Accounting Material For Interviews

ACCOUNTING MATERIAL FOR INTERVIEWS
English Essay Writing 1 * 5 = 5 Marks English Correct the Sentense 5 * 1 = 5 Marks Multiple Choice QUestions 40 * 1 = 40 marks (Accounts & Finance) Accounts & Finance Questions need to write Briefly 5 * 2 = 10 Marks Simple Arthamatic and Reasoning = 10 * 1 = 10 Marks -----------Total 70 Marks -----------If u select in Written test u will have Next HR Interview (Personal Questions) and Tecchinal round (Questions on Accounts and finance). Here i am attaching some imp Questions & Prepare well. 3.Subject Interview Accoounting Definations & Concepts and Principals Ratio's with definations , Shares & debeture Parent & subsidary Company Public ltd Company and Private Ltd Company Revenue Income/Expenditure deffered Income/Expenditure Capital Income/Expenditure Accured Income/Expenditure Time value of money Zero based Budget Fixed Cost, varible cost ,marginal cost and Break even Good will Amortisation Depriciation & Types Assets and types of Assets (i.e Tangible and Intangible,ficticious Assets) patnership and Jointventure and Consignment Trading P&L and Balance sheet (Format & Shedules) and Trail Balance Minirioty Interest or minority ownership Less than 50% ownership of a corporation's voting stock, or not enough ownership to control company operations. From a purely accounting point of view, a parent company which owns less than 100% but more than 50% of a subsidiary presents the value of the remaining ownership (the minority ownership) on the balance sheet in a separate account. In such cases, minority interest is shown as either a liability or an equity item on the consolidated balance sheet, and the income (or loss) owed to the minority owners is subtracted from (or added to) the parent's income to arrive at a net income number (consolidated). Lease & its Types Green shoe option Cash flow statements LOng Term Debt/Short Term Debt Non Balance sheet Items (Leases Assets/Foot Notes Items) margin of safety, In Finance Financial Management , divined yeild and networth capital Budgeting Financial services , Commercial Paper and Venture Capital and Mutual Funds Portfolio Management ,working Capital and types of Working capital,caliculation methods and Abt Project in the Acadamic ----------------------------------------
What is book building? -- --Book building is a process where by the company seeks bids from prospective investors for its Public offer. Based upon the bids received the offer price is fixed. What is an IPO? ---- IPO stands for Initial Public offering. The shares are issued for the first time to the public as opposed to the secondary market. What is an ADR? ----ADR is American Depository Receipt. A non US company issues ADRs in US in order to rise capital. An ADR will normally be in multiples of Equity shares of that company. What are the various investing opportunities you have? Real Estate, Government securities, Debentures, Equity Shares, Preference shares, tax saving Bonds, Mutual funds, Insurance etc. What is a merger? ----A merger is a transaction between two companies where by both companies merge into each other and as a result a new company is formed. What is a subsidiary company? -- --A company which is controlled by its holding company. The control could be because of any of the following factors. More than 50% of capital being owned by holding company. Majority of the Board of directors of subsidiary are from holding company. Who are promoters? ----Promoters are the people who initiates the idea of creating the company. They may/may not join the Board of directors after the company is formed. What are consolidated statements? ----These are the financial statements reported by a holding company and these statements include the financial performance of its subsidiaries. What is stock option? ----Stock option is an instrument that carries a right to buy the underlying stock at a certain price during certain time frame. Normally issued to the employees of the companies to motivate and retain them. What is the rule of Nominal accounts? ---Debit all expenses and losses. Credit all incomes and gains. What are the important financial ratios a banker looks into when you approach for loan? Debt Service coverage ratio Interest Coverage Ratio What is a prospectus? - ---It is an invitation asking prospective investors to invest in the company. What is the financial year in India ? Jan-Dec or Apr-mar or July-June?-----Apr1-Mar31 Give exmaple for the following: Non Cash Expenditures : Depreciation, Write down of investments, Provisions. Intangible assets : Goodwill, PATENTS, TRADEMARKS Adjustments after Net Income : Dividends, Interest on capital in case of partnerships Contingent liabilities : Guarantees Fixed expenses : Rent, Insurance All Items which are in Bold are important 1.all accounting concepts 2.revenue expendatures/deffered revenue expenditures/capital expenditure 3.pvt ltd company,public ltd comp 4.Types of shares

5.share premium/discount on issue of shares 6.memorentum of association 7.ariticles of association 8.subsidary company or holding company 9.minority interst 10.primary market or secondary market 11.stock exchanges in india and abroad 12.depriciation-Acounting standard-6 13.depletion/amortization 14.SEBI(security exchange board india ) 15.provision/reserve 16.general reserve or capital reserve 17.debentures and bonus shares 18.divedend-interium and final dividend 19.inventory valution and methods 20.goodwill valution and methods 21.cashflow and funds flow 22.working capital 23.marginal cost/margin of safety/break evenpoint/vairiable cost/semi varible cost/fixed cost 24.jointventure and partnership 25.non recurring items in p&l account Ex:sale of investment 26.non cash expenditure acoount in p&l account ex:depiriciatiaon 27.diff. between revenue and income 28.accrued income 29.debtor/creditor defenations 30.write entry and posting outstanding salaries 31.accounting treatment: loss of inventory---no insurance coverage partly insurance coverage fully insurance coverage 32. ratio analysis----all ratios are prepared33. form of balance sheet--horizontal\vertical---schedule 6 very important fully covered 34.capital profit and revenue profit 35.rebate u/s 88 of income tax act 36.mutual fund / trade discount/cash discount 37.duties of finance manager 38.interim audit/statutory audit 39.Sensex Questions asked in Earlier interviews collected from frineds Provisions Vs Reserves What is Balance sheet and Cash flow Schedule 6 format Trading A/c Vs P&L A/c Exampls of Non Recurring Expenditure Revenue Vs Income Ratio Analysis All formulas (Imp debt equity , optimim stage of debt equity) what is cost of goods sold Finance Manager Duties Capital expenditure and Fixed expenditure What is IPO What is ADR

Tell about Credit Rating agencies Diff b/w Gross profit and Net Profit Leverages (operating and financial ) Leverages usage Closing stock ( Cost or Market value which is less) PortFolio Management Mutual funds What is "Limited " in company names means Prospectues Qurom Diff b/w Pvt and Public Limited Company Income Tax Paid is not treated as Expenditure for Income Tax Time Value of Money, how it will useful in Capital Budgeting Father of Economics -- Adam Smith Father of Scientific MgtFW Taylor Integrated and Non Integrated Accounts Holding Vs subsidiary companies Revaluation Reserve Recurring and Non Recurring Items in P&l a/c Association not for profit Deductions Accrual Basis and Cash Basis GodWill Working Capital Costing Basics and important topics What is meant by B/sheet, Cashflow How going concern concept reflects in B.sheet (Like margin of safety, varible cost, semi-variable cose) Q)depreciation,Amortization and Impairment? Q)cap expr and rev.expr Q)tangible-intangible Q)associate & holding ---subsi if we r having 20 to 50% interest more than 50% subsi Q)What is appropriation account and what are the components of appr.a/c?from Net profit --------to provide reserves. Q)what is EPS and DPS? Q)Asset write-down arises, when on review by a company, circumstances indicate that the carrying value of an asset, that an entity holds for usage may not be recoverable, and if the sum of expected future cash flows is less than the carrying value of the asset, an impairment is recognized to the extent the carrying value exceeds the fair value of the
asset. Note: Asset write-down is not to be confused with depreciation or amortization (which is a regular charge of the cost of an asset over its estimated
useful life). Asset impairment arises as result of review of the long-lived assets by an entity, where as depreciation is a uniform charge of the cost of the asset over its estimated useful life. Diff between Capital Resv and Revenue Resrv? What are the components of B/S? What is net-worth? What is differed Expenditure?Where can u find iton B/S? what is liquid ratio and acid ratio? Debt-Equity ratio? What is unearned revenue?Ex: Advanced income What is Working Capital? Structure of cost sheet? Functions of financial Mgt? What is Primary market and Secondary market? SEBI? capital expenditure -- money spent for additions or improvements to structures or equipment that are used to carry on the activities of an organization or individual. Q)capital gain or loss -- the gain or loss incurred from the sale or disposition of assets including securities and real estate. Q)accounting equation -- the basic equation of double-entry accounting that reflects the relationship of assets, liabilities and net worth (reserves + stockholders equity + retained earnings). The equation may be expressed in its simplest form as: assets = liabilities + net worth. Q)accounts payable -- amounts recorded as liabilities on the books of a company, institution or individual that are owed, but have not yet been paid, to a creditor for previously purchased merchandise or services. Q)accounts receivable -- amounts recorded as assets

on the books of a company, institution or individual that are due, but have not yet been collected, from a debtor for the previous purchase of merchandise or services. employee stock options minority interest consolidated accounts kinds of depreciation charge , employee stock options
Mergers and Amalgamations ********Derivatives mutual funds open end and close end option and warrants
FI Questionnaire 1. What is the difference between company and company code? 2. How many chart of accounts can be attached to a company code? 3. How many chart of accounts does SAP define, and its purposes? 4. What are substitutions and validations? What is the precedent? 5. What is a controlling area? 6. Define relationship between controlling area and company code. 7. What is a fiscal year variant? 8. What are special periods used for? 9. What do you mean by year dependent in fiscal year variants? 10. What are shortened fiscal year? When are they used? 11. What are posting periods? 12. What are document types and what are they used for? 13. How are tolerance group for employees used? 14. What are posting keys? State the purpose of defining posting keys? 15. What are field status groups? 16.What are withholding tax types and tax codes? 17. What is a transport request? 18.What is dunning? What is the maximum level of dunning? 19. What is automatic payment program and what are its pre-requisites? 20. What are open items? What is open item clearing? 21.What are house banks? What are bank chains state the purpose of having bank chains? 22. State the procedure of setting up cash journals? 23. What is a Chart of depreciation? 24. How many chart of depreciation can be assigned to a company code? 25. What is a depreciation key? 26. What are asset classes 27. How is account determination done for assets? 28. What are depreciation areas? What is the purpose of defining depreciation area? 29. What are cost elements and what are cost element groups? 30. What are cost centers? Define cost center hierarchy? 31. What are primary and secondary cost elements?

32. How is FI and SD integrated? 33. How is FI and MM integrated? 34. How is FI and Asset module integrated? 35. What is a real Internal order? 36.What is a statistical internal order? 37. What is assessment? 38. What is distribution? 39. What are commitment items? 40. What are internal orders? 41. How are internal orders settled? 42. What is a settlement rule? .
(1) __________ is concerned with the maximization of a firm's earnings after taxes. (a) Shareholder wealth maximization (b) Profit maximization (c) Stakeholder maximization (d) EPS maximization Answer : B (2) Which of the following would generally have unlimited liability? (a) A limited partner in a partnership. (b) A shareholder in a corporation. (c) The owner of a sole proprietorship. (d) A member in a limited liability company (LLC). Answer : C (3) Which of the following examples would be deductible as an expense on the corporation's income statement? (a) Interest paid on outstanding bonds. (b) Cash dividends paid on outstanding common stock. (c) Cash dividends paid on outstanding preferred stock. (d) All of the above. Answer : A (4) In finance we refer to the market where new securities are bought and sold for the first time as the __________ market. (a) money (b) capital (c) primary (d) secondary Answer : C (5) Which of the following would not improve the current ratio? (a) Borrow short term to finance additional fixed assets. (b) Issue long-term debt to buy inventory. (c) Sell common stock to reduce current liabilities. (d) Sell fixed assets to reduce accounts payable. Answer : A (6) Krisle and Kringle's debt-to-total assets ratio is.4. What is its debt-to-equity ratio? (a) .2 (b) .77 (c) .667 (d) .333 Answer : C (7) Which group of ratios measures a firm's ability to meet short-term obligations? (a) Liquidity ratios.

