Key Notes IPCC Advanced Accounting
Short Description
REvise whole advanced accounts in one go....
Description
PREFACE There is no dearth of textbooks on accounting. So it may be pertinent to ask why we need another book.
This is not a book that is written as a book. This book is evolved from the notes prepared for satisfying the needs of students. The only motivation was to explain accounting in a logical manner, whereby one could master the methodology based on a deeper insight into the basic structure of accounting. The emphasis here is not so much on the mechanical practice but on the conceptual understanding of the methodology. The objective is to ensure that the study of this book enables the reader to understand accounting numbers
in a clearer and better perspective. Various aids have been included in the book to facilitate learning and make it interesting. Case Studies:
They not only make the concept clearer, the presentation leaves a vivid visual impact, which has good recall value.
Pictures & Clipart: Uniformity in highlighting the important points and making reading interesting. Concept Questions: Makes your concepts very clear and strengthen the base. Class Work:
It help students to recall and test their knowledge and, going a step further, their power to analyse and derive. Class work need students to seek out what is not obvious from the information provided
If this approach builds confidence in the minds of students about accounting methodology & if it makes it possible to understand & apply it logically, I believe, I have achieved my goal.
DEDICATION Dedicated to Her, My Infinite Happiness, My Wife Hemlata Bhangariya I am Feeling the tranquillity and happiness when I come to lay this book in your lap. Say you’re surprised? Say you like it? Say it’s just what you wanted? Because it’s yours –
because I love you.
CHAPTER NO.
NAME OF THE CHAPTER
PAGE NO
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1
CONCEPTUAL FRAMEWORK
2
UNDERWRITING OF SHARES
3
LIQUIDATION OF COMPANIES
4
BANKING COMPANIES
5
INSURANCE COMPANIES
6
ELECTRICITY COMPANIES
8
DISSOLUTION OF PARTNERSHIP ACCOUNTS
8.1 – 8. 19
9
AMALGAMATION & SALE OF FIRM TO A COMPANY
9.1 – 9.11
10
DEPARTMENTAL ACCOUNTS
10.1– 10. 6
12
ESOP, BUYBACK, EQUITY SHARES WITH DIFFERENTIAL RIGHTS
12.1 – 12.11
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3.1 – 3.19 4.1 – 4.11 5.1 – 5.16 6.1 – 6.9
1.1
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1.1
preparation of Financial Statements in compliance with AS. Deal with the topics not covered by AS. Development & review of AS Promoting harmonisation of regulations, AS and procedures. Interpretation of financial statements.
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Applicable to all general purpose financial statements prepared annually by all commercial, industrial and business enterprises (Public or private) Special purpose financial reports like prospectus, Tax computations are outside the scope. Framework can’t override Accounting Standards.
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There are three fundamental accounting assumption: 1) Going Concern 2) Consistency 3) Accrual
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1.2
Financial performance
Financial position
Balance sheet Assets
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Profit and Loss A/c
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Debit
Rs. Credit
Rs.
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Profit and loss account (P & L A/C)
Balance Sheet
Liabilities Rs.
Cash flows
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Other relevant information
Cash Flow Statement
Notes to accounts
Cash flow statement Notes to accounts Particulars
Rs .
• • • •
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In India, FS means B/s, P&L A/c, notes to Accounts & cash flow statement.
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1.3
Investors
Employees
Whether to buy, sell / hold investment. Ability of organisation to survive. Ability of organisation to pay dividend.
Stability, continuity and growth of company. Ability to provide remuneration, retirement and other benefits.
Lenders
Interested in repayment of Interest and Loan principal.
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Customers
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• •
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Suppliers
Govt. agencies
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Ability to pay the dues Decide credit policy
They want to know because they • Regulate the functioning of business for public good. • Charge excise duties and taxes. • Control the prices.
• •
Employment Contribution to the local economy www.cavidya.com
1.4
Understandability
Useful to a wide range of users in making economic decisions
Relevance
Reliability
Relevant for decision-making needs of users
Free from material error and bias and can be depended upon by users
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True and Fair View
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Within the entity over time and also between different entities
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Comparability
Application of the principal qualitative characteristics & of appropriate accounting standards
Primarily transactions and events are measured in terms of money. The three elements of measurement are: 1) Identification of objects and events to be measured; 2) Selection of standard or scale to be used; 3) Evaluation of dimension of measurement standard or scale.
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Money as a scale of measurement is not stable. Thus information of one year measured in money terms may not be comparable with that of another year. © CA Anand R. Bhangariya
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1.5
Historical Cost
Current Cost
Realisable value
Present Value
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You have purchased one Car on 01.01.2001 for Rs. 10 Lakhs – Historical Cost
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Today i.e. on 01.08.2011, if you want to sell this car after 10 years, it will fetch you Rs. 3 Lakhs. – Realisable Value
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Today same car is available in the market for Rs. 15 Lakhs. – Current Cost
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Present Value: As per present value, an asset is carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business.
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Your dad invested Rs. 1,00,000 in Fixed deposit with Bank of Baroda for 1 year @ 10% p.a.
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1,00,000 Present Value
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10000 X 110/100
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1,10,000 Future Value 1.6
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Capital refers to net assets of a business. Since a business uses its assets for its operations, a fall in net assets will usually mean a fall in its activity level.
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It is therefore important for any business to maintain its net assets in such way, as to ensure continued operations at least at the same level year after year.
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In other words, dividends should not exceed profit after appropriate provisions for replacement of assets consumed in operations. For this reason, the Companies Act does not permit distribution of dividend without providing for depreciation on fixed assets. P = (CA - CL) – (OA – OL) – C + D P = Profit CA = Closing Assets CL = Closing Liabilities OA = Opening Assets
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OL = Opening Liabilities C = Introduction of Capital D = Dividend / Drawings
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1.7
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Definition: “Underwriting is an agreement, with or without conditions, to subscribe to the securities of a body corporate when existing shareholders of the corporate or the public do not subscribe to the securities offered to them”.
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2.1
The underwriter is not eligible for commission on shares taken by the promoters, employees, directors, their friends and business associates.
subscribed for 200 shares. Directors / Promoters
subscribed for 800 shares.
Company issues 1,000 shares of Rs. 10 for Rs. 12 each. Commission is paid on the issue price i.e. Rs. 12 X 800 = 9,600
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Commission = 9,600 X 5% = 480.
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The maximum amount of commission: 5% of the issue price of shares 𝟏 2 % of the issue price of debentures 𝟐 rate authorized by the articles whichever is less.
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Public
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Underwriter
It may be paid in cash or in fully paid-up shares or debentures or a combination of all these.
2.2
Company issue 1,00,000 shares & appointed an underwriter.
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If public do not subscribe the shares, Underwriter will subscribe the same.
Underwriter
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Public
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7 Banks have underwritten 557.14 crores value of shares TATA Steel.
The company may enter into underwriting arrangement with number of underwriters. This arrangement is called Joint Underwriting.
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2.3
Decided to issue 10000 shares and appointed an underwriter
Company issue 10000 shares and appointed an underwriter With condition that HSBC will take at least 2,000 shares
Public Public applied for 12,000 shares.
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HSBC will take 2,000 shares irrespective of no. of shares applied by public.
underwriter agrees to take up a specified number of shares irrespective of the number of shares subscribed for by the public. © CA Anand R. Bhangariya
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Public
Public applied for 6,000 shares.
HSBC will take remaining 4,000 shares.
The underwriter agrees to take up agreed proportion of shares, not taken up by the public. www.cavidya.com
2.4
Issue 1,00,000 shares for which they appointed underwriters with equal underwriting 'Marked' applications are those applications which bear the stamp of an underwriter.
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‘Unmarked' applications are those applications which does not bear the stamp of an underwriter.
Company
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Company received Marked Application for SBI 25,000, HSBC 15,000 and Unmarked 20,000
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20,000 Unmarked applications Distributed in the ratio of gross liability i.e. 1 : 1.
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50,000 Applications (-) 25,000 Applications (Marked)
(-) 10,000 Applications (Unmarked) 15,000 shares
© CA Anand R. Bhangariya
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Net Liability 94220 26740
50,000 Applications (-) 15,000 Applications (Marked) (-) 10,000 Applications (Unmarked) 25,000 shares www.cavidya.com
1.The distinction between marked and unmarked applications becomes immaterial when The whole issue is subscribed by only one underwriter. The issue is fully subscribed 2.When there is more than one underwriter, the unmarked applications are divided amongst underwriters in the ratio of their gross liability. 2.5
Decided to issue 1,00,000 shares and appointed an underwriter
Decided to issue 1,00,000 shares and appointed an underwriter
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100% issue is underwritten by underwriter.
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100% issue underwritten by Underwriter
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80% issue is underwritten by underwriter
20% Company
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20% is treated as having underwritten by company
80% Underwriters
Marked applications = Total number of applications received x percentage of underwriting. www.cavidya.com
2.6
Statement Showing the Liability of Underwriters [Figures - No. of shares] Underwriters
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Less: Unmarked applications allotted in the ratio of gross liability
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Less: Firm underwriting Net Liability as per agreement
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A ××× ×××
B ××× ×××
××× ×××
××× ×××
××× ×××
××× ××× ×××
××× ××× ×××
××× ××× ×××
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Gross liability Less: Marked applications (excluding firm underwriting)
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2.7
No 1.
