ACCOUNTS NOTES

MEANING & SCOPE OF ACCOUNTING:

The committee on terminology set up by the American Institute of Certified Public Accountants
formulated the following definition of accounting in 1961:
“Accounting is the art of recording, classifying and summarizing in a significant manner and in
terms of money, transactions and events which are, in part at least, of a financial character, and
interpreting the results thereof.”

RECORDING All business transactions are evidenced by some docume nts like sale bill,
purchase bill, voucher, salary slips, etc. and are recorded in the books of
accounts from such documentary evidences generated in normal course of
business. Recording is done in Journal which is further divided in subsidiary
books according to nature and size of the business. The proce ss
of recording transactions and events in Journal is known as Journalizing.
CLASSIFYING This stage deals with classification of similar transactions or entries unde r
one group or account so as to put information in compact and usable form.
SUMMARISING This process leads to the preparation of following financial statements:
a) Trial Balance
b) Profit and Loss A/c
c) Balance Sheet
d) Cash Flow statement.
ANALYSING It means methodical classification of the data given in the financial
statements and it forms the basis for interpretation. It is the establishment
of relationship between the items of the Profit & Loss A/c and Balance
sheet. The technique of Ratio Analysis is often used for this purpose.
INTERPRETATION It is concerned with explaining the meaning and significance of the
relationships as established by the analysis of the accounting data. This
financial data is interpreted in a manner that enables various e nd use rs to
understand the financial condition and profitability of the business
concern. The interpretation helps various stakeholders to take their
respective decision rationally.
COMMUNICATING It is concerned with the transmission of summarized, analysed and
interpreted information to the end-users to enable the m to make rational
decisions. This is done through preparation and distribution of accounting
reports, which include besides the usual profit and loss account and the
balance sheet, additional information in the form of accounting ratios,
graphs, diagrams, fund flow statements etc.

SYSTEMS OF ACCOUNTING:
ACCRUAL BASIS The method of recording transaction by which revenues, cost, assets and
OF liabilities are reflected in the accounts in the period in which they accrue. This
ACCOUNTING: basis is also referred to as “Mercantile basis of accounting”.

(BASIS OF The purpose of accrual basis accounting is to relate the revenue earned to cost
ACCOUNTING incurred so that reported net income measures an enterprise performance
BENEFITS during a period instead of merely listing its cash receipts and payments. Accrual
RECEVIED OR basis of accounting recognizes assets, liabilities or components of revenue and
GIVEN) expenses received or paid in cash in past and expected to be received or paid
in cash in future.

The following are essential features of accrual system:

 Revenue is recognised as it is earned irrespective of whether cash is
received or not;

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  Cost are matched against revenue on the basis of relevant time pe riod to
determine periodic income and
 Costs which are not charged to income are carried forward and are ke pt
under continuous review. Any cost that appears to have lost its utility or
its power to generate future revenue is written off as a loss.

CASH BASIS OF The method of recording transaction by which revenues, costs and Assets
ACCOUNTING and liabilities are reflected in the accounts in the period in which actual
receipts or actual payments are made.
(BASIS OF
ACCOUNTING Cash system is suitable in the following situations:
IS CASH  Where the organization is very small;
RECEIVED OR  Where credit transactions are almost negligible and collections are
PAID) uncertain e.g. accounting in case of professionals like doctors, lawyers,
CAs, CSs. But while recording expenses they take into account the
outstanding expenses also. In such a case, the financial statement prepared
by them for determination of their income is termed as Re ceipt and
expenditure account.

ELEMENTS OF FINANCIAL STATEMENTS:

ASSETS An Asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.
LIABILITY A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
EQUITY Equity is the residual interest in the assets of the entity after de ducting all its
liabilities.
INCOME Income is increases in economic benefits during the accounting pe riod in the
form of inflows or enhancements of assets or decreases of liabilities that re sult
in increase in equity, other than those relating to contributions from equity
participants.
EXPENSES Expenses are decreases in economic benefits during the accounting pe riod in
the form of outflows or depletion of assets or incurrences of liabilities that result
in decrease in equity, other than those relating to distribution to equity
participants.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS:

Certain fundamental accounting assumptions underlie the preparation and presentation of
financial statements. They are usually not specifically stated because their acceptance and use are
assumed. Disclosure is necessary if they are not followed.

1. GOING CONCERN: The enterprise is normally viewed as a going concern, i.e. as continuing in
operation for the foreseeable future. It is assumed that the enterprise has neither the intention
nor the necessity of liquidation or of curtailing materially the scale of operations.

2. CONSISTENCY: It is assumed that accounting policies are consistent from one period to
another.

3. ACCRUAL: Revenue and cost are accrued that is recognised as they are e arned or incurred (and
not as money is received or paid) and recorded in the financial statement of the period to which
they relate.

BOOK KEEPING:

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 Book-keeping is an activity concerned with the recording of financial data relating to business
operation in a significant and orderly manner. It covers procedural aspects of accounting
work and embraces record keeping function.

 Book Keeping is done for the end product i.e. “Financial Statements” which includes Profit &
Loss A/c, Balance Sheet including schedules and notes to account.

 Book Keeping requires suitable classification of transactions and events which is determined
by the requirement relating to financial statements.

 A book-keeper may be responsible for keeping all the records of a business or only of a minor
segment, such as position of the customers’ accounts in a departmental store. A substant ial
portion of the book-keeper’s work is of a clerical nature and is increasingly being accomplished
through the use of mechanical and electronic devices. Accounting is based on a careful and
efficient book-keeping system.

 The essential idea behind maintaining book-keeping records is to show correct position
regarding each head of income and expenditure.

 Maintenance of books of accounts and the preparation of financial statements of a company

are guided by the Companies Act, 2013, of a co-operative society by Co-ope rative Societies
Act, of banks and insurance companies by special Acts governing these institutions and so
on. However, for sole-proprietorship and partnership business, there is no specific legislation
regarding maintenance of books of accounts and preparation of financial statements. The
Income-tax Act, 1961 requires maintenance of books of accounts in some cases.

 Companies Act, 2013 mandates all companies to keep & maintain the books of accounts.

OBJECTIVES OF BOOK KEEPING:

1. Systematic recording of Transactions – Basic objective of accounting is to systematically
record the financial aspects of business transactions i.e. book-keeping.

2. Ascertainment of results of above recorded Transactions– Accountant prepares profit and

loss account to know the results of business operations for a particular period of time.

3. Ascertainment of the financial position of the business – Businessman is not only interested in
knowing the results of the business in terms of profits or loss for a particular pe riod but is
also anxious to know that what he owes (liability) to the outsiders and what he owns (assets) on
a certain date.

4. Providing information to the users for rational Decision-Making– Accounting as a ‘language of

business’ communicates the financial results of an enterprise to various stakeholders by means
of financial statements. Accounting aims to meet the information needs of the decision-makers
and helps them in rational decision-making.

5. To know the Solvency position: By preparing the balance sheet, management not only reveals
what is owned and owed by the enterprise, but also it gives the information regarding concern’s
ability to meet its liabilities in the short run (liquidity position) and also in the long run as and
when they fall due.
BOOK KEEPING VS ACCOUNTING:

Book Keeping Accounting

It is a process concerned with the It is a process concerned with the summarizing of
recording of transactions. the recorded transactions.
It constitutes the base of accounting It is considered as the language of the business.

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Financial statements do not form part of Financial statements are prepared in this proce ss
this process on the basis of the book keeping records.
Managerial decisions cannot be taken on Management takes decisions on the basis of these
the basis of these records. records.
It has several sub fields of accounting like cost
There is no sub field of book keeping accounting, financial accounting, management
accounting, etc.
Financial position of the business cannot
Financial position of the business is asce rtained
be ascertained through book keeping
records. on the basis of accounting reports.

SUB FIELDS OF ACCOUNTING:

FINANCIAL  It covers the preparation and interpretation of financial statements and
ACCOUNTING communication to the users of accounts.
 It is historical in nature as it records transactions which had alre ady
been occurred.
 The final step of financial accounting is the preparation of Profit and
Loss Account and the Balance Sheet.
 It primarily helps in determination of the net result for an accounting
period and the financial position as on a given date.

MANAGEMENT  It is concerned with internal reporting to the managers of a busine ss

ACCOUNTING unit.
 To discharge the functions of stewardship, planning, control and decision-
making, the management needs variety of information.
 The different ways of grouping information and preparing reports as
desired by managers for discharging their functions are referred to as
management accounting.

COST  The terminology of Cost Accounting published by the Institute of Cost

ACCOUNTING and Management Accountants of England defines cost accounting as:
“the process of accounting for cost which begins with the recording of
income and expenditure or the bases on which they are calculated and ends
with the preparation of periodical statements and reports for ascertaining
and controlling costs.”

SOCIAL  The demand for social responsibility accounting stems from increasing
RESPONSIBILITY social awareness about the undesirable by-products of economic
ACCOUNTING activities.
 As already discussed earlier, social responsibility accounting is concerned
with accounting for social costs incurred by the e nterprise and social
benefits created.

HUMAN  Human resource accounting is an attempt to identify, quantify and

RESOURCE report investments made in human resources of an organization that
ACCOUNTING are not presently accounted for under conventional accounting practice.

USERS OF ACCOUNTING INFORMATION:

INVESTORS They provide risk capital to the business. They need information to asse ss
whether to buy, hold or sell their investment. Also they are interested to
know the ability of the business to survive, prosper and to pay dividend.

EMPLOYEES Growth of the employees is directly related to the growth of the organization

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 and therefore, they are interested to know the stability, continuity and
growth of the enterprise and its ability to provide remuneration,
retirement and other benefits and to enhance employment opportunities.

LENDERS They are interested to know whether their loan-principal and inte rest w ill
be paid when due.

SUPPLIERSAND They are also interested to know the ability of the enterprise to pay their
CREDITORS dues that helps them to decide the credit policy for the re levant concern,
rates to be charged and so on.

CUSTOMERS Customers are also concerned with the stability and profitability of the
enterprise because their functioning is more or less dependent in a vertical
chain, suppose, a company produces some chemicals used by pharmaceutical
companies. It supplies chemicals on three month’s credit. If all of a sudden it
faces some trouble and is unable to supply the che mical, the customers will
also be in trouble.

GOVERNMENT They regulate the functioning of business enterprises for public good,
AND THEIR allocate scarce resources among competing enterprises, control prices,
AGENCIES charge excise duties and taxes, and so they have continued interest in the
business enterprise.

PUBLIC The public at large is interested in the functioning of the enterprise because
it may make a substantial contribution to the local economy in many ways
including the number of people employed and their patronage to local
suppliers.

DOUBLE ENTRY SYSTEM

Double entry system of book-keeping has emerged in the process of evolution of various
accounting techniques. It is the only scientific system of accounting. According to it, every
transaction has two-fold aspects–debit and credit and both the aspects are to be re corded in
the books of accounts. For example, if a business acquires something then e ither it must have
been given by someone or it must have been acquired by giving up something. On purchase of
furniture either the cash balance will be reduced or a liability to the supplier will arise. This has
been made clear already; the Double Entry System is so named since it records both the aspects.
We may define the Double Entry System as the system which recognizes and re cords both the
aspects of transactions. This system has proved to be systematic and has be e n found of gre at
use for recording the financial affairs for all institutions requiring use of money.
It was in 1494 that Luca Pacioli, the Italian mathematician, first published his compre he nsive
treatise on the principles of Double Entry System.
ADVANTAGES OF DOUBLE ENTRY SYSTEM
This system affords the under mentioned advantages:
(i) By the use of this system the accuracy of the accounting work can be established, through the
device of the trial balance.
(ii) The profit earned or loss suffered during a period can be ascertained together with details.
(iii) The financial position of the firm or the institution concerned can be ascertained at the e nd
of each period, through preparation of the balance sheet.
(iv) The system permits accounts to be kept in as much details as necessary and, therefore
affords significant information for the purposes of control etc.
(v) Result of one year may be compared with those of previous years and reasons for the change
may be ascertained.
It is because of these advantages that the system has been used extensively in all countries.

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TRANSACTIONS
In the system of book-keeping, students can notice that transactions are recorded in the books
of accounts. A transaction is a type of event, which is generally external in nature and can be
determined in terms of money. In an accounting period, every business has huge number of
transactions which are analysed in financial terms and then recorded individually, followed by
classification and summarization process, to know their impact on the financial statements.
A transaction is a two way process in which value is transferred from one party to another. In it
either a party receives a value in terms of goods etc. and passes the value in te rms of mone y or
vice versa. Therefore, one can easily make out that in a transaction, a party re ceives as we ll as
passes the value to other party. For recording transaction it is very important that they are
supported by a substantial document like purchasing invoices, bills, pay-slips, cash-memos,
passbook etc.

Transactions analysed in terms of money and supported by proper docume nts are re corded in
the books of accounts under double entry system. To analyse the dual aspect of each transaction
two approaches can be followed:
(1) American Approach.
(2) Traditional Approach.

AMERICAN APPROACH OR MODERN APPRAOCH:

According to this approached the rules of debit and credit transactions are divided into the
following five categories:
(a) Transactions relating to owner, e.g., Capital – these are personal accounts.
(b) Transactions relating to other liabilities, e.g., suppliers of goods – these are mostly pe rsonal
accounts.
(c) Transactions relating to assets, e.g., land, building, cash, bank, stock-in-trade, and bills
receivable – these are basically real accounts.
(d) Transactions relating to expenses, e.g., rent, salary, commission, wages, and cartage – The se
are nominal accounts.
(e) Transactions relating to revenues, e.g., interest received, divide nd re ceived, sale of goods –
these are nominal accounts.

TRADITIONAL APPROACH OR BRITISH APPROACH:

Under traditional approach of recording transactions one should first understand the term de bit
and credit and their rules.
Transactions in the journal are recorded on the basis of the rules of debit and cre dit only. For
the purpose of recording, these transactions are classified in three groups:

(i) Personal transactions.

(ii) Transactions related to assets and properties.
(iii) Transactions related to expenses, losses, income and gains.

CLASSIFICATION OF ACCOUNTS
(i) Personal Accounts: Personal accounts relate to persons, debtors or creditors. Example would
be; the account of Ram & Co., a credit customer or the account of Jhave ri & Co., a supplie r of
goods. The capital account is the account of the proprietor and, therefore, it is also personal but
adjustment on account of profits and losses are made in it. This account is further classified into
three categories:
(a) Natural personal accounts: It relates to transactions of human beings like Ram, Rita, etc.

(b) Artificial (legal) personal account: For business purpose, business entities are treated to have
separate entity. They are recognised as persons in the eye of law for dealing with other pe rsons. For
example: Government, Companies (private or limited), Clubs, Co-operative societies etc.

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(c) Representative personal accounts: These are not in the name of any person or organization but
are represented as personal accounts. For example: outstanding liability account or pre paid
account, capital account, drawings account.

(ii) Impersonal Accounts: Accounts which are not personal such as machinery account, cash
account, rent account etc. These can be further sub-divided as follows:

(a) Real Accounts: Accounts which relate to assets of the firm but not debt. For example,
accounts regarding land, building, investment, fixed deposits etc., are real accounts. Cash in
hand and Cash at the bank accounts are also real.

(b) Nominal Accounts: Accounts which relate to expenses, losses, gains, revenue, etc. like salary
account, interest paid account, and commission received account. The net result of all the nominal
accounts is reflected as profit or loss which is transferred to the capital account. Nominal accounts
are, therefore, temporary.