(b) Debt ratios. (c) Coverage ratios. (d) Profitability ratios. Answer : A (8) According to the accounting profession, which of the following would be considered a cash-flow item from a "financing" activity? (a) A cash outflow to the government for taxes. (b) A cash outflow to repurchase the firm's own common stock. (c) A cash outflow to lenders as interest. (d) A cash outflow to purchase bonds issued by another company. Answer : B (9) Cash budgets are prepared from past: (a) balance sheets. (b) income statements. (c) income tax and depreciation data. (d) None of the above answers are Answer : D (10) The accounting statement of cash flows reports a firm's cash flows segregated into what categorical order? (a) Operating, investing, and financing. (b) Investing, operating, and financing. (c) Financing, operating and investing. (d) Financing, investing, and operating. Answer : A (11) The firm had a net increase of $800,000 in net fixed assets over the last period. The beginning and ending net fixed asset account balances were $9,100,000 and $9,900,000 respectively. If the firm purchased $2,000,000 in additional fixed assets and sold $100,000 of fixed assets at book value, what was the firm's depreciation expense over the period? (a) $800,000 (b) $1,100,000 (c) $1,900,000 (d) $2,700,000 Answer : B (12) If EOQ = 40 units, order costs are $2 per order, and carrying costs are $.20 per unit, what is the usage in units? (a) 10 units. (b) 16 units. (c) 40 units. (d) 80 units. Answer : D (13) What is the book value of common equity per share of common equity outstanding for the following firm? The firm has 20,000 common shares authorized of which 15,000 are outstanding at a par value of $1. Additional paidin-capital represents $300,000 and retained earnings are an additional $300,000. (a) $1 (b) $20 (c) $21 (d) $41 Answer : D (14) Upon close examination of the income statement, which of the following mathematical expressions would be true? (a) Net Sales - Gross Profit = Income from Operations (b) Gross Profit + Selling, General and Administrative Expenses = Net Sales (c) Income from Operations - Interest Expense - Income Tax Expense = Net Income (d) None of the above are true. Answer : C

(15) Which of the following is not a correct expression of the accounting equation? (a) Assets - Liabilities = Owners' Equity (b) Net Assets = Equities (c) Assets = Equities (d) Assets = Liabilities + Owners' Equity Answer : B (16) The owners' equity section of a balance sheet contains two major components: (a) Common Stock and Additional Paid-in Capital (b) Paid-in Capital and Retained Earnings (c) Common Stock and Retained Earnings (d) Net Income and Dividends Answer : B (17) Which of the following would not be included on a balance sheet? ( a) Accounts receivable. ( b) Accounts payable. ( c) Sales. ( d) Cash. Ans:C (18) If total assets were $21,000 and total liabilities were $12,000 at the beginning of the year, and if net income for the year was $5,000, what is total owners' equity at the end of the year? (a) $ 4,000 (b) 5,000 (c) 9,000 (d) 14,000 Answer : D (19) Treasury stock involves shares which are: (a) issued and outstanding. (b) authorized but not yet issued. (c) subscribed but not yet authorized. (d) issued but not currently outstanding. Answer : D (20) If a transaction during the year caused one asset to increase by $40,000 and another asset to decrease by $30,000, which of the following events may have caused these effects? (a) Merchandise inventory was purchased and paid for entirely with cash. (b) Cash was received in exchange for the issuance of common stock. (c) Equipment was purchased and paid for partly with cash and with an account payable for the difference. (d) None of the above could have caused these effects. Answer : C (21) Net assets were $9,500 at the beginning of the year and $12,000 at the end of the year. Merchandise Inventory went up by $1,000 during the year, Accounts Payable went down by $500, and Accounts Receivable went down by $2,000. If the Cash account was the only other asset and there were no other liabilities, what happened to cash during the year? (a) Cash increased by $2,000. (b) Cash increased by $3,000. (c) Cash decreased by $2,000. (d) None of the above. Answer : B (22) The term 'current assets' does not includea) Payments in advance. b) Bills receivable. c) Long-term deferred charges. d) Cash at bank

Ans:C (23) The retained earnings balance for Matt & Anne's Food Center at December 31, 2003 was $33,000. The balance at December 31, 2004 was $47,000. During 2004, dividends in the amount of $6,000 were declared and paid to stockholders. The only other change in retained earnings was due to net income. The net income for 2004 was? (a) $8,000 (b) 14,000 (c) 20,000 (d) 26,000 Answer : C (24) The principle stating that all expenses incurred while earning revenues should be identified with the revenues when they are earned, and reported for the same time period is the: (a) cost principle. (b) revenue principle. (c) expense principle. (d) matching principle. Answer : D (25) "The firm must be treated as financially separate and distinct form its' owner(s)". This rule is known as: (a) The account
E.O.Q: Economic order Quantity. It is a quality of material that Can be ordered at which both ordering cost and carring costs are minimum. E.O.Q = 2AO A= Annual usage units O= ordering cost per Annam C= Carring cost per unit per Annam Semi Variable Cost : These costs are partly fixed and partly, variable in relation to out put For Example:- Telephone bill, Electricity bill Angle of Incidents:- When both the cost curve and sales curve cuts or meet at a point. That point is called as Break even point. - The angle left after profit angle (or) Angle of Incidents Margin of safety:- Difference between told actual sales-break even sales Margin of safety = Total sales B.E.P Margin of safety will be reached faster if angle of Incidents is Total sales = 30000 Margin safety = 30000-20000 BEP sales = 20000 = 10000 Means Excess actual sales over break even sales is called margin of safety. Absorption Costing: Each and every item of cost i.e, variable cost and fixed cost is charged to the product. Case 1: In this case fixed cost are charged to the product on the basis of normal capacity.
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[Normal Capacity The number of units Normally produced by the Company case 2: In case of under Absorption. That cannot should be charged to the P & L A/C Case 1: Ex: Normal units 10000 Actual production 12000 Fixed over heads 100000 The absorption rate= fixed overheads/Normal units =100000/00000 And total Absorption should be Restrited to 100000. In any case. The absorbed Amount should not exceed the actual fixed cost. Case 2: if the actual production is 8000 units The absorption Rate = 100000/10000=10// per unit The amount absorbed Amount= 100000-80000 = 20000 which is charged to the P& L A/C Marginal Costing:- In the case of Marginal costing only variable cost are absorbed by the product. - In this case the fixed costs are considered as period cost and this should be charged to P & L A/C Costing: The process of determining cost is called as costing Variable cost:- 1. Cost which is changing with every change in production additionally if you want to producing one more unit we need to expend additional cost variable cost in expected to fluctuate in 10 units 100/- total directly in proportionate the changes for 11th unit additionally 10/- in value of production (or) sales. 2. Cost for unit will not change but there is change in total cost 10 units 100Rs Cost per unit = cost/unit=100/10=10/11units 110/Cost per unit=110/11=10/Fixed Cost:- 1. This cost is fixed will not change with Increase or decrease in production Ex:- Factory rent 2. The total cost will not change but cost per unit will change. Rent 10000 1 person share 10000 2 persons share 50000 each 4 persons share 2500 each P.V Ratio: Profit value Ratio. It is a Ratio between contribution and sales P/V Ratio= Contrubution/salesX100 Contribution per unit=sale price-variable cost Break Even Point (B.E.P) This is a point at which there is no profit no loss. At this point to total amount received is equal to the total cost Total sales Amount-Total Cost Amount (Variable Cost + Fixed cost) Total contribution=Total fixed cost Ex: Selling price 10/P/V=10-5 Variable cost 5/=5/Fixed Cost 10000/5/100X100=50% B.E.P (Units) = Fixed Cost/Contribution per unit 10000/5=200units B.E.P(Value) = Fixed cost/P/v Ratio 10000/50X100=20000 Statement of Marginal Cost:Total Sales-variable cost= contribution Contribution-fixed cost=profit Ratio: 1. Current Ratio: Current Assets/Current liabilities
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Current Assets are those which can be converted in to cash in the short run The term short run means-generally a period of one year Current Assets: Inventories + Sundry debtors + cash and bank balance + short term loans & Advances + Marketable non trade Securities + prepaid Expences. Current Liabilities:- cash credit + bank O.D + short term borrowings + creditors + proposed dividend + unclaimed dividend + provision for taxation (provision for tax Advance tax paid) 2. Quick Ratio:- Quick Assets/Quick liabilities Quick Assets = Current Assets-Stock and prepaid expences-other liquid portion of current Assets Quick Liabilities = Current Liabilities cash credit, Bank, Borrowing and other short term Borrowings 3. Debt Equity Ratio:- Debt/Eqity Debt=Secured loan and unsecured loan less cash credit and Bank O.D Equity= paid up share capital including preference capital and free reserves 4. Debt service Coverage Ratio:profit after tax+ Interest + Depreciation + non cash items/ Intrest + Debt Instalment 5. Intrest coverage Ratio:Earnings available to equity share holders/Number of Equity shares 6. P.E Ratio= Price earnings Ratio market price per share/Earnings per share 7. Dividend yield Ratio = Dividend per share/ market price per share 8. Operating Leverage = Contribution/Earnings before Intrest & Tax 9. Finance Leverage = Earnings Before Intrest & Tax/Earnings Before Tax Total Leverage = operating Leverage / Finance Leverage MOA Defines companies Contribution and Scope MOA is the contribution of the Company this document Represents Rules and Regulation of the Company MEMORANDUMS It is a primary document It is subordinate to the Act It is a must for every Company Strict provisions for alteration Ultra virus MOA even all the members. Cannot ratify it SHARES Shares are a part of the capital of the company Share holders are members or Oweners of the compny When recommended by the Board dividend could be declared to share holders Shares do not carry on any charge Shares have restrictions Issue at a discount Share holders have voting Rights ARTICLES It is Secondary document It is subordinate to MOA & the Act Can be written or taken from Company Act Special Resolution is sufficient except where the amendment brings in to effect a private from public Ultra virus AOA but intra virus the MOA can be Ratified DEBENTURE Debentures contribute a loan Debenture holders are creditors Fixed amount of Intrest on debentures paid before dividend declaration Debentures generally have a charge on the asset of the company Debentures do not have Restrictions Issue at a discount Debenture holders do not have voting rights
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Dividend is payable only when profits are there No fixed dividend SHARE HOLDER One of the owners of the Company and has proprietory intrest in the Company When the Company makes profits and the board recommends, share holder gets a share in the profits No security for his Investment Eligible for voting rights On liquidation, share holders are paid last Dividend is payable whether profits are there or not Rate of Intrest is fixed DEBENTURE HOLDER Only a creditor of the Company Gets a fixed rate of Intrest whether the Company makes profit Normally debentures are security No voting Rights Ranks priority with regard repaid
SHARE Has a nominal value May be fully paid or partly paid Can be transferred is whole numbers and not in fractions Each and every shares shall be of equal denomination Shares are identified with distinctive numbers Can be issued directly to the public
STOCK No Nominal value Always fully paid Can be transferred in fractions May be of unequal amount Do not have any distinctive numbers Only fully paid up shares can be converted in to stock and cannot be issued Directly BILL OF EXCHANGE In a bill there is an order to pay In a bill there are there parties 1. Drawer 2. Drawee 3. Payee In a bill the drawer and the payee may be the same The maker of a bill is liable only when the drawee does not accept or pay A bill has to be accepted by the drawee before he can be held liable LEDGER The ledger is the Book of second entry Depending upon his conveniences the trader Records of the transaction in the ledger It will never Loose importance as it is the main book of Accounts which is relied upon permanently In the preparation of trial balance and final A/Cs Ledger is a must In the finalization of income tax to be paid, the tax authorities depend on ledger.
