UNIT.
I Issue of Shares
Meaning of Shares: A share maybe defined as one of the equal parts into which the capital of
the company divided, entitling the holder of the share to a proportion of the profits.
According to Sec 2(46) of the companies Act “ Share means in the capital of the
company and includes stock except where or distinction between stock and share is expressed
or implied.
Kinds / Types of shares
1. Preference share
2. Equity shares and
3. Share with differential shares
I. Preference share:
According to Sec 85 of the Act “Preference shares are those shares on which there is
preference rights a) To claim dividend during the lifetime of the company and b) To claim
repayment of capital on the winding up”
Types of Preference shares:
1. Cumulative Preference shares
2. Non- Cumulative Preference shares
3. Participating Preference shares
4. Non- Participating Preference shares
5. Convertible Preference shares
6. Non- Convertible Preference shares
7. Redeemable Preference shares
8. Guaranteed Preference shares
II. Equity shares
According to Sec 85(2) “Equity shares are those shares which are not preference shares”
.Equity share are also called as ordinary shares.
III. Shares with differential rights:
a)Deferred shares:
Deferred shares are also known as Founders shares or Management shares. They
are issued to promoters and their friends at the time of formation of a company.
These shares enjoy all the residuary in profits after satisfying the preference and
equity dividend claims.
b) Shares with differential rights
Companies (Amendment Act 2000) has provided under section 2(46A)
for issue of shares with differential rights in accordance with the provisions of sec 86
i) Dividend ii) Voting rights and iii) Otherwise
Stock
Stock means the share of a company in a different form. Stock is aggregate of fully paid
up shares consolidated and divided into different parts. The main purpose of such
consolidation or division is to make it convenient to hold shares.
UNIT.II
Meaning of Redeemable preference shares:
Preferences shares may be issued at repayable at the option of the company (if
authorized by the articles of association) is called Redeemable Preference
shares
Capital Redemption Reserve (CRR)
When preference share are to be redeemed out of divisible profits, a amount
equal to the face value of shares so redeemed is transferred to capital
redemption reserve
Capital Redemption Reserve a/c is to be treated as capital reserve like paid up
capital.
Capital Redemption Reserve a/c is issue fully paid bonus shares to its shareholders.
Premium on Redemption
This is a capital loss which can be provided out of securities premium
account. If securities premium does not exist or is insufficient, other profit of
the company can be use to provided for the premium on redemption.
Profits Prior to incorporation
1. Profit prior to incorporation : It mean the profit earned up to the date
of incorporation from the date of purchase company. These pr0foits are
capital profits and these are not available for dividends to shareholders.
Therefore the profit before incorporation is to be credited to capital
reserve account. If there is any loss prior to incorporation. It is treated as
capital loss and to be debited to Goodwill account.
2. Time ratio: This is the ratio of months or days before and after
incorporating during the accounting period. All expenses of a company
which can be linked or related to time must be divided between pre and
post incorporation periods in Time ratios. Examples are salaries, rent,
stationery, postage, depreciations, bank charges, and interest etc.
3. Adjusted time Ratio : If any changes were made in the number of
employees or office accommodation, etc. weightage must be given to
the changes in arriving at the time ration. Such a ration is called weighted
Time Ratio.
4. sales ratio: This is the ratio of sales or turnover of the company before
and after incorporation, Sales ratio is the logical basis to divide the gross
profit earned by the company. All expenses related to sales are also to
be apportioned in sales ratio ,For example Advertising, salesmen
commission , sales promotion expenses, carriage outwards , bad debts
and discount allowed etc.
Final Accounts
Final Accounts Meaning
Final accounts of a company consists of a
balance sheet, s statement of profit and loss account
and notes to account and working notes attached to
balance sheet and statement of profit and loss
Valuation of Goodwill and shares
UNIT.IV
Meaning of Goodwill
‘Goodwill is the present value of a firms anticipated excess earning”
‘The capacity of a business to earn profit in future is basically what is meant by
the term goodwill”
According to the Institute of Chartered Accounts of India, goodwill is “ an
intangible asset arising from business connections or trade name or reputation of
an enterprise”
Factors affecting goodwill
1.Profitability: The Term profitability refers to the profit which the firm is
expected earn future. The buyer of business is always interested in knowing
whether the business will maintain its profits in the future.
2.Normal rate of return : It refer to tot eh rate of earrings which investor in
general expect on their investment in a particular type of industry . It varies
depending upon general factor like the bank rate, economic conditions, political
stability etc.
3. Capital employed : At the time of calculating the goodwill of a firm, it is vey
important to ascertain the value of capital employed, since the profits of affirm
can be justified in terms of capital employed only.
Methods of valuation of Goodwill
1.Average profit method
2.Super profit method
i)Purchase of super profit method
ii) Capitalisation of super profit method
iii) Annuity method
3.Capitalisation method
1.Average profit method: Goodwill is valued on the basis of an agreed number
of years purchase of the average profit , calculation by references to recent years
Goodwill =Average profit X no of years purchase
Note: Average profit=Total profit
No of year
2.Super profit method: Average profit of the firm is compared with the normal
profit on the invested capital in the firm. Excess of average profit over normal
profit is known as super profit
i)Purchase of super profit method ; The value of goodwill is ascertain
as follows:
Goodwill: = super profit X no of years purchase
ii) Capitalisation of super profit method : The method tries to find the
amount of capital needed for earning the super profit.
