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Friday, November 26, 2010

company law-professional misconduct

Professional misconduct
Under section 9 of the Company Secretaries Act, 1980, the Council of the Institute is mandated to manage the affairs of the Institute and discharge the functions assigned to it under the Act. The Council has authority to exercise disciplinary powers by instituting inquiry into cases where it is prima facie of the opinion that a member is guilty of professional or other misconduct.
Section 21 of the Act and Regulations 15, 16, 17, 18 & 19 of the Company Secretaries Regulations, 1982 lay down the procedure to be followed in an enquiry to know that for the purpose of disciplinary proceedings, 'member of the Institute' includes a person who was a member of the Institute on the date of the alleged misconduct although he has ceased to be a member at the time of enquiry.
DEFINITION OF PROFESSIONAL OR OTHER MISCONDUCT
Section 22 of the Act deems any act or omission specified in the Schedules to the Act to be a misconduct.  It categorically provides that the Council’s power to enquire into the conduct of any member under any circumstances is in no way limited or abridged.
 
Professional misconduct in relation to members of the Institute is broadly categorized as below:
A.      Professional misconduct in relation to Company Secretaries in Practice (Part I of the First Schedule containing 11 clauses)
B.       Professional misconduct in relation to members of the Institute in service (Part II of the First Schedule containing two clauses)
C.      Professional misconduct in relation to members of the Institute generally (Part III of the First Schedule containing three clauses)
D.      Other misconduct in relation to members of the Institute generally (Part IV of the First Schedule containing two clauses)
E.       Professional misconduct in relation to Company Secretaries in Practice (Part I of the Second Schedule containing ten clauses)
F.       Professional misconduct in relation to members of the Institute generally (Part II of the Second Schedule containing four clauses)
G.      Other misconduct in relation to members of the Institute generally (Part III of the Second Schedule containing one clause)
 
A)        Professional misconduct in relation to Company Secretaries in Practice (Part I of the First Schedule containing 11 clauses)
 
A Company Secretary in Practice shall be deemed to be guilty of professional misconduct, if he–
   (1)   allows any person to practice in his name as a Company Secretary unless such person is also a Company Secretary in practice and is in partnership with or employed by him;

   (2)   pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than a member of the Institute or a partner or a retired partner or the legal representative of a deceased partner, or a member of any other professional body or with such other persons having such qualifications as may be prescribed for the purpose of rendering such professional services from time to time in or outside India.
          Explanation. – In this item, “partner” includes a person residing outside India with whom a Company Secretary in practice has entered into partnership which is not in contravention of item (4) of this Part;
   (3)   accepts or agrees to accept any part of the profits of the professional work of a person who is not a member of the Institute:
          Provided that nothing herein contained shall be construed as prohibiting a member from entering into profit sharing or other similar arrangements, including receiving any share commission or brokerage in the fees, with a member of such professional body or other person having qualifications, as is referred to in item (2) of this part;
   (4)   enters into partnership, in or outside India, with any person other than a Company Secretary in practice or such other person who is a member of any other professional body having such qualifications as may be prescribed, including a resident who but for his residence abroad would be entitled to be registered as a member under clause (e) of sub-section (1) of section 4 or whose qualifications are recognized by the Central Government or the Council for the purpose of permitting such partnerships;
   (5)   secures, either through the services of a person who is not an employee of such company secretary or who is not his partner or by means which are not open to a Company Secretary, any professional business:
          Provided that nothing herein contained shall be construed as prohibiting any arrangement permitted in terms of items (2), (3) and (4) of this Part;
   (6)   solicits clients or professional work, either directly or indirectly, by circular, advertisement, personal communication or interview or by any other means:
          Provided that nothing herein contained shall be construed as preventing or prohibiting–
          (i)   any company secretary from applying or requesting for or inviting or securing professional work from another company secretary in practice; or
         (ii)   a member from responding to tenders or enquiries issued by various users of professional services or organizations from time to time and securing professional work as a consequence;
   (7)   advertises his professional attainments or services, or uses any designation or expressions other than Company Secretary on professional documents, visiting cards, letterheads or sign boards, unless it be a degree of a University established by law in India or recognized by the Central Government or a title indicating membership of the Institute of Company Secretaries of India or of any other institution that has been recognized by the Central Government or may be recognized by the Council:
          Provided that a member in practice may advertise through a write up setting out the services provided by him or his firm and particulars of his firm subject to such guidelines as may be issued by the Council;
   (8)   accepts a position as a Company Secretary in practice previously held by another Company Secretary in practice without first communicating with him in writing;
   (9)   charges or offers to charge, accepts or offers to accept, in respect of any professional employment, fees which are based on a percentage of profits or which are contingent upon the findings, or result of such employment, except as permitted under any regulation made under this Act;
(10)   engages in any business or occupation other than the profession of Company Secretary unless permitted by the Council so to engage:
          Provided that nothing contained herein shall disentitle a Company Secretary from being a director of a company except as provided in the Companies Act, 1956;

 
 
(11)   allows a person not being a member of the Institute in practice, or a member not being his partner to sign on his behalf or on behalf of his firm, anything which he is required to certify as a Company Secretary, or any other statements relating thereto.
B)         Professional misconduct in relation to members of the Institute in service (Part II of the First Schedule containing two clauses)
A member of the Institute (other than a member in practice) shall be deemed to be guilty of professional misconduct, if he, being an employee of any company, firm or person–
   (1)   pays or allows or agrees to pay, directly or indirectly, to any person any share in the emoluments of the employment undertaken by him;
   (2)   accepts or agrees to accept any part of fees, profits or gains from a lawyer, a Company Secretary or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification.
 
C)         Professional misconduct in relation to members of the Institute generally (Part III of the First Schedule containing three clauses)
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he –
   (1)   not being a Fellow of the Institute, acts as a Fellow of the Institute;
   (2)   does not supply the information called for, or does not comply with the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority;
   (3)   while inviting professional work from another Company Secretary or while responding to tenders or enquiries or while advertising through a write up, or anything as provided for in items (6) and (7) of Part I of this Schedule, gives information knowing it to be false.
 
