Presentation on theme: "MODULE : C Special Accounts CA R.C. Joshi, FCA,CAIIB,LL.B. B.Com(Hons.)"— Presentation transcript:
MODULE : C Special Accounts CA R.C. Joshi, FCA,CAIIB,LL.B. B.Com(Hons.)
Special Accounts: In brief we would cover the following Bank Reconciliation Trial Balance Capital & Revenue Expenditure Inventory Valuation Bills of Exchange Consignment Joint Venture Leasing & Hire Purchase
Module – C Special Accounts Accounts for no-Trading Organisations Depreciation Accounting Accounting From incomplete records (Single Entry System Ratio Analysis
Bank Reconciliation Every trader/business maintains Bank Account. However when you compare the balance on a particular day (generally at the end of month )on comparison the Bank Balance as per Books maintained by Business & that reflected by Bank Statement may not be matching most of the times. A few reasons are listed below :
BR : Difference in CB & PB Bank Reconciliation Statement is a state All Cheques Issued may not have been Presented in Bank All Cheques deposited may not been Credited in Bank Account Interest & Bank Charges effected by Bank Standing Instruction given to Bank not reflected in Businessmans Books
BR : Difference in CB & PB For eg. Tel. Bills, Electric Bills & Insurance Premia (debited by Bank ) Standing Instruction for Credits may be FD Interest, Dividends etc. Dishounour of Cheques deposited as also those issued by Business Direct Credit in Bank by Business. Thus Bank Reconciliation is a statement prepared to explian the difference between the balance as as per the ash Book & Bank Pass Book/Statement.
BR It is a STATEMENT(not an Account) prepared by Customer. Overcasting the deposit side of Cash Book increases the Bank Balance as per Cash book. Bank shows as Deposits & withdrawals what is called for Receipts & Payments by Businessman in his Cash Book.
Bank A/C as per Cash Book for Dec Dec Dr. Dec Cr. 1 To Opening Bal To A & Co By X & Co By Y & Co By Cash (C)(withd.) To Cash ( C ) Dep By MTNL To B & Co By Z & Co By Bal C/d
Bank Statement Withdrawals Deposits Balance 1 Dec Opening Bal Cr. 7 X & Co Y & Co A & Co Cr. 10 Cash Cash Cr. 31 By Charges By Dividend Cr.
Bank Reconciliation as on 31 st December Rs Bank Balance as per Cash Book as on 31 st Dec Add: Chequ issued but not presented MTNL Rs.800+ Z & Co. Rs.900 = Rs.1700 Dividend Credited not effected in CB Rs Less : Cheque Deposited but not credited Rs. 700 Bank Chgs. Debited not effected in CB Rs Ans: bank Bal. as per Bank Statement 13400
BR Statement (When we start with Bank Bal. as per Bank Statement Rs Bank Balance as per Cash Book as on 31 st Dec Add: Cheque Deposited but not credited Rs. 700 Bank Chgs. Debited not effected in CB Rs – Less :Chequ issued but not presented MTNL Rs.800+ Z & Co. Rs.900 = Rs.1700 Dividend Credited not effected in CB Rs Ans: bank Bal. as per Bank Statement 12300
Select the appropriate 1.Dr. Bal. as per Pass Book means ______ (Overdraft, Favourable Balance, neither of the two) 2. Cheque deposited it is recorded on________side (of Cash Book) & when dishonoured it is recorded on _______ side of the CASH BOOK. (Debit, Credit) 3.Debit Bal. in the Cash Book shows (Overdraft, Favourable Balance, neither of the two) 4. Insurance premia paid by the Bank is ________ (debited/Credited) by the Bank. 5.Direct Deposit by the Customer is first recorded in (Cash Book, Pass Book).
BR :Match the following Column : A Column:B 1.Cash Book Dr. Side 1. Deposits 2. Cash Book Cr. Side 2. Withdrawals 3. Pass Book Dr. side 3. Receipts 4. Pass Book Cr. Side 4. Payments 5. Dr. Bal. in Pass book 5. Overdraft as per Pass Book.
Answers 1(3) 2(4) 3(2) 4(1) 5(5)
TRIAL BALANCE Rectification of Errors Trial Balance is a list or abstract of balances from Books(ledger, Cash Book, journal) to determine posted Debits/Credits and to establish a basic summary for financial statements. It may be prepared monthly, quarterly & half yearly.
