Mba i Accounting for Management [14mba13] Notes

Accounting for Managers

14MBA13

Subject Code: 14MBA13 No. of Lecture Hours / Week: 04 Total Number of Lecture Hours: 56 Practical Component: 01 Hour / Week

IA Marks: 50 Exam Hours: 03 Exam Marks: 100

Syllabus Module 1: (4 Hours) Introduction to Accounting: Need and Types of Accounting, Users of Accounting, concepts and conventions of Accounting, Accounting Equation (problems on accounting equation). Module 2: (10 Hours) Preparation of books of Accounts: Journals, Subsidiary books, three column cash book, ledgers and trial balance. Depreciation- Straight line and Written down Value Methods. Module 3: (12 Hours) Preparation of Financial Statements: Preparation of final accounts of sole traders. Preparation of final accounts / statement of companies-both horizontal & vertical form of financial statements. (Basic problems on Final accounts of companies) Module 4: (14 Hours) Analysis of Financial Statements: Comparative, common size and trend analysis, Ratio Analysis, Preparation of financial statements using ratios, Preparation of Cash flow Statement (Only indirect method). Module 5: (6 Hours) Accounting Standards and IFRS: Need for accounting standards. IFRS and proposed changes in Indian Accounting Standards. Module 6: (4 Hours) Emerging issues in Accounting: Corporate Governance and clause 49 of the listing agreement, Human Resource Accounting, Forensic Accounting, Window Dressing- Sustainability Reporting Module 7: (6 Hours) Fundamentals of Taxation: Overview of Heads of Income, deductions u/s 80C, Income Tax Rates and Returns – For Individuals only (Only Theory)

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Index

Module

Content

Page No.

Module-1

Introduction to Accounting

3-9

Module -2

Preparation of books of Accounts

10-20

Module 3

Preparation of Financial Statements

21-27

Module 4

Analysis of Financial Statements

28-40

Module 5

Accounting Standards and IFRS

41-42

Module 6

Emerging issues in Accounting

43-49

Module 7

Fundamentals of Taxation

47-58

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MODULE I Introduction to Accounting An account (in bookkeeping) refers to assets, liabilities, income, expenses, and equity, as represented by individual ledger pages, to which changes in value are chronologically recorded with debit and credit entries. These entries, referred to as postings, become part of a book of final entry or ledger. Examples of common financial accounts are cash, accounts receivable, mortgages, loans, PP&E, common stock, sales, services, wages, and payroll. Definition of Accounting Accounting operates within a broad socio-economic environment, and so, the knowledge required of the accountant cannot be sharply compartmentalized.It is therefore, difficult to discuss one area without relating to other areas of knowledge. We place a great emphasis on the conceptual knowledge. The accountant should not only know but he should understand. From the above it is clear that to define accounting as such, is rather difficult. Many accountants have defined Accounting in very many languages. However, we can consider the following definitions: 1.H.Chakravorty: ―Accountancy is the science of recording, classifying and summarizing transactions so that relation with outsiders is exactly determined and result of operation during a particular period can be calculated, and the financial position as the end of the period may be shown. 2.A.I.C.P.A.: "Accountancy may be defined as the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events, which are in part, at least of financial character, and interpreting the results thereof". 3.Taylor and Shearing: "Accounting may be defined as the art and science of recording business transactions in a methodological manner so as to show: (a) the true state of affairs of a business of a particular period of time and, (b) the surplus or deficiency which has accrued during a specific period." Objectives of Accounting The broad objects of Accounting may be briefly stated follows: 1.To maintain the cash accounts through the Cash Book and to find out the Cash balance on any particular day. 2.To maintain various other Journals for recording day-to –day non –cash transactions. 3.To maintain various Ledger Accounts to find out the exact amounts of incomes and expenses or gain and losses or receivables and payables. 4.To furnish information regarding Purchases and Sales, both Cash and Credit. 5.To find out the net profit or net loss or surplus or deficit for any particular period. 6.To find out the total capital on a particular date. 7.To find out the positions of assets on a particular date.

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Importance or Uses of Accounting 1. Facilitate to replace memory Accounting facilitates replace human memory by maintaining complete record of financial transactions. Facilitates to comply with legal requirements 2. Accounting facilitates to comply with legal requirements which require an Enterprise to maintain books of accounts. For e.g. Sec 209 of the Companies Act 1956, requires a company to maintain proper books of accounts on accrual basis. 3. Facilitate to ascertain net results of operations Accounting facilitates to ascertain net result of operations by preparing Income Statement or P&L A/c. 4. Facilitates to ascertain financial position Accounting facilitates to ascertain financial position by preparing Balance Sheet. 5. Facilitates the users to take decisions Accounting facilitates the users to take decisions by communicating accounting information to them. 6. Facilitates to comparative study Accounting facilitates a comparative study in the following four ways: (i) Comparison of actual figures with standard or budgeted figures for the same period and the same firm. (ii) Comparison of actual figures of one period with those of another period for the same firm (iii)Comparison of actual figures of one firm with those of another standard firm belonging to the same industry. (iv) C omparison of actual figures of one firm with those of industry to industry to whom the firm belong. 7. Assists the management Accounting assists the management in planning and controlling business activities and in taking decision. 8. Facilitates control over assets Accounting facilitates control over assets by providing information regarding Cash balance, Bank balance, Debtors, Fixed Assets, Stock etc.

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Scope of Accounting Accounting covers the following activities: 1. Identifying the transactions and events Accounting identifies transactions and events of a specific firm. A transaction is an exchange in which each participant receives or gives value. An event is a happening of consequence to a firm. E.g. use of raw materials for production. 2. Measuring the identified transactions and events Accounting measures the transaction and events in terms of a common measurement unit that is the ruling currency of a country. 3. Recording It is concerned with the recording of identified and measured financial transactions in an orderly manner. 4. Classifying It is concerned with the classification of the recorded transactions so as to group the transactions of similar type at one place. E.g. maintaining ledger for each type of Account. 5. Summarizing It is concerned with the summarization of the classified transactions in a manner useful to the users. E.g. Preparing P&L A/c, B/S, Cash Flow & Fund Flow Statements. 6. Analyzing It is concerned with the establishment of relationship between the various items or group of items taken from P&L A/c & B/S or both. 7. Interpreting It is concerned with the explaining the meaning and significance of the relationship so established by the analysis. The accountants should interpret the statements in a manner useful to the users, so as to enable the users to make reasoned decisions out of alternative course of action. 8. Communicating It is concerned with the transmission of summarized, analyzed and interpreted information to the users to enable them to make reasoned decisions.

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Accounting Conventions & Concepts Accounting Entity Concept According to this assumption, a business is treated as a separate entity that is distinct from its owner(s), and all other economic proprietors. This concept requires that for accounting purposes a distinction should be made between (i) personal transactions and business transactions, and (ii) transactions of one business entity and those of another business entity. Money measurement Concept According to this concept, only those transactions which are capable of being expressed in term of money are included in the accounting records. Non-monetary transactions should be ignored. E.g. Guarantee given by bank, Strikes, Lockouts, Layoff etc Accounting Period Concept According to this concept, the economic life of an enterprise is artificially split into periodic intervals which are known as accounting periods at the end of which an income statement and position statement are prepared to show the performance and financial position. Going Concern Concept According to this concept, the enterprise is normally viewed as a going concern that is, continuing in operation for the foreseeable future. Generally Accepted Accounting Principles (GAAPs) GAAPs may be defined as those rules of action or conduct which are derived from experience and practice and when they prove useful, they become accepted as principles of accounting. Criteria for acceptance of the Accounting Principles: • Relevance: A principle is relevant to the extent it results in information that is meaningful and useful to the user of the accounting information. • Objectivity: Objectivity connotes reliability and trustworthiness. A principle is objective to the extent the accounting information is not influenced by personal bias or judgment of those who provide it. • Feasibility: A principle is feasible to the extent it can be implemented without much complexity or costs.

Basic Principles of Accounting • • • • • • •

Duality Principle Revenue Recognition Principle Historical Cost Principle Matching Principle Full Disclosure Principle Objectivity Principle Consistency Principle

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Duality Principle The duality aspects of transaction is the basis of double entry records. The entry made for each transaction is composed of two parts-one for debit and another for credit. Every debit has equal amount of credit. Revenue Recognition Principle This principle is mainly concerned with the revenue being recognized in the Income Statement (P&L A/c) of an enterprise. Revenue is the gross inflow of cash. It includes receivable from sale of goods, rendering of services and use of enterprise resources, interests, royalties and dividends. Revenue is recognized in the period in which it is earned irrespective of the fact whether it is received or not during that period. Historical Cost Principle According to this principle, an asset is ordinarily recorded in the accounting records at the price paid to acquire it at the time of its acquisition and the cost becomes the basis for the accounts during the period of acquisition and subsequent accounting periods. The cost of an asset is systematically reduced from year to year by charging depreciation and the asset is shown in the balance sheet at book value. Matching Principle According to this principle, the expenses incurred in an accounting period should be matched with the revenues recognized on all goods sold during a period, cost of those goods sold should also be charged to that period. In Trial balance all debits should be matched with all credits. In B/S, assets side should be matched with liabilities side. Full Disclosure Principle According to this principle, the financial statements should act as means of conveying and not concealing. The financial statements must disclosure all the relevant and reliable information. It should be full, fair and adequate so that the users can take correct assessment about the financial performance and position of the enterprise. Objectivity Principle According to this principle, the accounting data should be definite, verifiable and free from bias of the accountant. This principle requires that each recorded transaction in the books of accounts should have an adequate evidence to support it. (E.g. vouchers, receipts, invoices etc.) Consistency Principle According to this principle, whatever accounting practices are selected for a given category of transactions, they should be followed continuously from one accounting year to another.

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Accounting Standard Meaning Accounting standard is a selected set of accounting policies or broad guidelines regarding the principles and methods to be chosen out of several alternatives. Standards conform to applicable laws, customs, usage and business environment. Objective The main objective of accounting standards is to harmonize the diverse accounting policies and practices at present in use in India. Importance or Advantages of setting Accounting standards Reduction in variations: Standards reduce to a reasonable extent or eliminate altogether confusing variances in the accounting treatment used to prepare financial statements. Disclosure beyond that required by law; There are certain areas where important information is not statutorily required to be disclosed. Standards may call for disclosure beyond that required by law. Facilitates comparison: The application of accounting standards would to a limited extent, facilitate comparison of financial statements of companies situated in different parts of the world and also of different companies situated in the same industry. Accounting Equation • The accounting equation shows the relationship between the economic resources belonging to a business and the claims against those resources. • Economic resources are termed as assets. Claims are termed as liabilities and owners ‘claims or owners ‘equity. Assets = Liabilities + Owners’ equity Users of Accounting Information Investors Investors are the owners of the firm. So, they need information to decide which investments to buy, retain or sell as well as the timing of the purchases or sales of those investments. They also need information to assess mgt. performance and the ability of the firm to pay dividends. Lenders Lenders, such as banks and debenture-holders, need to know about the financial stability of a business who approach them for funds. They are interested in information that enables them to determine whether their loans, and the related interest, will be paid when due.

