CA Foundation Accounts Revision Notes

Accounts Revision Notes For CA Foundation Exams

THEORETICAL FRAMEWORK

“Accounting is the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof.”
Accounting procedure can be basically divided into two parts:
1. Generating financial information and
2. Using the financial information.
The objectives of accounting can be given as follows:
1. Systematic recording of transactions
2. Ascertainment of results of above recorded transactions
3. Ascertainment of the financial position of the business
4. Providing information to the users for rational decision-making
5. To know the solvency position
The main functions of accounting are as follows:
1. Measurement
2. Forecasting
3. Decision-making
4. Comparison & Evaluation
5. Control
6. Government Regulation and Taxation
Objectives of Book-keeping:
1. Complete Recording of Transactions and
2. Ascertainment of Financial Effect on the Business
The various sub-fields of accounting are:
(i) Financial Accounting (ii) Management Accounting
(iii) Cost Accounting (iv) Social Responsibility Accounting
(v) Human Resource Accounting
The various users of accounting information:
(i) Investors (ii) Employees
(iii) Lenders (iv) Suppliers and Creditors
(v) Customers (vi) Government and their agencies
(vii) Public (viii) Management
Accounting is closely related with several other disciplines and thus to acquire a good knowledge in accounting one should be conversant with the relevant portions of such disciplines.
Accounting concepts define the assumptions on the basis of which financial statements of a business entity are prepared.
The following are the widely accepted accounting concepts:
(a) Entity concept (b) Money measurement concept
(c) Periodicity concept (d) Accrual concept
(e) Matching concept (f) Going Concern concept
(g) Cost concept (h) Realisation concept
(i) Dual aspect concept (j) Conservatism
(k) Materiality
Accounting principles are a body of doctrines commonly associated with the theory and procedures of accounting serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternatives exist.
Accounting conventions emerge out of accounting practices, commonly known as accounting principles, adopted by various organizations over a period of time.
There are three fundamental accounting assumptions:
(i) Going Concern (ii) Consistency (iii) Accrual
Qualitative characteristics are the attributes that make the information provided in financial statements useful to users. Understandability, Relevance, Reliability, Comparability, Materiality, Faithful Representation, Substance over Form, Neutrality, Prudence, Full, fair and adequate disclosure and Completeness are the important qualitative characteristics of the financial statements.
Revenue expenditures are shown in the profi t and loss account while capital expenditures are placed on the asset side of the balance sheet since they generate benefi ts for more than are accounting period.
Prepaid expenses are future expenses that have been paid in advance. These are shown in the balance sheet as an asset.
Receipts obtained should be classified between revenue receipts and capital receipts.
Accounting Policies refer to specifi c accounting principles and methods of applying these principles adopted by the enterprise in the preparation and presentation of financial statements. Policies are based on various accounting concepts, principles and conventions.
Three major characteristics which should be considered for the purpose of selection and application of accounting policies. viz., Prudence, Substance over form, and Materiality
A change in accounting policies should be made in the following conditions:
(a) It is required by some statute or for compliance with an Accounting Standard.
(b) Change would result in more appropriate presentation of fi nancial statement.
Measurement is vital aspect of accounting. Primarily transactions and events are measured in terms of money
There are three elements of measurement:
(i) Identifi cation of objects and events to be measured;
(ii) Selection of standard or scale to be used;
(iii) Evaluation of dimension of measurement standard or scale.
There are four generally accepted measurement bases or valuation principles. These are:
(i) Historical Cost; (ii) Current Cost;
(iii) Realizable Value; (iv) Present Value.