Particulars
L.F.
3.
4.
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Dr. To Underwriters Personal A/c
Underwriter’s Liability [Application + Allotment money] Underwriter’s Personal A/c. To Equity Share Capital A/c To Share premium A/c
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Commission due Underwriter’s Commission A/c. To Underwriter’s Personal A/c.
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Settlement of Account Bank A/c. To Underwriter’s Personal A/c. (in case of receipt) (in case of payment, reverse the above entry)
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Dr.
Credit
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Applying Money received towards firm Underwriting Bank A/c
2.
Debit
Dr.
Dr.
2.8
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3.1
Whatever may be the reason for insolvency, all companies going into for liquidation has to undergo following steps.... Liquidator Statement of Accounts provides the details of his receipts & payments during the liquidation process.
Step 1
Step 2
Court receives petition from Creditors Court Appoints official liquidators Liquidator is the person who conducts the dissolution of the company
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Board of Directors upon the order of High Court, prepares Statement of Affairs & submits the same to Liquidator.
Liquidator submits "Liquidator Statement of Accounts"
Liquidator takes the custody of property
Court orders dissolution.
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Step 3
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Prepares Statement of Affairs which provides the details like 1) The assets of the company 2) Its debts and liabilities; 3) The names of its creditors, stating separately the amount of secured and unsecured debts; 4) The debts due to the company.
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3.2
Particulars Assets not specifically pledged (as per list 'A') Balance at Bank Cash in Hand Marketable Securities Bills Receivable Trade Debtors Loans and Advances Unpaid Calls Stock-in-trade Work-in-progress Freehold Property, Land and Buildings . . Leasehold Property Plant and Machinery Furniture, Fittings, Utensils, etc Investments other than marketable securities Livestock Vehicles, etc. Other property, viz. …………
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Estimated Realisable Values (Rs)
3.3
*Assets specifically pledged (as per list B') (a) Estimated Realisable Value
(Rs)
(b) Due to Secured Creditors
(Rs)
(c) Deficiency Ranking as Unsecured
(d)Surplus carried to last column
(Rs)
(Rs)
Estimated surplus from assets specifically pledged
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Estimated total assets available for preferential creditors, debenture holders secured by a floating charge, and unsecured creditors** (carried forward) Summary of Gross Assets
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Gross realisable value of assets specifically pledged Other Assets Gross Assets (Rs)
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(d) Rs. Rs
Estimated total assets available for preferential creditors, debenture holders secured by a floating charge, and unsecured creditors** (brought forward).
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3.4
(e) Gross Liabilities
A C
Liabilities (to be deducted from surplus or added to deficiency as the case may be.) Secured creditors (as per List 'B') to the extent to which claims are estimated to be covered by assets specifically pledged Preferential creditors (as per List 'C') Estimated balance of assets available for Debenture holders secured by a floating charge and unsecured creditors Debenture Holders secured by a floating charge (as per List 'D') Estimated Surplus / Deficiency as regards Debenture Holders Unsecured Creditors (as per List 'E') Estimated unsecured balance of claims of creditors partly secured on specific assets, brought from preceding page(c) Trade Accounts Bills Payable Outstanding Expenses Contingent Liabilities (state nature) Estimated Surplus / Deficiency as regards Creditors Issued and Called-up Capital: ... preference shares of... each... called-up (as per List 'F') ... equity shares of... each... called-up (as per List G) Estimated Surplus/Deficiency as regards Members** (as per List 'H')
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Rs
Rs
3.5
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Items contributing to deficiency (or Reducing Surplus):
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1
Excess (if any) of Capital and Liabilities over Assets on the…………20 …… as shown by Balance Sheet
2
Net dividends and bonuses declared during the period from……..20……… to the date of the statement
3
Net trading losses
4
Losses other than trading losses written off or for which provision has been made in the books during the same period
5
Estimated losses now written off or for which provision has been made for the purpose of preparing the statement
6
Other items contributing to deficiency or reducing Surplus Items reducing Deficiency (or contributing to Surplus):
7
Excess (if any) of assets over capital and liabilities on the….…20….. as shown on the Balance Sheet
8 9 10
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Net trading profits (after charging items shown in note below) for the period from 20 to the date of statement
Profits and income other than trading profits during the same period Other items reducing Deficiency or contributing to Surplus Deficiency/Surplus as shown by Statement
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3.6
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Liability in respect of bills discounted by the company is contingent, any amount expected to be paid in respect of bills discounted should be included in List E. This applies to all contingent liabilities. Bills payable are creditors and hence should be included in the appropriate list according to the securities held by the holders of the bills. Generally Bills payable are unsecured and hence included in unsecured creditors (list E). Debentures should be assumed to have a floating chare, 3 if nothing is mentioned regarding the security held by the debenture-holders (List D). Unclaimed dividends should be included in unsecured creditors. Uncalled capital should not be treated as an asset but calls in arrears should be treated as an asset (List A). Personal guarantees by directors are not considered as security.
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3.7
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As per section 530, there are in totality 7 dues which has to be paid first in case of liquidation which are as follows. i.
ii.
iii. iv.
v.
vi. vii.
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All revenues, taxes, cesses and rates due to Central Government or State Government or local authorities. The amount should have become due and payable within 12 months before the winding up order. Wages or salaries of an employee for four months. The wages or salary for four months must be due within 12 months next preceding to relevant date. The amount shall not exceed such sum as may be notified by the Central Government (presently Rs 20,000) for any one claimant. Accrued holiday remuneration which has become payable to an employee or in case of his death to any other person. All amounts due in respect of contributions payable by the company as employer under any law. However, this is not payable if the company is being voluntarily wound up for reconstruction or amalgamation. Compensation payable under the Workmen's Compensation Act, 1923 in respect of the death or disablement of any officer or employee of the company. All sums due to any employee from the Provident Fund, Pension Fund, Gratuity Fund or any fund for the welfare of the employee including any contribution due to the fund, and Any expenses of investigation held in pursuance of Section 235 and 237 and appointed as payable by the company.
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3.8
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However, even within these 7 dues, company has to first settle down the dues related to the Workmen. However, regular Secured Creditors of the company don’t find any place in Section 530
Workman
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Realisable value of security given to Secured Creditors Rs. 3,00,000
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Amount Due is Rs. 1,00,000
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Secured Creditor Amount Due is Rs. 4,00,000
1,00,000 + 4,00,000 = 5,00,000
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Question is who will get the payment first?
© CA Anand R. Bhangariya
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Workers because they are preferential creditors as per section 530 or Secured Creditors because they have security??? www.cavidya.com
3.9
Workman Amount Due is Rs. 1,00,000
Realisable value of security given to Secured Creditors Rs. 3,00,000
B d
3,00,000 × 1/5 = 60,000
Realisable value of Security Rs. 3,00,000
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3,00,000 × 4/5 = 2,40,000
As per Section 529 A ,Workman & Secured Creditors are treated as Overriding Preferential Payments i.e. they have preference over other preferential creditors.
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Overriding Preferential Payment
Balance unpaid amount of workmen (1,00,000-60,000) Short amount paid to secured creditors due to sharing of workmen Total
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Amount Due is Rs. 4,00,000
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1,00,000 + 4,00,000 = 5,00,000
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Secured Creditor
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Rs. 40,000 Rs. 60,000 Rs. 1, 00,000 3.10
The liquidator must present an account of his receipts and payments at least twice a year as long as he is in the office to
The court (in case of compulsory winding up)
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The Registrar (in case of voluntary winding up)
Order of Payment :1) Workmen's dues and claims of the secured creditors as mentioned in Section 529A 2) Overriding preferential payments 3) Legal charges, 4) Liquidator's remuneration 5) Cost of expenses of winding up, Section 530 (6) 6) Preferential creditors, Section 530 (1) 7) Creditors secured by floating charge 8) Unsecured creditors. 9) Preferential shareholders 10) Equity shareholders.
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3.12
Receipts To Cash and Bank Balances
Rs.
Payments By legal charges
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To Realisation of Assets (individually)
By Liquidator’s remuneration
To Surplus from secured creditors
% on amounts distributed
To Calls in arrears realized
% on realisation
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% on amounts paid to shareholders By Cost of winding up
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To Calls on contributories realised
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By Debenture holders creditors (having a floating charge) + outstanding interest By Preferential By Unsecured creditors By Payment to contributories Preference shareholders + Arrear dividends By Equity shareholders
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Total
… 3.13
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Later on Co. goes into liquidation Machinery security worth Rs. 10,00,000
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Plant & Machinery worth Rs. 10,00,000/-
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If Realised Rs. 9,00,000 Treated as Receipts
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Surplus amount of Rs. (9,00,000 – 7,50,000) = 1,50,000
If Realised Rs. 5,00,000
Treated as Unsecured Creditors
Liquidators Statement of A/c Unsecured creditors 2,50,000
Receipts 1,50,000
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Loan of Rs. 7,50,000
Deficit amount Rs. (7,50,000 – 5,00,000) = 2,50,000
Liquidators Statement of A/c
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Insolvent Ltd.
Creditors
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3.14
a) Balance Sheet (Extract) of Insolvent Ltd.