PROMISSORY NOTE In a pro-note there is a promise to pay In a pronote there are two parties the maker and the payee Pronote cannot be made payable to the maker himself The maker a pronote is primarily liable A pronote is signed by the person liable to pay. so no acceptance is needed JOURNAL Journal is the book of first or original entry. It is also called the Book of first entry Transaction in the Journal will be recorded Immediately When once the entries are posted to ledger the Journal Looses its Importance In the preparation of final A/Cs Journal is not useful The tax authorities generally may not depend on Journal
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TRIAL BALANCE The trial Balance is prepared to check the arithmetical accuracy of the Books of Accounts Trial balance doesnot show the financial position of business The trials balance is prepared based on the Ledger Accounts The preparation of trial balance is not compulsory Trial balance can not be shown as a documentary evidence
BALANCE SHEET Balance sheet is prepared to knowledge true position of Assts and liabilities particular date The financial position can be knowledge from balance sheet The balance sheet is prepared on the base of information from trial balance The preparation of balance sheet is must But balance sheet will be accept documentary evidences by tax authorities and courts BALANCE SHEET The objective of preparing balance sheet is to know financial position of the business on a specific date Balance sheet is a statement and hence TO and BY are not used Capital Incomes and expenditures are shown in the balance sheet Balance sheet will not show any balancing figure. A total of liabilities and Assets side should always be equal
PROFIT & LOSS ACCOUNT Objective of preparing P&L A/C to ascertain the Net profit cost it loss of the business during the year Is an account having debit and credit as such TO and BY are used recorded in the P & L A/C Revenue expenditure and Incomes are accorded in the P & L A/C Balancing figure of this Account either net profit or Net loss
Fixed Assets:- These assets are acquired for long term use in the business Liquid assets:- These assets also known as circulating, fluctuating or current assets can be converted is to cash as early as possible. Fictitious assets: Fictitious assets are those assets, which do not have physical Form. They do not have any real value Ex: loss on issue of shares, preliminary Expences. Intaugible assets:- Intaugible assets are those having no physical existence and can not fouch Ex: Goodwill, Trademarks Contingent liabilities :- These are not the real liabilities they are not actual liabilities at present. They right become liability in future on condition that the contemplated evint SHARE CERTIFICATE The holder is a registered member of the compound The holder of a share certificate is essentially a member For the issue of share certificate may required approval of the central Govt. All Companies must issue share certificates Share certificate is issued is partly (or) fully paid shares SHARE WARRANT The bearer of a shares warrant is not a registered member The bearer of a share warrant can be a member only if the article so provided in AOA Share warrant can be issued central Govt. approval is must Share warrants can be only by public companies Share warrant can be issued only fully paid shares
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Share certificate in not negotiable The holder of a share certificate can present a petition for winding up Share warrant is negotiable The holder of a share warrant can not present a petition winding up
Bookkeeping :- is complementary to the Accounting process Book keeping is the systematic recording of financial and Economic transactions. Accounting is the snalysis and Interpretation of book keeping records. Realization concept: Revenues will be Recorded in book only when they are realized Cash Book: the cash book is a sub-divisinal of the Book of original entry recording transactions involving receipts and payments of cash. All cash transactions are first entered in the cash book and these posted from cash book in to the ledger - transactions are recorded chronologically in the cash book Bill of exchange:Is a instrument in writing containing can un conditional order signed by the laker PRUDENCE : Incomes are recognized, when they are realised all possible expences are provide Realization Concept : In this concept Assets are recorded at the realization value of Assets and not the histocal cost basis So now a days realization convention is not accepted professional According bodys. TERM LOANS: Term loans represents by secured borrowing and at present are the most important source of finance for new projects The generally carry a rate of interest these loans are generally repayable over a period of years in annual , semi annual , quantity installments Term loans are also provided by banks, state financial institutions and all India lending institutions CASH PROFIT Cash profit is arrived by adjusting the non cash transactions to the net profit CASH FLOW STATEMENT Accounting standard 3 explain about this - this statement shows how much cash is generated and expensed in the organization during the year , it also opening and closing balance of cash - it is use full for investors and creditors - it provides vital(important) information about companies ability to generate future cash flow to satisfy investors and creditors expectations Methods of preparing cash flows:- There are two methods 1. Direct method = Gross receipts gross payments 2. indirect method = net profit add non cash expenditure less nosh income (credit sales) = net cash flow CLASSIFICATION OF CASH FLOW - Operating cash flow - Investing cash flow - Financing cash flow
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CASH: Purchasing power in hand called cash CASH EXPENSES Cash in paid for expenses incurred eg wages paid, salaries paid NON CASH EXPENSES:- That is cash is not going to out of business - Eg depreciation, writing off goodwill , patents - Writing off preliminary expenses - Discount on issue of shares and debenture CAPITAL EXPENDITURE - Expenses incurred of on long term investment - The benefits will flow or enjoyed by the organization for more than one year eg plant machinery - The item dealt is called as issued it is expressed or identified in its own name eg plant machinery - Assets is purchased for utilization in the business in the normal course of business - Depreciation is to be considered for the life of asset REVENUE EXPENDITURE - These expenses shown in the debit side of p&l account - Expenditure incurred for short term investment - The benefits for the expenditure will flow or enjoyed by the organization for the current year only eg salaries - The item dealt is called goods and merchandise Plant goods T v - goods Goods are purchased with an intention to sell. There no need of depreciation COMPANY - Company cones in to existence only when it is registered under the companies act - Membership incase of a company minimum private -2nos public-7nos maximum private-50 nos, public unlimited - A company on its incorporation enjoys a separate legal entity - Incase of company members liability is limited PARTNER SHIP - A Firm is created by mutual agreement between partners, registration is optional - Membership incase of firm two partners minimum, and maximum banking business -10 nos , other business 20 nos - A firm does not have a separate legal entity - In case of firm partners are jointly & severally liable COMPANY : A company is a trading association, a company is required to be registration under the companies act CLUB: Club is a on trading association, registration of a club is not mandatory DELECREDORY COMMSSION: It is extra commission paid to bare the bad debts collection loss DEMAT ACCOUNT: - Demat Means the meterilised Account - It is a separate Account maintained for Investment (shares, securities, debentures, bonds Extra--- It gives Information about shares bought and sold prices at which shares were bought and sold. shares presently holding amount held. I.R.R: (Internal Rate of Return) This method takes is to consideration time value. It can be said as discounted Rate of Return Purchase Consideration: consideration paid by the transferor company to the share of transfree company.
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Economic value Addes : A company or business earning profit which is more than cost of capital (Return Expected by Investors) Impairment: Permanent decline in value of Asset A.B.C ANALYSIS: ABC Analysis is a Method of Inventors control it is popular system of Inventory control The item of inventors is generally classified in to three types. Those are ABC A= is usage value is Maximum and No.of items is Minimum B= is usage value is medium and no.of itmes is medium C= is usage value is lowest and no.of itmes is highest. Annual Report: Annual Report is a Report - which will contain the all financial statements of the company and - auditors Report and performance of Company and - Auditors opinion of the company - with previous Reports Sweat equity shares : Equity shares issued by the company to employees directors such issue should be authorized by a special Resolution passed by the company in general meeting. Memorandum: memorandum means memorandum of association as originally framed alter from time to time is pursuance of any previous company law or of this act. MEMBER: - Name entered in the Register of Members - Member is also a share holder - Share warrant holder is not a member SHAREHOLDER - Name not entered in the Register of members - Share holder is not a member unless name is entered in the register of members - Share warrant holder is share holder PARTNER - Partner is one of the owner - Partnership is governed by partnership act 1932 - Partner has a un limited liability DIRECTOR - Director is one of the member of the executive bsodu - Companies is governed by companies act 1956 - Director is generally not liable ISSUE OF SHARES AT DISCOUNT Shares can be issued at a discount, if the following conditions are fulfilled - the issue of shares at a discount must be by a resolutions passed by the members at the general meeting - the issue should be sanctioned by the Company law tribunal - the resolution authorizing t;h3e issue of shares specified the maximum rate of discount at which the shares are to be issued - the rate of discount shall not exceed 10% unless comp any law tribunal allowed such excess under special circumstances - the issue can be made only after one year has elapsed since the Company was entitled to commence business - the shares shall be issued with in two months of the sanction by the Company law tribunal or such other period as permitted SHARES ISSUED AT A PRI CE LESS THAN THE NOMINAL VALUES
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Then it is called shares issued at discount the difference between the issued price and nominal value is discount on issue of share. It is shown in balance sheet under head of miscellaneous expenditures no write off GOODWILL Is to be Calculated basically on the basis of following methods: Capitalization Method Super profit Method Capitalization Method: Normal capital employed=future maintainable profits/Normal Rate of Return Goodwill = normal capital employed-actual closing capital employed Super profit Method: Super profit Method=future Maintainable profits-Actual Capital employee X Normal Rate of Return Goodwill = super profit X No. of years for which super profit can be Maintained capital employed= Total Assets of the Company-out siders liabilities Goodwill : It is an Amount paid over and above the value of Assets and liabilities of the under taking Goodwill is the Reputation of the business. This reputation is due to Excess Sales and profit made then normal sales and profit reasons for good will are: 1. good reputation 2. favorable location 3. ability and skill of employees 4. good management extragoodwill is of two types 1. purchased goodwill 2. developed goodwill purchased goodwill: More Amount paid for Assets than require Ex: Total Assets 100000 Amount paid 150000 Developed good will : This goodwill not to be written in books Shares at a premium: When a Company issues shares at a price higher than the nominal value of the (Securities) then the difference in the nominal value and the issue price is the premium. - The premium may be received in cash or in kind - But the share premium collected by a Company on issue of shares in required to be retained in a separate Accounts titled as (security) premium Account. Securities premium account can be used only for 1. paying up of fully paid bonus shares to be issued by the Company to its members 2. To write off preliminary expences 3. to write off underwriting expences /commission paid discount allowed on any issue of shares or debentures of the Company 4. To provide premium payable by a Company on Redemption of redeemable shares or Redemption of debentures of the Company. Distribution of securities premium amount as dividend is not permitted. Security premium is not a free reserves it is in the nature of capital reserve. Accounting Concepts: 1) Business entity Concept: In Accounting language business is separate person is Business entity (and the person who has invested money in that Business or not the same so the person who is Investing money must be treated as loan given) If the invest money in business should be share as capacity. - the owner of the Business is business it self
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- both business and person investing are two different persons so every person activities must be written saperately - Business activities must be written is business books - person activities must be written is personal books - capital is shown as liability in B/S. the reason Investing this is business in lending money from the person investing - this is also called as SAPERATE LEGAL ENTITY 2) Money measurement concept: business records only those transactions which are Expressed in money terms. They will not record transactions if only expressed in other unit of measurement. 3) cost concept: transactions in books are recorded at cost at the actual Amount Incured market value is not considered ex: 10 Laks worth land if purchased 1 Lak we shall record at one laks only. 4) Going concern concept: - It is assumed but overly business will be running for future seable - That the business entity desent have any intension to stop an Business activities in year future - If we feel that the Business will not run or has to be stop in year foreseeable future. Then all the things have to recorded at realizable values. 5) Dual Aspct Concept: - each transaction as two activities a. power to receive some thing (goods purchased) b. Duty to pay some thing (duty to pay money) 6) Accrual concept: not only cash items are recorded in the books but also credit items are to be recorded. Cash Accounting system: Only cash transactions are recorded if the system is following Matching Principle: Revenues are matched with relevant expences for getting that revenue in that period. - all expences incurred or matched with relevant incomes
Out Standing Expenditure: Expenditure incurred but the payment for which is not yet paid will be shown in the balance sheet liabilities side and profit and loss account debited. Accrued expenses: The expenditure which is incurred and the payment thereof might or might not be paid. Working capital: For running day to day activities a business, some capital is required which is called working capital Working capital: current assets current liabilities Excess of total current assets over current liabilities Working capital cycle/ operating cycle: there is a complete cycle from cash to cash , Operating cycle is the time duration required to convert cash in to cash a. conversion of cash in to Raw material b. conversion of raw material in to work in progress c. conversion of work in progress in to finished goods d. conversion of finished goods debtors and e. conversion of debtors in to cash No operating cycle: No of days in year / operating cycle period Stock exchange: stock exchange is the place , where stocks shares and other securities of the listed companies bought and sold