D)        Other misconduct in relation to members of the Institute generally (Part IV of the First Schedule containing two clauses)
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if –
   (1)   he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term not exceeding six months;
   (2)   in the opinion of the Council, he brings disrepute to the profession or the institute as a result of his action whether or not related to his professional work.]
 
 
E)         Professional misconduct in relation to Company Secretaries in Practice (Part I of the Second Schedule containing ten clauses)
A Company Secretary in practice shall be deemed to be guilty of professional misconduct, if he—
   (1)   discloses information acquired in the course of his professional engagement to any person other than his client so engaging him, without the consent of his client, or otherwise than as required by any law for the time being in force;
   (2)   certifies or submits in his name, or in the name of his firm, a report of an examination of the matters relating to company secretarial practice and related statements unless the examination of such statements has been made by him or by a partner or an employee in his firm or by another Company Secretary in practice;
   (3)   permits his name or the name of his firm to be used in connection with any report or statement contingent upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast;
   (4)   expresses his opinion on any report or statement given to any business or enterprise in which he, his firm, or a partner in his firm has a substantial interest;
   (5)   fails to disclose a material fact known to him in his report or statement but the disclosure of which is necessary in making such report or statement, where he is concerned with such report or statement in a professional capacity;
   (6)   fails to report a material mis-statement known to him and with which he is concerned in a professional capacity;
   (7)   does not exercise due diligence, or is grossly negligent in the conduct of his professional duties;
   (8)   fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion;
   (9)   fails to invite attention to any material departure from the generally accepted procedure relating to the secretarial practice;
(10)   fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time.
 
F)         Professional misconduct in relation to members of the Institute generally (Part II of the Second Schedule containing four clauses)
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he—
   (1)   contravenes any of the provisions of this Act or the regulations made thereunder or any guidelines issued by the Council;

   (2)   being an employee of any company, firm or person, discloses confidential information acquired in the course of his employment, except as and when required by any law for the time being in force or except as permitted by the employer;
   (3)   includes in any information, statement, return or form to be submitted to the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing them to be false;
   (4)   defalcates or embezzles moneys received in his professional capacity.
 
G)         Other misconduct in relation to members of the Institute generally (Part III of the Second Schedule containing one clause)
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months.]
 

company law-documentary evidence

documentary evidence means any document (paper) which is presented and allowed as evidence in a trial or hearing, as distinguished from oral testimony. However, the opposing attorney may object to its being admitted. In the first place, it must be proved by other evidence from a witness that the paper is genuine (called "laying a foundation"), as well as pass muster over the usual objections such as relevancy.

auditing-meaning of vouchers

A voucher is an accounting document representing an internal intent to make a payment to an external entity, such as a vendor or service provider. A voucher is produced usually after receiving a vendor invoice, after the invoice is successfully matched to a purchase order. A voucher will contain detailed information regarding the payee, the monetary amount of the payment, a description of the transaction, and more. In Accounts Payable systems, a process called a "payment run" is executed to generate payments corresponding to the unpaid vouchers. These payments can then be released or held at the discretion of an Accounts Payable supervisor or the company Controller. The term can also be used with reference to accounts receivable, where it is also a document representing intent to make an adjustment to an account, and for the general ledger where there is need to adjust accounts within that ledger; in that case it is referred to as a journal voucher.

compamy law-special points to be consider while purchase of business

A few points as a course of initial observations to be considered while acquiring company-
1)      NET WORTH: The first and crucial aspect that is to be considered while acquiring a company is the net worth. The most influential factor regarding the payment of purchase consideration) PC will depends upon the value of net worth of the company.
 
ü  If the value of net worth is positive, then it will not lead to much discussion in the fixation of PC. Based upon the future economic benefits, large scale of operations and other taxation benefits accruing to the company the payment of PC more than its net worth will depends.
ü  If the net worth of the company is negative then we have to consider the reasonableness and factors satisfying payment of PC to a negative net worth company.
Generally, the reasons will be –
Ø  Synergy benefits after acquiring the company as a whole and new customers accruing to the existing business
Ø  Forecast of Expected future cash flows may be positive or
Ø  The company is in gestation period and will give future economic benefits once it starts its commercial production
In order to know the correctness of financials of the company (Required for calculation of net worth) we can go for a due diligence audit.
2)      Captive Intensive: Generally the service organizations are non-captive incentive contrary for other companies. Because the value of service organizations depends upon the quality of personnel it is hiring. The risk is less in acquiring captive incentive company than the non – captive organizations. The reason is because even though the merger is not successful the purpose for which we have acquired, still we can gain something by selling its assets.
3)      Ratios:  Analysis of the ratios from the financials of the targeted company plays a major for acquisition. The following ratios we can consider like – operating profit ratio, current ratio, absolute liquid ratio, proprietary ratio, solvency ratio, fixed assets-current ratio….. etc.,
Generally there is a belief among many people that current ratio cannot be less than one (Working capital can’t be negative), they feel it is not good for the running a business. But the above view is partially correct, even though current ratio is less than one still we can manage if we have good cash/bank balances
4)      Investments:  If the company is having investment (Whether it may be short term/long term (Trading or not) / Investment property), then we have to go for a fair valuation which will give a clear picture about the group.
Let us say for example ABC Ltd is having investments in its subs DEF Ltd, GHI Ltd, KLM Ltd and NOP Ltd.
In the financials of ABC Ltd (Stand alone), the investments of subs were generally presented at acquisition cost/Historical rate. So, in order to arrive at clear picture we have to go for fair valuation of investments.
The company which is not good individually may performs well at group level, if you are acquiring a company means you also acquiring the group companies in which the targeted company is interested.
 
5)      While analyzing the PAT of the companies we have to consider whether any extraordinary items were taken into account and its impact on the profit.
6)      The brand value, value added chains, industry profile, financial healthiness and other important points must be taken into account for acquiring a business.
 