Particulars Land & Building Furniture Stock Cash in hand Cash at bank Loan from bank (secured by pledge of stock)
Rs. 5,00,000 2,00,000 1,50,000 25,000 45,000
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Commission =
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛 100+𝑟𝑎𝑡𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛
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Particulars
Rs.
Land & Building
5,00,000
Furniture
2,00,000
Stock [1,50,000 – 1,00,000 Cash in hand Cash at bank Total 5% remuneration
×
50,000
Nil 7,50,000 37,500 Not entitled to get any commission on cash & bank balance
𝐶𝑎𝑠ℎ 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛. © CA Anand R. Bhangariya
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[It is assumed that secured creditors themselves realize the asset. Hence, liquidator is eligible for remuneration only on surplus]
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1,00,000
If the amount available is insufficient to pay unsecured creditors fully, the commission due to the liquidator is calculated as per the following formula –
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Liquidator is entitled to remuneration @ 5% of the amount of asset realised by him.
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3.15
Insolvent Ltd.
Liquidator repays debentureholders on 31-12-2011
Solvent
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01-04-2011 to 31-12-2011
i.e. 5,00,000 X 12/100 X 9/12 = 45,000
A C
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Interest is payable upto the date of actual payment loan
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Outstanding 12% debenture of Rs. 5,00,000
Liquidated on 30-09-2011
Insolvent
Interest is payable upto the date of liquidation
01-04-2011 to 30-09-2011 i.e. 5,00,000 X 12/100 X 6/12 = 30,000
Rule is applicable for all the debts
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3.16
Particulars
Rs.
Equity share capital Preference share capital
10,00,000 35,00,000
Particulars
Cash
1,00,000
2009-10
1,00,000
2010-11
1,00,000
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50,00,000
Pref. dividend (payable) : 2008-09
Rs.
If not declared by company, treated as Arrears
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If declared by company in GM, treated as Debt.
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Particulars Cash
A C Debt
© CA Anand R. Bhangariya
Rs.
Particulars
Cash =
Equity =
50,00,000 (-) 10,00,000 40,00,000
50,00,000 3,00,000
Rs.
Preference shares =
47,00,000 Dividend on PS
(-) 35,00,000 5,00,000 (-) 3,00,000 2,00,000
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3.17
Liabilities Share Capital, Authorised and Subscribed: 5,000 6% Preference Shares of Rs.100 each fully paid *2,500 Equity Shares of Rs. 100 each Rs. 75 paid up 7,500 Equity Shares of Rs. 100 each Rs. 60 paid up Liabilities Add: Deficit (Given)
n a
5,00,000 1,87,500 4,50,000
Loss to be borne by 10,000 equity shareholders Loss per share Rs 6,94,250 ÷ 10,000
n A
Amount of call for 7,500 equity shares of Rs. 100 each Rs. 60 paid (69.42 - 60)
A C
Total Amount collected (7,500 shares x Rs. 9.425) Amount of refund for 2,500 equity shares of Rs. 100 each Rs. 75 paid (75 – 69.425) Total amount refunded (2,500 shares x Rs. 5.575)
© CA Anand R. Bhangariya
94220 26740
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r a
g n
a h
B d
Total equity capital paid up (Rs 4,50,000 + 1,87,500)
a iy
Rs.
Deficit = 56,750
Rs. 6,37,500 56,750
6,94,250 69.425 9.425 70687.5
5.575 13937.5
3.18
Liability Of ' B' List Of Contributors
a iy
r a
List ‘A’
List ‘B’
The 'A' list contains the names of persons who are members for a period of one year prior to the date of winding up.
The 'B' list contains the name of persons who were members with a period of one year prior to the date of winding up.
a h
g n
B d
In case present shareholders (List A) fail to pay, money shall be called from the past shareholders (List B) subject to certain conditions. 1) A past member holding partly paid shares who has ceased to be a member for one year or upwards before the commencement of the winding up shall not be liable to contribute. Only those members who have ceased to be members within one year before the commencement of winding up may be called upon to contribute. Such contributories are called 'B' list contributories. 2) A 'B' list contributory will be liable to pay only for those creditors or debts which were contracted before he ceased to be member. 3) 'B' list contributory will be liable only if present member is unable to make payment. 4) Maximum amount which may be called from him will be the amount unpaid on his shares.
A C
© CA Anand R. Bhangariya
n a
n A 94220 26740
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3.19
A C © CA Anand R. Bhangariya
n a
B d
n A
94220 26740
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r a
g n
a h
a iy
4.1
An Asset becomes NPA when it ceases to generate income. Term loan
Overdraft / cash credit
Bill purchased and discounted
Mr. Sam
Mr. John
Mr. Ramesh
Overdraft = 1,00,000 Date of withdrawal = 31-12-2011
discounted bills of exchange
Took loan of Rs. 25 lakhs Due date = 31.12.2011
Bank don’t receive any amount towards Installment till 31.3.2012
If Mr. John do not pay any amount in the bank then the account is treated as “Out of Order”
n a
Difference of 90 days
The account has remained “out-oforder” for a period exceeding 90 days
The bill remains overdue for a period exceeding 90 days.
n A
Out of order for 90 days
Difference of 90 days
A C
Interest or Instalment of principal has remained overdue for a period exceeding 90 days. © CA Anand R. Bhangariya
a h
94220 26740
Nature
The bill remains ‘overdue’ up to 31.3.2012
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a iy
r a
g n
Drawee dishonoured the bill on due date i.e. 31-12-2011
B d
Agriculture advances
Farmer
took agriculture advance for short duration crop.
He does not repay any amount for a period of two crop season then it is treated as NPA The instalment of principal or interest thereon remains overdueShort Duration Crops – Two Crop Seasons Long Duration CropsOne Crop Seasons 4.2
Standard Assets
Sub-standard Assets
Doubtful Assets
Asset which do not pose any problems and which do not carry more than normal risk attatched to the business. They are not NPAs.
Assets which have remained an NPA for a period not exceeding 12 months.
An asset classified as doubtful if it remained in the sub-standard category for 12 months.
B d
n a
r a
g n
a h
a iy
Loss Assets
Asset, where loss has been identified by the bank or internal / External Auditors or by the RBI Inspection.
Term Loan taken on 31st Jan. 2006
n A
Maturity on 30th June 2006
A C
Upto 1st Oct. 2006 Term loan will be treated as NPA From 1st Oct. 2006 to 30th Sept. 2007 – Substandard Asset After 1st Oct. 2007 – Doubtful Asset
© CA Anand R. Bhangariya
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Customer do not repay the loan till 30th Sept. 2006 i.e. default continues for 90 days after maturity. If Auditor stamps doubtful asset as a bad, then it is Loss Asset.
4.3
Nature of Asset
Standard Assets Direct Advances to Agricultural and SME Sectors Residential Housing Loans beyond Rs.20 Lakhs advanced to Specific Sectors (E.g. Personal Loans-credit card, commercial Real Estate Loans, Capital Market Exposures and Loans and Advances to non deposit taking NBFC) Others (Not Covered above)
Sub Standards Assets – Irrespective of ECGC Cover & Security Available (When Unsecured exposures is less than 10% of Total Outstanding Exposure provide additional 10% on total outstanding, therefore totaling to 20%)
n A
r a
g n
a h
B d
n a
a iy
Required Provision as a % of Total Outstanding 0.25% 1% 2% 0.40%
15%
Doubtful Assets- Secured Portion • Up to 1 Year • 1 – 3 Years • More than 3 years
25% 40% 100%
Doubtful Assets – Unsecured Portion Loss Assets
100% 100%
A C
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4.4
Particulars
a iy
70,00,000
Term loan (-) Security (Building)
Security Realisable value = 20 lakhs
Loan Rs. 70,00,000
B d
Particulars Balance Outstanding Less:
Unsecured Portion Less:
n a
Realisable Value of Security
n A
r a
g n
Unsecured portion
Rs.
A C
Rs. XXXX XXXX XXXX
Total Provision Required 94220 26740
30,00,000
XXXX
Provisioning Required: 1. For net Unsecured Portion (100% x Net Unsecured Portion) 2. For Secured Portion of Advance (Amount x Appropriate %)
© CA Anand R. Bhangariya
50,00,000
XXXX
Extent of ECGC Cover
Net Unsecured Portion
20,00,000
(-) ECGC (50,00,00 X 40%) 20,00,000
a h
Gives guarantee to the extent of 40%.
Rs.
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XXXX XXXX XXXX 4.5
Mr. Ram
Ram discounts bill with bank of amount Rs. 10,000 for 3 months @ 5% on 01.03.2011
Discount of Rs. 125 10,000 × 123 × 5% is Income for Bank which they credited to its Revenue Account.
1st March 2011
Discount of Rs. 41.67 (125 × 13)
A C
n A
n a
F. Y. – 2010-2011
As per accrual concept
r a
g n
a h
B d
31st March 2011
a iy
Rebate on bills discounted refers to the unearned discount on those bills that will mature after the date of closing of accounts or that portion of the discount which relates to the period falling after the close of the year.
31th May 2011
Discount of Rs. 83.33 (125 × 23) F. Y. – 2011-2012
Unearned interest = bill value X discount rate X (No. of days to maturity on balance sheet date / 365 days)
This unearned discount of Rs.83 which belongs to next F.Y. is called as Rebate on Bill Discounted. © CA Anand R. Bhangariya
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4.6
No 1.