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Mutual a. b. c. fund: Mutual fund is fund , which collects the investments of small saving holders and re- Invest in capital market , like share market , debt market, It clearly link between small saving holders and capital markets EX: UTI mutual fund Debt- Securitization: a. It is a mode of Financing b. Where in securities are issued on the basis of package of assets , this involves the following process of activities Organizing function Pooling function Securitization function Primary market: Shares are purchased directs at the time of allotment by the company Secondary market: Shares are purchased from market through the stock exchange Memorandum of association: a. It is the main document of the company b. If this document represents constitution of that company c. It contains 1. name clause 2. Objective clause 3. State clause 4. capital clause 5. liability clause 6. situation clause Articles of association: This document represents rules and regulations of the company, it defines duties , rights and powers of the governing body between themselves and company Limited liability: liability is limited to the face value of share Minority interest: In a subsidiary company , the majority shares is held by holding company ( say suppose 80% of shares taken by holding company remaining 20% is held by some other people who are little interested in the company. This little interest is called as minority interest, these people are called as minority share holders Subsidiary company: A company who is selling more than 51% of shares to another company is called subsidiary company Holding company: A company who is buying more than 51% of shares from another company is called holding company Pubic limited company: 1. minimum members -7 2. maximum members unlimited 3. minimum directors-3 4. After getting business commencement certificate , they can do business( but not after incorporation) 5. public limited company can go to public issue private limited company: 1. minimum members -2 2. maximum members 50 3. minimum directors 2 4. can start business after incorporation 5. private limited company shall not issue shares to outsiders Government company: A government company is a company in which not less than 51% of the paid up share capital of the company is held by Central
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government, state government, partly by the central govt, and partly one or more General Reserve: It is reserve which is created to meet any meet any future unknown liability , it can be utilized as dividend Capital reserve: profits in the nature of capital or profits in the form of capital nature Reserve capital: reserve capital is called up only at the time of liquidation if assets held are not sufficient to meat the liabilities PROVISIONS - Provisions is charge against profits - is made for known liability or expenditure - it is utilized for that purpose only - is shown above the line - above the line means profit and loss account RESERVE - Reserve in an appropriation profits - it is made for future unknown liability - it can be utilized for any future purpose - is known below the line - below the line means p&l appropriation account
PRIMARY MARKET Shares are purchased directly at the time of allotment by the company
SECONDARY MARKET Shares are purchased from market through the stock exchange
STOCK EXCHANGE Stock exchange is the place, where stocks shares and other securities of the listed companies bought and sold
DEBT SECURITAZATION
It is a mode of financing Where in securities are issued on the basis of package of assets called polio This involves the following process of activities Organizing function Pooling function Securitization function
WORKING CAPITAL
For planning day to day activities of a business Current assets current liabilities , excess of total current assets over current liabilities
WORKING CAPITL CYCLE/ OPERATING CYCLE
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There is complete cycle from cash to cash Conversion of cash in to raw material Conversion of raw material in to work in progress Conversion of work in progress in to finished goods Conversion of finished goods in to debtors and Conversion of debtors in to cash
No of operating cycle= no of days in a year/operating cycle period
ACCRUED INCOME Income earned but which not due ( no right to receive on this date) Earned during the current accounting year but not have been actually received by the end of the same year OUT STANDING INCOME Income accrued and due but was not received DEBTORS Means taken goods on credit, who owes an amount to some body, People who has taken loan or money CREDITORS Means from whom have taken goods on credit people to whom we owes ACCRUED EXPENSES The expenditure which is incurred and the payment there of might or might not be paid PREPAID EXPENDITURE The amount paid for the expenditure relating to the future years OUT STANDING EXPENDITURE The expenditure incurred but the payment for which is not yet paid and will be shown in the balance sheet liabilities side and debited to profit and loss account AMORTISATION Writing of intangible assets eg patents, goodwill this assets there is no physical existence RECURRING EXPENSES Items which are repeated eg sales and wages NON RECURRING EXPENSES Items which are not regular and repeated eg buying of machinery or other fixed assets, insurance claims DELCREDERE COMMISSION Consignment of goods it is extra commission paid to bare the bad debts collection
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STOCK EXCHANGE Stock exchange is the place where stocks shows and other securities of the listed companies bought and sold LIMITED COMPANY Liability is limited to the face value of shares MINORITY INTEREST In a subsidiary company the majority shares is held by holding company ACCOUNTING DEFINITION: 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 atleast, of a financial character, and interpreting the result thereof. SUB-FIELDS OF ACCOUNTING: 1. BOOK-KEEPING: It covers procedural aspects of accounting work and embraces record keeping function. Obviously book-keeping procedures governed by the end product, the financial statements, i.e. profit and loss account, and balance sheet including schedules and notes forming part of accounts. Profit and Loss account gives result of economic activities for a period and Balance Sheet states the financial position at the end of the period. Record keeping also requires suitable classification of transactions and events. This is also determined with reference to the requirements of financial statements. 2. FINANCIAL ACCOUNTING: It covers the preparation and interpretation of financial statements and communication to the users of accounts. 3. MANAGEMENT ACCOUNTING: It covers the generation of accounting information for management decisions. So it addresses to a single user group, the management. It includes cost accounting which deals with keeping cost records, measurement of cost of product/service and cost control methods. ACCOUNTING EQUATION: EQUITY + LIABILITIES = ASSETS (or) EQUITY + LONG TERM LIABILITIES = FIXED ASSETS + CURRENT ASSETS CURRENT LIABILITIES. MEASUREMENT BASES: There are four generally accepted measurement bases. These are: i) Historical Cost ii) Current Cost iii) Realisable Value iv) Present Value HISTORICAL COST: It means acquisition price. Assets are recorded at an amount of cash or cash equivalent paid or the fair value of consideration given at the time of acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation. In some circumstances a liability is recorded at the amount of cash or cash equivalent expected to be paid to satisfy it in normal course of business.
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CURRENT COST: Assets are recorded at the amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the discounted amount of cash or cash equivalents that would be required to settle the obligation currently. REALISABLE VALUE: As per realizable value, assets are carried at the amount of cash or equivalent that could currently be obtained by selling the assets in an orderly disposal. Haphazard disposal may yield something less. Liabilities are carried at their settlement values; i.e., the undiscounted amounts of cash or cash equivalents expressed to be paid to satisfy the liabilities in the normal course of business. PRESENT VALUE: As per present value, an asset is carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of future net cash outflows that are expected to be required to settle the liabilities in the normal course of business. EX: Mr. X found that he can get Rs.20,00,000/- if he would sell the machine purchased, on 1-1-82 paying Rs.7,00,000/- and which would cost Rs.25,00,000/in case he would buy it currently. ACCOUNTING CONCEPTS: Accounting Concept is generally used to mean a Notion only or mental idea about something. For example, Cost, Income and Capital, Debit and Credit, Assets and Liabilities etc., are concepts i.e., basic assumptions or conditions upon which science of accounting is based. There is no authoritative list of these concepts. In other words, concept means such ideas which are coupled with different accounting procedures e.g. Appropriation and Charge, Reserve and Provisions, Depletion and Amortisation etc. The following are some of the important generally acceptable concepts: (ICWA) Accounting is the language of business; affairs of a business unit are communicated to others as well as to those who own or manage it through accounting information which has to be suitably recorded, classified, summarized and presented. To make it full of meaning, accountants have agreed on a number of concepts which they try to follow. These are given below: (SHUKLA) BUSINESS ENTITY CONCEPT: Accountants treat a business as distinct from the persons who own it; then it becomes possible to record transactions of the business with the proprietor also. Without such a distinction, the affairs of the firm will be all mixed up with the private affairs of the proprietor and the true picture of the firm will not be available. This concept has now been extended to accounting separately for various division of a firm in order to ascertain the results for each division separately. It has been of immense value in determining results by each responsibility centre Responsibility Accounting. MONEY MEASUREMENT CONCEPT: Accounting records only those transactions which are expressed in monetary terms, though quantitative records are also kept. An event, even though important, like a quarrel between the production manager and the sales manager, will not be recorded unless its monetary effect can be measured with a fair degree of accuracy. It should be remembered that
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money enables various things of divers nature to be added up only through money values and not otherwise. COST CONCEPT: Transactions are entered in the books of account at the amounts actually involved. Suppose a firm purchases a piece of land for Rs. 1,50,000/- but considers it as worth Rs.3,00,000/-. The purchase will be recorded at Rs.1,50,000/- and not any more. This is one of the most important concepts it prevents arbitrary values being put on transactions, chiefly those resulting in acquisition of assets. Another way of saying the same thing would be that the amount to be recorded is objectively arrived at as a result of the mutual agreement of the two parties involved. Of course, sometimes accountants have necessarily to be satisfied with an estimate only the amount of depreciation to be charged each year in respect of machinery is an example; the amount has to be an estimate since the future life of the machinery cannot be known precisely. GOING CONCERN CONCEPT: It is assumed that the business will exist for a long time and transactions are recorded from this point of view. It is this that necessitates distinction between expenditure that will render benefit over a long period and that whose benefit will be exhausted quickly, say, within the year, of course, if it is certain that the concerned venture will exist only for a limited time, the accounting record will be kept accordingly. DUAL ASPECT CONCEPT: Each transaction has two aspects, if a business has acquired an asset, it must have resulted in one of the following: a) some other asset has been given up; or b) the obligation to pay for it has arisen; or rather, c) there has been a profit, leading to an increase in the amount that the business owes to the proprietor; or d) the proprietor has contributed money for the acquisition of the asset. The reserve is also true. If, for instance, there is an increase in the money owed to others, there must have been an increase in assets or a loss. At any time: Assets = Liabilities + Capital; or, rather, Capital = Assets - Liabilities In other words, capital, i.e., the owners share of the assets of the firm, is always what is left out of assets after paying off outsiders. This is called the Accounting Equation. It is self evident but very useful. REALISATION CONCEPT: Accounting is a historical record of transactions; it records what has happened. It does not anticipate events though anticipated adverse effects of events that have already occurred are usually recorded. This is of great importance in stopping business firms from inflating their profits by recording sales and incomes that are likely to accrue. Unless money has been realized either cash has been received or a legal obligation to pay has been assumed by the customer no sale can be said to have taken place and no profit or income can be said to have arisen. ACCRUAL CONCEPT: If an event has occurred or a transaction has been entered into, its consequences will follow. Normally, all transactions are settled in cash but even if cash settlement has not yet taken place, it is proper to bring the transaction or the event concerned into the books. Income or profit arises only out of business operations when there has been an increase in the owners share of the assets of the firm (called owners equity) but not if the increase has
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resulted from money contributed by the owner himself. Any increase in the owners equity is called revenue and anything that reduces the owners equity is expense (or loss); profit results only when the total of revenues exceeds the total of expenses or losses MATCHING CONCEPT: This concept recognizes that the determination of profit or loss on a particular accounting period is a problem of matching the expired cost allocated to an activity period. In other words, the expenses which are actually incurred during a specific activity period, in order to earn the revenue for the said period, must be matched against the revenue which are realized for that period. For this purpose, expenses which are specially incurred for earning the revenue which are realized period are to be considered. In short, all expenses incurred during the activity period must not be taken. Only relevant cost should be deducted from the revenue of a period for periodic income statement, i.e., the expenses that are related to the accounting period shall be considered for the purpose of matching. This process of relating costs to revenue is called matching process. It should be remembered that cost of fixed asset is not taken but only the depreciation on such fixed asset related to the accounting period is taken. (For the purpose of matching, prepaid expenses are excluded from the total costs but outstanding expenses are added to the total cost for ascertaining the cost related to the period). Like costs, all revenues earned during the period are not taken, but revenue which are related to the accounting period are considered. Application of matching concept creates some problems which are noted below: a) Some special items of expenses, e.g., preliminary expenses, expenses in connection with the issue of shares and debentures, advertisement expenses etc., cannot be easily identified and matched against revenues of a particular period. b) Another problem is that how much of the capital expenditure should be written off by way of depreciation for a particular period for matching against revenue creates the problems of finding out the expected life of the asset. As such, accurate matching is not possible. c) In case of long term contracts, usually, amount is not received in proportion to the work done. As a result, expenditures which are carried forward and not related to the income received, may create some problems.
