% Preference shares
CO. LTD
xxx
___
Capital:
xxx
A
xxx
xxx
___
65
xxx
xxx
8% Debenture
CO. LTD
CO. LTD
xxx
Capital:
xxx
___
___
xxx
Loan A/C
xxx
xxx
xxx
Capital:
___
___
xxx
xxx
Introduction to the final accounts of limited company.

Features of a company.
It is establish ed by a group of people who are called shareholder (owner) of a
company
Separate legal entity (name) from its owners.
Minimum 2, Maximum No limit , in case of plc and 2 to 50 in case of pvt. Ltd
Perpetual life
Capital contributed by purchase of shares.
Profit distributed to owners is called dividend
Board of director elected by share holder s will responsible for running of day to
day affairs of the business.
Types of company.
The following are two types of company
1.
Public limited company.
66
Minimum number of shareholders 2, Maximum no limit.

Capital should be at least 50000/
Shares are transferable to any body/shares are traded at stock
exchange.
Private limited company.
Minimum number of shareholders 2, max. 50.
Capital can be less than 50000/
Shares are not transferable/shares are not traded at stock Exchange.
It is also called family business
Share.
A share is a share in the share capital of a company .(owner
ship certificates)
Types of share
the following are two types of shares.
1. Preference shares
Rate of dividend is fixed .10%,20%
At the time of payment of dividend preference will be given to
shareholder
2. Ordinary share or common share.
Rate of dividend is not fixed it is decided by board of
directors at the end of year in annual general meeting (AGM)
considering profit of company in that particular year.
After payment to preference shareholders dividend id paid to
ordinary shareholders
Capital structure
Capital structure of limited company is consisted of following
three components.
Total number of share(Ordinary /common or preference)
Face value per share
67
Total amount of share capital (ordinary /common or
preference)
Types of capital .
The following are the types of capital .
1.Authorsed share capital ./Registered capital .
Total capital of the company which is allowed by the gov,t,to
subscribe/issue
2.
10%50,000 preference shares@1 each
50,000
100,000 Ordinary shares @1each
100,000
Issued share capital

That part of authorized capital which is issued to public
for subscription .
10%,40,000 preference shares @1each40,000
50,000 Ordinary share @1 each
50,000
Dividend :That portion of profit which is distributed

among shareholder is called dividend
.Dividend is
always calculated on issue share capital . (Ordinary

/common or preference).
Dividend is of two types
I Interim dividend :Declared and paid during the year:
II Proposed /final dividend : Declared at end of year and
paid in the next year thats why it is also current liability
of business
1. T &P&L Appropriation A/C
2. Balance sheet
FORMAT OF TRADING AND PROFIT & LOSS APROPRIATION A/C
68
Sale
xxx
Less :Returned /sale returns
xxx
Net sales
xxx

Opening stock
xxx
Add: purchases
xxx
Add; carriage inward
xxx
Less: Returned outwards/ purchases return
xxx
xxx
Less closing stock
xxx
xxx
Gross profit
xxx
Add: Discount received / Rent received
xxx
Add: Decrease in provision for doubtful debted
xxx
Add: profit on disposal of asset or Any other income
xxx
xxx
Less: Expenses
Rent
xxx
Salaries
xxx
Wages
xxx
Insurance
xxx
Advertising
xxx
xxx
Bad debts
xxx
Increase in provision for doubtful debt
xxx
Carriage inwards
xxx
xxx
Van running cost
xxx
69
Fuel expenses
xxx
Loss on disposal of assets
xxx
xxx
Net profit for the year before taxation
xxx
Less: corporation tax
xxx
Net profit for the year after tax
xxx
Less: Appropriation
Transfer to general reserve
Interim dividend : Preference shares
Proposed Dividend :
xxx
Ordinary shares
xxx
Preference shares
xxx
Ordinary shares
xxx
xxx
Retained profit for the year
xxx
Add: Retained profit of last year (if any)
xxx
Retained profit for the year C/D
xxx
Fixed Assets,
Cost
Dep.
N.B.V
Plant and machinery
xxx
xxx
xxx
Building
xxx
xxx
xxx
Motor Van
xxx
xxx
xxx
xxx
xxx
xxx
xxx
CURRENT ASSETS
Closing stock
xxx
Debtors
xxx
Less;: Provision for doubtful debts
xxx
xxx
70
Cash in hand
xxx
Cash at bank/ Bank
xxx
Prepayment
xxx
Less: Creditors due within one years:

Credit
xxx
Bank Overdraft
xxx
Accrued Expenses
xxx
Taxation
xxx
Proposed dividend
xxx
Proposed dividend on preference shares
xxx
Proposed dividend on ordinary shares
xxx
xxx
xxx
xxx
Less: Credit due after one years.

Loans
xxx
Debentures
xxx
xxx
xxx
Capital and Reserves.

10%, 40,000 preference shares@ 1 each
xxx
50,000 Ordinary shares @ 1 each
xxx
General Reserve
xxx
Share Premium
xxx
Profit& loss A/c
xxx
Reserves
xxx
71
This is a form capital is internally generated not provided by the shareholders.