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Security Analysis and Advisers Investors and creditors seek the assistance of information specialists in assessing prospective returns. Equity and bond analysts, stock holders and credit rating agencies offer a wide array of information services. Information specialists serve the need of investors by providing them with skilled analyses and interpretation of financial reports. Management Mgt.needs information for planning and controlling operations, for making special decisions, and for formulating major plans and policies. Employees and Trade Unions Employees are interested in information about the enterprise as well as its general operations, stability and profitability. Employees have an interest in the financial affairs of ; the enterprise since it is the main source of their income. Trade unions are required for wage negotiations. Suppliers and Other Trade Creditors They are keen to obtain information that enables them to determine whether amounts owed to them will be paid when due. Customer They are interested in the financial affairs of an enterprise to decide how much business to do with it, and to assess its ability to service the product or to honor warranty agreements. Govt. & Regulatory Agencies They also require information in order to regulate the business practices of enterprises, determine taxation policies and provide a basis for national income. A number of regulatory agencies like SEBI, Insurance Regulatory Authority and Stock Exchanges have a legitimate interest in financial reports of publicly held enterprises to ensure efficient operation of capital markets. General Public Financial statements assist the public by providing information about the trends and recent developments in the prosperity of an enterprise and the range of its activities.

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Module II Preparation of books of original records Meaning It is a statement of the various dealings which occur between a customer and the firm. It can also be expressed as a clear and concise record of the transactions relating to a person or a firm or a property (asset) or a liability or an expense or an income. Classification of Accounts 1. Personal Accounts 2. Impersonal Accounts a) Real Accounts b) Nominal Accounts Personal Accounts Accounts related to an individual person, firm, company and bank is called personal accounts. The proprietor being an individual his Capital A/c and his Drawing A/c are also known as ‗Personal Accounts‘. Real Accounts Assets or properties or trading goods related to a firm is called Real Accounts. E.g. Furniture A/c, Purchase A/c, Sales A/c. etc., Nominal Accounts Any expenses incurred or incomes received other than real accounts is called Nominal Accounts. E.g. Salary for the staff, Rent paid, Commission received etc. Debit & Credit Aspects One aspect will be either the ‗Receiving Aspect‘ or ‗Incoming Aspect‘. This is termed as Debit Aspect. Another aspect will be ‗Giving Aspect‘ or Outgoing Aspect‘ or ‗Income Aspect‘. This is termed as Credit Aspect. Golden Rules of Accounts: 1. Personal A/c – Debit the Receiver 2. Real A/c

-- Credit the Giver -- Debit what Comes in

3. Nominal A/c

-- Credit what goes out -- Debit all expenses & losses

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Journal A daily record of events or business; a private journal is usually referred to as a Below each journal entry a brief explanation of the transaction is given within the brackets is called narration Procedures to enter Journal Entries 1. First find out, which two accounts belongs to a particular transaction. 2. Then find these two accounts belonging to which category i.e. Personal or Real or Nominal A/cs. 3. Then see rules of the category and match with accounts. 4. Write the journal entry with date, amount in both sides and narration. Example: 1 Journalize the following transactions: 3.02.06 Goods purchased for Rs.14,500. 7.02.06 Goods sold to Lakshmi Rs.5,000 9.02.06 Received Commission Rs.300 10.02.06 Goods sold for cash Rs.29,000 12.02.06 Goods purchased from Meenakshi for Rs.6,000 15.02.06 5 Chairs purchased from Saravana Stores Rs.300 each 20.02.06 Paid to Saravana Stores 28.02.06 Salary paid Rs.1000, Rent paid Rs.500 Example:2 (Jan 2005) Journalize the following transactions: Jan 2004, 2 Started business with Rs.1,00,000 Paid into bank Rs.50,000 Bought furniture for cash Rs.6,000 Bought furniture for resale Rs.4,000 Sold goods to Mr.X Rs.6,000 Sold goods Rs.5,000 Purchased from Y for Rs.5,000 Charged depreciation on Machinery Rs.1,000 Withdrew form bank Rs.3,000 for private use. Deposited a cheque into bank for Rs.6,000 Cheque deposited on 14th Jan was dishonored Paid rent, salaries, postage Rs.5,000, Rs.6,000 and Rs.150 respectively.

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Prob:3 (Jan 2006) Journalise the following transactions in the books of Vishwanath. . Vishwanath started his business with the following: Cash in hand 1500 Cash at bank 3500 Goods in hand 3000 Furniture 2000 Buildings 10,000 ii. Gave charity Rs.20. iii. Loan taken from the bank Rs.5,000 iv. Purchased a motor car in exchange for goods Rs.2,000 and cheque Rs.3,000 v. Paid proprietor‘s life insurance premium Rs.100 vi. Bought goods from Laskshman on account Rs.2,000 vii. Furniture costing Rs.300 was destroyed by fire. Prob:5(June 2004) Journalise the following transactions in the books Raju and Company. 2002 Jan 2 Started the business with Rs.80,000 Jan 3 Bought furniture for Rs.12,000 Jan 6 Bought stationary for Rs.500 Feb1 Purchased goods for cash @ Rs.20,000 Feb5 Sold goods for cash worth Rs.4,000 Feb7 Sold to Mohan goods worth Rs.2,000 Feb14 Bought goods from Tilak @ Rs.8,000 Feb18 Paid office cleaning charges of Rs.200 Feb20 Bought goods from Kamalesh worth Rs.4,000 Feb21 Sold to Vishnu & Co goods worth Rs.3,000 Feb 22 Received form Mohan Rs.2,000 Feb 25 Paid to Kamalesh Rs.2,000

• Ledger Ledger is a secondary book of entry. The journal entries are posted to the ledger at the end of each period. Ledger is a book containing various account. In this book, separate account is opened for each and every transactions of different nature. Procedures to post entries from Journal book to Ledger book 1. List out the no. of accounts in the journal book. 2. Open separate ledger account for each account. 3. Debit side of the entry in the journal book will come under credit side of the ledger and vice-versa Dept. of MBA-SJBIT

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4. In debit side of the ledger book while entering the entry, add ‗To‘. In credit side, add ‗By‘. 5. Balance the amount in both the sides. Prob:1 1995 Mar1 Kannan commenced business with Rs.25,000 3 Purchased goods for Rs.15,000 5 Paid salary Rs.500 8 Received interest Rs.50 10 Cash Sales Rs.2,000 12 Purchased goods for cash Rs.3,000 15 Goods sold to Kumar Rs.1,000 18 Purchased a cycle for Rs.680

• Trial Balance Trial Balance is a statement of ledger balances. In this statement four columns are provided for recording the serial number, name of accounts, debit balances and a credit balances. The total of such balances must be equal. Rules

Debit : All assets, expenses & losses Credit : All liabilities, incomes & gains

Prob:1 From the following transactions pass necessary journal entries, prepare ledger accounts and trial balance: 2003 Apl1 Started business with a capital of Rs.10,000 2 Purchased goods from Mr.Gopal for Rs.1,500 3 Paid to Mr.Gopal in full in cash Rs.1,450 4 Sold to goods Mr. Kannan for Rs.500 5 Received cash from Kannan in full settlement Rs.450 6 Paid salary Rs.300 7 Purchased furniture for Rs.1000 8 Sold goods for Rs.1,300 9 Received interest Rs.50 10 Deposited cash into bank Rs.1000 11 Paid wages Rs.100 12 Withdraw cash from Bank for personal use Rs.200

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Prob:2 (Jan 2006) Prepare a trial balance from the following balances of the year ending 2002 Capital 28,000 Purchases 15,000 Stock of goods 4,000 Plant 15,000 Motor car 8,000 Furniture 5,000 Dis.recd. 400 Wages 8,200 Baddebts 400 Creditors 6,500 Sales 40,000 Salaries 2,800 Cash at bank 4,000 Commission (cr) 600 Return inwards 2,000 Returns outwards 1,000 Cash in hand 600 Debtors 5,600 Rent 3,500 General exp. 300 Dis. Allowed 300 Interest recd. 200 Carriage 1,500 Advertisement 500

Prob:3 Prepare a Trial balance from the following as on 31st Mar 2002 Capital 16,800 Drawings 5,000 Stock 21,000 Purchases 36,000 Purchase Ret. 2,000 Sales Ret. 3,000 Debtors 4,500 Creditors 2,500 Furniture 900 Bills receivable 2,300 Bills payable 4,200 Wages 1,200 Advertisement 600 Subsidiary book A subsidiary book is prepared when the transactions of similar nature are large. It is prepared as a substitute for journal. By preparing this book, entries are minimized. E.g. Sales Book, Purchase Book etc. Types of Subsidiary Books 1. Purchase book 2. Sales book 3. Purchases Return book 4. Sales Return book 5. Bills Receivable book 6. Bills Payable book 7. Cash book Dept. of MBA-SJBIT

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1. Purchase book This book is kept with the object of recording credit purchases of goods for resale. Each inward invoice after it has been entered as to calculations and also to the quantity, quality and price of the goods received is numbered consecutively and then entered in the purchase books. Purchase Book Postings: Each personal a/c is credited with its respective amount and the monthly total of this book is debited to purchases a/c in the Ledger. 2. Sales book The object of this book is to record credit sales. An outward invoice is made out for credit sale and checked as to quantity, quality and price of the goods before the letter is sent out to the customer. Sales Book Posting: Each personal a/c debited with its respective amount and the monthly total of the book is credited to sales a/c in the ledger. 3. Purchase Returns Book This book record returns outward, that is, return of goods bought. A debit note is made out with a carbon duplicate and sent to the party to whom the goods are returned. Purchase Returns Book Postings: Each individual personal a/c is debited with its respective amount and the monthly total of the book is credited to returns outward a/c in the ledger. 4. Sales Returns Book Return inwards, that is, return of goods sold by us, are recorded in this book. On receipt of goods, credit notes with carbon duplicates are made out and sent to those customers who have returned us the goods. Sales Returns Book Posting: Each personal a/c get the individual credit and the returns inwards account get the debit with the monthly total of the book. 5. Bills Receivable Book The purpose of this book is to keep a detailed record of all the bills receivable received by a trader. A bill receivable is one is respect of which the trader is entitled to receive money at some specific date as shown on the face of the bill. Drawer is a person who is drawing the bills. He is the supplier of the goods. Acceptor is accepting the bill. He is the purchaser of the goods. 6. Bills Payable Book This book is kept to record full details of all bills payable accepted by a trade A bill payable is one, which has been accepted by a person and the amount of which he is under obligation to pay at some definite future time.

