Class 12 Accounts, Business Studies and Economics study material

AS- 3 Cash Flow Statement

AS- 3 Cash Flow Statement notes, CFS format, Cash Flow from Operating, Financing & Investing Activity, Change in Working Capital, Cash & Cash equivalent & CFS Specimen

By admin, 1 yearJune 23, 2022 ago

Ratio Analysis Ratio means comparison of quantitative relationship between two common variables that expresses how much bigger one is than the other. Accounting ratio analysis is a scientific and effective tool of evaluating operating and financial position of a company by determining and interpreting quantitative relationship among variables of financial statement. Types of Accounting Ratio Broadly Accounting ratio has been classified into four categories: 1. Liquidity ratio These ratios are calculated to measure the firm’s ability to meet short term obligations. 2. Solvency ratio It is calculated to assess long term financial position of the company and ability to pay off long term obligations. 3. Turnover or Activity ratio These ratios help to assess how efficiently a company is utilizing its resources. 4. Profitability ratio These ratios help to assess business ability to generate profit out of sales and expenses incurred on generation sales. Types of Liquidity ratio I. Current ratio = Current Asset ÷ Current Liability (2:1 is ideal) II. Liquid ratio/ Quick ratio/ Acid Test Ratio = Liquid or quick asset ÷ Current Liability (1:1 is ideal) Note: Current Asset = Current Investment + Inventories (excluding spares & loose tools)+Net Trade receivables (Trade Receivable - Provision for doubtful debts and discount on debtors) +Cash & Cash equivalent+Short term loans & advances+Other current assets such as Prepaid expenses, Accrued income, Interest receivable, advance tax Current liability = Short term borrowing +Trade payables+Short term provisions+Other current liability such as Outstanding expense, Income received in advance. Liquid Asset = Current asset – Inventory – Prepaid expense Working Capital = Current Asset – Current Liability Types of Solvency ratios I. Debt to Equity Ratio = Long term Debt or Non Current liability ÷ Equity or Shareholders’ fund II. Total asset to debt ratio = Total asset ÷ Non Current liability or Long term debt III. Proprietary ratio = Shareholders’ fund or proprietors’ fund ÷ Total asset IV. Interest Coverage ratio = Earning or Profit before interest and tax ( EBIT or PBIT) ÷ Interest on long term Debt (NCL)* Note: Non-Current liability (NCL) or Long term debt = Long term borrowing such as Debentures, Long term loans + Deferred tax liability + Long term provisions such as Long Term Provision for Gratuity, Leave Encashment, Provision workmen compensation towards VRS etc + Other long term liabilities Or NCL = Total asset (Excluding Non Trade Investment) – Shareholders’ fund – Current liability Or NCL = Capital Employed – Shareholders’ Fund Capital Employed = NCL + Shareholders’ Fund Or Capital Employed = Total Asset(Excluding Non Trade Investment) – Current Liability Noncurrent asset (NCA) = Tangible asset less depreciation+ Intangible asset less amortization or Depreciation + Capital work in progress + Non Current Investment (Excluding Non Trade Investment) + Long term Loans & Advances + Deferred Tax Asset + Intangible Assets under Development + Other Non current Asset Total Asset = Non Current Asset (NCA) + Current Asset Net Asset or Shareholders’ fund (SHF) Or Proprietors’ Fund = Share capital + Reserve & Surplus + Money received against share warrant + Share application pending allotment Or SHF = Total asset – NCL ¬¬– Current liability (CL) Or SHF = NCA + Working capital – NCL Net Asset Or SHF = Total Asset – Total Liability Working Capital = Current Asset – Current Liability Note: Always remember, Non Trade Investment is not included while Calculating Total Asset of a Company. Depreciation or Amortization is subtracted From Tangible Asset & Intangible asset to calculate Total Asset. When accumulated Depreciation is given in the question, we should not subtract it from Fixed Asset (Tangible & Intangible) as it is already adjusted in Fixed Assets.