Accounting Process

The accounting process starts with the recording of transactions in the form of journal entries.
The recording is based on double entry system. This book or register called journal is the book of first or original entry.
Next step is to post the entries in the ledger covered in the next unit.
Process of transferring journal entries in the accounts opened in Ledger is called posting.
Ledger is known as principal books of accounts and it provides full information regarding all the transactions pertaining to any individual account.
The diff erence between the totals of debits and credit sides is found out as the balance. Some of these balances are transferred to the profi t and loss account and some are carried forward to the next year i.e., shown in the balance sheet, depending upon the nature of the account.
Trial balance contains various ledger balances on a particular date.
It forms the basis for preparing fi nal statement i.e. profi t and loss statement and balance sheet.
If it tallies, it means that the accounts are arithmetically accurate but certain errors may still remain undetected.
It is very important to carefully journalize and post the entries, following the rules of accounting.
Instead of recording all journal entries in one register, it is better to categorize the entries on the basis of type of transactions.
Various subsidiary books are maintained so as to record transactions of one type in each register. These are also called books of original entry or prime entry.
Example of subsidiary books are purchases book, sales book, purchase returns books, sales returns book, bills receivable book etc. On the basis of these subsidiary books, the ledger accounts are prepared.
Cash book contains cash transactions and also bank transactions, if it has a separate book column. It is both a subsidiary book and a principal book.
Cash book can be prepared adding discount column also.
Unintentional omission or commission of amounts and accounts in the process of recording the transactions are commonly known as errors.
Accounting errors are generally of four types-
(a) Errors of Principle;
(b) Errors of Omission;
(c) Errors of Commission;
(d) Compensating Errors.
Some errors may affect the Trial Balance and some of these do not.
The method of rectifi cation of errors depends on the stage at which the errors are detected. If the error is detected before the preparation of trial balance, rectification is carried out by making the statement in the appropriate side of the concerned account.
In case of the errors detected after the preparation of the trial balance, we open a suspense account with the amount of difference in the trial balance. Then complete journal entries can be passed for rectifying the errors.
For rectifying the errors detected in the next accounting period, a special account ‘Profit and Loss Adjustment Account’ is opened for correction of amounts relating to expenses and incomes.

BANK RECONCILIATION STATEMENT

Bank pass book is merely a copy of the customer’s account in the book of a bank.
Bank reconciliation statement is a statement which reconciles the bank balance as per cash book with the balance as per bank pass book by showing all causes of diff erence between the two.
- The salient features of bank reconciliation statement:
- The reconciliation will bring out any errors that may have been committed either in the cash book or in the pass book;
- Any undue delay in the clearance of cheques will be shown up by the reconciliation;
- A regular reconciliation discourages the accountant of the bank from embezzlement. There have been many cases when the cashiers merely made entries in the cash book but never deposited the cash in the bank; they were able to get away with it only because of lack of reconciliation.
- It helps in finding out the actual position of the bank balance.
The diff erence in the balances of both the books can be because of the following reasons:
1. Timing diff erences,
2. Transactions;
3. Errors.
Bank reconciliation can be start from any of the following four balances given in the question:
1. Dr. balance as per cash book
2. Cr. balance as per cash book
3. Dr. balance as per pass book
4. Cr. balance as per pass book
There are two methods of reconciling the bank balances :
1. Bank reconciliation statement without preparation of adjusted cash-book.
2. Bank reconciliation statement after the preparation of adjusted cash-book.

INVENTORIES

Inventory can be defined as assets held for sale in the ordinary course of business, or in the process of production for such sale, or for consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machinery spares.
The inventories of manufacturing concern consist of several types of inventories: raw material (which will become part of the goods to be produced), parts and factory supplies, work-in-process (partially completed products in the factory) and, of course, finished products.
Proper valuation of inventory has a very signifi cant bearing on the authenticity of the financial statements.
Cost of goods sold is calculated as follows:
Cost of goods sold = Opening Inventory + Purchases + Direct expenses – Closing Inventory.
Inventories should be generally valued at the lower of cost or net realizable value.
Inventory Valuation Techniques:
- Historical Cost Methods
  - SpecificIdentifi cation Method
  - FIFO (First in first out) Method
  - LIFO (Last in first out) Method
  - Average Price Method
  - Weighted Average Price Method
- Non-Historical Cost Methods
  - Adjusted selling price method
  - Standard cost method

There are two principal systems of determining the physical quantities and monetary value of inventories sold and in hand. One system is known as ‘Periodic Inventory System’ and the other as the ‘Perpetual Inventory System’.