They are either created out of profit or through various adjustments to capital
structure of a company or through the valuation of fixed assets.
Reserves has two types. I.
1.
Revenue Reserves II.
Capital Reserves
Revenue Reserves . Revenue reserves are created by voluntary/ transfer
from P&L appropriation A/C into particular reserve. Examples include General
Reserves, Assets replacement reserve, foreign exchange reserve and profit & loss
a/c (Retained profits). Profit retained for business are not distributed among
shareholder are Revenue which are also called distribution reserves, which means
that dividend can be paid out of these reserves.
Entry
P&L appropriation a/c

Revenue Reserves
II.
Capital Reserves.
These reserves are not created out of profits of a
company but are required by law under different circumstances. They are also
Statutory Reserves|
They include share premium Asset revolution reserve and Capital redemption
reserves. They are non- distributable reserves and divided can not be paid out of
these reserves.
Revenue Reserves
Bonus share
Dividend
Capital Reserves
ISSUE OF SHARES
The sequence of transaction is as follow both for ordinary and preference
shares.
1. Issue of prospectus
Details
No entry
2. Receipt of application Bank a/c

With application
Debit
Credit
Xxx
Xxx
72
money
Application &
3. Refund of application
Xxx
allotment a/c
money to
Xxx
Bank a/c
unsuccessful
Bank a/c
applications
Xxx
Application and
4. Receipt of allotment
allotment a/c
money & shares to
Application and
the applicants
allotment a/c
5. Transfer of
Xxx
Xxx
Capital a/c
application money to
Xxx
Share premium a/c
Xxx
capital a/cOR
Share premium a/c
Bank a/c
1st call or 2nd call
Xxx
Xxx
xxx
Xxx
a/c
6. Receipt of 1st call or
2nd
1st call or 2nd call a/c
Call money.
xxx
capital a/c
share premium a/c
7. Transfer of call
money to capital a/c
(ordinary or
preference )OR share
premium a/c
Ordinary or preference share capital account

Balance c/d
Application & allotment

xxx
First & final call

xxx
Share premium account

Ordinary share capital
xxx
xxx
73
Balance c/d
xxx
First &final
xxx
xxx
xxx
Bank Account
Application &allotment
xxx
xxx
Application& allotment
xxx
Balance c/d
xxx
Call
xxx
xxx
Application and allotment account
Ordinary Share Capital a/c
xxx
Share Premium a/c
xxx Bank (allotment money)
Bank (Refund)
xxx
Bank (application money)
xxx
xxx
xxx
First or Second call Account
Ordinary Capital /Share premium a/c xxx Bank
xxx
Xx
x
BONUS SHARES
x
xx
Company reserves belong to the ordinary shareholders. Director of a

company may transfer with the agreement of the shareholders some of the balance
on the reserves to the Ordinary share capital account. The directors will then issue
to the ordinary shareholders additional share certificate equal to the amount of the
reserves transferred in proportion to the shares they already hold. These new
shares are known as bonus shares because the shareholders do not pay any
additional cash for them .An issue of bonus shares is also known as a scrip issue.
The accounting entries for issue of Bonus Shares are:
Share Premium
Profit & loss a/c
74
Bonus shares a/c

2.
Bonus shares a/c

Ordinary shares capital account
OR
Share premium
Profit & loss a/c
Ordinary share capital account
Effect of bonus on shares on Balance sheet

I
Reserves will decrease
II
Ordinary share capital will increase
The reason why directors may propose a bonus issue is:

1.
Theses reserve must be considered as part of the long term of the capital
of the company. If they are returned in the balance sheet as reserve real
capital employed in the business is obscured.
2.
The reserve may be capital reserve which cannot be distributed to the

shareholders as cash dividends.
3.
It may not be financially product to distribute the revenue reserves as

cash dividends because the liquidity position of the company may not
permit this sort of distribution anyway.
Rights Issue
The preliminary formalities involved in issuing shares to the general public
can be a very expenses matter. A private company may not make such an offer
in any case. The directors may therefore decide to raise additional capital by a
right issue for which the formalities are less demanding.
A right issue is one in which shares are offered to existing shareholder not
to general public. The expenses and inconvenience of preparing a full
prospectus as for the public issue.
75
An additional advantage of a right issue is that control of the company

remains with the existing shareholders. Normal accounting entries will be
passes on the occasion
Of right issue.
Effect of issue of right shares on balance sheet.
I
Cash will increase
II
Ordinary share capital will increase
Convertible loan stock:

Gives the holders the opportunity at a future date to convert the loan into
Ordinary shares of the company at a predetermined price. If, when the time arrives
for the stock holders to exercise their option, the market value of the shares is
higher than the predetermined price, the debenture holders could find the exchange
attractive. On the other hand, if the share value is below the predetermined price,
they would be unlikely to exercise their option.
Advantages of exercising the option are:
1.
The debenture holders continue to have an interest in the company and

will be
Able to attend and vote at company meetings.

2.
Dividends on shares may be likely to exceed the interest on debentures.
3.
There is also possibility that value of shares should be increased with

passage of time in a healthy company.
Effect of conversion of convertible loan stock into Ordinary shares on Balance

Sheet.
I
convertible loan stock will decrease
II ordinary Share Capital will increase

Redemption and purchase of own shares by a company
A company is permitted by the companies Act, 1985, to issue redeemable
preference shares.
A company may issue redeemable preference shares because
76
1They may be redeemed when there is a surplus of capital and the

surplus funds cannot be put to profitable use.
Capital may be needed in the medium term for a project but the
project may be expected to generate sufficient funds in due course to enable
the capital to be repaid.
If a shareholder in a family company dies his personal
representatives may require money as a matter of some urgency to pay
taxes.
Companies are permitted to redeem their own shares in the
following two methods:
1
Out of the proceeds of a new issue of shares.