Disagreement of a Trial Balance Type of errors Errors of principle (No effect on trail balance ) Clerical Errors OMMISSIONCOMMISSION Compensatory Complete(No effect on TB) Partial(After TB)
Errors Compensating Errors: One effect nullifies the wrong effect on another Error of Commission: A clerical error committed while posting, totaling or balancing of an Account Error of Principles : An error arising out of non-observance of Accounting Principles One Sided Error: An error which affects only one side of Account
Errors Two Sided Errors : An error affecting two sides Rectifying Entry : An entry passed to rectify the error. Suspense Account: An Account opened to tally trial balance temporarily.
Example-1 Goods purchased from Sohanlal wrongly entered into Sales Register at Rs.500. Correct Entry( That should have been) Purchases A/c. Dr. 500 To Sohanlal Cr.Rs.500 Wrong Entry Passed Sohanlal A/c. Dr. 500 To Sales Cr. 500
Example-1 Rectification Entry Sales A/c. Dr.500 Purchase A/c. Dr.500 To Sohanlal Cr. Rs.1000 (Being purchase of goods wrongly recorded in Sales Register now rectified.)
Example -2 Salary Paid to Vijay, Accountant wrongly recorded to his Personal A/c. Rs.1000 Correct Entry Salary A/c. Dr To Cash Cr. Rs.1000 Wrongly Passed as : Vijay A/c. Dr To Cash Cr. Rs. 1000
Example-2 Rectification entry Salary A/c. Dr To Vijay A/c. Cr (Being Salary paid wrongly debited to personal A/c now rectified).
Example-3 Wages paid for installation of Machinery Rs.500 were debited to Wages A/c.Rs.500 Correct Entry Machinery A/c. Dr. 500 To cash Rs.500 Wrongly passed as : Wages A/c. Dr. 500 To Machinery Rs.500
Example-3 Rectification Entry Machinery A/c. Dr. Rs.500 To cash Rs.500 ( Being wages paid for Installation of Machinery is wrongly debited to Wages A/c. now rectified).
Example-4 Rent paid Rs.200 wrongly debited to Postage A/c. Correct Entry: Rent A/c. Dr. Rs. 500 Cash A/c. Cr. Rs.500 Entry wrongly passed as : Postage A/c. Dr. Rs. 500 Cash A/c. Cr. Rs.500
Example-4 Rectification Entry Rent A/c. Dr. Rs. 500 To Postage A/c. Cr. Rs.500 (Being Payment of Rent wrongly debited to Postage A/c. now rectified).
Match the following Column: A Column : B 1.Trial Balance 1. Diff. in Trial Bal. 2. Net Trial Bal. 2. Always shows Dr. bal. 3. Gross Trial Bal. 3. Always shows Cr. Bal. 4. Suspense A/c. 4. Generally shows Dr. Bal. 5. Real A/c. 5. Statement of balances of ledger A/cs 6. Dr. or Cr. Balances 7. Ledger A/c. 8. Debit & credit totals Ans: 1(6), 2(5), 3(8), 4(1), 5(2)
Fill in the Blanks 1.Errors which cancel out the effects of one another are called _________ Errors 2. Mistakes involving wrong recording or posting are called Errors of ________ 3. Difference in Trial Balance is transferred to ____________Account. 4. When a transaction is not recorded it is an error of _________.
CAPITAL EXPENDITURE & REVENUE EXPENDITURE From the Trial Balance we can observe that some items directly appear in Balance Sheet while a some other items are charged to P&L A/c. Items which directly appear are generally CAPITAL while those charged to P & L are REVENUE. How this is classified?
The Basis 1.Nature of the Expenses 2. Effect on revenue Earning Capacity 3. Benefit from the Expenditure 1.NATURE : Tests : Whether recurring in ordinary course of business : Salary, Electricity Bill, Tel Charges, Raw purchased etc. Applicability of Materiality Concept : An Wall Clock costing Rs.500/- having long useful life & it is non-recurring. However Materiality Concept it allowed to be charged as REVENUE. Building, Plant & Machinery, Motor Cars are examples of CAPITAL Expenditure
Effecting on Revenue Earning Capacity The expense which help to generate income/revenue in the current year are revenue in nature and should be matched against the earned in the current year. If the expenditure helps to generate revenue for more than one accounting year is generally called purchase of plant.
State whether expenditure is Revenue/ Capital/ Deferred Revenue 1.Freight paid on a Machine for bringing it to factory. 2.The shifting of stock from old works to new site. 3.The overhauling expenses of Machine 4.The Legal expenses incurred in connection with raising of Debentures issue. 5 Purchase of Machinery. 6. Labour Welfare Expenses
True or False 1.A revenue expenditure of one party may be Capital receipt for the other party. 2.Receipts from Sale of machinery is revenue receipt. 3.The distinction between & revenue expenditure can not be definite. It depends on the facts & circumstances of each case. 4.Legal charges paid for purchase of land are
True or False Capital Expenditure but legal charges paid in the ordinary course of business is revenue expenditure. 5. Wages paid in the Ordinary Course of business are revenue expenditure but wages paid for erection of machinery are capital expenditure. 6.Debenture receipts are revenue receipts.