Classify the below mentioned accounts:

PROFIT & LOSS ACCOUNT

Particular Type Particulars Type
Opening Stock Real Sales Nominal
Purchases Nominal Closing Stock Real
Direct Expenses Nominal
Gross Profit
Salary Nominal Gross Profit
Rent Nominal Discount Received Nominal
Legal Fees Nominal Interest Received Nominal
Travelling Nominal Commission Received Nominal
Printing & Stationery Nominal Rent Received Nominal
Electricity Expense Nominal Dividend Received Nominal
Telephone Expense Nominal
Office Expense Nominal
Interest Paid Nominal
Repairs & Maintenance Nominal
Insurance Expense Nominal
Advertisement Expense Nominal
Discount Allowed Nominal
Accounting Charges Nominal
Bad Debts Nominal
Depreciation Nominal
Net Profit

Liabilities TypeBALANCE SHEET Assets Type

Non-Current Liabilities Non-Current Assets
Share Capital Personal Goodwill & Patent Real
Reserves & Surplus Personal Plant and Machinery Real
Bank Loan Personal Land and Building Real
Debentures Personal Furniture and Fixtures Real
Public Deposits Personal Vehicles Real
Unsecured Loans Personal Long term investments Real
Current Liabilities Current Assets
Sundry Creditors Personal Sundry Debtors Personal
Dividend Payable Personal Loans and Advances Personal
Bill Payable Personal Cash and Bank balance Real
Bank Overdraft Personal Bill Receivable Real
Outstanding Expenses Personal Stock Real
Prepaid Expenses Personal

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GOLDEN RULES OF ACCOUNTING:
All the above classified accounts have two rules each, one related to De bit and one re lated to
Credit for recording the transactions which are termed as golden rules of accounting, as
transactions are recorded on the basis of double entry system.

1. Personal account is governed by the following two rules:

Debit the receiver; Credit the giver

2. Real account is governed by the following two rules:

Debit what comes in; Credit what goes out

3. Nominal account is governed by the following two rules:

Debit all expenses and losses; Credit all incomes and gains.

JOURNAL
Transactions are first entered in this book to show which accounts should be debited and which
credited. Journal is also called subsidiary book. Recording of transactions in journal is te rmed as
journalizing the entries.

A journal contains the following columns:

i. Date: The date on which the transaction took place.
ii. Particulars: The two aspects (debit and credit) are recorded here.
iii. Ledger Folio (LF): it records the page number in the ledger in which the accounts are
given entry are posted.
iv. Amount (Debit): debit amount is recorded in the Dr. Column
v. Amount (Credit): Credit amount is recorded in Cr. Column

FORMAT OF JOURNAL
Date Particulars L/f Dr. Amount Cr. Amount

Process of Journalizing:
1. Ascertain what accounts are affected in the transaction
2. Ascertain the nature of the account (i.e. Real, Personal & Nominal)
3. Apply the rules of debit and credit to each type of account.
4. Pass the entry.

Points to be taken into consideration while recording a transaction in the Journal:

1. Journal entries can be Simple Entry (i.e. one debit and one credit) or Compound entry ( i.e .
one debit and two or more credits or two or more debits and one credit or two or more debits
and credits). In such cases, it is important to check that the total of both debits and credits
are equal.

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2. If journal entries are recorded in several pages then both the amount column of e ach page
should be totalled and the balance should be written at the end of that page and also that the
same total should be carried forward at the beginning of the next page. However, this total is
only for checking arithmetical accuracy & does not serve any other purpose.

3. When journal entries for two or more transactions are combined, it is called Composite journal
entry.

SUBSIDIARY BOOKS:
In a Business most of the transactions generally relate to receipts and payments of cash, sale of
goods and their purchase. It is convenient to keep a separate register for each such class of
transactions one for receipts and payments of cash, one for purchase of goods and one for sale of
goods. A register of this type is called a book of original entry or of prime entry. For transactions
recorded in such books there will be no journal entry. The system by which transactions of a class
are first recorded in the book, specially meant for it and on the basis of which ledger accounts
are then prepared is known as the Practical System of Book keeping or even the English System.
It should be noted that in this system, there is no departure from the rules of the double entry
system.

TYPES OF SUBSIDIARY BOOKS:

PURCHASE BOOK It records the credit purchase of goods traded in.

Example: stationery dealer purchased stationery in credit from Ram.

SALES DAY BOOK It records the credit sale of goods dealt in (traded in)
Example: Furniture dealer sold furniture on credit.

PURCHASE It records the goods or material returned to the supplie rs that have be e n
RETURN BOOK purchased on credit. When goods are returned to supplie r a de bit note is
issued to him indicating that his account has been debited with the
amount mentioned in the debit note.
SALES RETURN It records the goods or material returned by the purchase r that had be e n
BOOK sold on credit. When goods are returned by a customer a credit note is sent
to him mentioning that his account has been credited with the value of
goods returned.
BILLS It records the bills of exchange or promissory note received by a busine ss
RECEIVABLE entity.
BOOK
BILLS PAYABLE It records the acceptances given to the creditor in the form of bills or
BOOK promissory notes.

CASH BOOK It is used to record all cash transactions of the business.

Example: Sale of goods in cash, Sale of Fixed Assets in cash, Purchase of
goods in cash, Purchase of Fixed Asset in cash, Payment of Expenses, Receipt
from Debtors, Payment to creditors, etc.

JOURNAL PROPER All entries which cannot be recorded in the above subsidiary books are
(BALANCING recorded in this book.
JOURNAL)
Example: opening entries, Closing entries, rectification entries,
Depreciation, Credit purchase of Fixed Assets, Credit Sale of Fixed Asse ts,
etc.

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JOURNAL PROPER:
OPENING When books are started for the New Year, the opening balance of assets and
ENTRIES liabilities are journalized.

CLOSING At the end of the year the profit and loss account has to be pre pare d. For
ENTRIES this purpose, the nominal accounts are transferred to this account. This is
done through journal entries called closing entries.

RECTIFICATION If an error has been committed, it is rectified through a journal entry.

ENTRIES
TRANSFER If some amount is to be transferred from one account to another, the
ENTRIES transfer will be made through a journal entry.

ADJUSTING At the end of the year the amount of expenses or income may have to be
ENTRIES adjusted for amounts received in advance or for amounts not yet se ttled in
cash. Such an adjustment is also made through journal e ntries. Usually, the
entries pertain to the following:
(a) Outstanding expenses, i.e., expenses incurred but not yet paid;
(b) Prepared expenses, i.e., expenses paid in advance for some period in the
future;
(c) Interest on capital, i.e., the interest which the proprietor thinks proper to
allow on his investment; and
(d) Depreciation, i.e., fall in the value of the assets used on account of we ar
and tear. For all these, journal entries are necessary.

ENTRIES ON If someone who accepted a promissory note (or bill) and is not able to pay in
DISHONOUR OF on the due date, a journal entry will be necessary to record the non-
BILLS payment or dishonour.
MISCELLANEOUS The following entries will also require journalizing:
ENTRIES (a) Credit purchase of things other than goods dealt in or materials required
for production of goods e.g. credit purchase of furniture or machine ry will
be journalized.
(b) An allowance to be given to the customers or a charge to be made to them
after the issue of the invoice.
(c) Receipt of promissory notes or issue to them if separate bill books have not
been maintained.
(d) On an amount becoming irrecoverable, say, because, of the customer
becoming insolvent.
(e) Effects of accidents such as loss of property by fire.
(f) Transfer of net profit to capital account.

CASH BOOK:
CASH BOOK - A Subsidiary Book as well as Principal Book

Cash transactions are straightaway recorded in the Cash Book and on the basis of such a record,
ledger accounts are prepared. Therefore, the Cash Book is a subsidiary book. But the Cash Book
itself serves as the cash account and the bank account; the balances are e ntered in the trial
balance directly. The Cash Book, therefore, is part of the ledger also. Hence, it has also to be
treated as the principal book. The Cash Book is thus both a subsidiary book and a principal book.

KINDS OF CASH BOOK:

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 Cash Book

Single Column Two Column Three Column Petty Cash Book

Record cash To record Cash, To record Receipts

Record Cash and payment of
transactions along bank and Discount
Transaction petty cash
with discount Transactions

The main Cash Book may be of the three types:

(i) Simple Cash Book;
(ii) Two-column Cash Book;
(iii) Three-column Cash Book.

In addition to the main Cash Book, firms also generally maintain a petty cash book but that is
purely a subsidiary book.

SIMPLE CASH BOOK:

Date Particulars J/f Amount Date Particulars J/f Amount

Such a cash book appears like an ordinary account, with one amount column on each side . The
left-hand side records receipts of cash and the right hand side the payments. Balancing of the
Cash Book: The cash book is balanced like other accounts. The receipts column is always bigge r
than payments column. The difference is written on the credit side as 'By balance c/d'. The totals
are then entered in the two columns opposite one another and then on the de bi t side thebalance
is written as "To Balance b/d", to show cash balance in hand in the be ginning of ne xt period.

DOUBLE COLUMN CASH BOOK

Date Particulars J/f Cash Bank/Disc Date Particulars J/f Cash Bank/Disc

If along with columns for amounts to record cash receipts and cash payments another column is
added on each side to record the cash discount allowed or the discount received, or a column on
the debit side showing bank receipts and another column on the credit side showing payme nts
through bank. It is a double column cash book.

Cash discount is an allowance which often accompanies cash payments. For example, if a customer
owes ` 500 but is promised that 2% will be deducted if payment is made within a certain period,
the customer can clear his account by paying promptly ` 490. Cash receive d will be ` 490 and `
10 will be the discount for the firm receiving the payment discount is a loss; for the person making
the payment it is a gain. Since cash discount is allowed only if cash is paid, it is convenient to add
a column for discount allowed on the receipt side of the cashbook and a column for discount
received on the payment side of the cash book.

In the cash column on the debit side, actual cash received is entered; the amount of the discount
allowed, if any, to the customer concerned is entered in the discount column. Similarly, actual

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cash paid is entered in the cash column on the payments side and discount received in the discount
column. Also the bank column on the debit side records all receipts through bank and the same
column on the credit side shows payment through bank.

Balancing: It should be noted that the discount columns are not balanced. They are merely
totalled. The total of the discount column on the re ceipts side shows total discount allowed to
customers and is debited to the Discount Account. The total of the column on the payments side
shows total discount received and is credited to the Discount Account. The Cash columns are
balanced, as already shown. The bank columns are also balanced and the balancing figure is
called bank balance. Thus a double column cash book should have two columns on each side
comprising of either cash and discount transaction or cash and bank transactions.

THREE COLUMN CASH BOOK

Date Particulars J/f Cash Bank Disc Date Particulars J/f Cash Bank Disc

A firm normally keeps the bulk of its funds at a bank; money can be deposited and withdrawn at
will if it is current account. Probably payments into and out of the bank are more numerous
than strict cash transactions. There is only a little difference between cash in hand and mone y
at bank. Therefore, it is very convenient if, on each side in the cash book, another column is
added to record cash deposited at bank (on the receipt side of the cash book) and payme nts out of
the bank (on the payment side of the cash book).

Distinction Trade Discount Cash Discount

Meaning It is a reduction granted by a A reduction granted by a supplier from
supplier from the list price (MRP) of the invoice price in consideration of
goods or services on business immediate payment or payment within a
considerations (such as quantity stipulated period of time.
bought, etc.) other than for prompt
payment.

Purpose It is allowed to promote the sale or It is allowed to encourage the prompt

as a trade practice. payment.

Time when It is allowed on purchase of goods It is allowed on immediate payment or

allowed payment within specified period.
Disclosure in It is shown by way of deduction in It is not shown in the invoice.
the invoice the invoice itself.

Ledger Trade discount account is not Cash discount account is opened in the
Account opened in the ledger ledger

Variation It may vary with the quantity It may vary with the period within which
purchased the payment is made.

PETTY CASH BOOK

In a business house a number of small payments, such as for telegrams, taxi fare, cartage, e tc.,
have to be made. If all these payments are recorded in the cash book, it will become unnecessarily
heavy. Also, the main cashier will be overburdened with work. Therefore, it is usual for firms to
appoint a person as 'Petty Cashier' and to entrust the task of making small payments say below `
25, to him. Of course he will be reimbursed for the payments made. Later, on an analysis, the
respective account may be debited.

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IMPREST SYSTEM OF PETTY CASH
It is convenient to entrust a definite sum of money to the petty cashier in the beginning of a period
and to reimburse him for payments made at the end of the period. Thus, he will have again the
fixed amount in the beginning of the new period. Such a system is known as the Imprest system
of petty cash.

The system is very useful especially if an analytical Petty Cash Book is used. The book has one
column to record receipt of cash (which is only from the main cashier) and other columns to record
payments of various types. The total of the various columns show why payments have been made
and then the relevant accounts can be debited.

(i) The amount fixed for petty cash should be sufficient for the likely small payments for a
relatively short period, say for a week or a fortnight.

(ii) The reimbursement should be made only when petty cashier prepares a state ment showing
total payments supported by vouchers, i.e., documentary evidence and should be limited to the
amount of actual disbursements.

(iii) The vouchers should be filed in order.

(iv) No payment should be made without proper authorization. Also, payme nts above a ce rta in
specified limit should be made only by the main cashier

(v) The petty cashier should not be allowed to receive any cash except for reimbursement.
In the petty cash book the extreme left-hand column records receipts of cash. The money column
towards the right hand shows total payments for various purposes; a column is usually provided
for sundries to record infrequent payments. The sundries column is analysed. At the end of the
week or the fortnight the petty cash book is balanced. The method of balancing is the same as for
the simple cash book.

LEDGER ACCOUNTING:
INTRODUCTION:

After recording the transactions in the journal, recorded entries are classified and groupe d into
by preparation of accounts and the book, which contains all set of accounts (viz. pe rsonal, re al
and nominal accounts), is known as Ledger. It is known as principal books of account in which
account-wise balance of each account is determined.

SPECIMEN OF LEDGER ACCOUNTS

A ledger account has two sides-debit (left part of the account) and credit (right part of the
account). Each of the debit and credit side has four columns. (i) Date (ii) Particulars (iii) Journal
folio i.e. page from where the entries are taken for posting and (iv) Amount.

Date Particulars J/f Amount Date Particulars J/f Amount

POSTING:
The process of transferring the debit and credit items from journal to classified accounts in the
ledger is known as posting.

RULES REGARDING POSTING OF ENTRIES IN THE LEDGER

1. Separate account is opened in ledger book for each account and entries from ledger poste d to
respective account accordingly.
2. It is a practice to use words 'To' and 'By' while posting transactions in the le dger. The word
'To' is used in the particular column with the accounts written on the debit side while 'By' is
14 | Page
used with the accounts written in the particular column of the credit side. These 'To' and 'by' do
not have any meanings but are used to represent the account debited and credited.
3. The concerned account debited in the journal should also be debited in the ledger but
reference should be of the respective credit account.

BALANCING AN ACCOUNT
At the end of the each month or year or any particular day it may be necessary to asce rtain the
balance in an account. This is not a too difficult thing to do; suppose a person has bought goods
worth ` 1,000 and has paid only ` 850; he owes ` 150 and that is balance in his account. To
ascertain the balance in any account, what is done is to total the sides and ascertain the difference;
the difference is the balance. If the credit side is bigge r than the de bit side , it is a credit balance.
In the other case it is a debit balance. The credit balance is written on the de bit side as, "To Balance
c/d"; c/d means "carried down". By doing this, two sides will be e qual. The totals are written on
the two sides opposite one another.

Then the credit balance is written on the credit side as "By balance b/d (i.e., brought down)".This
is the opening balance for the new period. The debit balance similarly is written on the cre dit side
as "By Balance c/d", the totals then are written on the two side s as shown above as the n the
debit balance written on the debit side as, "To Balance b/d", as the ope ning balance of the new
period.

It should be noted that nominal accounts are not balanced; the balance in the end are transferred to
the profit and loss account. Only personal and real accounts ultimately show balances. In the
illustration given above, one will have noticed that the capital account, the purchases account,
sales account, the discount account, the rent account and the salary account have not been
balanced. The capital account will have to be adjusted for profit or loss and that is why it has
not been balanced yet.

