basic accounting part notes.docx

7/27/2019 Basic Accounting Part notes.docx

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Basic Accounting Part-I

Accounting Education

Accounting education is an essential part of our education because without such education ,

we can not calculate our income , our saving and our financial strength . In general , every

person of this world need accounting education for maintaining their personal record . This is

also called personal book keeping . But when we study the theoretical concept of accounting

education , we find different definitions and rules and regulation for proper accounting .

Now let us start What is Accounting Education ?

Accounting Education is combination of two words .

Accounting education = Accounting + Education

Accounting

Accounting is not counting but it is science which is helpful for hunting for the results of

business. Accounting is recording , analysis and finalisation of large scale businesstransactions. Accounting introduces all tools and techniques to solve many or almost every

problem of businessmen, factories, Corporations and firms relating to maintaining accounts

and different financial reports .

Education

Education is way to get knowledge with scientific method .According to Swami Vivekananda

the great philosopher said that it makes us self-confident .It is just use of persons internal

powers . After getting education, person gets moral and professional qualities. After getting

education any body can do any professional work. All other persons respect because he is

well educated.

Accounting Education

Mixer of both words makes accounting education. Accounting education may be defined as

that part of education which provide us the knowledge about accounting terms , journal ,

ledger , final accounts , analysis and interpretation the result of business . Moreover , this

education provide all knowledge of cost calculation and control and it gives different tools for

analysis the financial statement . It is very helpful for making business planning . In single

line , I say , Accounting is brain of Business , with it business becomes mad and there is no

chance to develop it . If you are perfect in this field of education you can easily maintain not

only your head office accounts but all the accounts of your all branches. You can maintain

the accounts not only your business but you will understand every business like agricultural,

industrial and any other service sectoral accounts .Here I want to explain service sector,

service sector is a sector where services are being provided by service providers. So

professional accountant can easily understand the terms subscription, fees, donation, fund,

provident fund, allowance, and gratuity.

Objective of Accounting Education

Almighty has sent us on the earth. What is the objective of sending us on earth? If you do not

know then you can not say that there is no any objective of sending us on the earth .Because

your thinking of your brain is very limited but God is supreme power who knows the aim ofyour sending on earth. He wants that you will do any work and make whole world beautiful


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and wonderful. Like this there are so many objectives of accounting education.

Accounting education helps you proper utilization of your money and capital.

It will tell you that you are getting high rate of investment or not.

What is your earning per share .

It will help you to making planning, policies. Proper accounting education if you will getfrom our accounting expert , you will become not only accounts manager but also

professional Scholar in the field of accounting education. Because today, different concepts,

principals of different area are changing. In this changing environment, accountant will have

to adjust.

If you will not get these new and technical knowledge in the field of accounting, then you

will fail in the field of accounting .These days duty of accountant is not limited up to voucher

entries in computer. But they have to decide proper utilization of the capital and saving non

useful expenditures.

Areas of Accounting

Financial Accounting

Financial accounting is relating to record all financial activity. These activities are related to

business. Because of area of business is increasing day by day so the area of financial

accounting is also increasing. Every day a new type of business is started. So daily

accountant invents a new journal entry. Accountant will take the help of financial accounting

with new thinking of result. So a new chapter of financial accounting is included by us.

3rd ConceptMatching Concept

When I was doing graduate from my college, my respected teacher taught me that matching

concept is very important for an accountant. It means we will compare all expenses with the

incomes of business. After matching or compare, it will provide you the real result of

performance of business. We can say it profit or loss . So If today you want to know profit or

loss of your business, let us start match of your business incomes with your business

expenses.

4th ConceptConservatism Concept

This concept is made when accountant thought that it is very important to secure ourbusiness. The risk of business is called losses. So it is the basic duty of accountant to secure

his business from different losses. For securing Loss he can make different provisions like

provision for doubtful debts, provision for depreciation reserve for contingent liabilities.

Definition of Accounting Concept

Concepts are the different thoughts given by expert in respective field. Now we come on

accounting concept topic. Accounting concepts are also given by different accounts

professional for development of scientific accounting. There are following accounting

Concepts:-1. Accounting Period Concept


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According to this concept, every business discloses their result after certain period. That

period is called accounting period. The time of this accounting period is one year which

started from 1 Jan to 31st Dec. But some companies prefer to adopt the accounting period

according to income tax financial period which starts from 1st April and close to next year

31st march. The main motive of making accounting period is that it tells us whether businesshas given good result or not.

2. Business Entity Concept

According to this concept, every business is separate from his owner of business. If

businessman takes some money from business. Then it is just loan given by business to

businessman. So, it is very necessary to record all transactions between business and

businessman. This concept is very useful in partnership type or company type business

because in that type of business we can charge interest on all drawing by partner and get

earning from drawing.

3. Cost Concept

According to this concept, every businessman or accountant will enter all assets on cost basis

in their books. He has no right to record the assets on their market value because market

value is changing day by day. So showing correct position of business, it is very necessary to

show all assets on their original cost at which we purchase it but we can deduct depreciation

if it is not new asset.

4. Matching Concept

According to this concept, an accountant can get net profit or loss for business after

comparison of all incomes and expenses of that business. Without doing this he can not get

real profit or loss. So it is duty of accountant to make profit and loss account and show

expenses in debit side and incomes in credit side .After this he must compare both side ifincomes are more than expenses, it will be net profit or if expenses are more than income

then it will be net loss

Definition of Accounting Terminology

"Accounting Terminology are such accounting words which are most suitable for describing

its category. For example 'book of accounts' is general word and Ledger is proper accounting

word for more suitable , so these accounting words are known as accounting terminology . "

It is very necessary for that person who is related to other field like technology or medicine .

Suppose if a doctor or engineer want to know the term profitability ratio or know what is

financial analysis . If you told them with explaining accounting terminology , he never

understand . But if you will tell him basic accounting terms with explanation like what is

asset and what is liabilities or what is capital , he easily understand if you give some guidance

. Here I am giving some basic accounting terminology for this benefit.

1.Cash = Cash is that liquid part of money with this we can buy material goods .

2.Money = Money may be in cash , bank cheque or any bill of exchange

3.Material = Material means the goods which we use for production

4.Finished product = Finished product means goods which is produced after machiningprocess.


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management and corporate accounting. Both accountancy and accounting is branch of

science and professional accountants use this science for recording, classify, analysis and

summarizing of transactions of business and main aim is to provide useful information to

interested parties regarding their business.

Definition of JournalJournal is a day books in which bookkeeper records all the transaction first time . Transaction

must be record in this book date wise and journal applies the rules of double entry system .

Suppose Ram takes loan of Rs.100000 from his friend. Then what come in is cash and so

cash account will be debited and His friend is giver of loan, so his friends loan account will

be credited in journal.Journal entry will be passed in the journal of Ram

Cash Account Dr. 100000 /

To Friends loan Account / 100000

In other words journal is the book of primary entry . Whenever any transaction or event

occurs it is recorded in the

first instance in the journal . There are various types of journal.

1. Purchase day book ? to record transactions relating to credit purchases.2. Sales day book ? to record transactions relating to credit sales.3. Purchase return book ? to record transactions relating to purchase returns.4. Cash book ? to record cash , bank and discount transactions .5. Journal Proper ? to record other transactions for which no specific journal is

maintained .

All transaction are first recorded in the journal as and when they occur , the record is

chronological , as otherwise it would be difficult to maintain the record in an orderly manner.The form of journal is given below :

Journal_________________________________________________________________________

Date ? particular ? L.F. ? Dr. Amount ? Cr. Amount ?

________________________________________________________________________

The columns have been numbered only to make clear the following explanations but

otherwise they are not numbered . The

following point should be noted :

1. In the first column the date of the transaction is entered , the year is written at the top ,then month and in the narrow part of the column the particular is entered .