CONCEPT AND ACCOUNTING OF DEPRECIATION

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Objectives for providing depreciation are:
- Correct income measurement
- True position statement
- Funds for replacement
- Ascertainment of true cost of production
Factors in the measurement of depreciation:
- Cost of asset
- Estimated useful life of the asset
- Estimated scrap value (if any) at the end of useful life of the asset.
Methods for providing depreciation:
- Straight line method
- Reducing balance method
- Sum of years of digits method
- Annuity method
- Sinking fund method
- Machine hour method
- Production units’ method
- Depletion method
The resulting profi t or loss on sale of the tangible asset is ultimately transferred to profi t and loss account.
The depreciation method residual value & useful life applied to an asset should be reviewed at least at each financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, on account of the above, they should be changed to reflect the changed pattern.
Whenever there is a revision in the estimated useful life of the asset, the unamortised depreciable amount should be charged to the asset over the revised remaining estimated useful life of the asset.
Whenever the depreciable asset is revalued, the depreciation should be charged on the revalued amount on the basis of the remaining estimated useful life of the asset.

BILLS OF EXCHANGE AND PROMISSORY NOTES

A Bill of Exchange is defined as an “instrument in writing containing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument”.
A Bill of Exchange has the following characteristics:
1. It must be in writing.
2. It must be dated.
3. It must contain an order to pay a certain sum of money.
4. The promise to pay must be unconditional.
5. The money must be payable to a defi nite person or to his order to the bearer.
6. The draft must be accepted for payment by the party to whom the order is made.
7. It should be properly stamped.
8. Payment must be in legal currency of the country.
The party which makes the order is known as the drawer. The party which accepts the order is known as the acceptor and the party to whom the amount has to be paid is known as the payee. The drawer and the payee can be the same.
A promissory note is an instrument in writing, not being a bank note or currency note containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person. Under Section 31(2) of the Reserve Bank of India Act a promissory note cannot be made payable to bearer.
1. It must be in writing.
2. It must contain a clear promise to pay. Mere acknowledgement of a debt is not a promissory note.
3. The promise to pay must be unconditional “I promise to pay `50,000 as soon as I can” is not an unconditional promise.
4. The promiser or make r must sign the promissory note.
5. The maker must be a certain person.
6. The payee (the person to whom the payment is promised) must also be certain.
7. The sum payable must be certain. “I promise to pay `50,000 plus all fi ne” is not certain.
8. Payment must be in legal currency of the country.
9. It should not be made payable to the bearer.
10. It should be properly stamped.
11. It does not require any acceptance.
DIFFERENCES – BILL OF EXCHANGE AND PROMISSORY NOTE

Entries- On receipt of Bill, the payee makes the following entry in his books of accounts:
Bills Receivable Account Dr.
To Drawee/Maker of the note
(1) A accepts a Bill of exchange drawn on him by B. In the books of B the entry will be :
Bills Receivable Account Dr.
To A
(2) A sends to B the acceptance of D. In this case also, the entry in the books of B will be :
Bills Receivable Account Dr.
To A
The person who receives the bill has three options. These are:
(i) He can hold the bill till maturity. (Naturally in this case no further entry is passed until the date of maturity arrives).
(ii) The bill can be endorsed in favour of another party say Z. In this case, the entry will be to debit the party which now receives the bill and to credit the Bills Receivable Account.
Z Dr.
To Bills Receivable Account
(iii) The Bill of Exchange can be discounted with bank. The bank will deduct a small sum of money as discount and pay rest of the money.
Bank Account Dr. (with the amount actually received)
Discount Account Dr. (with the amount of loss or discount)
To Bills Receivable Account
On the date of maturity there will be two possibilities:
1. The first is that the bill will be paid, that is to say, met or honoured. The entries for this will depend upon what was done to the bill during the period of maturity. If the bill was kept, the cash will be received by the party which originally received the bill. In his books, therefore, the entry will be :
  Cash Account Dr.
  To Bills Receivable Account
  But if he has already endorsed the bill in favour of his creditor or if the bill has been discounted with the bank he will not get the amount; it will be the creditor or the bank which will receive the money. Therefore, in these two cases, no entry will be made in the books of the party which originally received the bill.
2. The second possibility is that the bill will be dishonoured, that is to say, the bill will not be paid. If the bill is dishonoured, the bill becomes useless and the party from whom the bill was received will be liable to pay the amount (and also the expenses incurred by the party).
  Therefore, the following entries will be made :
  1. If the bill was kept till maturity then :
  Drawee / Maker of the note Dr.
  To Bills Receivable Account
  2. If the bill was endorsed in favour of a creditor, the entry is :
  Drawee / Maker of the note Dr.
  To Bill payables
  3. If the bill was discounted with the bank :
  Drawee / Maker of the note Dr.
  To Bank A/c
The due date of each bill is calculated as follows:

SALE OF GOODS ON APPROVAL OR RETURN BASIS

As per the definition given under the Sale of Goods Act, 1930, in respect of such goods, the sale will take place or the property in the goods pass to the buyer:
(i) When he signifies his approval or acceptance to the seller;
(ii) When he does some act adopting the transaction;
(iii) If he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, on the expiry of the specified time (if a time has been fi xed) or on the expiry of a reasonable time
Accounting entries depend on the fact whether the business sends goods on sale or approval basis (i)casually; (ii) frequently; and (iii) numerously.
Accounting entries
- WHEN THE BUSINESS SENDS GOODS CASUALLY ON SALE OR RETURN BASIS

1. When goods are sent on sale or return basis:
Trade receivables / Customers Account Dr. [Invoice price] To Sales Account

2. When goods are rejected or returned within the specified time:
Sales/Return Inwards Account Dr. [Invoice price] To Customers/Trade receivables Account

3. When goods are accepted at invoice price:
[No entry]

4. When goods are accepted at a higher price than invoice price:
Trade receivables / Customers Account Dr.
To Sales Account [Diff erence in price]

5. When goods are accepted at a lower price than the invoice price:
Sales Account Dr.
To Trade receivables / Customers Account [Diff erence in price] 6. (i) At the year-end, when goods are lying with customers and the specified time limit is yet to expire:
Sales Account Dr. [Invoice price] To Trade receivables / Customers Account
(ii) These goods should be considered as Inventories with customers and in addition to the above, the following adjustment entry is to be passed:
Inventories with Customers on Sale or Return Account Dr.
To Trading Account [Cost price or market price whichever is less]

WHEN THE BUSINESS SENDS GOODS FREQUENTLY ON SALE OR RETURN BASIS

Under this method, record of goods sent is maintained in a specially ruled Sale or Return Journal / Day Book instead of passing entry for sale of goods. This Day Book is divided into 4 main columns – (1) Goods sent on Approval; (2) Goods Returned: (3) Goods Approved; and (4) Balance.

(i) At the time of approval
Customer’s A/c Dr.
To Sales A/c
(ii) At the time of preparing of Final Accounts
An adjustment entry is required for balance goods which is as follow:
Goods with Customers on Sale or Return Account Dr. [Cost or net realisable value whichever is less] To Trading Account

WHEN THE BUSINESS SENDS GOODS NUMEROUSLY ON SALE OR RETURN

When transactions are numerous, a business maintains the following books: (a) Sale or Return Day Book; and (b) Sale or Return Ledger. ‘Ledger’ contains the accounts of the customers and the ‘Sale or Return’ Total account. ‘Day Book’ is the primary book which records all transactions, and from there these are entered in the ‘Sale or Return’ Total account. It is important to remember that both are Memorandum Books, i.e., these records are not a part of regular books of accounts.

Consignment

In Consignment one person (consignor) sends goods to another person (consignee) to be sold on behalf of and at the risk of the former.
In the case of consignment, cost means not only the cost of the goods as such to the consignor but also all expenses incurred till the goods reaches the premises of the consignee. Such expenses include packaging, freight, cartage, insurance in transit, octroi, etc.
Expenses incurred after the goods have reached the consignee’s godown (such as godown rent, insurance of godown, delivery charges) are not treated as part of the cost of purchase for valuing inventories on hand.
If the expected selling price of inventories on hand is lower than the cost, the value put on the inventories should be expected net selling price only, i.e. expected selling price less delivery expenses, etc.i.e. expenses necessary for sales.
Proforma invoice is made to show the high value of goods consigned than the cost and entries in the books of the consignor are made out on that basis. Even the inventories remaining unsold will initially be valued on the basis of the invoice price.
Hence, if entries are first made on invoice basis, the effect of the loading (i.e., amount added to arrive at the invoice price) must be removed by additional entries to ascertain profit or loss.
Abnormal loss is valued just like inventories in hand. Students should be careful while valuing goods lost in transit and goods lost in consignee’s godown. Both are abnormal loss but in case of former consignee’s non-recurring expenses are not to be included whereas it is to be included in case of latter.
Normal loss, is an unavoidable loss and be spread over the entire consignment while valuing inventories. The total cost plus expenses incurred should be divided by the quantity available after the normal loss to ascertain the cost per unit.
Commission is the remuneration paid by the consignor to the consignee for the services rendered to the former for selling the consigned goods. Three types of commission can be provided by the consignor to the consignee, as per the agreement, either simultaneously or in isolation. They are:
1. Ordinary commission
2. Del-credere commission
3. Over-riding commission
For accounting of consignee, he is concerned only when he sends an advance to the consignor, makes a sale, incurs expenses on the consignment and earns his commission. He debits or credits the consignor for all these as the case may be.
It has been assumed that fi nal payment received from Vijay.
Abnormal loss is always calculated at cost even if invoice price of goods is given.
Value of inventories always valued at invoice price if invoice price is given.

