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Accounting education is an essential part of our education because without such education , we can not
calculate our income , our saving and our financial strength . In general , every person of this world need
accounting education for maintaining their personal record . This is also called personal book keeping . But
when we study the theoretical concept of accounting education , we find different definitions and rules and
Accounting
Accounting is not counting but it is science which is helpful for hunting for the results of business.
Accounting is recording , analysis and finalisation of large scale business transactions. Accounting introduces
all tools and techniques to solve many or almost every problem of businessmen, factories, Corporations and
Education
Education is way to get knowledge with scientific method .According to Swami Vivekananda the great
philosopher said that it makes us self-confident .It is just use of person’s internal powers . After getting
education, person gets moral and professional qualities. After getting education any body can do any
Accounting Education
Mixer of both words makes accounting education. Accounting education may be defined as that part of
education which provide us the knowledge about accounting terms , journal , ledger , final accounts ,
analysis and interpretation the result of business . Moreover , this education provide all knowledge of cost
calculation and control and it gives different tools for analysis the financial statement . It is very helpful for
making business planning . In single line , I say , Accounting is brain of Business , with it business becomes
mad and there is no chance to develop it . If you are perfect in this field of education you can easily
maintain not only your head office accounts but all the accounts of your all branches. You can maintain the
accounts not only your business but you will understand every business like agricultural, industrial and any
other service sectoral accounts .Here I want to explain service sector, service sector is a sector where
services are being provided by service providers. So professional accountant can easily understand the
terms subscription, fees, donation, fund, provident fund, allowance, and gratuity.
Almighty has sent us on the earth. What is the objective of sending us on earth? If you do not know then
you can not say that there is no any objective of sending us on the earth .Because your thinking of your
brain is very limited but God is supreme power who knows the aim of your sending on earth. He wants that
you will do any work and make whole world beautiful and wonderful. Like this there are so many objectives
of accounting education.
•Accounting education helps you proper utilization of your money and capital.
•It will tell you that you are getting high rate of investment or not.
•It will help you to making planning, policies. Proper accounting education if you will get from our
accounting expert , you will become not only accounts manager but also professional Scholar in the field of
accounting education. Because today, different concepts, principals of different area are changing. In this
•If you will not get these new and technical knowledge in the field of accounting, then you will fail in the
field of accounting .These days duty of accountant is not limited up to voucher entries in computer. But they
have to decide proper utilization of the capital and saving non useful expenditures.
Areas of Accounting
Financial Accounting
Financial accounting is relating to record all financial activity. These activities are related to business.
Because of area of business is increasing day by day so the area of financial accounting is also increasing.
Every day a new type of business is started. So daily accountant invents a new journal entry. Accountant
will take the help of financial accounting with new thinking of result. So a new chapter of financial
If you want to increase your profit, then start to decrease your cost. What a dialogue, this is not
a dialogue but this is the reality of today business. Every day an accountant invents new method
of decreasing the cost. All method of calculation of FIFO , LIFO , standard costing , variance
calculation and making of cost budget is not the end of cost accounting but this is the starting of
cost accounting . Internet cost reduction method is also a new mile stone in this direction.
Management Accounting
One new manager will do work in the field of management accounting. He will utilize accounting
information in new way . This is the real definition of management accounting. How to use
accounting data and accounting education in the field of management so that we will carry our
business at international level. Ratio analysis , fund flow statements, cash flow statements ,
working capital management , capital budgeting , cost of capital calculation is just starting in this
point .
Accounting Education's future is very bright . If you will become expert in this sector of
education , then you can get good earning with respect and honour . What does a person want
any more except this . He wants money with honour. Both two things , you can get from
accounting Education . But becoming expert in accounting education is not so easy. Just learning
of some of the principals of accounting , you can not become expert in accounting education .
Today the age of geographical and international business we should need to study contineusly
the new concept of accounting education due to changing situation of different new business .
Accounting is practical science , it demands your acceptance and your own work in this practical
field of education . Some of great Accounting expert are researching the new techniques of
accounting . In this technique not only you will able to record but the technique
• Automatically get the interpretation or comment on your accounting work even passing a
single entry . What will effect on financial position and what will effect on profitability of
business.
So , All the expert of accounting field should make the future of accounting education more
Accounting concepts means flow of thoughts of all wise accounting professionals of this world .
acceptability. "
In other words accounting concepts some normal rules which can be changed but which has
come in to existence with so many hard work of accountants in past. These are basics thoughts
of an accountant.
To know more about Accounting Concepts are very necessary to learn because without this you
can not understand the fundamentals of accounting. There are many concepts which an
Under this concept the entity of business man is separate from its business. The main reason is
that owner is just giver of capital but if he withdraws without any restriction or any control.
Business can dissolve within two days. So every transaction related to withdrawing money from
business must be recorded by accountant. So this concept gives us basic knowledge while we are
recording transactions in our books that we must know that concern has its own entity and our
duty is to record every transaction even it is related to owner or not . Businessman's capital is
also the liability of business and if he withdraw for personal use , it is known as drawing and it is
deducted from his capital . So under this concept , accountant records every cash , goods and
usage of fixed assets for personal use of businessman and while he makes balance sheet all
Under this concept we record all assets on their cost not in market value. This concept is very
useful for stable recording of accounting .Because if all transaction recording will start on their
market value then it create tension to accountant. Because nobody can say what will the price of
your fixed asset in next day. So record all assets on their original cost. But time to time
depreciation is deducted from this . But we never record all assets on their market price .
When I was doing graduate from my college, my respected teacher taught me that matching concept is very
important for an accountant. It means we will compare all expenses with the incomes of business. After
matching or compare, it will provide you the real result of performance of business. We can say it profit or
loss . So If today you want to know profit or loss of your business, let us start match of your business
incomes with your business expenses.
This concept is made when accountant thought that it is very important to secure our business. The risk of
business is called losses. So it is the basic duty of accountant to secure his business from different losses.
For securing Loss he can make different provisions like provision for doubtful debts, provision for
depreciation reserve for contingent liabilities.
It is very necessary for that person who is related to other field like technology or medicine . Suppose if a
doctor or engineer want to know the term profitability ratio or know what is financial analysis . If you told
them with explaining accounting terminology , he never understand . But if you will tell him basic accounting
terms with explanation like what is asset and what is liabilities or what is capital , he easily understand if
you give some guidance . Here I am giving some basic accounting terminology for this benefit.
1.Cash = Cash is that liquid part of money with this we can buy material goods .
2.Money = Money may be in cash , bank cheque or any bill of exchange
3.Material = Material means the goods which we use for production
4.Finished product = Finished product means goods which is produced after machining process.
5.Debit = It means , we write any amount on which have our some right ? suppose , Ram account is debit ,
it means ram gets some money or goods from us , so we have some right on ram means either we can get
our money or price of goods . So accounts always given the name debit . In case of asset like furniture
account debit means , we are the owner or purchases it from any other person. In case expenses , any
expenses are debit because we take some service so we pay .
6.Credit = Credit means reduce some amount if we have to given to other . ? Suppose Bank has to given
sham 5000 . This is the liability of Bank when bank paid to customer . Bank will credit the account of
customer .
7.Entry = accounting of any transaction with systematical way is called entry
8.Owner's equity = Owner's equity means the claim of owner on the assets of business.
9.Creditor's equity = Creditor's equity means the claim of creditor on the assets of business.
10.Memorandum Account = This is the account which uses just as memory record but not formal account
.
11.brought down ( b/d) = It means transfer from previous balance to new page or next day or next
month .
12.carried forward = It means transfer of balance to new page or next day starting point of account or
next month's starting point of account's balance .
13.Ledger folio= It is the specific number of each account in ledger , the book of accounts .
14.Contra = It is also show in the cash book in the form of C . When cash withdraw from bank or deposit to
bank , it is known as contra , after this no need to show in ledger accounts because all dual process of
accounting is completed in cash book .
15.goodwill= It means all profits which can count in money which comes from the reputation , quality
products or name of company.
Benefits of Accounting Education
1st Benefit
The most important benefit of accounting education is that you will become well educated in the field of
accounting. With this you can solve any accounting problem. It is reality that 90% successful businessmen
have accounts background. So becoming perfect businessman it is very necessary to learn accounting
education.
2nd Benefit
If you have prefect in accounting, you can use your money with effective way. Because you know that what
accounts tells you about the current position of your business and how can you change this position with
other solution tools of accounting. If you are in the home at accounting, then you will know the inflow and
outflow of money and after this you can create the way of changing inflow into outflow and outflow into
inflow. This does not mean cheating but it means ability to change fund according to time and place.
3rd Benefit
Accounting Education increases your practical and business maths. Because calculating of profit margin ,
calculation of cost of goods sold , calculation of balance of different accounts , calculation of different ratios
surely increase the calculation ability of any general person.
4th Benefit
Accounting Education gives you the power of estimation about company is under how long in the water of
his financial and revenue position. Just apply simple formula you can estimate the financial position of
company. That is asset – liabilities = capital if you know and use of this simple formula you can compare
two companies. Now you can understand yourself, if you will learn all the matters of accounting, you can
easily calculate the length and breathe of financial position of company, after this you can suggest how to
make effective structure of company which faces any economy problem.
5th Benefit
It is general saying that a good accountant is always a good manager. He can make good plans for
company. Because, pulse rate of company’s financial work is in his hand. All cash inflow and outflow is
recorded by him. So if you learn accounting education, you can easily manage your business.
1. Book keeping is just record of transaction, but accounting is huge science of recording,
result.
2. A book keeper always works under head accountant and book keeper is often said account
assistant.
3. Calculation of tax and filling of tax return is the part of duties of accountant. But, he can
take help from book keeper for tracking the total of the incomes of business.
4. Book keeping is just like machine work in which book keeper passes the vouchers into
books but accounting work is fully professional and need high experience for analysis and
cash balance with physical cash in hand, stock in books with physical stock in Godown. Most
difficult work of accountant is to make final account and analysis of financial statements.
What is accountancy?
Accountancy is the practical form of accounting. In many countries, all accounting courses are done by using
word
Accountancy is related to making of final accounts and preparing of financial reports which are useful for
business,
debtors, creditors, tax authorities and employees. In the British, Professional accountants have made the
Consultative
Committee of Accountancy Bodies. CCAB is now a limited company with six members:
But, In India, accountancy is just basic introduction of accounting at secondary level and full course
completed in graduate with learning of different subjects like financial, cost, management and corporate
accounting. Both accountancy and accounting is branch of science and professional accountants use this
science for recording, classify, analysis and summarizing of transactions of business and main aim is to
Definition of Journal
Journal is a day books in which bookkeeper records all the transaction first time . Transaction must be
record in this book date wise and journal applies the rules of double entry system . Suppose Ram takes loan
of Rs.100000 from his friend. Then what come in is cash and so cash account will be debited and His friend
is giver of loan, so his friend’s loan account will be credited in journal.Journal entry will be passed in the
journal of Ram
In other words journal is the book of primary entry . Whenever any transaction or event occurs it is
recorded in the
5. Journal Proper ? to record other transactions for which no specific journal is maintained .
All transaction are first recorded in the journal as and when they occur , the record is chronological , as
otherwise it would be difficult to maintain the record in an orderly manner. The form of journal is given
below :
Journal
_________________________________________________________________________
________________________________________________________________________
The columns have been numbered only to make clear the following explanations but otherwise they are not
numbered . The
1. In the first column the date of the transaction is entered , the year is written at the top ,
then month and in the narrow part of the column the particular is entered .
2. In the second column , the names of the accounts involved are written , first the account to
be debited , with the word Dr. written towards the end of the column. In the next line , after
leaving little space , the name of the account to be credited is written preceded by the word To
( the modern practice shows inclination towards omitting Dr and To . Then in the next line the
explanation for the entry together with necessary details is given , this is called narration.
3. In the third column the number of the page in the ledger on which the account is written up
is entered
4. In the fourth column , the amounts to be debited to the various accounts concerned is
entered .
Before one can journalise transactions , one must think on the basis of the rules given above , the effect of
the transactions on assets , liabilities , expenses , gains etc. of the firm . In accordance with the effect , the
accounts to be debited or credited will be determined . Then the entry will be made in the journal as
indicated above .
In the accounting education, making of journal is very important. Because without making journal entries,
we can not calculate the result of business in the form of profit and loss account and balance sheet. So
Journal accepts the rules of double entry system. Rule for making journal
Suppose Ram purchase goods of Rs. 10000 from Sham @ 10% trade discount on credit. After 15 days. Ram
Because goods comes in Ram’s business so Purchase account will debit with Rule 2nd and its first part
Because Sham is giver of goods so he is giver and account with his name will be credit with rule 1st and its
second
Trial balance is the statement which shows the list of balance of all ledger accounts .It is made for checking
mathematical error , making of final accounts and maintaining budget of company. Because of it is made on
basis of company’s all ledger accounts , so we satisfy about mathematical correctness , if debit balance of
1st Step : Making all ledger accounts and the calculate their balance , if any account’s debit side is more
than credit balance , its balance will be called debit balance , if the credit balance is more than debit side
2nd Step : Make statement in vertical form in which you have show particular for making the list of account
and right
______________________________________________
_______________________________________________
6. Purchase account
5. Sale account
5th Step : If trial balance is not matched, the difference will be show as suspense account
Important notes
Closing Stock is not shown in trial balance because , it is adjusting item and we can give dual effect on final
account. All other items whose account is not made in proper ledger will not shown in trial balance .
In accounting, there are only revenue nature and capital nature expenses. Revenue nature expenses records
in profit and loss account while capital nature expenses are recorded in balance sheet.