2. In the second column , the names of the accounts involved are written , first theaccount to be debited , with the word Dr. written towards the end of the column. In

the next line , after leaving little space , the name of the account to be credited is

written preceded by the word To ( the modern practice shows inclination towards

omitting Dr and To . Then in the next line the explanation for the entry together with

necessary details is given , this is called narration.

3. In the third column the number of the page in the ledger on which the account iswritten up is entered


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4. In the fourth column , the amounts to be debited to the various accounts concerned isentered .

5. In fifth column , the amount to be credited to the various account is entered .Before one can journalise transactions , one must think on the basis of the rules given above ,

the effect of the transactions on assets , liabilities , expenses , gains etc. of the firm . Inaccordance with the effect , the accounts to be debited or credited will be determined . Then

the entry will be made in the journal as indicated above .

How can make the journal entriesIn the accounting education, making of journal is very important. Because without making

journal entries, we can not calculate the result of business in the form of profit and loss

account and balance sheet. So please care fully get the education of making journal.

Journal accepts the rules of double entry system. Rule for making journal

Every rule has two partsFirst rule for personal accounts

1. Who is receiver = Debit2. Who is giver = Credit

2nd Rule for real accounts

1. What comes in business = Debit2. What goes from business = Credit

3rd Rule for nominal accounts

1.All the expenses and losses = Debit

2.All the incomes and gains = Credit

Practical example for making journal ?

Suppose Ram purchase goods of Rs. 10000 from Sham @ 10% trade discount on credit.

After 15 days. Ram pays full settlement of all money with @ 10% cash discount.

Journal Entries in the books of RamBecause goods comes in Rams business so Purchase account will debit with Rule 2nd and its

first part

Because Sham is giver of goods so he is giver and account with his name will be credit with

rule 1st and its second

part after this we will pass the journal entry

Purchase account Dr. 9000

To Sham Account 90000

After 15 days will pass second journal entry in ram books

Sham Account ( He is the receiver ) Dr. 9000

To Cash Account ( it goes out of business ) 8100

To Discount Received ( It is the income of business 900


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Trial balance and steps for making trial balance

Definition of Trial balance

Trial balance is the statement which shows the list of balance of all ledger accounts .It is

made for checking mathematical error , making of final accounts and maintaining budget of

company. Because of it is made on basis of companys all ledger accounts , so we satisfyabout mathematical correctness , if debit balance of this statement is equal to credit balance

of this statement .

Steps for making trial balance

1st Step : Making all ledger accounts and the calculate their balance , if any accounts debit

side is more than credit balance , its balance will be called debit balance , if the credit balance

is more than debit side balance , it is called credit balance .

2nd Step : Make statement in vertical form in which you have show particular for making the

list of account and right

side , you have to debit balance and credit balance .

Performa of Trial balance______________________________________________

S. No. ? Particular ? Debit Balance ? Credit balance ?

_______________________________________________

3rd Step : Debit balance

1. assets accounts balance2. expenses account balance3. loss account s balance4. investment account balance5. drawing accounts balance6. Purchase account7. Sale return Account

4th Step : Credit balance

1. Liabilities accounts balance2. Provision accounts balance3. Capital accounts balance4. Reserve and surplus accounts balance5. Sale account6. Purchase return account

5th Step : If trial balance is not matched, the difference will be show as suspense account

Important notes

Closing Stock is not shown in trial balance because , it is adjusting item and we can give dual

effect on final account. All other items whose account is not made in proper ledger will not

shown in trial balance .


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Different types of Expenses

In accounting, there are only revenue nature and capital nature expenses. Revenue nature

expenses records in profit and loss account while capital nature expenses are recorded in

balance sheet.

Revenue expenses are again subpart of direct expenses and indirect expenses

Direct expenses are the main type of expenses which are related to production and purchase

of goods. These expenses are

incurred during the purchase of goods and transfer to trading account. I am giving the

examples of

Direct expenses:-

Wages

Freight Carriage Carriage inward Octrai Royalty on production Factory expenses Factory depreciation Fuel , oil and power All other expenses related to purchase of goods

Indirect Expenses

Office expenses Sales expenses Advertising Administrative expenses Bad debts Depreciation of office assets Interest on loan All other expenses relating to sale and marketing

Simple income statement

Sales (Net ) XXXX

Less cost of goods sold XXXX

( or merchandising cost) XXXX

______________________________

Gross profit XXXX

Less operating expenses XXXX

1.office and administrative expenses

2.selling and distribution expenses

3.Financial expenses

______________________________


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Net Income XXXX

______________________________

Net sales refer to total sales less sales returns and are calculated as follows

Cash sales XXXX

credit sales XXXX

_________________________total sales XXXX

less sales return XXXX

___________________________

Net sales

___________________________

Cost of goods sold means the cost price or cost of manufacture of the goods or commodities

actually sold and is

calculated as follows.

Opening stock XXXX

add purchase less purchase returns XXXXadd direct expenses XXXX

less closing stock XXXX

__________________________

cost of goods sold XXXX

____________________________

Basic Accounting Part-III

Bank Reconciliation Statement

Reconciliation of Bank accountsReconciling the Company's Bank Accounts with the Banker's Statement is a fundamental and

regular task of Accounting. First, there should be the ability to 'check back' the correctness ofthe reconciliation. This has been done, by marking the 'Bank Date' against the voucher. For

instance, if you have issued a cheque on 8th April, which was ultimately cleared by your

Bank on 19th April, - you would set the 'Bank Date' for the voucher to be 19th April. This

means, that when you next need to 'check back' whether the entry made by you is correct, you

will only need to verify the Bank Statement of the 19th. Second, that you should be able to

'recover' the reconciliation as of any date. This is of crucial importance to Auditing. The Bank

Reconciliation is one of the pre-requisites of Auditing and verification of the correctness of

accounts at the year end. However, it is not a 'real-time' taskin the sense, that it is not done

by the auditor's on the first day of the next year. This means, that the reconciliation made on

31st Mar, should be 'viewable' even in August, - by when almost all the cheques would havesubsequently been marked as reconciled. This has again been achieved using the concept

above.

Bank Accounts may have a different 'Starting Date' for reconciliation purposes. When you

create a Bank Account, you are requested to give an 'Effective Date for Reconciliation' just

before the Opening Balance. Normally, this would be the 'Books Beginning from' date itself.

However, you could have imported data from a previous version of Tally or from any other

system (where the reconciliation process was not available or was different. In that case, you

may not wish to reconcile the bank account with your bank statements from the very

beginning. Give the date from which you want the reconciliation facility to be activated.

Then, previous entries will not appear for reconciliation, but will be taken as a reconciled

Opening Balance. A quick experiment with Reconciliation will show you what is meant.


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Here is how you go about it:

Bring up the monthly summary of any Bank Book. (You could do this from the Balance

Sheet, Trial Balance, or Display/Account Books/Bank Books, and selecting a Bank). Bring

you cursor to the first month (typically April), and press Enter. This brings up the Vouchers

for the month of April. Since this is a Bank Account, an 'additional' button F5: Reconcile will

be visible on the right. Press F5.The display now becomes an 'Edit' screen in 'Reconciliation' mode. The primary components

are:A column for the 'Bankers Date'

The 'Reconciliation' at the bottom of the screen, showing: Balance as per Company Books

Amounts not reflected in Bank

Balance as per Bank The Balance as per Company Books reflects your Balance as on the last

date (in our example case, 30- Apr). The Amounts not reflected in Bank is the debit and

credit sums of all those vouchers whose Bank Date is either BLANK, or GREATER than 30-

Apr (i.e. these vouchers have not yet been reflected in the Bank Statement).