CONVENTIONS: It refers to the general agreement on the usage and practices in social or economic life, it is a customary practice, rule, method or usage. In other words, it is an accounting procedure followed by the accounting community on the basis of long standing customs. Accounting Conventions can be used as follows: CONSISTENCY: The accounting practices should remain in the same from one year to another for instance, it would not be proper to value stock-in-trade according to one method one year and according to another method next year. If a change becomes necessary, the change and its effect should be stated clearly. DISCLOSURE: Apart from legal requirements, good accounting practice also demands that all significant information should be disclosed. Not only various assets, for example, have to be stated but also the mode of valuation should be disclosed. Various types of revenues to be stated but also the mode of valuation should be disclosed. Whether something should be disclosed or not will depend on
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whether it is material or not. Materially depends on the amounts involved in relation to the asset or transaction group involved or to profits. CONVERVATISM: Financial Statements are usually drawn up on rather a conservative basis. Window-dressing, i.e., showing a position better that what it is, is not permitted. It is also not proper to show a position substantially worse than what it is. In other words, secret reserves are not permitted. MATERIALITY: Materiality means relative importance. In other words, whether a matter should be disclosed or not in the financial statements depends on its materiality, i.e., whether it is material or not. American Accounting Association defines Materiality as under: An item should be regarded as material if there is reason to believe that knowledge of it would influence the decision of informed investors. An accountant cannot ignore the consideration of materiality of procedures. The term itself is a subjective term. As such, an accountant should record an item of material even though it is of small amount if the same influences the decisions of the users, viz. proprietors, auditors, or investors etc. On the other hand if it is found that an information is not sufficiently important to influence the quality of periodical financial statements, the same should be treated as immaterial and hence should be avoided. It has been stated above that materiality depends on the amounts involved and the account so affected. As a result, whether a particular item is material or immaterial depends on the amount and nature of the same. Because, the material information helps the management to avoid unnecessary wastage of time and money on principal matters. It should be noted that this doctrine of materiality refers to separate disclosure of information in the published financial statements for the user of the same. In short, material items should separately be disclosed whereas immaterial items may not be disclosed separately but may be combined in a consolidated form in the published financial statements. FUNDAMENTAL ACCOUNTING ASSUMPTIONS: Certain fundamental accounting assumptions underlie the preparation of financial statements. They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed, together with the reasons. The following are recognized by the International Accounting Standards Committee as fundamental accounting assumptions.: a) Going Concern: The Enterprise is normally viewed as a going concern, that is 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 curtaining the scale of its operations. b) Consistency: It is assumed that accounting policies are consistent with one period to another. c) Accrual: Revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements or the periods to which they relate. (The considerations affecting the process of matching costs with revenues under the accrual assumption are not dealt with in this statement).
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NOTES TO ACCOUNTS: Notes to accounts are the explanation of the management about the items in the financial statements i.e., profit and loss account and balance sheet. The management gives more explanation and information about the item of profit and loss account and the balance sheet and any other items, by way of notes of accounts Notes to accounts are integral part of financial statement. ACCOUNTING STANDARDS: An Accounting Standard is a selected set of accounting policies or broad guidelines regarding the principles and methods to be chosen out of several alternatives. Standards conform to applicable laws, customs, usages and business environment. So there is no universally acceptable set of standards. In India, Accounting Standards Board (ASB) has the authority of issuing Accounting Standards. The sole objective of Accounting Standards is to harmonise the diversified policies to make the system more useful and effective. The Council of the ICAI has so far issued twenty eight Accounting Standards. However, AS-8 on Research & Development is withdrawn consequent to issue of AS-26 Intangible Assets. These are as follows: Date from which mandatory (accounting periods commencing on or after) 1-4-1993 1-4-1999 1-4-2001 1-4-1995 1-4-1996 1-4-1995 1-4-2003 Withdrawn and included in AS-26 1-4-1993 1-4-1993 1-4-2004 (Any foreign exchange transaction entered before 1-4-2004 shall be accounted for as per Enterprises to which applicable at present All All See Note - 2 All All -All All All All All
AS 1 2 (Revised) 3 (Revised) 4 (Revised) 5 (Revised) 6 (Revised) 7 (Revised) 8 9 10 11 (Revised)
Title of the AS Disclosure of Accounting Policies Valuation of Inventories Cash Flow Statements Contingencies and Events Occurring after the Balance Sheet Date Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies Depreciation Accounting Accounting for Construction Contracts Accounting for Research & Development Revenue Recognition Accounting for Fixed Assets The Effects of Changes in Foreign Exchange Rates
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Revised AS - 11(2004) 1-4-1994 1-4-1995 1-4-1995 1-4-1995 1-4-2000 1-4-2001 1-4-2001 1-4-2001 1-4-2001 1-4-2001 See Note - 4 1-4-2002 1-4-2004 1-4-2002 1-4-2003 1-4-2004 1-4-2004 1-4-2005 1-4-2004
12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Accounting for Government Grants Accounting for Investments Accounting for Amalgamations Accounting for retirement benefits in Financial Statements of Employers Borrowing Costs Segment Reporting Related Party Disclosures Leases Earning Per Share Consolidated Financial Statements Accounting for Taxes on Income Accounting for Investment in Associates in Consolidated Financial Statements Discontinuing Operations Interim Financial Reporting Intangible Assets Financial Reporting of Interest in Joint Venture Impairment of Asset
All All All All All See Note All All See Note See Note See Note All All All All All See Note - 2 All All (with certain exceptions in respect of paragraphs 66 & 67 of the Standard)
-2
-2 -3 -4
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Provisions, Contingent Liabilities and Contingent Assets
NOTE 1: a) Sole Proprietary concerns / Individuals b) Partnership Firms c) Societies registered under the Societies Registration Act d) Trusts e) Hindu Undivided Family f) Association of persons NOTE 2: AS - 3, AS - 17, and AS - 20 have been made mandatory in respect of following enterprises: i) Enterprises whose equity or debt securities are listed on a recognized stock exchange in India, and enterprises that are in the process of issuing or debt securities that will be listed on a recognized stock exchange in India as evidenced by the board of directors resolution in this regard. ii) All other commercial, industrial and business reporting enterprising, whose turnover for the accounting period exceeds Rs. 50 Crores. NOTE 3: AS - 21 is mandatory if an enterprise presents consolidated financial statements. In other words, the accounting standard does not mandate an enterprise to present consolidated financial
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statements but, if the enterprise presents consolidated financial statements for complying with the requirements of any status or otherwise, it should prepare and present consolidated financial statements in accordance with AS - 21. NOTE 4: AS - 22 comes into effect in respect of accounting period commencing on or after 1-4-2001. It is mandatory in nature for: (a) All the accounting periods commencing on or after 1-4-2001, in respect of the following: (i) Enterprise whose equity or debt securities are listed on a recognized stock exchange in India and enterprises that are in the process of issuing equity or debt securities that will be listed on a recognized stock exchange in India as evidenced by the board of directors resolution in this regard. (ii) All the enterprises of a group, if the parent consolidated financial statements and the Accounting Standard is mandatory in nature of respect of any of the enterprises of that group in terms of (i) above. (b) All the accounting periods commencing on or after 1-4-2002, in respect of companies not covered by (a) above (c) All the accounting periods commencing on or after 1-4-2003, in respect of all other enterprises. E.O.Q. (Economic Order Quantity): It is a quality of material that can be occurred at which both ordering costs and carrying costs are minimum. E.O.Q.= Root 2AO/C A= Annual Consumption O= Ordering Cost per order C= Carrying Cost per unit per annum Semi-Variable Cost: These costs are partly fixed and partly variable, in relation to output. Ex: Telephone Bill, Electricity Bill. Angle of Incidence: When both the cost curve and sales curve cuts or meet at a point that point is called as Break Even Point. The angle left after their inter section is called profit angle or angle of incidents. Sales Curve
Margin of Safety: Difference between Total Actual Sales - Break Even Sales Margin of Safety = Total Sales - B.E.P. Margin of Safety will be reached faster if angle of incidents is more and vice versa. Ex: Total Sales = 30000 ; B.E.P. Sales = 20000 therefore Margin of Safety = 30000 - 20000 = Rs. 10000
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Absorption Costing : Each and every item of cost i.e., variable cost and fixed cost is charged to the product. Case 1 :In this case fixed cost are charged to the product on the basis of normal capacity. [Normal capacity The number of units normally produced by the company] Case 2: in case of under absorption, that amount should be charged to the P&L A/c Ex: Case-1 : Normal units = 10,000 Actual production = 12,000 Fixed over heads = Rs.1,00,000/The absorption rate : fixed over heads = 1,00,000 Normal units 1,0000 = Rs.10/- per unit And total absorption should be Restricted to Rs.1,00,000/In any case the absorbed amount should not exceed the actual fixed cost. Case-2 : if the actual production is 8,000 units The absorption Rate :1,00,000 =Rs.10/- per unit 10,000 The amount absorbed =8000X10 = Rs.80,000 Under absorbed Amount : 1,00,000 - 80,000= Rs.20,000/Which is charged to the Profit and Loss A/c. Marginal Costing: This is a technique of Decision Making. In the case of Marginal Costing only variable cost are absorbed by the product. In this case the fixed costs are considered as period cost and this should be charged to P & L A/c. Costing: The Process of determining cost is called as costing. Variable Cost: 1. Cost which is changing with every change in production additionally if you want to producing one more unit we need to expend additional cost. Ex: for 10 units Rs.100/for 11th unit additionally Rs.10/2. Cost per unit will not change but there is change in total cost. Ex: for 10 units Rs.100/Cost per unit = cost/unit =100/10= Rs.10/11 units 110/Cost per unit= 110/11 = Rs.10/Fixed Cost: 1. This cost is fixed will not change with increase or decrease in production. Ex: Factory rent 2. The total cost will not change but cost per unit will change. Ex: Rent = Rs.10000/1 person share =Rs.10000/2 persons share= Rs.5000/- each
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4 persons share = Rs.2500/- each P/V Ratio (Profit - Volume Ratio) : It is a Ratio between Contribution and Sales. P/V Ratio = Contribution / Sales x 100 Contribution per unit: Selling Price per unit - Variable Cost per unit Break - Even - Point (B.E.P.): This is a point at which there is no profit or no loss. At this point to total amount received is equal to the total cost incurred. Total Sales amount= Total Cost Amount (Fixed Cost + Variable Cost) Total Contribution = Total Fixed Cost Ex: Selling Price = Rs.10/Variable Cost= Rs.5/Fixed Cost= Rs.10000/Contribution= Rs.10-Rs.5 = Rs.5/P/V Ratio = Contribution x 100 = 5/10x100=50% Sales B.E.P.Units= Fixed Cost/ Contribution per unit = 10000/5= 2000 units. B.E.P.Value= Fixed Cost/ PV Ratio = 10000/50x100 = Rs.20000/Statement of Marginal Cost: Total Sales - Variable Cost = Contribution Contribution - Fixed Cost = Profit Current Ratio: Current Assets / Current Liabilities Current Assets are those which can be converted into cash in the short run. The term short run means - generally a period of one year. Current Assets = Inventories + Sundry Debtors + Cash and Bank Balances + Short Term Loans & Advances + Marketable Non-Trade Securities + Prepaid Expenses. Current Liabilities = Cash Credit + Bank O.D. + Short Term Borrowings + Creditors + Proposed Dividend + Unclaimed Dividend + Provision for Taxation (Provision for Tax Advance Tax Paid) Quick Ratio: Quick Assets / Quick Liabilities Quick Assets = Current Assets - Stock and Prepaid Expenses - Other Liquid Portion of Current Assets Quick Liabilities = Current Liabilities Cash Credit, Bank Borrowings and Other Short Term Borrowings Debt Equity Ratio: Debt / Equity Debt = Secured Loan and Unsecured Loan minus Cash Credit and Bank O.D. Equity = Paid-up Share Capital including Preference Capital and Pre-Reserves Capital Employed = Net Fixed Assets + Working Capital Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Debt Service Coverage Ratio = Profit after Tax + Interest + Depreciation + Non-Cash Items Interest + Debt Installment
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Interest Coverage Ratio = Earning Before Interest Interest P.E.Ratio (Price Earning Ratio) = Market Price Per Share Earning Per Share Dividend Yield Ratio = Dividend Per Share Market Price Per Share Operating Leverage = Contribution___________ Earning Before Interest & Tax (EBIT)
Finance Leverage = Earning Before Interest & Tax (EBIT) Earning Before Tax Total Leverage = Operating Leverage x Finance Leverage EPS = Earnings available to Equity Shareholders No.of Equity Shares outstanding
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Memorandum of Association (MOA) Memorandum defines the companies constitution and scope. MOA is the companies constitution and scope. It is a primary document. It is subordinate to the Act. It is a must for every company. Strict provisions for alteration. Ultra virus MOA even all the members cannot ratify it. (change).
Articles of Association (AOA) AOA represents Rules and Regulations of the company. It is a secondary document. It is subordinate to MOA and Act. Can be written or taken from Companys Act. Special resolution is sufficient except where the amendment brings into effect a private from public. Ultra virus AOA but intra virus the MOA can be ratified.
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Shares Shares are part of the capital of the company. Shareholders are members or owners of the company. When recommended by the board dividend could be declared to shareholders. Shares do not carry on any charge. Shares have restrictions issue at a discount. Shareholders have voting rights.