Revenue expenses are again subpart of direct expenses and indirect expenses
Direct expenses are the main type of expenses which are related to production and purchase of goods.
incurred during the purchase of goods and transfer to trading account. I am giving the examples of
Direct expenses:-
• Wages
• Freight
• Carriage
• Carriage inward
• Octrai
• Royalty on production
• Factory expenses
• Factory depreciation
Indirect Expenses
• Office expenses
• Sales expenses
• Advertising
• Administrative expenses
• Bad debts
• Interest on loan
______________________________
3.Financial expenses
______________________________
______________________________
Net sales refer to total sales less sales returns and are calculated as follows
_________________________
Net sales
___________________________
Cost of goods sold means the cost price or cost of manufacture of the goods or commodities actually sold
and is
calculated as follows.
__________________________
____________________________
Reconciling the Company's Bank Accounts with the Banker's Statement is a fundamental and regular task of
Accounting. First, there should be the ability to 'check back' the correctness of the reconciliation. This has
been done, by marking the 'Bank Date' against the voucher. For instance, if you have issued a cheque on
8th April, which was ultimately cleared by your Bank on 19th April, - you would set the 'Bank Date' for the
voucher to be 19th April. This means, that when you next need to 'check back' whether the entry made by
you is correct, you will only need to verify the Bank Statement of the 19th. Second, that you should be able
to 'recover' the reconciliation as of any date. This is of crucial importance to Auditing. The Bank
Reconciliation is one of the pre-requisites of Auditing and verification of the correctness of accounts at the
year end. However, it is not a 'real-time' task – in the sense, that it is not done by the auditor's on the first
day of the next year. This means, that the reconciliation made on 31st Mar, should be 'viewable' even in
August, - by when almost all the cheques would have subsequently been marked as reconciled. This has
Bank Accounts may have a different 'Starting Date' for reconciliation purposes. When you create a Bank
Account, you are requested to give an 'Effective Date for Reconciliation' just before the Opening Balance.
Normally, this would be the 'Books Beginning from' date itself. However, you could have imported data from
a previous version of Tally or from any other system (where the reconciliation process was not available or
was different. In that case, you may not wish to reconcile the bank account with your bank statements from
the very beginning. Give the date from which you want the reconciliation facility to be activated. Then,
previous entries will not appear for reconciliation, but will be taken as a reconciled Opening Balance. A quick
Bring up the monthly summary of any Bank Book. (You could do this from the Balance Sheet, Trial Balance,
or Display/Account Books/Bank Books, and selecting a Bank). Bring you cursor to the first month (typically
April), and press Enter. This brings up the Vouchers for the month of April. Since this is a Bank Account, an
'additional' button F5: Reconcile will be visible on the right. Press F5.
The display now becomes an 'Edit' screen in 'Reconciliation' mode. The primary components are:A column
The 'Reconciliation' at the bottom of the screen, showing: Balance as per Company Books Amounts not
reflected in Bank
Balance as per Bank The Balance as per Company Books reflects your Balance as on the last date (in our
example case, 30- Apr). The Amounts not reflected in Bank is the debit and credit sums of all those
vouchers whose Bank Date is either BLANK, or GREATER than 30-Apr (i.e. these vouchers have not yet been
The Balance as per Bank is the Nett effect of your Book Balance offset by the amounts not reflected in the
Bank – which should equal the balance in the Bank Statement. (Of course, some variation may persist due
to entries made in the Bank Statement which you have not yet entered in your Books – but since you WILL
definitely enter them, and only then print your reconciliation, it will ultimately reflect the correct balance).
You will find, as you mark off the individual vouchers by setting the 'Bank Date', that the Reconciliation at
the bottom of screen keeps reflecting those changes instantly. When you are finished, press Ctrl+A (or press
Enter as many times as necessary to skip over the unmarked vouchers), and accept the screen. (If your
screen has a largish number of vouchers it may take some time to complete the acceptance – be patient).
The next time you come for reconciliation, you will be presented only with those vouchers which remain
Making of Bank reconciliation statement by yourself Bank reconciliation statement tells the reason why your
cash books bank column is not matching with your bank pass book .
Free is only one word which is use every person when he or she search from google.com. So It is duty of
every webmaster
to write the word in his website . So I am writing this article of free accounting knowledge .
There are 2 points if you wish to get this free accounting knowledge .
2. Your aim is to get knowledge and then next it also give to another without any cost.
It may be noted that the American institute of certified public accounts , in 1941 defined accounting as the
specialised art of recording , classifying and summarizing in a significant manner transaction terms of money
which are
of a financial character and interpreting the result . In the course of the time the definition has become
broader to
•Financial Statements
Two basic financial statements are prepared by an enterprise one is profit and loss statement and other is
balance sheet
•Accounting Equation
Three components of a balance sheet can be stated in the form of following basic accounting equation
This equation tells at the glance that the resources of this enterprise total and these assets are financed by
two source
•Business Transactions
It can be a purchase of goods , collection of money , payment to creditors for goods and expenses . An
event to be a
transaction must possess the quality of economic substance , relate to business and affect the economic
results .
•Assets
fixed assets are assets held on a long term basis , such as land , building , machinery and plant etc.
Current assets are assets held on a short term basis such as debtors bills receivables , stock , cash and bank
etc.
•Liabilities
These are the obligations or debts that the enterprise must pay in money or services at sometime in the
future . They
Accounting is very close relationship with maths , economics ,statistics , business study and other area.
Different formula used in financial , cost and management accounting can be satisfied on the basis of
maths . In accounting , we records only economical transaction related to money or money's worth And our
govt. policies effects on our financial accounts . Suppose if central govt. changes the rate of depreciation
then our net profit and financial position will effect from this point . So we should necessary to understand
the relationship of accounting with other field for better knowing accounting . Accounting , maths ,
economics and business study all makes good structure of a good economy . Because if one field is not fully
will be on other fields . Suppose if an statistics have to collect previous year market sales data but
accounting of market is very poor so he will have to collect wrong data and different economic decision will
be wrong . We can understand all field just as different parts of body , if one part is weak other surely
effected from it .
Accounting cycle
Sometime , you read this term in any book about accounting cycle , But you would not research of this term
. Actually accounting cycle is very simple term .It means that all the activities in accounting will absorb in
first point and then it make accounting cycle .This term is very useful for an accountant because an
Suppose Ram purchases goods from any company this transaction when comes in the front of an accountant
, he records it after this he see its result on his final accounts but in last automatically it support to
completing the whole accounting cycle . In other words any financial transaction is the beginning point of
accounting cycle and an accountant must give importance to each transaction of business.
Depreciation is just decrease the value of any fixed asset.When you will use it ,then the value of fixed asset
will be decreased . So calculating of net profit and correct financial position , it is the duty of accountant to
show it in profit and loss account . Rates of depreciation may differ according to the nature of fixed asset
some assets’ depreciation rate is low and other is high because high decreasing value due to expiry. In
balance sheet ,we deduct depreciation from fixed asset .After deducting we can calculate net value of fixed
Depreciation account can also be made by accountant but every year it must send to profit and loss account
because this is nominal account . Different law like income tax law and corporate law fix this depreciation
depreciation rate from these laws but calculating correct amount of depreciation . Also , account manager
should decide when a fixed asset will buy . For replacement purpose , it is duty of accountant and account
manager to calculate and transfer and written off depreciation every year from fixed asset .Some business
entity makes also provision for depreciation .The Balance as per Bank is the Nett effect of your Book Balance
offset by the amounts not reflected in the Bank – which should equal the balance in the Bank Statement. (Of
course, some variation may persist due to entries made in the Bank Statement which you have not yet
entered in your Books – but since you WILL definitely enter them, and only then print your reconciliation, it
will ultimately reflect the correct balance). You will find, as you mark off the individual vouchers by setting
the 'Bank Date', that the Reconciliation at the bottom of screen keeps reflecting those changes instantly.
When you are finished, press Ctrl+A (or press Enter as many times as necessary to skip
Depreciation
It is a gradual deterioration or decrease in the value of asset after using that asset in our day to day work or
after spending of time. In this world, everything is perishable, so making true profit and calculates true
value of any asset at present time, it is very necessary to depreciate on fixed asset and deduct from it.
Fluctuation
If you are doing business or linked with any business, you know that prices are always up and down due to
changing in the condition of business environment. Fast changing in market prices is called fluctuation. It is
not called depreciation because, it is not related to use of fixed asset. Fluctuation can also increase the price
of fixed asset but after deducting depreciation, value of fixed assets will be decreased. Fluctuation is fully
ignored and there is no accounting treatment. But we show depreciation as a loss of business.
Obsolescence
When new fixed assets’ quality, efficiency and capacity decrease the value and usability of old fixed assets,
then it is called obsolescence of old fixed assets.The main example, we can look in different machines or
technical equipment especially in medical field. Every new equipment decreases the value of previous
equipment. Because of it is not related to the nature and use of fixed asset, so it is also not depreciation.
Obsolescence is not important in field of accounting but it is important in technology research and marketing
of product.
Before making of fixed asset account, we must know following journal entries :-
In this method fixed asset account is very simple T shaped. There is not fixed Proforma for making fixed
asset account
There are many methods of calculation of depreciation . No one apply on the all assets , because , different
assets have different nature and according to management policy and effect of laws specially tax laws ,
different methods are used for providing depreciation . There are 10 methods of calculation of depreciation .
Out of which approximate 5 are the most important and it should be learned .
Fixed installment method is that method , in which we calculate fixed rate of depreciation and then with this
rate we
Depreciation = ___________________________________
For example Satifsan purchased an asset of $ 20000 and he can use it for 4 years and after four year its
scrape value
every year we provide $ 4000 and deduct from original cost of fixed asset . So its other name is original cost
1. It is easy to calculate
3. It divides all weight of total depreciation equally in all period of life of asset .
4. After providing depreciation , balance will shows correct value of fixed asset .
1. After showing zero value of expiry of fixed asset in books , but it is possible that asset is in good
position .
Then what provision will show in books , this method does not tell to accountant .
2. Some assets ' value will increase after spending of time at there we can not use this on that assets .
3. There is no provision in this method for buying new asset after scrap of old assets .
Provision of depreciation account is the account of provision of depreciation. First of all we should
understand provision of depreciation .Provision of depreciation is the collected value of all depreciation .With
making of this account we are not credited depreciation in asset account. But transfer every year
depreciation to provision of depreciation account. Every year we adopt this procedure and when assets are
sold we will transfer sold assets ‘total depreciation to credit side of asset account. For calculating correct
profit or loss on fixed asset. This provision uses with any method of calculating depreciation.
•Fixed asset is made on its original cost and every year depreciation is not transfer to fixed asset account.
•This system can be used both in straight line and diminishing method of providing depreciation.
•Calculation of loss on sale is very important where is provision of depreciation account is kept.
Of sale XXXX
____________________________________________
___________________________________________
___________________________________________
•At the sale total depreciation on of sold asset from its purchasing will transfer from provision of
depreciation account to fixed asset account , its journal entry will Provision for depreciation account Debit
Diminishing balance method of providing depreciation is very important from accounting point of view. In
this method,
accountant calculates depreciation on the asset from which he deducts all previous depreciation from asset.
For example Suppose we purchase a machinery at $ 50000 and if we fix 10 % depreciation on machinery
with diminishing balance method, then first year depreciation will $ 5000 , next year will calculate
So, we calculate depreciation on written down value of asset so , its other name is written down method or
reducing
value method .
2.This is very scientific method and provides logic that which asset is abolish due to spending of time at that
portion
3.Income tax officer prefers this method for assessment of business and professional income.
If we buy any asset after first year, we need not to calculate depreciation from beginning.
1.In this method we also ignore interest on capital which is used for purchasing such asset.
2.All new and old assets are mixed with each other, for an auditor, it is so difficult to differ among them.
But we can use following formula for calculating depreciation in W.D.V. method.
R = 1 – ( S/C) 1/n
R = rate of depreciation
S = S is scrape value
c = c is cost of asset
Reserves
Reserves are accounting terms. In general, it is saving of money, but in accounting terminology , it has
different meaning.
According to accounting technician, “ Reserves are that funds which withdraw from general or special profit
of business and keep it in safe pocket of company. This sum is used when any loss happens in business. "
Accounting Experts always in favor to keep some money or retain some fund for future losses, because
future is uncertain and for increasing working capital of business, accountant should retain some money out
of total profit before distribution it to shareholders. It is shown in profit and loss appropriation account.
Indian company law has fixed it and in other countries , their company laws fix it and from time to time
Types of Reserves
There are two main types of reserves which I am explaining with following way :-
1. Open reserves
Open reserves may be defined all reserves which shows in the balance sheet. Every person or public can
know such reserves of company. Those reserves provide full information to shareholders about which
amount has gone to reserves or why they are not getting all amount of dividend. This type can also divide in
sub parts
a) Capital reserves
Capital reserves are main type of open reserves. It is not created out of profit of company. This reserve is
not used for distributing the dividend to shareholders of company. The main sources of these reserves are
following:-
b) Revenue reserves
Revenue reserves are that part of open reserves which are created out of profit of company. It is showed in
profit and
loss appropriation account .It can be used for dividend to shareholders. There are following benefits of
revenue reserves:
1. Extension of business
i) general reserves
ii ) Specific reserves = Specific reserves includes dividend equalization reserve, debenture redemption
reserve , staff reserve. Investment fluctuation reserve, taxation reserve and contingency reserves.
2. Secret Reserves
Secret reserves may be defined as that type of reserves which is not shown in final account of company.