Financial Accounting Ratios

Financial Accounting Ratios & types of Accounting Ratio – Liquidity ratio, Profitability ratio, Turnover or Activity ratio, Solvency ratio

By admin, 1 yearJune 23, 2022 ago

Redemption of Debentures: It refers to repayment of amount of Debentures to Debentureholders for discharge of its Liability towards Debentures. Points to be considered at the time of Redemption: Debentures are normally redeemed on maturity date, However, it can be redeemed before maturity by Draw of lots, Purchase from Open Market for Cancellation or by Conversion into Shares or New Debentures; If Article of Association of Company authorises it and if the terms and conditions of Debentures permit it. Debentures can be redeemed either at Par or Premium as per the terms of issue. In case of Purchase from Open Market for Cancellation, money paid for Purchase of Debentures is the amount of Redemption. Sources of Redemption: 1. Out of Capital: No transfer of adequate Fund to Debenture Redemption Reserve (DRR). However, Rule 18 (7) of Companies (Share Capital & Debentures) Rules of Indian Companies Act 2013; Every Company other than Companies exempted from creating DRR, to transfer at least 25 % of Nominal Value of total Redeemable Debentures of a particular Class to DRR out of Surplus available for Payment as Dividend to Shareholders. 2. Out of Profit: Redemption solely out of Profits. 100 % Nominal value of total Redeemable Debentures are transferred to DRR out of Surplus available for Payment as Dividend to Shareholders. 3. Out of Profit & Capital Both: Redemption of Debentures Partially out of Profit & Partially out of Capital. In this case, Company is not required to transfer 100 % of Face value of Debentures to DRR. At least 25 % is required to be transferred to DRR. Notes: Following points are noteworthy with respect to creation of DRR: If Question is silent Create DRR of 25 % of Face Value of Debentures If Redemption is out of Profit  Transfer 100 % of Face Value of Debentures to DRR. If amount of DRR is given in the question If less than 25 %, value of Debentures is given in the Question, Transfer Balance amount in order to make it 25 %. If more than 25 % is given in the question, transfer that value to DRR. Debenture Redemption Reserve (DRR) Amount set aside out of amount available for Payment as Dividend to Shareholders of the Company. DRR is created on Non Convertible Debentures or Non Convertible part of Debentures in case of Partially Converted Debentures. Adequate Amount is required to be credited to DRR before Redemption begins. Exemptions to Create DRR as Per Indian Companies Act, 2013: 1. All India Financial Institutions & Other Financial Institutions Controlled by RBI. 2. Banking Companies and 3. National Housing Bank. Disclosure of DRR in Balance Sheet: In Equity & Liability Part of Balance Sheet under the Head “Shareholders’ Fund” and Sub Head “Reserve & Surplus”. Debenture Redemption Investment (DRI) Along with DRR, Companies are required to invest 15 % in Specified Securities on or before 30 April of Current year, of Total Face value of Debentures to be redeemed by the next year. For Example X LTD is going to redeem 10000 Debentures of Rs 100 by 31 March 2018, then it has to invest 15 % of redeemable value in Specified Securities on or before 30 April, 2017. Specified Security means: Deposits with any Scheduled Bank, Unencumbered Securities of Central or State Government, Unencumbered Securities as per Section 20 Of Indian Trust Act. 1882 & Unencumbered Bonds issued by any other Company as per Section 20 of Indian Trust Act. 1882. DRI is made by those Companies who are required to create DRR. Companies exempted to create DRR are also exempted to make DRI. Methods of Redemption of Debentures 1. On Maturity in Lump Sum 2. On Installments by Draw of Lots 3. By Purchase From Open Market 4. By Conversion

Accounting for Redemption of Debenture

Accounting for Redemption of Debentures, Debenture Redemption Reserve, Debenture Redemption Investment, Sources & Methods of Redemption of Debentures

By admin, 1 yearJune 23, 2022 ago

Debentures It is a financial instrument, issued by Companies to raise Funds from the Market that acknowledges Payment of Interest on regular intervals and Repayment of Principle on maturity of the instrument to its holders. It includes Debentures, Stock, Bonds or any other Instrument of a Company that evidences debt on it. It can be redeemable (having maturity period) or Irredeemable (No maturity period.) (Explanation of Types of Debentures has been ignored intentionally.) Accounting Treatment & Disclosures in relation to Discount or Loss on Issue of Debentures Discount or Loss on Issue of Debentures is a capital loss which can be written off against 1. Security Premium Reserve or 2. Profit & Loss A/C A Company can write off Discount or Loss on Issue of Debentures in two ways: 1. In first Year itself either from Security Premium Reserve A/C or P&L A/C. 2. Writing Off amount of Discount or Loss on Issue of Debentures in equal Installments every year over the maturity period of Debentures. For Example Company issues 1000 Debentures of Rs. 100 at 10 % Discount and to be redeemable after 5 years at 20 % Premium. Loss on issue is to written off in 5 equal installments over 5 Years maturity period.