Answers to True or False 1. True 2. False 3. True 4. True 5. True 6. False
13. INVENTORY VALUATION
Objective The main objective for accounting for INVENTORIES is to ascertain income through matching appropriate costs t for receipts as well as conversion of raw materials into semi-finished & finished products. As per Accounting Standard-2 the inventory may be for sale in the ordinary course of business In the process of production for such sale The production for goods or services for sale including maintenance, supplies and consumables other than machinery & spares.
Find out Stock Value under 3 methods : (page:249),April,2009 Date Recepits L.F Units Rate Issued Date Units 1 Op. Stock Purchases Purchases Purchase Stock verification on 3 rd April reveals loss of 1o units. Show the stock of Cost of goods sold & valuation of stock as on 7 th april,2009 under FIFO,LIFO & Weighted Average Cost Method.
FIFO(page no: 250) April,09 Receipts Issue* Balance *10.50= *10= *10.20= *10.50= *10= *10.20=102 90*10.20= *10.50=2100 Closing Stock under FIFO Method :290 units Rs.3018 Cost of Goods Sold : 1100 units Rs Loss of Units : 10 units Rs.80
LIFO April,09 Receipts Issue Balance 6 200*10.50= *8= *1050= Units 200*10.50= *8= , *8=2320 Closing Stock under LIFO 290 units Rs.2320 Cost of Goods Sold 1100 units Rs Loss of Units 10units Rs.100
Average Weighted Cost April,09 Receipts Issue Balance *8= *9.09= loss = *9.09= *10.20= *9.21= *9.21= *9.21= *10.50= *9.58= *9.58= *9.58=2778 Stock: units 290*9.58= Rs.2778 Cost of Goods Sold 1100 units=10251 Loss of units 10*9.09 = Rs.91.
Base Stock Method Base Stock Method : It is assumed holding of minimum quantity (base stock) with a particular price & the quantity in excess thereof are dealt with some other basis. Adjusted Selling Price:
Methods Periodic Inventory Perpetual Inventory Implications of FIFO & LIFO Methods in rising methods & falling Prices. Requirements In rising Market, FIFO just like LIFO in falling Market will reflect lowest cost so higher profits.
Fill in the Blanks 1. The inventory valuation is subjective because it depends on the _________________followed by the accountant 2. Historical value is reduced to net realisable value due to the accounting convention of ____________. 3. Net realisable value is the estimated selling price in the ordinary course of business less costs of of _______________and less costs necessary to make the ______. 4. The ascertainment of the costs at the end by physically counting the stock is known as _________. 5. The basis of inventory valuation should not be changed frequently because its violates the accounting principle of ____________.
Answers to fill in the Blanks 1. Accounting Policies 2. Conservatism 3. Completion, Sale 4. Periodic Inventory 5. Consistency
14. BILLS OF EXCHANGE
Bills of Exchange The main journal is divided into a number of journals. So there are Bills Receivable & Bills Payable journals. Types of Instruments of Credit : Promissory Note Bills Of Exchange : It is an instrument in writing Signed by the maker containing an unconditional order to pay a certain sum of money to a person named in the instrument or to his order to the bearer on a certain fixed future date or demand. (se. 5 of NI Act)
Bills of Ex. ( c). Here Bank collects the money from Drawee remits to A. Cash or Bank A/c. Dr To Bank for Bills Collection Cr (d) When endorsed Bill is met. No entry in Bs Books. In Bs Books : Bills Payable A/c. Dr To Cash/ Bank Cr
Dishonouring of Bill Books of A a) Dishonour of retained Bill. Bs A/c. Dr To BR A/c. Cr To Cash 100 (b) Discounted Bill Dishonoured - BR A/c/ Dr Noting Charges Dr. 100 To Cash A/c. Cr Bs A/c. Dr To BR A/c. Cr To Cash 100
Dishonouring of Bill Books of A (a) Dishonour of retained Bill. Bs A/c. Dr To BR A/c. Cr To Cash 100 (b) Discounted Bill Dishonoured - BR A/c/ Dr Noting Charges Dr. 100 To Cash A/c. Cr Bs A/c. Dr To BR A/c. Cr To Cash 100