Means it has neither been shown in profit and loss appropriation account nor in balance sheet. These
reserves can easy created by showing less value of assets and more value of liabilities in balance sheet. If a
company has created such secret reserves for the benefits of company, it will be surely strong his financial
1. Write creditor account on any excel sheet with making two sides one side is debit and other
side is credit.
2. Write your business's creditors opening balance in credit side with giving by balance b/d
name.
3. Write the amount that you have given to your creditors in the current year in the debit side
of creditor account.
4. Write closing balance of your creditors in the end of this year ( this amount shows unpaid
amount which is payable to your creditor at the end of this year ) in the debit side of this account
5. You will see that debit side is more than credit side of this account , the difference will be
credit purchase and it should be written in the credit side of this account
This credit purchase is very necessary when you will calculate the net consumption of your stock
because for calculating net consumption for stock , we always add purchase in the opening stock and deduct
closing stock . This net consumption will show in profit and loss account or income and expenditure
account .
Revenue item
If any item of business which does not create any asset of business that type of items are called revenue
items, suppose we pay rent but rent can not create any fixed asset so this is revenue item and it must show
in profit and loss account , but if we have a special fund for building , this fund create long term asset up to
that period this will show as fixed liabilities . This is not revenue item .
There is also major difference is that revenue items benefit is related to current year but capital items'
benefits are related more than one year. If advertisement's expense is 100 Rupees and its benefit can only
But if we expand Rs. 9000000 lakh on advertisement and its estimated benefit is for 10 years then this will
And all capital items will shown in balance sheet or financial statement .
Capital loss
Capital loss may be defined as the loss relating to sale of any fixed asset or any other financial loss like
premium given on repayment of debentures or bonds, or discount on issue of shares and debentures.
Ist Example
Suppose, if any machine’s book value is $ 50000 and sell it on $ 40000 and $ 10000 is loss on sale of
2nd Example
Suppose, if a company has 100 debentures of other company and each debenture is of $ 100 but these
debentures are sold at $ 80 per debenture, so company is getting loss on sale of debenture of $ 2000. This
is capital loss in profit and loss account of company, we can not show any capital loss. In other words these
losses can not be debited in Profit and loss account of company. These all losses will show in assets side of
balance sheet of company. After this, it is written off by dividing number of fixed years and transferring to
profit and loss account. If you know what is mean of written off , then , I can also explain it , written off
means that part of any expenses or loss which is transferred from balance sheet to profit and loss account
Revenue losses
Revenue losses include all losses which happen due to operating any business activity. It includes cash
discount on sale, depreciation, loss due to falling of market prices. So, these losses will show in the debit
side of profit and loss account of company. It is deemed that when we start the different activities of our
business , many losses are happen , so it should be closed by transferring all these losses to profit and loss
account .
There are following main features or characteristics of revenue expenditures . These features are very useful
for your decision to adding any expenses in profit and loss account .
Any expenses which is related general operation of business that all expenses will be revenue expenditures
These type of expenses are related to short period, means benefit of these expenses is less than one year.
These expenses’ main feature is that these expenses is useful for maintaining the stability or efficiency of
fixed assets,
4. Recurring Nature
One of most important feature of these expenses that these expenses are recurring nature. In other words
these expenses happen Again and again in general business activities. For example , expenses for giving
refreshment is revenue expenditure because almost daily , these type of expenses is paid by company .
These type of expenditure is useful for maintaining the profit of business , but also above features should
include in the expenses which I have mentioned in above points because capital expenditure will also helpful
profit and you will then confused revenue and capital expenditure’s difference .
What are basic rules for making difference between capital and revenue expenditure
Ist Rule
All expenses which are done for getting any fixed asset must be capital expenditure. For example, expenses
of carriage and freight for getting fixed assets are also capital expenditure and will include in the total cost
of fixed assets.
2nd Rule
All expenses which are done for increasing the size or improvement in fixed assets must be capital
expenditure.
3rd Rule
All expenses which are done for getting share capital or long term loan must be capital expenditure.
4th Rule
Look also nature of business , if business is relating to general goods sale -purchase transaction then above
three rules will applicable but , if nature of business shows dealing in above transaction , then above
5th Rule
Legal judgments is also so important for taking decision , Like Income tax law 1961 has provided some rule
regarding assessment of business and profession . These rules also give good guidance for making
As a matter of fact , deferred revenue expenditure is capital expenditure . Because , it has both quality of
revenue
Example:
Heavy advertisement expenses , because this is for promotion of sale so, it is revenue expenses but because
amount is too large so it is also capital expenditure. Now, it will include in deferred revenue expenditure. If
we fix the target of getting benefit for this advertisement is 10 years and advertising cost $ 500000. Now $
500000 is divided by 10 years and we get $ 50000 and it will show as revenue expenses in profit and loss
account and balance amount of $ 450000 will show in balance sheet. Every year one tenth part of Original
and total advertising expenses will go to profit and loss account. This deferred revenue account will close in
10th year when there will not be any balance for showing as asset in balance sheet .
There are also other deferred revenue expenditures like underwriting commission, discount on issue of
shares and debentures , brokerage paid on purchase of shares and debentures, research expenses and
development expenses
Definition of Drawing
We use drawing many times in financial accounting .Drawing here means any amount withdraw from
business for personal use. Not only cash but if we withdraw any product from business or any asset of
It surely reduces the capital of any business. So business man must record drawing in his books so that
accountant can calculate correct profit or loss of business man .Some accounting terms, Intangible assets
This is the asset which is not visible but we can feel them . The main examples of these assets are goodwill,
Factitious Assets
If any asset which has no any market price that asset is called factitious assets .This is showed as expenses
of capital expenditure . The main example of these factitious assets are Preliminary expenses , discount on
calculations
1. cost of goods sold =opening stock + purchase +direct expenses - closing stock
Definition of Goodwill
Goodwill is an intangible asset which makes any organisation with his good name , by selling quality product
, by selling product at less price .Goodwill can be earned by speaking sweat words to customer . An expert
but in general IT is the excess of super profit over general profit .or If any concern is gaining more profit
than his general rate of return then it means it is generating Goodwill .Goodwill can not generate with in
night but for generating goodwill any firm can take 10 to 20 years . Which is called long period is suitable for
generating goodwill .
If you are selling your old firm you can also demand the value of goodwill with total cost of your asset . If
record your income and expenses. Because without recording your personal accounting , you can not make
your domestic budget. If you are living in any noble family , it is you duty to complete your all expenses
with your limited income , so make estimation of all monthly expenses . This estimation can be done if you
have recorded early months expenses . So it is your duty to record your personal expenses. Recording of
personal income and expenses is very easy . Just keep a Note book in you pocket and after spending any
expenses you must record your expenses. After month you will see what is your total expenses and where
did you expand it. On this base you can make you family budget. If you can not keep note book then you
can record your expenses in excel sheet. In each night you can record full day expenses in different things
like juice , ice-cream , wheat , petrol , dresses , fees , charity etc. After month total them you can get you
monthly recorded expenses after one year you can your yearly real expenses . It is not necessary that all
year we have to do same expenses but we can estimate our yearly expenses.
In beginning
I think that India is inventor of all basic rules of accounting because , In India all commercial activities are
started . So Need of recording transaction is the first preference of India. All records kept in Sanskrit
language. Accounting system is so scientific , no body can cheat in this accounting system. So there is not
need of auditing the accounting in that time. Different countries visitors and businessmen came in India and
took all knowledge of accounting and went to their country. So India is the first accounting Education giver
In the Middle
In middle of accounting education theme, we will take different scientist in whole world who gave their
contribution for accounting education. I am giving giving their name and other detail Luca Pacioli (1445 -
1517) Luca Pacioli also known as Friar Luca dal Borgo, is credited for the "birth" of accountancy. His Summa
proportionality, Venice 1494), was a textbook for use in the abbaco schools of northern Italy, where the
sons of merchants and craftsmen were educated. It was a compendium of the mathematical knowledge of
his time, and includes the first printed description of the method of keeping accounts that Venetian
merchants used at that time, known as the double-entry accounting system. Although Pacioli codified rather
than invented this system, he is widely regarded as the "Father of Accounting". The system he published
included most of the accounting cycle as we know it today. He described the use of journals and ledgers,
and warned that a person should not go to sleep at night until the debits equalled the credits. His ledger had
accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses — the
account categories that are reported on an organisation's balance sheet and income statement, respectively.
He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced
ledger. His treatise also touches on a wide range of related topics from accounting ethics to cost accounting.
John Mellis of Southwark, England had written his book in 1588 in which he wrote basic principals of
accounting , which used in modern accounting. Richard Dafforne accountant There are so many accountant
who contribute their time and energy to make accounting upto date.
In the End
In the end of this theme , I can tell you one thing that 100 billion people works daily in the field of
accounting. From making of family budget to making of national and world project budget , accounting is
used as scientific source of data , on the basis all future planning have been done by different people in
whole world. If you are thinking that just passing the voucher entries and making final account is accounting
, then you are wrong. Theme of accounting is in system not in doing just clerk work. Passing the voucher
entry is clerk work. But If you are become real accountant in real sense . Then make your businessmen's all
plans and budget by doing all analysis of finance statement. So that you will succeed in reducing every cost
of business and increasing all incomes of business. All management accounting is nothing but proper
It is true that accounting is an information system. It is system in which an accountant gets all financial
reports .These reports can be received by accountant if he takes all the steps of accounting procedure.
There are following in points which show that accounting is an perfect accounting system? Accounting gives
us profit and loss account and balance sheet , on these two reports , we get the information of revenue
position and our financial position? Because in accounting , there is the facility of calculate cash flow
statement and fund flow statement , so it provides us the information about our inflow and out flow of funds
and cash? Accounting is an equipment in the hand of accountant and manager , with this equipment they
can make their all future plannings, future budget .With accounting , they can easily estimate , is there
Many accountants think that loan and advance is almost same . Both means when a person borrows the
money from other, it is called loan or advance . But , If you will deep study of this , then you found many
Loan means debt for personal or business purposes in which loan taker is responsible to return his taken
Advance is to get money from those , which have our mutual relationship .
Suppose
•Debtor can give advance money for purchasing any future goods from his supplier or creditor . or Supplier
can demand
Rohan has to buy of Goods $ 50000 in 5/5/2009 but he pay to Sham $ 50000 in advance in 5/3/2009 .
Loan is just Contract between Lender and borrower in which they fix their terms and condition .
What is rate of interest on loan , what is the installment amount , when installment of loan will given , What
penalty
will be levied if , installment is not given at proper time and many more conditions they can fix .
But in advance , term and condition is fix on their relationship , a good relationship with employer , you can
get
Sometime Imprest cash and call in advance is also deemed advance but these are not loan items .
IASB publishes his new amendments .According to this now IASB will gets public comments to clarify the
requirements in
IAS and IFRIC 9 reassessment of Financial Instruments.Now any one can also read Financial instruments
project page
The proposals are set out in an exposure draft Embedded Derivatives, on which the IASB invites comments
by 21 January
Accounting Education means that education which teaches recording and maintaining books of accounts .
This education came in existence after mathematics and Economics science . In the point of facts , if It
should be said that above education is the base of accounting education . Above Education are very helpful
for getting accounting Education . In accounting education , we learn what is way of recording our different
transactions. With this education , we can calculate our business's result relating to different transactions
and events . It is not easy to find to reward or return on investment made by businessman .
Suppose , A company whose sale is 6 Billion $ ( 6 X 1000000000000 $ ) and it has spread in 120 countries
and if you are said to calculate the profit or loss of a company . Then , you will feel giddy . But ,if you learn
accounting education , you will feel reposal and easement to calculate above profit or loss. This accounting
education is also helpful for determination of tax because , if we learn to record all transactions in the books
and on this base we can calculate correct value of tax and become responsible businessman of this nation.
All tax officers or assessing officers confess the accounts of professional accountants who are expert in
accounting education. Success of business is fully under accounting's thumb . It is impossible to develop
business without accounting data and effective use of them for business plannings . For analysis of different
statement is also depend on cost and management accounting which are subbranches of accounting . One of
magistral feature of accounting is that this education is encumbrance on brain . All work is done in this
education with fully scientific method of accounting . After spending of time , all other educations forget but
accounting education is always young and challenging position in the brain of accountant . Accountant does
their work with new power . It is the reason that as accountant's experience increases , by the way amounts
It is true that getting of any education is no so simple and you have to face several difficulties . Like other
education accounting education is not so easy . It is the way of complexities and Complications but student
should do hard practice and try to understand accounting terminology . After this student can solve every
problem of accounting .
1st Maintaining the accounts relating to issue, forfeiture and reissue of shares.
When we issue share first time, it is the duty of accountant to records all the transactions relating to issue of
share must be recorded in the books of company. The process of issue is completed the following way.
getting the final amount in the form of IST, second and final calls.
So when any amount we receive, it must be recorded by accountant of company. If we are refunding the
In company accounts, the accountant can face the problems of forfeiture of shares and reissue of forfeited
shares. Many inexperienced accountant do 90% mistake in passing the voucher entries relating to forfeiture
and reissue of shares. This is broad concept and I will write full tutorial on forfeiture and reissue shares.
Debenture is just loan which is taken by any company, so it is the duty of the accountant to record relating
Bonus shares are the shares to existing shareholder. When company thing that it is according to the
company policies, then company can issue the bonus shares. So record of bonus is all very necessary in
company accounting.
