CAPITAL EXPENDITURE

 Capital expenditures are funds used by a company to acquire, upgrade,

and maintain physical assets such as property, plants, buildings,
technology, or equipment.
 Capital expenditures are payments made for goods or services that are
recorded or capitalized on a company's balance sheet instead of expensed
on the income statement.
 The benefits of capital expenditure are like to accrue for a long period.
 It is shown on the asset side of balance sheet.
 Examples: Purchase of land, vehicles, building, plant & machinery,
goodwill, patent rights, furniture and fixtures, preliminary expenses etc.
 Interest paid on loan to purchase a fixed asset, Cost of improvement in
the old fixed assets, Wages paid for erecting the machinery, cost of
acquisition and installation of a fixed asset.

REVENUE EXPENDITURE
 Revenue expenditures are short-term expenses used in the current period
or typically within one year.
 It includes the expenses required to meet the ongoing operational costs
of running a business.
 It is an expenditure incurred for the purpose of earning an income.
 It is incurred for the maintenance of an asset or the business.
  It includes the ordinary repair and maintenance costs that are necessary
to keep an asset in working order.
 Revenue expenditures are debited in the trading and profit and loss
account.
Examples: Salary, wages, rent, depreciation, taxes etc

DEFERRED REVENUE EXPENDITURE

 Deferred revenue expenditure refers to those expenses which will be
incurred in the current accounting period but the benefits of which lasts for
more than one accounting year.
 It describes money spent by a business that will create future revenue.
  The revenue earned will cover more than one accounting year.
It's usually a one-time expense that creates ongoing benefits
 The part of deferred revenue expenditure that was not written off in one
accounting year will be shown in the balance sheet as fictitious Asset.
Advertisement of high amounts will be treated as deferred revenue
expenditure.

TRIAL BALANCE
 A trial balance is a list of all the general ledger accounts (both revenue
and capital) contained in the ledger of a business.
 This list will contain the name of each nominal ledger account and the
value of that nominal ledger balance
 A statement of debit and credit balance of account.
 It is prepared to check the arithmetical accuracy of the accounts.
 The trial balance is not a part of final accounts.
 The trial balance is not a part of double entry system.
 Difference in a trial balance can be temporarily put into the suspense
account.
 Compensating errors and error of principles are not disclosed by the trial
balance.
Methods for preparing Trial balance
1) Total method (Totals are recorded)
2) Balance method (Amounts are balanced)
Balance method is the best method for preparation of trial balance.

ACCOUNTING ERRORS
1) Clerical errors
a) Omission - Omission of a transaction from ledger
 Complete omission
 Partial omission
 b) Commission - Occurred when posting, balancing & totalling (Affect
TB)
c) Compensating - One error compensate another (Not affect TB)
2) Error of principle - Correct posting of a transaction in the correct side of
the ledger but in a wrong account.
ERRORS THAT AFFECT TB
 Partial omission
 Wrong balancing
 Extracting wrong figures from ledger
 Listing a debit balance to the credit side of the Trial Balance
 Listing a credit balance to the debit side of the Trial Balance
 The posting of debit as credit or vice versa
TRADING & PROFIT& LOSS ACCOUNT
Trading Account
 First stage of preparation of final accounts
 Only consider revenue items
 It reveals gross profit or gross loss
 Balance transferred to P&L account
 Direct expense – Dr (Purchase)
 Direct income – Cr (Sale)
 Nominal account
Profit & Loss Account
 Revenue statement.
 Statement of expenses and income for a particular period.
 Nominal account
 It reveals net profit or net loss
 Indirect expense – Dr (Salary)
 Indirect income – Cr (Commission received)
Balance sheet
 Financial statement
 Position statement
 Static statement
 Prepared on a particular date
 Financial position of the business
 Earning capacity
 Financial health
 Snapshot of business
 Real and personal accounts
 Components - Assets, liabilities and capital
 Assets - Capital expenditure
 Liabilities - Capital receipt
 Balance of ledger account which is not closed deal with Balance sheet
(PYQ)
 Asset = Liabilities + Capital
 Preparation of Balance sheet deals with deals with Section 6 of
Companies Act 1956
 Preparation of Balance sheet deals with deals with Section 3 of
Companies Act 2013 (Amendment)

MARSHALLING
 Arrangement of assets and liabilities in certain specific order in the
balance sheet is called Grouping or Marshalling.
 The Marshalling of balance sheet is done in two ways 1. Liquidity order
and 2 Permanence order.
Types of Assets
1) Fixed asset
 Assets which have a long period of life and have a high value are fixed
assets.
 Depreciation is charged to fixed assets due to wear and tear.
 Eg : Machinery, Furniture , Land, Building
2) Current asset
 Cash and other assets that are expected to be converted to cash within a
year.
 Floating asset, Circulating asset
 Changes in the price of current asset is fluctuation
3) Tangible asset
 Assets which have physical existence
 Assets are visible and are able to touch.
 Eg :Vehicles, Furniture
4) Intangible asset
 Assets which have no physical existence
 Assets are not visible and are not able to touch.
 Eg: Goodwill, Trade mark, Copy right
5) Fictitious asset
 Assets which have no material form and no resale value
 Benefit could be received in future.
 Eg: Preliminary expense, underwriting commission
 6) Wasting assets
 Assets subject to depletion.
 Eg : Mines, coal
7) Contingent assets
 These are assets the existence, values and ownership of which depends
up on the occurrence of a specified event.
 Eg: claim for refund of income tax, sales tax, uncalled share capital

NPA (Non Performing Asset)