Bills Sent for collection BR A/c/ Dr Noting Charges A/c 100 To Cash A/c. Cr. 100 To Bills for collection Bs A/c. Dr To BR A/c. Cr To Noting Charges 100
When endorsed Bill is dishonoured BR A/c Dr Noting Charges A/c Dr. 100 To C Bs A/c Dr To BR To Noting Charges 100 In Bs Books Bills Payable Noting Charges A/c Dr. 100 To Bills Payable 10100
On retirement In As Books Cash A/c Dr. Rs.9500 Rebate A/c Rs. 500 To Bills Receivable Rs In Bs Books Bills Payable A/c. Dr. Rs To Cash A/c. Cr Rs.9500 To Rebate Cr. Rs.500
When Bills is renewed B by paying Rs Bill is renewed for a period of 3 months for which pays 3 months interest at 10% p.a. First old bill is to be cancelled Bs A/c Dr. Rs To Bills Receivable A/c. Cr. Rs Cash A/c Dr. Rs.4000 Bills Receivable A/c Rs.6150 To Interest A/c Rs.150 To Bs A/c Rs.10000
Renewal in Bs books First old bill is to be cancelled Bills Payable A/c Dr. Rs To As A/c. Cr. Rs As A/c Dr. Rs Interest A/c. Dr. Rs. 150 To Cash A/c. Cr. Rs To Bs A/c Rs.6150
Accommodation Bills These bills are drawn without consideration & objective is to accomdate one party. The rest of things are same as Bills receivable (with exception to sharing of discount in the manner they share Proceeds from Bills).
State whether the following statements are true or false 1. A bill of exchange is a negotiable instrument. 2. A bill of exchange need not to be dated. 3. A bill of exchange must be accepted by the drawer. 4. Drawer is a person to whom the bill is endorsed. 5. Amount of bill is paid to the payee. 6. Drawee after acceptance becomes acceptor. 7. A bill of exchange must be in writing. 8. A bill of exchange may be drawn for payment in kind. 9. Drawer has the right to discount the bill. 10. There are three parties to a bill of exchange..
State whether the following statements are true or false 11. There are two parties to a promissory note. 12. Drawee is the maker of the bill exchange. 13. Debtor is the maker of a promissory note. 14. A bill of exchange is a conditional order. 15. A bill of exchange must be properly stamped. 16. The maker of a promissory note must sign it. 17. Mere acknowledgement of debt is not a promise. 18. A bill of exchange which arises out of trading relationship of two persons is called a trade bill. 19. Acceptance is voluntary for a bill of exchange. 20. In general acceptance, the drawer agrees with some of the conditions of the bill.
BE: Fill in the Blanks 1.When goods are sold on credit seller, becomes a ________ and buyer becomes a _________. 2. Negotiable Instrument can be ________ from one person to another. 3. A bill of exchange must be properly _________ 4. A bill of exchange must be signed by the ________. 5. A Bills of exchange is accepted by the _________
Answers to fill in the blanks Ans1. Creditor, Debtor 2. transferred 3. Stamped 4. Maker 5. drawee.
Consignment Account 15. Consignment Account
15.CONSIGNMENT ACCOUNT A consignment is the dispatch of goods buy its owner to its agent for the purpose of selling. It this Principal (Owner) is a Consignor, Agent is a Consignee. The goods so sent are called Consignment Outward & for Agent it is Consignment Inward.
15.CONSIGNMENT ACCOUNT Since transfer of goods to Agent is not a sales the invoice prepared is called Pro forma invoice. And the Statement prepared by Agent Showing sale of goods received on Consignment.Unsold stock or damaged stock, expenses incurred & his commission is called ACCOUNT Sale. Commission: ORDINARY & DEL CREDRE. Ordinary Commission is paid on total Sales. Losses or bad debts are borne by Consignee
Consignment Ex. (page 281) Jyotimal of Kolkata consigned 50 cases Cotton Goods costing Rs.2000 each to Ziauddin of Decca. Jyotimal paid follwing expenses : Carriage Rs Freight Rs & loading Charges Rs Ziauddin sales 30 cases at Rs.3500 each and incurs the following exp. Landing Charges Rs Warehousing & Storage Rs.5000 & selling Rs It is found that 2 cases have been lost in transit. Ziauddin is entitled to a commission of 10% on gross sales. Draw the necessary ledger accounts in the books of Jyotimal.