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Cash Book A cash book is a special journal which is used for recording all cash receipts and cash payments. A cash book is a book of original entry since transactions are recorded for the first time from the source documents. The cash book is a ledger in the sense that it is designed in the form of a cash a/c and records cash receipts on the debit side and cash payments on the credit side. Types of Cash Book 1. Single Column Cash Book 2. Cash Book with Discount Column 3. Cash Book with Bank & Discount Column 4. Petty Cash Book 5. Single Column Cash Book Single column cash book has one amount column on each side. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side. Format Single Column Cash Book Dr Cr Prob:1 Enter the following transactions in Single Column Cash Book. 2001 Jan1 Cash in hand Rs.1,700 5 Paid to Bansal Rs.300 & discount allowed by 8 Purchased goods from Goyal & Co. for cash 10 Received from Kansal Rs.980 16 Sold goods to Garg & Co for cash Rs.400 21 Paid to Ansal Rs. 295 & discount received Rs.5 25 Paid wages Rs.50 31 Paid to X & Co in full settlement of his account (which shows a credit balance of Rs.400.)Rs. 390 31 Purchased Furniture Rs.200

him Rs.10 Rs.400

Prob:2 Prepare a simple cash book from the following transactions of Mr. X of Delhi. 2001, Apl 1 Mr.X commenced business with cash Rs.4,800 3 He bought goods for cash Rs.3,000 5 Sold goods for cash Rs.60 6 Received cash from Mr. Manohar Lal Rs.216 9 Paid into bank Rs.1,800 13 Paid cash to Hari Rs.129 16 Sold goods for cash Rs.900 17 Paid for stationary Rs.9 Paid for office furniture Rs.1110 Received from Mr. Kailash Chand Rs.408 Paid for advertising Rs.54 Dept. of MBA-SJBIT

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Purchased postage stamp Rs.5 Paid rent Rs.60 Paid electricity charges Rs.9 2. Cash Book with Discount Column Cash book with discount column has two columns I.e cash column and discount column in each side. All cash receipts & discounts allowed are recorded on the debit side and all cash payments & discounts received are recorded on the credit side. Double column Cash book Prob:1 Prepare a double column cash book from the following transactions of Mr. R.K. Gupta: 2001 Jan1 Opening Cash balance Rs.4,000 3 Cash sales Rs.6000 5 Sold goods to Suresh for Rs.2,000 & received from him Rs.1,980. 6 Goods purchased for cash Rs.2,000 10 Wages paid Rs.40 19 Goods purchased from Mr. Manjunath Rs.2,500 and paid 27 Cash paid to Radha Rs.400 28 Goods purchased for cash Rs.2,070 Prob:2 Prepare a double column cash book from the following transactions of Mr. Y: 2004 Mar 1 Mr. Y commenced business with cash Rs.3,900 3 Bought goods for cash Rs.4,110 4 Paid Mr.Mohanlal cash Rs.57 and discount recd. Rs.3 6 Deposited in Bank Rs.2,400 Paid for office furniture in cash Rs.279 9 Sold goods for cash Rs.1,800 12 Paid wages in cash Rs.72 13 Paid for stationary Rs. 24 15 Sold goods fro cash Rs.1500 17 Paid for miscellaneous exps.Rs.27 19 Received cash from Mr. Jindhal Chand Rs.291 and allowed his discount Rs.9 21 Purchased a radio set Rs.150 22 Paid salary RS.240 25 Paid rent Rs54 28 Paid electricity bill Rs.21 29 Paid advertising Rs.24 31 Paid into bank Rs.1,500

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3. Three Column Cash Book Three column cash book has three amount columns (one for cash, one for bank and one for discount) on each side. All cash receipts, deposits into bank and discount allowed are recorded on debit side and all cash payments, withdrawals from bank and discount received are recorded on the credit side. Three Column Cash Book Prob:1 Enter the following transactions in the Three Column Cash Book. 2005 Jan 1 Opened a bank a/c by depositing by Rs.6000 in cash 2 Goods sold to Mohan for cash Rs.250 5 Settled Hari‘s a/c of Rs.200 at a discount of 5% 7 Received from Shyam a cheque for Rs.725. Discount allowed Rs.25 10 Purchased a typewriter for Rs.200. Spent Rs.50 on its repairs. 12 Shyam‘s cheque was returned dishonored 15 Received a money order for Rs.25 from Hari 20 Shyam settled his account by means of a cheque for Rs.755. Rs.5 being for interest charged. 27 Purchased Machinery from Rajiv for Rs.5,000 and paid him by means of a bank draft purchased from bank for Rs.5,005. 28 Cash withdrawn from the bank Rs.10,000.

Prob:2(June 2004) From the following information, prepare suitable cash book: 2002, April 1 Cash at hand Rs.2,200 2 Cash at bank Rs.8,700 3 Bought goods from Rahim Rs.7,300 4 Cash sales deposited with the bank Rs.5,500 8 Sold goods to Das Rs.8,200 9 Received cheque in full settlement of Das‘s a/c Rs.8,000 10 Paid to settle Rahim‘s a/c Rs.7,000 12 Purchased office furniture by cheque Rs.3,500 13 Bought goods from Ghosh Rs.10,400 15 Paid carriage Rs.200 18 Bank collected dividend Rs.500 20 Withdrawn from bank Rs.2,000 25 Paid wages Rs.1,500 27 Paid to Ghosh by cheque Rs.10,000

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Prob:3 (Jan 2005) Rule the Three column cash book of a merchant and record there in the following transactions. Balance the cash book on 31st July 1998. July 1998 1 Commenced business with Rs.10,000 2 Paid into bank Rs.8,000 3 Purchased goods by cheque Rs.3,000 4 Paid rent Rs.150 12 Purchased furniture by cheque Rs.1,800 15 Cash sales Rs.650 16 Gave Gopal a cheque Rs.970 (allowed discount by him Rs.25) 18 Received from Narayan a cheque for Rs.1,500 and he was allowed a discount of Rs.30 20 Paid into bank Rs.1,500 25 Paid wages Rs.60 26 Drew for office use Rs.400 from bank 27 Drew for personal use Rs.100 from bank 28 Issued a cheque to Amar was dishonored 30 Furniture purchased for resale for cash Rs.250.

Prob:4 Prepare a three column cash book from the following transactions: 2004, Oct 1 Cash in hand Rs.1,800 Cash at bank Rs.11,000 5 Discount a bill at 5% through bank Rs.4,000. 7 Bought goods by cheque Rs.7,000 8 Bought goods by cash Rs.500 10 Honored our own acceptance by cheque Rs.5,000 14 Paid trade exps. 16 Paid into bank 18 Ramesh who owed us Rs.500 became bankrupt and paid us 50p in the rupee 20 Received cash from Mohan Rs.400 Allowed discount Rs.10 23 Withdrew from bank Rs.400 Paid to Ganesh Rs.300 Allowed us discount Rs.10 24 Received Rs.2000 for a bill from Hari and deposited the same into bank 25 Withdrew from bank for private exps. Rs.300 27 Sold goods for cash Rs.200 28 Received cheque for goods sold Rs.9,000 29 Received payment of a loan of Rs.5,000 and deposited Rs.3,000 out of it into bank. 30 Bank charges as per pass book Rs.5 4. Petty Cash Book Petty cash book is the book which is used for the purposes of recording the payment of petty cash expenses. E.g.Postage & stationary exps. Differences between Main cash book and Petty cash book 1. In the main cash book all cash receipts are recorded whereas in the petty cash book only cash Dept. of MBA-SJBIT

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receipts from main cashier are recorded. 2. In the main cash book all cash payments except payments of petty cash exps., are recorded whereas in the petty cash book only payment of petty cash expenses are recorded. Imprest System of Petty Cash Book The amount which the main cashier hands over to the petty cashier in order to meet the petty cash expenses of a given period is known as ‗imprest‘ or ‗float‘ Advantages of Imprest System of Petty Cash Book 1. Control over mistakes: Chances for mistakes are reduced since the chief cashier regularly examines petty cash book. 2. Control over petty exps.: Petty expenses are kept within the limits of imprest since the petty cashier can never spend more than the available petty cash. 3. Control over fraud: Misappropriation if any, is always kept within the limits of imprest. 4. Saving of chief cashier‘s time: The time of chief cashier is saved when pettyexps.are recorded in petty cash book. Petty Cash Book Prob:1 From the following, prepare petty cash book on imprest system of Laxman & Co. for the month of Jan 2001. 2001 Jan1 Opening balance Rs.100 2 Paid for stamps Rs.12 3 Paid cleaners wages Rs.15 4 Paid for bus fare Rs.16 5 Paid tea etc. Rs.15 6 Paid for repairs of cycle Rs.10 7 Paid for advertisement Rs.30 8 Drew imprest from head cashier 9 Paid for cartage Rs.10 10 Paid for traveling exps. Rs.25 11 Paid for Telegram Rs.15 12 Paid for entertainment to salesman Rs.20 13 Paid for repairs of cycle Rs.10 14 Paid for printing bill Rs.5 15 Paid for stationary Rs.3

Dept. of MBA-SJBIT

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14MBA13

Module 3 Preparation of Financial Statements Final accounts consists of two statements i.e. (I) Income Statement or Trading, profit & Loss A/c and (ii) Balance Sheet. Income statement which shows the net results of the firm. Balance sheet shows the financial position of the business. As these two statements provide the final result of any business, they are called final accounts. Income Statement • Income statement consists of both • Trading A/c and • Profit & Loss A/c (i) Trading A/c The object of this account is to arrive at the results of trading operation.I.e.to find out that the organization has derived profit or loss out of buying & selling operation. Profit & Loss A/c This account is prepared to ascertain the net profit/loss of the business during an accounting period. The P&L a/c can be defined as a statement that summarizes the revenues and expenses of an accounting period so as to reflect the changes in various critical areas of firm‘s operations.