Joint venture

Parties to joint venture usually prepare a memorandum called Memorandum Joint Venture Account to record primarily all revenues and expenses relating to venture mentioning the party who collected revenue or met the expenses. This memorandum is very useful to determine profit/loss of venture as well as to prepare Joint Venture Account.
Venturers may keep record for venture transactions in three ways:
(i) Simply a Joint Venture Investment A/c can be maintained wherein the investments made, revenue collected, share of profi t/loss and final remittance received made are recorded.
(ii) Alternatively, a venturer can prepare Joint Venture Account to record all costs and revenues relating to venture and so balance of Joint Venture Account will show profi t/loss. In such a case a separate account of co-venturer is maintained.
(iii) Alternatively, separate books can be maintained for joint venture transactions, mainly when a separate Joint Bank Account is opened.

Royalty Accounts

”Royalty” may be defined as periodic payment made by one person (lessee) to another person (lessor) for using the right by the lessee vested in the lessor.
Minimum Rent is the amount of rent which the lessee is required to pay to the lessor whether he has derived any benefi t or not out of the right vested to him by the lessor.
Short-workings means excess of Minimum Rent over the Actual Royalty.
Right of Recoupment implies that lessor allows the lessee the right to carry forward and set off the short-workings against the excess or surplus of royalties over the Minimum Rent in the subsequent years.

Average Due Date

Average Due Date is one on which the net amount payable can be settled without causing loss of interest either to the borrower or the lender.
It is used in various cases like:
(i) Calculation of interest on drawings of partners.
(ii) Cancellation of various bills of exchange due on diff erent dates and issuance of a Single bill.
(iii) Amount lent in one instalment and repayable in various instalments
When the amount is lent in various instalments then average due date can be calculated as :

When interest is chargeable on drawings, and drawings are on different dates, interest may be calculated on the basis of Average Due Date of drawings.
Average due date in a case where the amount is lent in one instalment and repayment is done in various instalments will be:

Every promissory note or bill of exchange (other than those payable on demand or at sight or on presentment) falls due on the third day after on which it is expressed to be payable. This exempted period of three days is called days of grace.

Account Current

When interest calculation becomes an integral part of the account. The account maintained is called “Account Current”.
Some examples where it is maintained are:
(i) Frequent transactions between two parties.
(ii) Goods sent on consignment
(iii) Frequent transactions between a banker and his customers
(iv) In case of Joint venture when no separate set of books is maintained for joint venture
There are three ways of preparing an Account Current :
(i) With the help of interest tables
(ii) By means of products
(iii) By means of products of balances

FINAL ACCOUNTS OF NON-MANUFACTURING ENTITIES

Non-manufacturing entities are the trading entities, which are engaged in the purchase and sale of goods at profit without changing the form of the goods.
w For accounting, profit is measured at two levels:
(a) Gross Profit
(b) Net Profit
The principal function of final statements of account (Trading Account, Profit and Loss Account and the Balance Sheet) is to exhibit truly and fairly the profitability and the financial position of the business to which they relate. In order that these may be properly drawn up, it is essential that a proper record of transactions entered into by the business during a particular accounting period should be maintained.
At the end of the year, it is necessary to ascertain the net profit or the net loss. For this purpose, it is first necessary to know the gross profit or gross loss. Gross Profit is the difference between the selling price and the cost of the goods sold. For a trading firm, the cost of goods sold can be ascertained by adjusting the cost of goods still on hand at the end of the year against the purchases.