Debentures Debentures constitute a loan. Debenture holders are creditors. Fixed amount of interest on debentures paid before dividend declaration. Debentures generally have a charge on the asset of the company. Debentures do not have restrictions issue at a discount. Debenture holders do not have voting
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rights. Interest is payable whether profits are there or not. Rate of interest is fixed.
7 8
Dividend is payable only when profits are there. No fixed dividend.
1 2
3 4 5
Shareholder One of the owner of the company and has proprietary interest in the company. When the company makes profits and the board recommends, shareholder gets a share in the profits. No security for his investment. Eligible for voting rights. On liquidation, shareholders are paid last.
Debenture holder Only a creditor of the company Get a fixed rate of interest whether the company makes profit or not. Normally debentures are secured. No voting rights. Ranks priority with regard repayment.
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Shares Has a nominal value. May be fully paid or partly paid. Can be transferred in whole numbers and not in fractions. Each and every share shall be of equal denominations. Shares are identified with distance numbers. Can be issued directly to the public.
Stock No nominal value. Always fully paid. Can be transferred in fractions also. May be unequal amounts. Do not have any distinctive numbers. Only fully paid up shares can be converted in to stock and cannot be issued directly. Revenue expenditure Expenditure incurred for the maintenance of asset. These expenses are shown in the debit side of profit and loss account. Expenditure incurred for short term investment. The benefits for the expenditure will flow or enjoyed by the organization for the current year only. Ex: salaries, printing & stationary etc. The item dealt is called goods or merchandise. Plant Goods ; T.V. Goods. Goods are purchased with an intention to sell. There is no need of depreciation.
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6 7
Capital expenditure Expenditure for the purchase and installation of asset. These assets are shown at the assets side of the balance sheet Expenses are incurred for long term investment. The benefits will flow or enjoyed by the organization for more than one year. Ex: plant and machinery The item dealt is called as asset. It is expressed or identified in its own name. Plant Plant ; T.V. T.V. Asset is purchased for utilization in the business, in the normal course of business. Depreciation is to be considered for the life of asset.
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1 2 3 4
Profit and Loss Account Objective of preparing P & L Account to ascertain the net profit or loss of the business during the year. In this account having debit and credit as such To and By are used Revenue expenditure and incomes are recorded in the Profit and Loss Account. Balancing figure of this account either net profit or net loss.
Balance Sheet The objective of the preparing Balance Sheet is to know the financial position of the business on a specific date. Balance Sheet is a statement and hence To and By are not used. Capital incomes and expenditures are shown in the Balance Sheet. Balance Sheet will not show any balancing figure. A total of Liabilities and Assets side should always be equal. Non-Recurring Expenses Items Which Are Not Regular And Repeated. Ex: Buying of Machinery or Other Fixed Assets, Legal Expenses, Loss or Profit on sale of Asset, Insurance Claims. Private Limited Company Minimum number of members are 2. Maximum number of members are 50. Minimum directors are 2. Can start business after incorporation. Private Limited Company shall not issue its shares to outsiders. Reserve Reserve is an appropriation on profits. It is made for future unknown liability. It can be utilized for any future purpose. Is shown below the line. Below the line means Profit and Loss Appropriation Account. Joint Venture It is a terminable venture. It may not bear a name. Persons carrying on business are called Co-venturers. The profits are ascertained for each venture separately cash basis of accounting is followed.
Recurring Expenses Items which are repeated. Ex: Salaries & Wages
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Public Limited Company Minimum number of members are 7. Maximum number of members are unlimited. Minimum directors are 3. After getting business commencement certificate they can do business. Public Limited Company can go for public issue. Provision Provision is a charge against the profits. Is made for known liability or expenditure. It is utilized for that purpose only. Is shown above the line. Above the line means Profit and Loss Account. Partnership It is a going concern. It always has a name. Persons carrying on business are called partners. Profits are ascertained at regular intervals, i.e., annually.
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1 2 3 4
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1 2 3 4
Deposit Deposits are amounts, received by the company from the public. Deposits are short term or middle term financial sources. Deposits are unsecured. It is easy to rise public deposits. Member Name entered in the register of members. Member is also a share holder. Share warrant holder is not a member.
Debenture Debenture is a document, which acknowledge debt, which is issued by company Debentures are long term financial sources. Debentures are generally secured. Issue of debentures restricted by RBI. Share holder Name not entered in the register on members. Share holder is not a member unless name is entered in the register of members. Share warrant holder is share holder.
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1 2 3
Partner Partner is one of the owner. Partnership is governed by Partnership Act, 1932. Partner is a unlimited liability.
Director Director is one of the member of the executive body. Companies is governed by the Companies Act, 1956. Director is generally not liable.
1 2
3 4
Company Company comes into existence only when it is registered under the companies act. Members: minimum Private : 2 Members Public : 7 Members Maximum Private : 50 Public : un limit. A company on its incorporation enjoys a separate legal entity. In case of company members liability is limited.
Partnership A firm is created by mutual agreement between partners. Registration is optional. Members: Minimum 2 Partners. Maximum In case of Banking Business : 10 In case of Other Business : 20. A firm does not have separate legal entity. In case of firm, partners are jointly or severably liable.
1 2
Company A company is a trading association. A company is required to be registered under the companies act.
Club Club is a non trading association. Registration of a club is not mandatory.
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Trial Balance The Trial Balance is prepared to check the arithmetical accuracy of the books of accounts. Trail Balance does not show the financial position of business. The Trial Balance is prepared based on the ledger accounts. The preparation of Trial Balance is not compulsory. Trial Balance cannot be shown as a documentary evidence. Balance Sheet Balance Sheet is prepared to know the true position of assets and liabilities on a particular date. The financial position can be known from balance sheet. The Balance Sheet is prepared on the basis of information from Trial Balance. The preparation of Balance Sheet is must. Balance Sheet will be accepted as documentary evidences by tax authorities and courts. Surrender of Shares Surrender is affected with the assent of share holder. Surrender can be done only fully paid up shares.
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1 2
Forfeiture of Shares Forfeiture is proceeding against reluctant shareholder. ( defaulted in call payment) Forfeiture can be done only partly paid up shares.
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Share Certificate The holder is a registered member of the company. The holder of a share certificate is essentially a member. For the issue of share certificate may not required approval of the Central Government. All companies must issue share certificates. Share certificate is issued is partly or fully paid shares. Share certificate is not negotiable. The holder of a share certificate can present a petition for winding up.
Share Warrant The bearer of a share warrant is not a registered member. The bearer of a share warrant can be a member only if the article so provided in and as. Share warrant can be issued Central Govt. approval is must. Share warrant can be issued only by public companies. Share warrant can be issued only fully paid shares. Share warrant is negotiable. The holder of a share warrant cannot present a petition for winding up.
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Promissory Note In promissory note there is a promise to pay.. In promissory note there are two parties, namely, the maker and the payee. A promissory note is signed by the person liable to pay. So no acceptance is needed.
Bill of Exchange In a bill there is an order to pay. In a bill there are three parties, namely, drawee, drawer, and payee. A bill has to be accepted by the drawee before he can be held liable.
Journal Journal is the book of first or original
Ledger The ledger is the book of second
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entry. It is also called the book of first entry or primary entry. Transaction in the journal will be recorded immediately. When once the entries are posted in to ledger, the journal losses its importance. In the preparation of final accounts journal in not useful. The tax authorities generally may not depend on journal. entry. Depending upon his conveniences the trader records the transaction in the ledger. It will never lose importance as it is the main book of accounts which is relied upon permanently. In the preparation of trial balance and final accounts ledger is a must. In the finalization of income tax to be paid, the tax authorities depend on ledger.
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Book-keeping : is complement to the accounting process. Book-keeping is the systematic recording of financial and economic transactions. Accounting: is the analysis and interpretation of Book-keeping records. Cash Book : The Cash Book is a sub division of the original entry recording transactions involving receipts and payments of cash. All cash transactions are first entered in the cash book and then posted from cash book in to the ledger. Transactions are recorded chronologically in the cash book. Bill of Exchange : is a instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. Prudence: Incomes are recognized when they are realized, all possible expenses are provide. Term Loans : Term Loans represents secured borrowing and at present are the most important source of finance for new projects. They generally carry a rate of interest. These loans are generally repayable over a period of 6 to 10 years in annual, semi annual, or quarterly in installments. Term loans are also provided by banks, state financial institutions and all India term lending institutions. Cash Profit: Cash is arrived by adjusting the non-cash transactions to the net profit after tax. Net profit after tax xxxx Add: Non-cash expenses xxx xxxx Add: Depreciation xxx xxxx Less: Non-cash incomes(credit sales) xxx Cash Profit xxxx Cash Flow Statement: Accounting Standard 3 explains about this. The statement shows how much cash is generated and expended in the organization during the year. It also shows opening and closing balance of cash. It is use full for investors and creditors. It provides vital (important) information about companies ability to generate future cash flow to satisfy investors and creditors expectations.
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Methods in preparing cash flows: There are two methods, these are a) Direct Method, and b) Indirect Method. In Direct Method : Gross Receipts Gross Payments = Net Cash Flow In Indirect Method : Net Profit + Non-cash Expenditure Non-cash Incomes (Credit Sales) = Net Cash Flow. Classification of Cash Flows : i) Operating Cash Flow ii) Investing Cash Flow iii) Financing Cash Flow Cash : The purchasing power in hand is called cash. Cash Expenses : Cash is paid for expenses incurred. Ex: Salaries, Wages paid etc. Non-cash Expenses : it is an expenditure, there is no cash involvement. Expenses are incurred but cash is not paid ( that is cash is not going out of the business) Ex: depreciation writing off, goodwill, patents, writing off preliminary expenses, discount on issue of shares and debentures, loss on revaluation of assets and liabilities etc., in this cases income is reduced since tax saving is effected. Amalgamation : Involves merger of two existing companies or a company takeover the another company. Absorption : A company take over another company. Amalgamation includes absorption. Fixed Assets : These assets are acquired for long term use in the business. Liquid Assets : These assets also known as circulating, fluctuating, or current assets. These assets can be converted in to cash as early as possible. Fictitious Assets : Fictitious assets are those assets, which do not have physical form. They do not have any real value. Ex: loss on issue of shares, preliminary expenses etc. Intangible Assets : Intangible assets are those having no physical existence and cannot touch. Ex: Goodwill, Patents, and Trademarks etc. Contingent Liabilities : These are not the real liabilities. They are not actual liabilities at present. They right become a liability in respect of pending. This is not shown in balance sheet. That may be shown as notes under balance sheet. Del-credre Commission : It is extra commission paid to bear the bad debts collection loss. Demat Account : Demat means the materialized account. It is a separate account maintained for investments (Shares, Securities, Debentures, Bonds etc.). It gives information about shares sought and sold, prices at which shares were bought and sold, shares presently holding and amount held. IRR (Internal Rate of Return) : This method takes in to consideration time value. It can be said as discounted rate of return.
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Purchase Consideration : Consideration paid by the transferor company to the shareholders of Transferee Company. Economic Value Added : A company or business earning profit which is more than cost of capital (Return expected by Investors). Impairment : Permanent decline in value of asset. ABC Analysis : ABC Analysis is a method of inventory control. It is popular system of inventory control. The item of inventory is generally classified in to three types. These are: A : Usage value is Maximum and number of items is Minimum. B : Usage value is Medium and number of items is also Medium. C : Usage value is Lowest and number of items is Highest. Annual Report : Annual Report is a report, which will contain the all financial statements of the company and auditors report and main opinions on performance of company. It is useful with previous reports. Sweat Equity Shares : means equity shares issued by the company to employees, directors. Such issue should be authorized by a special resolution passed by the company in general meeting. Memorandum : means MOA as originally framed or altered from time to time in pursuance of any previous company law or of this act. Issue of Share at a Discount : Shares can be issued at a discount, if the following conditions are fulfilled. The issue of shares at a discount must be a resolution passed by the members at the general meeting. The issue should be sanctioned by the company law tribunal. The resolution authorizing the issue of shares specified the maximum rate of discount at which the shares are to be issued. The rate of discount shall not exceed 10%. Unless company law tribunal allowed such excess under special circumstances. The issue can be made only after one year. One year has elapsed since the company was entitled to commence business. The shares shall be issued with in two months of the sanction by the company law tribunal or such other period as permitted. Shares issued at a price less than the nominal value : Then it is called shares issued at discount. The difference between the issued price and nominal value is discount on issue of share. It is shown in balance sheet under the head of miscellaneous expenditure not written off. Shares issued at Premium: When a company issues shares at a price higher than the nominal value of the share (securities) then the difference in the nominal value and the issue price is the premium. The premium may be received in cash or in kind. But the share premium collected by a company on issue of shares is required to be retained in a separate accounts titled as share (securities) premium account. Securities premium account can be used only for paying up of fully paid bonus shares to be issued by the company to its members. To write off preliminary expenses.