The Balance as per Bank is the Nett effect of your Book Balance offset by the amounts not

reflected in the Bankwhich should equal the balance in the Bank Statement. (Of course,some variation may persist due to entries made in the Bank Statement which you have not yet

entered in your Booksbut since you WILL definitely enter them, and only then print your

reconciliation, it will ultimately reflect the correct balance). You will find, as you mark off

the individual vouchers by setting the 'Bank Date', that the Reconciliation at the bottom of

screen keeps reflecting those changes instantly. When you are finished, press Ctrl+A (or

press Enter as many times as necessary to skip over the unmarked vouchers), and accept the

screen. (If your screen has a largish number of vouchers it may take some time to complete

the acceptancebe patient).

The next time you come for reconciliation, you will be presented only with those vouchers

which remain unreconciled. Thus, the task keeps becoming simpler.

Making of Bank reconciliation statement by yourself Bank reconciliation statement tells thereason why your cash books bank column is not matching with your bank pass book .

Free accounting knowledge

Free is only one word which is use every person when he or she search from google.com. So

It is duty of every webmaster

to write the word in his website . So I am writing this article of free accounting knowledge .

There are 2 points if you wish to get this free accounting knowledge .

1.You must have save you energy and money

2. Your aim is to get knowledge and then next it also give to another without any cost.

It may be noted that the American institute of certified public accounts , in 1941 defined

accounting as thespecialised art of recording , classifying and summarizing in a significant manner transaction

terms of money which are

of a financial character and interpreting the result . In the course of the time the definition has

become broader to

include imparting economic information to permit informed judgements and decisions .

Economic events have been defined as happenings of consequence to a business entity

Basic terms in accounting

Financial Statements

Two basic financial statements are prepared by an enterprise one is profit and loss statement

and other is balance sheet

Accounting Equation


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Three components of a balance sheet can be stated in the form of following basic accounting

equation

Assets = liabilities + capital

This equation tells at the glance that the resources of this enterprise total and these assets are

financed by two source

also known as outsiders claims and owner equity.Business Transactions

It can be a purchase of goods , collection of money , payment to creditors for goods and

expenses . An event to be a

transaction must possess the quality of economic substance , relate to business and affect the

economic results .

Assets

These are economic resources of an enterprise

fixed assets are assets held on a long term basis , such as land , building , machinery and plant

etc.

Current assets are assets held on a short term basis such as debtors bills receivables , stock ,cash and bank etc.

Liabilities

These are the obligations or debts that the enterprise must pay in money or services at

sometime in the future . They

represent creditors , claims against assets of the firms.

Relationship of accounting with other fieldAccounting is very close relationship with maths , economics ,statistics , business study and

other area. Different formula used in financial , cost and management accounting can be

satisfied on the basis of maths . In accounting , we records only economical transaction

related to money or money's worth And our govt. policies effects on our financial accounts .Suppose if central govt. changes the rate of depreciation then our net profit and financial

position will effect from this point . So we should necessary to understand the relationship of

accounting with other field for better knowing accounting . Accounting , maths , economics

and business study all makes good structure of a good economy . Because if one field is not

fully developed , its side-effect surely

will be on other fields . Suppose if an statistics have to collect previous year market sales data

but accounting of market is very poor so he will have to collect wrong data and different

economic decision will be wrong . We can understand all field just as different parts of body ,

if one part is weak other surely effected from it .

Accounting cycleSometime , you read this term in any book about accounting cycle , But you would not

research of this term . Actually accounting cycle is very simple term .It means that all the

activities in accounting will absorb in first point and then it make accounting cycle .This term

is very useful for an accountant because an accountant is man who maintain accounts .

Suppose Ram purchases goods from any company this transaction when comes in the front of

an accountant , he records it after this he see its result on his final accounts but in last

automatically it support to completing the whole accounting cycle . In other words any

financial transaction is the beginning point of accounting cycle and an accountant must give

importance to each transaction of business.


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Depreciation and effect on final accountDepreciation is just decrease the value of any fixed asset.When you will use it ,then the value

of fixed asset will be decreased . So calculating of net profit and correct financial position , it

is the duty of accountant to show it in profit and loss account . Rates of depreciation may

differ according to the nature of fixed asset some assets depreciation rate is low and other is

high because high decreasing value due to expiry. In balance sheet ,we deduct depreciationfrom fixed asset .After deducting we can calculate net value of fixed asset which can be show

in balancesheet .

Depreciation account can also be made by accountant but every year it must send to profit

and loss account because this is nominal account . Different law like income tax law and

corporate law fix this depreciation rate so we must see the reference of

depreciation rate from these laws but calculating correct amount of depreciation . Also ,

account manager should decide when a fixed asset will buy . For replacement purpose , it is

duty of accountant and account manager to calculate and transfer and written off depreciation

every year from fixed asset .Some business entity makes also provision for depreciation .The

Balance as per Bank is the Nett effect of your Book Balance offset by the amounts notreflected in the Bankwhich should equal the balance in the Bank Statement. (Of course,

some variation may persist due to entries made in the Bank Statement which you have not yet

entered in your Booksbut since you WILL definitely enter them, and only then print your

reconciliation, it will ultimately reflect the correct balance). You will find, as you mark off

the individual vouchers by setting the 'Bank Date', that the Reconciliation at the bottom of

screen keeps reflecting those changes instantly. When you are finished, press Ctrl+A (or

press Enter as many times as necessary to skip

Depreciation

It is a gradual deterioration or decrease in the value of asset after using that asset in our day today work or after spending of time. In this world, everything is perishable, so making true

profit and calculates true value of any asset at present time, it is very necessary to depreciate

on fixed asset and deduct from it.

Fluctuation

If you are doing business or linked with any business, you know that prices are always up and

down due to changing in the condition of business environment. Fast changing in market

prices is called fluctuation. It is not called depreciation because, it is not related to use of

fixed asset. Fluctuation can also increase the price of fixed asset but after deductingdepreciation, value of fixed assets will be decreased. Fluctuation is fully ignored and there is

no accounting treatment. But we show depreciation as a loss of business.

Obsolescence

When new fixed assets quality, efficiency and capacity decrease the value and usability of

old fixed assets, then it is called obsolescence of old fixed assets.The main example, we can

look in different machines or technical equipment especially in medical field. Every new

equipment decreases the value of previous equipment. Because of it is not related to the

nature and use of fixed asset, so it is also not depreciation. Obsolescence is not important in

field of accounting but it is important in technology research and marketing of product.


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How to make fixed asset account under fixed installment method Before making of fixed asset account, we must know following journal entries :-

1. For providing depreciation on asset at the end of the year

Depreciation account DebitFixed asset account credit

2nd For transferring of depreciation to profit and loss account

Profit and loss account debit

Depreciation account credit

In this method fixed asset account is very simple T shaped. There is not fixed Proforma for

making fixed asset account

Methods of providing depreciation

There are many methods of calculation of depreciation . No one apply on the all assets ,

because , different assets have different nature and according to management policy and

effect of laws specially tax laws , different methods are used for providing depreciation .

There are 10 methods of calculation of depreciation . Out of which approximate 5 are the

most important and it should be learned .

1st method of providing depreciation

Fixed installment method

Fixed installment method is that method , in which we calculate fixed rate of depreciation and

then with this rate wededuct every year from fixed asset .

Original cost of asset - scrape value of asset

Depreciation = ___________________________________

Effective working life of asset

For example Satifsan purchased an asset of $ 20000 and he can use it for 4 years and after

four year its scrape value

will be $ 4000 . Calculate depreciation with fixed installment method

Depreciation = 20000- 4000/4 = $ 4000

Rate of depreciation = 4000/20000X 100 = 20%

every year we provide $ 4000 and deduct from original cost of fixed asset . So its other nameis original cost method or straight line method of providing depreciation .