FINAL ACCOUNTS OF MANUFACTURING ENTITIES

Direct manufacturing expenses are costs, other than material or wages, which are incurred for a specific product or saleable service.
Indirect Manufacturing expenses these are also called Manufacturing overhead, Production overhead, Works overhead, etc.
Overhead is defined as total cost of indirect material, indirect wages and indirect expenses.
Indirect material means materials which cannot be linked directly with the units produced, for example, stores consumed for repair and maintenance work, small tools, fuel and lubricating oil, etc. In most manufacturing operations, the production of the main product is accompanied by the production of a subsidiary product which has a value on sale.
By-product is a secondary product. This is produced from the same raw materials, which are used for producing the main product and without incurring any additional expenses from the same production process in which the main product is produced.

Partnership

The Indian partnership act defines as the relationship between the persons who have agreed to share the profit of business carried by all or any on them acting for all
The LLP is a separate legal entity, liable to the full extent of its assets, with the liability of its partners being limited to their agreed contribution in LLP which may in tangible or intangible nature or both tangible and intangible
In the partnership firm relationship between the partners is governed by the mututal agreement. The agreement ids popularly known as partnership deed which is to be properly stamped.
In the absence of the agreement, interest and salary is payable to the partner only if there is profit.
During the course of business, partnership firm will prepare trading & profit & loss account at the end of every year.
There are two methods of accounting
1. Fixed Capital Method, and
2. Fluctuating Capital Method

In fixed capital method, generally initial capital contributions by partners are credit to partners capital account and all subsequent transactions and events are dealt through current account. Unless a decision is not taken to change it, initial capital account balance is not changed

In fluctuating Capital method, no current account is maintained. All such transactions and events are passed through capital account. Naturally capital account balance of every partner fluctuates every time.

Interest on capital is calculated on the relevant period during which capital of partner is used in business.
Subject to contract between partners, interest on capital is to be provided out of profits only. Thus in case of loss no interest ti be provided. In case of insufficient profit (i.e the net profit is less than the interest on capital) the amount of profit will be distributed in the ration of capital as partners get profit by the way of interest only.
Sometimes a partner may enjoy the right to have the minimum amount of profit in the year as per the terms of agreement. In such a case, allocation of profit is done in normal way is share of profit of partner, who has been guaranteed minimum profit, is more than the guaranteed profit. However if the share of profit is less than guaranteed amount, he takes minimum profit and the excess amount will be shared by remaining partner as per their agreed ratio.

Goodwill

Goodwill is the reputation in respect of profits expected in future over and above the normal profits.
Valuation of Goodwill arise in following cases
1. when profit sharing ratio among partners is changed
2. when new partner is admitted
3. when a partner retires or dies
4. when business is dissolved or sold
Methods of valuation of Goodwill

Average Profit Basis :

Average Profit = Total Profit/ No. of Years

Goodwill = Average Profit X No. of Years Purchase

The profit taken into consideration are adjusted against abnormal loss, abnormal profit, return of Non-Trade investments and errors

2. Super Profit Basis

Capital Employed = Assets – Liabilities

Find Normal Rate of Return (NRR)

Find Normal Profit = Capital Employed X NRR

Find Average Actual Profit

Find Super Profit = Average Actual Profit – Normal Profit

Goodwill = Super Profit X No. of Years Purchase

3. Annuity Basis

Goodwill = Super Profit X Annuity Number

4. Capitalization Basis :

Goodwill = Super Profit/ NRR

Admission of New Partner

New Partners are admitted for the benefit of the Partnership Firm. New Partners is admitted either for increasing the Partnership capital or for strengthening the management of the firm.
When a new partner is admitted to Partnership, assets are revalued and liabilities are reassessed. A Revaluation account (Or Profit & Loss Adjustment Account) is opened for the purpose . The account is debited with all deduction in value of assets and increase in liabilities and credited with increase in value of assets and decrease in value of liabilities. The difference in two side will show the profit or loss and this is transferred to capital account of old partners in their old profit sharing ratio.
Whenever new partners is admitted into partnership, any reserve lying in balance sheet is transferred to capital account of old partners in their old profit sharing ratio.