Prob:1 From the following balances extracted at the close of the year ended 31st Dec, 1998, prepare the Profit & Loss a/c as at that date. Rs. Rs. Gross Profit 1,53,000 Carriage outward 7,500 Salaries 27,500 Discount (Dr.) 1,500 Apprentice Rent 3,300 Premium(Cr) 4,500 Traveling exp 600 Fire Insur. Premium 2,700 Rates & taxes 1,050 Printing & Stationary 750 Trade exps. 900 Bad debts 6,300

Dept. of MBA-SJBIT

Page 21

Accounting for Managers Prob:2 Prepare P&L a/c as on 31st Dec, 1999 from the following information: Doubtful debts 250 Discount on Drs. 420 Discount recd. 1,850 Commission (cr) 1,000 Int. on investment 750 Traveling exp 1,500 Postage 270

14MBA13 Rs.

Balance Sheet A Balance Sheet is a statement depicting the financial position of the business on a specific date. Balance sheet is defined as a still-photograph of the state of affairs of the business at a particular date. The financial position of a business is revealed by its assets and liabilities on a particular date. Prob:1 From the following particulars, prepare a balance sheet as at 31st Dec, 1998 Rs. Rs. Capital 75,000 Loan to Kumar 7,500 Buildings 82,500 Investments 4,500 Furniture 3,750 Cash in hand 300 Bills receivable 5,250 Cash at bank 5,250 Sundry debtors 30,000 Drawings 4,500 Bills payable 3,750 Net profit 58,350 Sundry creditors 23,700 Stock 10,500 Machinery 6,750

Prob:2 From the following balances, prepare Trading and Profit Loss A/c for the year ending 31st, Dec 2003 and Balance Sheet on that date. Rs. Rs. Capital Purchases 35,000 46,850 Building 18,750 Wages 2,500 Machinery 9,250 Electric charges 190 Debtors 7,000 Printing & Stationary 2,000 General exp. 800 Carriage inwards 850 Rent paid 3,710 Cash at bank 3,000 Drawings 650 Return outwards 110 Salaries 1,110 Cash in hand 1,800 Dis. Allowed 200 Sundry creditors 10,000 st 16,500 Returns inwards 450 Stock (1 Jan) Sales 65,900 Bills payable 5,000 Closing stock as Rs.18,210

Dept. of MBA-SJBIT

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Prob:3 The following is the Trial Balance of Sri.Balaji on 30th June 2003 Debit Credit Rs. Rs. Capital 1,86,000 Drawings 15,735 Stock (1-7-02) 17,280 Sundry creditors 18,900 Sundry debtors 43,500 Machinery 60,000 Patents 22,500 Freehold land 30,000 Buildings 96,000 2,96,340 Sales Purchase 1,22,025 Sales returns Purchase returns Cash in hand 1,620 Cash at bank 7,890 Insurance 1,800 General exp 9,000 Salaries 45,000 Wages 25,440 14,190 Factory fuel and power Carriage on purchases 6,120 Carriage on sales 9,600 Rent 27,000 5,29,740

5,29,740

The following adjustments are to be effected: • Stock on 30th June 2003 Rs.20,400 • 5% on sundry debtors is to be written off as bad • Salaries for the month of June 2003 amounting to Rs.4,500 were unpaid. • Insurance include a premium of Rs.510 on a policy expiring on Dec, 31st 2003. • Rent Rs.3,000 is accrued but not received. • Depreciate Machinery @ 10% and Patents @20% You are required to prepare Trading, Profit & Loss A/c and the Balance Sheet as on June 2003.

Dept. of MBA-SJBIT

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COMPANY ACCOUNTS Prob:1 The following are the balances of XYZ Ltd. as on 31st March, 2005: Debit Rs. Credit Rs. Premises 30,72,000 Share capital 40,00,000 Plant 33,00,000 12% Debentures 30,00,000 Stock 7,50,000 Profit & Loss A/c 2,62,500 Debtors 8,70,000 Bills payable 3,70,000 Goodwill 2,50,000 Creditors 4,00,000 Cash and bank 4,06,500 Sales 4,50,000 Calls in arrear 75,000 General reserve 2,50,000 Interim dividend paid 3,92,500 Bad debts provision on Purchases 18,50,000 1.4.04 35,000 Preliminary exp 50,000 Wages 9,79,800 General exp 68,350 Salaries 2,02,250 Bad debts 21,100 Debentures Int. paid 1,80,000 1,24,67,500 1,24,67,500 Adjustments • Depreciate plant by 15% • Write off Rs5,000 from Preliminary expenses. • Half year‘s Debenture Interest due. • Credit 5% provision on debtors for doubtful debts. • Provide for Income Tax @ 50% • Stock on 31st March, 2005 was Rs.9,50,000 Prepare Final Accounts of the company. Prob:2 Sherry Engg. Ltd. have authorized capital of Rs.50 lakhs divided into 5,00,000 equity shares of Rs.10 each. Their books show the following balances as on 31st Dec, 2006. Equity share Capital 20,00,000 Discounts & rebates 30,000 (2,00,000 shares of Rs.10 each) Carriage inwards 57,500 4% Debentures 5,00,000 Patterns 3,75,000 Bank overdraft 7,57,000 Rates, tax & insurance 55,000 Sundry creditors 2,40,500 Furniture & Fixtures 1,50,000 Sundry Creditors 2,40,500 Materials purchased 12,32,500 Sales 36,17,000 Repairs 46,500 Rent (cr) 30,000 Wages 13,05,000 Transfer fees 6,500 Coal & fuel 63,000 Profit & Loss A/c (cr) 67,000 Freehold land 12,50,000 Engg. Tools 1,50,000 Goodwill 3,75,000 Sundry Debtors 2,66,000 Dept. of MBA-SJBIT

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Bills receivables 1,34,500 Advertisement 15,000 Commission & brokerage 67,500 Business exp. 56,000 Bank Current A/c 45,500 Cash in hand 8,000 Debenture interest (for half year 31.6.06) 10,000 Interest – banks 91,000 Preliminary exp. 10,000 Calls in arrear 10,000 Additional Information The stock as on 31st Dec 2006 was Rs. 7,08,000. Outstanding wages Rs.25,000 and outstanding business expenses Rs.25,000. Dividend declared @ 10% on paid-up capital. Charge Depreciation: Plant & Machinery @5%; Engg. Tools @ 20%; Patterns @ 10%; Furniture & Fixtures @10% Provide 2% on debtors as doubtful debts after writing off Rs.21,500 as bad debts. Write off preliminary expenses Rs.5,000 and create debenture redemption reserve Rs.50,000. Provide Rs.2,40,000 for income tax. Prepare Final Accounts of this company. Prob:3 On 31st March, 2005 the following balances appears in the books of the Alpha Hotels Ltd. Debit Rs. Credit Rs. Interest on debentures 60,000 12% Mortgage debentures 5,00,000 Rates & Taxes 18,000 Share capital 40,00,000 Stock of provisions on General reserve 5,00,000 1.4.04 2,50,000 Unclaimed dividends 15,000 Purchase of provisions 25,00,000 Prov. For bad debts 50,000 Salaries and wages 7,50,000 Trade Creditors 2,50,000 Provident fund contbn.30,000 Expenses owing 80,000 Misellaneous exp. 50,000 Visitors‘ credit balances 10,000 Directors fees 24,000 Staff Provident fund 7,50,000 Managing director‘s P & L A/c 81,000 Salary 2,15,000 Income from boarding & lodging 51,00,000 Land 15,00,000 Misc. receipts 65,000 Buildings 50,00,000 Depreciation A/c: Furniture & Fittings 15,00,000 Buildings 20,00,000 Linen, Crockery, Glassware Cutlery and utensils 3,20,000 Furniture 10,00,000 Sundry debtors 3,50,000 Linen, Crockery etc. 1,80,000 Prepaid exps. 25,000 Advance against 15,00,000 Dept. of MBA-SJBIT

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purchase of Buildings Cash in hand 15,000 Balance at bank 4,74,000 1,45,81,000

1,45,81,000

After taking the following information into account prepare the company‘s balance sheet as on 31st March 2005 and its profit & loss a/c for the same period: • • • • •

Stock of provisions on 31st March, 2005 was valued at 3,00,000 Provide Rs.1,00,000 for depreciation of furniture and fittings; Rs.20,000 for depreciation of linen, crockery etc. Make a provision for taxation @50% The directors decide to recommend a dividend @10% on the paid up capital of the company and transfer the remaining balance in profit & loss a/c to general reserve. The entire paid up share capital of the company consists of fully paid equity shares of Rs.10 each.

Prob:4 (July 2005) X Ltd. was registered with a nominal capital of Rs.10,00,000 divided into shares of 10 each, of which 40,000 shares had been issued and fully paid. The following is the trial balance extracted on 31.12.2003. Stock (1.1.2003) 1,86,420 Manufacturing wages 1,09,740 Manufacturing exp. 19,240 Purchases and sales 8,21,460 11,69,900 Repair to machinery 8,610 Carriage inwards 4,910 Carriage outwards 9,260 Transfer fees 40 Advance income tax 14,290 Bank loan 50,000 Interest on loan 1,250 Debtors and creditors 1,64,400 92,220 P/L A/c (1.1.2003) 8,640 Returns 12,640 9,810 Bank current A/c 6,860 Cash in hand 1,920 Lease hold factory 64,210 Plant & machinery 78,400 Loose tools 12,500 Share capital Commission Calls in arrears Dept. of MBA-SJBIT

4,00,000 8,640 1,000 Page 26

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Electricity charges 17,610 (factory Rs.14,210, office Rs. 3400) Directors fees 12,000 Office salaries 13,000 Audit fees 1,250 Office furniture 5,000 Preliminary exp. 6,000 Good will 1,50,000 17,30,610

• • • • • • •

17,30,610

You are required to prepare trading and P/L A/c for the year ending 31.12.03 and a balance sheet as at that date after taking in to consideration the following adjustments. Write off 1/3 of preliminary exp. Depreciation is to charge at 20% on plant and machinery and 10% on furniture. Manufacturing wages Rs.1,890 and offices salaries Rs.1,200 are outstanding. Provide for interest on bank loan for 6 months. Stock was valued at Rs.1,24,840 and loose tools at Rs.10,000 Reserve Rs.8,500 on debtors for doubtful debts. Reserve further Rs.3,120 for discount on debtors

Dept. of MBA-SJBIT

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Module-4 Analysis of Financial Statement INTRODUCTION TO FINANCIAL ANALYSIS Analysis means methodical classification of the data given in the financial statements. Interpretation means explaining the meaning and significance of the data so simplified. Financial Analysis is the process of identifying the financial strengths and weakness of the firm by properly establishing relationships between the items of the balance sheet and the profit and loss account. Different tools of financial Analysis The various tools used for the analysis of the financial statements of a firm are: 1. Comparative Financial Statements 2. Common size Financial Statements 3. Trend Analysis 4. Ratio Analysis. ILLUSTRATION The following illustration will be used for explaining the various tools of financial analysis: Illustration: From the following profit and loss Account and Balance sheets of Swadeshi Polytex Ltd. For the year ended 31st December 1987 and 1988, you are required to prepare a Comparative Income Statement and a Comparative Balance Sheet. Profit and Loss Account (in lakhs of rupees) Particulars To Cost of goods sold To Operating Expenses: Administrative expenses Selling expenses To Net Profit