 An advance or borrowed account which doesn't generate income to is called
NPA.
  NPA is an asset failed to yield income
 Assets become NPA, if remain unpaid for two quarters
 Narasimham committee
STANDARD ASSET
 Accounts do not disclose any credit problem is a standard asset
 Standard assets are those which are not NPA.
SUBSTANDARD ASSET
 Substandard assets are those which are NPA for a period not exceeding two
years
 A general provision of 10% of the outstanding is required for sub-standard
assets
LIABILITIES
 Obligation of business
1) Short term liabilities
Repayable within one year
2) Long term liabilities
Repayable after one year
3) Contingent liability
 Liability happening on future base on an event
 Never shown on balancesheet
 Full disclosure
 It shown on footenote
OWNERS CAPITAL
 Capital = Asset – Liability
 Capital increased because of profit & Additional share
 Deduction in owners capital - Drawings
 N/P - added
 N/L - deducted
 Interest on capital - added
 Drawings - deducted
Q) Drawings made by cash ...... account is credited
Drawing Dr
To cash
Q) Drawings made by asset
Drawing Dr
To Asset
Q) Drawings made by goods
Drawing Dr
To purchase
ADJUSTMENT ENTRIES
 Adjustment entries are passed to get actual results

1) Closing stock
 Unsold stock in the business at year end
 Physically verified at the end of the period
 Closing stock valued at cost price or market price whichever is less
 Closing stock methods - FIFO, LIFO, ABC Analysis
 Closing stock doesn't have ledger balance
 Recorded assets side in the balance sheet
  Adjustment entry of closing stock
Closing stock A/c dr
To Trading A/c
2) Loss of stocks
 Abnormal reasons (Fire, Earthquakes)
 Loss of stock always valued at cost price only
Situations
 When goods are insured and get full claim
a) Insurance company/claim dr
To Trading A/c
b) Recorded as asset side in the balance sheet (Claim amount)
 Goods insured and get part of claim
a) Insurance claim Dr
To Trading A/c
b) The loss amount recorded in
P&L A/c Dr
To Loss of stocks
c) Actual amount received should be recorded in Asset side
 Goods are not insured (credit sided
a) Loss of stock a/c
To trading a/c
 b) P&L a/c dr
To Loss of stocks
3) Goods withdrawn from the business
Drawings A/c dr
To purchase
4) Goods distributed as free Sample
Advertisement A/c dr
To purchase A/c
5) Outstanding expenses
 Expenses due but not paid
 O/s expenses are personal A/c or representative personal A/c
 Also known as Accrued expense
  It is a current liability
 It is added to concerned expense in the trading & P&L A/c
 Expense a/c dr
To O/s expense
6) Prepaid expenses
 The expenses paid in advance
 It should be deducted in concerned expense
 Recorded in the asset side of balance sheet
 Also known as unexpired expenses
 Prepaid expense Dr
To concerned expense
7) Accrued Income
 Income earned but not received
 Also known as outstanding income
 It should be shown on credit side in the P&L A/c
 It should be added to concerned income in P&L A/c
 Recording in the asset side of balance sheet
 Accrued income A/c
To Income A/c
8) Income received in advance
 Also known as unearned income
 Income received but service rendered in the next year
 It should be deducted in the concerned income in P&L a/c
  Recorded in liability side of balance sheet
 Income A/c
To unearned income
9) Interest on capital
 Interest on capital is expense to the business
 Interest on capital is income to the owner
 It should be added to opening capital of the firm
 Interest on capital is purely expense
 If it is given in outside trial balance, debited in P&L
a/c and recorded in liability side (added to capital)
 If it is given in trial balance, it should be recorded only in P&L
 Increased capital
Interest on capital dr
To capital
(When interest given outside TB)
Given in TB
P&L A/c Dr
To interest on capital
10) Interest on drawings
 It is income to the business
 It is shown on credit side of P&L a/c
 It is an expense to the owner of the business.
 It is deducted from the capital
  If it is given in TB, it should be shown in P&L
 Drawings a/c Dr
To interest on drawings
 Interest on drawings a/c Dr
To P&L a/c
11) Bad debt
 It is loss to the business
 Uncollectable debt or irrecoverable debt is called bad debt
 If bad debt given in the trial balance it is only taken in the P&L A/c
 If further bad debt in the outside TB, It is deducted from Sunday
debtors in asset side
DEPRECIATION
 Depreciation indicates reduction in value of any fixed assets
 Depreciation helps in ascertaining uniform profit in each accounting year
 Depreciation allows to take the advantage of tax benefit
 Non monetary expense
 The fund created for replacement of fixed asset is depreciation fund

Different Methods Of Depreciation

1) Fixed instalment method
 Straight line method/ original cost method.
 Earliest and one of the most widely used methods depreciation.
  In this method depreciation charged in every year is uniform and is
calculated on the original cost of the asset.
 The asset will attain zero value after its working life in this method.

2) Diminishing balance method

 Reducing instalment method
 Written down value method
 Fixed percentage is written off every year on the book value of the
asset
 Book value = original cost - depreciation provided till date
 The depreciation charging is diminishing in each year and the value
of asset will not become zero after its working life
  This method is most suitable for plant and machinery where repairs
are heavy

3) Annuity method
 In this method, the cost of the asset together with the interest there on
is written off annually in equal instalments.
 The book value is brought down to zero at the end of its working life
 Depreciation amount ascertained by the use of Annuity tables

4) Sinking fund method

 Asset kept at its original cost throughout its life
  An amount equal to annual depreciation is drawn every year and
invested in securities outside the business
 Calculated with reference to sinking Fund tables

5) Insurance policy method

 An insurance policy will be taken out for the amount required to
replace the asset after its estimated life period
 The annual premium to be paid to the insurance company will be the
amount of depreciation charged every year
6) Revaluation method
 As per this method, independent valuation of asset is made at the end
of every year by experts.
 This method is most suited for inexpensive assets like loose tools,
patents, live stocks etc.