TRIAL BALANCE:
INTRODUCTION:

Preparation of trial balance is the third phase in the accounting process. After posting the accounts
in the ledger, a statement is prepared to show separately the debit and credit balances. Such a
statement is known as the trial balance. It may also be prepared by listing each and every account
and entering in separate columns the totals of the debit and credit sides. Whichever way it is
prepared, the totals of the two columns should agree. An agreement indicates reasonable accuracy
of the accounting work; if the two sides do not agree, then there is simply an arithmetic error(s).

This follows from the fact that under the Double Entry System, the amount written on the de bit
sides of various accounts is always equal to the amounts entered on the cr e dit sides of othe r
accounts and vice versa. Hence the totals of the debit sides must be e qual to the totals of the
credit sides. Also total of the debit balances will be equal to the total of the credit balances. Once
this agreement is established, there is reasonable confidence that the accounting work is fre e
from clerical errors, though is not proof of cent per cent accuracy, because some errors of principle
and compensating errors may still remain. Generally, to check the arithmetic accuracy of accounts,
trial balance is prepared at monthly intervals. But because double entry system is followed, one
can prepare a trial balance any time. Though a trial balance can be pre pare d any time but it is
preferable to prepare it at the end of the accounting year to ensure the arithmetic accuracy of all
the accounts before the preparation of the financial statements. It may be noted that trial balance
is a statement and not an account.

If Trial Balance does not tally, then it is artificially tallied by opening Suspense Account . Late r
on, errors are rectified and Suspense Accounts get closed automatically.

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OBJECTIVES OF PREPARING THE TRIAL BALANCE:
The preparation of trial balance has the following objectives:
(i) Trial balance enables one to establish whether the posting and othe r accounting proce sses
have been carried out without committing arithmetical errors. In other words, the trial balance
helps to establish arithmetical accuracy of the books.

(ii) Financial statements are normally prepared on the basic of agreed trial balance; othe rwise
the work may be cumbersome. Preparation of financial statements, therefore, is the second
objective.

(iii) The trial balance serves as a summary of what is containe d in the le dger; the le dger may
have to be seen only when details are required in respect of an account.
The form of the trial balance is simple as shown below:

Trial balance of
As on
Sr. Name of Account L/F Debit Credit
No Amount Amount

METHODS OF PREPARATION OF TRIAL BALANCE

1. TOTAL METHOD
Under this method, every ledger account is totalled and that total amount (both of debit side and
credit side) is transferred to trial balance. In this method, trial balance can be prepare d as soon
as ledger account is totalled. Time taken to balance the ledger accounts is saved under this method
as balance can be found out in the trial balance itself. The difference of totals of e ach ledger
account is the balance of that particular account. This method is not commonly used as it cannot
help in the preparation of the financial statements.

2. BALANCE METHOD
Under this method, every ledger account is balanced and those balances only are carried forward
to the trial balance. This method is used commonly by the accountants and helps in the
preparation of the financial statements. Financial statements are prepared on the basis of the
balances of the ledger accounts.

3. COMPOUND METHOD:
Under this method, totals of both the sides of the accounts are written in the separate columns.
Along with this, the balances are also written in the separate columns. Debit balances are written
in the debit column and credit balances are written in the credit column of the trial balance. This
method also is not commonly used

16 | Page
 SCHEDULE III TO COMPANIES ACT, 2013

FINANCIAL STATEMENTS FOR A COMPANY WHOSE FINANCIAL STATEMENTS ARE REQUIRED

TO COMPLY WITH THE COMPANIES (ACCOUNTING STANDARDS) RULES, 2006.

PART 1: BALANCE SHEET FORMAT

I. EQUITY AND LIABILITIES

1. Shareholder’s Fund
a) Share Capital
b) Reserves and Surplus
c) Money received against share warrants

2) Share Application Money Pending allotment

3) Non-Current Liabilities:
a) Long Term Borrowings
b) Deferred Tax Liabilities (Net)
c) Other Long term Liabilities
d) Long term provisions

4) Current Liabilities
a) Short Term Borrowings
b) Trade Payables
(A) total outstanding dues of micro enterprises and small
enterprises; and
(B) total outstanding dues of creditors other than micro
enterprises and small enterprises

c) Other Current Liabilities

d) Short Term Provisions

II. ASSETS
1) Non-Current Assets
a) Property, Plant & Equipment and Intangible Assets
i) Property Plant & Equipment
ii) Intangible Assets
iii) Capital WIP
iv) Intangible Assets under development

b) Non-Current Investments
c) Deferred Tax Assets (Net)
d) Long Term Loans and Advances
e) Other Non-Current Assets

2) Current Assets:

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a) Current Investments
b) Inventories
c) Trade Receivables
d) Cash and Cash Equivalents
e) Short term loans and advances
f) Other current Assets

GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET

1. An asset shall be classified as current when it satisfies any of the following criteria:—
(a) It is expected to be realized in, or is intended for sale or consumption in, the company’s
normal operating cycle;
(b) It is held primarily for the purpose of being traded;
(c) It is expected to be realized within twelve months after the reporting date; or
(d) It is cash or cash equivalent unless it is restricted from being exchanged or use d to se ttle a
liability for at least twelve months after the reporting date.
All other assets shall be classified as non-current.

2. An operating cycle is the time between the acquisition of assets for processing and their
realization in cash or cash equivalents. Where the normal operating cycle cannot be identified, it
is assumed to have duration of twelve months.

3. A liability shall be classified as current when it satisfies any of the following criteria:—
(a) It is expected to be settled in the company’s normal operating cycle;
(b) It is held primarily for the purpose of being traded;
(c) It is due to be settled within twelve months after the reporting date; or
(d) The company does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting date. Terms of a liability that could, at the option of the
counterparty, result in its settlement by the issue of equity instruments do not affect its
classification.
All other liabilities shall be classified as non-current.

4. A receivable shall be classified as a “trade receivable” if it is in respect of the amount due on

account of goods sold or services rendered in the normal course of business.

5. A payable shall be classified as a “trade payable” if it is in respect of the amount due on account
of goods purchased or services received in the normal course of business.

6. A company shall disclose the following in the notes to accounts.

7. Depending upon the Total Income of the company, the figures appearing in the Financial
Statements Shall be rounded off as given below: –
Total Income Rounding Off
Less than 100 Crores To the nearest hundreds, Thousands, Lakhs or Millions or
Decimals thereof
100 Crores or more To the nearest Lakhs, Millions or Crores or Decimal Thereof

8. Once a unit of measurement is used, it should be used uniformly in the Financial Statements.

KEY FEATURESOF 1) The Schedule III permits only Vertical form of presentation.
BALANCE
SHEET 2) It uses “Equity and Liabilities” and “Assets” as headings.
SCHEDULE III
3) All assets and liabilities classified into current and non-current and
presented separately on the face of the Balance Sheet.

11 | Page
 4) Number of shares held by each shareholder holding more than 5% shares
now needs to be disclosed.

5) Details pertaining to aggregate number and class of shares allotted for

consideration other than cash, bonus shares and share s bought back will
need to be disclosed only for a period of five years immediately preceding the
Balance Sheet date.

6) Any debit balance in the Statement of Profit and Loss will be disclosed
under the head “Reserves and surplus.” Earlier, any debit balance in Profit
and Loss Account carried forward after deduction from uncommitted reserves
was required to be shown as the last item on the asse t side of t he Balance Sheet.

7) Specific disclosures are prescribed for Share Application money. The

application money not exceeding the capital offered for issuance and to the
extent not refundable will be shown separately on the face of the Balance
Sheet. The amount in excess of subscription or if the requirements of
minimum subscription are not met will be shown under “Other current
liabilities.”

8) The term “sundry debtors” has been replaced with the term “trade
receivables.” ‘Trade receivables’ are defined as dues arising only from goods sold
or services rendered in the normal course of business. Hence, amounts due on
account of other contractual obligations can no longer be included in the trade
receivables.

9) It requires separate disclosure of “trade receivables” outstanding for a

period exceeding six months from the date the bill/invoice is due for
payment.”

10) “Capital advances” are specifically required to be pre se nted se parately

under the head “Loans & advances” rather than including elsewhere.

11) Tangible assets under lease are required to be separately specified under
each class of asset. In the absence of any further clarification, the term “under
lease” should be taken to mean assets given on operating lease in the case of
lessor and assets held under finance lease in the case of lessee.

12) Under the Schedule III, other commitments also need to be disclosed.

A. SHARE For each class of share capital (different classes of prefe rence shares to be
CAPITAL treated separately):

(a) The number and amount of shares authorized;

(b) The number of shares issued, subscribed and fully paid, and subscribe d
but not fully paid;

(c) Par value per share;

(d) A reconciliation of the number of shares outstanding at the beginning

and at the end of the reporting period;

(e) The rights, preferences and restrictions attaching to each class of share s
including restrictions on the distribution of dividends and the repayme nt of

12 | Page
 capital;

(f) Shares in respect of each class in the company held by its holding company
or its ultimate holding company including shares held by or by subsidiaries or
associates of the holding company or the ultimate holding company in
aggregate;

(g) Shares in the company held by each shareholder holding more than 5 per
cent. shares specifying the number of shares held;

(h) Shares reserved for issue under options and contracts/commitments for
the sale of shares/disinvestment, including the terms and amounts;

(i) For the period of five years immediately preceding the date as at which the
Balance Sheet is prepared:

(A) Aggregate number and class of shares allotted as fully paid-up pursuant
to contract(s) without payment being received in cash.

(B) Aggregate number and class of shares allotted as fully paid-up by way of
bonus shares.

(C) Aggregate number and class of shares bought back.

(j) Terms of any securities convertible into equity/preference shares issued

along with the earliest date of conversion in descending order starting from the
farthest such date;

(k) Calls unpaid (showing aggregate value of calls unpaid by dire ctors and
officers);

(l) Forfeited shares (amount originally paid-up).

(m) A company shall disclose Shareholding of Promoters* as below:

Shares held by promoters at the end of the year
S No Promoter No. of % of Total % change
Name Shares Shares during the
year

*Promoter here means promoter as defined in the Companies Act, 2013.

** Details shall be given separately for each class of shares

*** percentage change shall be computed with respect to the numbe r at the
beginning of the year or if issued during the year for the first time then with
respect to the date of issue.
B. RESERVES (i) Reserves and Surplus shall be classified as:
AND SURPLUS (a) Capital Reserves;
(b) Capital Redemption Reserve;
(c) Securities Premium Reserve;
(d) Debenture Redemption Reserve;
(e) Revaluation Reserve;
(f) Share Options Outstanding Account;

(g) Other Reserves–(specify the nature and purpose of each reserve and the
amount in respect thereof);

20 | Page
 (h) Surplus i.e., balance in Statement of Profit and Loss disclosing
allocations and appropriations such as dividend, bonus shares and transfer
to/from reserves, etc.;
(Additions and deductions since last balance sheet to be shown unde r e ach
of the specified heads);

(i) A reserve specifically represented by e armarked inve stments shall be

termed as a “fund”.

(iii) Debit balance of statement of profit and loss shall be shown as a negative
figure under the head “Surplus”. Similarly, the balance of “Reserves and
Surplus”, after adjusting negative balance of surplus, if any, shall be shown
under the head “Reserves and Surplus” even if the resulting figure is in the
negative.

C. LONG-TERM (i) Long-term borrowings shall be classified as:

BORROWINGS (a) Bonds/debentures;

(b) Term loans:

(A) From banks.
(B) From other parties.

(c) Deferred payment liabilities;

(d) Deposits;

(e) Loans and advances from related parties;

(f) Long term maturities of finance lease obligations;

(g) Other loans and advances (specify nature).

(ii) Borrowings shall further be sub-classified as secured and unsecured.

Nature of security shall be specified separately in each case.

(iii) Where loans have been guaranteed by directors or others, the aggregate
amount of such loans under each head shall be disclosed.

(iv) Bonds/debentures (along with the rate of interest and particulars of

redemption or conversion, as the case may be) shall be stated in descending
order of maturity or conversion, starting from farthest redemption or
conversion date, as the case may be. Where bonds/debentures are
redeemable by instalments, the date of maturity for this purpose must be
reckoned as the date on which the first instalment becomes due.

(v) Particulars of any redeemed bonds/debentures which the company has

power to reissue shall be disclosed.

(vi) Terms of repayment of term loans and other loans shall be stated.

(vii) Period and amount of continuing default as on the balance sheet date in
repayment of loans and interest shall be specified separately in each case.

D. OTHER LONG- Other Long-term Liabilities shall be classified as:

TERM LIABILITIES (a) Trade payables;
(b) Others.

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E. LONG-TERM The amounts shall be classified as:
PROVISIONS (a) Provision for employee benefits;
(b) Others (specify nature).

F. SHORT-TERM (i) Short-term borrowings shall be classified as:

BORROWINGS (a) Loans repayable on demand;
(A) From banks.
(B) From other parties.
(b) Loans and advances from related parties;
(c) Deposits;
(d) Other loans and advances (specify nature).

(ii) Borrowings shall further be sub-classified as secured and unsecured.

Nature of security shall be specified separately in each case.

(iii) Where loans have been guaranteed by directors or others, the aggregate
Amount of such loans under each head shall be disclosed.

(iv) Period and amount of default as on the balance sheet date in repayment
of loans and interest shall be specified separately in each case.

(v) current maturities of Long term borrowings shall be disclosed separately.

(Inserted w.e.f 01.04.2021)

FA. TRADE The following details relating to Micro, Small and Medium Enterprises shall
PAYABLES be disclosed in the notes:-

(a) the principal amount and the interest due thereon (to be shown
separately) remaining unpaid to any supplier at the e nd of each accounting
year;

(b) the amount of interest paid by the buyer in terms of section 16 of the Micro,
Small and Medium Enterprises Development Act, 2006, along with the
amount of the payment made to the supplier beyond the appointe d day
during each accounting year;

(c) the amount of interest due and payable for the period of delay in making
payment (which have been paid but beyond the appointed day during the
year) but without adding the interest specified under the Micro, Small and
Medium Enterprises Development Act, 2006;

(d) the amount of interest accrued and remaining unpaid at the end of e ach
accounting year; and

(e) the amount of further interest remaining due and payable e ve n in the
succeeding years, until such date when the interest dues above are actually
paid to the small enterprise, for the purpose of disallowance of a deductible
expenditure under section 23 of the Micro, Small and Medium Ente rprises
Development Act, 2006.

Explanation.-The terms' appointed day', 'buyer', 'enterprise', 'micro enterprise',

'small enterprise' and 'supplier', shall have the same me aning assigned to those
under clauses (b), (d), (e), (h), (m) and ( n) re spe ctively of section 2 of the
Micro, Small and Medium Enterprises Development Act, 2006

FB. TRADE The following ageing schedule shall be given for Trade payables due for

22 | Page
PAYABLE DUE payment:-
FOR PAYMENT Particulars Less than 1-2 2-3 More than 3 Total
1 Year Years Years Years
(Inserted w.e.f (i) MSME
01.04.2021) (ii) Others
(iii) Disputed Dues
– MSME
(iv) Disputed Dues -
Others
G. OTHER The amounts shall be classified as:
CURRENT (a) Current maturities of long-term debt;
LIABILITIES (b) Current maturities of finance lease obligations;
(c) Interest accrued but not due on borrowings;
(d) Interest accrued and due on borrowings;
(e) Income received in advance;
(f) Unpaid dividends;

(g) Application money received for allotment of securities and due for re fund and
interest accrued thereon. Share application money includes advance s
towards allotment of share capital. The terms and conditions including the
number of shares proposed to be issued, the amount of premium, if any, and
the period before which shares shall be allotted shall be disclosed. It shall also
be disclosed whether the company has sufficient authorized capital to cover
the share capital amount resulting from allotment of share sout of such share
application money. Further, the period for which the share application money
has been pending beyond the period for allotment as mentioned in the
document inviting application for shares along with the reason for such share
application money being pending shall be disclosed. Share application
money not exceeding the issued capital and to the e xte nt not refundable shall
be shown under the head Equity and share application money to the extent
refundable, i.e., the amount in excess of subscription or in case the
requirements of minimum subscription are not me t, shall be separately
shown under “Other current liabilities”;

(h) Unpaid matured deposits and interest accrued thereon;

(i) Unpaid matured debentures and interest accrued thereon;
(j) Other payables (specify nature).