Particulars
L.F.
For discounting of bill by customer and recording the discount income: Bill Discounted A/c
Dr.
2.
3.
a h
B d
For transfer of unearned discount to Rebate on Bills Discounted: Discount on Bill A/c To Rebate on Bills Discounted A/c (at Unearned Discount)
n a
n A
For transfer of Opening Balance of unearned interest to Interest and Discount for the year: Rebate on Bills Discounted A/c To Discount on Bills A/c
A C
© CA Anand R. Bhangariya
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Credit
r a
g n
To Customer’s A/c (at Present Value) To Discount on Bills A/c (Balancing figure=Income of the Bank)
a iy
Debit
Dr.
Dr.
4.7
banks are required to maintain capital adequacy ratio of 9%.
Mr. Ram
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑨𝒅𝒆𝒒𝒖𝒂𝒄𝒚 𝑹𝒂𝒕𝒊𝒐 =
A C © CA Anand R. Bhangariya
g n
a h
1,000 X 9% = Rs. 90
B d
r a
a iy Mr. Mohan
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑭𝒖𝒏𝒅𝒔 × 𝟏𝟎𝟎 𝑹𝒊𝒔𝒌 − 𝒘𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝑨𝒔𝒔𝒆𝒕𝒔 + 𝑹𝒊𝒔𝒌 − 𝒘𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝒐𝒇𝒇 𝑩𝒂𝒍𝒂𝒏𝒄𝒆 𝒔𝒉𝒆𝒆𝒕 𝒊𝒕𝒆𝒎𝒔
n a
n A
94220 26740
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4.8
Tier – I capital is permanent capital and are readily available at the time of crisis. Tier – II capital is less permanent and are less readily available. Computation of Tier – I Capital Paid up Equity Share Capital – 50 crore shares of Rs. 10 each Add: (i) Statutory Reserve
g n
(iii) Other free reserves
a h
(iv) Capital Reserve arising out of surplus from sale of assets
B d
(i) Equity Investment in Subsidiaries (ii) Intangible Assets (iii) Current and brought forward losses
r a XXX
(ii) Share Premium
Less:
a iy
Rs.
XXX XXX XXX
Rs. XXX
XXX XXX
XXX XXX XXX
XXX XXX Any deferred revenue expenditure related to Voluntary Retirement Scheme (VRS) would not be deducted from Tier – I capital
n a
n A
Computation of Tier – II Capital (ii) Cumulative perpetual preference shares (iii) Revaluation reserve at a discount of 55% (iv) Contingency and Loss Reserves
A C
Rs.
Rs. XXX XXX XXX XXX
Tier – II capital is limited to maximum of 100% of Tier – I capital. © CA Anand R. Bhangariya
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4.9
Computation of Off Balance Sheet Items No I II III
IV
V VI
Asset Cash and Balance with RBI Balances with banks Money at call and short notice Investments a. Government and other approved securities b. Others Advances Bills purchased and discounted and other credit facilities a. Claims guaranteed by Government of India b. Claims guaranteed by State of Government c. Claims on Public sector undertakings d. Others Fixed Assets (net of depreciation) Other Assets a. Advance income tax, TDS, Interest accrued on Government securities and interest accrued on balance with RBI b. Others
A C
n a
n A
94220 26740
0 100
0 0 100 100 100
0 100
Computation of Risk Weighted Assets
Acceptances, Endorsements, Other obligations, etc. a. Guaranteed by Central / State Government b. Others © CA Anand R. Bhangariya
a iy
r a
g n
a h
B d
% Weight to Book Value 0 0 0
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0 100 5.10
Financial Statement
Form
Schedule No.
A C
a iy
r a
n a
8 9 10 11 12
Capital Reserves and Surplus Deposits Borrowings Other liabilities and provisions Cash and balance with RBI Balance with banks, money at call and short notice Investments Advances Fixed assets Other assets Contingent liability
Profit and Loss Account
13 14 15 16
Interest earned Other income Interest expended Operating expenses
A
B
1 2 3 4 5 6 7
Name
Balance Sheet
© CA Anand R. Bhangariya
n A
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g n
a h
B d
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5.11
A C © CA Anand R. Bhangariya
n a
B d
n A 94220 26740
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r a
g n
a h
a iy
5.1
Covers the risk on account of
Fire
n a
B d
n A
Insurance cover on property. Insurable value determinable. Policy cant be cancelled. Claims is payable by insurance company in the event of loss suffered by insured due to a specialised cause.
A C
© CA Anand R. Bhangariya
94220 26740
Accidental Death
a iy
r a
g n
a h
Flood
Theft
Covers the risk on account of
Death on account of disease
Insurance cover on life of human Insurable value determined by policy holder. Policy can be terminated. Claims is payable either on death or on expiry of stipulated period in the policy.
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5.2
Insurance Company
g n
“Insurance contract”
a h
Premium
Premium is the payment made by the insured as consideration for the grant of the insurance.
A C
The contract in which insurance company undertakes to indemnify the insured on the happening of certain event in consideration of a specified amount.
n a
B d
The period for which an insurance policy is taken is known as “Term of the Policy”.
n A
The amount for which the insurance policy is taken is called as “Sum Insured”
a iy
r a
Agent
Businessman
Term of policy Sum Insured
Insurance policy
The document which contains all the term & conditions of insurance & risk covered.
Agent’s Balance: It has a Credit balance. It also include the premium collected by them from the policyholders. It has a Debit balance.
© CA Anand R. Bhangariya
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5.3
Car
Term of policy 1 yr. (Every year needs renewal)
Claim arises only when the loss occurs or the liability arises.
A C © CA Anand R. Bhangariya
n A 94220 26740
g n
a h
B d
n a
r a
Businessman
Taken insurance on vehicle.
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a iy LIC
Taken insurance on his life. Term of policy = 10 years Claim is payable in case of
Death
OR
Maturity of policy
5.4
The surrender value under an Insurance Policy is the value of the insured is eligible to receive on closure or surrender of a life insurance before its claim falls due.
a iy
Mr. X taken Insurance policy of Rs. 10 Lakhs for 10 years on 1-1-2011
LIC Premium paid for 5 years
n A
31-12-2015 Could not pay premium but decided to continue the policy.
r a
g n
a h
B d
n a
1-1-2011
A C
Could not pay premium decided to discontinue the policy.
Mr. X
The amount paid on discontinue of the policy is called Surrender value.
31-12-2020
Paid Up Value = Sum Assured x (No. of Premium Paid ÷ Total Number of Premium Payable) 5
Paid Up Value = 10,00,000 × 10 = 5,00,000.
Paid up policy is the policy converted in case the insured is unable to continue paying premiums on his life policy, and discontinues the payment. © CA Anand R. Bhangariya
94220 26740
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5.5
LIC Company earned profit of Rs. 2.5 Crores. Taken Life Insurance policy Rs. 10 Lakhs each.
On Maturity Mr. X
Mr. X
Share in profit
n a
n A
10,00,000
10,000
r a
g n
a h
B d
Policy Amount
a iy
Mr. Y
10,00,000 Mr. Y
Bonus is the share of policy holders in the surplus balance in Life Fund. With profit policy:-Under this policy, a policy holder is entitled to participate in profits of life insurance company in addition to fixed sum payable on maturity. Without profit policy:-Under this policy the insured is not entitled to share profit of life insurance company. The insured receives only fixed sum of money on maturity. The premium on this policy is comparatively less than in the case of with profit policies. The bonus can be distributed either in cash or by reduction in the future premium or may be distributed upon maturity of the policy.
A C
© CA Anand R. Bhangariya
94220 26740
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5.6
Mr. X has taken policy of 15 years on 1-1-2011.
LIC
B d
15 Premiums
n a
g n
a h
31-12-2025
1-1-2011
31-12-2030
a iy
r a
On attaining the age of 45, insurance company will pay fixed annual payment to Mr. X till death.
Mr. X
Death
Fixed annual payment (Annuity)
Insurance Company guarantees to pay money regularly as long as one lives, in consideration of lump sum money received from the insured. The payment of annuity depends upon the age of annuitant and the prevailing rate of interest. The annual (or regular) payment is called annuity and the lump sum money received is called "Consideration for annuities granted". Annuity paid represents an expenditure of the life insurance business and consideration received for annuities is an item of income.
A C
© CA Anand R. Bhangariya
n A 94220 26740
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5.7
Insured
From Bajaj Allianz point of view, Insurance is Ceded.
Insured approaches Bajaj Allianz for Insurance Cover
Bajaj Allianz contacts TATA AIG to cover itself against larger risk.
A C
© CA Anand R. Bhangariya
94220 26740
B d
n a
TATA AIG will pay commission to Bajaj Allianz for business received
a iy
r a
g n
a h
On the happening of uncertain event covered under policy
n A
First Insured will pay premium to Bajaj Allianz
Bajaj Allianz General Insurance Company
From TATA AIG point of view, Insurance is Accepted.
Bajaj Allianz will pay the claims to the insured.
TATA AIG will repay the amount of claim to Bajaj Allianz
Bajaj Allianz will transfer the premium to TATA AIG for risk undertaken www.cavidya.com
5.8
Premium:
a iy
Particulars
Rs.