Goodwill: = Average super profit
Normal rate of return X100
iii) Annuity method : Super profit is being considered as the value of
annuity over a certain number of years and for this purpose, compound interest
is calculated at certain respective percentage.
Goodwill: = Super profit X annuity table.
3.Capitalisation method: The total value of the business or capitalized value of
business is found out by capitalizing the expected average profits on the basis of
normal rate of return.
Goodwill: = Total value of the firm -Net tangible assets
Note: Total value of the firm: Total assets - Liabilities
Valuation of shares
Valuation of shares is the process of knowing the value of company’s shares.
Share valuation is done based on quantitative techniques and share value will
vary depending on the market demand and supply
Methods of valuation of shares
1.Net assets Methods or Equity method
2.Yield method
3.Fair value method
1.Net assets Methods or Equity method : This method measures the value of
the net asset of the company against each share. Since the valuation is made on
the basis of the assets of the company it is known as net assets.
Net assets value of share =Net asset available for equity share holders/
No of equity share
2.Yield method : Yield is effective rate of return on the investment made in this
shares by the investor. It always expressed in terms of percentage. Since the
valuation of shares is made on the basis’ of yield its is called yield method.
Expected rate of return: Profit available for equity dividend X 100
Paid up equity
Yield value per share: Expected rate of return X Paid up
Normal rate of return value per
Equity shares
3.Fair value method : There are some accounts who do not prefer to use net asset
value or yield value for ascertaining the correct value of Shares.
Fair value = Net assets + Yield value
2
UnitV
Accounting Standards
H ar ve y a n d K e e r : A c c o u n t i n g st a n d a r d s ar e a m et h o d o r an a p p r o a c h t o
preparing accounts which has been chosen and established by the bodies
overseeing the profession.
T. P. G bosh: A cco u n ting st and ar ds ar e t h e p oli cy d o cu men t s i ssu ed b y t h e
recognised expert accountancy body relating to various aspects of measurement,
tr eat men t an d disclo sur e o f acco u ntin g t r an sacti o ns and ev ent s.
Farlex: Accounting standard is a principle that gove rns current accounting
practices and that is used as reference to determine the appropriate treatment of
Definitions of Social Accounting:
Social accounting may be defined as identification and recording of business
activities regarding social responsibility. Social responsibility concept is the one of
the important concept of management . It is the duty of enterprise to do some social
activities for completing their social responsibility
.
Social accounting is very important tool to measure the performance of any
company in view of social responsibility . Company has to make social
responsibility income statement and balance sheet . But it is not compulsory to make
these statements .
Social Accounting:
“Social Accounting is the application of double entry book keeping
to social economic analysis.” —Kohler
Definition of Human Resource Accounting
Definitions of HRA
(1) Woodriff, " HRA is an attempt to identify and report investments
made in human resources of an organisation that are presently not
accounted forin conventional accounting practice. Basically, it is an
information system that tells the management what changes over
time are occurring to the human resources of the business".
(ii) The American Accounting Association's Committee, "HRA is the
process of identifying and measuring data about human resources
and communicating this information to interested parties".
(iii) Stephen Knauf, "HRA is the measurement and quantification of
human and organisational inputs such as recruiting, training,
experience a communication".
According to R. L. Woodruff :
"Human resource accounting is an attempt to identify and report investment
made in human resource of an organisation that are presently not accounted
for in conventional accounting practice".
According to American Accounting Association committee :
"Human resource accounting is the process of identification and measuring
data about human resource and communicating this information to
interested parties".
Inflation accounting
Inflation accounting is the process used to factor massive price increases into an
organization’s financial statements. When there is a significant amount of price
inflation or deflation, the impact on the financial statements of a company operating
in that environment can be so severe that the value of the information in the
statements declines to the point of being nearly useless.
Inflation accounting refers to the adjustment of the financial statements during
inflationary periods. This special accounting technique is only used in inflationary
periods where the general level of prices is usually high for three consecutive
quarters.
It involves the recording of the income and expenditure of the business at the current
prices and reinstating all the three statements of the company and analyze the cost
and the trend of the current company.
Definition: Inflation accounting is a system for accounting which purports is
record, as a built-in mechanism, all economic events in terms of current cost”
“Different methods of Inflation Accounting
There are various kinds of techniques that are involved in inflation accounting and there
are various methods attached to it.
1. Current Purchasing Power(CPP) Method: This technique involves the
adjustment of the financial statements to the current price changes. It involves
recalculating the historical financial figures of the company at the current
purchasing power which is done by applying a certain conversion factor.
2. Current Cost Accounting(CCA): Under this method, the cost categories and
the various cost items and the items in the balance sheet are shown at the current
cost rather than the historical cost and the profit is determined on the actual cost
period and not on the basis of the sales.
3. Hybrid method: It is Combined the CPP and CCA methods to develop a hybrid
method with the intention of reaping the advantages of both the methods