7) Depletion method
This method is mostly suited for wasting assets like mines, quarries,
oil wells etc.
8) Machine hour rate method
This method is most suited for machines whose working life can be
estimated in terms of working hours

Cost of the machine - scrap value

Total number of estimated working hours

9) Mileage method
 The cost of the asset is divided by the total mileage estimated for
its whole life to find out the rate of depreciation.
 This method is suitable in the case of motor vehicles.
10) Sum of years digit method
 This method is a variant of diminishing balance method.
 The depreciation amount is decreasing every year
 Remaining life of the asset (Including current Year)/ Sum of all
the digits of the life of the asset in years X (Original cost - scrap
Value)
CONSIGNMENT
 A consignment is the transfer of possession of goods from the owner
(consignor) to another party (consignee) who becomes the agent of the
owner for selling the goods.
 Goods send on consignment is not a sale.
 In consignment, the document used to give information of the goods send
is called Performa invoice
 When goods are sent on consignment, consignment account is debited
 In consignment sales, the title of the goods remains with the consignor
 In consignment sales, only the possession of goods is transferred, but not
the ownership.
 The relationship between consignor and consignee is that of principal and
agent Goods send on consignment account is closed by transfer to trading
account.
 Consignment stock is valued a cost plus non-recurring expenses
 Delcredre commission is allowed to cover loss due to bad debts
 Delcredre commission is a guarantee against bad debts
 The consignment stock is shown as an asset in the balance sheet
 An account sale is a document prepared and sent by the consignee to the
consignor
 COMPANY ACCOUNTS
 A company is a person created by statute
 A company can invest money in another company only if it is authorised by
its memorandum of association
Types of company
1. Private Company
Minimum number of persons required to register a private limited
company is 2
Maximum number of persons allowed in a register a private limited
company is 200
A private company cannot invite public for subscribing shares and
debentures
 2. Joint Stock Company
Minimum number of persons required to register a public company - 7
Maximum number of persons allowed in a joint stock company is -
unlimited
Foreign company
A Foreign company is one that incorporated outside India but has business
operation in India
Important Documents
1. Memorandum of Association
The magnacarta of a company is its Memorandum of Association – MOA
The objectives of companies are given in its memorandum of association
 2. Articles of Association
The internal management of a company is specified in the article of
association Articles of association of a company contains rules and
regulations relating to internal management of the company

Profit or Loss prior to incorporation

1. Profit prior to incorporation
When a running business is taken over by a company from a date prior to
its incorporation, the profit earned upto the date of incorporation is known
as Profit prior to incorporation.
Profit prior to incorporation is transferred to capital reserve or may be
adjusted against Goodwill
 2. Loss prior to incorporation
When a running business is taken over by a company from a date prior to
its incorporation, the loss incurred up to the date of incorporation is
known as loss prior to incorporation.
Loss prior to incorporation is shown under the head Miscellaneous
Expenditure in the asset side of the balance sheet.

Absorption
An existing company take over the business of another company is called
absorption
Audit of a company
 The auditor of a government company is appointed by central Government
 The auditor of a company is appointed for a period of one year
 The civil liability of a company auditor is for negligence
 Section 224 of companies act deals with appointment and remuneration of
auditors.
 The first auditor of a company is appointed by board of directors
 The audit of a joint stock company is conducted in order to meet the
statutory requirements
 CO-OPERATIVE ACCOUNTING
 The own funds of cooperative societies include these
a. Share capital
b. Entrance fees /Admission fees
c. Reserve funds
d. Other reserves
 In co-operative societies R&D statements is prepared with the help of
ledger total.
 In co-operative societies R&D statements is prepared instead of trial
balance
 The fund maintained by a society to which Rule 63 applies is Fluid
resources, 20% of the total of its demand and time liabilities
 Register of dividends is the register which contains details regarding the
dividends declared
 Co-operative societies maintain books of accounts as per Rule 29 of KCS
Act
 In co-operative societies accounting, instead of the symbols "Dr" and "Cr"
receipts and payments are used
 In R & D of a co-operative society receipts includes liability and income
 In a co-operative balance sheet liabilities are arranged in the order of
permanency
 The closing balance of R & D is shown in balance sheet
 State aid by way of share capital includes both direct and indirect
 Principal State Partnership Fund (PSPF) shall be utilised by apex society
 Register of monthly R&D is a register containing the total of receipts and
payments money
 Credit limit Statement is a statement containing details regarding the loans
to be disbursed
 Direct partnership of Government in co-operative societies is principle
state partnership fund
 Amount given in lump sum and the repayment in instalment is called Loan
 Amount given by government in which there is no repayment expected is
called grant
 Amount given by a bank but a part of which is not repayable is called
subsidy
 Share capital, admission fees, entrance fees, reserve fund and other funds
of a o operative society is owned fund
 Loans given by DCB to PACS is an example of borrowed funds of PACS
 The sixth item of the expenditure side of audited P & L of a co-operative
society is depreciation fund
 Agricultural credit stabilization fund is to be maintained by credit
cooperative societies
 Profit and loss account is prepared to know the profit or loss
 Due to account is asset of the society
 Due by account is liability of the society
 Adjusting heads due to in a co-operative society means suspense asset
 The profit obtained by selling permanent asset of the society is to be shown
in as capital reserve in balance sheet
 Loan to members should be shown on the payment side of the R& D
 In the R&D of a co-operative society, the receipts side includes liability
and income
 The R&D of a co-operative society is prepared from its Ledger Accounts
 PARTNERSHIP ACCOUNTS
 The business carried on by two or more persons is called partnership.
 The Indian Partnership Act of 1932 defines partnership as the relation
between persons who have agreed to share the profit of a business carried
on by all or any one of them acting for all.
 Partnership is the result of an agreement between the partners.
 The persons who form a partnership are individually known as partners and
collectively as a partnership firm.
Partnership Deed
 The document in which terms and conditions regarding the conduct of
partnership business are given is known as the partnership deed.
 The partnership deed should be properly stamped, but may or may not be
registered
 In the absence of a partnership deed partners share profit and loss equally