Total premium received on direct business Add:
Premium received on reinsurance accepted
Less:
Premium o/s received for last year
B d
Transfer to revenue a/c Commission:
n a
n A
Particulars
Commission on direct business Add:
a h
Premium paid on reinsurance ceded
r a
g n
Premium o/s at the end of the year
Rs.
Commission paid on reinsurance accepted
A C
Commission o/s at the end of the year
Less:
Commission received on reinsurance ceded Commission o/s paid for last year
Transfer to revenue a/c
© CA Anand R. Bhangariya
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5.9
Claims Less Reinsurance:
a iy
Particulars
Rs.
r a
Total claims paid on direct business (Including all incidental expenses incurred in settlement of claims) Add: Claims on reinsurance accepted Claims o/s at the end of the year Less:
B d
Claims o/s paid for last year
Transfer to revenue a/c
A C © CA Anand R. Bhangariya
n a
n A 94220 26740
g n
a h
Claims paid on reinsurance ceded
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5.10
a iy
Mr. X insured his Car on 1-1-2011 for a period of 1 year. Mr. X
Policy is taken for one year. i.e. Risk is for one year
1-1-2011 financial year ends
n a
n A
a h
B d
31-3-2011
g n
r a
31-12-2011
On 31-3-2011 company has to make provision for unexpired risk for the next financial year.
Marine Hull Insurance – 100% of Net Premium Fire, Marine Cargo and Miscellaneous Business – 50% of Net Premium
A C
If company feels that reserves is not sufficient to meet claims to the date of closing of the financial year, they may build up additional reserves for unexpired risks. © CA Anand R. Bhangariya
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This is the voluntary reserve and company will decide its percentage on net premium. 5.11
Form B - RA
Financial Statement No. 1
Revenue A/c
Schedule Name Premiums earned – net
3
Commission
Operating Expenses related to Insurance Business -
g n
B - PL
Profit and Loss A/c
B - BS
Balance Sheet
5
Share Capital
6
Reserves and Surplus
7
Borrowings
8
Investments
9
Loans
10
Fixed Assets
11
Cash and Bank Balances
12
Advances and Other Assets
13 14 15
Current Liabilities
A C © CA Anand R. Bhangariya
a h
B d
n a
94220 26740
r a
Claims Incurred (Net)
4 -
n A
a iy
2
Provisions Miscellaneous Expenditure www.cavidya.com
5.12
This represents the excess of revenue receipts over revenue expenditure relating to life insurance business. The fund is available to meet the aggregate liability on all policies outstanding. Revenue account is prepared every year to ascertain the balance of life insurance fund at the end of the year. Closing Balance of Life Insurance Fund:
Opening balance
B d
Add : Revenue Income
Less : Revenue Expenses Closing balance
A C © CA Anand R. Bhangariya
n A
n a
94220 26740
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r a
g n
a h
Particulars
a iy
Amount
5.13
a) b)
c) d) e) f) g)
h)
The balance in the life assurance fund can not be taken as the profit made by the life insurance business. For the purpose of ascertaining the profit insurance company has to calculate its net liability on all outstanding policies. For calculating net liability, the actuaries calculate the present value of liability on all the policies in force as well as present value of future premium to be received on policies in force. The excess of the present value of future liability over the present value of future premium is called the net liability. If the life insurance fund is more than the net liability, the difference represents the profit. On the other hand, the excess of net liability over the life assurance fund represents the loss for the inter-valuation period. 95 % of the profit of life business must be distributed to the policy holders by way of "Bonus ", on with profit policies and the remaining 5 % has to the utilised for such purpose as the Government may determine. The profit or loss to the life insurance business is ascertained by preparing a statement called "Valuation Balance Sheet“.
n a
n A
Particulars
A C
To Net Liability as per Actuarial Valuation
Valuation Balance Sheet As on…………
Amount XXX XXX
To Surplus (Net Profit)
© CA Anand R. Bhangariya
B d
Total 94220 26740
r a
g n
a h
a iy
Particulars By Life Assurance Fund as per Balance Sheet
XXX
By Deficiency (Net Loss)
XXX
Total www.cavidya.com
Amount XXX
XXX 5.14
a iy
Particulars
Rs.
Profit as per Valuation Balance Sheet
r a
Add: Interim Bonus paid
g n
Less: Loss on sale of Investments Less: Provision for taxation
a h
Profit made during the Year
B d
Add: Balance Brought Forward
Total Profit
n a
Less: Transfer to Fund Available for Distribution
n A
XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
Distribution to Shareholders (@ 5%)
XXX
Distribution to Policyholders (@ 95%)
XXX
Less: Interim Bonus paid
XXX
Amount due to policyholders
XXX
A C
© CA Anand R. Bhangariya
94220 26740
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5.15
Form A - RA
Financial Statement No. 1
Revenue A/c
Schedule Name Premiums earned – net
3
Operating Expenses related to Insurance Business Benefits Paid (Net)
g n
A - PL
Profit and Loss A/c
A - BS
Balance Sheet
5
Share Capital
6
Reserves and Surplus
7
Borrowings
8
Investments
9
Loans
10
Fixed Assets
11
Cash and Bank Balances
12
Advances and Other Assets
13 14 15
Current Liabilities
A C © CA Anand R. Bhangariya
a h
B d
n a
94220 26740
r a
Commission
4 -
n A
a iy
2
-
Provisions Miscellaneous Expenditure www.cavidya.com
5.16
A C
n a
n A
© CA Anand R. Bhangariya
B d
94220 26740
www.cavidya.com
r a
g n
a h
a iy
6.1
Double Account System is a special method of presenting the Final accounts rather than a special system of keeping accounts. The main objective of this system is to disclose how much capital has been raised and how much capital has been utilised in the acquisition of assets.
a h
B d
n a
Particulars
Rs.
r a
g n
Amount spent for Extension as well as Repairs jointly
a iy
Particulars
Rs.
Amount equal to the present cost of replacement of the old asset
XXX
Total cost of replacement
XXX
Less Sale proceeds of scrap of the old aset
XXX
Add Value of materials of old asset used in rebuilding the new asset
XXX
Less Value of materials of old asset used in rebuilding the new asset
XXX
Less present cost of replacement of the old asset
XXX
A C
n A
Capitalised
XXX
Charged to Revenue XXX
© CA Anand R. Bhangariya
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6.2
No 1.
Particulars
L.F.
For Cash Expenses incurred New Main A/c
2.
3.
4.
For use of old materials in new construction New Main A/c To Replacement A/c
n A
a h
B d
n a
For sale of old materials Bank A/c To Replacement A/c
A C
g n Dr.
Credit
r a
Dr.
Replacement A/c To Bank A/c
a iy
Debit
Dr.
Dr.
For closing replacement account Revenue A/c To Replacement A/c
© CA Anand R. Bhangariya
94220 26740
Dr.
www.cavidya.com
6.3
1. Contingency Reserve: A sum equal to not less than 1/4 % and not more 1/2 % of the original cost of fixed assets must be transferred from the Revenue Account to Contigency Reserve until it equals 5 % of the original cost of fixed assets. The amount of the reserve is required to be kept invested in trust securities. The balance in reserve can be utilised with the approval of the State Government for the following purposes: a) To meet expenses or loss of profits arising out of accidents, strikes or circumstances beyond the control of the management; b) To meet expenses on replacement or removal of plant or works other than the expenses necessary for normal maintenance or renewal; and c) to pay compensation payable under law for which no other provision has been made.
B d
r a
g n
a h
a iy
2. Consumer Rebate reserve: This reserve is used for reduction in rates or otherwise return to the consumers.
n a
n A
3. Tariffs and Dividend control reserve: This can be utilised whenever the clear profit is less than the reasonable return. This is like Dividend Equalisation Reserve. 4. General Reserve: a) Section 67 of the Act, lays down that after interest and depreciation have been provided, a contribution to general reserve shall be made at the rate not exceeding 1/2% of the original cost of the fixed assets until the total of such reserve come to 8 % of the original cost of the Assets. b) This applies only to the Electricity Boards though there is nothing to stop electricity companies from building up reserves.
A C
© CA Anand R. Bhangariya
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6.4
a iy
The Electricity (Supply) Act, 1948 provides that an electricity company can not charge any rates as they like. They are entitled to charge such rates which gives them a reasonable return. They must so adjust the rate that the amount of clear profit in any year does not exceed the reasonable return by more than 20%.
a h
g n
B d
r a
1)
Objective: The law seeks to prevent an Electricity Company from earning very high profit,. For the purpose, concept of Reasonable Return has been propounded. Reasonable Return is the normal which a Electricity Company can e expected to earn.