15.CONSIGNMENT ACCOUNT(pg. no:281) Consignment A/c To Goods Sent on Cons. Rs By Ziauddin(Sales) (50*2000) Rs. 30*3500 To Bank:carriage 2500 By Goods lost in Transit 5000 Freight (2*2000= ) Loading Chgs To Ziauddin Loading 3000 By Good lost in transit 7500 Warehousing 5000 Selling To Ziauddin (Commission) To P & L A/c 8500 By Closing Stock
Ziauddins A/c To Consignment By Consignment Exp By Consignment-Comm ______ By Bank Cl. Stock; 50*2000 = Rs In transit 3* =7500 Add; Prop. Exp.Consignor 15*500 Rs Consinee: Non recurring: On 15 cases for warehousing 45cases 3000 for 15 cases1000.________ 38500
15.Indicate the Correct Answer. 1.When goods are sent on Consignment debit is given to (a) Consignees A/c (b) Consignment Account(( C ) Sales A/c. 2.The relationship between Consignor & Consignee is that of (a) Principal & Agent() buyer & Seller( C ) debtor & Creditor. 3. A loss which is natural & unavoidable is called (a) abnormal (b) normal ( c) Contingent 4. A loss arising due to pilferage, theft, fine etc. is (a) Normal (b) abnormal ( c) Contingent 5. Abnormal loss of stock after adjusting for recovery of insurance claim is transferred to (a) Trading A/c. (b) P& L A/c ( c)Capital A/c. 6. Consignees A/c is a (a) Nominal A/c.(b) Personal A/c. (C ) Real A/c. 7. Del Credre Commission is calculated on (a) Cash Sales (b) Credit Sales ( C ) total Sales.
15.Answers to Indicate the Correct Answer 1 ( b) 2(a) 3( b) 4 (b) 5 (b) 6 ( b) 7( C )
16. Joint Venture JV
It is an agreement between two or more parties. The agreement is made to carry on a specific job The agreement is over as soon as venture is completed
JV Example (pg.288 ) A & B entered into a JV sharing P & L in the ratio of 3:2 They opened a Joint Bank A/c. where A deposited Rs.5000 & B deposited Rs A purchased goods for Rs & incurred Rs.5000 for expenses out of the Joint Bank & he also supplied materials from his stock for Rs He sold the entire goods for Rs & deposited entire amount into the joint Bank a/c. B purchased goods for Rs & incurred Rs.3000 for various expenses out of the joint Bank A/c. He sold all the goods for Rs except for goods valued at Rs.2000 which he took for his own use. The proceeds were also deposited in joint Bank a/c. Pl. prepare JV A/c, Joint Bank A/c & C-Venturers A/c.
Joint Venture A/c. (pg.288) To Joint Bank By Joint Bank A/c Pur Sale Proceeds Exp Sale Proceeds To As Capital 3000 To Joint Bank A/c By Bs A/c- Goods Taken 2000 Pur Exp To Profit Trd. A B
Joint Bank A/c To A (Contri) By JV (goods & Exp) To B(contribution) By JV To JV(Sale Proceeds)50000 By A-Final Pay To JV- Sale Proceeds By-B –Final Pay CO-VENTURERS A/c A B A B To JV 2000 By JV A/c To JV Bank A/c By JV By JV-Proft
16 JV: Fill in the blanks 1. In JV the association of persons is of a _______ nature. 2. JV may also be called as a ______ partnership. 3. The co-venturers enter into a ________ with each other. 4. The co-venturers agree to share ______ or _________arising out of business. 5. The persons entering into JV are called __________. Ans: Temporary 2. Temporary/restricted 3. Contract 4. Profit/Loss 5. Co venturers
16.JV Match (1) JV (a) Personal (2) Co-ventures A/c (b) Nominal A/c (3) Goods Supplied on JV A/c ( C )Real (4 ) Joint Bank A/c (d) Personal (5) Cr. Bal. in JV A/c. (e) Profit on JV (6) JV ends (f) Completion of Venture
Leasing is a contract between two parties,whereby the owner of an assets transfers his rights of use to some other party on payment of a fixed periodical rent. So there are Lessor, Lessee, Lease Deed, Lease Rent terms use. Types : 1. Finance or Capital lease. 2. Operating Lease 3. Services Lease and 4. Leveraged Lease. FINANCE or CAPITAL LEASE: This is fairly for a long time. i.e. Primary Period+ Secondary Period. During Primary period Lessor charges Lease Rent in a manner covering Cost of the Machine plus interest thereon. In secondary period he charges Nominal rent.
Operating Lease Operating lease is a lease which is not Finance or a Capital lease.It does not transfer any of the rewards and the risk of ownership of the leased property to the lessee. The contract is, usually, cancelable and of lower maturity period than in case of financial lease. Normally, the period of lease is much less compared to the economic life of the asset.