4th Maintaining the accounts of Right shares
Right shares can also issue to existing shareholder on the proportion of their existing shares .These shares
Regular accounts means to pass the voucher entries related to purchase, sale, expenses, and losses,
incomes of company or on the behalf of company. The recording way is equal to the recording way of sole
Maintaining the final accounts of company is very necessary because company laws of different countries
have given strict provision for making and publishing the final accounts of company. There the final
This account is equal to the profit and loss account of other organization.
It is very compulsory to make profit and loss appropriation account. In company level business , shareholder
is differ from management or directors , so what is the dividend and what amount of profit and loss reserves
in company will write in the debit side of this account. Other thing I will discuss in next articles.
Balance Sheet
This sheet shows the assets and liabilities of company. Company must show his contingent liabilities in the
From accounting point of view, it is very necessary to calculate commission of different full time and part
time directors of company. Different countries’ company laws can make the rules and regulations regarding
these commissions, so you must know the current rates of such commission if you have the responsibility of
making the company accounts.The area of expenses and incomes of company is so wide, so thinking of
Company account’s main part is to calculate the dividend and interest and then record. There are different
types of dividend which is issue by company but interest is given on loan and debentures issued by
company.
9th Corporate tax
Current rules and regulations relating to corporate tax depend on the finance bill and budget , so before
Bonus shares
Bonus shares mean a gift or premium in form of stock by a company to its shareholders . It may be stated
as extra dividend to share holder in a joint stock co. from surplus profits in the legal context a bonus share
is neither dividend nor a gift . It is governed by regulations of the company law that it can neither be
The bonus shares can be issue out of profit or reserve which have been earned by the company these are
profit or reserve which are free for the purpose of dividend and as specified in company act . but it can not
view , those reserve and surpluses which are not earned by company that is which are existing due to
• general reserve
• revenue reserve
• free reserves
• capital reserve
• sinking fund
Bonus
Bonus is an accounting term , it means a premium or gift which is paid normally in cash.
Bonus shares
Bonus shares means a gift or premium in the form of stock by company to its shareholders . It may be
stated as extra dividend to shared holder in a joint stock company from surplus profit s in the legal context
a bonus share is neither dividend nor a gift . It is governed by regulations of the company law that it can
The bonus shares can be issue out of profit or reserve which have been earned by the company over the
previous years .Normally these are profit or reserve which are free for the purpose of dividend and as
specified in company act. but it can not views those reserve and surpluses which are not earned by company
•general reserves
•revenue reserves
•free reserves
•capital reserves
First test
Residual reserve test As per this guidline the residual reserve after the proposal of capitalisation ( bonus
2nd test
As per this guidline 30% of average amount of profit before tax in the previous three year should yield a
rate of dividend of expended capital base of the company at 10%
3rd test
This test indicates teh maximum amount which can be utilised for issue shares capital at one time shall not
To determine a maximum amount of bonus which can be decleared the test mention above will be apply .
Firstly the first two test will be consider the amount of bonus will be restricted upto the lower amount but
this amount will not exceed the existing paid up capital of the company .
In brief the following steps should be consider for the purpose of bonus
1. Bonus shares not permitted in less existing partly paid up shres are converted into fully paid up shares
2. Bonus can not exist teh paid up equity capital of the company
3. The balance of residual reserve must not less than 40% of increased capital
4. 30% of average profit before tax of previous 3 year must yield 10% dividend on the increased capital
I am giving the full detail of accounting treatment of bonus shares step by step
1st case
When the partly paid up shares are converted into fully paid up shares through bonus issue
For providing the amoutn of bonus out of reserve , then the following journal entry will pass
• For amount due on final call of shares ( Existing shares unpaid amount
1st step
Take the basis of bonus issue for the purpose of determining for purpose of total amount of bonus basis of
bonus issue.
(a) To convert the existing partly paid up shares into fully paid up shares
Bonus shares numbers Total no. of issued shares= __________ X ___________Basis issue numbers
Capital budgeting is process of selecting best long term investment project . Capital budgeting is long term
Ist step
2nd step
Screening the proposal
3rd step
4th step
5th step
6th step
7th step
Performance review
• Corporate or Company
Corporate or company is the synonym. Company means association of person which do any business for
earning profit. But it must register and formed under any company law of any country. Because company is
an artificial person and do work with separate entity. Company has its own charter and internal article of
association.
• Shares
This is main term of corporate accounting. When we divide total capital of company into parts then each part
is called share. Suppose, if you have 100000 capitals and if you divide into 1000 parts. Then it means
• Preference Shares
Preference shares are the main type of shares if company issues that type of shares, then the share holder
of these types of shares has the benefit that they can get part of profit with fixed rate and before giving the
part of profit to equity shareholders. In the end of company, these shares are get preference of their
repayment.
• Equity Shares
Equity Shares are the shares which are differ from preference shares. The shareholder of these shares has
no preference relating getting dividend or any repayment. They are real owner of company and have the
Dividend is that part of profit which distribute among shareholder. Its other name is divisible profit. Dividend
• Debenture
Debenture is just paper which is given by company when company takes loan from public. It is issued under
company seal. In this paper company accepts that he will repay the loan taken by him after certain period
• Redemption
Redemption is technical term in corporate accounting .It means repayment of loan taken by company. When
company issued debenture then company also writes the mode of redemption of debenture. There are
different ways of redemption of debenture. The best way is to create sinking fund and keep some part of
profit in it as annual installment. So that company can pay his taken loan without any tension.
• General Reserve
General reserve is the part of retained profit. It is very compulsory to make general reserve in company for
payment of contingent liabilities or for development of company. Every finance bill has right to amend or
change the rate of % in general reserve. This part is not issued as dividend
Some time a company can decide to issue of shares on premium or on discount. In both situations we must
Issue of shares on premium means that if company wants to get more money of each share. Then the
company can demand premium with the face value or nominal value of shares. This is called issue of shares
on premium. Suppose if the face value of shares is RS.100 Company can issue of his 10000 @ Rs. 105 it
means company is also demanding RS. 5 per share as premium. According to new amendments in Company
law 1956, Company must open security premium account, if co. issue shares on premium. All money which
got with name of premium will transfer to security premium account . The following entry will passed in the
books of company
1.For the due of share Allotment money
• Shares Capital Account Credit xxxx ( With the face value of shares)
If company has demanded the premium with his call money from share holders , then on the place share
allotment account we must write share call account , all other journal entry will be same.
It means that company demands less amount than face value of shares .This less amount is called discount
on issue of shares .
In the situation when company want to buy any fixed asset , then company can issue shares to supplier of
fixed asset .
At this time company pass the following journal entries :-
In case if company issue in premium or on discount to the suppliers of fixed asset . Then we first calculate
the number of shares for doing any accounting treatment for this
Numbers of shares
Numbers of shares
Value of Fixed asset= ------------------------Value of per share (Face value – Discount per share)
Suppose xy company purchase the machinery of RS. 90000 by issue of shares at discount of shares of 10%
Journal entries
Suppose xy company purchase the machinery of RS. 120000 by issue of shares at Premium of shares of
20% if face value of share is RS.10
Journal entries
When a company makes the balance sheet after first time issue of shares. There may be the case of call in
arrear.
In my earlier article, I have already explained call in arrear and call in advance. In this article, I want to
explain, how you will do the adjustment in balance sheet for call in arrear. Call in arrear must be deduct
Called up Capital = Capital demanded at the time of Application + Allotment + and calls money
Less call in arrear = at the time of allotment and due date of call money
Call in Arrear
Call in arrear means company has demanded his due amount of allotment or call money but .But if
shareholder does not pay his allotment money on due date it deems as call in arrear , this is the asset of
company and it must deduct from call up capital for calculation paid up capital. If there is no any rule the
1st journal entry will write at the time of due but not received the allotment money from share holder
3rd journal entry is related to company’s interest received on due amount of call in arrear. This is the
income of company:-
Call in Advance
Call in advance means that company did not call the allotment or calls but shareholder gives the call money
in advance form .So this is the liability of company . Company is liable to pay 6% interest on call in advance
to shareholder
1st journal entry will pass for adjustment of advance money of allotment received at the time of application
2nd Journal entry will pass for when the amount of allotment due
3rd Journal Entry for paying the interest on call in advance to shareholder
Share forfeitures means cancel the power of share holder if he does not pay his call money when company
demands for this .Company will give 14 days notice, after 14 days if shareholder did not pay then company
will forfeit his shares and cut off his name from the register of shareholder. Company will not pay his
1st situation
In this situation shares issue at part and there is no pro-rata situation. So the following entry will pass
Share capital Account Debit (called up amount of forfeited shares
Share call in arrear Account Credit (Amount did not receive of forfeited shares)
2nd Situation
Dear friend if shares are issue on premium or on discount, then if we did not receive the premium, then we
write in journal entry otherwise we will not show security premium account in share forfeiture journal entry
Security premium account Debit (If premium is not received from share holder)
Share call in arrear Account Credit (Amount did not receive of forfeited shares)
3rd situation
In case there is also difficulty to calculate the net amount of allotment received in case some amount is not
received and same person we have adjust some amount of share application.
Money xxxxxx
_________________
Xxxxxx
As forfeited shares
Xxxxxxx
Less (-) xxxx
Perportion in
Of adjusted application
Money which is
We received in advance
________________________________
______________________________ ____________
Allotment xxxxx
Redemption of Debenture means repayment at the maturity of debenture. Because earlier we told that
debentures are long term loan so it is very necessary to redeem the debentures.
1st Method
Lumbsum method
It means when company repay the Lumbsum amount to debenture holder . There following sub method of
this method
A) Without Provision
According to Company law , if you have to redeem without any provision , it is necessary to make reserve of
debenture redemption reserve with 50% of total amount of debenture so that company can easily repay the
debenture without any provision at the time of redemption the following journal entry will pass.
This is very important method of redemption of debenture. Sinking fund means take one part of profit for
repayment of debenture. This is calculated with sinking fund table. This is invested in such scheme which
gives us Lumbsum amount so that we can easily repay the debenture without any tension. This is very
popular and scientific method of redemption of debenture. In this method we open the sinking fund and
sinking fund investment account. Sinking fund’s other name is also Debenture Redemption Fund Account.
The following accounting treatment is done by the accountant of company when the company follow this
method .
9th Journal Entry for receiving the money from sale of investment
12th Journal entry for balance of sinking fund transferred to general reserve account
Before writing this article , I have studied deeply several books of accounting . Actually this type of provision
is needed in Corporate type business . Because in the sole trade and partnership firm there is no treatment
of provision for income tax and income tax paid because above two type business level , it is the duty of
business man to pay income tax personally . So in above situation if he take any fund from business for
paying income tax , it is deemed as drawing or other words we can say that his capital will reduce if you pick
some amount for paying any income tax . No other treatment is done in sole trade or partner ship
I am giving you full detail of accounting treatment , if you have to do this type of work in any company .
Ist Step
2nd Step
In India , we all company pay income tax of previous year income . Means what we earn in last year we
have to pay tax on next year that is called assessment year. But Under the law of Income tax , all company
For Example
Suppose company can guess that it will earn RS. 5 crore in this year .
So on this advance guess company make his reserve or provision of income , it may be the 5% or 10% or
15% or 30% on his estimated income. This is called provision for income tax .
Now company Make the voucher entry of this provision by providing amount from profit and loss account
After provision or estimated income tax , company submit his advance income tax return to income tax
department ,
After one year when income tax department calculate the real income tax by providing the real income
Actual income tax will adjust with provision of income tax by passing following adjustment entry
•We must calculate the difference between actual paid tax and ( advance + tds )
If advance and tds is more than actual tax , then income tax department return your excess tax paid
If advance and tds is less than actual tax , then income tax department demand more tax from you , and
Indian Company law 1956's section 210 , 216, and 217 binds board of directors of company to show profit
and loss account and balance sheet of company and auditor's report's copies in annual general meeting of
Company . All these reports are called annual reports of company . It is also compulsory for company to
publish both in print and now in website also . These reports show the performance of company to public .
These days many companies are using charts and graphs for publishing their final accounts . Because , it is
attractive and gives good impression to customers and interested people of company . Many charts are so
•Due to advancement of Internet technology you can make charts and Graphs of production cost , sale ,
income and expenses classification and distribution of income into dividend and tax and present in website
of Company .
For learning point of view I have made some chart of company's data . all these reports are made in excel or
Accounting is very interesting subject .Simplicity is not the feature of accounting . Different complex
problems , you will face in the field of accounting . Today , I am telling you about valuation of stock
.Because businessmen buy different stock at different time at different cost . But when we will show our
closing stock , we will face this problem . There have many rates at which we charge our cost of closing
Suppose Rajpura alcon company buys raw material of wire at different cost but we this company records
closing stock of this raw material , this company can use first in first out method for calculation of closing
stock . This method is also called fifo . It means that the stock which bought first , it sent for sale first so
last stock cost will the rate for calculating closing stock. There is another method last in first out or average
cost method . I always suggests businessmen and accountant to use average cost method for calculating
closing stock.
Inventory management is main duty of an accountant of any company . He is responsible both quantity and
monetary record of all the material in which company deals . We know that trader buys the goods and
sometime he returns to his suppliers . He also sells the goods and some time his customers return him his
goods . So , Inventory will convert from buying to selling step by step. Accountant have to give the reports
1. What is total amount and quantity of goods purchased and sold of different kind .
Quotation is just proposal for sale : It is not sale but offer of sale given by seller to the buyer of goods .
When any company want to buy with minimum cost he publish tender for that buying if any body sends
offer for sale with his selling rates , discount rate , delivery time and other such term and condition then
•Taxes
•Delivery
•Quantities
•Legal compliance
•Warranty conditions
•Patent conditions
Delivery note is issued when goods physically delivered by seller to buyer. Its other name is delivery
Accountant can prepare both Invoice -cum - Delivery note at the time of delivery.