In this method cash is made available for redemption of shares by
issue of new shares and share premium a/c is used if shares are to be
redeemed at premium.
The amount of the premium which may be debited to share premium
accounts limited to:
The premium on the shares when they were issued and,
The balance presently standing to the credit of the share premium
account (i.e. the share premium account must not end up with a debit
balance)
Entry
Redeemable preference shares a/c ***
Premium on redemption shares a/c
Profit & loss a/c
***
Cash a/c
***
***
By capitalizing profits that would otherwise be distributable to the

shareholders.
77
In this method first of all capital Redemption Reserve will be created from
General reserves. Shares may be redeemed at a premium, the premium on
redemption may charges to share premium account only if:
1
The shares to be redeemed were originally issued at a premium and
The shares are to be redeemed out of the proceeds of a new issue of

shares.
The accounting enteries for Redemption of shares are:

1.
For creation of Capital Redemption Reserve

General Reserve
Profit &loss a/c
Capital Redemption Reserve a/c
2.
For redemption of shares &payment of cash

Redemabe Preference shares a/c
Premium on redemption of shares a/c
Profit &loss a/c
Cash a/c
For capitalization of Capital Redemption Reserve

Capital Redemption Reserve a/c
Ordinary Share Capital Account
Effect of redemption of preference shares on Balance Sheet:

I
Redeemable preference shares capital will be decreased

Share Premium a/c will be decreased (if needed)
II
Cash will be decreased
Debentures
A debenture is a document containing details of a loan obtained by a
company. The loan may be secured on the assets of the company. Debenture
carries a fixed rate of interest.
Debenture is usually redeemable on or before a specified date.
Debenture holders are Creditors, not owners of the company as shareholders are.
78
Debenture should always be shown as long term liabilities (amounts falling due
after one year)
Redemption Of Debentures----Same like redemption of preference shares
Effect of Redemption of Debenture on Balance Sheet.
I
II
Debenture will be decreased

Cash be decreased
Share Premium a/c OR Profit & loss a/c will be decreased (if needed)
Cash flow statement for the year ended 31December 19-3
1.
Net cash inflow (outflow) from operating activities (W-1)

xxx
2. Returns on investments and servicing of finance
4.
5.
Interest received
xxx
Interest paid
xxx
Drawing (if any)
xxx
Net cash inflow (outflow) from ROI & SOF
xxx
3. Taxation paid (Previous year)
xxx
Investing activities/Capital expenditure

Purchase of tangible fixed assets
xxx
Sale of plant and machinery
xxx
Net cash inflow (outflow) from investing activities
xxx
Payments of Divends
Interim divided paid
xxx
Proposed dividend (previous year)
xxx
Net cash inflow (outflow) before financing activities
xxx
6. Financing activities
Issue of Ordinary /Preference share capital
xxx
Sale of debenture of goes getting loans
xxx
79
Redemption of debenture
xxx
Repayment of loans
xxx
Net cash inflow (outflow) from financing activities

Increase / (Decrease) in cash
xxx
xxx
(W-1)
Cash flow from operating activities

Operating profit /Net profit before interest & tax
xxx
Add: Depreciation for year
xxx
Loss on sale of fixed assets
xxx
Goodwill written-off
xxx
Increase in provision for doubtful debts
xxx
Reserve ((if any)
xxx
Less: profit on sale of tangible fixed assets

Decrease in provision for doubtful
xxx
xxx
Less increase in current assets
xxx
Add: Decrease in current assets
xxx
Less Decrease in current liabilities
xxx
Add: Increase in current liabilities
xxx
Net cash inflow (outflow) from operating activities
xxx
Analysis of changes in cash and equivalents during the year

Balance at 1January
xxx
Net cash inflow (Outflow)
xxx
Balance at 31December
Interpretation of Accounts /Accounting OR Financial Ratio
80
Accounting Ratio:
Accounting ratios are calculated from Trading & profit & loss account and
Balance sheet.
It is the relationships among figure appearing in the final accounts of a
listed Company. It can be expressed in terms of %, proportion or in times. It is
normally used for analysis and decision making purpose.
Types of Ratio.
There are main four types of ratio.
1.
Profitability ratio
2.
Financial ratio
3.
Investment ratio
4.
Utilization of ratio
1. Profitability ratio
I. Gross profit ratio =
Gross profit*100
Sale
II.Net profit ratio
Net profit*100
Sale
III. ROCE
(Return on capital employed )
=Profit before interest &Tax*100

Capital employed
IV. Return on Equity = Profit before tax & after preference divided *100
Ordinary share capital +Reserve

V. Expenses/operating expenses =particulars expenses*100
Sale
2. Financial ratios.
Current ratio or working capital ratio =
Current assets
Current liability
Standard ratio: 2:1
II. Liquid ratio/Acid test ratio /Quick ratio=
Current assets closing stock
81
Current liabilities
Standard ratio:1:1
III.
Stock Turnover ratio =
Cost of goods sold = Times

Average stock
Average stock
IV.
Debtors ratios.
Opening stock + closing stock

2
Average number of days in which debtors pay to the
business.
V.
Creditor
Creditor
* 365 = xxx days.
Credit Purchase
Investment ratios
1.
Gearing ratio =
Fixed cost capital * 100

Total capital
Note:
Fixed cost capital includes long term loan, preference shares and
bank overdraft.
Total Capital:
II.
Ordinary share capital + Reserves + Fixed cost capital.
Earning per share. ( EPS)
Earning for ordinary.

Number of ordinary shares
Note : Earning means profits after tax and divided on preference shares.
III.
Price earning ratio (PER) Market price of share

EPS
IV.
Dividend covers
Profit available to pay ordinary dividend

Ordinary divined.
V.
Dividend yield
Declared rate of dividend* Nominal value of share

Market price of shares
VI.
Earning Yield
I.
II.
Dividend yield dividend cover.

Earnings
Market price per shares * Number of
shares
82
VII.
Interest cover =
Profit before interest & tax

Interest charges
4.
Utilities of resources ratio.
1.
Utilities of capital employed =
Sale
Times
Capital employed
II.
Utilization of total assets =
Sale
Times
Total asset
Total assets include fixed assets and current assets.
III.
Utilization of fixed assets =
Sale
Times
Times
Fixed assets
IV.
Utilization of current assets =
Sale
Current assets
COST AND MANAGEMENT ACCOUNTING.