Accounting For Issue of Debentures

Accounting for issue of debentures at Par, Premium, Discount, as collateral security, Writing off Discount/ Loss on issue, redemption & Interest on Debentures

By admin, 1 yearJune 22, 2022 ago

Share Capital Funds raised by company by issue of shares. Two types: Equity Share A share that provides voting rights to its holders, belong to owners of the company, carries maximum risk and return, in which dividend is not fixed and on winding up of the company the holders of these shares receive only what is left after paying off all the liabilities and obligations of the company including Preference Shareholder repayment. Preference Share A share which carries a preferential right to get fixed dividend over equity shares to its holders and repayment of capital before holders of equity share capital. It does not carry voting right. Classification of Share Capital Authorised or Nominal Capital Maximum amount of share capital that a company can raise as per Memorandum of Association. Issued Capital That part of authorised capital .which has been issued by company to raise funds from time to time. Subscribed capital That part of issued capital which has been subscribed by public. Called Up capital That part of Subscribed capital which has been called up by company to be paid by subscribers. Paid up capital That part of Subscribed capital which has been paid by subscribers. Note: Minimum 90 % subscription of issued capital is required as per Indian Companies Act, 2013. Otherwise, Company has to take back its issue. Disclosure of Share Capital in Company’s Position Statement / Balance Sheet Extract of Position Statement / Balance Sheet as on … I. Equity & Liabilities Shareholders’ Funds A. Share capital B. Reserve & Surplus C. Money received against Share Warrants II. Current Liability Other Current Liability Current Asset Cash & Cash Equivalent Notes to Accounts: A. Share Capital Authorised capital …Equity Shares of Rs.…each ….preference shares of Rs…..each Issued Capital …Equity Shares of Rs.…each ….preference shares of Rs…..each Subscribed Capital Subscribed & Fully Paid up …Equity Shares of Rs.…each ….preference shares of Rs…..each Subscribed but not Fully Paid up …Equity Shares of Rs.…each Less: Calls in Arrears ….preference shares of Rs…..each Less: Calls in Arrears Add: Forfeited Equity Shares Add: Forfeited Preference Share B. Other Current Liability Calls in Advance C. Reserve & Surplus Security Premium Reserve Capital Reserve D. Cash & Cash Equivalent Cash in hand & Bank Accounting of Share Capital Shares can be issued either for cash or for consideration other than cash. Issue of Shares for cash: Two methods Shares Payable in Lump sum It means when payment of shares is received in one instilment. Shares Payable in Installments: Payment of shares is received in installments. First installment comes with application known as application money, Second- allotment, third -First call, fourth - Second call and so on. Last installment is also called as Final call. Accounting Entries for issue of Shares Payable in Lump sum issued at Par 1. On receipt of application money Bank A/c ….....................….Dr To Share Application A/c 2. on allotment of Shares Share Application A/c……….Dr To Share Capital A/c Accounting Entries for issue of Shares Payable in Lump sum issued at Premium 1. On receipt of application money Bank A/c ….....................