Benefits of this method1. It is easy to calculate

2. It show zero value of fixed asset at the end of its life .

3. It divides all weight of total depreciation equally in all period of life of asset .

4. After providing depreciation , balance will shows correct value of fixed asset .

Disadvantage of this method1. After showing zero value of expiry of fixed asset in books , but it is possible that asset is in

good position .

Then what provision will show in books , this method does not tell to accountant .

2. Some assets ' value will increase after spending of time at there we can not use this on that


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assets .

3. There is no provision in this method for buying new asset after scrap of old assets .

Basic Accounting Part-IV

What is provision of depreciation account?Provision of depreciation account is the account of provision of depreciation. First of all we

should understand provision of depreciation .Provision of depreciation is the collected value

of all depreciation .With making of this account we are not credited depreciation in asset

account. But transfer every year depreciation to provision of depreciation account. Every year

we adopt this procedure and when assets are sold we will transfer sold assets total

depreciation to credit side of asset account. For calculating correct profit or loss on fixed

asset. This provision uses with any method of calculating depreciation.

There are following feature of provision for depreciation account

Fixed asset is made on its original cost and every year depreciation is not transfer to fixed

asset account.Provision of depreciation account is Conglomerated value of all old depreciation.

Entry of depreciation will change also

Depreciation account Debit

Provision for depreciation account credit

This system can be used both in straight line and diminishing method of providing

depreciation.

Calculation of loss on sale is very important where is provision of depreciation account is

kept.

Which we can calculate with following way

Cost of sale of fixed asset XXXX

Less total depreciation up to the dateOf sale XXXX

____________________________________________

Written Down Value of sold asset XXXX

Less Sale price XXXX

___________________________________________

Loss on sale of Asset XXXX

___________________________________________

This loss will show in the credit side of asset account

At the sale total depreciation on of sold asset from its purchasing will transfer from

provision of depreciation account to fixed asset account , its journal entry will Provision fordepreciation account Debit

To fixed asset Account Credit

Diminishing balance method of providing depreciation

Diminishing balance method of providing depreciation is very important from accounting

point of view. In this method,

accountant calculates depreciation on the asset from which he deducts all previous

depreciation from asset. So, every year amount of depreciation will go down.

For example Suppose we purchase a machinery at $ 50000 and if we fix 10 % depreciation

on machinery with diminishing balance method, then first year depreciation will $ 5000 , next

year will calculate depreciation $ 50000 - $ 5000 = $ 45000 X 10 % =$ 4500

Third year depreciation will apply on $ 45000 - $ 4500 = $ 40500

So, we calculate depreciation on written down value of asset so , its other name is written


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down method or reducing

value method .

Now we are seeing the value of depreciation is decreasing

Ist year = $ 5000

2nd year = $4500

3rd year = $ 4050Benefit or advantages of this method1.This is also very easy method.

2.This is very scientific method and provides logic that which asset is abolish due to spending

of time at that portion

of depreciation is not included in asset.

3.Income tax officer prefers this method for assessment of business and professional income.

If we buy any asset after first year, we need not to calculate depreciation from beginning.

Disadvantages of this method1.In this method we also ignore interest on capital which is used for purchasing such asset.

2.All new and old assets are mixed with each other, for an auditor, it is so difficult to differamong them.

3.It is difficult to calculate optimum rate of depreciation

But we can use following formula for calculating depreciation in W.D.V. method.

R = 1( S/C) 1/n

R = rate of depreciation

S = S is scrape value

n = n is the working life of an asset

c = c is cost of asset

Reserves

Reserves are accounting terms. In general, it is saving of money, but in accounting

terminology , it has different meaning.According to accounting technician, Reserves are that funds which withdraw from general

or special profit of business and keep it in safe pocket of company. This sum is used when

any loss happens in business. "

Accounting Experts always in favor to keep some money or retain some fund for future

losses, because future is uncertain and for increasing working capital of business, accountant

should retain some money out of total profit before distribution it to shareholders. It is shown

in profit and loss appropriation account. Indian company law has fixed it and in other

countries , their company laws fix it and from time to time change it due to changing

businessenvironment.

Types of Reserves

There are two main types of reserves which I am explaining with following way :-

1. Open reservesOpen reserves may be defined all reserves which shows in the balance sheet. Every person or

public can know such reserves of company. Those reserves provide full information to

shareholders about which amount has gone to reserves or why they are not getting all amount

of dividend. This type can also divide in sub parts

a) Capital reservesCapital reserves are main type of open reserves. It is not created out of profit of company.


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This reserve is not used for distributing the dividend to shareholders of company. The main

sources of these reserves are following:-

1. profit earned prior to incorporation2. Premium on the issue of shares and debentures.3. Profit on reissue of forfeited shares4. Profit set aside for the purpose of redemption of preference shares.5. Profit on sale of undertaking or part of it.6. Surplus on revaluation of assets and liabilities.

b) Revenue reserves

Revenue reserves are that part of open reserves which are created out of profit of company. It

is showed in profit and

loss appropriation account .It can be used for dividend to shareholders. There are following

benefits of revenue reserves:

1. Extension of business2. Set off unknown losses of business.3. Used to create strength in the financial position of business.4. To make stability in the dividend rate.

These revenue reserves can also divide into two parts.

i) general reserves

ii ) Specific reserves = Specific reserves includes dividend equalization reserve, debenture

redemption reserve , staff reserve. Investment fluctuation reserve, taxation reserve and

contingency reserves.

2. Secret Reserves

Secret reserves may be defined as that type of reserves which is not shown in final account of

company. Means it has neither been shown in profit and loss appropriation account nor in

balance sheet. These reserves can easy created by showing less value of assets and more

value of liabilities in balance sheet. If a company has created such secret reserves for the

benefits of company, it will be surely strong his financial position. These secrete reserves can

be created by following ways:

Showing heavy depreciation value Showing the less value of goodwill and closing stock of business. Secrete of sale value of business. Showing heavy liabilities which is not of company. Showing capital expenses as revenue expenses. Grouping of free reserves with creditors. Current asset not shown in balance sheet.

Calculation the credit purchase


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1. Write creditor account on any excel sheet with making two sides one side is debit andother side is credit.

2. Write your business's creditors opening balance in credit side with giving by balanceb/d name.

3. Write the amount that you have given to your creditors in the current year in the debitside of creditor account.

4. Write closing balance of your creditors in the end of this year ( this amount showsunpaid amount which is payable to your creditor at the end of this year ) in the debit

side of this account

5. You will see that debit side is more than credit side of this account , the differencewill be credit purchase and it should be written in the credit side of this account

6. Now you are seeing your credit purchase .This credit purchase is very necessary when you will calculate the net consumption of your

stock

because for calculating net consumption for stock , we always add purchase in the openingstock and deduct closing stock . This net consumption will show in profit and loss account or

income and expenditure account .

Difference between revenue and capital items

Revenue itemIf any item of business which does not create any asset of business that type of items are

called revenue items, suppose we pay rent but rent can not create any fixed asset so this is

revenue item and it must show in profit and loss account , but if we have a special fund for

building , this fund create long term asset up to that period this will show as fixed liabilities .

This is not revenue item .

There is also major difference is that revenue items benefit is related to current year butcapital items' benefits are related more than one year. If advertisement's expense is 100

Rupees and its benefit can only related to current year then this is revenue item .

But if we expand Rs. 9000000 lakh on advertisement and its estimated benefit is for 10 years

then this will be the capital item.

All revenue item will show in profit and loss account

And all capital items will shown in balance sheet or financial statement .