Cost Accounting is classifying, recording and a appropriate a allocation of
expenditures for the determination of the costs of products of services, and for the
presentation of arranged data for purpose of control and guidance of management .
It includes the ascertainment of the cost of every order ,job , contract, process,
service or unit as may be appropriate. It deals with the cost of production ,selling
and distribution of the product
Cost Accounting is the application of costing and cost accounting principles,
methods and techniques to control cost and ascertainment of profitability.
The following are the main objectives of cost accounting :
:To ascertain the cost per unit of different products manufactured by a business .
: To provide a correct analysis of cost by different elements of cost both by
processes or operations.
:To disclose souse of source of wastage whether of material , time or expenses or
in the use machinery , equipment and tools and to prepare such reports which may
be necessary to control such wastage.
83
:To provide requisite data and service as a guide to price fixing of products
manufactured or services rendered.
:To ascertain the profitability of each product and advice the management as to
how these profits can be maximized.
:To revel sources for economy by installing and implementing a system of cost
control for materials , labour and overheads.
:To present and interpret data for management planning ,decision making and
control .
:To help in the preparation of budgets and implementation of budgetary control.
:To organize an effective information system so that different levels of
management may get the required information at the right time in right from for
carrying out their individual responsibilities in an efficient manner.
:To guide management in the formulation and implementation of incentive bonus
plans based on productivity and cost saving.
:To supply useful data to the management to take various financial decisions such
as introduction of new products, replacement of lab our by machine etc.
:To organize the internal audit systems to ensure effective working of different
departments.
: To provide specialized services of cost audit in order to prevent the errors and
frauds and to facilitate prompt and reliable information to the management.
Broadly speaking , the above objective can be regrouped under the following
three heads :
1. Ascertainment and analysis of cost and income by product, function and
responsibility.
2. Accumulation and utilization of cost for control purpose to have the minimum
possible cost consistent with maintenance of quality. This objective is achieved
through fixation of targets, ascertainment of actual and targets and reporting
deviations to the management for decisions making.
3. Providing useful data to the management for decisions making .
84
Cost classification
Cost classification is the process of grouping costs according to their common
characteristics. The important ways of classification are:
1.
By Nature of Element
2.
By Functions
3.
As Direct and Indirect
4.
By Variability
5.
By controllability
6.
By Capital or Revenue
7.
By Time
8.
According to Planning and control
Now few classification will be discussed in detail.

By Nature or Element. According to this classification, the costs are divided into
three categories i.e. (elements of product cost)
I Materials: Material cost has following two types.
Direct materials cost. Cost of that material which is basic requirement /need
for the production of a product . For example wood for Furniture making.
Indirect materials cost. Cost of that material which is helping element for
the completion.
II
Labour cost has following two types

Direct labour cost . Cost of that labour which is directly engaged for
conversion of wood into furnitures as per design.

Indirect labour cost. Cost of that labour which is engaged for the help of
direct labour in the production of a product . For example store man, security
guard, cleaners, and other helping labour.
III
FOII :All indirect manufacturing cost of products. Example includes:

Deprecation of factory machinery /building
Fuel expenses
85

Insurance of factory machinery /building
As direct and indirect. Accounting to this classification, total cost is divided into
direct costs and indirect costs.
Direct cost are those which are incurred for and may be conveniently identified
with a particular cost centre or cost unit. Example are:
I
Direct Materials cost.
II
Direct labour cost
III
Direct expenses
IV
Loose tool expenses

By variability .Accounting to this classification, costs are classified
according to their behavior in relation to change in the level of activity or volume

of production. On this basis, costs are classified into three groups .i.e. fixed,
variable and semi-variable
I Fixed Costs (period Costs) Costs are commonly described as those which
remain fixed in total irrespective of increase or decrease in the volume of output or
productive activity for a given period of time . Fixed cost per unit decrease as
production increases and increases as production decline .These costs are known
as period costs because these are dependent on time rather than on output .
Examples pf foxed costs are: Rent, Maintenance cost Insurance of factory
building, Deprecation (if straight line method is used)
II Variable Costs (direct costs) Costs are those which vary in total in direct
proportion to the volume of output. Such costs are known as product costs because
they depend on the quantum of output rather than on time. Examples are:
i.
Direct Materials cost.
ii.
Direct Labour cost.
iii.
Direct expenses.
iv.
Variable FOH.
86
iii.
Semi- variable Cost are those which are party fixed and partly variable.
For example telephone expenses include a fixed portion of monthly charge plus
variable charge according to calls; thus total telephone are semi- variable.
Manufacturing Accounts. It is prepared by Manufacturing businesses

which are engaged in the production of certain goods. It show the cost of the
production of goods i.e. cost of materials labors and factory overheads. It is and
expense/ cost account.
Manufacturing cost/ Elements of cost.

1.
Material cost.
Material costs has followings two types.
Direct material cost. cost of that material which is basic
requirement/ need for the production of a product. For example wood for furniture
making.
Indirect material cost. Cost of that material which is helping
element foot the completion of a product. For example paint or glue or steel- bar
used in furniture making.
2.
Labor cost.
Labor cost has following two types.
Direct labor cost. Cost of that labor which is directly engaged in

the production of a product. For example labor directly engaged for
conversion of wood into furniture as per design.
Indirect labor cost. Cost of that labour which is engaged for the
help of direct labour in the production of a product. For example
store men security guard cleaner sand other helping labour.
3.
Factory overhead.
All indirect manufacturing costs of a product.
Example includes:
Indirect labour cost.