Dist. Fin. Lease & Op. Lease. Fin. Lease may give option to Any lease where lessor takes risk at nominal price. Lessor takes a risk Long term Short term Lessor incurs maintenace Lessee incurs maintenance With intention of becoming owner No such intention On Liability side Dues less down On Asset side Dep. is Prov. payment appears reduced on yearly payment the instalments
Operating Lease Leasing of telephones, vehicles, computers, etc., are some of the examples of the operating lease. The lease period is normally for a short period and may stretch from a day to about three years
Service Lease This takes care of Services & not Capital outlay. Assets generally remains with the Lessee. Leveraged Lease : In this type there are three parties. Financier apart from Lessor & Lessee.
Accounting Treatment in case of Finance Lease: 1. Under Fixed Assets Head would appear Sub-Head as Assets given on Lease along with Dep. Bank A/c. Dr. To Lease Rent Lease Rent A/c Dr. To P & L A/c.
Hire Purchase & Instalment Sale Hire Purchase has two Components instalments & Interest. Distinction: HP & Instalment 1. Ownership 2. On Default in Repayment 3. Buyers right to terminatye Contract 4. Buyers right to dispose off goods 5. Loss of Goods
17Lease 1. In a lease agreement there are ___ parties. 2. The user of the assets is known as_______ 3. In higher purchase transactions the buyer Pays the price in _______. 4. In higher purchase, the ownership of goods passes to the buyer on payment of _______ instalment. 5.The ownership of goods passes to the buyer immediately in ________system. 6. Under Hire Purchase, buyer is called____ while seller is called ______.
Answers 1.two 2. Lessee. 3. Installment 4. Last 5. instalment 5. Hire Purchaser & Hire Vendor
18. ACCOUNTS OF NON- TRADING ORGANISATION
18. Non- Trading Organisations are also required to maintain the following books of accounts like Cash Book, General Ledger, Journal, Membership Register, Donations Register, Property Register & Others depending on the type for eg. Students Register in case School. Final Accounts consist of 1.Receipts & Payment A/c 2. Income & Expenditure A/c. 3. Balance sheet.
18 Receipts & Payment A/c. : This shows actual amounts (Cash & cheques) received and paid for the whole year. Income & Expenditure A/c ; It is similar to P&L A/c. that Businessman prepares. Balance Sheet : It is same as B/S in Business. Capital here referred to as Capital Fund or General Fund.
Diff. Rec. & Payments & I & E A/c. Receipts & Payments Income & Exp. 1. Classification : Real A/c. 1. Nominal A/c. 2. Contents: Summary of actual receipts & Payments 2.It contains I & E of a period 3. Items included: Capital & Revenue 3. Only Revenue 4. Op. & Cl. Bal.: Cash & Bank 4. No op. or Cl. Bal but In R & P. Ends with deficit & Surplus.
Choose the Correct Answer (a)The I & E account is prepared on the basis of : (i) Mercantile system of Accounting (ii) Cash System of Accounting (iii) Hybrid System of Accounting (b) Amount received towards endowment fund is: (i) Revenue Receipt (ii) Capital Receipt (iii) Deferred Revenue Receipt.
Non Trading Accounts ( C ) The debit balance in the Income & Expenditure Account indicates : (i) the excess of income over expenditure (ii) the excess of expenditure over income (iii) the excess of Cash receipts over Cash Payments (d) Which of the following items should not be entered in the receipts & payments accounts of a Club : (i) Subscriptions received (ii) Sale of Machinery ( iii) Loss on sale of Furniture.
Answers a(i) Mercantile system of Accounting b(ii) Capital Receipt c(ii) the excess of expenditure over income d( iii) Loss on sale of Furniture.
Non- Trading Accounts (e) Subscriptions receivable at the beginning & at the end of the year are Rs.2000 & Rs.3000 respectively. Income & Expenditure shows subscriptions at Rs The amount shown as subscriptions in Receipts & Payments (a) (b)23000 & (c ) Rs Ans: Subscriptions Received During the year (? say X ) Less : Subscriptions received for Previous year 2000 Less : Sub. Received in advance nil Add: Outstanding subscription for Current year 3000 Subscriptions taken to I & E A/c Therefore X = Rs Rs Rs.3000 =Rs Ans.