2)
Standard Rate: Standard Rate is determined for the purpose of determining yield on the Capital Base in computation of Reasonable Return. Standard Rate = Reserve Bank of India Rate + 2%
3)
Computation of Reasonable Return
A C
n a
n A
© CA Anand R. Bhangariya
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6.5
Particulars Yield on Capital Base= Capital Base x Standard Rate of Return Income on Investments Contingencies Reserve
Add:
1/2% of Loans advanced by the Electricity Boards
Add:
1/2% of amount borrowed from State Government approved organisation/ Institutions
Add:
1/2% of amount raised by the Issue of Debentures
XXX
Add:
1/2% of on balance in Development Reserve
XXX
Add:
Other amount as allowed by Central Govt. having regard to the prevailing tax structure
XXX
Reasonable Return
XXX
A C
© CA Anand R. Bhangariya
Investment
g n
a h
B d
n a
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than
r a
Add:
n A
other
a iy
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against
Rs. Lakhs XXX XXX XXX XXX
6.6
a iy
a) The original cost of fixed assets available for use and necessary for the purpose of the undertaking less contribution, if any, made by the consumers for construction of service lines. b) The cost of intangible assets. c) The original cost of works in progress. d) The amount of investments made compulsorily against Contingency Reserve; e) The monthly average of stores, materials, supplies and cash and bank balances. [Monthly average of Current Assets, excluding amount due from Consumer]. Less: i. Depreciation on tangible assets and amounts written off from intangible assets. ii. Loans advanced by the Board; iii. Loans from approved institutions iv. Debentures v. Security deposits of consumers held in cash vi. The amount standing to the credit of the Tariff and Dividends Control Reserve vii. The amount set apart for the Development Reserve and viii. Balance in consumer Rebate/ Benefit Reserve.
A C
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n A
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a h
g n
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r a
6.7
a iy
1)
Meaning: Clear Profit is the difference between the amount of income and the sum of expenditure including specific appropriations. It is the net Profit of the Company.
2)
Computation of Clear Profit:
Particulars To Losses brought forward from previous year To Income Tax To Intangible asset written off To Contribution to Contingency Reserve To Arrears of Depreciation To Development Reserve To Other appropriations permitted by: State Government. To Balance being CLEAR PROFIT Total
A C
© CA Anand R. Bhangariya
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g n
r a
Particulars By Net Profit after usual working charges and interest.
a h
B d
n a
n A
Rs
Rs
Total
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6.8
a iy
Surplus is the difference between the Clear Profit and the Reasonable Return.
Disposal of Surplus 20% of Reasonable Return
Electricity Company (A) Least of the following: • 1/3rd of 20% of Reasonable Return • 5% of reasonable return
A C
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n a
n A
(B) = 50% of Balance 50% Transfer to Tariff and Dividend Control Reserve
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g n
a h Balance
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r a
Balance (D) Consumer Rebate Reserve
(C) = 50% of Balance 50% Transfer to Consumer Control Rebate Reserve
6.9
A C © CA Anand R. Bhangariya
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B d
n A 94220 26740
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r a
g n
a h
a iy
8.1
a iy
Dissolution of Partnership
Dissolution of Firm
Change in existing relationship between the partners. Firm continues its business as before It may take place in following ways. a) Change in existing PSR among partners b) Admission of new partner c) Retirement of a Partner. d) Death of a Partner e) Insolvency of a Partner f) Completion of the venture if partnership is formed for that g) Expiry of the period of partnership, if it is for the specific period of the time.
According to Section 39 of the partnership Act 1932, the dissolution of partnership between all the partners of a firm is called the Dissolution of The Firm. That means the Act recognises the difference in the breaking of relationship between all the partners of a firm and between some of the partners;
A C
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n A
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a h
B d
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Death of Partner
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8.2
Second Step
• Prepare Balance Sheet of the firm as on date of dissolution.
First Step
• Non cash assets are converted into cash • Profit or loss on sale of assets is transferred to Realisation account.
A C
n a
B d
n A
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a iy
• Balance in Realisation account is transferred to Capital account. • Available cash is distributed to creditors & partners.
Last Step
Object of Realisation Account Whatever may be the reason for dissolving the partnership, the accounts have to be closed. A special account called Realisation Account is used to record the closing transactions, showing net gain or loss that has resulted from the realisation of assets & settlement of liabilities. © CA Anand R. Bhangariya
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8.3
No Particulars (a) Transfer of recorded Assets to Realisation A/c Realisation A/c (With the total) Dr. To Sundry Assets A/c (With their individual book values) (b) Transfer of Liabilities, Provisions to Realisation A/c Liabilities A/c (With their individual book figures) Provision for Doubtful Debt A/c Provision for Depreciation A/c To Realisation A/c (with the total) (c) 1.
2.
n a
Realisation all Assets (whether recorded or unrecorded) When assets are sold for cash Cash/ Bank A/c To Realisation A/c
A C
n A
Assets are taken away by partner Partners Capital A/c To Realisation A/c
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Dr. Dr. Dr.
Debit
Credit
a iy
r a
g n
a h
B d
L.F.
Dr.
Dr.
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8.4
No Particulars 3. Assets are given away to any of the creditors towards the full/partial payment of his dues. No Journal Entry may be passed
L.F.
2.
a h
n a
B d
Partner agreeing to discharge a liability Realisation A/c To Respective Partners Capital A/c
A C
n A
(e) Payment of Realisation Expenses 1. When expenses are paid in cash Realisation A/c To Cash / Bank A/c © CA Anand R. Bhangariya
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Credit
a iy
r a
g n
(d) Discharge of outsiders Liabilities (whether recorded or unrecorded) 1. When Liabilities are discharged in cash Realisation A/c Dr. To Cash / Bank A/c
Debit
Dr.
Dr.
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8.5
No Particulars 2. When expenses are paid by partner Realisation A/c To Partners Capital A/c
L.F.
g n
When any of the partners agrees to do dissolution work for an agreed remuneration Realisation A/c Dr. To Concerned Partner’s Capital A/c
4.
When expenses are paid by a partner who has to bear such expenses No Entry
5.
When exps. are paid by the firm on behalf of a partner who has to bear such expenses Concerned Partner’s Capital A/c Dr. To Cash/ Bank A/c
A C
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n a
n A 94220 26740
a h
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Credit
a iy
r a
Dr.
3.
Debit
8.6
No Particulars (f) Transfer of Profit in PSR on Realisation Realisation A/c To All Partners Capital A/cs (g)
Transfer of Loss in PSR on Realisation All Partners capital A/cs To Realisation A/c
L.F.
g n
a h
B d
Credit
a iy
r a
Dr.
Dr.
Debit
(h) Payment of Partner Loan/ Advances Partners Loan/ Advance A/c Dr. To Capital A/c (Only to the extent of Dr. Balance in capital A/c) To Cash A/c (with the Balance) (i)
A C
n a
n A
Transfer of Accumulated Profit in PSR Profit & Loss A/c General Reserve A/c To All Partners’ Capital A/c
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Dr. Dr.
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8.7
No Particulars (j) Transfer of Accumulated Losses in PSR All Partners’ Capital A/c To Profit & Loss A/c To Deferred Revenue Expenditure A/c
L.F.
2.
n a
n A
In case of credit balance in a Current Account of a Partner Concerned Partner’s Current A/c To concerned Partner’s Capital A/c
A C
© CA Anand R. Bhangariya
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g n
a h
B d
Concerned Partner’s Capital A/c To concerned Partner’s Current A/c
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Credit
a iy
r a
Dr.
(k) Transfer of the Balance in Current Account(s) 1. In case of debit balance in a Current Account of a partner
Debit
Dr.
Dr.
8.8
No Particulars (l) Payment to/by a Partner 1. In case of payment by a partner having a debit balance in his Capital A/c Cash /Bank A/c Dr. To Concerned Partner’s Capital A/c 2.
A C © CA Anand R. Bhangariya
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n A 94220 26740
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Debit
Credit
a iy
r a
g n
a h
Payment to a partner having a credit balance in his Capital A/c Concerned partner’s Capital A/c To Cash/ Bank A/c
L.F.
Dr.
8.9
The treatment of goodwill in case of dissolution of a firm may be summarized as follows:
a iy
No.
Particulars
If Goodwill is Already appearing in the Books
If Goodwill is not Appearing in the Books
(a)
On Transfer to
Realisation A/c
The question of transfer
Realisation A/c (b)
Dr.
On sale for cash
Cash/ Bank A/c
does not arise at all
Dr.
a h
To Realisation A/c (c)
On being taken over
A C © CA Anand R. Bhangariya
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n A 94220 26740
B d
Concerned Partner’s Capital A/c Dr.
By any of the partners
To Realisation A/c
r a
g n
To Goodwill A/c
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Cash/Bank A/c
To Realisation A/c
Concerned Partner’s Capital A/c Dr. To Realisation A/c
8.10
Trial Balance Particulars Debtors
50,000
g n 3,00,000
a h
Realisation A/c
1) 2)
B d
3,00,000
Debtors
n a
n A
r a
3,50,000
Less: Provision for bad debts
Debtors
a iy
Rs.
Realisation A/c
3,50,000
Provision 50,000
An Asset against which a provision or reserve has been created, should be transferred at its gross figure and not at its net figure e.g. Debtors Provision/Reserve against an asset is a separate account and thus, it should be transferred to Realisation Account separately like other liabilities, e.g. Provision for Doubtful Debts A/c, Machinery Replacement Reserve
A C
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8.11
Trial Balance Particulars
r a
Creditors
5,00,000
Provision for discount on creditors
1,00,000
4,00,000
n a
n A
Realisation A/c
Provis. 1,00,000
B d
(5,00,000 – 1,00,000)
g n
a h
Realisation A/c Creditors
a iy
Rs.
Creditors 5,00,000
1) Provision /Reserve against a liability is a separate account and thus, it should be transferred to Realisation A/c separately like other assets, e.g. Provisions for Discount on Creditors. 2) A liability against which a provision or reserve has been created, should be transferred at its gross figure and not at its net figure, e.g., Creditors.