Deprecation of factory machinery/ building.
87
Rent of factory building.

Fuel expenses
Loose tools expenses
Insurance of factory machinery/ building
Stock in the manufacturing business.

1.
Raw martial stock.
2.
Work in progress( incomplete goods}
3.
Finished goods (Goods ready for sale}
Main Points
Profit/ loses on manufacturing.
The difference between cost of manufacturing and cost of bought- in goods
is a factory profit or profit on manufacturing and increases the profits of the firm
and if the cost of production exceeds the cost of similar bought in goods, a
factory loses on manufacturing
Manufacturing profit OR factory profit
i.
Added to cost of production
ii.
Added to net profit
Manufacturing loss OR factory loss

i.
II.
Deducted from cost of production.Ii.
Deducted from net profit
Elimination of unrealized manufacturing profit on unsold stock of
finished goods.
The prudence concept requires that profit shall not be anticipated before it
is realized. If the valuation of closing stock of finished goods includes an element
of factory profit this unrealized profit must be laminated in the profit and loss
account and balance sheet by making an appropriate provision.
i.
Creation/ increase in provision.

Profit and loss account.
88
Provision account ( with the amount of creation or increase)

Decrease in provision:
Provision account;
Profits and loss account ( with the amount of decrease)
ii.
In balance sheet ; deduct provision from stock of closing finished
goods.
Manufacturing a/c
Trading& P&L a/c
Balance Sheet.
Manufacturing account.
Opening stock of raw material
xxx.
Add : purchase of raw material
xxx.
Add : carriage inwards
xxx.
Less : Return outwards/P/return
xxx.
xxx.
Less closing stock of raw material
xxx
Cost of raw material used

Add: direct labor cost/ direct wages/ factory wags/ Mfg. wages
Add: direct expenses ( if any) ( Royalty)
Prime cost
Add: F.O.H
xxx.
Indirect labor cost
xxx.
Deprecation of factory machinery/ building
xxx.
xxx.
Fuel expenses
xxx
xxx
89
xxx
Loose tools expenses ( opening stock + purchases closing stock)

Insurance of factory machinery / building
xxx
xxx
xxx
Total factory cost/ total manufacturing cost
xxx
Add : factory profit or manufacturing profit ( loss)
xxx
Trading & Profit & Loss A/C

Sales
xxx

Opening stock of finished goods
xxx
Add: Production cost of goods completed
xxx
Less: closing stock of finished good
xxx
Gross Profit
xxx
Add ; Rent received/Discount received
xxx
Add : Decrease in provision for unrealized profit on unsold stock.
xxx
xxx
Less; Expenses
Rent
xxx
Salaries/ Wages
xxx
Insurance
xxx
Advertising
xxx
Bad debts
xxx
Depreciation on Furniture
xxx
Fuel. Expenses
xxx
Increase in provision for unrealized profit on unsold stock
xxx
xxx
90
Net profit/ Net loss
xxx
Add: Factory profit or manufacturing profit ( loss)
xxx
xxx
Balance sheet
Current assets
Stock of raw Material ( closing)
xxx
Work in progress
( closing)
xxx
Finished goods
( closing)
xxx
Loose tools
( closing)
xxx
Matrial / Stock costing

There are two system of material costing or inventory control.
Perpetual inventory system.
A Perpetual inventory system is one in which a running balance is

maintained of stock
After every purchase and sale of stock in Material card or store card or Bin
card.
This system is normally adopted permanently by the big business units

which have a lot of daily transactions.( purchase/ sale)
Expensive system because certain employed to be engaged for maintaining

record of stock transactions and stationary will also be consumed largely.
Following three methods are used in this system:
o FIFO
o LIFO
o Average cost method
Proper material. Card/Bin card to be prepared
Format of bin card/ material card

Date
Purchase/Receipts
Units
Unit cost Total cost
Sale/Issue
Units
Unit cost
Total cost
Balance
Units
Unit
Total
cost
cost
91
Periodic inventory system
2.
A periodic inventory system is one in which only the totals of purchases

and sales are record at the end of each accounting period and a new balance
is calculated at the end of particular period.
This system is normally adopted by small business units which have few
transactions over a particular period.( purchase/ Sale)
Less expensive because no need to engage employees for maintaining

record of stock transaction.
Following three methods are also used in this system:
o FIFO
o LIFO
o Average cost method
Advantages and disadvantages at page No 324 of Randal book.
To be prepared
Calculation of profit
Calculation of value of closing stock under FIFO, LIFO, AVCO.
Stock valuation statement.

Format of calculation of profit ( trading and profit & loss account)
FIFO
Sales
LIFO
xxx
AVCO.
xxx
xx
x
Less: cost of goods

sold
Opening Stock
Add :Purchases
Less : closing stock
xxx
xxx
xxx
xxx
xxx
xxx xxx
xxx
xxx
xxx
xxx
xxx
92
Gross profit
xxx
Rent
Advertising
Depreciation
xx
xxx
xxx
xxx
x
xxx
xxx
xxx
xx
xxx
xxx
xxx
(xxx)
(xxx)
(xxx)
Net profit
xx
x
Format of stock valuation statement
xx
x
Stock ( at cost ) as on 10-1-06

xxx
Add: item which were in stock on 31-12-05 ( at cost)
Sales
xxx
Goods sent to customer on approval
xxx
Purchase made but not received
xxx
Damaged stock (
xxx
Purchase return/ Return outwards
xxx
Stock sheet understated
xxx
Less: item which are not in stock on ====(at cost)
Purchases
xxx
Sales return /Return inwards
xxx
xx
x
93
Stock sheet overstated