Friday, September 17, 2010

corporate accounting

Corporate 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 application money with application
getting the allotment money when shares are allotted to shareholders
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 amount then also its record must be kept in company books.
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. Today I am concentrating our all area of company accounts.
2nd Maintaining the debentures Accounts

Debenture is just loan which is taken by any company, so it is the duty of the accountant to record relating to issue and repayment of debentures.
3rd Maintaining the accounts of Bonus Shares

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 are also very important from recording point of view.
5th Maintaining regular accounts

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 trade or firm’s transactions.
6th Maintaining the final accounts of Company

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 statement is made in final accounts of company by accountants of company.
Profit and loss account
This account is equal to the profit and loss account of other organization.
Profit and loss appropriation account
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 footnote in the below of this balance sheet.
7th Calculation of Managerial Commission

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 accountant must be so wide.
8th Dividend and Interest Calculation

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 calculation and recording of corporate tax.

Meaning of Bonus shares
Bonus means premium or gift which is paid normally in cash
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 declared like a dividend nor gifted away . .

Source of bonus shares
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 revaluation of assets etc.
Profit and loss account
general reserve
revenue reserve
free reserves
dividend equalization fund
capital reserve
sinking fund
debenture redemption reserve only after redemption
development rebate reserve
allowance after expiry of 8 years
capital redemption reserve
share premium or security premium if received in cash


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 neither be declared like a dividend nor gifted away.
" issue of bonus shares in liew of dividend is not allowed ."


Source of bonus shares
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 that is which are existing due to revaluation of assets etc.


•Profit and loss account
•general reserves
•revenue reserves
•free reserves
•dividend equalization fund
•capital reserves
•sinking fund or debenture redemption reserve only after redemption
•Development rebate reserve /allowance after 8 years
•Capital redemption reserve
•Shares premium or security premium if received in cash.


Corporate Accounting Part-II
SEBI Guidlines for determining maximum quantom of bonus issue
First test
Residual reserve test
As per this guidline the residual reserve after the proposal of capitalisation ( bonus issu) should be at least 40% of increased paid up capital

5 Free reserve - 2 paid up capital before the bonus issue
= ------------------------------------------------------------
7

2nd test
Profitability requirement 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%
= 3 average profit - existing share capital
3rd test
Maximum limit requirement
This test indicates teh maximum amount which can be utilised for issue shares capital at one time shall not exceed the total amount of paid up equity capital of the company
Amount of bonus < total existing quity paid up capital
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


Accounting treatment of bonus shares
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
Capital reserve account debit
general reserve account debit
revenue reserve account debit
free reserve account debit
dividend equalization fund account debit
profit and loss account debit
Bonus to equity shareholders account credit

For amount due on final call of shares ( Existing shares unpaid amount
Share final call account debit
Share capital account credit

For adjustment of final call amount out of profit
Bonus to shareholder account debit
share final call account credit
2nd case
When new fully paid up bonus shares are issued
a) for providing amount of bonus
Capital reserve account debit
share premium account debit
capital redemption reserve account debit
other general reserve account debit
Profit and loss account debit
bonus to shareholder account credit
b) for issue of bonus
Bonus to equity shareholder account debit
equity share capital account credit


Calculation the value of bonus shares
Steps for calculation the value of bonus shares
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
Numbers of existing equity shares X unpaid amount
b) To determine the number of bonus shares

Bonus shares numbers Total no. of issued shares
= ________________ X _________________
Basis issue numbers
c) Amount of new bonus shares

= no. of bonus shares X issue price

Steps of capital budgeting process
Capital budgeting is process of selecting best long term investment project . Capital budgeting is long term planning for making and financing proposed capital out laying

Steps for capital budgeting process
Ist step
Identification involved in capital budgeting proposals
2nd step
Screening the proposal
3rd step
Evaluation of various proposals
4th step
Fixing the priorities
5th step
Final approval and planning the capital expenditure
6th step
Implementing the proposal
7th step
Performance review


Terms used in Corporate Accounting
 ¤ 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 company has 1000 shares of 100 rupees each.
¤ 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 right to give the vote.
¤ Dividend
Dividend is that part of profit which distribute among shareholder. Its other name is divisible profit. Dividend may be given by cash or through bonus or any other type.
¤ 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 with given rate of interest.
¤ 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


Accounting Treatment of issue of shares on premium and discount
Some time a company can decide to issue of shares on premium or on discount. In both situations we must know the basic concept before doing any accounting treatment.
Issue of shares on premium
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

For the due of share Allotment money
1.Shares Allotment Account Debit xxxx ( with the total amount )
Shares Capital Account Credit xxxx ( With the face value of shares)
Security Premium Account Credit xxxx( With the amount of premium)

2. For Allotment money Received
Bank Account Debit xxxx ( face value + Premium )
To Share Allotment Account xxxx
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.
According to Section 78 , We will use this fund according to guidelines of law.

Meaning of Issue of shares at discount :-
It means that company demands less amount than face value of shares .This less amount is called discount on issue of shares .
Journal entry of discount on issue of shares
When we receive allotment by giving discount on issue of share
1 Amount due of allotment
Share Allotment Account Debit xxxx( face value of allotment – discount)
Discount on issue of share account Debit xxxx( amount of discount)
To Share capital account
2. When allotment money actually received
Bank account debit xxx( face value of allotment –discount)
To share allotment account


Accounting treatment of issue of share for purchasing an fixed asset
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 :-

For purchasing fixed on credit
Fixed asset account debit xxx
Creditor account credit xxx
For issue of shares
Creditor account Debit xxx
Share Capital Account credit xxx
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

In case of issue at premium

Numbers of shares
Value of Fixed asset
= ------------------------
Value of per share (Face value + premium)

In case if issue of shares at discount
Numbers of shares
Value of Fixed asset
= ------------------------
Value of per share (Face value – Discount per share)
After this the following journal entry will pass
Suppose xy company purchase the machinery of RS. 90000 by issue of shares at discount of shares of 10% if face value of share is RS.10
Journal entries
Machinery account debit 90000
Creditor account credit 90000
2 for issue shares to creditors at discount
No. of shares =90000/9 = 10000
Amount of discount =RS.10000