Dept. of MBA-SJBIT

1987 Rs. 600 20 30 150 800

1988 Particulars Rs. 750 By Net Sales 20 40 190 1000

1987 Rs. 800

1988 Rs. 1000

800

1000

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Balance Sheet Liabilities Bills Payable Sundry Creditors Tax Payable 14% Debentures 16% Preference Capital Equity Capital Reserves

1987 Rs. 50 150 100 100 300 400 200 1,300

1988 Rs.

(in lakhs of rupees) 1987 Rs. 100 200 200 100 300 300 100 1,300

1988 Rs. 140 300 300 100 270 270 140 1,520

Comparative

Financial

Assets

75 200 150 150 300 400 245 1, 520

Cash Sundry Debtors Stock Land Building Plant Furniture

COMPARATIVE FINANCIAL STATEMENTS A simple method

for financial

analysis

is

Statements. Comparative financial statements will contain items at least for two periods. Changes – increases and decreases – in income statement and balance sheet over period are shown. Comparative Financial Statements can be prepared for more than two periods or on more than two dates. Illustration: From the illustration of M/s Swadeshi Polytex Ltd prepare comparative income statement comparative balance sheet. Swadeshi Polytex Ltd. Comparative Income Statement for the years ended 31st December 1987 and 1988 (in lakhs of rupees)

Particulars

Dept. of MBA-SJBIT

1987 Rs.

1988 Rs.

Absolute increase(+) or decrease (-) in 1988 Rs.

Absolute increase (+) or decrease(-) in 1988 %

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Net Sales Less: Cost of goods sold Gross Profit

800 600 200

1000 750 250

+200 +150 +50

+25 +25 +25

Operating Expenses: Administrative expenses Selling expenses

20 30

20 40

-+10

-+33.33

Total Operating expenses

50

60

+20

+20

150

190

+40 Absolute increase(+) or decrease (-) in 1988 Rs.

+26.67 Absolute increase (+) or decrease(-) in 1988 %

Net Profit

1987 Rs.

1988 Rs.

COMMON SIZE FINANCIAL STATEMENTS Comparative Financial Statements can be prepared for more than two periods or on more than two dates. However, it becomes very cumbersome to study the trend with more than two periods data. Trend percentages are more useful in such cases.

Common size financial statements are those in which figures reported are converted into percentages to some common base.

In the income statement, the sale

figure is assumed to be 100 and all figures are expressed as a percentage of sales. Similarly, in the Balance Sheet, the total of assets or liabilities is taken as 100 and all figures are expressed as a percentage of this total. Illustration: On the basis of the data given in the previous illustration pertaining to Swadeshi Polytex limited, prepare the common size income statement and common size balance sheet for the years ended 31st March 1987 and 1988. Solution:

Dept. of MBA-SJBIT

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Swadeshi Polytex limited Common Size Income Statement for the years ended 31st March 1987 and 1988 Particulars Net sales Less: Cost of goods GROSS PROFIT Operating Expenses: Administrative Expenses Selling Expenses Total Operating

1987 1988 Figures in % 100 100 75 75 25 25 2.50 3.75 6.25

2.00 4.00 6.00

The above statement shows that though in absolute terms, the cost of goods has gone up, the percentage of its cost to sales remains consistent at 75%. This is the reason why the gross profit continues at 25% of sales. Similarly, n absolute terms the amount of administrative remains the same but as percentage to sales it has come down by 0.5%. Selling expenses have increased by0.25%. These all lead to net increase in net profit by 0.25%. Swadeshi Polytex limited Common Size Balance Sheet for the years ended 31st March 1987 and 1988

Particular s CURRENT ASSETS Cash Debtors Stock Total Current Assets FIXED ASSETS Building Plant Furniture Land Total fixed assets TOTAL ASSETS Particular s CURRENT LIABILITIES Bills Payable Dept. of MBA-SJBIT

1987 % 100

1988 % 100

7.7 15.3 0 15.3 8 38.4 8 6 23.0 23.0 7 77.7 7.7 0 61.5 0 4 100.0 0 1987 % 100

9.2 19.7 1 19.7 4 48.6 4 9 17.7 17.7 6 69.2 6.6 1 51.3 8 1 100.0 0 1988 % 100

3.8 4

4.9 3 Page 31

Accounting for Managers Sundry Creditors Taxes payable Total Current Liab ilities LONG TERM LIABILITIES 14% Debentures CAPITAL & RESERVES 16% Preference share capital Equity share capital Reserves Total Shareholders' Funds TOTAL LIABILITIES AND CAPITAL

14MBA13 11.5 47.6 23.0 9 7 7.6 9 23.1 30.7 0 15.3 6 76.9 8 3 10 0

13.1 69.8 27.9 6 5 9.8 6 19.7 26.3 2 16.1 2 72.0 5 5 100

Interpretation The percentage of current assets to total assets was 38.46 in 1987. It has gone up to 48.69 in 1988. Similarly the percentage of current liabilities to total liabilities (including capital) has gone up from 2307 in 1987 to 27.95 in 1988. Thus the proportion of current assets has increased by percentage of 10 as compared to increase in the proportion of current liabilities, which is about 5%. This has improved the working capital position of the company. There has been a slight deterioration in the debt-equity ratio though it continues to be sound. The proportion of shareholders‘ funds in the total liabilities has come down from 69.24% to 61.19% while that of debenture holders has gone up from 7.69% to 9.86%.

TREND ANALYSIS Trend percentages are immensely useful in making a comparative study of financial statements for several years. The method of calculating trend percentages involves the calculation of percentage relationship that each item bears to the same item in the base year. Any year may be taken as the base year. It is usually the earliest year. Any intervening year m Each item of base year is taken as 100 and on that basis the percentage for each item of the years is calculated. These percentages can also be taken as Index Numbers showing relative changes in the financial data resulting with the passage of time.

Dept. of MBA-SJBIT

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Illustration: From the following data relating to the assets side of the balance sheet of Kamadhenu Ltd., for the period 31st December 1985 to 31st December 1988 you are required to calculate the trend percentage taking 1985 as the base year. Assets Cash Debtors Stock-in-trade Others current Land assets Building Plant TOTA L

In lakhs of Rs. As on 31st December1986 1985 1987 100 120 80 200 250 325 300 400 350 50 75 125 400 500 500 800 1,00 1,20 1,00 1,00 1,20 0 0 2,85 3,34 3,78 0 0 0 0 5 0

1988 140 400 500 150 500 1,50 1,50 0 4,69 0 0

Solution ASSETS

December 31st (Rupees in lakhs) 1986 1985 1987 1988

Current Assets Cash Debtors Stock-in-trade Other Current Assets Total Current Assets Fixed Assets Land Building Plant Total Fixed Assets

100 200 300 50 650

120 250 400 75 845

80 325 350 125 880

400 800 100 0220 0

500 100 0 100 0250 0

500 120 0 120 0290 0

140 400 500 150 119 0 500 150 0 150 0350 0

Trend percentages Base year 1985 1986 1985 1987 1988 100 100 100 100 100

120 125 133 150 129

80 163 117 250 135

140 200 167 300 183

100 100 100 100

125 125 100 114

125 150 100 132

125 175 150 159

Ratios for Financial Statement Analysis A ratio gives the mathematical relationship between one variable and another. Ratios are well known and most widely used tools for financial analysis. The various types of ratios have been classified into the following categories: 1. Liquidity ratios 2. Turnover ratios 3. Profitability ratios Dept. of MBA-SJBIT

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4. Ownership ratios Earnings ratio Dividend ratios Leverage ratios -- Capital structure ratios -- Coverage ratios

LIQUIDITY RATIOS

Liquidity implies a firm‟s ability to pay its debts in the short term. This ability can be measured by the use of liquidity ratios. Short term liquidity involves the relationship between current assets and current liabilities. 1. Current Ratio Current Assets Current Ratio = ---------------------------Current Liabilities Current assets include cash, marketable securities, debtors, inventories, loans and advances and prepaid expenses. Current liabilities include loans and advances taken, trade creditors, accrued expenses and provisions.

2. Quick Ratio This ratio is also termed as Acid Test Ratio. Quick Assets Quick Ratio = ---------------------------- Current Liabilities

Quick Assets = Current Assets – Inventories

Dept. of MBA-SJBIT

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14MBA13 TURNOVER RATIOS

3. Accounts Receivable Turnover Ratio Accounts Receivable Ratio (Debtors turnover ratio)

= Net sales (or) Net Credit sales Receivables Average Accounts Receivables

The average accounts receivable is obtained by adding the beginning receivables of the period and the ending receivables and by dividing the sum by 2. The net sales or net credit sales made by the firm should be taken for analysis. 4. Average Collection Period The average number of days for which the debtors remain outstanding is called the average collection period. It is calculated as under: Average Collection period =

360 Average Accounts Receivables Turnover

. Inventory turnover ratio The liquidity of a firm‘s inventory may be calculated by dividing the cost of gods sold, by the firm‘s inventory. The invent ory or stock turnover, measures how fast the inventory is moving through the firm and generating sales. It is calculated by the following formula:

Inventory turnover = Cost of goods sold Average inventory

(or) Net sales Inventory

Where, average inventory is the average of the opening and closing inventory in any year and inventory means only the closing inventory at the end of a year. 6. Fixed Assets Turnover ratio Fixed assets turnover ratio =

Net sales Fixed assets

(or) _Cost of goods sold fixed sales

This ratio is supposed to measure the efficiency with which the fixed assets are employed Dept. of MBA-SJBIT

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7. Total Assets Turnover Ratio Total Assets Turnover Ratio = Net sales Total Assets.

Total assets are simply the balance sheet total at the end of the year. PROFITABILITY RATIOS 8. Gross Profit Margin Ratio Gross profit is the difference between the net sales and the cost of goods sold Gross Profit Margin Ratio = Gross profit Net sales This ratio shows the margin left after meeting manufacturing costs.

9. Net Profit Margin Ratio Net Profit Margin Ratio = Net profit Net sales It shows the earnings left for the shareholders (both equity and preference) as a percentage of net sales.