•Delivers goods against order or without order (where order does not exist)
•Prepares sales invoice linking the delivery note where sales invoice was not prepared at the time of
delivery.
Debit Note
When A business organisation purchases the goods from other business organisation . Some goods out of
them can be rejected by a business organisation to other . At this time for recording the purchase return ,
Ist Method: We wait our supplier , when he accepts our rejected goods and send us credit note . This credit
note will be the debit note for our purchase return entry. With this purchase return entry our stock will
reduce with the amount of goods return outward and We make voucher Entry in Debit Note in tally 9
2nd Method: In this we issue the debit note with return goods and pass the voucher entry of purchase
2nd Step:Create the Ledger of Purchase return under the head of purchase
3rd Step: Pass the voucher entry of purchase return in debit note voucher of tally 9
Credit Note
When A business organisation sells the goods to other business organisation . Some goods out of them can
be rejected by other business organisation . At this time for recording the sale return , there is two method
Ist Method: We wait our customer , when he send us Debit note . This Debit note will be the Credit note for
our Sale return entry. With this Sale return entry our stock will increase with the amount of goods return
inward.
and We make voucher Entry in Credit Note in tally 9
2nd Method: In this we issue the credit note as we accept rejected goods and pass the voucher entry of
2nd Step: Create the Ledger of Sale return under the head of Sale
3rd Step: Pass the voucher entry of Sale return in Credit note voucher of tally 9
Labour is very important part of production . Its cost is very important in total cost of production . So we
Definition
Labour cost means all amount which direct or indirect is given to labourer or employee for his work for
production .
2. Dearness allowance
3. Provident fund
6. Pension of employee
It is the duty of cost accountant to reduce the cost of labour so that cost of production will reduce and
businessmen can sell their products at lower price. So he must know what exact reasons beyond increasing
labour cost .
Ist Reason
There are many business activities and events which affect the quantity and value of stock.
1st Affect: When company buys the material , it increase the quantity and value of stock.
2nd Affect: When company returns the goods to supplier , it reduces quantity and value of stock.
3rd Affect: When company sells the goods to buyers then it reduces quantities and value of stock.
4th Affect: When our customers returns us the goods at this time our quantity and value of stock will
increase .
5th Affect: Today is most important effect is the effect of of inflation and deflation . It affect only on the
6th Affect: There are different method of calculating of stock can affect the value of stock . Calculating the
Some people are coming from non medical and medical in field of accounting . There can easily learn tally
and some basic rules of accounting From any coaching institute but they do not know the accounting
treatment of outstanding expenses in book of accounts . Then I am training of this point at this time .First of
all I am telling you that outstanding expenses are those expenses which are payable but not paid , so it is
our duty to record it at the closing of financial year .Dear friends according to the accounting principals any
expenses paid or payble is the expenses of business , so when we makes profit and loss account of business
, it must be added in paid expense and you can make journal entry in tally
Name of items
Adjustment entry
1. Closing stock
Outstanding expenses will add in expenses . if it is direct it will go to trading account’s debit side , if it is
indirect nature then it will go to the debit side of profit and loss account
It will be the current liability so it will go to the liability side of balance sheet.
3. advance expenses
4. income receivable
It will add in the income and go to credit side of profit and loss account
To purchase account
7. Destroyed of goods
To trading
If there is no insurance
8. Depreciation
It will deduct from fixed asset . Because it decrease the value of asset
If you have make any provision for doubt ful debts the its journal entry will passed
( New bad debts which is not shown in trial balance will transfer to provision for doubtful debt account )
Net value of provision for doubtful debt account transfer to profit and loss account’s debit side
=total bad debt + closing balance or provision of doubtful debt or this year provision - opening balance of
= debtor – new bad debts – this year provision or closing balance of provision for bad debts
To outstanding commission
It will shown in the debit side of profit and loss account as o/s commission to manager
If it charge on the amount after charging such commission then we will calculate
Before doing accounting treatment of provision for doubtful debts , you must know the complete definition
of provision . In accounting , it is a reserve that is against loss due to non payment of debtors . In case
debtor does not give us our amount . Then if we have make provision or reserve for this , we can easily
purchase new goods but if we have no money due to every year bad debts then we can become insolvent .
So with our work experience we should make our provision on our debtors with some % on debtor .
Now you are ready for doing the accounting treatment of provision for doubtful debts .
Entry for recording actual bad debt which did not record in books of business
Entry for transferring bad debts to provision for bad debts Account
Transfer of provision for bad debts account to profit and loss account
It is not necessary that provision for doubtful debt account will go only to the debit side of this account but it
may go to the credit side . It will decide after making provision for doubtful debt account . Which is very
easy to make . I am showing you this account . After study of this account you can easily make this account
Manufacturing accounting
Manufacturing accounting means accounting relating to production or manufacturing. All accounting can
divide also manufacturing and non manufacturing. Accounting up to converting raw material to finished
product includes in manufacturing accounting. We specially open manufacturer account for recording all
items regarding production. In manufacture account we record direct material cost, labor cost and
production overhead cost. Manufacture account is helpful to find out the value of cost of production which
Manufacturing account starts opening balance of raw material in its debit side. Amount of purchase of raw
material are also debited in this account and direct labour charges and other manufacturing overheads like,
depreciation of plant, lighting of plant and factories other expenses will transfer to debit side of
manufacturing account. In the credit side of manufacturing account we shows closing balance of raw
material and work in progress and scrap sale. The difference of both sides is the cost of production which
transfers to trading account’s debit side. Manufacturing account is also helpful for finding the value of gross
profit because gross profit is difference between cost of sale and sale value but cost of sale can not be
calculated without finding the value of cost of production .So, factory accountant records every transaction
relating to factory and one these voucher entry basis we find manufacture or manufacturing account.
To make the accounts of ngo and charitable societies is very simple . In charitable societies we have to
make receipt and payment account . This is just like cash account .But cash account can not be made in non
profit organization .Debit side of receipt and payment account is receipt of cash. Ngo can receipt cash in the
form of subscription , interest ,general donation , rent received and entrance fees etc. Ngo can also pay
certain expenses like salaries , printing & stationery expenses and other purchasing of fixed and current
asset . This must show in the credit side of receipt and payment account .After doing this , accountant can
calculate balance of cash at the end time of accounting period . It is also duty to collect other information
like outstanding and advance income and expenditure :-for calculating net excess of income over expenses
_______________________________________________________________
xxxxxxxxxxx_________________________________________________________
Statement showing of income in income and expenses account
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Making the accounts of Sport clubs or trust or society is very easy but you should know the way of
maintaining it . First of all when you are making the accounts you must classify all the item in to capital and
revenue nature . If expenses are in cash , so it must show in receipt and payment accounts , here do not
see any nature because this account show all receipt of cash and bank from any source for business . Even if
we get money through other person's credit card , then it will be deemed cash receipt . After this you can
easily make income and expenditure account . This account shows net income or loss from club , so only all
expenses which belongs to this year will send in expenses side of this account .It is not necessary that these
It is very easy to make the accounts of temple . A temple is religious place. So recording of donation from
devotee is very necessary. Devotee may be monthly or annual member. A seal of Of temple must be on the
receipt and continually it records in the books of accounts .It is also necessary to record all the expenses
related to langur, rent, lighting, and electricity, building repair and other smangum expenses. For this
temple accountant should make the income and expenditure account and receipt and payment account. If it
is registered under charitable trust , then to make accounts of such temple is very useful for keep the faith
of devotee. Because fraud in temple fund can decrease the number of devotee in that temple
Partnership accounting
In partnership accounts you must open profit and loss appropriation account . It is accounts in which
accountant can adjust salary , interest on capital and interest on drawing and also new division of profit or
loss . So it is necessary to make this account . At the time of admission , partnership accounts can be
change .
Because Capital accounts will change because , old partner sacrify for new partner so it is the duty to new
partner to give some part of goodwill in cash of any other way . So that other partner can credit it in their
capital accounts .
In the partnership accounting , all the final accounts are same as sole trade business final accounts . But
main difference in these accounts are that In partner ship accounting , we make one extra account that is
called profit and loss appropriation account which is used for calculating net share of profit or loss of
•In the debit side , we show interest on capital , salary and commission of partners and
•in credit side we shows interest on drawing , after adjusting these items , we transfer net profit to partners
•In Absence of any partner ship deed Partner will divide profit or loss equally
•No salary to any partner Interest on loan given by any partner is 6% annual.
Suppose A and B are the partners . They do not have any partnership agreement . How will you solve the
a) A spent twice the time that B devoted to business .A claims that he should get a salary of Rs. 3000 per
month for extra time spent Ans. No Salary will be given in the absence of any agreement .
b)B has provided a capital of Rs. 50000 where as A has provided only Rs. 10000 as capital . A however has
provided Rs. 20000 as loan to firm . What interest if any will be given to A and B ?Ans. Only interest on loan
d) B wants that profit should be distributed in ratio of capital but A wants that it should be distributed
equally
There are four latest method apply , if any body withdraws any fund or cash for personal use from his firm .
1.If any partner withdraws every month in the first day the he will pay to firm @ given rate for 6.5 months
2.If any partner withdraws every month in the middle of month , he will pay interest on drawing @ given
3.If any partner withdraws every month in the end of month , he will pay interest on drawing @ given rate
4.If any partner does not withdraw every month then his withdrawing month usage product will be
calculated
5000X10 =50000
after calculating product he calculate his payable interest on drawing @ given rate
Without permission , a new partner can not enter in any firm but with the acceptance of all partner , a new
partner has come in partnership firm , then it is the duty of existing partner to sacrifice his share for giving
share to new partner .It is the duty of new partner to give his own capital and share of goodwill to
partnership firm
It is necessary to calculate new and sacrifice ratio at the time of admission of a new partner because all the
journal entries like profit sharing of new firm and goodwill division is on base of calculated new and sacrifice
ratio respectively .
It is necessary to calculate profit or loss on the revaluation of assets and liabilities at the time of admission .
This profit or loss must be divide between old partner in old ratio . Because this is the result of the hard
Calculate the share of Goodwill which will have to take from new partner
There are many method of calculating and accounting treatment of goodwill . But these days goodwill name
has been changed with premium . and It has been brought in business by new partner is very famous
treatment . This premium is divided by old partner in their sacrifice ratio . It means their share will transfer
Some time all partner can decide to maintain their new capital . If any partner’s share will less than
accepted portion then , that partner will give fresh capital in cash form or any partner who has given more
capital from accepted capital , that partner can withdraw this excess in cash form .
Before making of provision of bad debts accounts , you must understand the concept of provision , reserve
etc. Because without understanding these you cannot understand the concept of making of provision of bad
debts accounts .
When we start our business , we faces certain losses like bad debts , depreciation or discount so if we do not
keep some part of our cash or profit in cash form in business pocket , we can face the problem of lack of
money for operational requirement , so we take future planning and after scientific estimation we makes
provision of reserve of our losses on the certain percentage of loss it may be 5% or 10% or 15 % . This is
•It will open with opening balance of provision for bad debts
•In the debit side we will write actual bad debt of trail balance and outside
•in the debit side also writing new provision of bad debts with writing to balance c/d
•Balancing figure will be the amount of provision transferring to profit and loss account as loss written off .
Rectification of errors
Rectification of errors is very tough work . It is main duty of chartered accountant of any country . A lot of
errors can be done by accountant . So C.A. audits the full accounts and if he see any error , his duty to see
that why it happen and how can rectify this so that profit or loss or financial position do not affect of this
happenings .To day my main aim is not write just article on this topic but actually , I want to give you
simple way to correct your accounts error forever .Read following lines very seriously and concentrately
1. first of find out your error and mistake from accounts
2. write what is the mistake or incorrect journal entry or incorrect accounts .This error may affect one
4. in rough page , you will also have to do treatment of your mistake.Suppose you wrote 1000Rs. as sake
instead of RS.2000 sale which was correct .Its wrong is journal entry is
Then now your are analyst you should see that 1000 is less in both side so for making the correctness pass
another
I am writing very simple method for correcting the mistakes and error in books of accounts
All work must be done on rough paper or notepad .There are the part of working notes .
Ist step
2nd step
What should be the correct entry or what should record which is correct according to the nature of error of
accounting
3rd step
Best rectification of error or write the rectification entry in such a way so that difference will be auto
correct .
I take an example
XYZ co. purchased machinery of $ 5000 but by mistake this amount was debited in purchase account .
Ist step
Wrong entry
Purchase account debit $ 5000
2nd step
Correct entry
3rd Step
Balance sheet is main part of financial statement . This is necessary to make it . Making of balance sheet is
very easy
but you must know the rule of making balance sheet . In Right side we will have to show all assets and in
Correct calculation of goodwill is very difficult work. But with using correct formulae of specific method , you
can
Ist Method
In this method, we calculate previous year’s profits average and then we multiply it with number of
purchase years.
2nd Method
In this method, we calculate normal profit with normal rate on investment. Then we calculate super profit
with
following formula.
3rd Method
Capitalization method
4th Method
Annuity Method
In this method we first of all calculate annuity . Annuity means annual value . These day , accountant are
using
different annuity tables for calculating annuity , after this they can easy calculate goodwill with following
formula .