Capital lossCapital loss may be defined as the loss relating to sale of any fixed asset or any other

financial loss like premium given on repayment of debentures or bonds, or discount on issue

of shares and debentures. Capital loss may explain with many other examples:Ist ExampleSuppose, if any machines book value is $ 50000 and sell it on $ 40000 and $ 10000 is loss

on sale of machinery, this is called capital loss.

2nd ExampleSuppose, if a company has 100 debentures of other company and each debenture is of $ 100

but these debentures are sold at $ 80 per debenture, so company is getting loss on sale of

debenture of $ 2000. This is capital loss in profit and loss account of company, we can not

show any capital loss. In other words these losses can not be debited in Profit and loss

account of company. These all losses will show in assets side of balance sheet of company.

After this, it is written off by dividing number of fixed years and transferring to profit and

loss account. If you know what is mean of written off , then , I can also explain it , written off


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means that part of any expenses or loss which is transferred from balance sheet to profit and

loss account for closing the account of loss or expenses , specially capital losses .

Revenue lossesRevenue losses include all losses which happen due to operating any business activity. It

includes cash discount on sale, depreciation, loss due to falling of market prices. So, theselosses will show in the debit side of profit and loss account of company. It is deemed that

when we start the different activities of our business , many losses are happen , so it should

be closed by transferring all these losses to profit and loss account .

Feature of revenue expenditures

There are following main features or characteristics of revenue expenditures . These features

are very useful for your decision to adding any expenses in profit and loss account .

1. General operating expenses

Any expenses which is related general operation of business that all expenses will be revenueexpenditures and will be debited in profit and loss account

2. Expenses related to short period

These type of expenses are related to short period, means benefit of these expenses is less

than one year.

3. Expenses for maintaining the stability of fixed assets

These expenses main feature is that these expenses is useful for maintaining the stability or

efficiency of fixed assets,

4. Recurring Nature

One of most important feature of these expenses that these expenses are recurring nature. In

other words these expenses happen Again and again in general business activities. For

example , expenses for giving refreshment is revenue expenditure because almost daily ,these type of expenses is paid by company .

5. Helpful for maintaining the profit of business

These type of expenditure is useful for maintaining the profit of business , but also above

features should include in the expenses which I have mentioned in above points because

capital expenditure will also helpful for maintaining the

profit and you will then confused revenue and capital expenditures difference .

What are basic rules for making difference between capital and revenue expenditure

Ist Rule

All expenses which are done for getting any fixed asset must be capital expenditure. For

example, expenses of carriage and freight for getting fixed assets are also capital expenditure

and will include in the total cost of fixed assets.

2nd Rule

All expenses which are done for increasing the size or improvement in fixed assets must be

capital expenditure.

3rd Rule


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All expenses which are done for getting share capital or long term loan must be capital

expenditure.

4th Rule

Look also nature of business , if business is relating to general goods sale -purchasetransaction then above three rules will applicable but , if nature of business shows dealing in

above transaction , then above transaction becomes revenue expenditure .

5th Rule

Legal judgments is also so important for taking decision , Like Income tax law 1961 has

provided some rule regarding assessment of business and profession . These rules also give

good guidance for making difference between revenue and capital expenditures.

What is deferred revenue expenditure?As a matter of fact , deferred revenue expenditure is capital expenditure . Because , it has

both quality of revenue

and capital items, so it is deemed as deferred revenue expenditure.

Example:

Heavy advertisement expenses , because this is for promotion of sale so, it is revenue

expenses but because amount is too large so it is also capital expenditure. Now, it will include

in deferred revenue expenditure. If we fix the target of getting benefit for this advertisement

is 10 years and advertising cost $ 500000. Now $ 500000 is divided by 10 years and we get $

50000 and it will show as revenue expenses in profit and loss account and balance amount of

$ 450000 will show in balance sheet. Every year one tenth part of Original and total

advertising expenses will go to profit and loss account. This deferred revenue account willclose in 10th year when there will not be any balance for showing as asset in balance sheet .

There are also other deferred revenue expenditures like underwriting commission, discount

on issue of shares and debentures , brokerage paid on purchase of shares and debentures,

research expenses and development expenses

Definition of Drawing

We use drawing many times in financial accounting .Drawing here means any amount

withdraw from business for personal use. Not only cash but if we withdraw any product frombusiness or any asset of business for personal use that will be drawing.

It surely reduces the capital of any business. So business man must record drawing in his

books so that accountant can calculate correct profit or loss of business man .Some

accounting terms, Intangible assets

This is the asset which is not visible but we can feel them . The main examples of these assets

are goodwill, patent, trade marks

Factitious AssetsIf any asset which has no any market price that asset is called factitious assets .This is showed

as expenses of capital expenditure . The main example of these factitious assets are

Preliminary expenses , discount on issue of shares and debenture


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calculations

1. cost of goods sold =opening stock + purchase +direct expenses - closing stock

2. Gross profit = sale price - cost of goods sold

3. Net profit = Gross profit - Indirect expenses

4. Commission on net profit before charging such commission

= Net profit before charging X Rate/100+Rate

Definition of GoodwillGoodwill is an intangible asset which makes any organisation with his good name , by selling

quality product , by selling product at less price .Goodwill can be earned by speaking sweat

words to customer . An expert can tell about the correct value of Goodwill

but in general IT is the excess of super profit over general profit .or If any concern is gaining

more profit than his general rate of return then it means it is generating Goodwill .Goodwill

can not generate with in night but for generating goodwill any firm can take 10 to 20 years .

Which is called long period is suitable for generating goodwill .

If you are selling your old firm you can also demand the value of goodwill with total cost ofyour asset . If you thinkthat Firm or company name is saleable in market .

Personal accounting means recording of domestic expenses and income . It is very

necessary that to record your income and expenses. Because without recording your personal

accounting , you can not make your domestic budget. If you are living in any noble family , it

is you duty to complete your all expenses with your limited income , so make estimation of

all monthly expenses . This estimation can be done if you have recorded early months

expenses . So it is your duty to record your personal expenses. Recording of personal income

and expenses is very easy . Just keep a Note book in you pocket and after spending any

expenses you must record your expenses. After month you will see what is your total

expenses and where did you expand it. On this base you can make you family budget. If you

can not keep note book then you can record your expenses in excel sheet. In each night youcan record full day expenses in different things like juice , ice-cream , wheat , petrol , dresses

, fees , charity etc. After month total them you can get you monthly recorded expenses after

one year you can your yearly real expenses . It is not necessary that all year we have to do

same expenses but we can estimate our yearly expenses.

The theme of accounting education.

In beginning

I think that India is inventor of all basic rules of accounting because , In India all commercial

activities are started . So Need of recording transaction is the first preference of India. All

records kept in Sanskrit language. Accounting system is so scientific , no body can cheat inthis accounting system. So there is not need of auditing the accounting in that time. Different

countries visitors and businessmen came in India and took all knowledge of accounting and

went to their country. So India is the first accounting Education giver

In the MiddleIn middle of accounting education theme, we will take different scientist in whole world who

gave their contribution for accounting education. I am giving giving their name and other

detail Luca Pacioli (1445 - 1517) Luca Pacioli also known as Friar Luca dal Borgo, is

credited for the "birth" of accountancy. His Summa de arithmetica, geometrica, proportioni et

proportionalita (Summa on arithmetic, geometry, proportions and proportionality, Venice

1494), was a textbook for use in the abbaco schools of northern Italy, where the sons of

merchants and craftsmen were educated. It was a compendium of the mathematical


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knowledge of his time, and includes the first printed description of the method of keeping

accounts that Venetian merchants used at that time, known as the double-entry accounting

system. Although Pacioli codified rather than invented this system, he is widely regarded as

the "Father of Accounting". The system he published included most of the accounting cycle

as we know it today. He described the use of journals and ledgers, and warned that a person

should not go to sleep at night until the debits equalled the credits. His ledger had accountsfor assets (including receivables and inventories), liabilities, capital, income, and expenses

the account categories that are reported on an organisation's balance sheet and income

statement, respectively. He demonstrated year-end closing entries and proposed that a trial

balance be used to prove a balanced ledger. His treatise also touches on a wide range of

related topics from accounting ethics to cost accounting. John Mellis of Southwark, England

had written his book in 1588 in which he wrote basic principals of accounting , which used in

modern accounting. Richard Dafforne accountant There are so many accountant who

contribute their time and energy to make accounting upto date.