xxx
Stock in hand as at 31-12-2004
xxx
Absorption costing:
This is a technique of costing in which all cots of a
product are considered the product cost and it includes direct material cost, direct
labour cost, direct expenses and fixed & variable overheads.
Profit statement under absorption costing
Sale
Less: Cost of goods sold
Direct Material Cost
xxx
Direct labour cost
xxx
Direct expenses (if any)
xxx
FOH Fixed
xxx
Variable
xxx
Add. Opening stock
xxx
Less closing stock (To be calculated)
xxx
Gross profit
xxx
Overheads
It means all direct costs of production and it includes indirect
material cost, indirect labour , factory repair , factory fuel expenses , factory rent
,factory utility bills, looses tool expenses, factory insurances , depreciation of
factory machinery , depreciation of factory building etc. For distribution of
overheads Departments of a business can be divided into two types:
I
Production departments----Engaged in production of certain products.
II
Service departments --------Supporting to production departments
Overheads can be divided into two ways.

Allocation (Direct expenses ): Expenditure are allocated to a cost centre when it
was made specifically for that cost centre. Examples of expenditure which can be
allocated are:
94
Expenditure
Cost centre
Lubricating oil
Machine shop
Repairs to racking
Stores
Food
Canteen
Apportionment (indirect expenses) :Expenditure which are made for the
benefit of the business generally cannot be allocated ; it is apportioned on some

equitable basis. Such expenditure are rent, rates insurances heating and lighting
etc.
Apportionment of indirect expenses to cost centre must be made on fair and
reasonable bases.
Bases for appointment of overheads:
Overheads
Building, rent, rates, maintenance,
Basis for apportionment to cost
centers
Depreciation, Insurance
On floor area of each cost
Heating, lighting
On floor area of each cost centre
Plant, machinery and equipment
depreciation On cost or book value of Asset
Plant, machinery and equipment
insurance
On replacement or cost value of
asset
Cost of store keeping
On number or value of
stores requisition
Raised by each cost centre
Cost of canteen, personnel/administration .Deptt on number of personal
/employees of cost
Centre
To be done
GOH Distribution sheet
95
Transfer of Services Department cost to production departments

Calculation of FOH Rate or OAR
FOH Distribution sheet
Cost element
Basis of
Tota Maching
Apportionme l
Assemb Painting
Packing
ly
nt
Indirect material cost Allocated
xxx
Xxx
Xxx
Xxx
Xxx
indirect labour cost
Allocated
xxx
Xxx
Xxx
Xxx
Xxx
Factory
Floor area
xxx
Xxx
Xxx
Xxx
Xxx
repairs/maintenance
Floor area
xxx
Xxx
Xxx
Xxx
Xxx
heating
Floor area
xxx
Xxx
Xxx
Xxx
Xxx
Plant depreciation
Cost of plant
xxx
Xxx
Xxx
Xxx
Xxx
Plant insurance
Replacement
xxx
Xxx
Xxx
Xxx
Xxx
xxx
Xxx
Xxx
Xxx
Xxx
xxx
Xxx
Xxx
Xxx
Xxx
xxx
Xxx
Xxx
xxx
Xxx
xxx
xxx
xxx
value of
plant
Storekeeping
No. of
requisitions
Total
1st . Apportionment
(packing Dept)
2nd Apportionment
(paint Dept)
96
FOH Rate OR(Overhead Absorption Rate)
Estimated FOH of
department
Base
Base for (calculation of FOH Rate)
1. Direct labour hours
2. Machine hours
3. units of producaton
4. Direct material cost
5. Direct labour cost
6. Prime cost
Over/under recovery of overheads
Overheads absorption rate are based upon budgeted level of activity and if
actual expenditure and activity are equal to budget the overheads will be recovered
exactly and if actual activity does not correspond to the budget the cover/under
recovery of overheads will be resulted.
Budgeted/estimated overheads
50,000
Actual overheads
60,000
Under estimated
10,000
If actual overheads are than budget/ estimated overheads, it is under

esteemed and will be added to cost of production
If actual overheads are less than budgeted/estimated overheads , it is over
estimated and will be deducated from cost of production
Marginal Costing
In this techniques of costing only VARIABLE COSTS are considered
product cost.i.e.Direct material cost, Direct expenses and variable
costs are considered period cost i.e fixed FOH
Profit statement under Marginal Costing
Sale
xxx
FOH. Fixed
97
Less; Variable Cost of goods sold

xxx
Direct Labour Cost
xxx
Direct expenses (if any)
xxx
Add. Opening stock
xxx
Less closing stock (To be calculated)
xxx
xxx
Contribution Margin (sales-variable costs)
xxx
Less
xxx
Fixed overheads
Net Profit
xxx
Profit statement under Absorption costing /Marginal costing

Absorption costing
Marginal costing
Sale
Less: cost of goods sold
xxx
Direct Material cost
xxx
Direct expenses
xxx
xxx
FOH :variable
Xxx
Xxx
Fixed
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Add. Opening stock

Less closing stock
Xxx
Xxx
xxx
Gross profit /contribution Margin

Less: Fixed FOH
xxx
Xxx
Xxx
Profit
xxx
98
Break even analysis.