Revaluation account
This account is very useful for calculating the profit or loss when partners decides to reconstruct their
partnership firm . When a new partner comes in firm or exit from firm , making of this account is very
Revaluation account
Dr. side
Cr. Side
Revaluation account
This account is very useful for calculating the profit or loss when partners decides to reconstruct their
partnership firm . When a new partner comes in firm or exit from firm , making of this account is very
Capital Adjustment
When two or more partner decides to change their capital according to their profit and loss ratio , then it is
For Example: Suppose one partner A who invested Rs. 100000 and other partner B invested Rs 200000 . If
they decides to divide their capital in their profit sharing ratio and suppose their profit and loss sharing ratio
is 1:1 then we calculate total capital first that is Rs.300000 and if we divide into ½ and ½ , it will be 150000
and150000 to A and B. so A will invest more 50000 Rupees and B will withdraw Rs . 50000 because his old
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How can You calculate new and sacrifice ratio at the time of admission of new partner
Calculation of new and sacrifice ratio at the time of admission of new partner is very easy. If you want to
calculate new profit sharing ratio, you should only calculate the difference between old and sacrifice ratio
.Sacrifice ratio means total sacrifice of old partner for new partner.
It is given by old partner to new partner so if you want to calculate new profit sharing ratio, you just deduct
this from old profit sharing ratio. But in different situation, partner can make condition at the time of
admission, and fix his surrender share for new partner from his share then we first calculate sacrifice ratio
For example Ram and sham are the two partners with profit sharing ratio are 3:2. Sita enters in this partner
ship. Both after that sita will take ¼ as new share, If agree that Ram will give 20% of his share and balance
will give by Sham then we will calculate both new and sacrifice profit sharing ratio as bellow way.
Solution :-
of new partner to give goodwill in cash or in any other way to old partner . There are following method with
1st method
Under this method , new partner gives his share of goodwill to old partners personally .So there is no need
to record
2nd method
Under this method , old partner bring his share of goodwill in cash form in the firm and it is taken by old
partner in
their sacrifice ratio . For this following journal entry pass in the books of firm
3rd method
when new partner bring goodwill in cash in business and taken by old partner and then withdraw by old
partner
Above two entries will pass as same as in second method but third new entry will pass
4th method
If new partner do not bring goodwill in cash in firm , then following entry will pass for the adjustment of
goodwill .
5th method
6th method
If goodwill already exits in balance sheet of old partner , then it must be transfer to old partner’s capital
To goodwill xxxxxxx
7th method
If new partner brings other asset as goodwill of his share of goodwill . Then following entry will pass
When a new partner in partnership firm , he and other partner can agree for the capital adjustment on the
basis of new profit sharing ratio and new partner’s capital as base . In such condition , we first calculate
Suppose Vinod is new partner in the firm of vijay and rajesh with 3:2 and their capital are Rs. 10000 and
Rs. 30000 but Vinod will ¼ share . He brings Rs. 10000 as capital . If all the partner agree to adjust their
capital according to new profit sharing ratio , then calculate who invest more capital in cash form or who
Vijay brings his external capital in cash because now he needs = 18000-10000 = 8000
In the partnership accounting, at the time of retirement or admission, we either make revaluation account
or make memorandum revaluation account but we should know the main difference between both
1.In memorandum revaluation account we make reciprocal entries in same account for covering double
2.In memorandum revaluation system of accounting, we can not change the value of assets or liabilities
outside because all the
3.In memorandum revaluation account , first we divide profit or loss on revaluation is in old profit sharing
but after reciprocal entries recording we divide partner in new profit sharing ratio but in revaluation
4.Making of memorandum revaluation account is not necessary but making of revaluation account is very
necessary .
In any partnership firm when a partner retires from a firm it is the duty of remaining partner to give him his
share because he has to spend his remaining life . So at this time accounting treatment is very necessary in
•Calculate new profit sharing ratio and calculate gaining ratio by deducting new profit sharing ratio from old
ratio .
•Calculate profit or loss on revaluation of assets and liabilities and transfer it to retiring partner's capital
account .
•Calculate the goodwill share of retiring partner and transfer to retiring partner's capital account ( credit side
•Calculate joint life policy share and transfer to retiring partner's capital account
•Calculate General reserve share and transfer to retiring partner's capital account
•In his debit side we will transfer his drawing and interest on his drawing after this we can give his capital
after
above adjustment in cash form or after this his amount will deemed as loan to firm . Firm will liable to give
6% interest to retiring partner . Make and retiring partner and calculate his total amount and give him .That
This is very simple account and it is open when Firm has to pay deceased partner’s executors. In this
account first of all we calculate payable amount then we calculate per year installment of executors then
dead partner B
in four installment with 10% rate of interest . For this we divide Rs 100000 by 4 and it will Rs. 25000 every
year but
and same procedure for 3rd and 4th year . This is the easy method of given amount to executor of deceased
partner
You must know the definition of dissolution of firm before completing the accounting treatment at the time
of dissolution .
Dissolution is the end of firm and its work . In other words , after dissolution , firm will not continue same
business with same partners because there are so many causes of dissolution of firm . Dissolution may be
with or without interfere of court . When faith among partners have completely ended or partners are
continuing illegal business or all the partners became insolvent then court may order to dissolute the firm
At this time for proper allocation of assets among liabilities , it is very necessary to treatment each and
1st step
· In the debit side of this account we will transfer all current and fixed assets at book value except cash and
bank account.
· In the credit side of this account we will transfer all the liabilities except general reserve and capital
accounts
· In the debit side of this account we will show the all the amount of payment of creditors in cash or if any
partner
· In the credit side of this account we will show the amount received after sale of the assets or name of
· In the debit side of this account we will also show the expenses of realization of assets .
· The difference of this account will profit or loss which will transfer to capital accounts of partners in their
ratio.
2nd step
After this capital accounts of partner will be made . This account will open with opening balance of their
capital. In the credit side we will transfer general reserve share , profit share of realization account this
account show the new amount that will be paid to each partner after dissolution .
3rd step
Making of cash or bank account. This will the last account which will make at the time of dissolution because
at the time of dissolution , it is necessary to make this account . This account shows receipt and payment of
cash or bank at the end of business. There must not a balance at the end of business in this account . If the
debit side of this account is equal to the credit side of this account , you are made proper this account .
Accounting Treatment of Assets and liabilities taken by partner at the time of dissolution
When a partner agree to pay the liabilities or take over any asset then firm will make the realisation account
and respective partner who take over the asset will credit in realisation account and if he agree to pay the
liabilities then his account will debit in realisation account . For this we will pass the journal entry.
1. For take over the assets Partner's capital account Dr. ( Who take over the assets)
Generally we see that a long time is spent on realisation of assets after dissolution of firm . But we can
distribute it in installment basis . When any part of assets sells and we get the amount that amount is called
gradual realisation and its piecemeal distribution is done with following method.
1) First of all we pay all realisation expenses out of series realisation of assets
2) After this we pay outside liabilities like trade creditors , B/P out of this realisation of assets.
These days , partnership firms are converting into limited companies for getting the benefit of limited
liabilities . At this time firms book is closed just like dissolution of firms . In the books of firms , the following
New Company Account Debit ( Purchase price = Agreed value of assets - agreed value of liabilities )
If profit
Realisation account Debit
After journal entry , you can transfer into ledger for making realisation account , company account ,
partner's capitalaccount
Amalgamation of Firms
When two or more firms merge into one firm and makes a new firm , then this is called amalgamation of
firms . For accounting point of view this definition is so important because if one firm purchases other firm ,
then this is not called amalgamation but if both firms decide to join or integrate then this is called
amalgamation .
For Example
Suppose A and B firm decide to close their business and start the business with the name of AB firm after
joining with each other then this is called amalgamation of A and B firm.
Steps for closing the accounts of old firm at the time of amalgamation of firms
When two firm amalgamate with each other , at this time we treat following accounting in the books of old
1st
2nd
Transferring reserve to old partners capital account into their old ratio
3rd
treatment of Goodwill
We evaluate the goodwill according to the condition of agreement and then goodwill will open with agreed
If assets and liabilities are not taken by new firm , then these item will transfer to the capital accounts of
A -Treatment of assets and liabilities taken by new firm (In the books of old partners)
5th
There is boom in jewellery business . Due to increasing the value of gold jewellery business is giving high
rate of return to business man . Because of my background is related to this business so , I am writing and
telling you the technique of how to make and maintain the accounts of jewellery business .It is very simple
to record of jewellery business but it is very harmful to make any mistake in these type of accounts .
Because 10 gram’s quantity’s value is approximately Rs. 10000 so be careful while doing the accounts of
jewellery business .
When we purchase gold , it will our raw material . So it will deal as stock , it should valued on cost . Then
you should regular passing the voucher entry of purchasing of gold . in cash book if you purchase on cash ,
if you purchase on credit , then your duty is also to maintain the accounts of your creditors also . Because
this is our current liabilities , we should know how much amount , we will have to pay to our creditors . In
manual accounting , we just make journal or day book , ledger after this we should find out our profit or loss
from manufacturing , trading and profit and loss account after this we also must make balance sheet .
got from cash sale can be deposited in head office bank account. b) All miscellaneous expenses is given by
cash book.
c) All salaries, rent, advertising and other expenses must be paid by head office.
d) Head office can send goods to branch on cost price or invoice price.
e) It is necessary for branch to make the list of debtors if branch has all to sell the goods on credit .It is
On these memorandums and registers head office can make branch account
For making branch account in head office, we open each branch account in head office with given branch
name.
If you have your own website , web blog , or any blog and you are earning more than tax limit in India . I
am providing you the full tutorial of accounting treatment of web publishing profession . For this I am
making income and expenditure account ( In vertical form ) which is accepted by Income tax department.
Income and Expenditure Account of Swami Vivekanand Online Publishing Institute ( For Example ) As on
Incomes
1.Earning from web publishing ( there is no need to mention AdSense publishing or any other source XXXXX
9.Earning from other printing newspaper or journal for publishing in their printing press XXXXX
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Total Earning from web publishing profession XXXXX
12.Bank Charges for transfer of your earning in your bank account XXXXX
13.Travelling Expenses for getting latest news for your website XXXXX
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You must keep different proof , like photo copy of earning cheques , bill of Internet rent , or electricity and
bank statement when you have to return of income tax for web publishing work
Employees provident fund is the fund which is created for the social security and retirement benefits for
theemployees. Different Countries organizations are created this for the benefits of employees. Employees'
Provident Fund Organisation of India EPFO , India Established in 1952 consequent to the enactment of the
Provisions Act, 1952. The head office of the Organisation is in New Delhi. [1].
Presently, the following three schemes are in operation under the Act:
1. Enrolment: An employee is eligible for membership from the day he joins the covered establishment.
•If the employee’s emoluments exceed Rs. 6,500/- per month, he has the option to join the Scheme(s) with
•Declare previous employment details, if any, in Form No. 11 to the employer. On becoming a member of
the Schemes file details in Form No. 2 ( family particulars/ nominations) through the employer.
•Rate of contribution payable by a member shall be @ 12% of his emoluments. A member can contribute
Employee
Both Employer and employee give their share in this fund . Currently employee gives 12% of his basic salary
Employer
Employer is also responsible for contribution in employees provident fund for the benefit of employees .
3.67% Provident Fund (A/c 1) + 8.33% Pension (A/c 10) + 1.10% Admin Charges onPF (A/c 2) + 0.50%
7. Regular activities:
•Employee should fill, at the time of joining, nomination & Declaration form.
•Form 2, includes the following· Name of the employee· Parent/spouse name· Date of Birth· Sex· Marital
Status· AC No·
Address· Names, address, relation, Share for each etc Also for changing nominee names Form 2 is used. His
eligibility
•19 PFForm 19 is used for withdrawing PF amount. Employee and parent/spouse name, name of the
establishment, Ac no, Reasons for leaving service, Contribution for current financial year etc.
•Form 19: Employee should fill, all information like Bank a/c, name, DOJ…with signature and then Employer
like present year contributions, DOR…for PF Fund – Due date: After 60 Daysof Resignation)
•Transfer :- Form 13Form 13 is used for transferring an employee AC from one company to another. Both
employer and
employee have to specify his name, PF AC no, Position etc and submitted with a covering letter
(consolidated list of
employees). Photocopy of the above is kept in PF file for transfer.4. Employee register 3A, 65. For advance :
Form 316.
•Process detailsForm 10 D (For claiming benefits under Pension)Employee should fill like Expired/late
employee name,
•Form 20 (For Claiming EPF Contributions)Employee should fill like Expired/late employee name, nomination
name,
•Form 5 IF (For Claiming EDLI benefits, nominee will get benefit)EDLI for death case, nominee will get
benefit.7.
•Form 9 (Register of employers - Application for review filed under)Monthly Remittance / Challans:1.
Challans every
month before 15th (4 copies/ quadruplicate)2. All A/c (A/c Nos-1,2,10,21&22)3. To Bank4. both employer &
employee
contribution· Account group no eg Ma mu 1246 (state-first two alphabets /city/acc no: of the company)·
Month· Total
number of subscribers· Total wages due for each account (wages on which calculations are done)· Each
accounts totals
(consolidated amount with employer and employee share)· Name of the establishment and address· Name
and signature of
the depositor· Name of the bank, mode and date of remittance etc
•Challan is submitted tp PF office along with form-12A every month.Monthly returns:1. Form 12 A, with all
information
and employees list of contribution before 25th2. With Form 5 (new joiners list) , form 10 (resigned
employees list),
challans copy3. Information about last month employees, new & resigned employees & this month
establishment and address· Month· Code no: of the factory· A c no:· Name of new employees· Fathers or
Husband name in
case of married women· Date of birth· Sex· Date of joining the fund· Total period of previous services as on
the date
of joining the fund Form 10· Name of the establishment and address· Month· Code no: of the establishment·
A c no:· Name
of member who is leaving· Fathers or Husband name in case of married women· Date of leaving service·
Reasons for
leaving service· Signature of authorized officer and stamp of the establishment Cross checking the above is
done with
the salary statement which includes the number and name all current employees.Form 12 A:· Name of the
establishment and
address· Currency period and month (April yr to march yr)· Statutory rate of contribution (12%)· Group
unexampled establishment. Establishment having more than 1000 have to keep a PF trust and have to
code)· Total wages due for each account (wages on which calculations are done)· Amount of contribution
and amount
remitted (consolidated amount with employer and employee share)· Date of remittance· Total number of
subscribers for
the current month.· Name and address of the bank in which the amount is remitted.· Details of subscribers
for E.P.F,
PF, EDLI--No of subscribers as per last month--No of new subscribers (vide Form 5)--No of subscribers left
service
(vide Form 10)--Total no of subscribers (After adding and subtracting the new and retired employees
with,the number
should tally with monthly list of employees)Cross checking the above is done with the salary statement.