 In the absence of any partnership deed:

No partners have a right to get salary
No interest on capital shall be allowed
No interest to be charged on drawings
Profit and loss to be shared equally
Interest at 6% is allowed to partners’ loan of the firm
Features of partnership
1) Registration: Not compulsory
2) Members
Minimum 2 persons
Maximum 100 persons
11) Unlimited liability
12) Mutual agency
Types of partnership firms
1. Partnership at will
It is a form of partnership at the will of partners
The validity period / period of maturity never mentioned.
2. Particular partnership
The partnership is formed for attaining certain / particular purpose.
Maturity period definitely mentioned.
3. General partnership
The liability of the partners is unlimited
Registration is optional
4. Limited partnership
The liability is Limited
For one person is unlimited and for other persons limited
Limited liability partnership Act 2008
Registration is compulsory.
Types of partners
1) Active partners
The partner who actively engage in the activities of the partnership
2) Sleeping partners
Contribute capital & share profit to him
Not engaged in the affairs of the business
Also called dormant partner
3) Secret partner
The relationship of the partner is not known to the public
Contribute capital but not share profit
4) Nominal partner
It is the partner by name only
To improve the reputation of the partnership
They cannot contribute capital.
They do not participate in management
5) Partner by estopel
By the behaviour of nature of the partner public is misunderstanding he is
a partner of the firm
6) Partner by holding out
Knowingly allowing him to the public as he is a partner of the firm
Methods of maintaining capital
 A partnership firm has many capital accounts
 The capital account of a partner shall be maintained in two ways
1. Fluctuating capital method
In fluctuating capital method, current or drawings account is not
prepared
2. Fixed capital method
In fixed capital method, current or drawings account is also prepared
Audit of partnership
 The duties of auditors of a partnership firm are regulated by agreement
between partnership firm and auditors
  The scope of external audit in the case of partnership firm is decided by
letter of appointment
 The auditor of a partnership firm is appointed as per agreement
Profit & Loss Appropriation Account
 The profit and loss appropriation account is prepared for a partnership firm
 The accounts prepared by a partnership firm to show the apportionment of
net profit is called profit and loss appropriation account
 The partners salary debited to profit and loss appropriation account
 The interest on drawings of a partner shall be credited to profit and loss
appropriation account
Reconstruction Of Partnership / Reconstitution
It is the change in the nature of relationship.
1. Change in the P&L of existing partners
2. Admission of new partner
3. Retirement of a partner.
4. Death of partner or insolvency of partners.
Admission of partner
 On admission of a new partner, the partnership firm is reconstituted
 At the time of admission of a partner, existing partners have to surrender
some of their share in favour of the new partner.
 The ratio in which partners surrender their profits - sacrificing ratio
  The ratio in which they agree to sacrifice their share of profits in favour of
incoming partner is called sacrificing ratio.
 Sacrificing Ratio = Old (Existing Ratio) - New Ratio
Admission accounting treatment
 Calculating new profit sharing ratio

Q) A&B are the partners sharing P&L in the ratio of 3:2.

They admit C as the new partner for 1/6th share.
What will be the new profit sharing ratio?
Answer:
Let assume total capital is 1.
 C = 1/6
Remaining share = 5/6
A’s share = 3/5 x 5/6 = 15/30
B’s share = 2/5 x 5/6 = 10/30
C’s share = 1/6 x 5/5 = 5/30
New profit sharing ratio = 15:10:5 = 3:2:1
Retirement
 When a partner retires from a firm, the remaining partners shall gain share
in future profit
 Gaining ratio is calculated on the retirement of a partner
 Gaining ratio = New Ratio - Old (Existing Ratio)
 Gaining ratio is the ratio in which remaining partners deciding to share the
outgoing partners share.

REVALUATION ACCOUNT
 On admission of a new partner, the firm stands reconstituted and
consequently the assets are revalued and liabilities are reassessed.
 It is necessary to show the true position of the firm at the time of admission
of a new partner.
 For this purpose a Revaluation Account is prepared.
 Revaluation account is debited for an increase in the value of Liabilities
 Revaluation account is credited for an increase in the value of Asset
 Revaluation account is credited for a decrease in the value of Liabilities
 Revaluation account is debited for a decrease in the value of Assets
 Profit on revaluation is transferred to the Credit side of the partners’ capital
account.
 Reserve should distributed amongst the existing partners in Existing ratio
 The amount brought in by the new partner is transferred to the existing
partner in sacrificing ratio
 Accumulated Losses are debited to the existing partner’s capital account in
existing profit sharing ratio.
 If the new partner brings amount of goodwill, the amount of goodwill
brought by him is credited to capital
  Goodwill appearing in the books of the firm is debited at the time of
admission of a new partner

CASH DISCOUNT AND TRADE DISCOUNT

Cash discount
 Cash discount is the reduction allowed by the seller to buyer or creditor
usually on making prompt payment.
 Cash discount encourages prompt payment of debts
 Cash discount is allowed by creditor
 Cash discount is an income for the debtor and expense for the creditor.
 It is shown the books of Accounts
Trade discount
 Trade discount is usually allowed by the wholesaler to the retailer from the
list price or catalogue price for bulk purchases.
 Trade discount encourages bulk purchases.
 Trade discount is allowed by wholesaler
 Trade discount is not shown in the books of accounts
 It is deducted before billing.
 CREDIT NOTE AND DEBIT NOTE
Credit note
 The credit note is prepared by the seller and forwarded to buyer
 Credit note is prepared for sales returns.
 Another name for sales return book is return inward book
 Credit note is a document send by the supplier to the customer
 Credit note provides the details of goods received back
 Credit note is the source document for recording entries in S/R journal
 The Credit note number is recorded in the sales return book
 Credit note is send to a customer when he returns the goods
Debit note
 A Debit note is given for purchase returns
 Another name for purchase return book is return outward book
 Debit note is the source document for recording entries in the purchase
return journal
 Debit note is the statement send by the customer to the supplier
 The Debit note number is recorded in the purchase return book