A C
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8.12
Trial Balance
Particulars Bank balance
A C © CA Anand R. Bhangariya
g n
a h
Cash & bank is never realized but same is distributed in its present form.
B d
n a
n A 94220 26740
r a
2,00,000
Realisation A/c Bank 2,00,000
a iy
Rs.
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8.13
Trial Balance Particulars
Assets Realised Loan from Relatives of the partners
30,000
g n
Creditors
20,000
a h
Partners Loan
To Bank By Bank Partners Loan 40,000 Creditors 20,000 Loan frm. Rel. 30,000
A C
r a
1,00,000
B d
Realisation A/c
1,00,000
n a
n A
At par
a iy
Rs.
40,000
Realisation A/c
To Bank Creditors 20,000 Loan frm. Rel. 30,000
By Bank 1,00,000
Partners Loan 40,000
Loan from relative of partner = external liability = at par with the creditors Loan from partner = payment is made after paying creditors, but before repayment of capital
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8.14
a iy
Different Ways of Dissolution
When all Partners are Solvent
n a
n A
a h
B d
r a
g n
Not all but some of the partners are solvent
When all partners are Insolvent
When all partners solvent, before balancing capital account of partners, the loan from any partner is to be paid first. And if any partner has taken any loan from firm, he has to bring necessary cash in to the business.
A C
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8.15
a)
b)
At the time of dissolution of a partnership firm, the capital account of a partner may show a debit balance after his share of any profit or loss on realisation has been included in his account. But if he cannot make good the whole or part of a deficiency, then what should be done? This deficiency must be shared by all the solvent partners. Ratio to share deficiency by Solvent partners
In their profit sharing ratio (like any business loss)
No.
Case
a)
In Case of Fixed Capitals
b)
A C
In the ratio of their last agreed capitals. (This issue was upheld in the case of “Garner Vs. Murray”.)
n A
Meaning of Last Agreed Capital
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In Case of Fluctuating Capitals
© CA Anand R. Bhangariya
n a
B d
r a
g n
a h
a iy
Last Agreed Capital means the Fixed Capital (given in the Balance Sheet) without any adjustment. Last Agreed Capital Means the Capital after making adjustments for past accumulated reserves, profits or losses, drawings, interest on capitals, interest on drawings, remuneration to a partner etc. to the date of dissolution but before making adjustment for profit or loss on realisation. 8.16
a iy
When all the partners are insolvent and the the assets of the firm are inadequate to meet the firm’s liabilities, the firm is said to be insolvent. In case of insolvency of firm, the creditors of the firm cannot be paid in full. The available cash with the firm is first used to pay realisation expenses
n A
g n
a h
B d
n a
r a
The balance amount is paid to creditors proportionately. Any balance remaining unpaid to them represent their sacrifice on account of insolvency of partners.
In order to close the acounts of firm, Realisation account is prepared in the usual manner.
A C
However if loss on realisation is to be determined before considering the amount ultimately paid to creditors, the creditors are not transferred to Realisation account.
© CA Anand R. Bhangariya
94220 26740
if loss on realisation is to be determined after considering the amount ultimately paid to creditors, the creditors are transferred to Realisation account.
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8.17
1. Till now, all the questions relating to dissolution (ireespective of solvency of partners) are based on the assumptions that all the assets are reallised & all the liabilities are setteled together before the partners are paid off.
a iy
r a
2.
In actual practice, it may not be possible to realise all assets on the date of dissolution and pay the liabilities on that date. Assets are realised and cash collected gradually.
3.
Cash available is applied in following order: a) Realisation expenses b) Outside Creditors c) Partners Loan d) Provision for Contingent Liability e) Partner’s Capital.
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n A 94220 26740
a h
g n
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8.18
Capital of the partners are not in PSR
Maximum loss Method
A C © CA Anand R. Bhangariya
B d
Proportionate Capital Method
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n A 94220 26740
g n
a h
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a iy
r a
Distribution of Cash
Capital of the partners are in PSR
Distribution of cash in PSR
8.19
A C © CA Anand R. Bhangariya
n a
B d
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r a
g n
a h
a iy
9.1
Amalgamating Firms
Sun Associates
g n
Decides to amalgamate and to form new partnership firm
a h
B d
a iy
r a
Moon Associates
Sun Moon Associates
n a
Separate existence of Sun Associates and Moon Associates comes to an end & a new firm Sun Moon Associates is formed.
A C
n A
Under amalgamation, two or more firms transfer their business to a new firm which is formed to take over such businesses. Usually all the assets and liabilities are revalued in order to ascertain the true position as on the date of amalgamation.
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9.2
No Particulars 1 For Goodwill – the value of the goodwill will be ascertained in case of each firm and amount will be credited to partners’ capital account in old PSR Good will A/c Dr. To partners’ capital A/c 2.
3.
4.
For Reserves and other undistributed profits Profit & Loss A/c General Reserve A/c To All Partners’ Capital A/c
n a
For increase in value of assets or decrease in value of liabilities Assets /Liabilities A/c To P & L Adjustment A/c
A C
n A
For decrease in value of assets or increase in value of liabilities P & L Adjustment A/c To Assets /Liabilities A/c
© CA Anand R. Bhangariya
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Debit
Credit
a iy
r a
g n
a h
B d
L.F.
Dr. Dr.
Dr.
Dr.
9.3
No Particulars 5. For profit on Revaluation P & L Adjustment A/c To partners’ capital A/c (For loss on revaluation entry will be reversed) 6.
7.
8.
For an Assets taken over by a partner Partners’ Capital A/c To Asset A/c
Dr.
n a
For an Assets & Liabilities taken over by new firm New Firm A/c Liabilities Taken Over A/c To Assets Taken Over A/c
A C
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Dr.
Debit
Credit
a iy
r a
g n
a h
B d
For an Liabilities taken over by a partner Liabilities A/c To Respective Partners Capital A/c
n A
L.F.
Dr.
Dr. Dr.
9.4
No Particulars 9. Assets/Liabilities no taken over the new firm will be either sold away or paid off and any profit or loss on such selling or payment will be transferred to Partners capital A/c in ratio of their capitals. 10. Transfer of partners’ Capital A/c Partners’ Capital A/c To New Firm A/c
A C
n a
n A
© CA Anand R. Bhangariya
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Dr.
Debit
Credit
a iy
r a
g n
a h
B d
L.F.
9.5
No Particulars 1. For an Assets & Liabilities taken over Assets taken over A/c
L.F.
g n
a h
2.
For any further contribution towards capital by the partners Bank A/c Dr. To Partners Capital A/c
3.
For any capital withdrawn by the partners Partners’ Capital A/c To Bank A/c
A C
n a
n A
© CA Anand R. Bhangariya
B d
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Credit
r a
Dr.
To Partners Capital A/c To Liabilities taken over
a iy
Debit
Dr.
9.6
Sold it’s business to a
Tom & Jerry Associates
Existence of Tom & Jerry Associates comes to an end
a h
B d
r a
g n
i.e. nothing but dissolution…
a iy
Disney Ltd.
We are going to follow same accounting treatment that we have followed in “Dissolution of Firm”
n a
n A
Sometimes the business of the Partnership Firm may be sold to a limited company. Procedure regarding closing of the books of account of Partnership firm is the same as in case of dissolution of a firm.
A C
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9.7
Will pay Purchase Consideration to Disney Ltd.
a h
Purchase Consideration
When Lump sum figure is given
n A
n a
PC = Lump Sum Figure For Eg. The company took over the firm’s business for a total consideration of Rs. 1,05,000
A C
© CA Anand R. Bhangariya
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B d
Tom & Jerry Associates
When Lump sum figure is not given
Payment Method
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r a
g n
For Assets & Liabilities taken over by it.
a iy
Net Asset Method
9.8
To arrive at Purchase consideration all payments made by the company to the firm are added together. It is done as under : Particulars
g n
Issue price of Equity shares Issue price of Preference shares
a h
Issue price of Debentures
B d
Total payment being the amount of Purchase consideration
a iy
r a
Cash Paid
Rs.
XXX XXX
XXX XXX XXX
Example :- The purchase consideration was to be satisfied by a cash payment of Rs. 56,000, the allotment of 8,000 equity shares of Rs. 10 each at 10% discount and the allotment of 2,000, 12% preference shares of Rs. 10 each. Solution :Particulars
A C
Bank
n a
n A
Rs. 56,000
Equity shares (8,000 X 9)
72,000
Preference shares (2,000 X 10)
20,000
Total payment being the amount of Purchase consideration © CA Anand R. Bhangariya
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1,48,000 9.9
The value of net assets taken over by the company is the amount payable. It is computed as follows
Particulars
g n
Less : Agreed value of Individual Liabilities taken over Value of Net Assets Taken Over (Purchasing Consideration)
A C © CA Anand R. Bhangariya
B d
n a
n A 94220 26740
a h
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a iy
r a
Agreed value of the Individual Assets taken over
Rs.