H. SHORT-TERM The amounts shall be classified as:

PROVISIONS (a) Provision for employee benefits.
(b) Others (specify nature).

I. TANGIBLE (i) Classification shall be given as:

ASSETS (a) Land;
(b) Buildings;
(c) Plant and Equipment;
(d) Furniture and Fixtures;
(e) Vehicles;
(f) Office equipment;
(g) Others (specify nature).

(ii) Assets under lease shall be separately specified under each class of
asset.

(iii) A reconciliation of the gross and net carrying amounts of e ach class of
assets at the beginning and end of the reporting period showing additions,

23 | Page
 disposals, acquisitions through business combinations and other
adjustments and the related
Depreciation and impairment losses/reversals shall be disclosed separately.

(iv) Where sums have been written-off on a reduction of capital or revaluation

of assets or where sums have been added on revaluation of assets, every
balance sheet subsequent to date of such write -off, or addition shall show the
reduced or increased figures as applicable and shall by way of a note also
show the amount of the reduction or increase as applicable together with the
date thereof for the first five years subsequent to the date of such reduction
or increase.

J. INTANGIBLE (i) Classification shall be given as:

ASSETS (a) Goodwill;
(b) Brands /trademarks;
(c) Computer software;
(d) Mastheads and publishing titles;
(e) Mining rights;
(f) Copyrights, and patents and other intellectual property rights, services
and operating rights;
(g) Recipes, formulae, models, designs and prototypes;
(h) Licenses and franchise;
(i) Others (specify nature).

(ii) A reconciliation of the gross and net carrying amounts of e ach class of
assets at the beginning and end of the reporting period showing additions,
disposals, acquisitions through business combinations and other adjustments
and the related amortization and impairment losses/rever sals shall be
disclosed separately.

(iii) Where sums have been written-off on a reduction of capital or

revaluation of assets or where sums have been added on revaluation of assets,
every balance sheet subsequent to date of such write -off, or addition shall
show the reduced or increased figures as applicable and shall by way of a
note also show the amount of the reduction or increase as applicable together
with the date thereof for the first five years subsequent to the date of such
reduction or increase.

K. NON-CURRENT (i) Non-current investments shall be classified as trade investments and

INVESTMENTS other investments and further classified as:
(a) Investment property;
(b) Investments in Equity Instruments;
(c) Investments in preference shares;
(d) Investments in Government or trust securities;
(e) Investments in debentures or bonds;
(f) Investments in Mutual Funds;
(g) Investments in partnership firms;
(h) Other non-current investments (specify nature).

Under each classification, details shall be given of names of the bodies corporate
indicating separately whether such bodies are (i) subsidiaries, ( ii) associates,(iii)
joint ventures, or (iv) controlled spe cial purpose e ntities in whom investments
have been made and the nature and extent of the investment so made in each
such body corporate (showing separately investments which are partly-paid). In
regard to investments in the capital of partnership firms, the names of the firms
(with the names of all their
partners, total capital and the shares of each partner) shall be given.

24 | Page
 (ii) Investments carried at other than at cost should be separately stated
specifying the basis for valuation thereof;

(iii) The following shall also be disclosed:

(a) Aggregate amount of quoted investments and market value thereof;
(b) Aggregate amount of unquoted investments;
(c) Aggregate provision for diminution in value of investments.

L. LONG-TERM (i) Long-term loans and advances shall be classified as:

LOANS AND (a) Capital Advances;
ADVANCES (b) Security Deposits;
(c) Loans and advances to related parties (giving details thereof);
(d) Other loans and advances (specify nature).

(ii) The above shall also be separately sub-classified as:

(a) Secured, considered good;
(b) Unsecured, considered good;
(c) Doubtful.

(iii) Allowance for bad and doubtful loans and advances shall be disclosed
Under the relevant heads separately.

(iv) Loans and advances due by directors or other officers of the company or any
of them either severally or jointly with any othe r pe rsons or amounts due by
firms or private companies respectively in which any director is a partner or
a director or a member should be separately stated.

M. OTHER NON- Other non-current assets shall be classified as:

CURRENT (i) Long-term Trade Receivables (including trade receivables on deferred
ASSETS credit terms);

(ii) Others (specify nature);

(iii) Long term Trade Receivables, shall be sub-classified as:

(A) (a) Secured, considered good;
(B) Unsecured, considered good;
(C) Doubtful.

(b) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.

(c) Debts due by directors or other officers of the company or any of them
either severally or jointly with any other person or debts due by firms or
private companies respectively in which any director is a partner or a director
or a member should be separately stated.

N. CURRENT (i) Current investments shall be classified as:

INVESTMENTS (a) Investments in Equity Instruments;
(b) Investment in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms;
(g) Other investments (specify nature).

Under each classification, details shall be given of names of the bodies

25 | Page
 corporate[indicating separately whether such bodies are: (i) subsidiaries, ( ii)
associates,(iii) joint ventures, or (iv) controlled special purpose e ntities] in
whom investments have been made and the nature and extent of the
investment so made in each such body corporate (showing separately
investments which are partly paid). In regard to investments in the capital of
partnership firms, the names of the firms (with the names of all their partners,
total capital and the shares of each partner) shall be given.

(ii) The following shall also be disclosed:

(a) The basis of valuation of individual investments;
(b) Aggregate amount of quoted investments and market value thereof;
(c) Aggregate amount of unquoted investments;
(d) Aggregate provision made for diminution in value of investments.

O. INVENTORIES (i) Inventories shall be classified as:

(a) Raw materials;
(b) Work-in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) Stores and spares;
(f) Loose tools;
(g) Others (specify nature).

(ii) Goods-in-transit shall be disclosed under the relevant sub-head of

inventories.

(iii) Mode of valuation shall be stated.

P.TRADE (i) Aggregate amount of Trade Receivables outstanding for a period exceeding
RECEIVABLES six months from the date they are due for payment should be separately
stated.

(ii) Trade receivables shall be sub-classified as:

(a) Secured, considered good;
(b) Unsecured, considered good;
(c) Doubtful.

(iii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.

(iv) Debts due by directors or other officers of the company or any of the m either
severally or jointly with any other person or debts due by firms or private
companies respectively in which any director is a partner or a director or a
member should be separately stated..

Q.CASH AND (i) Cash and cash equivalents shall be classified as:
CASH (a) Balances with banks;
EQUIVALENTS (b) Cheque, drafts on hand;
(c) Cash on hand;
(d) Others (specify nature).

(ii) Earmarked balances with banks (for example, for unpaid dividend) shall
be separately stated.

(iii) Balances with banks to the extent held as margin money or security
against the borrowings, guarantees, other commitments shall be disclosed
separately.

26 | Page
 (iv) Repatriation restrictions, if any, in respect of cash and bank balance s
shall be separately stated.

(v) Bank deposits with more than twelve months maturity shall be disclosed
separately.

R. SHORT-TERM (i) Short-term loans and advances shall be classified as:

LOANS AND (a) Loans and advances to related parties (giving details thereof);
ADVANCES (b) Others (specify nature).

(ii) The above shall also be sub-classified as:

(a) Secured, considered good;
(b) Unsecured, considered good;
(c) Doubtful.

(iii) Allowance for bad and doubtful loans and advances shall be disclosed
under the relevant heads separately.

(iv) Loans and advances due by directors or other officers of the company or any
of them either severally or jointly with any other person or amounts due by
firms or private companies respectively in which any director is a partne r or a
director or a member shall be separately stated.

S. OTHER This is an all-inclusive heading, which incorporates current assets that do

CURRENT not fit into any other asset categories.
ASSETS (SPECIFY
NATURE)

T. CONTINGENT (i) Contingent liabilities shall be classified as:

LIABILITIES AND (a) Claims against the company not acknowledged as debt;
COMMITMENTS (b) Guarantees;
(TO THE EXTENT (c) Other money for which the company is contingently liable.
NOT PROVIDED
FOR) (ii) Commitments shall be classified as:
(a) Estimated amount of contracts remaining to be executed on capital
account and not provided for;
(b) Uncalled liability on shares and other investments partly paid;
(c) Other commitments (specify nature).

U. THE AMOUNT OF DIVIDENDS PROPOSED TO BE DISTRIBUTED TO EQUITY AND PREFERENCE

SHAREHOLDERS FOR THE PERIOD AND THE RELATED AMOUNT PER SHARE SHALL BE
DISCLOSED SEPARATELY. ARREARS OF FIXED CUMULATIVE DIVIDENDS ON PREFERENCE
SHARES SHALL ALSO BEDISCLOSED SEPARATELY.

V. WHERE IN RESPECT OF AN ISSUE OF SECURITIES MADE FOR A SPECIFIC PURPOSE,

THEWHOLE OR PART OF THE AMOUNT HAS NOT BEEN USED FOR THE SPECIFIC PURPOSE AT
THE BALANCESHEET DATE, THERE SHALL BE INDICATED BY WAY OF NOTE HOW SUCH
UNUTILISED AMOUNTS HAVEBEEN USED OR INVESTED.

W. IF, IN THE OPINION OF THE BOARD, ANY OF THE ASSETS OTHER THAN PROPERTY PLANT &
EQUIPMENT AND NON-CURRENT INVESTMENTS DO NOT HAVE A VALUE ON REALISATION IN
THE ORDINARY COURSE OF BUSINESS AT LEAST EQUAL TO THE AMOUNT AT WHICH THEY
ARE STATED, THE FACT THAT THE BOARDIS OF THAT OPINION, SHALL BE STATED

27 | Page
28 | Page
 PART 2: STATEMENT OF PROFIT AND LOSS

I. Revenue from Operations

II. Other Income
III. Total Income (I + II)

IV. Expenses:
a) Cost of Material Consumed
b) Purchases of Stock in Trade
c) Changes in Inventories:
i) Finished Goods
ii) WIP
iii) Stock in Trade
d) Employee Benefit Expense
e) Finance Cost
f) Depreciation and Amortization
g) Other Expenses

V. Profit before exceptional and Extraordinary Items and

Tax

VI. Exceptional Items

VII. Profit before Extraordinary Items

VIII. Extraordinary Items

IX. Profit before Tax

X. Tax Expense:
i) Current Tax
ii) Deferred Tax

XI. Profit from Continuing Operations

XII. Profit from Discontinuing Operations

XIII. Tax Expense for discontinuing operations

XIV. Profit for the period

XV. EPS
i) Basic
ii) Diluted

29 | Page
GENERAL INSTRUCTIONS FOR PREPARATION OF STATEMENT OF PROFIT AND LOSS

KEY FEATURES 1) The name of ‘Profit and Loss Account’ has been changed to
OF PROFIT & “Statement of Profit and Loss”.
LOSS
SCHEDULE III 2) This format of Statement of Profit and Loss does not mention any
appropriation item on its face. Further, ‘below the line’ adjustments to
be presented under “Reserves and Surplus” in the Balance Sheet.

3) Any item of income or expense which exceeds 1% of the revenue from

operations or ` 100,000 (earlier 1 % of total revenue or ` 5,000),
whichever is higher, needs to be disclosed separately.

4) In respect of companies other than finance companies, revenue from

operations need to be disclosed separately as revenue from ( a) sale of
products, (b) sale of services and (c) other operating revenues.

5) Net exchange gain/loss on foreign currency borrowings to the extent

considered as an adjustment to interest cost needs to be disclosed
separately as finance cost.

6) Break-up in terms of quantitative disclosures for significant items of

Statement of Profit and Loss, such as raw material consumption, stocks,
purchases and sales have been simplified and replaced with the
disclosure of “broad heads” only. The broad heads need to be decided
based on materiality and presentation of true and fair vie w of the financial
statements.

REVENUE FROM (A) In respect of a company other than a finance company revenue
OPERATIONS from operations shall disclose separately in the notes revenue from—
(a) Sale of products;
(b) Sale of services;
(ba) Grants or donations received (relevant in case of section 8
companies only)
(c) Other operating revenues;
Less:
(d) Excise duty.

(B) In respect of a finance company, revenue from operations shall

include revenue
from—
(a) Interest; and
(b) Other financial services.
Revenue under each of the above heads shall be disclose d se parately
by way of notes to accounts to the extent applicable.

FINANCE COSTS Finance costs shall be classified as:

(a) Interest expense;
(b) Other borrowing costs;
(c) Applicable net gain/loss on foreign currency transactions and
translation.

OTHER INCOME Other income shall be classified as:

(a) Interest Income (in case of a company other than a finance
company);
(b) Dividend Income;
(c) Net gain/loss on sale of investments;

30 | Page
 (d) Other non-operating income (net of expenses directly attributable
to such income).

ADDITIONAL A Company shall disclose by way of notes additional information

INFORMATION regarding aggregate
expenditure and income on the following items:—(i)
(a) Employee Benefits Expense [showing separately
(i) salaries and wages,
(ii) contribution to provident and other funds,
(iii) expense on Employee Stock Option Scheme (ESOP) and Employe e
Stock Purchase Plan (ESPP),
(iv) Staff welfare expenses].

(b) Depreciation and amortization expense;

(c) Any item of income or expenditure which exceeds one pe r ce nt. of

the revenue from operations or `1,00,000, whichever is higher;

(d) Interest Income;

(e) Interest expense;

(f) Dividend income;

(g) Net gain/loss on sale of investments;

(h) Adjustments to the carrying amount of investments;

(i) Net gain or loss on foreign currency transaction and translation

(other than considered as finance cost);

(j) Payments to the auditor as

(a) auditor;
(b) for taxation matters;
(c) for company law matters;
(d) for management services;
(e) for other services; and
(f) for reimbursement of expenses;

(k) In case of Companies covered under section 135, amount of

expenditure incurred on corporate social responsibility activities;

(l) Details of items of exceptional and extraordinary nature;

(m) Prior period items;

(ii)
(a) In the case of manufacturing companies,—

(1) Raw materials under broad heads.

(2) Goods purchased under broad heads.

(b) In the case of trading companies, purchases in respect of goods

traded in by the company under broad heads.

(c) In the case of companies rendering or supplying services, gross

income derived from services rendered or supplied under broad heads.

(d) In the case of a company, which falls under more than one of the
categories mentioned in (a), (b) and (c) above, it shall be sufficient
compliance with the requirements herein if purchases, sales and
consumption of raw material and the gross income from services
rendered are shown under broad heads.

(e) In the case of other companies, gross income derived unde r broad
heads.

(iii) In the case of all concerns having works in progress, works-in-

progress under broad heads.

(iv) (a) The aggregate, if material, of any amounts set aside or propose d to
be set aside, to reserve, but not including provisions made to me e t any
specific liability, contingency or commitment known to exist at thedate
as to which the balance sheet is made up.

(b) The aggregate, if material, of any amounts withdrawn from such

reserves.(v) (a) The aggregate, if material, of the amounts se t aside to
provisions made for meeting specific liabilities, contingencies or
commitments.

(b) The aggregate, if material, of the amounts withdrawn from such

provisions, as no longer required.

(vi) Expenditure incurred on each of the following items, separately for

each item:—
(a) Consumption of stores and spare parts;
(b) Power and fuel;
(c) Rent;
(d) Repairs to buildings;
(e) Repairs to machinery;
(f) Insurance;
(g) Rates and taxes, excluding, taxes on income;
(h) Miscellaneous expenses,

(i)
(a) Dividends from subsidiary companies.
(b) Provisions for losses of subsidiary companies.