In the End

In the end of this theme , I can tell you one thing that 100 billion people works daily in the

field of accounting. From making of family budget to making of national and world project

budget , accounting is used as scientific source of data , on the basis all future planning have

been done by different people in whole world. If you are thinking that just passing the

voucher entries and making final account is accounting , then you are wrong. Theme of

accounting is in system not in doing just clerk work. Passing the voucher entry is clerk work.

But If you are become real accountant in real sense . Then make your businessmen's all plans

and budget by doing all analysis of finance statement. So that you will succeed in reducing

every cost of business and increasing all incomes of business. All management accounting isnothing but proper utilization of financial accounting .

Accounting As an Information System

It is true that accounting is an information system. It is system in which an accountant gets all

financial reports .These reports can be received by accountant if he takes all the steps of

accounting procedure. There are following in points which show that accounting is an perfect

accounting system? Accounting gives us profit and loss account and balance sheet , on these

two reports , we get the information of revenue position and our financial position? Because

in accounting , there is the facility of calculate cash flow statement and fund flow statement ,so it provides us the information about our inflow and out flow of funds and cash?

Accounting is an equipment in the hand of accountant and manager , with this equipment

they can make their all future plannings, future budget .With accounting , they can easily

estimate , is there suitable to invest money or not under there accounting reports.

Difference between Loan and Advance

Many accountants think that loan and advance is almost same . Both means when a person

borrows the money from other, it is called loan or advance . But , If you will deep study of

this , then you found many differences between loan and advances .

Loan means debt for personal or business purposes in which loan taker is responsible to


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return his taken money with interest .

Advance is to get money from those , which have our mutual relationship .

Suppose

Employee can get salary in advance from his employerAdvance transaction will arise due to relationship between employer and employee .

Debtor can give advance money for purchasing any future goods from his supplier or

creditor . or Supplier can demand

advance money for passing his order .

Rohan has to buy of Goods $ 50000 in 5/5/2009 but he pay to Sham $ 50000 in advance in

5/3/2009 .

Loan is just Contract between Lender and borrower in which they fix their terms and

condition .

What is rate of interest on loan , what is the installment amount , when installment of loan

will given , What penalty

will be levied if , installment is not given at proper time and many more conditions they can

fix .

But in advance , term and condition is fix on their relationship , a good relationship with

employer , you can get

advance salary with 0% interest rate .

Sometime Imprest cash and call in advance is also deemed advance but these are not loan

items .

IASB publishes his new amendments .According to this now IASB will gets public

comments to clarify the requirements inIAS and IFRIC 9 reassessment of Financial Instruments.Now any one can also read Financial

instruments project page

print-friendly version of the press release.

The proposals are set out in an exposure draft Embedded Derivatives, on which the IASB

invites comments by 21 January

2009. The exposure draft is available on the Website www.iasb.org.

Accounting Education means that education which teaches recording and maintaining books

of accounts . This education came in existence after mathematics and Economics science . In

the point of facts , if It should be said that above education is the base of accounting

education . Above Education are very helpful for getting accounting Education . In

accounting education , we learn what is way of recording our different transactions. With this

education , we can calculate our business's result relating to different transactions and events .

It is not easy to find to reward or return on investment made by businessman .

Suppose , A company whose sale is 6 Billion $ ( 6 X 1000000000000 $ ) and it has spread in

120 countries and if you are said to calculate the profit or loss of a company . Then , you will

feel giddy . But ,if you learn accounting education , you will feel reposal and easement to

calculate above profit or loss. This accounting education is also helpful for determination of

tax because , if we learn to record all transactions in the books and on this base we cancalculate correct value of tax and become responsible businessman of this nation. All tax


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officers or assessing officers confess the accounts of professional accountants who are expert

in accounting education. Success of business is fully under accounting's thumb . It is

impossible to develop business without accounting data and effective use of them for

business plannings . For analysis of different statement is also depend on cost and

management accounting which are subbranches of accounting . One of magistral feature ofaccounting is that this education is encumbrance on brain . All work is done in this education

with fully scientific method of accounting . After spending of time , all other educations

forget but accounting education is always young and challenging position in the brain of

accountant . Accountant does their work with new power . It is the reason that as accountant's

experience increases , by the way amounts to higher posts of administration .

It is true that getting of any education is no so simple and you have to face several difficulties

. Like other education accounting education is not so easy . It is the way of complexities and

Complications but student should do hard practice and try to understand accounting

terminology . After this student can solve every problem of accounting .

Corporate Accounting Part-I

1st Maintaining the accounts relating to issue, forfeiture and reissue of shares.

When we issue share first time, it is the duty of accountant to records all the transactions

relating to issue of share must be recorded in the books of company. The process of issue is

completed the following way.

getting the application money with application

getting the allotment money when shares are allotted to shareholders

getting the final amount in the form of IST, second and final calls.

So when any amount we receive, it must be recorded by accountant of company. If we arerefunding the amount then also its record must be kept in company books.

In company accounts, the accountant can face the problems of forfeiture of shares and reissue

of forfeited shares. Many inexperienced accountant do 90% mistake in passing the voucher

entries relating to forfeiture and reissue of shares. This is broad concept and I will write full

tutorial on forfeiture and reissue shares. Today I am concentrating our all area of company

accounts.

2nd Maintaining the debentures Accounts

Debenture is just loan which is taken by any company, so it is the duty of the accountant torecord relating to issue and repayment of debentures.

3rd Maintaining the accounts of Bonus SharesBonus shares are the shares to existing shareholder. When company thing that it is according

to the company policies, then company can issue the bonus shares. So record of bonus is all

very necessary in company accounting.

4th Maintaining the accounts of Right shares

Right shares can also issue to existing shareholder on the proportion of their existing shares

.These shares are also very important from recording point of view.


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5th Maintaining regular accounts

Regular accounts means to pass the voucher entries related to purchase, sale, expenses, and

losses, incomes of company or on the behalf of company. The recording way is equal to the

recording way of sole trade or firms transactions.

6th Maintaining the final accounts of CompanyMaintaining the final accounts of company is very necessary because company laws of

different countries have given strict provision for making and publishing the final accounts of

company. There the final statement is made in final accounts of company by accountants of

company.

Profit and loss account

This account is equal to the profit and loss account of other organization.

Profit and loss appropriation account

It is very compulsory to make profit and loss appropriation account. In company level

business , shareholder is differ from management or directors , so what is the dividend and

what amount of profit and loss reserves in company will write in the debit side of thisaccount. Other thing I will discuss in next articles.

Balance Sheet

This sheet shows the assets and liabilities of company. Company must show his contingent

liabilities in the footnote in the below of this balance sheet.

7th Calculation of Managerial Commission

From accounting point of view, it is very necessary to calculate commission of different full

time and part time directors of company. Different countries company laws can make the

rules and regulations regarding these commissions, so you must know the current rates of

such commission if you have the responsibility of making the company accounts.The area of

expenses and incomes of company is so wide, so thinking of company accountant must be sowide.

8th Dividend and Interest Calculation

Company accounts main part is to calculate the dividend and interest and then record. There

are different types of dividend which is issue by company but interest is given on loan and

debentures issued by company.