….Dr (Total Application money including Premium) To Share Application A/c 2. on allotment of Shares Share Application A/c……….Dr (Total Application money including Premium) To Share Capital A/c (with Nominal/ Face value) To Security Premium Reserve A/c (with Premium amount) Accounting Entries for issue of Shares Payable in Installments Issued at Par 1. On receipt of application money Bank A/c ….....................….Dr To Share Application A/c 2. on allotment of Shares Share Application A/c……….Dr To Share Capital A/c (with nominal/ face value) 3. Amount due on allotment Share allotment A/c……..Dr To Share Capital A/c 4. On receipt of allotment money Bank A/c………………………Dr To Share Allotment A/c 5. On First call being Due First Call A/c…………….Dr To Share Capital A/c 6. On receipt of First Call Bank A/c ……………….Dr To First Call A/c 7. On Second & Final Call being Due Second & Final Call A/c……….Dr To Share Capital A/c 8. On receipt of Second & Final Call Bank A/c ……………..Dr To Second & Final Call A/c Accounting Entries for issue of Shares Payable in Installments Issued at Premium: Case I. When premium is received at the time of application along with application money: 1. On receipt of application money Bank A/c ….....................….Dr (Total Application money including Premium) To Share Application A/c 2. on allotment of Shares Share Application A/c……….Dr (Total Application money including Premium) To Share Capital A/c (with nominal/ face value) To Security Premium Reserve A/c (with Premium amount) Note: All other Entries for allotment, First call and final call will remain similar as to the case of Shares issued at Par. Case II. When premium is receivable at the time of Allotment: 1. On receipt of application money Bank A/c ….....................….Dr To Share Application A/c 2. on allotment of Shares Share Application A/c……….Dr To Share Capital A/c (with nominal/ face value) 3. Amount due on allotment including Security Premium Share allotment A/c……..Dr To Share Capital A/c To Security Premium Reserve A/c 4. On receipt of allotment money including Security Premium Bank A/c………………………Dr To Share Allotment A/c Note: If question is silent with regard to receipt of Security Premium, it is assumed that it is due with allotment money. All other Entries for First call and final call will remain similar as to the case of Shares issued at Par. Case III. When premium is receivable at the time of Application, Allotment and all Calls: 1. On receipt of application money Bank A/c ….....................….Dr (Total Application money including Premium) To Share Application A/c 2. on allotment of Shares Share Application A/c……….Dr (Total Application money including Premium) To Share Capital A/c (with nominal/ face value) To Security Premium Reserve A/c (with Premium amount) 3. Amount due on allotment including Security Premium Share allotment A/c……..Dr To Share Capital A/c To Security Premium Reserve A/c 4. On receipt of allotment money including Security Premium Bank A/c………………………Dr To Share Allotment A/c 5. On First call being Due including Security Premium First Call A/c…………….Dr To Share Capital A/c To Security Premium Reserve A/c 6. On receipt of First Call including Security Premium Bank A/c ……………….Dr To First Call A/c 7. On Second & Final Call being Due including Security Premium Second & Final Call A/c……….Dr To Share Capital A/c To Security Premium Reserve A/c 8. On receipt of Second & Final Call including Security Premium Bank A/c ……………..Dr To Second & Final Call A/c