Retirement of Partner

Readjustment takes place in case of retirement of partner likewise in the case of admission of new partner. Whenever a partner retires, remaining partners make gain in their profit sharing ratio. so they arrange the amount to be paid to discharge the claim of retiring partner.
On retirement of Partner, it is required to revalue assets and liabilities just as in case of admission of partner. If there is revaluation profit and loss then such profit and loss is shared among existing partners including retiring partner in their existing profit sharing ratio.
On retirement if there is any or reserve standing in balance sheet is to be credited in capital account of partners in their old profit sharing ratio.
Following are the necessary adjustment while making final payment to retiring partner –
1. Transfer of reserve
2. Transfer of goodwill
3. Transfer of Profit or Loss on Revaluation.
There are three methods for treating premium paid on joint life policy: firstly it can be shown as an expense, alternatively it can be shown as an assets to the extent of its surrender value and the balance as an expense, Thirdly a joint life policy reserve can be created: On retirement of partner, surrender value of joint life policy raised in books if it is already not shown in books. If the surrender value is more than the value shown in balance sheet only the difference amount is transferred to revaluation reserve.

Death of Partner

The Problems arise on death of partners are similar to those arising on retirement. Revaluation and treatment of goodwill is done as done in retirement.
Treatment of Joint Life Policy will also be same as in case of retirement. However in case of death of partner, the firm would get the joint life value. The only additional point is that as death may occur on any date, the representatives will be entitled to to partner’s share from beginning of the year to date of death. After assessing the amount to be paid to deceased partner it should be credited to his Executor’s Account.
If the death take place during the accounting period, the Executor of deceased partner is entitled to have the share of profit profit upto the date of death based on the profit earned in immediately preceding year or some other agreed basis. for this purpose , deceased partner’s capital account is credit and profit & loss account is debited.

FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS

A non profit organization is a legal and accounting entity that is operated for the benefit of the society as a whole, rather than for the benefit of a sole proprietor or a group of partners or shareholders. Financial Statements of such organizations consists of:
1. Receipts and Payments Account
2. Income and Expenditure Account
3. Balance Sheet
A Receipts and Payments Account is a summary of the cash book
The income and expenditure account is equivalent to the Profit and Loss Account of a business enterprise.It is an account which is widely adopted by non-profit making concerns and is prepared by followingaccrual principle. Only items of revenue nature pertaining to the period of account are included therein.
Non-profit organizations registered under section 8 of the Companies Act, 2013 are required to prepare their Income and Expenditure account and Balance Sheet as per the Schedule III to the Companies Act,2013.
It may be noted that after various accounts have been adjusted as is considered necessary and all the revenue accounts have been closed off by transfer to the Income and Expenditure Account, there will still be a number of balances left over. These are included in the balance sheet. A balance sheet is thus a complement to such an account.
Donations, Entrance and Admission Fees, Subscription, Life Membership Fee are some of the sources of incomes for the non-profit organizations. These items have separate treatments with some being capitalized while others being treated on accrual basis, as told before.
Educational institutions are quite different from other not-for-profit organisations in terms of sources of finance and items of expenditure.

COMPANY ACCOUNTS

Company’ is termed as an entity which is formed and incorporated under the Companies Act, 2013 or an existing company formed and registered under any of the previous company laws.
Salient features of a company include: Incorporated Association; Separate Legal Entity; Perpetual Existence; Common Seal; Limited Liability; Distinction between Ownership and Management; Not a citizen; Transferability of Shares; Maintenance of Books; Periodic Audit; Right of Access to Information.
Types of companies: Government Company: Foreign Company; Private Company; Public Company; One Person Company; Small Company; Listed Company; Unlimited Company; Company limited by Shares; Company limited by Guarantee; Holding Company; Subsidiary Company.
The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the notified accounting standards and shall be in the form or forms as may be provided for diff rent class or classes of companies, as prescribed in Schedule III to the Companies Act, 2013. Financial Statements as per Section 2(40) of the Companies Act, 2013, include balance sheet as at the end of the financial year; profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year; cash fl ow statement for the financial year; statement of changes in equity, if applicable; and any explanatory note annexed to.