Match the following A B 1.Receipts & Payment A/c. (a) No intention of earning it Profit 2. I & E A/c. (b) Excess of expenditure over Income 3. Deficit (C) In & Exp. For the year 4. Non- Trading Organization (d) Actual Receipts & Payments in Cash 1 (d ) 2 ( C) 3 (b) 4 (a)
19. Depreciation Accounting
Depreciation (i) is a part Operating Cost (ii) It is reduction in the value of assets (iii) The decrease in the value of its assets is due to its use caused by wear & tear or obsolescence (iv) decrease in the value of assets in gradual & Continuous. Dep. Helps us to arrive at correct profit.
Accounting Entries Depreciation A/c Dr. To Asset A/c. Cr. ALTERNATIVELY Depreciation A/c Dr To Prov. For dep. A/c. Cr.
Methods of Depreciation Straight Line : Cost Price – Scrap Value Est. Life of assets (no. of yrs) W. D.V: Here Depreciation provided on the book value which appears after writing down depreciation periodically. Here the Value of asset would never become Zero whil in case of Straightline the value of asset become zero.
WDV Dep. Method: Machinery Account 1/4/05To Bank /3/06 By Dep ______ 31/3/06 By Bal C/d /4/06 To Bal B/d /3/07 By Depreciation 9000 ______. 31/3/07 By Bal C/d /4/07 To Bal /d /3/08 By Depreciation 8100 _______ 31/3/08 By Bal C/d /4/08 To Bal B/d /3/09 By Dep ______ 31/3/09 By Bal C/d /4/09 To Bal B/d 65610
Sinking Fund Sinking Fund Method (For Providing Dep.) Dep. A/c Dr. To Sinking Fund A/c Cr ( For Making Investment ) Sinking Fund Investment A/c. To Bank A/c. Cr.
SF method Next year Bank A/c. Dr. To Int. on Sink. Fund Invest. A/c.Cr. Dep. A/c. To Sinking Fund A/c. Int. on Sink. Fund Invest. A/c. Dr. To Sinking Fund A/c. Sinking Fund A/c. Dr. To Bank A/c.
In the year of Replacement (Sale of Investments) i) Bank A/c. Dr. To sinking Fund investment A/c. (Profit on sale of Investments) ii)Sinking Fund Inv. A/c. Dr. To Sinking Fund A/c) iii)Sinking Fund A/c. Dr. To Sinking Fund Inv. A/c.(Loss) iv)Dep. A/c. Dr. To Sinking Fund A/c (Dep. For the year )
SF Method (Sale of old asset) V. Sinking Fund A/c. Dr. To Asset A/c vi) Sinking Fund A/c. To Asset A/c. (Tr. Of sinking fund to Asset) (Pur. Of new asset) vii) New Asset A/c. To Bank A/c.
Example Rs is spent by way of overhauling on a 2 nd hand Motor car Purchased at Rs on 1/4/06. The car on which straight line method depreciation is provided is sold for Rs on 39/6/2009. Pl. show the entries & Motor Car showing profit or loss on sale of car.
Car 1/4/2003: By Car A/c. Dr. Rs To Bank A/c (being the purchase cost of 2 nd hand car) By Car A/c Dr To Bank A/c (Being the overhauling cost capitalised ). 31/3/04 By Dep. A/c Dr To Motor Car By P & L A/c. Dr To Dep
Car By Dep To Motor Car A/c By P & L A/c. Dr To Dep By Dep To Motor Car A/c By P & L A/c. Dr To Dep
30/06/2009 By Cash A/c Dr By Dep. A/c 2875 By Loss on Sale Car To Motor Car 80500
Motor Car A/c 1/4/03 To Bank /3/04 By Dep /4/03 To Bank /3/04 By Bal C/d /4/04 To Op. Bal /3/05 By Dep /3/05 By Bal C/d /4/05 To Op. Bal /3/06 By Dep /3/06 By bal c/d /4/06 To Op. Bal /6/06 By Dep /6/06 By Bank /6/06 By Loss on sale of car
20. Accounting from incomplete records Single Entry System
20. Accounting from incomplete Records (Single Entry System) Single entry system arises out of incomplete information & the Accountant has to construct Accounts based on the drawing figures from available information. Computation of PROFITS : (i) Net Worth Method : This involves adjustment for drawings & adjustment for capital Introduced. Sales & Purchase Policy Eg. Sales proportions/ Cash/ Credit sales Credit Policy: Closing debtors represent 2 months Credit Sales and Creditors represent 2 months Purchases. Price Policy: Selling Price at a certain % of Sales.