BANK RECONCILIATION STATEMENT

 The bank and its customer (e.g. a business entity) maintain independent
records in respect of the transactions taking place between them.
 Therefore it is necessary to assured that the two are in agreement on the
amount of money deposited and cheques agreement and they need to be
reconciled.
 Bank reconciliation statement is prepared by the customer of a bank to
reconcile the balance of pass book and the balance of bank column in the
cash book on a particular date.
 Bank reconciliation statement is prepared to bring the pass book balance in
agreement with the cashbook balance
 Bank reconciliation statement is self explanatory as it starts with the
balance of one book and ends with the balance of the other book.
 The disagreement between the two may be traced due to the following
factors
 (a) Un presented cheques
(b) Un credited cheques
(c) Bank charges
(d) Direct Credits
(e) Error of the customer or of the bank

GOODWILL
 Over a period of time, a business firm develops a good name and reputation
among the customers.
 This help the business earn some extra profits as compared to a newly set
up business.
 In accounting capitalised value of this extra profit is known as goodwill.
 Goodwill is the total assessed value of reputation of a business
 Goodwill is not subject to depreciation
 Goodwill account is real account
 Goodwill is intangible asset
 Goodwill is the first item of the balance sheet of trader kept in the order of
permanence
 Goodwill is shown under the heading fixed asset in the balance sheet
 Amortisation is used to show the loss in the value of Goodwill
(amortisation)
 The term fixed asset will include goodwill
  Liquidation expenses of the vendor company agreed to be paid by the
purchasing company is debited to the Goodwill account in the books of
latter company.
 In the case of joint stock companies, goodwill is shown on the asset side
under the head of fixed assets

Methods Of Valuation Of Goodwill

The method of valuation of goodwill is generally decided by the partners
among themselves while preparing partnership deed.
The following are the important methods of valuing the goodwill of a firm
1. Simple Average Profit Method
 Under this method, average of the profits of certain given years is
calculated.
 The value of the goodwill is calculated at an agreed number of year's
purchase of the average profit.
 Thus the goodwill is calculated as follows.
Value of goodwill = Average Profit x Number of years purchase
2. Super Profit Method
 A super profit is the excess of actual profit over the normal profits.
 If a new business earns certain percentage of the capital employed, it is
called ‘normal profit’.
  The value of the goodwill is calculated at an agreed number of years
purchase is multiplied by the Super profit.
 Normal profit is that profit which is, earned by other business unit of the
same business.
 Normal profit will be calculated as follows
Normal profit = Capital employed x normal rate of return/100
 Actual Profit: These are the profit earned during the year or it is also taken
as the average of the last few years profit.
Super Profit = Actual Profit - Normal Profit
3. Capitalisation Method
 In this method, goodwill is the amount of capital saved.
 Normally businessmen invest capital to operate business activities, and earn
profit with the efficient utilization of capital.
 If the business earns more profit by investing lesser amount of capital as
compared to other business, who earned same amount of profit with more
amount of capital, the saved amount is assumed to be goodwill.

 Under this method, the Goodwill is calculated in two ways

a) Capitalisation of Average profit
b) Capitalisation of Super profit
 RECEIPTS AND DISBURSEMENTS ACCOUNT
 Receipts and disbursements account is the receipts and payment statement
of a co-operative society
 It is a classified summary of the Ledger Accounts
 It contains receipts and payments of both cash and credit transactions.
 It serves basis for the construction of Trading and P&L and Balance sheet.
 It serves the purpose of a trial balance under double entry system.
RECEIPTS AND PAYMENTS ACCOUNT
 Receipts and payment account is a real account.
 It is a summary of cash book merging cash and bank items.
 The difference between the two sides of receipts and payment account will
represent cash in hand or cash at bank.
 Receipts and payment account will include both capital and revenue item.
 Receipts are shown in the debit side and payments are shown in the credit
side.
 Receipts and payment account is not a part of the double entry system.
 Receipts and payment account will not reveal the profit or loss
 It usually commences with an opening balance and closes with a closing
balance.
 INCOME AND EXPENDITURE STATEMENT
 Income and expenditure statement is a nominal account
 Income and expenditure statement has no opening balance
 It is prepared by non trading concerns in lieu of profit and loss account.
 It has no closing balance, but the difference will be shown as surplus or
deficit.
 It includes only items of revenue nature, capital items are excluded.
 It includes only current period’s income and expenditure.
 Incomes are shown on credit side and expenses are shown on the debit side.
 PROVISIONS
 Provision is a charge against profit.
 Provision is an amount set aside by charging (debited) it in the profit and
loss account, to provide for known liability the amount of which cannot be
determined accurately because they are not yet incurred.
 The term ‘provision’ means an amount, which is: written off, or retained,
by way of providing for depreciation, renewals, reduction in the value of
assets; or retained by way of providing for any unknown future liability of
which the amount cannot be determined accurately.
 Provision for Depreciation, Provision for Bad and doubtful debts etc are
examples of provisions.
 RESERVES
 Reserve means amount set aside out of profits (as calculated by the profit
and loss account) or other surplus which are not meant to cover any
liability, contingency, commitment or legal requirement.
 Thus, reserve covers the case of amount which is neither a liability nor a
provision.
 It is allocation of the profit and not a charge against the current revenue.
Reserve is an appropriation of profits to strengthen the financial position of
the business.
 For example, General reserve, Capital reserve etc
Types of reserve
(a) General Reserve
 It is the amount set aside out of profits for no specific purpose.
 It is available for strengthen the financial position or expansion of
business
 General reserve is created by debiting the profit and loss appropriation
account and crediting general reserve account.
(b) Specific Reserve
 A specific reserve is created for a given purpose.
 It cannot be used for any other purpose except for which they are created
(c) Secret Reserve
 It is a reserve the existence or the amount of which is not disclosed in
the balance sheet.
 It is also known hidden reserve
DIFFERENCE BETWEEN RESERVES AND PROVISIONS
Basis Reserves Provisions
Nature It is an appropriation of profit It is charge against profit
Purpose It is created to strengthen the It is created to meet known
financial position of business. liability for which the amount is
not determined.
Effect on taxable It reduces the taxable profit. It has no effect on taxable
profit
Distribution of It can be used for dividend It cannot be used for dividend
dividend distribution. distribution.
 DIFFERENCE BETWEEN REVENUE RESERVE AND CAPITAL RESERVE
Basis Of Difference Revenue Reserve Capital Reserve
Source of creation These reserves created from revenue These reserves created from
profits capital profits
Usage These reserves can be used to give These reserves cannot be used
dividend to shareholders for giving dividend to members.