XXX
XXX
XXX
9.10
Example : The agreed value of assets and Liabilities of partnership firm is as follows : Land and Building –Rs. 3,00,000; Plant – Rs. 1,50,000; Sundry Debtors – Rs. 47,500; Stock – Rs. 1,40,000; Bills receivable – 50,000; Sundry Creditors – Rs. 38,000 and Bills Payable – 80,000. Solution :Land and Building
a h
Plants Sundry Debtors
B d
Stock
n a
Bills Receivable Cash Less :
n A
Sundry Creditors
Bills Payable
A C
© CA Anand R. Bhangariya
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r a
g n
Particulars
a iy Rs.
3,00,000 1,50,000
47,500
1,40,000 50,000 1,00,000 38,000 80,000
Total (Purchase consideration)
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6,69,500
9.11
A C © CA Anand R. Bhangariya
n a
B d
n A
94220 26740
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r a
g n
a h
a iy
10.1
Separate set of books are kept for each department
This method of Acconting is employed when the size of the organisation is very large or As per the law.
A C © CA Anand R. Bhangariya
Each department is regarded as a separate unit and Accounts are kept independently.
n A 94220 26740
a h
The central Accounts department generally maintains columnar Purchase and Sales Day Book to distinguish between the purchases and sales of different departments. www.cavidya.com
r a
g n
At the year end the trading results of all the departments are combined to get the trading results of the organisation as a whole
B d
n a
a iy
All the departments are kept together in columnar form
A department does not maintain a full double-entry book-keeping system of its own. 10.2
Allocation of direct expenses to each department is easy. But in case of common expenses like Rent, Electricity, Insurance allocation of these expenses is difficult.
SI.
Expenses
1.
(a) Travelling salesman's salary and commission
g n
(b) Selling expenses
a h
(c) After-sales service (d) Discount allowed (e) Freight outwards
B d
(f) Provision for discounts on debtors
n a
(g) Sales manager's salary and other benefits 2.
(a) Rent, rates and taxes
n A
(b) Air conditioning expenses (c) Heating 3. 4. 5. 6. 7.
A C
Lighting Insurance on Stock Insurance on Building Insurance on Plant & Machinery Group insurance premium
© CA Anand R. Bhangariya
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a iy
r a
Basis
Sales of each department (Excluding inter-departmental transfers)
Area or value of floor space
Light points Average stock carried Area Value of Plant & Machinery Direct wages www.cavidya.com
10.3
SI.
Expenses
8. 9.
Basis
Power (a) Depreciation
g n
10. (a) Canteen expenses (b) Workman Compensation Insurance (c) Labour welfare expenses 11. Works manager's salary
n a
Time spent in each department Purchases of each department
13. Expenses directly related to a particular department
© CA Anand R. Bhangariya
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a h
Number of employees
B d
12. Carriage inwards
n A
r a
Value of assets in each department
(b) Repairs and renewals
A C
a iy
H.P. or H.P. x Hours worked
Charged to respective department.
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10.4
Some material has been transferred from grocery section to Fruits & Vegetables section. Cost is Rs. 100.00 But transfer is made at Rs. 125.00
i.e. it includes profit element of Grocery Section @25% on cost
a h
B d
r a
g n
Grocery Section
a iy
Fruits & Vegetables Section
At the end of FY, Fruits & Vegetable section will value it’s closing stock at its cost price i.e. Rs. 125.00 which is transfer price of Grocery section
n a
n A
Rs. 25 is unrealised profit which is equal to profit of grocery section. it is necessary to provide for unrealised profit on stock held out of inter departmental transfer.
A C
𝑺𝒕𝒐𝒄𝒌 𝑹𝒆𝒔𝒆𝒓𝒗𝒆
= 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑢𝑛𝑠𝑜𝑙𝑑 𝑠𝑡𝑜𝑐𝑘 ×
© CA Anand R. Bhangariya
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𝑃𝑟𝑜𝑓𝑖𝑡 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟 𝑃𝑟𝑖𝑐𝑒 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟 𝑝𝑟𝑖𝑐𝑒
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10.5
No 1.
Particulars
L.F.
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At the beginning of the next year reverse entry will be passed. Stock Reserve Account Dr. To Profit and Loss Account
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Liabilities
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Accounting entry:
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For Unrealised profit on stock Profit and Loss Account To Stock Reserve Account
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Debit
Balance Sheet
Amount
Assets
Amount
Current Assets Closing Stock Less: Stock Reserve
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10.6
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Definition :- The Companies (Amendment) Act 2000 has inserted a new clause (15A) in section 2 of the Companies Act, 1956, which states that Employee Stock Option means the option given to the whole time directors, officers or employees of a company, which gives such directors, officers or employees the benefit or right to purchase or subscribe at a future date , the securities offered by the company at a pre determined price
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12.1
XYZ Co. Company put the proposal in Meeting to offer ESOP Mr. Joy for approval.
Proposal contains 1) Mr. Joy should work with the company at least 5 years. 2) Mr. Joy should be able to grab the Indonesia Project. 3) Mr. Joy should achieve his yearly targets, as decided.
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Exercise Price
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Grant
Grant Date
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Mr. Joy (Director)
Vesting Conditions
Vesting Period
Mr. Joy is required to achieve these conditions within a time span of 6 years. i.e. (15.09.2011 – 15.09.2017) 15.09.2011 – 15.09.2018
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Expected Life of an Option
12.2
Say, Mr. Joy achieves the conditions given in proposal on 01.09.2017
Mr. Joy will not exercise the option
If market price of the share at the time of exercise of option is Rs. 500….
Will apply for the shares…
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Company offered Mr. Joy shares @ Rs. 150 but actual price of the shares in the market at the time of exercise of option is Rs. 100
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It’s employee’s right to purchase the shares or not but it’s the obligation of the company to sell the shares whatever may be the price of share.
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12.3
On 01.01.2011, gives offer to its
Ethical Ltd
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Employees
To purchase 1,000 shares each “at future date” between 01.01.2014 - 01.01.2015 “at a predetermined price of Rs. 200 subject to fulfillment of conditions on or before 01.01.2014.
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If employees want, they are free to dispose of the shares subject to lock-in-period if any.
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On 01.01.2015, market price of the shares is Rs. 500 i.e. market price is generally lower than exercise price.
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12.4
No
1.
Particulars In respect of options granted during any accounting period, the accounting value of the options shall be treated as another form of employee compensation in the financial statement of the company. The accounting value of the option = Number of options granted * (Market Price – Exercise Price) To Employee Stock Options Outstanding A/c
2.
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Stock option exercised by employees during exercise period Bank A/c Employee Stock Options Outstanding A/c To Equity Share Capital A/c To Securities Premium A/c
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Stock option lapsed on expiry of exercise period Employee Stock Options Outstanding A/c To General Reserve A/c
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Dr.
Debit
Credit
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Employee Compensation Expenses A/c
L.F.
Dr. Dr.
Dr.
12.5
4.
Transfer of balance in Employee Compensation Expenses A/c
Dr.
Profit & Loss A/c To Employee Compensation Expenses A/c
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Decides to issue the shares to the public at large on 01.01.2011.
Magical Ltd. (Listed Co.)
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Mr. Roy
As a part of public offer, Company gives offer to Mr. Roy to purchase 1,000 shares at a price of Rs.200 “immediately” whose market price is Rs. 350 now to retain him in a company. Mr. Roy can subscribe to the shares of the company, if & only if he is ready to work in a organisation for a period of 5 years. (i.e. Lock in Period)
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12.6
Company offers performance bonus to Ms. Rozy, that is linked to the performance of the company. Empire Ltd.
Shares of the company are trading at Rs. 250 on 01.01.2011
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After 5 years, i.e. on 01.01.2016, Value of share becomes Rs. 900.
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Now instead of giving her shares, Company will pay her appreciation in the value of shares of the company
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i.e. Company will pay her (Rs. 900 – Rs. 250) i.e. Rs. 650 per share.
If the value of Share becomes Rs. 100 on 01.01.2016, then option can’t be exercised.
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12.7
Types of ESOP for Accounting Purpose
Under this plan, employees receives the shares.
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Under this plans, the employees receive cash based on the price of enterprise’s shares.
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Cash Settled
Equity Settled
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Employee share based payment plans with cash alternative
Under these plans, either the enterprise or the employee has a choice of whether the enterprise settles the payment in cash or by issue of shares.
12.8
No A. 1.
2.
Particulars Fresh issue of shares Application money received Bank A/c To Share application & allotment A/c Allotment of shares Share application & allotment A/c Discount on issue of shares A/c To Equity Share Capital To Securities Premium A/c
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Dr.
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L.F.
Debit
Credit
Dr. Dr.
12.9
No Particulars B. Transfer of profits to Capital Redemption Reserve A/c (to the extent of nominal value of shares purchased) General Reserve A/c Profit & Loss A/c Other Reserves A/c To Capital Redemption Reserve A/c C. Amount due under Buy back Equity Share Capital A/c Securities Premium A/c Divisible Profit A/c To Equity Shareholders A/c
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Debit
Credit
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D. Payment of amount due Equity Shareholders A/c To Bank A/c
L.F.
Dr. Dr. Dr.
Dr.
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12.10
1) 2)
The Companies Amendment Act, 2000 has allowed companies to issue equity shares with disproportionate rights. The share capital of company limited by shares shall be only of two kinds, namely : a) Preference Share capital b) Equity share Capital – i. With voting rights ; or ii. With differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed.
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12.11
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