Annul returns:
•3. before 30th April every yearForm 6A:· Currency period and month (April yr to march yr)· Name of the
establishment
and address· Code no: of the establishment· No: of member voluntary contributing at a higher rate· AC No
of each
employee followed by their name, annual salary, annual contribution, employer contribution, refund of
advance, rate of
voluntary contribution.· This grand total should tally with all form 12 A and challans totals.
•Form 3A: RegisterThis form is filled up for each employee stating his each monthly salary, contribution,
Employer
share, Refund of advance, No of days/period of non contributing service, if any (eg. unauthorised leave). If
the
employee is resigned during that financial year then the date of leaving service and reasons for leaving
service should
be specified in this form. Using Form 3A, form 6 A is filled up and crosschecking is done with all challans and
12 A
forms.* Muster Roll * Wage Register * Inspection Book * Cash Book, Voucher & Ledger * PF work sheet
Forms:Form 3:
•Form 4: Contribution card for employees other than monthly paid employees - Form Form 5 A: Return of
Ownership to be
sent to the Regional Commissioner - Form Form 6: Return of the Contribution Cards sent to the
Commissioner on the
Consolidated Computation
•Form 9: Register of employees - Application for review filed under.Register 3: Individual Computation,
there Gross
What is Investment ?
Investment are those assets of businessman by which he earn dividend , interest , rent or profit due to
increase the value of investment .Current stock is not called investment because businessman purchases
Generally businessman invests money in property and building so, these are the basic
investments.According to Accounting Standard 13 “Investment is the assets held by enterprise for earning
Types of Investment
We can also include shares, debentures, and bonds and mutual funds of other company, if we purchase
Type of Business
1. Commodity business: - These are general type of business which deal in products but invests his extra
2. Financial business: - If any business which deal in the trading of shares, or debentures or any other fixed
property. Then his work is to purchase and sale of such product and earn profit from them. This is special
case .
According to AS -13 , at this time , these products will deem as his stock item not investment .
When a businessman buys investment include its cost and accrued interest . Then this investment is called
_________________________________________________________
12 X 100
Calculation of cost of investment = ( Quotation price X No. of security purchase ) – Accrued interest as per
calculated
When businessman buys investment on its cost and gives accrued interest amount extra to the seller .
Nominal Value
Nominal Value is face value of security . This is so important in investment accounting . Because interest is
4. For transfer of interest or dividend to profit and loss account at the end of year ( but there is no need to
enter
this entry in tally 9 because tally 9 automatically transfer to profit and loss account ) Interest account or
5. Pass the journal entry of profit on sale of investment in manual or tally 9 both Investment Account Debit
6. At end of year show investment at cost price or market price which is less as asset in balance sheet ( but
need no do in tally 9)
Example
On 1st jan 2008 S.P. Ltd purchase 1000 15 % debentures of Reliance Ltd. Of Rs. 100 each @ Rs. 96 each .
On 1st july
2008 , ½ of debentures were sold at Rs. 99 each . Debenture interest is payable half yearly on 30th june
and 31st
Working notes
1) Interest on 30th june 2008 will be received 15% on Rs 100000 for 6 months interest = Rs. 100000 X
15/100 X 6/12 =
Rs. 7500
2) ½ of debentures were sold @ Rs. 99 . Therefore sale proceeds will be Rs. 99 X 500 = Rs. 49500
3) Interest on 31st December 2008 will be received @ 15% on Rs. 50000 for 6 months . Interest = Rs.
50000 X 15/100 X
3) Create ledger of 15 Debenture in reliance Co. account under investment account , bank account under
4) Pass the voucher entry of purchasing investment in payment voucher, sale of investment in receipt
voucher and
interest received on investment is in receipt voucher and profit on sale of investment transfer to profit and
loss
Insurance is the contract in which Mercantilist pays minimum amount of premium to insurance company,
and shift his burden of risk of loss on the head of insurance company. Insurance company incurred the loss
of Mercantilist if it is under the policy of insurance. Generally Mercantilist does the insurance of many risks
like fire of shop or office or plant, fire of stock and loss of profit.
If Godown or office caught fire. Suppose fire to Godown and insurance company’s special evaluator can
easily evaluate the loss of building due to fire. But it is most difficult to calculate loss of stock or loss of
profit. Only accounting professionals can solve this problem with scientific rules and regulations of
accounting.
Particular Amount
------------------------------------------------------------------
XXXX
-----------------------------------------------------------------
-----------------------------------------------------------------
----------------------------------------------------------------
Or
“Memorandum trading account is not part of final account but it is just part of working notes for calculating
the net
1. From both above two methods we must need to calculate gross profit rate. There are following way to
calculate gross
profit of business. There are following way to calculate gross profit of business
G.P. Rate = Previous year Gross profit / Sale of previous year X 100
2. Average Clause
“ Average clause means insurance company will pay only insurance in the proportion of actual loss . Before
this rule businessman used to take insurance policy below the actual amount of his asset. So , Now under
----------------------------------------------
Suppose, xyz Co. got the insurance policy of $ 10000 but his stock value is $ 20000 and actual loss is $
5000. Now we
3. Some time, information of opening stock , purchase and sale is not give by businessmen , so calculating
correct value of loss due to fire it is very necessary to make total debtor account , total creditor account and
Many commerce students are confused about how to calculate loss of profit. They know that businessman
can take loss of profit, due to dislocation of business after fire to concern . It can also take with fire
insurance policy. But for getting claim , the businessman want to calculate exact loss of net profit from the
Ist step
As the starting point of this procedure you have to determine the value of gross profit because loss of profit
is easy to calculate by multiplying Gross profit with short of sale in that disturbance period .
-------------------------------------
-------------------------------------
2nd step
------------------------------------------------
xxxxx
--------------------------------------------------
==================================
3rd step
4th Step
---------------------------------------------
xxxx
---------------------------------------------
===================================
5th step
Important notes
1. We will use of only less rate from following rates for calculating correct amount of loss pf profit
-------------------------------------------------------------------------- X 100
Or
Policy value / sale of 12 months immediately proceeding fire as adjusted for trend .
2. The Indemnity period or dislocation period which will small, that period will be fixed for calculation of
claim .
4. Insured standing charges means all expenses which are mentioned in the policy of loss of profit.
Businessman wants
to get these expenses in the case of mishappening. We can make its list
•Traveling expenses
•Advertising
•Auditors fee
•Directors’ fee
•Salaries of permanent staff
•All not described expenses must not more than 5% of described standing expenses .
From the following information, find out the claim under loss of profit policy :-
Solution
Ist step
----------------------------------------------------------- X 100
10000+6000
---------------------- X 100
160000
= 10%
2nd step
Shortage of sale
---------------------------------------------------
$ 59400
-----------------------------------------------------
=====================================
3rd step
4th step
5th step
Average clause
Since the policy is subject to average clause, it is necessary to find out whether expected profit of the
current year
--------------------------------------------
---------------------------------------------
This is a case of under insurance. It means insurance company pays $ 110 of every $ 176 loss
" Record of Claim of insurance is special type transaction and only when we record when actual claim we get
. In this
we should make new group of sundry insurance under prime group of current asset after this we should
create ledger of
insurance company and other ledger one time . " When claim relating to fixed assets is admitted
* Above voucher entries means insurance company is receiver , he has taken our burden of loss And if loss
happen , it
mean we sent of fixed asset to insurance company means fixed asset goes out , so it will be credit .
Above voucher entries means insurance company is receiver , he has taken our burden of loss of stock
And if loss happens , it mean we sent of goods to insurance company means goods goes out , so it will be
Profit and loss account Credit When insurance claim amount is received
This entry means that we are receiver of cash and bank is our representative . So , this account Will debit in
voucher
entry and Insurance company is giver of claim amount and this entry is simply passed under the rules of
double entry .
When we compare two or more years total cash flow may be in three type of activities (i)In operating
activities from one financial year to another financial year we can get cash from selling of goods , receiving
the money or any other operating activities or we can outflow of cash in B/p , creditors or any buying of
You know very well that with two years any company can buy or sell any assets buying of fixed assets is
outflow and selling any asset is inflow of cash difference of both is net cash flow from investing activities .
Financial activities are related to buying and selling of shares and debentures .Selling of shares and
debenture is inflow of cash and opposite if company buys shares of other company , this is called outflow of
shares .
After calculating all net inflow and this is called flow of cash and statement making for this is called cash
flow statement .
Benefit is it only for cash management who wants to make different planning . An account manager easily
calculate what is the real cash flow position . Company’s overall flow of cash is favorable or not . Some time
cash book shows good current cash balance but a good account manager should investigate the overall flow
of cash before buying high funded assets . This decision should be taken after complete analyzing of cash
flow statement . Cash flow statement shows more outflow than inflow this is unbalanced situation .So be
careful .
Q: Define inflation accounting or price level accounting ? what are the main method of price level
Ans :Inflation accounting is recording ,classifying and summarizing of all transaction on current or market
cost and update recording amount according to time and changes .In price level accounting ,the value of
According to current purchasing power method , we calculate current cost with following method
II : Calculate
Current value of asset= Value of asset (Actual basis ) X Current index / previous price index
For example
Record value of Rs. 40000 machine on inflation accounting basis if 2005 index 100 and 2006 price index
=200
B/S
Machine 80000
1. Value of fixed asset will be take on current cost not historical cost basis
3. Transfer of difference between historical cost and current cost of asset to revaluation
reserve account
This method is just improvement of current purchasing price method .In replacement cost accounting , we
Suppose book value of machinery is 300000and price index of machinery is 2005 is 100 and 2006 is 300
then book value of furniture Rs. 200000 price index of furniture 2005=200 and 2006=400
2. In current value accounting method , we take all asset of business in balance sheet on their current value
This ratio is a relationship of current asset and current liabilities . It states the business current position to
pay the current liabilities in time as when due .There are two components of this ratio:
Current assets
1. Cash in hand
2. Cash at bank
3. Marketable securities
4. Sundry debtors
5. Bills receivable
6. Stock in trade
7. Prepaid exp.
Current liabilities
1. Sundry creditors
2. Bill payable
3. Outstanding bill
4. Bank overdraft
Average collection period and and Average payment period is basic test of the business's good or bad
activity or operation . This is the main part of financial analysis to calculate these type of ratio . Even a small
business man want to time in which he gets his debt from his debtors in whole year . He also wants to know
•These two ratios are the good symbol for calculating the efficiency and capacity of any type of organisation
•These two ratios are the good symbol for making good planning for increase or decrease working capital
efficiently . Because working capital is more effected from sundry debtors and sundry creditors.
Because it is based on debtors turnover ratio . So we should also know debtor turnover ratio
Average debtors amount is equal to sum of opening and closing debtors and after divide 2 , we can calculate
Average Creditors amount is equal to sum of opening and closing Creditors and after divide 2 , we can
Profitability ratios are so important , because of these ratios , we can take several decision for improving our
business concern . These ratios tells us the basic relationship between profit and net sale . What amount of
return we have receive on the basis of our sale . Is it good or not . If this is not good then what should we
There following main profitability ratios which is calculated in any company type of business.
5.Rate on Investment = Net profit before interest and tax / Capital Employed X 100
Net profit after interest , tax and pref. dividend= ____________________________________ X 100
8. Price Earning Ratio = current market price of share / earning per share
Responsibitlity Accounting
Some business organisation are now adopting responsibility accounting in their management section ,
though adopting
advance computer and internet facility they are setting each and every person's responsibility .
authority is given to person so that they are given to persons so that they are able to keep up their
performance . "In other words , the responsibility accounting is that type of management accounting that
collects and reports both planed actual accounting informations in the terms of responsibility centers."
1. Cost center
The cost center relates to that segment in which the managers are responsible for incurring the cost. But
2. Profit Center
When a responsibility center gets revenue from output then it is known as profit center. The difference
between revenue earned and cost incurred will be the amount of profit .
3.Investment Center
An investment centre is an entry segment in which a manager can control not only revenue or cost but also
investments . In this , the manager who is given the responsibility of investment center is under obligation
5. Analysis of performance
As an accountant, you must know working the working capital and benefits of its analysis. Dear working
capital means excess of current asset over current liabilities. In other word. If your current assets are more
than your current liabilities. These more current assets are known as working capital. For doing your
business with better way, the business must have working capital every time. If you have more current
assets than your current Liabilities , it means you can buy your stock of business , you can pay your
creditors . All time when your investor or any body who want to give you loan will see you working capital .
If your liquid capital is non , nobody will give you any debt or goods on credit . So it is the duty of
accountant of business . To make some working capital so that your business will grow with the help of loan
and debt. For this I am giving some tips. Each time when you pass the voucher entry in tally or any other
computer accounting software , then see what is the position of your working capital.