10. Earnings power Earnings is a measure of the operating profitability and is arrived at by the following formula: Earnings Power = Earnings before interest and taxes Average total assets EARNINGS RATIO 11. Earnings per share The shareholders are concerned about the earnings of the firm in two ways. One is the availability of the funds with the firm to pay their dividends and the other is to expand their interest in the form of retained earnings that the firm can use to improve its profitability. Earnings are expressed on a per share basis which is in short called EPS. Earnings Per Share = Dept. of MBA-SJBIT

Net Profit after Tax Number of outstanding shares Page 36

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12. P/E Ratio It is calculated as under Price – Earnings Ratio =

Market Value per share Earnings per share

13. Capitalization Rate The capitalisation rate is just the inverse of the Price-Earnings Ratio. Capitalisation Rate =

Earnings per share Market Value per share

LEVERAGE RATIOS Leverage refers to the use of debt finance. While debt capital is a cheaper source of finance, it is also riskier source of finance. Leverage ratios help in assessing the risk arising form the use of debt capital.

14. Debt Ratio The firm may be interested to know the proportion of interest bearing funded debt in the capital structure. Then this debt ratio will be helpful. It is arrived at by dividing the total debt (TD) by the capital employed (CE) or Net Assets (NA) Debt Ratio =

Total Debt (TD) Total Debt (TD) + Net Worth (NW)

=

Total Debt Capital Employed

Note: 1. Capital Employed = Net Assets = Net Fixed Assets + Net Current Assets 2. Net Current Assets = Current Assets – Current liabilities excluding interest bearing short term debt for working capital. NFA + CA = NW + TD + CL NFA + CA – CL = NW + TD NFA + NCA = NW + TD NA = CE Because equality of capital employed and Net assets, the debt ratio can also expressed as Debt Ratio = Total Debt (TD) Capital Employed (CE)

Dept. of MBA-SJBIT

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Accounting for Managers

14MBA13

15. Debt-Equity Ratio This ratio indicates the relative contributions of creditors and owners Debt – Equity ratio = Debt Equity

CASH FLOW STATEMENT MEANING Cash flow statement is a statement, which describes the inflows and outflows of cash and cash equivalents in an enterprise during a specific period of time. Such statement takes into account the receipts and disbursements of cash. A cash flow statement summarises the causes of changes in cash position of a business enterprise between two dates. CLASSIFICATION OF CASH FLOWS The cash flow are classified into three main categories as: 1. Cash flow from operating activities 2. Cash flow from investing activities 3. Cash flow from financing activities 1. CASH FLOW FROM OPERATING ACTIVITIES Operating activities are the principal revenue – producing activities of the enterprise and other activities that are not investing or financing activities. Cash flow from operating activities is principally derived from the principal revenue-producing activities of the enterprise. The cash inflows from operating activities include receipts from customers for sales or goods and services (including collection from debtors). Cash outflows from operating activities include payments to suppliers for purchase of materials and for services, payments to employees for services and payments to governments for tax duties. 2. CASH FLOW FROM INVESTING ACTIVITIES Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. It involves making and collecting of loans and acquiring and disposing of debt and equity instruments and fixed assets. The cash inflows from investing activities are receipts from collection of loans, receipts from sales of shares, debt or similar instruments of other enterprises, receipts from sales of fixed assets, and interest and dividends received on loans and investments. Cash outflows from investing activities are disbursements of loans, payments to acquire shares, debt or similar instruments of other enterprises, and payments (including advance and down payments) to acquire fixed assets.

Dept. of MBA-SJBIT

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3. CASH FLOW FROM FINANCING ACTIVITIES Financing activities are the activities that result in change in the size and consumption of the owners capital (including preference share capital in case of a company) and borrowings of the enterprise. Cash inflows from financing activities are proceeds from issuing shares or other similar instruments, debentures, mortgages, bonds and other short or long-term borrowings. Cash outflows from financing activities are the payments of dividends, payments to acquire or redeem shares or other similar instruments of the enterprise, repayments of amounts borrowed, principal payments to creditors who have extended long-term credit, and interest paid. Cash flow statement for the year ended Particula rs Cash flows from Operating Activities Eithe r Cash receipts from customers (-) Cash paid to customers Cash generated from operations (-) Income tax paid Cash flow before extra ordinary items Extraordinary items Net cash from (used in) operating activities [List of individual items such as depreciation, foreign exchange OR loss,Net loss on profit before tax and extraordinary items sale of fixed assets, interest Income, Adjustments for non-cash and nondividenditems income, interest expense etc.] operating Operating profit before working capital changes Adjustments for changes in current assets and Current liabilities ( list of individual items) Cash generated from (used in) operations before tax (-) Income tax paid Cash flow before extra ordinary items Extraordinary items Net cash from (used in) operating activities

Dept. of MBA-SJBIT

Rs.

Rs.

xxxx x xxxx (xxx x) xxxx (xxx x) xxxx xxxxx x xx x

xxxx x

xxxxx xxx xxx x xxx (xx x x) xxx x

xxxx x

xx x xx x xx x

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Cash flow from Investing Activities Individual items of cash inflows and cash outflows from investing activities [Such as purchase/sale of fixed assets, purchase or sale of investments, Interest received, dividend received etc.] Net cash from (used in) investing activities Cash flows from Finance Activities Individual items of cash inflows and cash outflows from financing activities [Such as proceeds from issue of shares, long-term borrowings, repayments of long-term borrowings, Receipts from sales of investments and fro collection interest paid, dividend paid etc. of loans Net cash from (used in) investing activities

xxxx xxx x xxx x xxx x

xxx xxxx x xxxx x xxxx x

Net Increase (Decrease) in cash and cash equivalents INVESTING ACTIVITIES Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Payments for purchase of investments and making loans

Receipts from interest and dividends on loans and investments

Payments for dividends on share capital

Receipts from issuance of share capital

Receipts from issuance of debentures

Receipts from other long-term borrowings

Dept. of MBA-SJBIT

FINANCING ACTIVITIES

Payments for principal on debentures and other borrowings Payments for interest on debentures and other borrowings Page 40

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14MBA13

Module-5 Accounting Standards and IFRS: The Accounting standards bring presentation of financial statements and

uniformity in aids in

the

preparation comparison

and of

Procedure for framing Accounting Standards The International Accounting Standards are issued by the IASC These Standards are received by ICAI assigned to ASB The Accounting standards are issued under the authority of the council of ICAI. So far the ASB of ICAI has issued 28 Accounting standards as shown below Mandatory for Accounting period beginning on or after

AS-2(Revised) AS-3(Revised) AS-4(Revised) AS-5(Revised) AS-6(Revised) AS-7(Revised) AS-8 AS-9 AS-10 AS-11(Revised) AS-12 AS-13 AS-14 AS-15 AS-16 AS-17 AS-18 AS-19 AS-20 AS-21

Dept. of MBA-SJBIT

Disclosure of Accounting Policies Valuation of inventories Cash Flow Statements Contingencies and Events occurring after Balance Sheet Date Net Profit or Loss, prior period items and changes in Accounting policies Depreciation Accounting Accounting for construction contracts Accounting for Research and Development Revenue Recognition Accounting of Fixed Assets Accounting for the effect of changes in foreign exchange rates Accounting for Government Grants Accounting for Investments Accounting for Amalgamations Accounting for retirement benefits in the financial statements of employers Borrowing costs Segment reporting Related Party Disclosures Leases Consolidated Financial Statements Earnings per share

1.4.1991 1.4.1999 1.4.2001 1.4.1995 1.4.1996 1.4.1995 1.4.2003 1.4.1991 1.4.1991 1.4.1991 1.4.1995 1.4.1994 1.4.1995 1.4.1994 1.4.1995 1.4.2000 1.4.2001 1.4.2001 1.4.2001 1.4.2001 1.4.2001

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Accounting for Managers AS-22 AS-23 AS-24 AS-25 AS-26 AS-27 AS-28 AS-29

Accounting for taxes on income Accounting for investments in consolidated finance statements Discounting operations Interim financial reporting Intangible assets Financial reporting of interest in joint ventures Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets

14MBA13 1.4.2001 1.4.2002 1.4.2004 1.4.2002 1.4.2003 1.4.2002 1.4.2004 1-4-2004

IFRS vs. Indian Accounting Standards The International Financial Reporting Standards refer to the reporting standards of finance as set by the international accounting standards. Both IFRS and Indian Accounting Standards have different accounting standards. However, with the growing market trend, the need of a common set of accounting standards was felt by all. Hence, IFRS is to be followed. However, with the differences in the standards existing between both the bodies, a careful handling is to be carried out. Following are few changes that will be made in case IFRS is issued and made compulsory: •AS-1: Disclosure of Accounting principles IFRS-/IAS-1: Adoption of international financial reporting standards/presentation of financial statements. •AS-3:cash flow statements IAS-7: cash flow statements •AS-4: events after the balance sheet date IAS-10: events recorded after the balance sheet date • AS-5: changes in accounting policies and accounting errors IAS-8: prior period changes and accounting policies and errors changes •AS-6 and AS-10: Depreciation and fixed assets IAS-16: plants, property and equipment‘s • AS-9: revenue recognition IAS-18: revenue The above mentioned standards were some of the examples to the changes in accounting standards of both the bodies. Not only that, IFRS deals with the balance sheet in the reverse manner as ours. The first emphasis is laid on to the assets in the order of liquidity. The next recorded details are that of the liabilities starting with the borrowings. Then finally the next recorded details are that of the equity capital which is completely opposite according to the Indian Accounting standards Dept. of MBA-SJBIT

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Module-VI Emerging issues in Accounting Corporate Governance Corporate governance refers to the system of structures, rights, duties, and obligations by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders. There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high-profile collapses of a number of large corporations during 2001–2002, most of which involved accounting fraud; and then again after the recent financial crisis in 2008. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest The term corporate governance has come to mean two things. * the processes by which companies are directed and controlled. * a field in economics, which studies the many issues arising from the separation of ownership and control. In A Board Culture of Corporate Governance business author Gabrielle O'Donovan defines corporate governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes'. Parties to corporate governance Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management and shareholders). Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large. Issues involving corporate governance principles include: * oversight of the preparation of the entity's financial statements * internal controls and the independence of the entity's auditors * review of the compensation arrangements for the chief executive officer and other senior executives Dept. of MBA-SJBIT

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Human Resource Accounting Human Resource Accounting (HRA) means to measure the cost and value of the people (i.e. of employees and managers) in the organisation. It measures the cost incurred to recruit, hire, train and develop employees and managers. HRA also finds out the present economic value of its employees and managers. After measuring the cost and value of its employees and managers, the organisation prepares a report. This report is called HRA Report. It is shown to the top level management. It can also be shown to the employees, managers and outside investors. What is Human Resource Accounting? Human Resource Accounting is the process of identifying and measuring data about Human Resources and communicating this information to the interested parties. It is an attempt to identify and report the Investments made in Human Resources of an organisation that are currently not accounted for in the Conventional Accounting Practices. Methods of Human Resource Accounting Quite a few Models have been suggested in the past for the Human Resource Accounting and these can be classified into 2 parts each having various Models. Some of the Important ones are:A. Cost Based Models I. Capitalisation of Historical Costs Model II. Replacement Costs Model III. Opportunity Cost Model B. Value Based Models I. Present Value of Future Earnings Model/ Lev and Schwartz Model II. Reward Valuation Model/ Flamholtz Model III. Valuation on Group Basis A. COST BASED MODELS I. Capitalisation of Historical Costs As per this Method of HR Accounting, the sum of all costs related to Human Resources (i.e. Dept. of MBA-SJBIT

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Recruitment, Acquisition, Formal Training, Informal Training, Informal Familiarisation, experience and development) is taken together to represent the value of the human resources. II. Replacement Costs The Historical Cost Method was highly criticised as it only takes into account the Sunk Costs which are irrelevant for Decision Making. Thus, a new model for Human Resource Accounting was conceptualised which took into the account, the costs that would be incurred to replace its existing human resources by an identical one. Individual Replacement Costs – which refers to the cost that would have to be incurred to replace an individual by a substitute who can provide the same set of services as that of the individual being replaced 2. Positional Replacement Costs – which refers to the cost of replacing the set of services referred by an incumbent in a defined position 1.