9th Corporate taxCurrent rules and regulations relating to corporate tax depend on the finance bill and budget ,

so before calculation and recording of corporate tax.

Meaning of Bonus sharesBonus means premium or gift which is paid normally in cash

Bonus shares

Bonus shares mean a gift or premium in form of stock by a company to its shareholders . It

may be stated as extra dividend to share holder in a joint stock co. from surplus profits in the

legal context a bonus share is neither dividend nor a gift . It is governed by regulations of the

company law that it can neither be declared like a dividend nor gifted away . .

Source of bonus sharesThe bonus shares can be issue out of profit or reserve which have been earned by the


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company these are profit or reserve which are free for the purpose of dividend and asspecified in company act . but it can not view , those reserve and surpluses which are notearned by company that is which are existing due to revaluation of assets etc.

Profit and loss account general reserve revenue reserve free reserves dividend equalization fund capital reserve sinking fund debenture redemption reserve only after redemption development rebate reserve allowance after expiry of 8 years capital redemption reserve

share premium or security premium if received in cash

Bonus

Bonus is an accounting term , it means a premium or gift which is paid normally in cash.

Bonus sharesBonus shares means a gift or premium in the form of stock by company to its shareholders . It

may be stated as extra dividend to shared holder in a joint stock company from surplus profit

s in the legal context a bonus share is neither dividend nor a gift . It is governed by

regulations of the company law that it can neither be declared like a dividend nor gifted

away.

" issue of bonus shares in liew of dividend is not allowed ."

Source of bonus shares

The bonus shares can be issue out of profit or reserve which have been earned by the

company over the previous years .Normally these are profit or reserve which are free for the

purpose of dividend and as specified in company act. but it can not views those reserve and

surpluses which are not earned by company that is which are existing due to revaluation of

assets etc.

Profit and loss account

general reservesrevenue reserves

free reserves

dividend equalization fund

capital reserves

sinking fund or debenture redemption reserve only after redemption

Development rebate reserve /allowance after 8 years

Capital redemption reserve

Shares premium or security premium if received in cash

Corporate Accounting Part-II

SEBI Guidlines for determining maximum quantom of bonus issue


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First test

Residual reserve test As per this guidline the residual reserve after the proposal of

capitalisation ( bonus issu) should be at least 40% of increased paid up capital

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

----7

2nd testProfitability requirement test

As per this guidline 30% of average amount of profit before tax in the previous three year

should yield a rate of dividend of expended capital base of the company at 10%

= 3 average profit - existing share capital

3rd testMaximum limit requirement

This test indicates teh maximum amount which can be utilised for issue shares capital at one

time shall not exceed the total amount of paid up equity capital of the companyAmount of bonus < total existing quity paid up capital

To determine a maximum amount of bonus which can be decleared the test mention above

will be apply . Firstly the first two test will be consider the amount of bonus will be restricted

upto the lower amount but this amount will not exceed the existing paid up capital of the

company .

In brief the following steps should be consider for the purpose of bonus

1. Bonus shares not permitted in less existing partly paid up shres are converted into fully

paid up shares

2. Bonus can not exist teh paid up equity capital of the company

3. The balance of residual reserve must not less than 40% of increased capital

4. 30% of average profit before tax of previous 3 year must yield 10% dividend on theincreased capital

Accounting treatment of bonus shares

I am giving the full detail of accounting treatment of bonus shares step by step

1st caseWhen the partly paid up shares are converted into fully paid up shares through bonus issue

For providing the amoutn of bonus out of reserve , then the following journal entry will pass

Capital reserve account debit general reserve account debit revenue reserve account debit free reserve account debit dividend equalization fund account debit profit and loss account debit Bonus to equity shareholders account credit For amount due on final call of shares ( Existing shares unpaid amount Share final call account debit Share capital account credit For adjustment of final call amount out of profit Bonus to shareholder account debit


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share final call account credit

2nd caseWhen new fully paid up bonus shares are issued

a) for providing amount of bonus

Capital reserve account debit share premium account debit capital redemption reserve account debit other general reserve account debit Profit and loss account debit bonus to shareholder account credit

b) for issue of bonus

Bonus to equity shareholder account debit equity share capital account credit

Calculation the value of bonus shares

Steps for calculation the value of bonus shares

1st stepTake the basis of bonus issue for the purpose of determining for purpose of total amount of

bonus basis of bonus issue.

(a) To convert the existing partly paid up shares into fully paid up shares

Numbers of existing equity shares X unpaid amount

b) To determine the number of bonus shares

Bonus shares numbers Total no. of issued shares= __________ X ___________Basis issue

numbers

c) Amount of new bonus shares= no. of bonus shares X issue price

Steps of capital budgeting process

Capital budgeting is process of selecting best long term investment project . Capital

budgeting is long term planning for making and financing proposed capital out laying

Steps for capital budgeting processIst stepIdentification involved in capital budgeting proposals

2nd step

Screening the proposal

3rd stepEvaluation of various proposals

4th step

Fixing the priorities

5th stepFinal approval and planning the capital expenditure

6th step

Implementing the proposal


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7th stepPerformance review

Terms used in Corporate Accounting

Corporate or CompanyCorporate or company is the synonym. Company means association of person which do any

business for earning profit. But it must register and formed under any company law of any

country. Because company is an artificial person and do work with separate entity. Company

has its own charter and internal article of association.

SharesThis is main term of corporate accounting. When we divide total capital of company into

parts then each part is called share. Suppose, if you have 100000 capitals and if you divide

into 1000 parts. Then it means company has 1000 shares of 100 rupees each.

Preference SharesPreference shares are the main type of shares if company issues that type of shares, then the

share holder of these types of shares has the benefit that they can get part of profit with fixed

rate and before giving the part of profit to equity shareholders. In the end of company, these

shares are get preference of their repayment.

Equity SharesEquity Shares are the shares which are differ from preference shares. The shareholder of

these shares has no preference relating getting dividend or any repayment. They are realowner of company and have the right to give the vote.

DividendDividend is that part of profit which distribute among shareholder. Its other name is divisible

profit. Dividend may be given by cash or through bonus or any other type.

Debenture

Debenture is just paper which is given by company when company takes loan from public. Itis issued under company seal. In this paper company accepts that he will repay the loan taken

by him after certain period with given rate of interest.

RedemptionRedemption is technical term in corporate accounting .It means repayment of loan taken by

company. When company issued debenture then company also writes the mode of

redemption of debenture. There are different ways of redemption of debenture. The best way

is to create sinking fund and keep some part of profit in it as annual installment. So that

company can pay his taken loan without any tension.

General Reserve


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General reserve is the part of retained profit. It is very compulsory to make general reserve in

company for payment of contingent liabilities or for development of company. Every finance

bill has right to amend or change the rate of % in general reserve. This part is not issued as

dividend

Accounting Treatment of issue of shares on premium and discount Some time a company can decide to issue of shares on premium or on discount. In both

situations we must know the basic concept before doing any accounting treatment.

Issue of shares on premium

Issue of shares on premium means that if company wants to get more money of each share.

Then the company can demand premium with the face value or nominal value of shares. This

is called issue of shares on premium. Suppose if the face value of shares is RS.100 Company

can issue of his 10000 @ Rs. 105 it means company is also demanding RS. 5 per share as

premium. According to new amendments in Company law 1956, Company must open

security premium account, if co. issue shares on premium. All money which got with name ofpremium will transfer to security premium account . The following entry will passed in the

books of company

1.For the due of share Allotment money

Shares Allotment Account Debit xxxx ( with the total amount ) Shares Capital Account Credit xxxx ( With the face value of shares) Security Premium Account Credit xxxx( With the amount of premium)

2. For Allotment money Received

Bank Account Debit xxxx ( face value + Premium ) To Share Allotment Account xxxx

If company has demanded the premium with his call money from share holders , then on the

place share allotment account we must write share call account , all other journal entry will

be same.

