Académique Documents
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Company
Unlimited liability
Cooperative societies
GAAP
Conceptual Framework of Financial Statements Accounting Concepts Requirements of Companies Act Accounting Standards Requirements of Income Tax Act
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Books of Accounts ( Sec.209 ) All sums of money received and expended by the company All Sales and Purchases of goods by the company All assets and liabilities of the company Cost records in case of companies engaged in production, manufacturing , processing, mining activities
Annual Accounts ( Sec.210 ) A balance sheet and A profit and loss account at every AGM
Form and Contents 1. Balance sheet to exhibit true and fair view of the state of affairs of the company and to comply with part I of schedule VI 2. Profit and loss account to give a true and fair view of the profit and loss of the company and to comply with part II of schedule VI 3. Every balance sheet and Profit and loss account to comply with accounting standards
Company not complying with AS to disclose Deviation from AS Reasons for such deviation Financial effect
ACCOUNTING STANDARDS
I.T. Act allows both cash as well as mercantile system of accounting Companies Act allows only mercantile system of accounting
COMPONENTS OF FINANCIAL STATEMENT Balance Sheet Income Statement Cash Flow Statement Notes to Accounts and Accounting Policies
To record transactions and events in the journal To record opening entries in the general ledger To post journal entries in appropriate accounts in the general ledger To balance the accounts in the general ledger To prepare the trial balance
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Trial Balance
Closing balances of accounts in the ledger as well as cash balance are taken
It tests the arithmetical accuracy of ledger balances It can be prepared monthly, quarterly and yearly It is a source document for preparing financial statement
CLOSING ENTRIES
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STEPS Transfer balances in revenue accounts to the Profit & Loss account Transfer balances in the expense account to the Profit & Loss account Transfer balances in the Profit & Loss account to Profit & Loss Appropriation account
Sources of Fund: Share Capital Reserves and surplus Secured loans Unsecured Loans
xx xx xx Xx
Uses of Fund: Fixed assets Investments Current assets, loans and advances xx Less: Current liabilities and provisions xx Net current assets Miscellaneous expenditure Profit and Loss account
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xx xx Xx xxx
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Balance Sheet
Asset side Items under Fixed Asset 1. Land 2. Building 3. Plant and Machinery 4. Furniture and Fixture 5. Vehicles
Balance Sheet
Investment
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Investment in govt. securities Investment in shares ,debentures and bonds Investment in immovable properties Investment in the capital of partnership firms
Balance Sheet
Current Assets, Loans, and Advances: Current Assets
--- Inventories --- Sundry debtors --- Cash and bank balances
Balance Sheet
Liabilities side:
Share Capital
--- Equity Share Capital --- Preference Share Capital
Balance Sheet
Loan Funds
Secured Loans
-- Term Loans -- Debentures --Working capital loans
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Unsecured Loans
-- Fixed deposits --Debentures --Security deposits
Balance Sheet
Current Liabilities and Provisions Current Liabilities
--- Sundry Creditors --- Expenses Payable --- Advances from customers --- Unclaimed dividends --- Interest accrued but not due
Provisions
--- Provision for taxation --- proposed dividend --- provision for contingencies
Expenditure
---Salaries, wages, bonus ---Power and fuel ---Rent, rates and taxes ---Traveling exp. ---Excise duty ---Provision for taxation
--- Materials Consumed ---Staff welfare expenses ---Repairs and maintenance ---Freight, transportation ---Interest ---Depreciation ---Extraordinary items
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General reserve Specific reserve Secret reserve Reserve fund Sinking fund
Reserves:
Capital Reserve: Gen. created out of profit or gains of capital nature like:
Profit on sale of fixed assets Profit prior to incorporation Security premium on issue of shares or debentures Capital profit on reissue of forfeited shares Profits on revaluation of assets and liabilities Profit on redemption of debentures
This reserve can be utilized for writing off intangible assets, or preliminary expenses or discount on issue of shares or debentures or underwriting commission or to meet capital losses.
Reserve fund: Sum set aside out of divisible profit and retained in order to provide for unexpected or unknown future contingencies or losses or to equalize dividends or to strengthen the financial position of the business.
Sinking Fund: It is a fund created with a specific purpose:
To replace a wasting asset, e.g.., a mine; or To replace an asset of depreciable nature; or To renew a lease; or To redeem or repay a long term liability, e.g., debenture or a long term loan, etc It is formed by setting aside, yearly, a fixed sum of money for a definite period. Such sum is invested at compound interest , so that at the end of the period the annual amounts, with interest accumulation, will be sufficient to repay the outstanding loan. This amount, which is set aside, is not charged to profit and loss account but to the profit and loss appropriation account. In case of sinking fund created for the purpose of replacing an wasting asset, the amount, which is set aside, is charged to profit and loss account.
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Meaning and Significance of Fixed Assets Fixed assets are used for production or providing goods or services They are not meant for resale in the ordinary course of business They constitute a significant portion of total assets Proper allocation between revenue and capital expenditure necessary to recognise and measure fixed asset
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Cost of Fixed Assets Purchase price inclusive of import duties less trade discount, rebates Any directly attributable cost incurred to bring the asset to its present working condition Admin. and general overhead charges specifically attributable to construction of a project Cost to be adjusted for exchange fluctuation If acquired in exchange for another asset , the cost is recorded either at FMV or net book value of the asset given up
Cost of fixed assets is affected by two following factors Government grants Borrowing costs
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DEPRECIATION
Definition:- Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. In other words depreciation is nothing but distribution of total cost of an asset over its useful life.
DEPRECIATION
Significance 1. It represents the charge of a fair proportion of the depreciable amount to P&L account over the useful life of an asset. 2. Depreciable amount is the historical cost or revalued amount of the asset less residual value. 3. It plays a significant role in determining the financial performance of an enterprise. 4. It is charged in each accounting year.
DEPRECIATION
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Depreciable Asset means an Asset which Is held by an enterprise for use in the production or supply of goods and services. Is not meant for resale in the ordinary course of business. Is expected to be used during more than one accounting period Has limited useful life.
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Straight Line Method:- Under this method depreciation is charged equally over the useful life of the asset. Formula: Depreciation = Cost of asset- Estimated residual value -----------------------------------------------------Estimated useful life
DEPRECIATION
2. Written down value method:- Under this method depreciation is charged at a fixed rate on the reduced balance of the asset every year. Rate of Estimated residual Depreciation = 1- n value --------------------------Cost of asset
DEPRECIATION
Requirements of Companies Act Sec. 205 and 350 deal with depreciation 1. Sec.205 states that no dividend shall be declared or paid out of profits without providing for depreciation. 2. Depreciation has to be provided a) as provided in sec.350, or b) as arrived at by dividing 95% of the original cost of the asset by the specified period 3. Sec.350 provides that depreciation has to be charged as per schedule XIV to the Companies Act.
DEPRECIATION
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Provisions of Income Tax Act Only WDV method is recognised Block of assets method is followed 100% dep. Is allowed if the asset is used for 180 days or more. 50% dep. if used for less than 180days
DEPRECIATION
Consistency Principle It requires that a method of dep. , once adopted , should be applied consistently unless 1. The statute requires the adoption of a new method. 2. It is required to comply the provisions of an accounting standard 3. The change is necessary for a more appropriate preparation and presentation of the financial statements.