III. Opportunity Cost Model This model was advocated by Hekimian and Jones in the year 1967 and is also known as the Market Value Method. This method of measuring Human Resources under this Model is based on the concept of opportunity cost i.e. the value of an employee in its alternative best use, as a basis of estimating the value of human resources. The opportunity cost value may be established by competitive bidding within the firm, so that in effect, managers bid for any scarce employee. A human asset therefore, will have a value only if it is a scarce resource, that is, when its employment in one division denies it to another division. B. ECONOMIC VALUE MODELS I. Present Value of Future Earnings Model This Model of human resource accounting was developed by Lev and Schwartz in the year 1971 and involves determining the value of human resources as per the present value of estimated future earnings discounted by the rate of return on Investment (Cost of Capital). II. Reward Valuation Model/ Flamholtz Model Flamholtz advocated that an Individual‘s Value to an organisation is determined by theservices he is expected to render. This model of Human Resource Accounting is an improvement to the ―Present Value of Future Earnings Model‖ as it takes into account

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NATURE AND INCIDENCE OF WINDOW DRESSING Window Dressing It is the act or instance of making something appear deceptively attractive or favourable; something used to create a deceptively attractive or favourable impression. The act or practice of giving something superficial appeal by skilful presentation. Nature of Window Dressing 1. Inflate the sales from the current year by advancing the sales from the following year. 2. Alter the ‗other income‘ figure by playing with non-operational figures like sale of fixed assets. 3. Fiddle with the method and rate of depreciation. (A switch may be effected from the written down value method to the straight line method or vice versa.) 4. Change the method of stock valuation from, say, direct costing to absorption, to minimize the cost of goods sold. 5. Capitalise certain expenses like research and development costs and product promotion cost, that are ordinarily written off in the profit and loss account. 6. Defer certain discretionary expenditures (like repairs, advertising, research and development) to the following year. 7. Make inadequate provision for certain known liabilities (gratuity etc.,) and treat certain liabilities as contingent liabilities 8. Make extra provisions during prosperous years and written them back in lean years. 9. Use totally unacceptable accounting practices. 10. Revalue assets to create the impression of substantial reserves.

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Module-VII

Fundamentals of Taxation VARIOUS HEADS OF INCOME All income shall be classified under the following heads of income for the purpose of charge of income tax and computation of total income. Income from Salaries Income from house property Profits and gains of business or profession Income from Capital gains Income from other sources Income from Salaries: Under section 15, the following incomes are chargeable under the head „salaries‟ Any salary due from an employer or former employer to an assessee in the previous year, whether paid or not; Any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, though not due or before it became due to him. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer of former employer, if not charged to income tax for any earlier previous year. Definitions: Under section 17 of the Act the following have been defined. Salary Perquisites Profits in lieu of salary Salary [Sec. 17(1)]: Salary includes Wages Any annuity or pension Any gratuity Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages. Any advance of salary, but not advance for purchasing a car, cycle, scooter or a house; etc Any payment received by an employee in respect of any period of leave not availed of by him.

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The annual accretion to RPF to the extent of the following o Employer‘s contribution in excess of 12% of salary o Interest on the balance in the RPF credited in excess of 9.5% The accumulated transferred balance from URPF account to a RPF account to the extent of it is chargeable. The contribution made by the central government or any other employer in the previous year to the account of an employee under a pension scheme referred to in sec 80CCD. Deductions: The income chargeable under the head salaries shall be computed after making the following deductions from gross salary: Deduction for entertainment allowance Deduction in respect of professional tax Entertainment Allowance [sec. 16(ii)] Entertainment allowance is not eligible for exemption but it only qualifies for deduction. Therefore, entertainment allowance is first included in gross salary and then deduction is allowed under section 16(ii). This deduction is available only in case of government employees and not in case of other employees. The deduction allowable in the case of government employees is to the extent of least of the following: Rs. 5,000; or 1/5 of salary; or Actual entertainment allowance received for the previous year. Salary for the purpose of entertainment allowance deduction means only basic salary. Professional Tax [sec. 16(iii) Deduction is allowed in respect of any sum paid by the assessee on account of a tax on employment. In case, if the professional tax is paid by the employer on behalf of the employee, the amount so paid should be included in gross salary as a perquisite and then deduction under section 16(iii) can be claimed. Death-cum-retirement Gratuity: [Sec. 10(10)] In case of Government employees: Any death cum retirement gratuity received by government employees is fully exempt from tax. In case of non-government employees covered by the payment of gratuity Act, 1972: Any gratuity received by a non-government employee who is covered by the payment of gratuity act of 1972, is exempt from tax to the extent of least of the following: (a) (b)

Dept. of MBA-SJBIT

Rs. 3,50,000; or 15 days salary (last drawn salary *15/26) based on last drawn salary for each completed year of service or part of the year in excess of 6 months; or Page 48

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Salary for this purpose means basic salary and dearness allowance In case of non- government employees who are not covered by the payment of gratuity Act of 1972 Any gratuity received by any other employee on retirement, death, termination or resignation is exempt from tax to the extent of the least of the following; (a) (b)

Rs. 3,50,000; or Half month‘s salary (on the basis of last 10 months average immediately preceding the month in which any such event occurs) for each completed year of service (fraction to be ignored); or Gratuity actually received.

(c)

Salary for this purpose means basic salary, dearness allowance-if provided in terms of employment and commission as a percentage of turnover achieved by the employee. Note: (a)Gratuity received during the period of service is always taxable (b)Where gratuity is received by an employee from 2 or more employers in the same previous year then the aggregate amount of gratuity exempt form tax cannot exceed the above limits prescribed. (c) In case where the employee has received gratuity in any earlier year from his former employer and also receives gratuity from another employer in a later year, the limit of Rs. 3,50,000 will be reduced by the amount of gratuity exempt from tax in any earlier year. Commuted Pension [Sec 10(10A)] Uncommuted pension refers to the pension periodically received by the employee. Commuted pension means lump sum amount taken by commuting the pension or part of the pension. Where an employee commutes, under pension rules, part of pension, the remaining portion will periodically received. Uncommuted pension is taxable as salary u/s 15 in the hands of both government and non-government employees. Any commuted pension received by a government employee is wholly exempt from tax. CBDT has clarified by circular number 623-dated 6-1-92 that judges of the High courts and Supreme courts are also entitled to the exemption. A non-government employee can avail exemption to the following extent (1) (2)

If the employee is in receipt of gratuity, 1/3 of the full value of the pension. If the employee is not in receipt of gratuity, ½ of the full value of the pension.

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Leave Salary [sec. 10(10AA)] Government employee: Any amount received as cash equivalent of leave in respect of period of earned leave to his credit at the time of retirement whether on superannuation or otherwise, is exempt from tax Non-Government Employees: Leave salary is exempt from tax to the extent of least of the following; Cash equivalent of the leave (on the basis of average of last 10 months‘ salary) to the credit of the employee at the time of retirement (calculated at 30 days credit for each completed year of service); or 10months‘ salary (on the basis of average of 10 months‘ salary); or The amount specified by the government --- Rs. 3,00,000 Leave encashment actually received. Even in the case of voluntary retirement by way of resignation, leave salary received qualifies for exemption. Salary for this purpose means basic salary, dearness allowance if provided in terms of employment and commission as a percentage of turnover achieved by the employee. Note: 1. Leave salary received during the period of service is taxable 2. Where leave salary is received by an employee from 2 or more employers in the same previous year then the aggregate amount of leave salary exempt from tax cannot exceed the limits prescribed. 3. In case where the employee has received cash equivalent of earned leave in any earlier year from his former employer and also receives leave salary from another employer in a later year, the limit of Rs. 3,00,000 will be reduced by the amount of gratuity exempt from tax in any earlier year. ALLOWANCES The various allowances, which are allowed from the employer to the employees, are classified under three categories Fully taxable Allowances Partly taxable allowances or allowances exempted up to specified limit. Fully exempted allowances. Fully Taxable Allowances. (1)Dearness allowance or dearness pay (2)Medical allowances (3)Tiffin allowance (4)Servant allowance (5)Non-practicing allowance (6)Warden allowance and proctor allowance (7)Deputation allowance (8)Overtime allowance Dept. of MBA-SJBIT

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Partly taxable allowances or allowances exempted up to specified limit: (1) House Rent Allowance [sec. 10(13A)] House rent allowance granted to an assessee by his employer is exempt from tax to the extent of least of the following (a) (b)

Excess of rent paid over 10% of salary, or If the accommodation is situated in Mumbai, Kolkatta, Chennai and Delhi--50% of salary If the accommodation is situated at any other places--- 40% of salary (c) Actual HRA received for the relevant period Exemption is not available to an assessee who lives in his own house; or in a house for which he does not pay any rent. Salary for this purpose means basic salary, dearness allowance if provided in terms of employment and commission as a percentage of turnover achieved by the employee calculated on due basis for the relevant period. Relevant period means the period during which the said accommodation was occupied by the assessee during the previous year. (2) Any allowance granted to an employee working in any transport system to meet his personal expenses during his duty performed in the course of running of such transport form one place to another place is exempt from tax to the extent of 70% of such allowance or Rs. 6,000 per month, whichever is less (3) Transport allowance: any transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and place of his duty to the extent of Rs. 800 per month. The same is exempted from tax up to Rs. 1,600 per month if it is given to an employee who is blind and/or physically handicapped. (4) Children Education Allowance: It is exempt from tax up to Rs. 100 per month per child up to a maximum of 2 children. (5) Children Hostel Allowance: It is exempt from tax up to Rs. 300 per month per child up to a maximum of 2 children Fully Exempted Allowances: (1) (2) (3)