Creditor account Debit 90000
Discount on issue of share account debit 10000
Share capital account credit 100000
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
Machinery account debit 120000
Creditor account credit 120000
2 for issue shares to creditors at discount
No. of shares =120000/12 = 10000
Amount of Premium =RS.20000

Creditor account Debit 120000
Share capital account credit 100000
Security premium account credit 20000


Adjustment in company’s balance sheet for call in arrear
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 from Called up capital
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
After deducting, it we can easily calculate paid up capital


Accounting Treatment of Call in arrear and call in advance
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 company has right to get 5% interest on call in arrear.
Journal Entries for call in arrear in the books of company
1st journal entry will write at the time of due but not received the allotment money from share holder
Call in Arrear Account Debit xxxx
To Share Allotment Account xxxx
2nd When call in Arrear received from shareholder
Bank Account Debit xxxx
To Call in arrear Account xxxx
3rd journal entry is related to company’s interest received on due amount of call in arrear. This is the income of company:-

Bank Account Debit xxxx
To Interest on Call in Arrear xxxx

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
Journal Entry for call in Advance
1st journal entry will pass for adjustment of advance money of allotment received at the time of application
Share Allotment Account Debit xxxx
To Call in Advance xxxx
2nd Journal entry will pass for when the amount of allotment due
Call in Advance Account Debit xxxx
To Share Allotment Account xxxx
3rd Journal Entry for paying the interest on call in advance to shareholder
Interest on call in advance Account Dr. xxxx
To Bank Account xxxx


Definition of share forfeitures
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 received fund from shareholder.
Deep accounting treatment is divided in following parts

1st situation
Simple accounting treatment
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 forfeited Account Credit (Amount received of forfeited shares)
Share call in arrear Account Credit (Amount did not receive of forfeited shares)

2nd Situation
When shares issue on discount and premium
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

Share capital Account Debit (called up amount of forfeited shares)
Security premium account Debit (If premium is not received from share holder)

Share forfeited Account Credit (Amount received of forfeited shares)
Share Allotment Account Credit (If allotment money is not received)
Share call in arrear Account Credit (Amount did not receive of forfeited shares)

In case shares are issued on discount
Share Capital Account Debit
Share Forfeiture Account Credit
Share Allotment Account Credit
Share call in arrear account credit
Discount on issue of shares account credit

3rd situation
When shares issue pro-rata base
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.
Calculate the net amount of allotment received
Total amount of allotment money due xxxxxx
Less Adjustment with application
Money xxxxxx
_________________
Xxxxxx
Less Amount not received
As forfeited shares
Xxxxxxx

Less (-) xxxx
Perportion in
Not received amount
Of adjusted application
Money which is
We received in advance

Total not receive allotment
= ------------------------------- x Total adjustment of application money
Total Allotment money

________________________________
Net amount not received
In the form of allotment xxxxxxx (-) xxxx

______________________________ ____________
Net Amount received in the form of
Allotment xxxxx

The following journal entry will passed
Share capital account Debit (Called up capital)
Share forfeiture Account Credit (Total Amount received of forfeited shares)
Share Allotment Account Credit (Net amount not received in the form of allotment, for calculation of this amount you must understand and use above formula)
Share Call in Arrear Credit (if you are not received any call money of share forfeited)

4th situation
When shares fully reissue
Reissue means sale to any other person after forfeiting from previous share holder.
In this situation we can reissue of share in discount or premium. For doing this we have to pass the following journal entry
Bank Account Debit
Discount on issue of shares Debit
Share forfeiture account Debit (Discount on reissue of shares)
Share capital account Credit (Face value of reissue of shares)
Security premium Account Credit (If shares reissue at premium

So difference between amount received from forfeiture and discount on reissue share will go to capital reserve account and following entry will passed
Share forfeited account Debit
Capital reserve account credit
This capital reserve account will show in liability side of balance sheet of company.

5th situation
When Shares partly reissue
It is most difficult situation when you will see the question paper and you found the sum where is pro-rata situation , then share holder did not pay and then these forfeited shares party reissue to another share holder because
Above 4 situations will cover but in the 4th situation’s last journal entry will pass after making forfeiture account in working note because only the amount go to capital reserve which is sold or reissue gain other will go to balance of share forfeiture account upto that date until we reissue all shares.
Share forfeiture Account
Credit Side of this account
By share capital Account 2000
Suppose we get 100 shares forfeiture money received
Rs,20 per share
_________
2000
________ _
Debit Side of this account
To share capital account 250
Suppose we have reissue of 50 shares at reissue discount Rs.5

To capital Reserve account
We will calculate this amount after deducting the proportion of of this gain according to sold shares
2000 x 50/100 – 250 = 750
To balance C/d 1000
_____________________________
2000

Then following journal entry will pass
Share forfeiture account Debit 750
To capital Reserve Account Credit 750
Corporate Accounting Part-III
Accounting treatment of Issue of debenture

For rendering the accounting treatment of issue of debenture, you should know debenture and what is use of debenture in any corporate.
Debenture is just long term loan which is taken by company. For this company issue debentures. This is just like a paper on which company has written that company is taking loan from debenture holder with given term. Company has to decide the rate of interest and repayment amount and time of repayment of debenture. These terms must be written in debenture paper at the time of issue of debenture. There are many type of debenture which can be issued by company. It may convertible or non convertible. It means that company converts debenture in to share if company issued convertible debenture but if company issued non convertible, company has no right to convert debentures into shares. Company can also redeemable and non redeemable debenture .It means that company repays the full amount of debenture holder after some time if company has issued redeemable debentures but if company issued non redeemable debentures, company will not repay in his life time. These debentures only will redeem after the winding up of company.
Because of this is important transaction relating to company, so it is very necessary to record in the books of company. Let us start the accounting treatment of issue of debenture.
A – Issue of Debenture at Par
1st journal Entry
When company receives application money of debentures

Bank account Debit
Debenture Application Account Credit

2nd Journal Entry
When company accepts the applications
Debenture Application Account Debit
Debenture Account Credit
3rd Journal Entry
When Allotment money of debenture due
Debenture Allotment Account Debit
Debenture Account Credit
4th Journal Entry
When Allotment money of debenture received
Bank Account Debit
Debenture Allotment Account Credit