(viii) The profit and loss account shall also contain by way of a note the
following information, namely:—
(a) Value of imports calculated on C.I.F basis by the company during
the financial year in respect of—
I. Raw materials;
II. Components and spare parts;
III. Capital goods;

(b) Expenditure in foreign currency during the financial year on account

of royalty, know-how, professional and consultation fees, interest, and
other matters;

(c) Total value if all imported raw materials, spare parts and
components consumed during the financial year and the total value of
all indigenous raw materials, spare parts and components similarly
 consumed and the percentage of each to the total consumption;

(d) The amount remitted during the year in foreign currencies on

account of dividends with a specific mention of the total number of non-
resident shareholders, the total number of shares held by them on which
the dividends were due and the year to which the dividends related;

(e) Earnings in foreign exchange classified under the following he ads,

namely:—
I. Export of goods calculated on F.O.B. basis;
II. Royalty, know-how, professional and consultation fees;
III. Interest and dividend;
IV. Other income, indicating the nature thereof.

UNDISCLOSED The Company shall give details of any transaction not recorded in the
INCOME books of accounts that has been surrendered or disclose d as income
during the year in the tax assessments under the Income Tax Act, 1961
(Inserted w.e.f (such as, search or survey or any other relevant provisions of the Income
01.04.2021) Tax Act, 1961), unless there is immunity for disclosure unde r any
scheme and also shall state whether the pre viously unrecorded
income and related assets have been properly recorded in the books of
account during the year.

CORPORATE Where the company covered under section 135 of the companie s act,
SOCIAL the following shall be disclosed with regard to CSR activities:-
RESPONSIBILITY (a) amount required to be spent by the company during the year,
(CSR) (b) amount of expenditure incurred,
(c) shortfall at the end of the year,
(Inserted w.e.f (d) total of previous years shortfall,
01.04.2021) (e) reason for shortfall,
(f) nature of CSR activities,
(g) details of related party transactions, e.g., contribution to a trust
controlled by the company in relation to CSR expenditure as per
relevant Accounting Standard,
(h) where a provision is made with respect to a liability incurred by
entering into a contractual obligation, the movements in the provision
during the year should be shown separately.

DETAILS OF Where the Company has traded or invested in Crypto currency or

CRYPTO Virtual Currency during the financial year, the following shall be
CURRENCY OR disclosed:-
VIRTUAL (a) profit or loss on transactions involving Crypto curre ncy or Virtual
CURRENCY Currency
(b) amount of currency held as at the reporting date,
(Inserted w.e.f (c) deposits or advances from any person for the purpose of trading or
01.04.2021) investing in Crypto Currency/ virtual currency.
 Accounting Principles
Accounting principles are the rules that an organization follows when reporting financial information. A
number of basic accounting principles have been developed through common usage. They form the
basis upon which the complete suite of accounting standards have been built.

1) Accrual principle. This is the concept that accounting transactions should be recorded in the accounting
periods when they actually occur, rather than in the periods when there are cash flows associated with
them. This is the foundation of the accrual basis of accounting. It is important for the construction of
financial statements that show what actually happened in an accounting period, rather than being
artificially delayed or accelerated by the associated cash flows. For example, if you ignored the accrual
principle, you would record an expense only when you paid for it, which might incorporate a lengthy
delay caused by the payment terms for the associated supplier invoice.

2) Conservatism principle. This is the concept that you should record expenses and liabilities as soon as
possible, but to record revenues and assets only when you are sure that they will occur. This introduces
a conservative slant to the financial statements that may yield lower reported profits, since revenue and
asset recognition may be delayed for some time. Conversely, this principle tends to encourage the
recordation of losses earlier, rather than later. This concept can be taken too far, where a business
persistently misstates its results to be worse than is realistically the case.

3) Consistency principle. This is the concept that, once you adopt an accounting principle or method, you
should continue to use it until a demonstrably better principle or method comes along. Not following
the consistency principle means that a business could continually jump between different accounting
treatments of its transactions that makes its long-term financial results extremely difficult to discern.

4) Economic entity principle / Separate entity principle. This is the concept that the transactions of a
business should be kept separate from those of its owners and other businesses. This prevents
intermingling of assets and liabilities among multiple entities, which can cause considerable difficulties
when the financial statements of a fledgling business are first audited.

5) Full disclosure principle. This is the concept that you should include in or alongside the financial
statements of a business all of the information that may impact a reader's understanding of those
statements. The accounting standards have greatly amplified upon this concept in specifying an
enormous number of informational disclosures. Example – Notes to Accounts, Schedule of Investments.

6) Going concern principle. This is the concept that a business will remain in operation for the foreseeable
future. This means that you would be justified in deferring the recognition of some expenses, such as
 depreciation, until later periods. Otherwise, you would have to recognize all expenses at once and not
defer any of them.

7) Matching principle. This is the concept that, when you record revenue, you should record all related
expenses at the same time. Thus, you charge inventory to the cost of goods sold at the same time that
you record revenue from the sale of those inventory items. This is a cornerstone of the accrual basis of
accounting. The cash basis of accounting does not use the matching the principle.

8) Materiality principle. This is the concept that you should record a transaction in the accounting records
if not doing so might have altered the decision-making process of someone reading the company's
financial statements. This is quite a vague concept that is difficult to quantify, which has led some of the
more picayune controllers to record even the smallest transactions.

9) Monetary unit principle. This is the concept that a business should only record transactions that can be
stated in terms of a unit of currency. Thus, it is easy enough to record the purchase of a fixed asset,
since it was bought for a specific price, whereas the value of the quality control system of a business is
not recorded. This concept keeps a business from engaging in an excessive level of estimation in deriving
the value of its assets and liabilities.

10) Reliability principle. This is the concept that only those transactions that can be proven should be
recorded. For example, a supplier invoice is solid evidence that an expense has been recorded. This
concept is of prime interest to auditors, who are constantly in search of the evidence supporting
transactions.

11) Revenue recognition principle. This is the concept that you should only recognize revenue when the
business has substantially completed the earnings process.

12) Time period principle. This is the concept that a business should report the results of its operations over
a standard period of time. This is useful for trend analysis. Generally yearly, it can be quarterly and half
yearly also.

These principles are incorporated into a number of accounting frameworks, from which accounting
standards govern the treatment and reporting of business transactions.
 Golden Rules of Accounting
1) Debit the receiver, credit the giver
2) Debit what comes in, credit what goes out
3) Debit all expenses and losses and credit all incomes and gains

These three golden rules of accounting lay the foundation on which the accounting system is standing today.
These rules standardize the representation of financial transactions across the industry.

Types of Accounts

Personal Real Nominal

Debit What Comes In The Receiver All Expenses and Losses

Credit What Goes Out The Giver All Incomes and Gains

• A Personal Account is a general ledger account connected to all persons like individuals, firms and
associations. An example of a Personal Account is a Creditor Account (Ram, Shyam, A & B Co. Ltd.).
Rule - In the case of a personal account, when a business receives something from another
business or individual, the first business becomes the receiver, and the second business or
individual from which it was received becomes the giver.
Example – Purchase of Goods from A & Co.
Purchases A/c Dr. XXXX
To A & Co. XXXX

• A Real Account is a general ledger account relating to Assets and Liabilities other than people
accounts. These are accounts that don’t close at year-end and are carried forward. An example of
a Real Account is a Bank Account.
Rule - In a real account, if a business receives something of value (property or goods), it is
represented in the books as debited. If something of value goes out from the business it is
represented in the books as credited.
Example – Purchase of Machinery worth Rs. 100,000 in cash.
Machinery A/c Dr. 100,000
To Cash. 100,000
• A Nominal Account is a general ledger account pertaining to all income, expenses, losses and gains.
At the end of Financial year, the total balance in an account is transferred to P/L A/c and next year
balance is reset and is started afresh. An example of a Real Account is Interest Account.
Rule - In a real account, if a business incurs a loss or expense, then the books' respective entry is
represented as a debit. If the business earns a profit or gains income by way of rendering services,
then the entry in the book is represented as credit.
Example – Payment of Office Rent worth Rs. 10,000 in cash.
Office Rent A/c Dr. 10,000
To Cash. 10,000
 Bookkeeping
It is the process of recording financial transactions of a company on a regular basis.

Importance – shows the correct financial position of a business at any point of time.

1) Single Entry System

2) Double Entry System

• Single Entry – Used by small business having uncomplicated transactions following cash basis of
accounting. In this system revenue and expense are recorded when they are paid. Very few
books of accounts are required to be maintained. Example – Cash book.

• Double-Entry - Used by business having more complex transactions who follows / need to
follow accrual basis of accounting. In this system revenue and expense are recorded when
they are incurred. Many books of accounts are required to be maintained. In this system all
transactions are posted in the form of a Journal Entry which require both sides i.e. Debit and
 Credit to be balanced. Ex – Sales to Ram worth Rs. 10,000 on credit on 1st Jan 2022. On 1st
Feb 2022 Ram paid Rs. 5,000.
Ram Dr. 10,000
To Sales 10,000

Cash Dr. 5,000

To Ram 5,000

Journal Entry – Process of recording any financial transaction having two legs i.e. Dr and Cr. A
Journal Entry should always be balanced on both the sides. If due to any reason both sides are
not balancing then we have to forcefully balance them using Suspense A/c.
A suspense account is a section of a general ledger where a business records doubtful entries
that still need further analysis to determine their proper classification and/or correct destination.
It can be a debit or credit. This account is used to balance the Journal Entry or Ledger Balance.
Example – Total of Debits in a Trial Balance is Rs. 10,00,000 and total of credits are Rs. 9,00,000
that means Rs. 1,00,000 of credit balance is missing and to balance the Trial Balance we have to
use Cr. of Rs. 1,00,000 as Suspense. Main reason behind creation of Suspense A/c is improper
recording of financial transactions aka Journal Entry. Suspense accounts are temporarily created
accounts and must be closed by the end of your accounting cycle.

Ques : Anonymous cash received on 1st Feb 2022.

 Elements of Accounting
1) Assets
2) Liabilities
3) Owner’s Equity / Capital
4) Revenue
5) Expense

• Assets – Any object or entity owned by company having economic value.

✓ Tangible Assets. Ex- Land, Building, Inventory etc.
✓ Intangible Assets. Ex – Goodwill, Account Receivables etc.

➢ Current Assets – Can be consumed, sold or converted into cash within 12 months.
Current Assets are always expenses i.e. charged to P/L.
➢ Fixed Assets – Tangible asset having life span of at least 12 months. Fixed assets
are depreciated or written off over the life of the asset as per depreciation
schedules provided by Companies Act.

Ques : Is Goodwill Fixed Asset or Current Asset? – It is a Fixed Asset.

• Liabilities - The debts, or financial obligations of a business.

✓ Current Liabilities – Debts expected to be paid within 12 months. Ex – Account
Payables.
✓ Non Current / Long Term Liabilities - Debts expected to be paid after 12 months.
Ex – Long term loans.

Ques : What is Working Capital? – The capital required in meeting day to day operations.
WC = Current Asset – Current Liabilities.

• Owner’s Capital / Equity - Owner's financial share of the company. That portion of the total
assets of the company which owner fully owns.

Ques: A started company A & Co. by bringing in Cash Rs. 10,00,000/- and loan from bank
of Rs. 5,00,000/- of which he bought fixed assets worth Rs. 8,00,000/-, purchased
inventory of Rs. 4,00,000/-, kept Rs. Rs. 2,50,000 in company’s bank account and Rs.
50,000 cash in hand. What will be his Fixed Asset, Current Asset, Current Liability, Long
Term Liability and Owner’s Equity.

✓ Contribution
✓ Distribution
✓ Retained Earnings
• Revenue - Money earned by business from selling a product or service, or from interest and
dividends on marketable securities i.e. money earned by business from day to day
operations. At the close of financial year, the balance at the end is transferred to P/L
Account.
Ques: Can Revenue be termed as Profit? – No, Revenue minus Expense is Profit.

• Expense – Expenditure incurred by business for running its day to day operations or any
expenditure that benefits business.
✓ Revenue Expense – The expenditure incurred in the normal course of business for
day to day operations. Ex – Salary, Office Rent, Electricity.
✓ Capital Expense – The expenditure which increase the production capacity or
shelf life of the capital asset. These, expense include the cost incurred to bring the
capital asset in its physical form. Ex – Machinery installation charges (this includes all
cost incurred in installation i.e. labor charges, electricity etc.), replacement of major
part of the machinery which increased its production capacity.
✓ Deferred Revenue Expenditure – The expenditure which is incurred in the current
financial year however the benefit CAN BE obtained over multiple periods. Ex –
Advertisement, Research & Dev exp.
Ques: Is depreciation an expense? If yes, which type of expense? – Yes, revenue exp,
since it is incurred in the normal course of business.
Important concept of Cash and Accrual basis of Accounting
Cash Basis – In this type of accounting all transactions are recorded when actual cash flows in or
out of the business. This type of accounting is not prevalent and small businesses who do not
have to comply with GAAP can follow cash basis. This is done for ease of business wherein only
one Cash Book is required to maintain; this avoids the complexity of preparing huge books of
accounts.
Accrual Basis - In this type of accounting all transactions are recorded as soon as the transaction
took place irrespective of the cash movement. This type of accounting is followed by almost all
companies. All companies who has to comply with GAAP has to follow accrual basis of
accounting. This type of accounting gives the correct financial position of the company. In this
case all books of accounts are required to be maintained, i.e. General Ledgers, Trial Balance, PnL
A/c, Balance Sheet.
 Notes to Accounts
Assuming we already know the word Financial Statements, they are those statements which represent
the financial position of the organization. They comprise of following statements:

• Profit and Loss Statement

• Balance Sheet with accompanying schedules
• Notes to Accounts
• Cash Flow Statement

Notes to accounts of financial statements contain details related to the information mentioned in the
main body of financial statements (i.e. Balance Sheet and PnL Statement). These notes (or footnotes)
inform about important accounting policies, company’s commitments, breakdown of sales, breakdown
of purchases, details of assets and liabilities, potential profits and losses, etc. The information provided
by notes to accounts is critical for concisely understanding and evaluating the financial statements of
the company.

Those who only focus on the main body of financial statements and oversee the notes commit a grave
blunder as they can be easily misled that way because Notes to Accounts largely impact the financial
position of an organization. The notes may be several pages long but they are not to be undervalued
while analyzing financial statements of a business. Therefore, a good way to read financial statements is
from bottom to up and from back to front i.e. Notes to Accounts should always be read along with B/S
and P/L statement for better understanding.

Many such notes are required to be provided by law (GAAP, IAS, IFRS) i.e. provisions, reserves,
depreciation, investments, inventory, share capital, employee benefits, contingencies, etc.

Most Common Notes to Accounts

Accounting What are the accounting policies used in the preparation of financial
Policies/Changes statements and if there are any changes during the financial year.
Example – Change in the method of accounting, going concern.
Acquisitions and Any M&A related transaction including all acquired assets, liabilities,
Mergers goodwill, etc.

Contingencies and Notes to financial statements include any contingent liabilities along with
Litigations its details and timeline.

Adopted method of depreciation on fixed assets, capitalized interest &

Depreciation
impairments are disclosed.
 Any exceptional item such as a huge loss, an unexpected rise in expense,
Exceptional Items
etc.

Fair Value Notes to financial statements also show related amount and reasons of fair
Measurements value measurements.

Goodwill Changes in goodwill and acquisition of goodwill (if any) are mentioned.

Inventories and Stock evaluation method is described and for investments, any gains/losses
Investments due to being realized are described.

Future outflow of lease payments is estimated and mentioned in the

Leases
footnotes.

All obligations due to be paid in the next 5 years including loans, interest
Long-Term Debt
on loans, etc.

Non-Cash Transactions Any event concluding to a profit or loss in future is specified.

Receivables and Notes to accounts contain significant receivables and payables including
Payables the parties concerned.

Any likely risk that may affect the company in future such as a govt. policy,
Risk and Possibilities
expected technology advancement is also stated.

Notes to accounts generally represent the issue of shares, buyback

Shareholder’s capital
programs, convertible shares, arrears, etc.