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To write off underwriting expenses / commission paid discount allowed on any issue of shares or debentures of the company. To provide premium payable by a company on redemption of debentures of the company. Distribution of securities premium amount as dividend is not permitted. Security premium is not a free reserves. It is in the nature of capital reserve.
Portfolio Management : Classification of assets get aims at minimizing the total risk while taking the maximum returns is called portfolio management. It refers to diversification of assets which means not keeping all eggs in the same basket. Good will : It is an amount paid over and above the value of assets and liabilities of the under taking. Goodwill is the reputation of the business. This reputation is due to excess sales and profit made then normal sales and profit. Reasons for goodwill are: Good reputation Favourable location Ability and skill of employees Good management. Goodwill is of two types, these are i) Purchased Goodwill and ii) Developed Goodwill Purchased goodwill: more amounts paid for assets than required Ex: Total Assets = 100000 Amount Paid= 150000 Developed Goodwill: This goodwill not be written in books. Goodwill is to be calculated basically on the basis of following methods, i) Capitalization method and ii) Super Profit Method Capitalization Method: Normal Capital Employed = Future Maintainable Profits Normal Rate of Return Goodwill = Normal Capital Employed Actual closing capital employed Super Profit Method: Super Profit = Future Maintainable Profits Actual Capital Employed x Normal Rate of Return. Goodwill = Super Profit x No. of years for which super profit can be maintained. Capital Employed = Total Assets of the Company Outsiders Liabilities. Annual Report : Annual Report contains Balance Sheet, Profit and Loss Account and Notes to accounts of the company during the last year. Notes to Accounts : it gives the information on the following aspects, i) Accounting policies with respect to Fixed assets and depreciation Research and development expenditure Foreign exchange transactions Excise duty Interim / proposed dividend Investments
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Miscellaneous expenditure
We are downloaded more than 12W Companys annual report from their web sites and internet. Then we can access more than 600 files. Cash Accounting System : Only cash transactions are recorded if the system is followed. Mercantile Accounting System : Both cash transactions and credit transactions are recorded in this system. If cash transactions are incurred first they are recorded first. If credit transactions are incurred first they are recorded first. In simple to say what ever is incurred first will be recorded first. Discount : Discounts are two types. These are i) Trade Discount and ii) Cash Discount Trade Discount : It is deducted from list price or catalogue price or tag. It is generally allowed by whole seller to retailer. Trade Discount are not recorded in books. Ex: Tag Price = Rs. 100 - Trade Discount = Rs. 10 Rs. 90 This amount is recorded in the books. Purchase A/c Dr 90 To Cash A/c 90 Cash Discount : This discount is given to debtors to make them pay debts as early as possible. Ex: Immediately - 5%, within 15 days 4%, within one month 2% etc. Cash discount is given for early or prompt payment. Cash discount are recorded in books. Purchase A/c Dr 100 To Cash 90 To Discount 10
Substance over form :Information is to be present in accordance with their substance and not nearly their legal from. Ex: Rights and benefits in Plant and Machinery, Transferred but registration is pending. It means the expenses before starting of the production or company or for extension of existing undertaking. Preliminary expenditure : is an expenditure incurred for setting or undertaking. Ex: i) for drafting legal documents (MOA and AOA) Legal Documents ii) Fees for registration of the company iii) Underwriting Commission iv) Brokerage and Charges for drafting, printing, typing and advertising the prospectus. Deferred Revenue Expenses : The benefit of the expenditure will be differed to the future periods for which the expenditure is charges. Differed revenue expenditure is known as asset in balance sheet. Ex: Preliminary expenses, Advertisement expenses Deferred Revenue Income : which is income differed to the future periods. That means it is not related to one period but related to more than one period.
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Ex: Pension Fund Scheme Capital Reserve : Amounts received on capital items. Revenue Receipts : Amount receive on revenue items. Amount received by sale of goods or services show the trading and profit and loss account credit side. Capital Profits : Capital profits are profits realized on sale of fixed assets or on discount of investments. They may be distributed by way of dividend. Revenue Profits : Revenue profits are the profits earned by the company through its ordinary activities. Debenture : Debenture is a document bearing the company common seal. Which creates or acknowledges a debt. It need not be secured (It may be secured or It may not be secured). It does not carry any voting rights, but it carries interest. Dividend : Dividend is a return on the investment to the share holders. It is paid out of the divisible profits of the company. Dividend is normally expressed in terms of percentage of the face value of the share. Types of Dividend : Dividend is 3 types. These are, i) Dividend of Preference Shares, ii) Dividend on Equity Shares and, iii) Interim Dividend. General Reserve : General Reserve is a Reserve which is created to meet any future unknown liability. It can be utilized as dividend. Capital Reserve : Profits in the nature of capital or profits in the form of capital nature. Ex: Share Premium, Share Forfeiture. Reserve Capital : Reserve Capital is called up only at the time of liquidation if assets held are not sufficient to meet the liabilities. Subsidiary Company : A company who is selling more than 51% of their shares to another company is called subsidiary company. Holding Company : A company who is buying more than 51% of shares from another company, is called holding company. A company shall be deemed to be a subsidiary of another company, if that other company, Controls the composition of its Board of Directors. Holds more than 50% of the voting power or paid up capital in the other company. Is the subsidiary any other company, which is the subsidiary of holding company. Government Company : A Government Company is a company in which not less than 51% of the paid up share capital of the company is held by Central Government, or State Government, or partly by the by the Central Government and partly by one or more State Governments. Memorandum of Association : It is the main document of the company. This document represents constitution of that company. It contains i) Name Clause, ii) Objective Clause, iii) State Clause, iv) Capital Clause, v) Liability Clause, and vi) Situation Clause.
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Articles of Association : This document represents rules and regulations of the company. It defines duties, rights, and regulations of the company between themselves and company. Limited Liability : Liability is limited to the face value of the share. Minority Interest : In a Subsidiary Company, the majority shareholding is held by holding company (say 60% or 80% or so, the remaining 40% or 20% is held by sum other people who are little interested in the company. This little interest is called as minority interest). These people are called as minority shareholders. Stock Exchange : Stock Exchange is the place, where stocks, shares and other securities of the listed companies bought and sold. Mutual Fund : Mutual Fund is a fund, which collects the investments of small saving holders and re-invest in capital markets, like share market, debt market. It creates link between small saving holders and capital markets. Ex: U.T.I. Mutual Funds. Debt Securitization : It is a mode of financing, where in securities are issued on the basis of package of assets (called pooled). This involves the following process of activities: Organizing function Pooling function Securitization function Primary Market : Shares are purchased directly at the time of allotment by the company. Secondary Market : Shares are purchased from market through the stock exchange. Working Capital : For running day to day activities of a business, same capital is required which is called working capital. Working Capital = Current Assets Current Liabilities or, Excess of Total Current Assets over Current Liabilities. Working Cycle or Operating Cycle : There is a complete operating cycle is the time duration required to convert cash in to cash cycle from cash to cash Conversion of cash into raw material Conversion of raw material into work in progress Conversion of work in progress into finished goods Conversion of finished goods into debtors and Conversion of debtors into cash No. of Operating Cycle = No. of Days in a year/Operating Cycle Period Objective of Working Capital Management : Optimum Investment in current assets reducing current liabilities. Working Capital Management : Decisions are to be taken for effective financing of current assets required for day to day running of the organization. Working Capital Management refers to the procedures and policies required to manage the working capital.
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Accrued Interest :The accrued interest is to be added to the concerned income in the credit side of the profit and loss account. The accrued interest is to be shown as an asset, Asset side of Balance Sheet Accrued Interest A/c Dr Interest A/c Accrued Income : means income earned, but which is not due (no right to receive on this date). Earned during the current accounting year but have not been actually received by the end of the same year. Ex: Interest on loan, Commission etc. Outstanding Income : Income accrued and due but was not receive. Debtors : means taken goods on credit. People who owes us i.e. people who has taken loan or money. Creditors : means from whom have taken goods on credit people to whom we owes i.e., these people have lent money to us or given money to us. Out Standing Salary : Salaries A/c Dr To Out Standing Salaries A/c Prepaid Salary : Prepaid Salary A/c Dr To Salary A/c Bad Debts : Debts which are bad. Bad Debts A/c Dr To Debtors A/c Provision for Bad Debts : Profit and Loss A/c Dr To Provision for Bad and Doubtful Debts Accrued Expenses : The expenditure which is incurred and the payment there of might or might not be paid. Prepaid Expenses :Prepaid expenses are to be deducted from such expenses in the debit side of profit and loss account. Shown as an asset in the assets side of Balance Sheet. The amount paid for the expenditure relating to the future years. Out Standing Expenditure : Expenditure incurred but the payment for which is not yet paid and will be shown in the balance sheet liabilities side, debited to profit and loss account Amortization : Writing off Intangible Asset Ex: Patents, Good will, for this asset there is no physical existence. Del credre Commission : It is extra commission paid to bear to the bad debts collection. Depreciation : Accounting Standard 6 deals with depreciation. It is charge for the use of assets in the operation, It may arise due to usage time or change of technology. Two methods are normally followed for charging the depreciation i) Written Down Method, and ii) Straight Line Method The rates of depreciation have been specified in Schedule XIV to the Companies Act, 1956. It is mandatory for the companies to charge depreciation
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Depreciation cannot be charged on land. Due to fluctuation in foreign exchange, if the value of asset increases, then depreciation should be charged on the increased value of the asset. Written Down Value : Every year depreciation is changing. Year by year it goes on decreasing. Depreciation is calculated on the opening balance of this year. Straight Line Method : Every year depreciation is same Ex: Total Value/Its Life (Note: In any method the total amount of asset must be depreciated is 95%). Annuity Method : Interest is taken care or Interest is added and depreciation is found. Depreciation Fund Method: Every year depreciation amount is invested in investments. Interest on investments receive in also invested. All this investments are sold, when new assets is to be purchased. Depletion Method : This method is use in mines, quarries. The total quantity of tones are estimated. Depreciation per tone is now calculated. Cost per tone = Total Cost / Estimated Tones Capital Budgeting : Analyzing and selection of investment projects whose returns are expected to extend beyond one year. Net Present Value : It is the difference between inflows and outflows. IRR : The rate which present value of inflows are equal to present value of outflows. PI: also called as benefit cost ratio. It shows relationship between present value of inflow and present value of outflows. i.e. inflows / outflows. Capital Structure : It refers to the proportion of debt equity and preference capital. Beta : Market Risk Systematic Risk Stand Demat : Industry Risk Unsystematic Risk Portfolio Management : means group of securities. ADVANCED FINANCIAL ACCOUNTING Funds Flow Statement: A statement that uses net working capital as a measure of liquidity position is referred to as funds flow statement.To go to the roots, this funds flow statement was termed where got and where gone statement. This statement records the increases and decreases in different items of the balance sheet. Later it was called funds statement. In 1963 Accounting Principles Board (APB) changed the name of the statement as statement of sources and applications of funds. Uses and importance of Funds Flow Statement: An essential too for the financial analysis and management.