Foreign allowance Sumptuary allowance to High court and Supreme court judges Allowances from U.N.O

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PERQUISITES Perquisites mean any casual emoluments fee or profit attached to an office or position in addition to salary or wages.It is a personal advantage--- something that benefits a man by going into his own packet. It does not cover a mere reimbursement of expenditure. The perquisites may in cash or in kind or in the form of benefits and amenities, whether they are convertible into money or not. The employer may provide it voluntarily or under service contract. For income tax purposes, the perquisites have been divided into three categories. Tax-free perquisites Taxable perquisites Perquisites taxable under specified cases. Tax-free Perquisites: The value of the following perquisites shall not be included in the salary income of an employee. Medical benefits Tea and snacks or free food or beverages provided in office or factory (work place) or through paid vouchers where are nor transferable and usable only at eating joints. Facility of motor car(s) Residential accommodation provided at site Facility of club or health club and similar facilities Expenses on telephone including mobile phone Employer‘s contribution to staff group insurance scheme Scholarship to employees or their children paid by the employer The facility of conveyance provided by the employer from residence to place of employment and vice versa Refreshment courses, etc. If the employer pays fees for an employee taking refresher course or management course in order to enable to the employee to perform his services more efficiently. Such expenses are treated as scholarship. Free rations to armed forces personnel Facility of guest house or holiday home‘ Welfare expenses Entertainment expenses Free or concessional ticket provided by the employer (engaged in the business of transport) for private journeys of the employee or his family members. Any perquisites paid or allowed by the government to its employees who are posted abroad. The value of rent-free official residence and the value of conveyance facilities provided to a judge. The value of rent-free furnished residence (including maintenance thereof) provided to a minister, an officer of parliament or a leader of the opposition in parliament. Gifts in kind laptops and computers provided by the employer for personal use of employees or any member of his house hold Dept. of MBA-SJBIT

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Interest free or concessional loan, if the amount loan in aggregate does not exceed Rs. 20,000 during the previous year. Transfer without consideration to an employee of a movable asset (other than computers, electronic items and car) by the employer after using it for ten years or more. Periodicals and journals required for discharge of work INCOME FROM HOUSE PROPERTY Basis of Charge: The annual value of property consisting of any building or lands appurtenant thereto of which the assessee is the owner shall be chargeable to income tax under this head. However, the said excludes the property used by the assessee for the purpose of any business or profession carried on by him and profits of which are chargeable to income tax under the head profits and gains of business or profession. INCOME FROM OTHER SOURCES This is a residuary head of income and sweeps all such taxable income, profits and gains which are not chargeable to income tax under any of the first four heads specified above. It is important to note that where there is a specified head for the income in question and a specified section providing for the head, such income cannot be assessed under this According to section 56(2), in a particular, the following incomes shall be chargeable to income tax under the head income from other sources. Dividend Lottery, crossword Puzzles, etc. Interest on securities. Hire of machinery, plant, etc. Hire of machinery, plant and buildings nor separately. Gift. Where any sum of money, the aggregate value of which exceeds Rs. 50,000, is received without consideration, by an individual or a HUF, in any previous year form any person or persons on or after 01-04-2006, the value of whole of the aggregate value of such sum. INCOMES CHARGEABLE TO TAX UNDER THE HEAD “PROFITS AND GAINS OF BUSINESS OR PROFESSION” [Section 28] (1) Profits and gains of any business or profession carried on by assesses at any time during previous year. (2) Compensation or other payment due to or received by any person – (a) managing whole or substantially whole of affairs of an Indian company or any other company in India at or in connection with the termination of his management or modification of the terms and conditions relating thereto; (b) on termination or modification of contract of his agency in India; Dept. of MBA-SJBIT

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(c) For vesting the management of any property or business in Government or any corporation owned or controlled by the Government. (3) Income derived by trade, professional or other similar association from specific services rendered to its members. This clause is an exception to general rule that income from mutual activity is not chargeable to tax. (4) Profits on sale of import licence; or Profits on transfer of Duty Entitlement Pass Book (DEPB) or Duty Free Replenishment Certificate (DFRC) under EXIM Policy; (5) Cash assistance against exports from Government of India and Duty Drawback; (6) Value of any benefit or perquisite, whether convertible into money or not arising from exercise of business or profession; (7) Interest, salary, bonus, commission or remuneration due to or received by partner from the firm. Such income is taxable in hands of partners to the extent it is allowed as deduction in hands of firm. Any amount not allowed as deduction to firm under Section 40(b), is not taxable in the hands of partner. (8) Any sum received or receivable, in cash or in kind, under an agreement for – (a) Non-competition i.e. not carrying out any activity in relation to any business; or (b) Exclusivity i.e. not sharing any know-how, patent, copyright, trademark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision of services. Exceptions : However, sum received for transfer of business, or transfer of right to manufacture, produce or process any article/thing, which is chargeable under ‗Capital Gains‘ is not taxable under this Section. (9) Any sum (including bonus) received under Keyman Insurance Policy.

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INCOME FROM CAPITAL GAINS 1. Chargeability u/s 45 Profits or gains arising from the transfer of a capital asset is chargeable to tax in the year in which transfer take place under the head "Capital Gains". Definitions Transfer: Sec. 2(47): Transfer in relation to a capital asset includes sale, Exchange, or relinquishment of the asset or extinguishment of any rights therein or the compulsory acquisition thereof under any law or conversion of the asset by the owner in stock-intrade of a business carried on by him or the maturity or redemption of a zero coupon bond. Capital Asset: Sec. 2(14): Capital Asset means property of any kind (Fixed, Circulating, movable, immovable, tangible or intangible) whether or not connected with business or profession. Exclusions — a. Stock-in-trade b. Personal effects of the assessee c. Agricultural land in a rural area d. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980 issued by the Central Government e. Special Bearer Bonds, 1991 issued by the Central Government. f. Gold Deposit Bonds issued under Gold Deposit Scheme 1999 Short-term capital asset: Sec. 2(42A): means a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer. However, in the following cases, an asset, held for not more than twelve months, is treated as shortterm capital asset— a. Quoted or unquoted equity or preference shares in a company Circular No. 495 dated 22.9.1987 explaining amendments by Finance Act, 1987 whereby unquoted shares of a private limited company also if held more than 12 months falls in the category of LTCG. Also Refer the Judgment in 120 TTJ 699 for unquoted shares held for less than 36 months. b. Quoted Securities Dept. of MBA-SJBIT

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c. Quoted or unquoted Units of UTI d. Quoted or unquoted Units of Mutual Funds specified u/s. 10(23D) e. Quoted or unquoted zero coupon bonds Long-term capital asset: Sec. 2(29A): means a capital asset which is not a short-term capital asset 2. Year of chargeability to tax Capital gains are generally charged to tax in the year in which ‗transfer‘ takes place. Exceptions — a. Sec. 45(1A) — Insurance Claim — In the year of receipt. b. Sec. 45(2) — Conversion of capital asset into stock-in-trade — In the year of actual sale of the stock. c. Sec. 45(5) — Compulsory acquisition — When consideration or part thereof is first received. Exempt Capital Gains under Section 10 10(33) : Transfer of US 64 on or after April 1, 2002 10(37) :

Compulsory acquisition of Urban Agriculture Land where consideration is received after March 31, 2004.

Long-term capital gain arising on transfer on or after 10(38) : October 1, 2004 of equity shares or units of equity oriented mutual fund and the STT is paid at the time of transfer Income Tax Deductions u/s 80C One can get following income tax deductions with qualified investments u/s 80C are as appended below:

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Section

80C

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Details Quantum of Deduction Life Insurance Premium, PPF, NSC, EPF, 5-year Fixed Deposit, Post Office Maximum Rs 100000 Senior Citizen Saving Scheme, ELSS, Tuition Fees including Admission fees or college fees paid for full time education of any two children‘s, Housing Loan Principal Repayment

Income Tax Deductions u/s 80CCC One can get following income tax deductions with qualified investments u/s 80CCC and some are as appended below: Profit in lieu of salary Profit in lieu of salary is a part of salary income and accordingly it is taxable under the head ―Income from Salary‖. Profit in lieu of salary means any payment made to an employee on lieu of salary even if the same has no connection with the profits of the employer. The word ‗profit‘ is used only to convey any ‗advantage‘ or ‗gain‘ by receipt of any payment by the employee. As per the Income Tax Act, 1961 ―Profit in lieu of salary‖ includes the following: 1. Any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms & conditions relating thereto is taxable as profit in lieu of salary. The recipient may however claim exemption u/s 10(10B) or 10(10C), if eligible. 2. Any payment (except to the extent it is specifically exempt u/s 10) due to or received by an employee from his employer or former employer or from a provident fund, or other fund (to the extent it does not consist of contributions made by the assessee or interest thereon) which may otherwise be taxable as income from salary. It may be noted that the assessee is entitled to exemption to the prescribed extent in respect of the following payments received by hima. Payment of Gratuity u/s 10(10); b. Payment of commuted pension u/s 10(10A); c. Payment of retrenchment compensation u/s 10(10B); Dept. of MBA-SJBIT

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d. Payment from statutory provident fund and public provident fund u/s 10(11); e. Payment from recognized provident fund u/s 10(12); f. Payment from an approved superannuation fund u/s 10(13); g. Payment of House Rent Allowance (HRA) u/s 10(13A). 3. Payment from unrecognized provident fund or superannuation fund to the extent it does not consist of contribution by the employee or interest on employee‘s contribution (at the time of payment to the employee). 1. Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy is taxable as ―profit in lieu of salary Income Tax slab For Individuals:

1 2

3

4

Income Slabs Where the total income does not exceed Rs. 2,00,000/-. Where the total income exceeds Rs. 2,00,000/- but does not exceed Rs. 5,00,000/-. Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/Where the total income exceeds Rs. 10,00,000/-

Tax Rates NIL 10% of amount by which the total income exceeds Rs. 2,00,000/Rs. 30,000/- + 20% of the amount by which the total income exceeds Rs. 5,00,000/-. Rs. 130,000/- + 30% of the amount by which the total income exceeds Rs. 10,00,000/-.

Surcharge : Nil Education Cess : 3% of the Income Tax.

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