If you see that there is no working capital, when current assets are equal to current liabilities , or current
liabilities are more than current assets this will be very serious position when working capital is in negative.
At this time, you must sell some fixed assets so that you can keep your working capital position in positive.
Never give goods on credit to any body who has not good dealing with you
Financial accounting, cost accounting and management accounting are interrelated because without co-
ordination and co-operation with each other, we will never succeed in achieving the objectives of business.
Financial accounting provides different financial statements. On these statements we calculate different cost,
like cost of material, cost of labour, and cost of overheads. On the basis we calculate cost of goods sold and
then we include our profit margin in it and the ascertain our product price. In management accounting,
financial and cost accounting supply different useful accounting information. On these accounting data
manager makes the plans of business. Organize different works. Even standard costing and budgeting is
very useful toots for controlling the organization. In a business the requirement of funds has to be carefully
estimated. Certain funds are required for long term purpose investment in fixed assets etc. A careful
estimation of such funds depends different ratio analysis which tells us that what is rate on capital
employed, if this rate is very high then we can get more fund for more production and for more production
give more money. Even financial management is also part of management accounting. If system of financial
accounting will complete with good way and rules and regulation, then other system of cost accounting and
Leverage analysis is the part of management accounting. This is the duty of finance manager to use the
technique for making ideal structure of capital. Leverage analysis is the best technique of finance manager.
With this technique he can make wonderful structure of capital. For doing leverage analysis he has to
Sales
Analysis of operating leverage of a firm is very useful to the financial manager. It tells the impact of changes
in
sales on operating income. A firm having higher Degree of operating leverage can experience a magnified
effect on
E.B.I.T. for even a small change in sales level. Higher D.O.L. can dramatically increase the operating profit.
But if
there is decline in sales level, E.B.I.T. may be wiped out and a loss may be operated.
% change in Earning per share= ____________________________% change in Earning before interest and
tax
Financial leverage helps the finance manager in designing the appropriate capital structure. One of the
objectives of planning an appropriate capital structure is to maximize the return on equity shareholders’
Financial leverage is doubled edged sword. On the one hand it increase earning per share and on the other
hand it increase financial risk. A high financial leverage means high fixed financial costs and high financial
risk i.e. as the debt component in capital structure increases , the financial leverage increases and at the
same time the financial risk also increase . So the finance manager therefore is required to trade off i.e. has
to bring a balance between risk and return for determining the appropriate amount of debt in the capital
structure of a firm. Thus the analysis of financial leverage is most important tool in the hands of finance
managers who are engaged in financing the capital structure of business firms, keeping in view the
The combined leverage measures the effect of a % change in sales on % change in Earning per share.
Or
________________ X ___________________
The ratio of contribution to earning before tax , given by combined leverage shows the combined effect of
financial and operating leverage . A high operating and high financial leverage combination is very risky. If
the company is producing and selling at a high level , it will make extremely high profit for its shareholders.
But even a small fall in the level of operations would result in a tremendous fall in earning per share. A
company must , therefore maintain a proper balance between these two leverage.
This is main tool of financial analysis. This type of analysis is useful when the accounting data of two periods
The figures of two periods are taken in their respective columns and increase or decrease after which
percentage is taking into account previous year as base year. After showing the increase or decrease the
interpretation in form of comment is also to be specified. However the various comparative statements are
to be prepared as follow.
To analysis the financial statement as per the technique of comparative statement analysis the first one is
the comparative balance sheet for preparation comparative balance sheet with following steps :
Ist step: Take the given balance sheet of two period in years
2nd step: Make the difference of each item of balance sheet in the vertical or horizontal form determining
the increase or
3rd Step Make the % of increasing or decreasing ( Previous year as base year)
c) profitability position
The income statement shows results of operation of business .The comparative income statement indicate
the variation with different item which are to be recorded in income statement .Over a particular period of
time that is one year. It shows the amount of gross profit, operating profit and net profit. However a
Interpretation or Comments can be given? On the increasing sale or cost of sale increasing or decreasing?
Operating expenses and incomes affecting the amount of profit or loss? Overall profitability position
Making of Cash flow Statement with both direct and indirect methods.
In good question of making cash flow statement , the examiner must give you two year balance sheet of
company , a profit and loss account and some additional information for making cash flow statement . With
above three basic information you can easily make cash flow statement with direct or indirect method . Here
we are taking one practical question , then we solve it both direct method and indirect method. This
The following is the abstract of balance sheet of Software securities ltd for the year 2005 and 2006
Liabities
1. Provision for depreciation 2005 –Rs. 108000 and 2006 –RS. 396000
Assets
3. Accumulated depreciation
Sales 1602000
126000
-------------------------
----------------------
__________________________________________
Additional information
1. Operating expenses include depreciation of rs. 59400 and charges from preliminary expenses of rs. 3600
3. cash dividend paid for the year 2006 amounted to rs. 27000 and fully paid bonus shares were given in
5. Equipment with a cost of rs .298800 was purchased for cash .Equipment with a cost of rs . 73800 ( book
6. Debenture for rs. 18000 were redeemed for cash and for rs.54000 were redeemed by converting into
8. Income tax paid during the year amounted to rs. 117000 Prepare cash flow statement with direct method
A- Category
activity
Inflow of cash
calculation
Less
Cash outflow
Calculation
= Cost of goods sold +opening creditors
-closing creditors =
____________________________________________
244800
__________________________________________
127800 127800
________________________________________
B- Category
Inflow of cash
______________________________________________
192600 192600
______________________________________________
C- Category
Cash inflow
_______________________________________________
95400 95400
_______________________________________________
____________________________________________________________
_____________________________________________________________
__________________________________________________________
Particularly Amount
--------------------------------------------------------------------------------------------------
A-category
1st Point
Items 342000
2nd Point
And losses
1. Depreciation 59400
______________
430200
3rd Point
2. Rental income
_________________
5th Point
1. Decrease in stock
2. Decrease in debtors
5. Increase in creditors
____________________
448200
6th Point
Current liabilities
1. Increase in stock 86400
________________________________________________________
244800
________________________________________________________
127800 127800
_____________________________________________________
B- Category
Inflow of cash
______________________________________________
192600 192600
______________________________________________
C- Category
Cash inflow
_____________________________________________________________________
95400 95400
________________________________________________
____________________________________________________________________
__________________________
Indirect method
A-cash flow from operating activity + B- Cash flow from investing activity + C- cash flow from financing
activity +
A- category regarding cash flow from operating activity is different from direct method , other part is as
same as
direct method
According to indirect method when we calculate cash flow statement, we will care 8 points. The main aim is
to calculate
cash net profit or loss for operating activity like sale and purchase of goods. Now I am explaining all 8 points
deeply
1st Point
Taking the net profit as per profit and loss account. This is (+) item. This is the base for calculating cash net
profit. Other 7 points are the just games of (+) and (-)
2nd point
Now we add all non cash and non operating expenses and losses in Ist point.
I want to tell you why we will (+) it in net profit. The answer is that because when we made of profit and
loss account
we had deducted these non cash and non operating expenses in our profit and loss account. Now our duty is
to add them .
1) Depreciation
Ans. Because it is true that these expenses in cash but we deems as cash outflow from financing activity or
investing
3rd Point
After adding 2nd point items , we must deduct 3rd point items. It means that all non cash or non operating
income must
be deducted from net profit for calculating cash net profit. In this , we can include
2) Rental income
4th point
5th point
Now we add decrease in current assets because it must increase the cash inflow and also add increase in
current
liabilities
1. Decrease in stock
2. Decrease in debtors
5. Increase in creditors
6. Increase in bill payables
6th point
1. Increase in stock
2. Increase in debtors
5. Decrease in creditors
General hint
7th point
8th point
Deduct income tax paid from 7th point. After this you can get net cash flow from operating activity. All other
Definition of Securitisation
Securitisation is the process of getting cash on the basis of different security notes and papers .Even some
company issues shares or debenture for getting fixed assets , this is also securitisation . In simple english
securitisation create the relationship of company with outer world in which company gets fund for doing
work .
Benefit of Securitisation
2. Raise of fund or finance through securitisation when other source are not supported .
suppose a person want to purchase a building for giving it rent , if he purchases with his cash then all risk of
fund is his own . But if he takes loan to make building then he becomes issuer of finance so from earning of
a) Rate of Return
It is the duty of account manager to find the rate of return. Select all those party which want to give us high
b) Risk Factor
Before giving credit to company, we also see our risk factor. i) personal risk- dishonesty , corruption ii)
trade risk– see previous profit and loss account iii) Debt equity ratio iv) Income interest ratio
c) Security
Before giving credit or loan account manager have to see what asset of business , businessman want to give
d) Marginal of requirement
Before giving loan or credit , it is the duty of bank's account manager under govt. policies that he must see
difference between security and loan Suppose Security $ 10000 – Loan $ 8000 = Marginal requirement
$2000 If our providing loan is less than the value of asset which we have received in the form of security ,
then this is good .
1. Social factors
Through social responsibility accounting, account manager is also check, whether providing of loan at low
2. Political factors
Account manager also check political and tax policies regarding providing of loan.
Before preparing of fund flow statement, you must know different accounting terms in fund flow statement.
1. AS – 3 units 1.
Accounting standard 3 units 1 of Institute of Chartered Accountant of India explains preparation and
If you want to clear UGC –NET in commerce subject, you should also learn fund flow statement. Because it
includes in paper 11 and paper 111 A syllabus in the form of fund flow analysis.
Fund flow statement is full subject in B.Com. , B.B.A., B.C.A. and M.Com. , M.B.A., M.C.A. classes . For
succeeding in these classes, you should know the whole system of fund flow statement.
Fund flow statement is very helpful for solving following practical problems of business. Why are current
assets are decreasing, even there are high profit?
1. Why did Company not issue dividend, even company has obtained profit?
3. What did Company do with the fund received from selling of shares and debentures?
So, above questions’ answer can be given after making fund flow statements.
Definition of Fund
Fund means working capital. If current assets of company is more than current liability of business, it is
Flow of fund means movement of fund. I take the example of air; we can feel its movement or flow of air.
Same thing is happen with fund, due to the activity of business fund is transfer from one asset to another
assets. If fixed assets are converted into current asset or fixed liability is converted into current liabilities,
these are the flow of fund. But if current assets are changed with current assets or current assets are
changed into current liabilities, then, there is no flow of fund because there is no change working capital.
Suppose, we get the money from debtor, this is not flow of fund because, working capital is not changed.
Both items of current assets and when current assets change into current assets, there will not be change in
working capital.
Flow of Fund = Fixed asset changes into current asset or current asset changes into fixed assets
Or
Fixed liability changes into current liability or current liability changes into fixed liability.
Fund flow statement is a statement which shows the inflow and out flow of funds between two dates of
balance sheet. So, it is known as the statement of changes in financial position. We all know that balance
sheet shows our financial position and inflow and outflow of fund affects it. So, in company level business, it
is very necessary to prepare fund flow statement to know what the sources are and what are applications of
According to Prof. Anthony, “The funds flow statement describes the sources from which additional funds
were derived and the use of which these funds were put.” Fund flow statements are known with different
names
Statement of source and uses of funds Or summary of financial operations Movement of working capital
statement Or Fund received and distributed statement Or Fund generated and expended statement.
First Step
For making of fund flow statement. It is very necessary to make statement of changes of working capital.
Because net increase in working capital is use of fund and net decrease in working capital is source of fund.
So, it is duty of accountant to make statement of changes of working capital. Making of statement of
We take two balance sheets, one is current year balance sheet and other is previous year balance sheet.
If current assets are more than previous year current assets, it means increase in working capital.
If current assets are less than previous year current assets, it means decrease in working capital. Because,
relationship between current assets and working capital is positive and if any changes in current assets,
If current liabilities are more than previous year current liabilities, it means decrease in working capital.
If current liabilities are less than previous year current liabilities, it means increase in working capital.
Relationship between working capital and current liabilities are inverse.
----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Current Assets
• Cash in hand
• Bills receivable
• Sundry debtors
• Temporary investments
• Stocks / inventories
• Prepaid expenses
• Accrued incomes
--------------------------------------------------------------------------------------------
----------------------------------------------------------------------- -----------------
Current liabilities
• Bills payables
• Sundry creditors
• Bank overdraft
• Dividends payables
---------------------------------------------------------------------------------------
Working capital
CA- CL
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Net increase or decrease in working capital =Increase in working capital – Decrease in working capital
2nd Step
Because is the source of fund and will show in fund flow statement’s source side. So before making fund
flow statement,we must make statement showing the fund from operation.Operation means business
activity and fund from operation means profit from business activity. So, you will easy understand that profit
from business activity between two accounting period must be the source of fund.
Add non –fund and non operating items which have been already
1. depreciation
• Goodwill
• Patents
• Trade marks
• Preliminary expenses
5. Dividends including
• Interim dividend
• Proposed dividend
7. Any other non fund / non operating items which have been debited to P/L account
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Less Non –Fund or non operating items which have already been credited to profit and loss account
1. Profit or gain from the sale of non current / fixed assets such as
2. Appreciation in the value of fixed assets such as increase in the value of land if it has been
5. any other non operating item which has been credited to profit and loss account
6. opening balance of profit and loss account or retained earnings as given in the balance sheet
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You can make also above statement in t shape adjusted profit and loss account form .
3rd Step
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-------------------------------------------------------------------> ? Amount ?
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A ) Source of funds
3. Issue of debentures
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3. Redemption of debentures
8. Payment of tax
9. Payment of dividends
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