5th Journal Entry
When Call money of debenture is payable
Debenture Calls Account Debit
Debenture Account Credit
6th Journal Entry
When Call money of debenture is received
Bank Account Debit
Debenture Calls Account Credit

B- When Company issue of debenture at premium
If premium is receivable with application money

1st Journal Entry
When amount of application received with premium

Bank Account Debit
Debenture Application account Credit

2nd Journal Entry
Debenture Application Account Debit
Debenture Account Credit
Security premium Account credit

If premium receivable on allotment then
Debenture Allotment account debit
Debenture Account Credit
Security Premium Account Credit

And allotment money received with premium
Bank account Debit
Debenture Allotment Account Credit

When Debenture Issued At discount
Debenture Allotment Account Debit
Discount on Issue of Debenture Account Debit
Debenture Allotment Account Credit

When discounted amount of debenture is received
Bank Account Debit
Debenture Allotment Account Credit


Redemption of Debenture and method of redemption
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.

Debenture Account Debit
Debenture holder Account Credit

2nd journal Entry
Profit and loss Appropriation Account Debit
Debenture Redemption Reserve Account Credit
3rd Journal Entry
Debenture holder Account Debit
Bank Account Credit
4th Journal Entry
Debenture redemption Reserve account Debit
General Reserve Account Credit


Sinking Fund – Method of redemption of Debenture
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 .

In the end of first year
1st journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit

2nd Journal Entry for invest the sinking fund
Sinking fund investment Account Debit
Bank Account Credit
In the end of next years but not end last year

3rd Journal Entry for receiving interest on investment
Bank Account Debit
Interest on sinking fund investment Account Credit
4th Journal Entry for transferring interest to sinking fund
Interest on Sinking fund investment account Debit
Sinking fund Account Credit

5st journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit

6th Journal Entry for invest the sinking fund
Sinking fund investment Account Debit
Bank Account Credit
At the end of last year

Bank Account Debit
Interest on sinking fund investment Account Credit
7th Journal Entry for transferring interest to sinking fund
Interest on Sinking fund investment account Debit
Sinking fund Account Credit

8st journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit
9th Journal Entry for receiving the money from sale of investment

Bank account Debit
Sinking fund investment account Credit
10th journal entry for any profit on sale
Sinking Fund investment Account Debit
Sinking fund account Credit

11th journal entry for repayment to debenture holders
Debenture Account debit
Bank account credit
12th journal entry for balance of sinking fund transferred to general reserve account

Sinking fund account debit
General reserve account credit


Accounting Treatment of Provision for Income Tax
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

Now In Case of Company or Corporate
I am giving you full detail of accounting treatment , if you have to do this type of work in any company .

Ist Step
Understanding the meaning of Company . I have already read on it see .
2nd Step
Understanding the meaning of provision of Income tax

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 have to pay tax in advance .
So without actual earning we starts to estimate earning .
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
Profit and loss account Debit
Provision for income tax account Credit
After provision or estimated income tax , company submit his advance income tax return to income tax department ,
then pass the following entry
Advance Income tax account debit
Bank Account credit
After one year when income tax department calculate the real income tax by providing the real income position of company in previous year .

•Adjustment of actual income tax with provision
Actual income tax will adjust with provision of income tax by passing following adjustment entry
Provision for income tax account Debit
Income tax Account ( Actual after assessment ) credit

•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
At this time two general entries will pass
1st transfer advance tax and tds to income tax account
Income tax account debit
Advance tax account Credit
Tds account Credit
2nd journal entry will pass for return the amount
Bank account debit
Income tax account credit
If advance and tds is less than actual tax , then income tax department demand more tax from you , and you will pay by following journal entry
1st transfer advance tax and tds to income tax account
Income tax account debit
Advance tax account Credit
Tds account Credit
2nd journal entry will pass for return the amount


Recent Trends in published accounts
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 popular and be successful for comparison of financial data of company .

•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 in online with Docs spreadsheet.



 

cost accounting + management accounting

Cost Accounting Part-I
At what rate will we calculate closing stock ?
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 stock but I am giving you solution of this problem very simply
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.

Introduction of Inventory Management
 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

I) What is total amount and quantity of goods purchased and sold of different kind .

II) What is value and quantity of total closing stock


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 that statement is called Quotation .
We can divide terms and condition of quotation in following way
•Taxes

•Prices , releases and set off

•Delivery

•Quantities

•Term and method of payment

•Contingencies and force majeure

•Legal compliance

•Warranty conditions

•Patent conditions

•Termination and cancellation

•Inspection , size and Tolerance

•Release of Information

Delivery Note and Invoice Delivery note is issued when goods physically delivered by seller to buyer. Its other name is delivery challan. But Invoice is just description of credit sale .
Accountant can prepare both Invoice -cum - Delivery note at the time of delivery.
There for to complete the sale transaction , the seller
•Delivers goods against order or without order (where order does not exist)
•Prepares delivery note or sales invoice ( Bill-cum- delivery note )
•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 , there is two method of making the voucher of this record .
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 return in debit note.
Steps of voucher entry in tally 9
1st Step
Yes the feature of debit and credit note
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 of making the voucher of this record .
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 Sale return in Credit note. Steps of voucher entry in tally 9
1st Step
Yes the feature of debit and credit note
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
Cost Accounting Part-II
Definition of Labour Cost and main reasons of increasing labour cost
Labour is very important part of production . Its cost is very important in total cost of production . So we should know what is meaning of labour cost .
Definition
Labour cost means all amount which direct or indirect is given to labourer or employee for his work for production .
In labour cost we include two type cost relating to labour
Ist type - Monetary cost of labour
In monetary cost of labour includes

1.basic wages/salary of employee
2.dearness allowance
3.provident fund
4.Employee state Insurance ( ESI)
5.Employee's share in profit of business
6.pension of employee
7.Gratuity and other monetary benefits
2nd Type - Non monetary labour cost
1.Free food facility to labourers
2.Subsidised housing facility
3.free educational facility to employee's children
Main Reasons of Increasing labour cost
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
•Increasing labour turnover
•Increasing idle time
•forgery names in wage sheet

Affect of Business Activities on Stock Calculation
 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 value of stock . But there is no change the value of stock.