The above points are only an indicative list and should be considered as exhaustive list. There may be
multiple points which can be mentioned in Notes to Accounts. The disclosure of any point in Notes to
Accounts lies with the Owners or Board of Directors, if auditors are not satisfied with the presentation of
Notes to Accounts or any financial statements i.e. they feel that important financial information is
concealed or wrongly presented that may mislead the readers of financial statements, then auditors
have the right to mention their opinion in Auditor’s report.
 Depreciation
Reduction in the value of fixed tangible asset over life of the respective asset.

Assets such as machinery and equipment are expensive. If a business allocates the entire cost of fixed
asset to P/L in the year of purchase it will have a huge impact on the business profitability and will not
portray the correct financial position. Instead of realizing an asset's entire cost in year one, companies
use depreciation to spread out the cost and generate revenue from it (concept of Matching principle).
This is done through depreciation, which allows a company to write off an asset's value over a period of
time, notably its useful life.

On Purchase of Asset:

Asset A/c. Dr 1,00,000 (Balance Sheet item) – Increase in Asset side

To Cash A/c. 1,00,000 (Balance Sheet item) – Decrease in Asset side

i.e. No Impact on Profit and Loss statement.

Does purchase of a fixed asset never impacts profit or loss of the company?

It does impact, through depreciation because the value of any machinery, equipment will not stay at the
same value forever, its value in market diminishes due to wear and tear. So, every company has to
reduce the value of their fixed assets over the expected life / shelf life through depreciation a/c.

There are specific rates for specific block of fixed assets which Companies Act, 1956 (revised by
Companies Act 2013) has prescribed. Companies have to follow these rates to depreciate the assets in
their Books of Accounts.

[Please note: Income Tax has prescribed different depreciation rates for specific block of assets; these
rates are solely used for Income Tax purpose and not for our accounting purpose].

Methods of Depreciation:

1) Straight-line – It is the most basic way to record depreciation. It reports equal depreciation expense
each year throughout the entire useful life until the entire asset is depreciated to its salvage value
(scrap).
Ex – Asset purchase price Rs. 5,000. Useful life – 4 years. Scrap value estimate after 4 years – Rs. 1,000.
Yearly depreciation amount: (5000-1000)/4 = 1,000/-. Hence depreciation rate is 1000/4000 = 25%.

2) Declining Balance or WDV - This method depreciates the machine by applying the depreciation % on the
remaining value of the asset at the end of each financial year. The method reflects the fact that assets
are typically more productive in their early years than in their later years. This method is more used by
big companies.
Ex – Asset purchase price Rs. 5,000. Useful life – 4 years. Depreciation % = 25%.
1st year depreciation = 5000*25% = 1,250. Remaining value = 5000-1250 = 3750.
2nd year depreciation = 3750*25% = 937.50. Remaining value = 3750-937.50 = 2812.50.
3rd year depreciation = 2812.50*25% = 703.125. Remaining value = 2812.50-703.125 = 2109.375.
 4th year depreciation = 2109.375*25% = 527.34375. Remaining value = 2109.375-527.34375 = 1582.03
The value of asset at the end of useful life is the salvage value of the asset.

3) Units of Production - The units-of-production depreciation method depreciates assets based on the total
number of hours used or the total number of units to be produced by using the asset, over its useful life.
This is not very much used in the industry.

4) Sum-of-the-Year's-Digits – This method is also not very common across the industry.

Journal Entry for depreciation at the end of Financial Year:

Asset Value Rs. 10,000. Assuming Rs. 1000 dep during 1st year, and Rs. 800 during 2nd year.
1st Year:
Depreciation A/c Dr. 1,000 – (Expense, will appear in P/L A/c and reduce the profits)
To Accumulated dep. 1,000 – (Contra A/c which appears below fixed asset as a negative bal)
2nd Year:
Depreciation A/c Dr. 800
To Accumulated dep. 800

At the end of second year the accumulated balance will increase to Rs. 1,800 and this will keep
on increasing year on year until it equals the original cost of the asset. From that time we stop
recording depreciation in our books as the full cost of asset has been wiped off.

Ques: Is accumulated depreciation a liability? – No, it is a contra account which has -ive bal
below fixed asset.
Should we remove accumulated depreciation and asset balance when they are equal? –
Yes, only for one year after that it can be removed.

Amortization
Reduction in the value of intangible asset over life of the respective asset. Ex – Patent, Goodwill,
Copyrights.

• Depreciation considers a tangible item's salvage value, while amortization does not
• Depreciation involves using the straight-line method or the accelerated depreciation method,
while amortization only uses the straight-line method
• Depreciation only applies to tangible assets, like buildings, machinery and equipment, while
amortization only applies to intangible assets, like copyrights and patents
 Ques: Which fixed asset never depreciate? - Land

Provision
They are balance sheet items representing funds set aside by a company as assets to pay for anticipated
/ expected future losses (conservatism principle). Provisions are recorded in books whenever any future
loss is anticipated. Provisions are created by recording an expense in the income statement and then
establishing a corresponding liability in the balance sheet. Ex – Provision for Bad Debt., Provision for loss
on xxxx.

Recording of provision purely depends on the estimate, a business can’t ignore the provision in its
financial statements if the loss is probable and there are high chances that losses will be incurred in
future. These provisions might also appear as a footnote on the Balance Sheet – contingent liability.

Journal Entry

Profit & Loss A/c Dr. xxxx – (This is a charge against P/L)
To Prov. For Bad Debt xxxx – (Appear in the liability side)

Cash A/c Dr. 10,000

Prov. For Bad Debt 5,000
To Accounts Receivables 15,000

Reserve
Reserve refers to a sum or percentage of profit that a company retains or keeps aside at the end of a
financial year towards meeting future contingencies that may occur. It is also used to strengthen the
business.

• Revenue Reserve - created from the profits earned from the core operations of a company or
organization. It is also termed as Retained Earnings. It can be used to pay dividends to
shareholders, expand the business.
• Capital Reserve – created from capital profits in short, this reserve is created by owner from its
capital balance. This reserve is created for specific purpose and a business can’t use this reserve
for reasons other than for which it is created for.

A reserve is an appropriation of profit for a specific purpose, while a provision is a charge for an
estimated expense.
 Accounting Ratios
Accounting ratios, an important sub-set of financial ratios, are a group of metrics used to measure the
efficiency and profitability of a company based on its financial reports. They provide a way of expressing
the relationship between one accounting data point to another and are the basis of ratio analysis.

1. Working Capital Ratio – Also known as current ratio.

Current Assets / Current Liabilities
2. Quick Ratio - Also known as the acid test ratio.
(Current Assets – Inventory) / Current Liabilities
This shows you how easily a business’s short-term debts will be covered by its existing liquid assets, or
cash. If the quick ratio is greater than one, the business is in a good financial position.

3. Debt to Equity ratio - This looks at whether or not a business is borrowing more than it can
reasonably pay back using equity as a metric. This ratio measures the degree to which the business’s
operations are funded by debt
Total Liabilities / Shareholders Equity
When this ratio is greater than one, the company holds more debt. If the value is below one, it indicates
that the company holds less debt.

4. Earning per Share - Earnings per share measures the net income you’ll receive for each share of a
company’s stock.
Net Income / Outstanding Shares
This can potentially be a negative number, if the company has traded at a loss over the year. Usually,
investors will look at EPS in combination with a number of other ratios like P/E to determine growth
potential.

5. Price to Earning ratio (P/E ratio)- One of the top indicators for earnings potential is the price to
earnings ratio, or P/E. This divides a company’s share price by its earnings per share. In other words, it
measures the amount an investor would pay for each dollar earned. This gives you a quick idea if a
stock is under or overvalued.
Share Price / Earnings per Share
Share prices vary by industry and market conditions, there isn’t a universal rule for what constitutes a
“good” P/E. However, you can compare the company’s P/E to similar stock prices for comparison.

6. Return on Equity ratio - Whether you’re investing your own money or interested in keeping
shareholders happy, you’ll need to know the return on equity ratio. This is one of the most important
financial ratios for calculating profit. The result tells you about a company’s overall profitability, and
can also be referred to as return on net worth.
(Earnings – Dividends) / Shareholders Equity
7. Profit Margin - The profit margin is one of the fundamental financial ratios to be aware of. This shows
you how efficiently a company is managing its overall costs, or how well it converts revenue into
profit.
Profit / Revenue
The higher the profit margin, the more efficient the company is in converting sales to profits.
IND AS
Indian Accounting Standard is the Accounting standard adopted by companies in India and issued under
the supervision of Accounting Standards Board (ASB). An accounting standard is a common set of
principles, standards, and procedures that define the basis of financial accounting policies and practices.
They improve the transparency of financial reporting; they ensure that different companies follow same
set of policies and principles. Different Financial Statements can be compared against each other only if
they follow same set of accounting policies and principles. In India following companies has to follow
IND AS mandatorily:

• Listed Companies (on Indian Stock Exchange)

• Having Net worth greater than 250 cr.
• all Banks, NBFCs, and Insurance companies having Net worth is more than or equal to INR 500
crore with effect from 1st April 2018

As of now there are 41 Ind AS notified by MCA (Ministry of Corporate Affairs).

US GAAP
US Generally Accepted Accounting Principles. US based companies are required to follow the US
Generally Accepted Accounting Principles (US GAAP) issued by the Financial Accounting Standards Board
(FASB) of US. Public companies in the U.S. must follow GAAP when their accountants compile their
financial statements.

Ques: A parent company is listed in US but it has a subsidiary company located and operating in India.
What accounting standard should it follow?

Ans: Both, the subsidiary company will prepare its FS as per IND AS, however the parent company is
situated in US, so the final consolidated statement should be prepared as per US GAAP.

IFRS
International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial
statements of public companies that are intended to make them consistent, transparent, and easily
comparable around the world. The IFRS are issued by the International Accounting Standards Board
(IASB). IFRS is based on the concept that Financial Statements of any two companies can be compared
against each other irrespective of the country where they are situated.
 Cash Flow Statement
To understand Cash Flow Statement, we first have to understand the word Financial Statements.
Financial Statements are those statements which represent the financial position of the organization.
They comprise of following statements:

• Profit and Loss Statement

• Balance Sheet with accompanying schedules
• Notes to Accounts
• Cash Flow Statement

Cash Flow Statement is a financial statement that summarizes the amount of cash and cash
equivalents entering and leaving a company. It provides aggregate data regarding all cash inflows a
company receives from its ongoing operations and external investment sources. It also includes all cash
outflows that pay for business activities and investments during a given period.
This shows cash made or used by the company from operating, investing and financing activities.

Ques: What is Cash and Cash Equivalents?

Is term deposit of 2 years at bank be called as Cash Equivalent?
Can Treasury Bills be classified as Cash Equivalent?

Who needs not to prepare Cash Flow Statement?

One Person Companies.
Dormant Companies. – Main operation is suspended
Companies having –
o Contributed share capital does not exceed ₹50 lakh.
o Turnover under the profit and loss account of the preceding financial year does not
exceed ₹2 crore.

Ques : Is it mandatory for partnership firms (including limited liability partnership) to prepare Cash
Flow Statement?

Formats of Cash Flow Statements:

➢ Direct Method - The statement of cash flows direct method uses actual cash inflows and
outflows from the company's operations, instead of modifying the operating section
from accrual accounting to a cash basis. It measures only the cash that's been received, which is
typically from customers and the cash payments or outflows, such as to suppliers. The inflows
and outflows are netted to arrive at the cash flow. This method is not widely used because it
does not consider accrual transactions.

➢ Indirect Method - The indirect method for the preparation of the statement of cash flows
involves the adjustment of net income with changes in balance sheet accounts to arrive at the
amount of cash generated by operating activities. It is one of the components of a company's
set of financial statements which is used to reveal the sources and uses of cash by a business. It
presents information about cash generated from operations and the effects of various changes
in the balance sheet on a company's cash position. It comprises of three components:

✓ Cash flows from operating activities – These are activities occurred during normal
course of business.
✓ Cash flows from investing activities – These include cash generated or spent relating to
investment activities. Investing activities include purchases of physical assets, investments in
securities, or the sale of securities or assets.
✓ Cash flows from financing activities – These activities show the net flows of cash that
are used to fund the company. Financing activities include transactions involving debt,
equity, and dividends.
 PRINCIPLes AND PRACTICe OF ACCOUNTING
PRINCIPLES AND PRACTICE OF ACCOUNTING: A CAPSULE FOR QUICK RECAP
The objective of Paper 1 “Principles and Practice of Accounting” at Foundation level is to develop an understanding of the basic concepts
and principles of Accounting and apply the same in preparing financial statements and simple problem solving. It has always b een the
endeavour of Board of Studies to provide quality academic inputs to the students. Keeping with this objective, it has been decided to bring
forth a crisp and concise capsule on the topics of Preparation of Final Accounts of Sole Proprietors and Partnership Accounts covered in
this paper. At Foundation level, both these topics largely involve understanding the types of Business entities, manufacturing expenses,
overhead expenses and preparation of final accounts and accounts of partnership firm, Features of a partnership, number of P artners,
Limited Liability Partnership, clauses required in a partnership deed, Powers of partners, Fixed and Fluctuating Capital, Int erest on
capital, Interest on drawings, valuation of goodwill,admission, retirement and death of a partner. The concepts involved in each sub-topic
have been gathered and presented through pictorial presentations in this capsule which will help the students in grasping the intricate
practical aspects. This Capsule facilitates the students in undergoing quick revision of Chap ters 7 and 8 of the study material, under no
circumstances, such revision can substitute the detailed study of the material provided by the Board of Studies. Students are advised to
refer the March, 2019 Edition of the Study Material for comprehensive study.

FINAL ACCOUNTS OF SOLE PROPRIETORS

BUSINESS ENTITIES MANUFACTURING COSTS

Manufacturing costs are classified into:
Business Entity
Raw Material Consumed .…..….
+Direct Manufacturing Wages ………
Manufacturing Non-Manufacturing
+Direct Manufacturing Expenses ………
Business Entities Business Entities
Direct Manufacturing Cost ………
+Indirect Manufacturing expenses or
Final Accounts Final Accounts
Manufacturing Overhead ………
Total Manufacturing Cost

Manufacturing Trading Profit Balance DIRECT MANUFACTURING EXPENSES

Account Accounts & Loss Sheet (for
(for Gross Accounts Position of Direct manufacturing expenses are costs, other
Profit) for Net Assets and than material or wages, which are incurred for a
Profit Liabilities) specific product or saleable service.
MANUFACTURING ENTITIES
Examples of direct manufacturing expenses are
The manufacturing entities generally prepare a separate
Manufacturing Account as a part of Final accounts in addition
to Trading Account, Profit and Loss Account and Balance (i) Royalties for using license or technology if
Sheet. The objective of preparing Manufacturing Account based on units produced,
is to determine manufacturing costs of finished goods for
assessing the cost effectiveness of manufacturing activities.
Manufacturing costs of finished goods are then transferred (ii) Hire charge of the plant and machinery used
from the Manufacturing Account to Trading Account. on hire, if based on units produced, etc.
(a) Trading account shows Gross Profit while Manufacturing
Account shows cost of goods sold which includes direct INDIRECT MANUFACTURING EXPENSES OR OVERHEAD
expenses.
(b) Manufacturing account deals with the raw material, and EXPENSES
work in progress while the trading account would deal with
finished goods only. These are also called Manufacturing overhead,
Production overhead, Works overhead, etc. Overhead is
defined as total cost of indirect material, indirect wages
Manufacturing (1) It shows the total cost of manufacturing the and indirect expenses.
account serves finished products and sets out in detail, with
the following appropriate classifications, the constituent Overhead = Indirect Material + Indirect Wages +
functions: elements of such cost. It is, therefore, debited Indirect Expenses
with the cost of materials, manufacturing
wages and expenses incurred directly or
indirectly on manufacture.
(2) It provides details of factory cost and NON-MANUFACTURING ENTITIES
facilitates reconciliation of financial books
with cost records and also serves as a basis of
comparison of manufacturing operations from Non-manufacturing entities are the trading entities, which are
year to year. engaged in the purchase and sale of goods at profit without
changing the form of the goods.
(3) The Manufacturing Account may also be used
for various other purposes. For example, if the
output is carried to the Trading Account at
market prices, it discloses the profit or loss on At the end of the accounting year, the entity must be interested
manufacture. Similarly, it may also be used to in knowing the results of the business so they prepare financial
fix the amount of production of profit sharing statements at the end of the year
bonus when such schemes are in force.
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PRINCIPLes AND PRACTICe OF ACCOUNTING
INCOME STATEMENT POSITION STATEMENTS
Profit or loss is disclosed in the Income Statement prepared at the It exhibits assets and liabilities of the business as at the close of the
close of the financial year financial year.
Income Statement is sub-divided into following two parts for a non- Apart from balance sheet to judge financial position of the business,
manufacturing concern: sometimes additional statements are also prepared like cash flow
(i) Trading account; and statement, value added statement etc. which is not mandatory for
(ii) Profit and Loss account non-corporate entities. These additional statements are prepared for
the better understanding of the financial position of the business.
Income Statement discloses net profit of the business after adjusting Position statement discloses the assets and liabilities position as on
from the income earned during the year, all the expenditures of the a particular date.
business incurred in that year.