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Reveals the changes in the working capital and gives the details of the sources from which working capital has been financed. Helps in the analysis of the financial operations and explains causes for the changes on the liquidity position of the company. Helps in dividend distribution and the formulation of an ideal dividend policy. Helps in making correct decisions in planning and development of the company. Concept of Sources and uses of Funds: An increase in non-current liabilities or a decrease in non-current assets of the firm is considered as source of funds. An increase in the non-current assets and a decrease in the noncurrent liabilities is a use of funds. A decrease in net working capital during the accounting period, is considered to be a source of funds. An increase on net working capital during the accounting period is considered to be a use of funds. Net Working Capital = Current Assets Current Liabilities Funds: The term funds means working capital i.e., the excess of current assets over current liabilities. Flow of Funds: The term flow means movement and includes both Inflow and Outflow. Ratio Analysis: It is the relationship between two financial values. To make it clear the word relationship stands for a financial ratio which is the result of two mathematical values. Gross Profit Ratio = Gross Profit / Sales x 100 This ratio tells us the result from trading Activity (from Buying and Selling). To know the Operating Efficiency of the Organisation. Net Profit Ratio = Net Profit / Sales x 100 It indicates the final result to organization and overall efficiency of the organization. Operating Profit Ratio = Operating Profit / Sales x 100 This ratio speaks of the operational performance of the organization and refer the managerial efficiency of the firm. Earning per Share = Equity Shareholders / No. of Equity Shareholders It reveals the profit available to ordinary shareholders. Dividend Yield Ratio = Dividend per Share / Market Value per Share It is very significant to the new investors. Dividend per Ratio = Dividend Payable / No. of Ordinary Shares. It indicates the amount of dividend to be paid to ordinary shareholders. Return on Investment = Return / Investment x 100 Cost of Goods Sold Ratio = Cost of Goods Sold / Sales x 100 Cost of Goods Sold = Opening Stock +Purchases + Wages Closing Stock
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Operating Exp. Ratio = Operating Exp. / Sales x 100 Operating Expenses = (Office Administrative Exp. + Selling & Distribution Exp. + Financial Exp.) Office & Administration Exp. Ratio = Office & Admn. Exp. / Sales x 100 Selling & Distribution Exp. Ratio = Selling & Distribution Exp. / Sales x 100 Financial Exp. Ratio = Financial Exp. / Sales x 100 Above five ratios make us know the relationship between various expenses and sales. The lower the ratio the greater is the profitability, and higher the ratio the lower is the profitability Operating Ratio = Cost of Goods Sold + Operating Expenses / Sales x 100 Operating Ratio tells us the efficiency of the conduct of business operation. A high ratio means the operating expenses are high and margin is less. Therefore the lower is the ratio the higher is the position. Non-Operating Expenses Ratio = Non Operating Expenses / Sales x 100 Current Ratio = Current Assets / Current Liabilities This ratio explains whether the firm is able to meet short term obligations or not. The higher ratio is an indication of the soundness of the organization. Current Assets = Cash in Hand + Cash at Bank + Sundry Debtors + Bills Receivable + Stock + Prepaid Exp. + Short term investment etc. Current Liabilities = Sundry Creditors + Bills Payables + Overdraft + Outstanding Expenses. The current ratio tells us the ability of the firm to meet its short term obligation. Liquidity Ratio = Liquid Assets / Current Liabilities Liquid Assets = Current Assets Stock The liquid ratio is very helpful in measuring liquidity position and firms capacity to pay off short term obligation. The liquid ratio is a measure of liquidity. Absolute Liquidity Ratio = Liquid Assets Debtors / Liquid Liabilities Liquidity Liabilities = Current Liabilities Bank Overdraft It gives a more meaningful measure of liquidity. The satisfactory ratio will be 1 : 1 i.e., Rs.1 worth of absolute liquid assets are sufficient for Rs.1 worth of current liabilities. Fixed Assets to Proprietors Funds = Fixed Assets / Proprietors Funds This ratio establishes the relationship between the fixed assets and proprietors funds. Proprietors funds also indicates the general financial strength of a firm. Total Assets to Proprietary Funds = Total Assets / Proprietary Funds Current Assets to Proprietor Funds = Total Funds Current Assets / Proprietary
Capital Gearing Ratio = Equity Share Capital / Fixed Interest - Bearing Securities Debt Equity Ratio = Debt or External Equities / Equity or Internal Equities
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It is one of the important structural ratios and establishes relationship between debt capital and equity capital. Debt capital is a cheaper source of finance. This ratio helps us in assessing the risk factor that arises in the use of debt capital in capital structure.
Stock Turnover Ratio = Cost of Goods Sold / Average Stock It reveals the movement of stock in the organization. If the no. of times is more it indicates the fast movement of stock. If the no. is less it indicates slow movement of stock in the organization. Debtors Turnover Ratio = Credit Sales / Average Debtors & Bills Receivable This ratio gives a picture of how many times debtors made payments to the firm. Creditors Turnover Ratio = Credit Purchases / Average Creditors & Bills Payable This ratio focuses light on how many times credit facility is allow to the firm. The lower the ratio the higher the facility of credit. Working Capital Turnover Ratio = Sales (or) Cost of Sales / Working Capital To know the relationship between working capital and sales. Fixed Assets Turnover Ratio = Sales (or) Cost of Sales / Fixed Assets To know the effective utilization of fixed assets in production. Total Assets Turnover Ratio = Sales / Capital Employed To test the managerial efficiency and business performance. This ratio measures how efficiently assets are employed overall. Ratio: The relationship between two financial values. Gross Profit: Sales Cost of Goods Sold Equity: Proprietary Funds Debt: Long term and short term liabilities Operating exp.: The aggregate of office and administrative expenses, selling & distribution and financial expenses. Financial Leverage: The use of fixed rate of sources along with owners equity is described as financial leverage. Amalgamation : When two or more companies carrying one similar business taken over by a newly formed company for the progress in business, it is called amalgamation. Absorption : It one or more companies are taken over by a company already in existence, it is called absorption. Reconstruction : It means reorganization of companys financial structure. Purchase Consideration : Purchase consideration means the purchase price agreed upon, which is paid by the purchasing company inorder to pay to the Vendor Company.
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Lump sum Method : Lump sum amount is paid to Vendor. HOLDING COMPANIES: It is obvious that Holding Companies can nominate the majority of directors in other companies which are known as subsidiary companies and therefore a holding company usually holds the majority of paid up equity share capital. When a company reaches the stage of floating another company holding majority of shares, it becomes a parent company. The existing companies in order to avoid competition float a company which holds a majority of their shares. Sec. 4 of the Companies Act, 1956 defines a Holding Company and Subsidiary Company by their relation to each other. A company shall be deemed to be a subsidiary of another if, but only if, The other company controls the composition of its Board of Directors; or The other company a) holds more than half of the nominal value of its equity capital, or b) if it is an existing company (i.e., a company formed before 1st April 1956) with both equity and preference shareholders, having equal voting rights, the other company controls more than half of the total voting power; or It is a subsidiary of any company which is the other companys subsidiary. To make it clear a company is termed to be the holding company of another only when the other is its subsidiary. Therefore a holding company is one which has control over one or more other companies. It is to be noted that there is no liquidation of subsidiary company. Moreover, its separate legal entity cannot be disturbed. The point is only acquisition of shares in the subsidiary company but not its assets or liabilities. Preparing consolidated Balance Sheet is common. Goodwill or Capital Reserve: When the Holding Company purchases the shares of subsidiary company by paying more than face value, the excess paid is treated as Goodwill. When the holding company purchases shares from the subsidiary company, less than the face value, the difference between face value and the amount paid is treated as capital reserve. Capital Profits: The profits and reserve in the subsidiary company on the date of shares acquired by the holding company is treated as capital profits. Revenue Profits: Profits earned by subsidiary company after acquiring the shares by holding company are called Revenue Profits. Minority Share Holders Interest: The amount related subsidiary company is treated as minority shareholders interest. Contingent Liabilities: Contingent Liability is a liability which may or may not arise. Inter company Transactions: Transactions between the holding company and the subsidiary company are known as inter company transactions. VALUATION OF SHARES: Net Assets Method: In this method valuation of shares is based on asset valuation. Net Tangible Assets: (Assets - Liabilities) - Intangible Assets Yield Method: This is also known as earning capacity or Market Value Method. Investors in general and small investors in particular pay for the shares on the
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basis of the income or yield expected. Therefore, the expected dividends are taken as the basis in this method. Fair Value Method: this is also called earning capacity valuation method or dual method. This is geared to rectify one of the limitations of the earlier method that the value of the share is based on the dividend but not on the earnings. This method relates the value of the share to the earning efficiency in terms of profitability of the company as the market price of the share is based on the earnings of the company rather than the dividend declared. Intrinsic value: Means the potential price of a companys common stock. Liquidation: Winding up of the company. Net Worth: Means the sum of paid up share capital plus reserves plus the preference share capital. VALUATION OF GOODWILL: Goodwill is the reputation and image built up which places the business in position to have long run survival, success and growth, success and growth besides positively influencing the earnings. Factors affecting goodwill: Profitability of Business, Brand Equity, Product of Service Quality, Customer Acceptance, Business Location and Access etc. Average Method: In this method which takes into account the average profits for the past few years and the value of goodwill is calculating as some years purchase of this amount. Super Profit Method: The excess of actual profits over the normal profit is known as super profit. A business unit may posses some advantages which enable it to earn extra profits over and above the amount that would be normally earned, if the same capital is employed elsewhere in a business of same risk class. Annuity Method: Under this method goodwill is calculated by taking the average super profit as the value of an annuity over a certain number of years. An annuity is a series of equal periodic payments occurring at equal intervals of time. In other words goodwill is calculated by finding the present value of an annuity discounted at a given rate of interest which is usually the normal rate of return. Value Added Statements: The Statements which show changes in value added which are created by production. Historical Cost Accounting: The accounting statements which are prepared on the basis of past transactions. Inflation Adjusted Statements: Accounting statements are adjusted on the basis of established price index. Replacement Cost: It is the cost of replacing an existing employee. Opportunity Cost: The actual or assumed rate for capitalization of the differential earnings expected to be earned by an employee.
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Annuity: A series of receipts or payments of a fixed amount for a specialized number of years. Present Value: The value of sums received in future being discounted by an appropriate capitalization rate.
FINANCIAL MANAGEMENT Financial Management: Concerns the acquisition, financing, and management of assets with some overall goal. Future Value: The value at some future time of a present amount of money, or a series of payment, evaluated at a given interest rate. Net Present Value: The Present Value of an investment projects net cash flows minus the projects initial cash outflow. Present Value: The current value of a future amount of money, or a series of payments, evaluated at a given interest rate. Price / Earning Ratio: The market price per share of a firms common stock divided by the most recent 12 months of earnings per share. Risk: The variability of returns from those that are expected. Capital Structure: The mix of a firms permanent long - term financing represented by debt, professed stock, and common stock equity. Compound Interest: Interest paid on any previous interest earned, as well as on the principal borrowed. Funds: Funds include not only cash but also the total current assets or financial resources. Profit Maximisation: It is a criterion for economic efficiency as profits provide a yard stick by which economic performances can be judged under condition of perfect competition. Wealth Maximisation: It stands that the management should seek to maximize the present value of the expected returns of the firm. Discounting: A reduction of some further amount of money to a present value at some appropriate rate in accordance with the concept of the time value of money. Sole Proprietorship: A sole proprietorship is a firm owned by an individual. He owns all assets and owes all liabilities of the business. Partnership Firm: A partnership firm is a business unit carried on by two or more persons with an intention to share profits or losses. The limitations are i) Unlimited liability ii) Limited life iii) difficulty in transferring ownership and iv) Limitations in raising funds.
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Joint Stock Company: A joint stock company is a legal entity created under the law and empowered to own assets, to incur liabilities, and to engage in business. It is an artificial person created by the law. The capital of a company is divided into small portions and each portion is called a share. Investors who buy these share are shareholders and they are the owners of the company. Co-operatives: Cooperative societies are associations formed voluntarily by the people to render service to the members of their society. They are formed to protect and safeguard the economic interest of the weaker sections of the society from the exploitation of stronger sections of the society.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) The SEBI Act, 1992 was promulgated after withdrawing the Capital Issues (Control) Act. SEBI is broad in its application covering wide ranging issues. The powers and functions of SEBI Act are: Regulating the business of stock exchanges Registering and regulating the working of Stock Brokers, Sub Brokers, Share Transfer Agents, Bankers to the Issue, Trustees of Trust Deeds, Registrars to an issue, Merchant Bankers, Underwriters, Portfolio Mangers, Investment Advisors. Registering and regulating the working of Depositors, Custodians of Securities, Credit Rating Agencies Registering and regulating the working of Venture Capital Fund, Collective Investment Schemes, Mutual Funds Promoting self regulating organizations. Prohibiting fraudulent and unfair trade practices Promoting investors education Prohibiting insider trading Regulating substantial acquisition of shares, takeover of companies.
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ACCOUNTING MATERIAL FOR INTERVIEWS