6th Affect

There are different method of calculating of stock can affect the value of stock . Calculating the value of stock with FIFO will differ the calculated stock with LIFO method .

Management Accounting Part-I
Cash Flow Statement
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 goods . So different can be said as net flow of operating activities .
(ii) Investing activities
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 .
(iii) Financial 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 accounting ? What are its main advantages and disadvantages ?
Ans : Definition of inflation
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 money is changed , our balance sheet ‘s figure unit also changed .
Method of price level /Inflation accounting :-
1.Current purchasing power accounting
According to current purchasing power method , we calculate current cost with following method
I Take current price index
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
=40000x 200/180 =80000
B/S
Machine 80000
2. current cost accounting
In the current cost accounting following point must take in mind :-
1 value of fixed asset
Will be take on current cost
Not historical cost basis
2. stock will be taken on market cost basis
3. Transfer of difference between historical cost and current cost of asset to revaluation reserve account
4. Calculate current operating profit
3. Replacement cost accounting method
This method is just improvement of current purchasing price method .In replacement cost accounting , we calculate current value basis of respective asset price index
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
Current value of machinery =300000x 300/100
Current value of furniture =200000x400/200
1. Current value accounting method
2. In current value accounting method , we take all asset of business in balance sheet on their current value




Definition of current ratio
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
current ratio = current assets /current liabilities

Importance of Calculating Average Collection period and Average Payment period  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 at what period he pays his creditors .

•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.
Lets start for calculating these two ratios

1.Average Collection Period
12 months or 365 days
= __________________
Debtors Turnover ratio
Because it is based on debtors turnover ratio . So we should also know debtor turnover ratio
Net Credit Sale
= _______________
Average Debtors amount
Average debtors amount is equal to sum of opening and closing debtors and after divide 2 , we can calculate the average debtors amount.

2. Average Payment Period
12 months or 365 days
= __________________
Creditors Turnover ratio
Because it is based on Creditors turnover ratio . So we should also know Creditors turnover ratio
Net credit Purchase
= _______________
Average Creditors amount
Average Creditors amount is equal to sum of opening and closing Creditors and after divide 2 , we can calculate the average Creditors amount.

What are Profitability Ratios 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 do in the improve actions of company.
There following main profitability ratios which is calculated in any company type of business.

1.Gross profitability ratio = Gross profit / Net Sale X 100
2.Operating Ratio = Operating Cost / Net Sale X 100
3.Operating Profit ratio = Operating Profit / Net Sale X 100
4.Net Profit ratio = Net profit / Net Sale X 100
5.Rate on Investment = Net profit before interest and tax / Capital Employed X 100
6.Earning Per Share (EPS)
Net profit after interest , tax and pref. dividend
= ____________________________________ X 100
Numbers of equity shares
7. Dividend Per Share (DPS ) Price Earning Ratio
Dividend on equity shares
= ____________________________________ X 100
Numbers of equity shares
8. Price Earning Ratio = current market price of share / earning per share
Management Accounting Part-II
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 .
So you should know about responsibility accounting .
Responsibility accounting is system of control where responsibility is a signed of control on cost . The proper
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."
Types of responsibility center
1. Cost center
The cost center relates to that segment in which the managers are responsible for incurring the cost. But there have no
responsibility of revenue. It is also known as expenses center.
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 for proper utilisation
of assets .
Steps of responsibility accounting
1.The organisation should be divide
2.Making of Responsibility Center
3.Making of targets or set the targets in different centers
4.Count actual performance
5. Analysis of performance
5.Timely improved action.

Definition of working Capital and benefits of its analysis 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 management accounting will gives good result.

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 calculate three leverage
1st leverage – Operating Leverage
Operational leverage is calculate by following formula
Operational leverage =
% change in Earning before interest and tax
____________________________________
% Change in 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.
2nd leverage - Financial Leverage
Financial leverage can be calculate with following formula
% 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’ funds or maximize the
earning per share.
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 objectives of their firm.
3rd leverage – Combined leverage
The combined leverage measures the effect of a % change in sales on % change in Earning per share.
Combined leverage = operating leverage X financial leverage
Or
Combined leverage=
% change in E.B.I.T. % change in E.P.S.
________________ X ___________________
% change in sales % change in E.B.I.T.
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.