PREPARATION OF FINAL ACCOUNTS

The BASIC PRINCIPLES in regard to accumulation of accounting period data are:

(i) a distinction should be made between capital and revenue receipts and payments;
(ii) also income and expenses relating to a period of account should be separated from those of another period.
(iii) different items of income and expenditure should be accumulated under significant heads so as to disclose the sources from which
capital has been procured and the nature of liabilities, which are outstanding for payment.

Having regard to these basic principles, the various matters to which attention should be paid for determining the different aspects of
transactions, a record of which should be kept, and the different heads of account under which various items of income and expenditure
should be accumulated, are stated below:

(b) Distinction between (c) All material (d) Record only current (e) Only transactions
(a) Distinction between
capital and revenue information to be period transactions:- completed before close
personal and business disclosed:- Every
expenditure:- A Though the record of of accounts should be
income:- Since the final information, considered transactions should be given effect:- It should be
statements of account distinction should be
made between capital and material for judging the maintained continuously, seen that only the effect
are intended to show profitability of the business
revenue, both receipts and at the end of each of transactions, which
the profitability of the or its financial position,
expenditure. Different types accounting period, the were concluded before the
business and not that of its should be disclosed. For
of income and expenditure transactions of the closing close of period of account,
proprietors, it is essential example, when the labour
should be classified under accounting period should has been adjusted in the
that all personal income charges have increased on
separate heads. Assets be cut off from those of the accounts of the year. For
and expenditure should be account of bonus having succeeding period.
should be included in the example, when a sale of
separated from business been paid to workmen,
Balance Sheet by following goods is to take place only
income and expenditure. the amount of bonus
accounting principles and after the goods have been
accounting standards. paid should be disclosed. inspected by the purchaser
Likewise, a provision for Similarly, if some of the and the inspection had not
income and expenses items of inventory are been made before the close
which have accrued but not readily saleable, these of the year, it would be
not paid, should be made should be valued at their incorrect to treat the goods
by estimation or otherwise approximate net realisable as a sale in the accounts of
on the same basis as in the value and the basis of the year.
previous year. valuation and value of such
inventory should be shown
separately.
MATCHING PRINCIPLE
This principle demands that expenses incurred to earn the revenue should be properly matched. This means the following:
(a) If a certain revenue and income is entered in the Trading / Profit and Loss Account all the expenses relating to it, whether or not payment has been
actually made, should be debited to the Trading / Profit and Loss Account. This is why at the end of the year an entry is passed to bring into account the
outstanding expenses. That is also the reason why the opening inventory of goods is debited to the Trading Account since the relevant sale is credited
in the same account.

(b)If some expense has been incurred but against it sale will take place in the next year or income will be received next yea r, the expense should not be
debited to the current year’s Profit and Loss Account but should be carried forward as an asset and shown in the Balance Sheet. It will be debited to the
Profit and Loss Account only when the relevant income will also be credited. The same reason applies to depreciation of assets also. The part of the cost
which is used to earn current year revenue is debited in same year.

(c) If an income or revenue is received in the current year but the work against it has to be done and the cost in respect of it has to be incurred next year,
i.e. income received in advance the income or the revenue is considered to be of next year. It should be shown in the Balance Sheet on the liabilities side
as “income received in advance” and should be credited to the Profit and Loss Account of the next year. E.g. Newspapers or magazines usually receive
subscriptions in advance for a year. The part of subscription that covers copies to be supplied in the next year is treated as income received in advance.

An exception: There appears to be one exception to the rule that only such costs as have yielded or is expected to yield revenue should only be debited
to Profit and Loss Account. For example, if a fire has occurred and has damaged the firm’s property the loss must be debited to the Profit and Loss
Account to the extent it is not covered by insurance. A loss, resulting from the fall of selling price below the cost or from some debts turning bad, must
similarly be debited to the Profit and Loss Account. If this is not done the profit will be over-stated.

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 PRINCIPLes AND PRACTICe OF ACCOUNTING
Adjustment Adjustment Entry Treatment in Profit & Treatment in Balance
Loss A/c Sheet
1. Closing Stock Closing Stock A/c Dr. Shown on the credit side Shown on the assets side
To Trading A/c
2. Goods sold but Debtors A/c Dr. Added to sales on the Added to Debtors on the
omitted to be To Sales A/c credit side assets side
recorded
3. Goods purchased Purchases A/c Dr. Added to purchases on Added to Creditors on the
but omitted to be To Creditors A/c the debit side liabilities side
recorded
4. Sale of goods on (i) Sales A/c To Debtors Dr. Deducted from sales on Deducted from debtors on
approval basis A/c the credit side the assets side.
(Sale value of goods)
(ii) Closing Stock A/c
To Trading A/c Dr. Added to closing stock Added to closing stock on
(Cost price of goods)
on the credit side the assets side.
5. Goods distributed as Free samples A/c Dr. Deducted from purchases Shown on the debit
free samples To Purchases A/c on the debit side side

6. Drawings in goods Drawings A/c To Dr. Deducted from purchases Deducted from capital on
Purchases A/c on the debit side the liabilities side

7. Depreciation Depreciation A/c To Dr. Shown on the debit Deducted from the
Asset A/c side concerned asset on the
assets side
8. Provision for Profit & Loss A/c To Dr Added to Bad-debts on Deducted from Debtors on
Doubtful debts Provision for Doubtful the debit side the assets side
Debts A/c
9. Provision for discount Profit & Loss A/c Dr. Shown on the debit Deducted from Debtors on
on Debtors To Provision for Discount side as a separate item the assets side
on Debtors A/c
10. Further Bad-debts Bad-debts A/c Dr. Added to Bad-debts Deducted from debtors on
To Sundry Debtors A/c (given in Trial Balance) the assets side.
on the debit side
11. Outstanding Expenses A/c Dr Added to the respective Added to the respective Shown on the liabilities side
Expenses To Outstanding expense on the debit side expense of the debit
Expenses A/c side
12. Prepaid or unexpired Prepaid Expenses A/c Dr. Deducted from the Deducted from the Shown on the assets side
expenses To Expenses A/c respective expense on the respective expense on
debit side the debit side
13. Accrued Income Accrued Income A/c Dr. Added to the respective Shown on the assets side
(Income earned but To Income A/c income on the credit
not received) side
14 Unearned Income Income A/c Dr Deducted from the Shown on the liabilities side
(Income received in To Unearned Income A/c respective income on
advance) the credit side
15. Interest on capital Interest on capital A/c Dr. Shown on the debit Added to the capital on the
To Capital A/c side liabilities side
16 Interest on Drawings Interest on Drawings A/c Dr. Shown on the credit Added to the drawings and
To Interest on Drawings side then deducted from Capital
A/c
17. Interest on Loan Interest on Loan A/c Dr. Shown on the debit Added to the loan on the
(taken from someone) To Loan A/c side liabilities side

18. Abnormal loss of Insurance Company A/c Dr. Total amount of loss is Amount not recovered Amount recovered from
stock Profit & Loss A/c deducted from purchases from the insurance the insurance company is
To Purchases A/c Dr. on the debit side company is shown on shown on the assets side.
the debit side
19 Charity in the form of Charity A/c Dr. Deducted from purchases Shown on the debit
goods To Purchases A/c on the debit side side

20 Manager’s Manager’s Commission Dr. Shown on the debit Shown on the liabilities side
Commission A/c side
To Outstanding
Commission A/c

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9
PRINCIPLes AND PRACTICe OF ACCOUNTING
PARTNERSHIP ACCOUNTS
INTRODUCTION TO PARTNERSHIP ACCOUNTS FEATURES OF A PARTNERSHIP
The relation of partnership arises from
Business Existence of an contract between parties and not from status
carried on by agreement as it happens in case of HUF (Hindu Undivided
all or any one Family). A formal or written agreement is
of them acting not necessary to create a partnership.
An
agreement for all
Unlimited
entered liability of all
into by all A partnership can exist only for business.
persons
partners Business Section 2 (b) of Indian Partnership Act,
concerned 1932 states that business includes every
trade, occupation and profession.
Partnership
An The persons concerned must agree to share
association the profits of the business. Section 4 of
Existence of of two Sharing of profit Indian Partnership Act, 1932 does not insist
a business or more upon sharing of losses. Thus, a provision for
persons sharing of loss is not necessary.
Sharing of
profits and
losses of the It means that the business is to be carried on
business by all or any of them acting for all. Thus, if the
Mutual agency person carrying on the business acts not only
for himself but for others also so that they
stand in the positions of principals and agents,
they are partners.
DEFINITION OF PARTNERSHIP

As per Section 4 Partnership is the relation between NUMBER OF PARTNERS

of the Partnership persons who have agreed to share
Act, 1932 the profit of a business carried on
Number of Partners
by all or any of them acting for all.

Minimum Partners Maximum Partners

ACCOUNTS OF PARTNERSHIP FIRM
Two 50
Trading and Profit and Loss Account and Balance Sheet

Profit and Loss Appropriation Account As per Section 464 of the Companies Act, 2013, no association or
partnership consisting of more than 100 number of persons as may
be prescribed shall be formed for the purpose of carrying on any
business. Rule 10 of Companies (incorporation) Rules 2014 specifies
Capital accounts of partners: fixed capital method or the limit as 50 .Thus, maximum number of members in a partnership
fluctuating capital method firm are 50.

LIMITED LIABILITY PARTNERSHIP

An LLP has
the special
The Limited characteristic of
Liability Partnership being a separate
The LLP will be a legal personality
(LLP) is viewed
as an alternative separate legal entity, The liabilities of the distinct from its
corporate business liable to the full LLP and partners The main benefit partners. The LLP is
extent of its assets, No partner would who are found to in an LLP is that a body corporate in
proposal that with the liability of be liable on account have acted with it is taxed as a
provides the nature.
benefits of limited the partners being of the independent intent to defraud partnership, but
liability but allows limited to their or un-authorized Creditors or for any has the benefits of The Limited Liability
agreed contribution actions of other fraudulent purpose being a corporate, or Partnerships
its members, in the LLP which partners or their shall be unlimited more significantly, a
the flexibility of (LLPs) in India
organizing their may be of tangible misconduct. for all or any of juristic entity with were introduced by
internal structure or intangible nature the debts or other limited liability. Limited Liability
or both tangible and liabilities of the LLP. Partnership Act,
as a partnership, intangible in nature.
which is based on 2008 which lay
a mutually arrived down the law for
agreement. the formation
and regulation of
Limited Liability
Partnerships.

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 PRINCIPLes AND PRACTICe OF ACCOUNTING
DEFINITION OF LLP 7 Number of Minimum 2 and Minimum 2 but no
Limited liability partnership as a partnership Partners Maximum 50 maximum limit
formed and registered under this Act; and
limited liability partnership agreement means 8 Ownership of Firm cannot own The LLP as an
any written agreement between the partners of Assets any assets. The independent entity
Section 2 of the the limited liability partnership or between the
Limited Liability limited liability partnership and its partners which partners own the can own assets
Partnership (LLPs) determines the mutual rights and duties of the assets of the firm
Act, 2008 defines partners and their rights and duties in relation to
that limited liability partnership. 9 Liability of Unlimited: Limited to the
Partners / Partners are extent of their
Members severally and contribution
jointly liable for towards LLP
MINIMUM NUMBER OF PARTNERS IN CASE OF LLP actions of other except in case of
partners and the intentional fraud
As per the LLP Act, any individual or body corporate may be firm and their or wrongful act
a partner in a limited liability partnership; provided that an
individual shall not be capable of becoming a partner of a limited liability extends to of omission or
liability partnership, if- personal assets commission by a
partner.
he has been found he is an he has applied to
to be of unsound u n d is ch a r g e d be adjudicated as 10 Principal Partners are the Partners are agents
mind by a Court Agent agents of the firm of the firm only
insolvent; or an insolvent and
of competent
his application is Relationship and of each other and not of other
jurisdiction and the
finding is in force; pending. partners

MAIN CLAUSES REQUIRED IN A PARTNERSHIP DEED

1. Name of the firm and the partners;
Every limited liability partnership shall have atleast two partners. 2. Commencement and duration of business;
3. Amount of capital to be contributed by each partner;
4. Amount to be allowed to each partner as drawings and the
timings of such drawings;
If at any time the number of partners of a limited liability 5. Rate of interest to be allowed to each partner on his capital and
partnership is reduced below two and the limited liability on his loan to the firm, and to be charged on his drawings;
partnership carries on business for more than six months while 6. The ratio in which profits or losses are to be shared;
the number is so reduced, the person, who is the only partner of 7. Whether a partner will be allowed to draw any salary;
the limited liability partnership during the time that it so carries 8. Any variations in the mutual rights and duties of partners;
on business after those six months and has the knowledge of the
9. Method of valuing goodwill on the occasions of changes in the
fact that it is carrying on business with him alone, shall be liable
constitution of the firm;
personally for the obligations of the limited liability partnership
10. Procedure by which a partner may retire and the method of
incurred during that period.
payment of his dues;
11. Basis of the determination of the executors of a deceased
Distinction between an ordinary partnership firm and an partner and the method of payment;
LLP 12. Treatment of losses arising out of the insolvency of a partner;
13. Procedure to be allowed for settlement of disputes among
Key Elements Partnerships LLPs partners;
14. Preparation of accounts and their audit.
1 Applicable Law Indian Partnership The Limited
Act 1932 Liability
Partnerships Act,
RULES IN THE ABSENCE OF PARTNERSHIP DEED
2008
1. No partner has the right to a salary
2 Registration Optional Compulsory with
ROC 2. No interest is to be allowed on capital
3 Creation Created by an Created by Law
Agreement 3. No interest is to be charged on the
drawings
4 Body Corporate No Yes
5 Separate Legal No Yes 4. Interest at the rate of 6% p.a is to be
Entity allowed on a partner’s loan to the
firm
6 Perpetual Partnerships do It has perpetual
Succession not have perpetual succession and 5. Profits and losses are to be shared
succession individual partners equally
may come and go

Note: In the absence of an agreement, the interest and salary payable to a

partner will be paid only if there is profit.

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11
PRINCIPLes AND PRACTICe OF ACCOUNTING
POWERS OF PARTNERS
In a Trial Balance of a partnership firm, one may find Capital
Accounts of partners as well as Drawings Accounts
(a) Buying and selling of goods

(b) Receiving payments on behalf of the firm and giving

valid receipt
Finally the Drawings Account of a partner may be transferred
(c) Drawing cheques and drawing, accepting and endorsing to his Capital Account so that a net figure is available.
bills of exchange and promissory notes in the name of the firm

(d) Borrowing money on behalf of the firm with or without

pledging the inventories-in-trade Generally the Drawings Account or Current Account (as it
is usually called) remains separate.
(e) Engaging servants for the business of the firm
PROFIT AND LOSS APPROPRIATION ACCOUNT
In certain cases an individual partner has no power to bind the
During the course of business, a partnership firm will
firm. This is to say that third parties cannot bind the firm unless
prepare Trading Account and a Profit and Loss Account
all the partners have agreed. These cases are: at the end of every year.