1. Break even (units)
=Fixed cost
=C.M per unit
Break even (Currency) =Fixed cost
x Sale price per unit xxx
C.M. per unit

2. Target profit:
=Fixed cost+target profit
=xxx
C.M. per unit

3. Margin of sagety =Total /current sale-break even sale
500,000-450,000=50,000
CM=
Contribution Margin
CM=
Sale Variable Cost
Process Costing.
In this techniques of costing cost of production is
charged to particular department or cost centre by preparation of process a/c for

that cost centre.
Process
costing is used when goods or service are produced in a series of
continuous or respective operations or process . Process costing is appropriate for

an industry, such as the manufacture , chemical manufactute etc .
Assume production for 2000 units is started and following results obtained:
Finished Goods
1500
Work in Progress
400
Unit lost
100
2000
Important points
1. Stage of Compleion of WIP.
It means that how many units of WIP are

completed with reference to material ,
labour and FOH. For example
Material
100
Labour
80
FOH
50
99
3. Losses/gains:
I.
Normal loss -5%,10%
II.
Abnormal loss-controllable loss
III.
Abnormal gain : 100-105=5 units
Normal loss:
Some loss of material may be expected in the course of
processing .This may result from spolage , evaporation or other wastage.

Experience will show what percentage of wastage may be expected under normal
conditions and this is regarded as normal wastage inherent in the process. The
cost of such waste will be borne by good production /output.
Abnormal losses and grains: Any wastage in excess of normal is treated as
abnormal loss and written off to profit and loss account via abnormal loss
account .
Calculations of per unit cost:
There are two ways to calculate per unit cost in process costing.
1.
Calculations of per unit cost If closing WIP is not existed in the

questions:
Total cost ---sale recovery of normal loss units
GOODS UNITS
Good units: All units will be considered good units except normal
loss units
II. If closing WIP is existed in the questions per unit cost will be calculated
by preparation of analysis of equivalent units of production in the
Following format
Cost elements
Finished Good +Abnormal
WIP
Total
Total
P.U
Loss-abnormal gain
Units
units
cost
Cost
Labour
1500
400
1900
8000
4.22
FOH
1500
320
1820
7500
4.11
1500
200
1700
6000
3.52
Material
100
11.85
STEPS
1.
Normal loss units
2.
Finished Good /WIP
3.
Abnormal Loss/Gain.
Process Account-I
xxx
Normal Loss (note-i)
Xxx Xxx
Finished goods
Xxx Xxx
Additional Mat. Cost if any
xxx
Direct labour cost
xxx
Direct expenses
xxx
FOH
xxx
Abnormal loss
Xxx Xxx
xxx
WIP(Balancing figure)
Xxx Xxx
Abnormal Gain
Note.1
xxx
Recovered amount by sale of scrape units/normal loss units should be
shown in the cost column

Process Account-2
xxx
Normal Loss
Xxx Xxx
Finished goods
Xxx Xxx
Additional Mat. Cost if any
xxx
Direct labour cost
xxx
Direct expenses
xxx
FOH
xxx
Abnormal loss
Xxx Xxx
xxx
WIP(Balancing figure)
Xxx Xxx
Abnormal Gain
xxx
Abnormal loss a/c

Process-1
xxx
Scape value(Recovery)
xxx
101
xxx
Joint product:
P&L
Abnormal gains a/c
xxx
Two or more different products may results from one
process .They are not recognizable as different products until they emerge at the
point of separation. If the products are known each have a significant sales value,
either at the point of separation or after further processing, they are known as joint
products are :
Example of joint products are :
Coal gas production : (I) coal gas
Oil refining :
(I) petrol
(II)coke
(II) Diesel oil
(III) Lubricants
Methods for calculation of joint products cost.

1. Units of output/ physical units
2. Sale value of the product
By products:
A by product is produced in a similar manner to a join
product, but it has a low sales value compared to the sales values(s) of other
man products(s) resulting from the process.
Example of by-products are:
Garment manufacture: Remain of material (can be sold for various uses.)
Founding: Slag (used in construction industries )
Joint cost includes by product cost
Total cost
150,000
Less: By product cost
20,000
Joint cost
130,000
Budget
Estimate of income and expenses of a business over a particular
period on the basic of estimated activity.
Types of budget
1. Cash budget
2. sale budget
102
3. production budget
4. Master budget
Project trading and profit & Loss a/c
Project balance sheet
Cash budget
Cash budget
III.
Receipts schedule
IV.
Payment schedule.
V.
Cash budget
Format of cash budget

Receipts
January
February
March
Cash sale
xxx
xxx
xxx
Received from debtors
xxx
xxx
xxx
Sale of fixed assets
xxx
xxx
xxx
Loan obtained
xxx
xxx
xxx
Any other cash received
xxx
xxx
xxx
xxx
xxx
xxx
Cash purchased
xxx
xxx
xxx
Paid to creditors
xxx
xxx
xxx
Expenses paid
xxx
xxx
xxx
Drawings
xxx
xxx
Payments
Purchased of fixed assets xxx
xxx
Loan repaid
xxx
Any other cash paid
xxx
xxx
Net receipts (payments)
Balance b/d ( opening)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
103
xxx
xxx
xxx
xxx
xxx
xxx
Cash budget
Opening balance of cash/
Balance b/d
xxx
xxx
xxx
Recipts
xxx
xxx
xxx
- Payment
(xxx)
(xxx)
(xxx)
Balance c/d
xxx
xxx
xxx
Production budget -------------------------from book ----------page 399

Flexible budget:
A budget is prepared on the basis of a predetermined level of activity,
however, management may anticipate the actual level of activity being greater or
less than budget. The budget may, therefore be flexed i.e prepared for various
level of activity to enable realistic comparisons of actual and budget result.
Note:
The most important thing in budget questions in policy of sales
purchases, payment of expenses and their calculations.

Project trading profit trading and profit & less account and projected
balance sheet will be prepared as already done.
Standard Costing.
It is the pretermined cost of a product. It includes
direct material cost,direct labour cost direct expenses and FOH.