ISSUE, FORFEITURE AND RE-ISSUE OF SHARES

Total capital of the company is divided into a number of small indivisible units of a fixed amount and each such unit is called a share.
The total capital of the company is divided into shares, the capital of the company is called ‘Share
Capital’.
Share capital of a company is divided into following categories:
(i) Authorised Share Capital or Nominal Capital; (ii) Issued Share Capital; (iii) Subscribed Share Capital (iv) Called-up Share Capital; (v) Paid-up Share Capital; (vi) Reserve Share Capital
Types of shares are:
(i) Preference Shares. Preference shares can be of various types, e.g.: (a) Cumulative Preference Shares (b) Non-cumulative Preference Shares (c) Participating Preference Shares (d) Non-participating Preference Shares (e) Redeemable Preference Shares (f) Non-redeemable Preference Shares (g) Convertible Preference Shares (h) Non-convertible Preference Shares.
(ii) Equity Shares
A company can issue shares either
(1) for cash or
(2) for consideration other than cash.
A public limited company cannot make any allotment of shares unless the amount of minimum subscription stated in the prospectus has been subscribed and the sum payable as application money for such shares has been paid to and received by the company.
When a company issues its securities at a price more than the face value, it is said to be an issue at a premium. Premium is the excess of issue price over face value of the security.
According to Section 52 of the Companies Act, 2013, Securities Premium Account may be used by the company:
(a) Towards issue of un-issued shares of the company to be issued to members of the company as fully paid bonus securities.
(b) To write off preliminary expenses of the company.
(c) To write off the expenses of, or commission paid, or discount allowed on any of the securities or debentures of the company.
(d) To provide for premium on the redemption of redeemable preference shares or debentures of the
company. (e) For the purchase of own shares or other securities.
Sometimes shareholders fail to pay the amount due on allotment or calls. The total unpaid amount on one or more instalments is known as Calls-in-Arrears or Unpaid Calls.
Some shareholders may sometimes pay a part, or whole, of the amount not yet called up, such amount is known as Calls-in-advance.
Interest on calls in arrear is recoverable and that in respect of calls in advance is payable, according to provisions in this regard in the articles of the company, at the rates mentioned therein or those to be fixed by the directors, within the limits prescribed by the Articles. Table F prescribes 10% and 12% p.a. as the maximum rates respectively for calls in arrears and those in advance.
The term ‘forfeit’ actually means taking away of property on breach of a condition. It is very common that one or more shareholders fail to pay their allotment and/or calls on the due dates. Failure to pay call money results in forfeiture of shares.
A forfeited share is merely a share available to the company for sale and remains vested in the company for that purpose only. Reissue of forfeited shares is not allotment of shares but only a sale.
Public limited companies, generally, issue their shares for cash and use such cash to buy the various types of assets needed in the business. Sometimes, however, a company may issue shares in a direct exchange for land, buildings or other assets. These shares should be shown separately under the heading ‘Share Capital’.

ISSUE OF DEBENTURES

Debenture is one of the most commonly used debt instrument issued by the company to raise funds for the business. A debenture is a bond issued by a company under its seal, acknowledging a debt and containing provisions as regards repayment of the principal and interest. Money payable on debentures may be paid either in full with application or in instalments.
Debenture holders are the creditors of the company whereas shareholders are the owners of the company. Debenture holders have no voting rights and consequently do not pose any threat to the existing control of the company. Shareholders have voting rights and consequently control the total affairs of the company.
Debentures can be classified on the basis of: (1) Security; (2) Convertibility; (3) Permanence; (4) Negotiability; and (5) Priority.
Issue of redeemable debentures can be categorized into the following:
1. Debenture issued at par and redeemable at par or at a discount;
2. Debenture issued at a discount and redeemable at par or at discount;
3. Debenture issued at premium and redeemable at par or at discount;
4. Debenture issued at par and redeemable at premium;
5. Debenture issued at a discount and redeemable at premium.
6. Debenture issued at premium and redeemable at premium.
Note: In practical life redemption at a discount is rare,
Collateral security means secondary or supporting security for a loan, which can be realised by the lender in the event of the original loan not being repaid on the due date. Under this arrangement, the borrower agrees that a particular asset or a group of assets will be realized and the proceeds there from will be applied to repay the loan in the event that the amount due, cannot be paid. Sometimes companies issue their own debentures as collateral security for a loan or a fluctuating overdraft.
Debentures can also be issued for consideration other than for cash, such as for purchase of land, machinery, etc.
The discount on issue of debentures is amortised over a period between the issuance date and redemption date. Loss on issue of debentures is also a capital loss and should be written off in a similar manner as discount on debentures issued. In the balance sheet both the items (Discount and Loss) are shown as Non-current/current assets depending upon the period for which it has to be written off .
Interest payable on debentures is treated as a charge against the profits of the company. Interest on debenture is paid periodically and is calculated at coupon rate on the nominal value of debentures.