(a) Submitting a The final accounts of a sole proprietorship concern will

(g) Entering into dispute relating not differ from the accounts of a partnership firm.
partnership on to the firm
behalf of the firm arbitration
The Profit and Loss Account will show the profit earned
by the firm or loss suffered by it.

(f) ) Acquisition of (b) Opening a bank

immovable property account on behalf of
belonging to the firm the firm in the name of This profit or loss has to be transferred to the Capital
a partner Accounts of partners according to the terms of the
Partnership Deed or according to the provisions of the
(c) Compromise or Indian Partnership Act (if there is no Partnership Deed
(e) Admission of any
liability in a suit or relinquishment of any or if the Deed is silent on a particular point).
claim or portion of
proceedings against
claim by the firm
the firm
(d) Withdrawal
of a suit or
proceeding filed
Two methods of accounting
on behalf of
the firm

The rights, duties and power of partners can be changed by

mutual consent.
Fluctuating capital Fixed capital method
ACCOUNTS method
Partnership Act doesn’t specifiy any format for preparation
of accounts of Partnership Firm and thus accounts are
prepared as per Basic rules of Partnership accounts.
There is not much difference between the accounts of a No current account is Generally initial capital
partnership firm and that of sole proprietorship (provided maintained. All such contributions by the
transactions and events partners are credited to
there is no change in the firm itself ).
are passed through capital partners’ capital accounts
The only difference to be noted is that instead of one Capital accounts. Naturally, and all subsequent
capital account balance transactions and events
Account there will be as many Capital Accounts as there are
of the partners fluctuates are dealt with through
partners. every time. So, in current accounts. Unless a
fixed capital method, decision is taken to change
a fixed capital balance it, initial capital account
When a partner takes money out of the firms for his is maintained over a balance is not changed.
domestic purpose, either his Capital Account can be debited period of time while in
or a separate account, named as Drawings Account, can be fluctuating capital method
opened in his name and the account may be debited. capital account balances
fluctuate all the time.

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 PRINCIPLes AND PRACTICe OF ACCOUNTING
GUARANTEE OF MINIMUM PROFIT

Sometimes, one partner can enjoy the right to have

minimum amount of profit in a year as per the terms of the
partnership agreement.

In such case, allocation of profit is done in a normal way

if the share of partner, who has been guaranteed minimum
profit, is more than the amount of guaranteed profit.
INTEREST ON CAPITAL

The amount of interest is debited to interest on capital However, if share of the partner is less than the guaranteed
accounts and credited to the capital accounts, if capitals are amount, he takes minimum profit and the excess of
fluctuating and current accounts, if capitals are fixed. Interest guaranteed share of profit over the actual share is borne by
on capital account is then closed by transfer to profit and loss the remaining partners as per the agreement.
appropriation account.

Alternatively, credit the capital (or current) account of the

partner concerned and debit the profit and loss appropriation There are three possibilities as far as share of deficiency by
account. other partners is concerned. These are as follows:
• Excess is payable by one of the remaining partners.
• Excess is payable by at least two or all the partners in an
FOR ALLOWING INTEREST ON CAPITAL agreed ratio.
• Excess is payable by remaining partners in their mutual
Profit and Loss Appropriation Account Dr.
profit sharing ratio.
To (Individual) Capital (or Current) Accounts of Partners

Subject to contract between the partners, If the question is silent about the nature of guarantee, the
interest on capitals is to be provided burden of guarantee is borne by the remaining partners in
out of profits only. Thus in case of loss,
Net loss and no interest is provided. But in case of their mutual profit sharing ratio.
Interest on insufficient profits (i.e. net profit less
Capital than the amount of interest on capital),
the amount of profit is distributed in the CAPITAL RATIO
ratio of capital as partners get profit by Partners may agree to share profits and losses in the capital ratio.
way of interest on capital only.

Capital ratio

INTEREST ON DRAWINGS
Calculation of Interest on Drawings: Total Drawings x Interest If capitals are fluctuating
Rate x Multiplication Factor If capitals are fixed and partners introduce or
withdraw capitals during the
(a) Fixed Amount is drawn:
year
Time of drawings Multiplication Time of Multiplication
Factor drawings factor
Beginning of 6.5/12 Beginning 7.5/12 the capitals for the purpose
profits will be shared of ratio would be determined
every month of each in the ratio of given with reference to time on the
quarter capitals basis of weighted average
method
Middle of every 6/12 Middle 6/12
month of each
quarter
VALUATION OF GOODWILL
Goodwill is the value of reputation of a firm in respect of profits
End of every 5.5/12 End of each 4.5/12 expected in future over and above the normal rate of profits.
month quarter
Note: Where the date of drawings not given then interest on drawing Necessity for valuation of goodwill
is always calculated for 6 months /multiplication factor will be 6/12 Necessity for valuation of goodwill
(b) Different amount is withdrawn at various dates: use product Change in profit Admission of Retirement When
method sharing ratio partner or death of business is
For charging interest on drawings partner dissolved or
(Individual) Capital (or Current) Accounts of Partners Dr. sold
To Profit and Loss Appropriation Account
This situation is not covered at Foundation level.
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13
PRINCIPLes AND PRACTICe OF ACCOUNTING
Revaluation Account or Profit and Loss Adjustment Account
• When a new partner is admitted into the partnership, assets
are revalued and liabilities are reassessed. A Revaluation
Account (or Profit and Loss Adjustment Account) is opened
for the purpose.
• This account is debited with all reduction in the value of
assets and increase in liabilities and credited with increase in
Methods of valuation of the value of assets and decrease in the value of liabilities.
goodwill • The difference in two sides of the account will show profit
or loss. This is transferred to the Capital Accounts of old
partners in the old profit sharing ratio.
• Annuity basis
• Super profit basis
• Capitalization basis ACCOUNTING ENTRIES
• Average profit basis
1 Revaluation Account Dr.
To Assets Account with the reduction in
• Average Profit = Total profit/
Number of years the value of the assets
• Goodwill = Average Profit x No. of
Average Years’ purchased (Individually which show a
profit basis • The profits taken into consideration decrease)
are adjusted with abnormal losses,
abnormal gains, return on non- To the Liabilities Accounts with the increase in the
trade investments and errors. liabilities.
(Individually which have to be
Increased)
• Calculate Capital Employed
• Assets ……. 2 Assets Account (Individually) Dr. with the increase in the
• Less: Liability ……. value of the of assets
• Capital Employed ……..
• Find the normal Rate of Liabilities Accounts Dr. with the reduction in
Super profit Return(NRR) the amount liabilities
basis • Find Normal Profit=Capital
Employed X Normal rate of Return To Revaluation Account
• Find Average Actual Profit
• Find Super Profit=Average Actual 3 Revaluation Account Dr. with the profit in the
Profit-Normal Profit old profit sharing ratio.
• Find Goodwill=Super Profit X
Number of Years Purchased To Capital A/cs of the old
partners
Or
• Goodwill=Super Profit x Annuity
Annuity basis Number Capital A/cs of the old Dr. with the loss in old
partners profit sharing ratio.
To Revaluation Account

Capitalization • Goodwill = Super Profit / Normal Rate

basis of Return

ADMISSION OF A NEW PARTNER

New partners are admitted for the benefit of the partnership firm.
New partner is admitted either for increasing the partnership capital in the old profit
or for strengthening the management of the firm. sharing ratio.
Revaluation Account should be
Adjustment of goodwill
or Profit and Loss amongst the old partners transferred to
Adjustment Account for in their scarificing gaining the Capital
revaluation of assets ratio Accounts of the
and liabilities Whenever a old partners
Admission of
Profit/loss on partner Reserve lying in new partner is
revaluation account the balance sheet admitted,
is transfer to old transfered to the any reserve
partners in their old profit capital accounts of old etc. lying in the
sharing ratio partners in their old Balance Sheet
profit sharing ratio

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 PRINCIPLes AND PRACTICe OF ACCOUNTING
GAINING PARTNERS Revaluation Account or Profit and Loss Adjustment
The partners whose profit shares have increased as a result of Account is closed automatically by transfer of profit or
change are known as gaining partners. loss balance to the Partners’ Capital Accounts.

GAINING RATIO
If it is decided that revalued figures of assets and liabilities
The ratio in have agreed in profit the other will not appear in the balance sheet of the continuing
partners, then a journal entry should be passed with the
which the to gain their from partner or amount payable or chargeable to the retiring partner
partners shares partners. which the continuing partners will share at the ratio of
gain.

difference between
Gaining
new profit shares
ratio = and old profit shares RESERVES
On the retirement of a partner any undistributed profit or
HIDDEN GOODWILL reserve standing at the Balance Sheet is to be credited to the
When the value of the goodwill of the firm is not specifically given, Partners’ Capital Accounts in the old profit sharing ratio.
the value of goodwill has to be inferred as follows:
Particulars Alternatively, only the retiring partner’s share may be
transferred to his Capital Account if the others continue
Incoming partner’s capital x Reciprocal of share of xxx at the same profit sharing ratio.
incoming partner
Less: Total capital after taking into consideration the xxx
capital brought in by incoming partner FINAL PAYMENT TO A RETIRING PARTNER
Value of Goodwill xxx
The following adjustments are necessary in the Capital A/c:

RETIREMENT OF A PARTNER
(i) Transfer of reserve

Revaluation
Account or (ii) Transfer of goodwill
Profit and Loss
Adjustment
Account for
revaluation of (iii) Transfer of profit/loss on revaluation
assets and
liabilities After adjustment of the above mentioned items, the Capital
Account balance standing to the credit of the retiring partner
Profit/loss on Adjustment of represents amount to be paid to him.
revaluation is goodwill amongst
transferred to old Retirement of the remaining
partners in their old partner partners in their
profit sharing ratio profit gaining ratio The continuing partners may
Retiring Partner’s Dr.
discharge the whole claim at
the time of retirement. Then Capital A/c
the journal entry will be To Bank A/c
Transfer of
reserves goodwill,
Transfer of profit/
loss on revaluation
to retiring partner Sometimes the retiring partner Retiring partner’s Dr.
agrees to retain some portion Capital A/c
of his claim in the partnership To Retiring Partner’s
as loan. The journal entry Loan A/c
will be To Bank A/c
REVALUATION OF ASSETS AND LIABILITIES ON
RETIREMENT OF A PARTNER
(a) Repayment may be made in
On retirement of a partner, it is required to revalue assets instalments over a period of
and liabilities. time and the interest is paid
As a rule, the on outstanding balance which
payment is made will be treated as a loan of the
To arrive at profit or loss on revaluation of assets and according to terms outgoing partner.
liabilities, a Revaluation Account or Profit and Loss of partnership (b) The amount due may be treated
Adjustment Account is opened. agreement which as a loan to the firm and in
might provide one return the firm will either pay
of the following interest at a fixed rate or share of
alternatives: the profit of the firm.
Profit or loss on revaluation , such profit or loss should be (c) An annuity may be paid to a
distributed amongst the existing partners including the retired partner for life or for an
retiring partner at the existing profit sharing ratio. agreed number of years for the
life of some dependent.

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15
PRINCIPLes AND PRACTICe OF ACCOUNTING
PAYING A PARTNER’S LOAN IN INSTALMENT AMOUNT PAYABLE TO LEGAL REPRESENTATIVES OF DEAD
PARTNER
Paying a partner’s loan is only a matter of arranging finance. (a) The amount standing to the credit
to the capital account of the deceased
partner

Sometimes it is stated that the loan is to be paid off in equal (b) Interest on capital, if provided in
instalments and that the balance is to carry interest. the partnership deed upto the date of
death

In such case, loan should be divided into equal parts. (c) Share of goodwill of the firm

The
The interest for the period should be calculated and The (d) Share of undistributed profit or
representatives
payment should consist of the instalment on account of the reserves
of dead
loan plus interest for the period.
partners are
entitled to
(e) Share of profit on the revaluation
of assets and liabilities
DEATH OF A PARTNER
When the partner dies the amount payable to him/her is paid to his/
her legal representatives. (f ) Share of profit upto the date of
death
Right of outgoing partner in certain cases to share subsequent
profits

(g) Share of Joint Life Policy.

As per provisions of Section 37 of the Indian Partnership Act.,
Where any member of a firm has died or otherwise ceased to
be a partner, and the surviving or continuing partners carry CALCULATION OF PROFIT UPTO THE DATE OF DEATH OF A
on the business of the firm with the property of the firm PARTNER
without any final settlement of accounts as between them and
the outgoing partner or his estate, then, in the absence of a
Such Profit is calculated through P&L
contract to the contrary, the outgoing partner or his estate is Suspense account. After ascertaining
entitled at the option of himself or his representatives to such the amount due to the deceased
share of the profits made since he ceased to be a partner as partner, it should be credited to his
Executor’s Account.
may be attributable to the use of his share of the property of
the firm or to interest at the rate of six per cent per annum on
the amount of his share in the property of the firm.
If the death of a partner occurs during
the year, the representatives of the
deceased partner are entitled to his/her
Provided that whereby contract between the partners an share of profits earned till the date of
option is given to surviving or continuing partners to purchase his/her death.
the interest of a deceased or outgoing partner, and that
option is duly exercised, the estate of the deceased partner,
or the outgoing partner or his estate, as the case may be, is
not entitled to any further or other share of profits; but if any
Such profit is ascertained by either of the following methods
partner assuming to act in exercise of the option does not in
all material respects comply with the terms thereof, he is liable
to account under the foregoing provisions of this section. This Time Basis Turnover or Sales Basis
way, the outgoing partner has the option to receive, interest at
the rate of 6% p.a. or the share of profit earned on the unsettled
amounts for the period till his dues are settled by the firm in We have to take into
It is assumed that profit
the absence of any contract made to the contrary. consideration the profit
has been earned uniformly
and the total sales of the
throughout the year
last year. Thereafter the
profit up to the date of
It may be noted that the outgoing partner is not bound to make death is estimated on the
election until the share of the profit that would be payable to basis of the sale of the last
him has been ascertained. year. Profit is assumed to
be earned uniformly at the
same rate.

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Journal Entries in Fund Accounting:

Amount Contributed by Partners:

Dr Bank a/c
Cr Capital a/c

Purchase of Investment by fund:

Dr Investment a/c
Cr Bank a/c

Purchase of Derivatives:
Dr Derivative Instrument (Like Interest Swaps) a/c
Cr Bank a/c

Direct Expense payment:

Dr Expense a/c
Cr Bank a/c

Direct Income received:

Dr Bank a/c
Cr Income

Accrued Expense Entry:

Dr Expense a/c
Cr Accrued Expense a/c

Payment of Accrued Expense:

Dr Accrued Expense a/c
Cr Bank a/c

Accrued Income Entry:

Dr Accrued Income a/c
Cr Income a/c

Receipt of Accrued Income:

Dr Bank a/c
Cr Accrued Income a/c

Prepaid Expense:
Dr Prepaid Expense
Cr Bank a/c

Amortising Prepaid Expense:

Dr Expense a/c
Cr Prepaid Expense a/c
Sale of Investment:
Dr Bank a/c
Cr Investment

Unrealised Gain on Investment/Derivative:

Dr Investment /Derivative a/c
Cr Unrealised gain

Unrealised Loss on Investment/Derivative:

Dr Unrealised Loss a/c
Cr Investment /Derivative a/c

Realised Gain while selling Investment/Derivative:

Dr Bank a/c
Cr Investment
Cr Realised gain

Realised Loss while selling Investment/Derivative:

Dr Bank a/c
Dr Unrealised Loss a/c
Cr Investment