Purpose These reserves are created for It is used for writing off the
meeting unforeseen losses capital
 SHARE CAPITAL
1. Authorized Share Capital
This is the maximum amount which the company is authorized to raise by
way of public subscription.
There is no legal limit on the extent of amount of authorized share capital
2. Issued Share Capital
That part of the authorized capital which is offered to the public for
subscription is called issued share capital.
3. Subscribed Share Capital
That part of the issued capital for which applications are received from the
public is known as subscribed share capital.
4. Called Up Share Capital
That part of the subscribed capital which has called upon the share holders
to pay is called up Share Capital.
5. Paid Up Share Capital
The part of the called up capital which is actually paid by the members is
called Paid up Share Capital.
The unpaid balance on the called up capital is known as calls in arrears.
The Called up capital - calls in arrears is considered to be the paid up share
capital.
 SHARE
A “share” has been defined by the Indian Companies Act, under section 2 (46)
as “A share is the share in the Capital of the Company”.
TYPES OF SHARES
A Company can issue two types of shares - Equity and Preference
(a) Equity Shares
Equity shares means that part of the share capital which is not a
Preference share capital
It means all such shares which are not Preference shares.
Equity shares are also called as Ordinary Shares.
 (b) Preference Shares
Preference shares are those shares which fulfil both the following two
conditions
i. They carry preferential share right in respect of dividend at a fixed
rate,
ii. They also carry preferential right in regard to payment of capital on up
of the company
PROCEDURE FOR ISSUE OF SHARES
A. Issue Of Prospectus
 Whenever shares are to be issued to the public the company must issue a
prospectus
 Prospectus means an open invitation to the public to take up the shares of
the company thus a private company need not issue prospectus.
 Even a Public Company issuing its shares privately need not issue a
prospectus.
 However, it is required to file a “Statement in lieu of Prospectus” with the
register of companies.
 The Prospectus contains relevant information like names of Directors,
terms of issue, etc.
 It also states the opening date of subscription list, amount payable on
application, on allotment & the earliest closing date of the subscription list.
B. Application Of Shares
 A person intending to subscribe to the share capital of a company has to
submit an application for shares in the prescribed form, to the company
along with the application money before the last date of the subscription
mentioned in the prospectus.
Over Subscription
 If the no. of shares applied for is more than the no. of shares offered to the
public then that is called as over Subscription.
Under Subscription
 If the no. of shares applied for is less than the no. of shares offered to the
public then it is called as Under Subscription.
C. Allotment Of Shares
 After the last date of the receipt of applications is over, the Directors,
Proceed with the allotment work.
 However, a company cannot allot the shares unless the minimum
subscription amount mentioned in the prospectus is collected within a
stipulated period.
 The Directors pass resolution in the board meeting for allotment of shares
indicating clearly the class & no. of shares allotted with the distinctive
numbers.
 Then Letters of Allotment are sent to the concerned applicants.
 Letters of Regret are sent to those who are not allotted any shares &
application money is refunded to them
 Partial Allotment
 In partial allotment the company rejects some application totally, refunds
their application money & allots the shares to the remaining applicants
Pro-Rata Allotment
 When a company makes a pro-rata allotment, it allots shares to all
applicants but allots lesser shares then applied for E.g. If a person has
applied for three hundred shares he may get two hundred shares.
D. Calls On Shares
 The remaining amount of shares may be collected in instalments as laid
down in the prospectus.
 Such instalments are called calls on Shares.
  They may be termed as Allotment amount, First Call, Second Call, etc.
E. Calls In Arrears
 Some shareholders may not pay the money due from them.
 The outstanding amounts are transferred to an account called up as “Calls-
in-Arrears” account.
 The Balance of calls-in- arrears account is deducted from the Called-up
capital in the Balance Sheet.
 Calls in arrear is an asset to the company
F. Calls In Advance
 According to Sec 92 of the Companies Act, a Company may if so
authorized by its articles, accept from a shareholder either the whole or part
 of the amount remaining unpaid on any shares held by them, as Calls in
advance.
 No dividend is paid on such calls in advance.
 However, interest has to be paid on such calls in advance.
 Calls in advance is a liability to the company