According to Section 78 , We will use this fund according to guidelines of law.

Meaning of Issue of shares at discount :-It means that company demands less amount than face value of shares .This less amount is

called discount on issue of shares .

Journal entry of discount on issue of shares

When we receive allotment by giving discount on issue of share

1 Amount due of allotment

Share Allotment Account Debit xxxx( face value of allotmentdiscount)

Discount on issue of share account Debit xxxx( amount of discount)

To Share capital account

2. When allotment money actually received

Bank account debit xxx( face value of allotmentdiscount)To share allotment account


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Accounting treatment of issue of share for purchasing an fixed asset

In the situation when company want to buy any fixed asset , then company can issue shares to

supplier of fixed asset .At this time company pass the following journal entries :-

For purchasing fixed on creditFixed asset account debit xxx

Creditor account credit xxx

For issue of shares

Creditor account Debit xxx

Share Capital Account credit xxx

In case if company issue in premium or on discount to the suppliers of fixed asset . Then we

first calculate the number of shares for doing any accounting treatment for this

In case of issue at premium

Numbers of shares

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

In case if issue of shares at discount

Numbers of shares

Value of Fixed asset= ------------------------Value of per share (Face valueDiscount per

share)

After this the following journal entry will pass

Suppose xy company purchase the machinery of RS. 90000 by issue of shares at discount of

shares of 10% if face value of share is RS.10

Journal entries

Machinery account debit 90000

Creditor account credit 90000

2 for issue shares to creditors at discount

No. of shares =90000/9 = 10000Amount of discount =RS.10000

Creditor account Debit 90000

Discount on issue of share account debit 10000

Share capital account credit 100000

Suppose xy company purchase the machinery of RS. 120000 by issue of shares at Premium

of shares of 20% if face value of share is RS.10

Journal entries

Machinery account debit 120000

Creditor account credit 120000

2 for issue shares to creditors at discount


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No. of shares =120000/12 = 10000

Amount of Premium =RS.20000

Creditor account Debit 120000

Share capital account credit 100000

Security premium account credit 20000

Adjustment in companys balance sheet for call in arrearWhen a company makes the balance sheet after first time issue of shares. There may be the

case of call in arrear.

In my earlier article, I have already explained call in arrear and call in advance. In this article,

I want to explain, how you will do the adjustment in balance sheet for call in arrear. Call in

arrear must be deduct from Called up capital

Called up Capital = Capital demanded at the time of Application + Allotment + and calls

moneyLess call in arrear = at the time of allotment and due date of call money

After deducting, it we can easily calculate paid up capital

Accounting Treatment of Call in arrear and call in advanceCall in Arrear

Call in arrear means company has demanded his due amount of allotment or call money but

.But if shareholder does not pay his allotment money on due date it deems as call in arrear ,

this is the asset of company and it must deduct from call up capital for calculation paid up

capital. If there is no any rule the company has right to get 5% interest on call in arrear.Journal Entries for call in arrear in the books of company

1st journal entry will write at the time of due but not received the allotment money from

share holder

Call in Arrear Account Debit xxxx

To Share Allotment Account xxxx

2nd When call in Arrear received from shareholder

Bank Account Debit xxxx

To Call in arrear Account xxxx

3rd journal entry is related to companys interest received on due amount of call in arrear.

This is the income of company:-

Bank Account Debit xxxx

To Interest on Call in Arrear xxxx

Call in Advance

Call in advance means that company did not call the allotment or calls but shareholder gives

the call money in advance form .So this is the liability of company . Company is liable to pay

6% interest on call in advance to shareholder

Journal Entry for call in Advance

1st journal entry will pass for adjustment of advance money of allotment received at the time

of application


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Share Allotment Account Debit xxxx

To Call in Advance xxxx

2nd Journal entry will pass for when the amount of allotment due

Call in Advance Account Debit xxxx

To Share Allotment Account xxxx

3rd Journal Entry for paying the interest on call in advance to shareholderInterest on call in advance Account Dr. xxxx

To Bank Account xxxx

Definition of share forfeitures

Share forfeitures means cancel the power of share holder if he does not pay his call money

when company demands for this .Company will give 14 days notice, after 14 days if

shareholder did not pay then company will forfeit his shares and cut off his name from the

register of shareholder. Company will not pay his received fund from shareholder.Deep accounting treatment is divided in following parts

1st situation

Simple accounting treatment

In this situation shares issue at part and there is no pro-rata situation. So the following entry

will pass

Share capital Account Debit (called up amount of forfeited shares

Share forfeited Account Credit (Amount received of forfeited shares)

Share call in arrear Account Credit (Amount did not receive of forfeited shares)

2nd Situation

When shares issue on discount and premium

Dear friend if shares are issue on premium or on discount, then if we did not receive the

premium, then we write in journal entry otherwise we will not show security premium

account in share forfeiture journal entry

Share capital Account Debit (called up amount of forfeited shares)

Security premium account Debit (If premium is not received from share holder)

Share forfeited Account Credit (Amount received of forfeited shares)Share Allotment Account Credit (If allotment money is not received)

Share call in arrear Account Credit (Amount did not receive of forfeited shares)

In case shares are issued on discount

Share Capital Account Debit

Share Forfeiture Account Credit

Share Allotment Account Credit

Share call in arrear account credit

Discount on issue of shares account credit

3rd situation


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When shares issue pro-rata base

In case there is also difficulty to calculate the net amount of allotment received in case some

amount is not received and same person we have adjust some amount of share application.

Calculate the net amount of allotment received

Total amount of allotment money due xxxxxx

Less Adjustment with applicationMoney xxxxxx

_________________

Xxxxxx

Less Amount not received

As forfeited shares

Xxxxxxx

Less (-) xxxx

Perportion in

Not received amountOf adjusted application

Money which is

We received in advance

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

money

Total Allotment money

________________________________

Net amount not received

In the form of allotment xxxxxxx (-) xxxx

______________________________ ____________

Net Amount received in the form of

Allotment xxxxx

The following journal entry will passed

Share capital account Debit (Called up capital)

Share forfeiture Account Credit (Total Amount received of forfeited shares)Share Allotment Account Credit (Net amount not received in the form of allotment, for

calculation of this amount you must understand and use above formula)

Share Call in Arrear Credit (if you are not received any call money of share forfeited)

4th situation

When shares fully reissue

Reissue means sale to any other person after forfeiting from previous share holder.

In this situation we can reissue of share in discount or premium. For doing this we have to

pass the following journal entry

Bank Account Debit


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Discount on issue of shares Debit

Share forfeiture account Debit (Discount on reissue of shares)

Share capital account Credit (Face value of reissue of shares)

Security premium Account Credit (If shares reissue at premium

So difference between amount received from forfeiture and discount on reissue share will go

to capital reserve account and following entry will passed

Share forfeited account Debit

Capital reserve account credit

This capital reserve account will show in liability side of balance sheet of company.

5th situation

When Shares partly reissue

It is most difficult situation when you will see the question paper and you found the sum

where is pro-rata situation , then share holder did not pay and then these forfeited shares party

reissue to another share holder because

Above 4 situations will cover but in the 4th situations last journal entry will pass after

making forfeiture account in working note because only the amount go to capital reserve

which is sold or reissue gain other will go to balance of share forfeiture account upto that date

until we reissue all shares.

Share forfeiture Account

Credit Side of this account

By share capital Account 2000Suppose we get 100 shares forfeiture money received

Rs,20 per share

_________

2000

________ _

Debit Side of this account

To share capital account 250

Suppose we have reissue of 50 shares at reissue discount Rs.5

To ca

basic accounting part notes.docx

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