Comparative financial statement This is main tool of financial analysis. This type of analysis is useful when the accounting data of two periods is
given. Generally two statements are prepared
i) Comparative balance sheet
ii) Comparative income statement
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.
i) Comparative balance sheet:-
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
decrease ( in absolute figure)
3rd Step
Make the % of increasing or decreasing ( Previous year as base year)
4th step
Interpretation (Comments)
a) Long term financial position
b) Working capital position
c) profitability position
d) Overall financial position
ii) Comparative Income Statements
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 comparative income statement is to be
prepared in following form.
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 question can
be asked in CA , ICWA , MCA ,MCOM and MBA exams
The following is the abstract of balance sheet of Software securities ltd for the year 2005 and 2006
Liabities
Provision for depreciation 2005 –Rs. 108000 and 2006 –RS. 396000
Retained earning 244800 370800
9% debenture 270000 198000
Account payable 72000 41400
Expense payable 0 18000
Assets
Land 2005 - Rs. 126000 and 2006 - Rs. 81000
building 360000 360000
Accumulated depreciation
on building 19800 37800
Equipment 122400 347400
Accumulated depreciation on
equipement 18000 50400
stock in hand 10800 97200
Account receivable 36000 122400
cash in hand 66600 97200
Preliminary expenses 10800 7200
Question gives you also income statememtn of software securities ltd
Sales 1602000
less cost of sale 837000
less operating exp. 397800
less interest exp. 21600
loss on sale of equipments 3600
126000
-------------------------
Net income before tax 342000
provision of tax 117000
----------------------
Net Income after tax 225000
__________________________________________
Additional information
1. Operating expenses include depreciation of rs. 59400 and charges from preliminary expenses of rs. 3600
2. Land was sold at its book value
3. cash dividend paid for the year 2006 amounted to rs. 27000 and fully paid bonus shares were given in the ratio of 2
shares for every 3shares held.
4. Interest expenses was paid in cash.
5. Equipment with a cost of rs .298800 was purchased for cash .Equipment with a cost of rs . 73800 ( book value rs.
64800) was sold for rs. 61200
6. Debenture for rs. 18000 were redeemed for cash and for rs.54000 were redeemed by converting into equity shares at
par value.
7.Equity shares of rs. 162000 were issued for cash at par.
8. Income tax paid during the year amounted to rs. 117000
Prepare cash flow statement with
direct method
indirect method
Cash flow statement with direct method
__________________________________________________________
Particularv Amount Amount
--------------------------------------------------------------------------------------------------
A- catagory
Cash flow from operating
activity
Inflow of cash
Cash sale & amount from debtors
calculation
= sale + opening bal. of debtors -
closing balance of debtors
= 1602000+36000-122400= (+) 1515600
Any other operating income (+) nil
Less
Cash outflow
1. Cash purchase and amount paid to creditors
Calculation
= Cost of goods sold +opening creditors
-closing creditors =
= 837000+72000-41400= (-) 867600
2. Cash operating Expenses
Operating expenses as per profit and
Loss account -depreciation - preliminary exp.
- Outstanding expense closing
= 397800 - 59400 -3600 -18000 = (-) 316800
Out flow of stock
+ opening stock (-) 86400
-closing stock =10800-97200
____________________________________________
244800
Less income tax paid (-) 117000
__________________________________________
127800 127800
________________________________________
B- Category
Cash flow from investing activity
Inflow of cash
1. sale of equipment (+) 298800
2.sale of land (+)45000
Less Cash outflow
1 cash paid for purchase of equipment (-) 298800
______________________________________________
192600 192600
______________________________________________
C- catagory
Cash flow of financing activity
Cash inflow
1. Issue of new shares (+) 162000
Less Cash outflow
1. Cash paid for redemption of deb. (-) 18000
2. Dividend paid (-) 27000
3. Interest Paid (-) 21600
_______________________________________________
95400 95400
_______________________________________________
Add opening cash balance + 66600
____________________________________________________________
Closing balance of cash 97200
_____________________________________________________________

Cash flow statement with Indirect method
__________________________________________________________
Particularv Amount Amount
--------------------------------------------------------------------------------------------------
A-category
Cash flow of operating activity
1st Point
Net Profit before taxation and extraordinary
Items 342000
2nd Point
Add for non cash and non operating expenses
And losses
1. Depreciation 59400
2. Preliminary expenses written off 3600
3. Discount on issue of shares and deb. w/o nil
4. Goodwill written off nil
5. Patent and trade marks written off nil
6. Interest on borrowing and deb. 3600
7. Loss on sale of fixed assets 21600
______________
430200
3rd Point
Less non –cash and non operating incomes (-) nil
1. Dividend income(For non financial co.)
2. Rental income
3. Profit on sale of fixed asset
_________________
4th point ( Ist point +2nd Point -3rd Point ) 430200

Adjustment of working capital changes
5th point
Add Decrease in current assets and increase in
Current liabilities (+) nil
1. Decrease in stock
2. Decrease in debtors
3. Decrease in accrued income
4. Decrease in prepaid expenses
5. Increase in creditors
6. Increase in bill payables
7. increase in outstanding expenses (+) 18000
8. Increase in advance incomes
9. Increase in provision for doubtfull debts
____________________
448200
6th Point
Less increase in current assets and decrease in (-)
Current liabilities
1. Increase in stock 86400
2. Increase in debtors 86400
3. increase in accrued incomes nil
4. increase in prepaid expenses nil
5. decrease in creditors 30600
6. Decrease in bill payables nil
7. decrease in outstanding expenses nil
8. decrease in advance incomes nil
9. Decrease in provision for d/d nil

________________________________________________________
244800
Less income tax paid (-) 117000
________________________________________________________
127800 127800
_____________________________________________________
B- Category
Cash flow from investing activity
Inflow of cash
1. sale of equipment (+) 298800
2.sale of land (+)45000
Less Cash outflow
1 cash paid for purchase of equipment (-) 298800
______________________________________________
192600 192600
______________________________________________
C- catagory
Cash flow of financing activity
Cash inflow
1. Issue of new shares (+) 162000
Less Cash outflow
1. Cash paid for redemption of deb. (-) 18000
2. Dividend paid (-) 27000
3. Interest Paid (-) 21600
_____________________________________________________________________
95400 95400
________________________________________________
Add opening cash balance + 66600
____________________________________________________________________
Closing balance of cash 97200
________________________________________________________________________
Management Accounting Part-III
The indirect method for calculating cash flow statement
Indirect method
Cash flow statement
A-cash flow from operating activity + B- Cash flow from investing activity + C- cash flow from financing activity +
opening balance of cash book = Closing balance of cash book
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 .
Now I am telling about these expenses and losses
1) Depreciation
2) Preliminary expenses written off
3) Discount on issue of shares and deb. w/o
4) Goodwill written off
5) Patent and trade marks written off
6) Interest on borrowing and deb.
7) Loss on sale of fixed assets
One more question you can ask to me
Why non operating expenses are added in net profit?
Ans. Because it is true that these expenses in cash but we deems as cash outflow from financing activity or investing
activity so there is no need to adjust in operation.
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
1) Dividend income (For non financial co.)
2) Rental income
3) Profit on sale of fixed asset
4th point
= Ist point + 2nd point – 3rd 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
3) Decrease in accrued income
4) Decrease in prepaid expenses
5) Increase in creditors
6) Increase in bill payables
7) increase in outstanding expenses
8) Increase in advance income
9) Increase in provision for doubtful debts
6th point
Increase in current assets and decrease in current liabilities must be deducted
1) Increase in stock
2) Increase in debtors
3) increase in accrued incomes
4) increase in prepaid expenses
5) decrease in creditors
6) Decrease in bill payables
7) decrease in outstanding expenses
8) decrease in advance incomes
9) Decrease in provision for d/d
General hint
· Increase in current assets means cash outflow so deduct
· Decrease in current liabilities is also cash outflow so deduct
· Decrease in current assets means cash inflow so add
· Increase in current liabilities is also cash inflow so add
7th point
Total cash flow from operating activity
= 4th point + 5th point – 6th point
8th point
Deduct income tax paid from 7th point
After this you can get net cash flow from operating activity
All other B and C category as same as first method.