ISSUE OF SHARES AT A PREMIUM

 When the shares are issued at a price higher than the nominal value of the
shares then it is called as shares issued at a premium.
 The amount of premium is decided by the board of Directors as per the
guide lines issued by SEBI.
 Such share premium collected by the company is credited to a separate A/c
called as Securities Premium A/c
 Although Securities Premium is a profit to the company, it is not a revenue
profit, it is treated as capital profit, which can be utilized only for the
following purposes as per sec.78 of the Companies Act
(a) Issue of fully paid bonus shares to the existing shareholders.
(b) Writing off the preliminary expenses of the company.
(c) Writing off the expenses of issue or the commission paid or discount
allowed on any issue of shares / debentures.
(d) Provide premium payable on preference shares redemption/debentures.
 The company can utilize the security Premium for any other purpose only
on obtaining the sanction of the court.
FORFEITURE OF SHARES
 When shares are allotted to an applicant, it becomes a contract between the
shareholder & the company.
 The shareholder is bound to contribute to the capital and the premium if
any of the company to the extent of the shares he has agreed to take.
 If one applicant fails to pay the calls then his shares may be forfeiture by
the directors if authorised by the Articles of Association of the company.
 The Forfeiture can be only for non-payment of calls on shares and not for
any other reasons.
RE-ISSUE OF FORFEITED SHARES
 The Directors may reissue the Forfeited shares at par, at premium or at a
reissued at a discount;
 The maximum discount is restricted to the amount Forfeited on these shares
+ the original discount.
ISSUE OF BONUS SHARES
 Profit making companies may desire to convert their profit into share
capital.
 This can be done by issue of bonus shares.
 Issue of Bonus shares is also called as conversion of profit into share
capital or capitalisation of profits.
 Bonus can be of two types
 (a) Making partly paid shares into fully paid by declaring bonus without
requiring shareholders to pay for the same.
(b) Issue of fully paid equity shares as bonus shares to the existing equity
shareholders.

DEBENTURES
 Debenture may be defined as a certificate issued by company under its seal
acknowledging a debt due by to its holder.
 The essential characteristic of debentures
1. Rate of interest of debentures are fixed
2. The valid duration of debenture is known as gestation period
3. Loss on issue of debenture is treated as miscellaneous expenditure
4. Discount on issue of debenture is capital loss
5. Interest on debentures is a charge against profit
6. Bond is secured debenture
7. The procedure for forfeiture and re issue of shares are given in articles of
association
 MANAGEMENT ACCOUNTING
Management accounting is a method of accounting that creates statements,
reports, and documents that help management in making better decisions
related to their business’ performance.
Managerial accounting is primarily used for internal purposes.
Management accounting tools for financial Analysis
1) Comparative Financial Statement Analysis
2) Common Size Statement Analysis
3) Trend Analysis
4) Ratio Analysis
5) Fund Flow Analysis
6) Cash Flow Analysis

A) Comparative Financial Statement Analysis

 A comparative statement is a document used to compare a particular
financial statement with prior period statements.
 Previous financials are presented alongside the latest figures in side- by-
side columns, enabling investors to identify trends, track a company's
progress and compare it with industry rivals.
 Prepare comparative Income statement & comparative Balance sheet
B) Common Size Statement Analysis
 It is also known as vertical analysis.
 This method analyses financial statements by taking into consideration each
of the line items as a percentage of the base amount for that particular
accounting period.
C) Trend Analysis
 Analysing financial data over a period of time
 Prepared by taking a year as a base year.
D) Ratio Analysis
 Ratio analysis is a medium to understand the financial weakness and
soundness of an organization.
 Interpretation depends upon the calibre of the analyst.
  The term ‘ratio’ refers to the mathematical relationship between any two
inter-related variables.
 It establishes relationship between two items expressed in quantitative
terms.
 Ratio can be defined as the term used to describe significant relationships
exist between figures shown in a balance sheet and profit and loss account
in a budgetary control system or any other part of the accounting
management.
FUNCTIONAL CLASSIFICATION OF RATIOS
Ratios can be further classified based on their functional aspects as discussed
below.
1. Liquidity Ratios/ Short Term Solvency Ratio
Liquidity ratios are used to find out the short-term paying capacity of a
firm, to comment short term solvency of the firm, or to meet its current
liabilities.
a) Current ratio = Current asset
Current liabilities
 Also called working capital ratio
 Bank rate ratio
 Idle ratio - 2:1
b) Quick ratio/ Acid test ratio
Quick ratio = Quick asset
Current liabilities
  Quick asset does not include inventories & prepaid expense
 Idle ratio – 1:1
2. Activity Ratios/ Efficiency/ Performance ratio
Activity ratios are also called turnover ratios. Activity ratios measure the
efficiency with which the resources of a firm are employed.
a) Stock Turnover / Inventory Turnover Ratio
 How far convert stock to sales
 Expressed in time
Stock turnover ratio = cost of goods sold
Average stock
 Stock velocity - minimum period to convert stock to sales
  in days = 365
Stock turnover days
 Low stock velocity - greater efficiency
 Longer period of stock velocity means - inefficient
b) Debtors turnover ratio
 How easily debtors are converted into cash
Credit sale
Average debtors including B/R
c) Creditors turnover ratio
 It measure creditors are paid during the year
Credit purchase
Average Creditors including B/P
 d) Working capital turnover ratio
 How efficiently working capital used
 No of times working capital used to make sales
3. Profitability Ratios
 The results of business operations can be calculated through profitability
ratios.
 These ratios can also be used to know the overall performance and
effectiveness of a firm.
a) Gross Profit Ratio
 Gross Profit Ratio establishes the relationship between gross profit and
net sales.
 This ratio is calculated by dividing the Gross Profit by Sales.
  It is indicated as percentage.
 Higher Gross Profit Ratio is an indicate firm has higher profitability.
 Gross Profit Ratio = Gross Profit / Net Sales x 100
 Gross profit = Sales - Cost of Goods Sold
 Net Sales = Gross Sales - Sales Return (or) Return Inwards
b) Net Profit Ratio
 Net Profit Ratio is also termed as Sales Margin Ratio (or) Profit
Margin Ratio (or) Net Profit to Sales Ratio.
 This ratio reveals the firm's overall efficiency in operating the
business.
 Net profit Ratio is used to measure the relationship between net profit
and sales.
 Net Profit Ratio = Net Profit / Net Sales x 100
 Net profit includes non-operating incomes and profits.
 Non-Operating Incomes such as dividend received, interest on
investment, profit on sales of fixed assets, commission received,
discount received etc.
 Higher Net Profit Ratio indicates the standard performance of the
business concern

c) Return on Investment Ratio

 This ratio is also called as ROI.
 This ratio measures a return on the owner's or shareholder's investment.
  This ratio establishes the relationship between net profit after interest and
taxes and the owner’s investment.
 Usually this is calculated in percentage.
 This ratio can be calculated as
Return on Investment Ratio = Net return on investment X 100
Cost of Investments
d) Return on asset = Net income
Average total assets