Assume standard units are 500 units and standard per unit cost is estimated as
under:
Material
3 met 2 each
Labour
2 Houm@2 per hour
FOH
100% OF D.labour
Standard cost per unit

Actual data after completion of period OR work
Actual output
480
104
Actual cost
Material
xxx
Labour
xxx
FOH
xxx
Variance Analysis
Material Variance
1.
Total material cost variance OR overall material variance

standard cost of material actual cost of material
(St.Qty x. price)-(Actual Qtyx actual price)
2.
Material price variance

standard price actual price x actual Qty purchased or used
Material usage /Quantity varience .

(Standard quantity actual quantity ) x standard price
Labour variance
1.
Total labour cost variance OR Overall labour variance

Standard labour cost---Actual hours cost.
3.
Labour Rate /wages varience

Standard Rate Actual rate x Actual hours worked.
4.
Labour Efficienvy Variance

Standard hours allowed actual hours worked x standard rate
Sale Variance
1.
Total sale variance OR overall sale variance

Standard sale price- actual sale price
(standard sale quantity x standard sale price)-(Actual sale quantity x
actual sale price)
2.
Sale price variance

Standard sale price-actual sale price x actual quantity sold
3.
Sale Volume variance

Standard sale quantity actual sale quantity x standard sale price
105
Investment Appraisal OR Capital Expenditures

1.
ARR
Accounting or Average rate of return
Net profit
100 = %
Average capital employed
average capital employed: of capital employed + working capital.
Accounting rate of return (ARR)
accounting rate of return calculates average annual profit as a percentage of
average capital employed.
Accounting capital is calculated as one half of the capital outlay on the
project based on the assumption that the fixed assets will be completely
deprecation by the end of the project. the return on capital from the project will be
compared with the return being earned on the capital already invested in the
business.
2.
Payback period.
Risk is an important factor to be considered in capital expenditure decisions. the

sooner the outlay on a project is an a project is covered by the inflow of cash the
better this is the payback period. A long period increase the risk that the outlay
will not be recouped. The payback period is measured in years. Only cash paid or
received enters into the calculated and non-cash item such as deprecation and
accruals and prepayment are ignored.
Comparison of the payback period of two projects
Project 1
Project 2
Cash ( out flow)
Cash ( outflow)
Inflow
Inflow
Years
Balance
(100-000)
Balance
(100-000)
(100,00)
(100,00)
106
20,000
(80,000)
15,000
(85,000)
40,000
(40,000)
20,000
(65,000)
40,000
25,000
(40,000)4
3.
IRR
30,000
-
(10,000)5
30,000
20,000
Internal Rate of return.

IRR= x + pq AC
Ad
X = Rate giving positive NPV

pq = Distance between two rates used to give NPVs
Ac = The positive + negative value
Internal rate of return ( IRR)
The net present value of a project is calculated by discounting net receipts
at rate equivalent to the cost of capital. This shows whether or not future net
receipts, when discounted will be at least to the in initial outlay in learns of the
present value of money.
If a company is to make a profit, it must earn a higher rate of return on an
investment than cost of its capital. Management needs to know what rate of return
an investment will yield. The expected yield can capital be compared with the rate
carned on its other capital. The rate is found by calculated the Internal Rate of
Return.
The Internal Rate of Return is the discounting rate which equates the
discounted net receipts from a project to its cost, i.e. the rate which produces a nil
NPV.
**************END***************

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Property of A.C.

This is the basic function of accounting. Recording means to put the

must be law full.

Goods sold & cash is paid on the spot/occasion

Goods sold but cash will be received after few

days etc. (Debtors)

Goods sold & cash received on the spot.

If goods sold are returned back to us due to any

reasons, it is called return inwards or sale return.

lands/building, debtors, stock etc.

the purpose to use them in business. Examples are machinery, furniture,

Obligations of the business.

bankovedraft, loan, accrued salary etc liability has two types:

those liabilities which are payable within a year.

Examples are creditors, bankoverdraft, accrued salary etc.

Examples are loan, debentures etc.

Investments by the owner in the business. Examples are cash

furniture, computer, machinery etc.

Earning of the business.

Examples are sale income, commission

received, discount received.

Spending of the business. Examples are salary, wages, rent, utility

bills, office expenses. Advertisement, fuel, repair etc.

his personal use it is called drawing. Examples are:

Personal bills paid out of the business cash.

Allowed by shopkeepers to customers. It may be

Discount allowed (expense) and discount received (income).

Allowed by one trader to another trader on bulk buying.

It is not recorded in the books of accounts. It is only shown in invoices.

There are five types of accounts.

Cash, furniture, land, vehicles, machinery, debtors, stock.

Creditor, bank overdraft, loan, accured salary, rent payable.

Sale, commission received, discount received.

Salary, rent, utility bills, insurance, advertising.

Rules of debit (Dr) & Credit (Cr)

Capital / Liability/ Income

Note: Normally expenses are Debited and incomes are credited.

What is type of these accounts?

DEBIT MUST HAVE CREDIT FOR

THE EQUAL AMOUNT.

Goods purchased for cash

It is prepared from journal or it can also be prepared directly from

In ledger, record relating to a particular account is maintained in a classified

Format of ---T. A/C.

Format of the trial balance.

Trading & profit and loss account.

Trading and profit & loss A/C

In T & P & L a/c income and expenses are shown.

Less: Return inwards/sale returns

Less: cost of goods sold.

Less: Return outwards/purchase return

Add: Carriage inwards

Less: Closing stock

Add: Discount received / rent received

Repair and maintenance

Van running cost

Net profit / net loss

Plant and machinery

Furniture and fitting

Cash at bank / bank

Less: Current liabilities.

Add: Net profit

BOOKS OF ORIGINAL OR PRIME ENTRIES OR DAY BOOKS OR SUB

Sale journal.Only credit sale of goods are recorded.