Single Entry System Conversion Method : This method requires more details like collections from debtors, Payment to creditors etc. to give a true picture. For e.g. For a Firm the Debtors at the beginning of the year are Rs.1lakh. Closing debtors are 20% more. Payment made to creditors during year Rs Here we are required to find out the credit purchase made during the year. We can the figure y constructing Creditors Account as under :
Creditors Account Dr. Cr. 1-April By Op. Bal 1,00,000 31/12 To Bank /12 By Purchases /03 To Cl. Bal (Balancing figure) In single entry problems sales/debtors may be given by ratio or /% or the number of times or in a algebra type where we have to find out value of X.
RATIO ANALYSIS Ch. 21.
21. RATIO ANALYSIS Accounting ratios are relationship expressed in mathematical terms between accounting figures which for meaningful purpose. Classification: P & L Ratios Balance Sheet Ratios Composite or Inter-Statement Ratios.
Functional Classification Profitability Turnover/Activity Ratios Financial/Solvency Ratios Financial Ratios may be further classified as Short Term Ratios/Liquidity Ratios or Long Term/ Solvency Ratios
PROFITABILITY RATIOS Return on Capital Employed EBIT * 100 Capital Employed Earnings before Interest & Tax Op. Profit means profit from the Operations of the Company plus Int(Long term) & Tax Capital Employed = Share Capital+ Reserves & Surplus+ Long Term loans –( Non- business assets + Fictitious assets) Proper calculation gives us Return on Capital Employed
Earnings Per Share (EPS) EPS = Net Profit after tax & Pref. Dividend No. of Equity Shares This shows whether equity Capital of Co. is properly used or not Companys capacity to pay Dividend. EPS helps us at estimating Market Price of the Company
Price Earning (P/E Ratio) Market Price of per Equity Share EPS Helps to decide whether to buy Share of a Company.
Gross Profit Ratio Gross Profit* 100 Net Sales It helps in Price decision & Profit from Op. before Charging all other expenses.
Net Profit Ratio Net Operating Profit * 100 Net sales
Solvency Ratios Long Term Solvency Ratios Fixed Assets Ratios : Fixed Assets Long Term Funds The ratio should not be more than one. If it is less than one then it indicates part of the Working Capital Financed through Long term Funds i.e. we may call Core Working Capital
Debt- Equity Ratio : i) DE Ratio : Total Long Term Debt Total Long Term Funds Ii) DE Ratio : Total Long Term Debt Shareholders Funds Debt Service Coverage Ratio= Cash Profit available for debt service Interest+ Instalment
Short Term Solvency Ratio i) Current Ratio = Current Assets Current Liabilities ideal ratio: 2.Acceptable to Bank 1.33 ii) Liquidity Ratio/Acid Test or Quick Ratio: Liquid Assets Current Liability
Turnover Ratios Stock Turnover Ratio = Cost of goods Sold during the year Average Inventory Debtors Turn over Ratios (Debtors Velocity) = Credit Sales Average Accounts Receivable Debtors Collection Period = Months or days in a year Debtors turnover or Accounts receivable Average Monthly or daily Credit sales
Fixed Assets Turnover Ratio = Cost of Goods Sold Net Fixed Assets
Balance Sheets as at 31 st March Rs. Lakhs Assets Fixed Assets: Gross Block Less : Dep Net Block Current Assets: Stock Debtors Other Current Assets Total Assets
EBIT * 100 Capital Employed EBIT=Earnings before Interest & Tax RoC For March,2000 Ret. On Cap. Emp = Total Cap. Employed for March,1999 isRs Rs for Mar,2000.So Av. Cap. Employed is Rs.6100 /2= 3050 lakhs. EBIT is Rs So RoC 1020*100= 33.34% 3050 RoC for March,2001 Total Cap. Employed for March,2000 is Rs Rs for Mar,2001.So Av. Cap. Employed is Rs.8200 /2= 4100 lakhs. EBIT is Rs So So 1800*100= 43.90% 4100
Current Ratio = Current Assets Current Liabilities = = Debt Equity Ratio = Total Long Term Debt Total Long Term Funds
Fixed Assets Turnover Ratio = Cost of goods Sold during the year Average Net Fixed Assets We may take sales when Cost of goods figures are not available 4800 = = Average Fixed Assets for March,2000 = =3480/2=1740 Average Fixed Assets for March,2001 = =3600/2=1800
Stock Turnover Ratio = Cost of goods Sold during the year Average Inventory We may take sales when Cost of goods figures are not available Sales 4800 = = Av Inv
EPS = Net Profit after tax & Pref. Dividend No. of Equity Shares Net Profit after Tax for 2000 = Rs.300 Lakhs = Rs.3 =EPS While no. of Eq. shares are 100 Lakhs Net Profit after Tax for 2001 = Rs.600 Lakhs = Rs. 6 =EPS While no. of Eq. shares are 100 Lakhs