Accounting for Share Capital

notes on Accounting for Issue, Forfeiture, Reissue, under & over subscription and Pro rata Allotment of Share Capital

By admin, 1 yearJune 22, 2022 ago

4. ADMISSION OF A PARTNER According to Section 31 of Indian Partnership Act, 1932, New Partner shall be admitted in the Firm only when all existing partners agree to admission of new partner or it is agreed otherwise by partners in Partnership Deed. Change in Profit Sharing Ratio Change in Profit Sharing Ratio takes place at the time of Reconstitution of Firm. In this chapter Admission of new Partner will lead to change in Profit Sharing Ratio of a Partner in existing firm. Since, New or Incoming Partner acquires his/her share from old Partners; therefore, we need to determine New Profit Sharing Ratio and also Sacrificing Ratio. New Profit Sharing Ratio New Profit Sharing Ratio is the ratio in which all Partners, including new Partner, share future profits and losses of the Firm. New Partner acquires share from Old Partners through different ways. There are different cases related to acquisition of Shares by New Partner from Old Partners Case 1. When New or Incoming Partner acquires his share from Old or Existing Partners in their Old Profit Sharing Ratio: Situation I. When Profit Share of New Partner is given, but sacrifice made by Old Partners are not given: NPSR is calculated as follows: Subtract New Partner’s Ratio from 1 and Divide remaining share among Old Partners in their OPSR. Example: A & B Profit Sharing Ratio is 2:3. New Partner C enters into Partnership for 1/5th Share. In this case NPSR will be calculated as follows: 1 – 1/5 = 4/5 New Ratio of A = 4/5 × 2/5 =8/25 New Ratio of B = 4/5 × 3/5 =12/25 Ratio of C = 1/5 = 1/5 ×5/5 = 5/25 So, NPSR of A: B: C = 8:12:5 Ratio of Old Partners remain same as is evident from example A:B = 8:12 = 2:3 Situation II. When Share of New Partner is given and also New Profit Sharing Ratio of Old Partner is given. Subtract New Partner’s Ratio from 1 and Divide remaining share among Old Partners in their NPSR. Example: New Partner C enters into Partnership for 1/5th Share. Future Profit Sharing Ratio or NPSR of A & B is 2:3. In this case NPSR will be calculated as follows: 1 – 1/5 = 4/5 New Ratio of A = 4/5 × 2/5 =8/25 New Ratio of B = 4/5 × 3/5 =12/25 Ratio of C = 1/5 = 1/5 ×5/5 = 5/25 So, NPSR of A: B: C = 8:12:5 Situation III. When New or Incoming Partner acquires his share from old or existing Partners equally. Deduct sacrifice made by old Partner to get NPSR of each Old Partner. Example: New Partner C enters into Partnership for 1/5th Share, which he took equally from A & B. Old Profit Sharing Ratio of A & B is 2:3. In this case NPSR will be calculated as follows: Share Surrendered by A= 1/2 × 1/5 = 1/10 Share Surrendered by B= 1/2 × 1/5 = 1/10 New Ratio of A = 2/5 – 1/10 = 3/10 New Ratio of B = 3/5 – 1/10= 5/10 Ratio of C = 1/5 = 1/5 ×2/2 = 2/210 So, NPSR of A: B: C = 3:5:2 Case 2. When New or Incoming Partner acquires his shares from Old or Existing Partners in a particular ratio Deduct sacrifice made by old Partner to get NPSR of each Old Partner. Example: New Partner C enters into Partnership for 1/5th Share, which he took from A & B in the ratio of 2:3. Old Profit Sharing Ratio of A & B is 2:1. In this case NPSR will be calculated as follows: Share Surrendered by A= 2/5 × 1/5 = 2/25 Share Surrendered by B= 3/5 × 1/5 = 3/25 New Ratio of A = 2/3 – 2/25 = 44/75 New Ratio of B = 1/3 – 3/25= 16/75 Ratio of C = 1/5 = 1/5 ×15/15 = 15/75 So, NPSR of A: B: C = 44:16:15

Admission Of Partner

Accounting Treatment of existing goodwill & Hidden Goodwill, calculation of new profit sharing ratio in different cases, New Partner

By admin, 1 yearJune 22, 2022 ago

Change in Profit Sharing Ratio

Investment Fluctuation Reserve Reconstitution of the Firm Sacrificing Ratio & Gaining Ratio Accounting Treatment of Goodwill Accounting Treatment of Reserves & Accumulated Profits or Losses

By admin, 1 yearJune 22, 2022 ago

Goodwill- Nature and Valuation

Methods of valuation of goodwill, Capitalisation Method, Capitalisation of Super Profit, Capitalisation of Average Profit, ion of Goodwill, Weighted Average Method

By admin, 1 yearJune 22, 2022 ago

Partnership Association of two or more persons who agree to do business carried by all or any of them and share its profits and losses. Partner: Members of Partnership. Firm: All members combined together to form a partnership is collectively known as Firm. Firm Name- The name under which Partnership Business is carried on. Partnership Deed: A written agreement signed by all partners, that contains terms and conditions of Partnership such as, Description of Partners, Description of Firm Nature of Business, Address of Firm Interest Rate on Partners’ Loan Interest Rate on Capital & Drawing Capital Contribution of Each Partner Profit Sharing Ratio Provisions related to Admission, retirement & Death of Partner Remuneration to Partners etc. Provisions of Partnership Act, 1932 in Absence of Partnership Deed Particulars Provisions of Indian Partnership Act, 1932 1. Sharing of profit/Losses Equal 2. Interest on Capital No Interest 3. Interest on Drawings No Interest Charged 4. Remuneration (Salary, Commission & others) No remuneration 5. Interest on Loan By a Partner 6 % Per Annum (even firm suffers loss as Interest on Partner’s Loan is a charge against Profit)

Accounting for Partnership- Minimum Earnings Guaranteed by a Partner Guarantee of Profit Past adjustment entries Appropriation of Profit Fixed & Fluctuating Capital, Minimum Earnings Guaranteed by a Partner, Guarantee of Profit, Past adjustment entries, Appropriation of Profit, Fixed & Fluctuating Capital

By admin, 1 yearJune 22, 2022 ago