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
1.Increase the rate of return
2.Raise of fund or finance through securitisation when other source are not supported .
3.I take one example explaining the third benefit
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 building , he
can pay the debt of building .

Factors to provide Loans:
1st Financial factors
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 rate on
our investment in the form of loan.
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 as security
for getting loan .
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 .
 2nd Non- financial factors
1. Social factors
Through social responsibility accounting, account manager is also check, whether providing of loan at low rate is
benefited for social popularity or not.
2. Political factors
Account manager also check political and tax policies regarding providing of loan.

How to prepare Fund Flow statement
Before preparing of fund flow statement, you must know different accounting terms in fund flow statement.
Academic need to learn the fund flow statement
1. AS – 3 units 1.
Accounting standard 3 units 1 of Institute of Chartered Accountant of India explains preparation and presentation of
statement of changes in financial position or fund flow statement
2. UGC – NET – Commerce
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.
3. Graduate / Post Graduate Classes
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.
4. Helpful in Practical business environment
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?
2.What happened with net profit, where did it go?
3.What did Company do with the fund received from selling of shares and debentures?
What are main sources of company to repay his debts?
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 called
working capital and working capital’s other name is Fund.
Fund = Working capital = Current assets – Current liability
Definition of Flow of Fund
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.

Definition of fund flow statement
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 fund between two dates of balance sheet.
Generally, it is prepare after getting two year balance sheet.
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.
Steps for making Fund flow statement
First Step
Making of statement of Changes of Working Capital
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 changes working capital is very easy
and simple.
We take two balance sheets, one is current year balance sheet and other is previous year balance sheet. Then we
separate current assets and current liabilities.
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, working
capital will change in same direction.
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.
Statement or schedule of changes in working capital
----------------------------------------------------------------------------------------
Particular--------------- ? previous year ? Current year ? Effect on working capital
-----------------------------------------------------------------------------------------
-----------------------------------------------------------? Increase ? Decrease
----------------------------------------------------------------------------------------
Current Assets
Þ Cash in hand
Þ Bills receivable
Þ Sundry debtors
Þ Temporary investments
Þ Stocks / inventories
Þ Prepaid expenses
Þ Accrued incomes
--------------------------------------------------------------------------------------------
Total current assets----------- ?xxxx ? xxxxx?
----------------------------------------------------------------------- -----------------
Current liabilities
Þ Bills payables
Þ Sundry creditors
Þ Bank overdraft
Þ Short term advances
Þ Dividends payables
Þ Provision for taxation
---------------------------------------------------------------------------------------
Total current Liabilities ----------?xxxx ?xxxx ?
------------------------------------------------------------------ -------------------
Working capital
CA- CL
---------------------------------------------------------------------------
Net increase or decrease in working capital =
Increase in working capital – Decrease in working capital
2nd Step
Statement showing the fund from operation
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.

Statement of fund from operations
Closing balance of profit and loss account or retained earning as
Given in the Balance sheet
Add non –fund and non operating items which have been already
Debited to profit and loss account
1. depreciation
2. amortization of fictitious and intangible assets
Þ goodwill
Þ patents
Þ trade marks
Þ preliminary expenses
Þ discount on issue of shares
3. Appropriation of retained earning such as
Þ Transfer to general reserve
Þ Dividend equalization fund
Þ Transfer to sinking fund
Þ Contingency reserve etc.
4. Loss on sale of any non current or fixed assets such as
Þ Loss on sale of land and building
Þ Loss on sale of machinery
Þ Loss on sale of furniture
Þ Loss on sale of long term investments
5. Dividends including
Þ Interim dividend
Þ Proposed dividend
(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account
-----------------------------------------------------------------------------------
Total ( A)-------------------------------------------------------> ? XXXXX ?
-------------------------------------------------------------------------------------
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
Þ Profit on sale of land and building
Þ Profit on sale of plant and machinery
Þ Profit on sale of long term investment etc.
2. Appreciation in the value of fixed assets such as increase in the value of land if it has been credited to profit
and loss account
3. Dividends received
4. excess provision retransferred to profit and loss account or written back .
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
-------------------------------------------------------------------------------------
Total ( B)--------------------------------------------------------------> ? XXXXX ?
----------------------------------------------------------------------------------------
Funds received from operation or business activities = total ( A) – Total ( B)
You can make also above statement in t shape adjusted profit and loss account form .
3rd Step
Fund flow statement
--------------------------------------------------------------------------------------
-------------------------------------------------------------------> ? Amount ?
-------------------------------------------------------------------------------------
A ) Source of funds

1.fund from operation ( balance of second step )
2.issue of shares capital
3.issue of debentures
4.raising of long term loans
5.receipts from partly paid shares , called up
6.amount received from sales of non current or fixed assets
7.non trading receipts such as dividend received
8.sale of investments ( Long term )
9.decrease in working capital as per schedule of changes in working capital
----------------------------------------------------------------------------------
total -------------------------------------------------------------> ? XXXXX ?
---------------------------------------------------------------------------------
Applications or uses of funds
1. Funds lost in operations ( Balance negative in second step )
2. redemption of preference share capital
3. redemption of debentures
4. repayment of long term loans
5. purchase of long term loans
6. purchase of long term investments
7. non trading payments
8. payment of tax
9. payment of dividends
10. increase in working capital ( As per positive balance of ist step )
-------------------------------------------------------------------------------------
total --------------------------------------------------------> ? XXXXX ?
--------------------------------------------------------------------------------------

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