4) Leverage ratio/ solvency ratio ( Long term solvency)

 How efficiently the firm is playing their long term
 To know the capasity of the firm to pay Long term debt
a) Debt Equity ratio
How much of debt can be paid it by equity
Debt Equity ratio = Debt
Equity
Idle ratio - 1:1
b) Propritory ratio
Shareholder Fund
Total Asset

 Portion of shareholders fund applied in total asset.

 Idle ratio 0.5:1
e) Capital gearing ratio
It reaveals company’s capital structure
Capital gearing ratio = Fixed Income bearing Fund
Equity shareholders Fund
5) Market test ratio
a) Earning per share = Earnings available
No of shares
b) Dividend per share = Dividend
No of shares
E) Fund flow analysis
 It is a financial document which you can create and use to analyse and
understand the financial position of your business.
  More importantly, it sets out where funds are coming into your
business and how they are being used.
 In some ways, it works along the same lines as a cash flow, but is
more detailed.
 A fund flow analysis combines a cash flow statement with other data
such as an income statement or a balance sheet.

F) Cash flow statement

 It is an important tool used to manage finances by tracking the cash
flow for an organization.
 It is usually helpful for making cash forecast to enable short term
planning.
 The cash flow statement shows the source of cash and helps you
monitor incoming and outgoing money.
 The statement also informs about cash outflows, expenses paid for
business activities and investment at a given point in time.
 The information that you get from the cash flow statement is beneficial
for the management to take informed decisions for regulating business
operations.
 COST ACCOUNTING
Cost
Cost is the amount of expenditure incurred on a product
Costing
Process of ascertaining cost
Cost Accounting
Formal way of recording cost in books of account
Cost Accountancy
Consists of the cost principles methods & techniques of costing
Cost report/sheet
Ultimate function of cost accounting
Prepared to know the cost of product
Cost control
Regulating the actions
It is the reduction in the overall cost of production
Cost audit
Ascertain the accuracy of cost accounting records to ensure that they are in
conformity with cost accounting principles, plans, procedures and objectives.
Cost object
It is the technical name of product
a) Cost center
Border sense
Area, dept or section where cost is incurred
b) Cost unit
Narrow sense
Separating the cost into smaller subdivision
Cost Presentation
Arranging the cost in a separate form by preparing cost sheet
The main aim of cost presentation is to take correct decision for management
Cost Reduction
It means reducing the cost per unit
It is the real & permanent reduction in the cost
TYPES OF COST
A) On the basis of Traceability
Direct cost Indirect cost
Direct material Indirect material
Direct labour Indirect labour
Direct expenses Indirect expenses
Direct cost - Easily identifiable, Indirect cost - Not easily identifiable
Prime cost = Direct material + Direct labour + Direct expenses
Overheads = Indirect material + Indirect labour + Indirect expenses
B) On the basis of functions
 Production : Cost related to production which means converting the RM to
FG
 Administration : Cost incurred for the proper administration of the product
 Selling& distribution : Commission, Advertisement
 Research and development cost : Cost involved in the R&D of the product
 Financing cost : Related to capital contribution of the product
 C) On the basis of variability
Fixed cost
Fixed costs remain the same regardless of production output.
Fixed costs may include lease and rental payments, insurance, and interest
payments.
Variable cost
Variable costs change based on the amount of output produced.
Variable costs may include labour, commissions, and raw materials.
Semi variable: Cost which is partly fixed and party variable
 D) On the basis of controllability
Controllable cost: Controllable under management
Uncontrollable cost: Not controllable under management
E) On the basis of normality
Normal cost: Normal cost is also a part of cost of production
Abnormal cost: Never include cost of production (loss by fire, theft)
Other costs
 Opportunity cost: It is the cost forgone for another alternative
 Sunk Cost: Cost already incurred that can’t be recovered
 Conversion Cost: The cost incurring for converting raw materials to
finished goods
 Replacement cost: The cost replacing an asset or method of production or
invention
 Historical cost: The cost incurred in the past
 Differential cost: Differential cost is the difference between the cost of two
alternative decisions, or of a change in output levels.
 Developmental cost: Cost involved in the introduction of new Product
 Shut down cost: A business firm may have to suspend its operations for a
period due to some temporary problem like shortage of raw material, non
availability of labour etc during this period no work is done yet certain
fixed costs like rent, insurance etc. are incurred
 Marginal cost: The cost of producing additional unit
 Carrying cost: The cost incurring for the maintaining of asset

 Economic Order Quantity (EOQ) : Refers to the quantity of materials to be

purchased at one time to optimize the cost
 Bin: is a place where materials are kept in safely.
 Bincard: The document showing the particulars of materials kept in the bin
 Bincard is maintained by storekeeper
 Stores ledger is a document showing the quantity and value of receipt issue
and balance of an item of material.
 Stores ledger is kept in Costing department.
 Time keeping refers to the recording of the time of a worker’s arrival and
departure from the factory.
 Time Booking refers to the recording of actual time spent by a worker in
various jobs carried out by him.
 Idle Time is the time during which a worker produces nothing, but for
which he gets wages.