Financial Accounting Tutorial PDF

Financial Accounting
About the Tutorial

Accounting is a business language. We can use this language to communicate financial
transactions and their results. Accounting is a comprehensive system to collect, analyze,
and communicate financial information.
Audience
This tutorial has been designed to help beginners pursuing education in financial
accounting or business management. Any enthusiastic reader with basic mathematics
knowledge can comprehend this tutorial. After completing this tutorial, you will find
yourself at a moderate level of expertise from where you can take yourself to next levels.
Prerequisites
Before you start proceeding with this tutorial, we assume that you have a basic
understanding of commerce.
Copyright & Disclaimer

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Table of Contents
About the Tutorial .................................................................................................................................... i
Audience .................................................................................................................................................. i
Prerequisites ............................................................................................................................................ i
Copyright & Disclaimer ............................................................................................................................. i
Table of Contents .................................................................................................................................... ii
1. FINANCIAL ACCOUNTING ─ RECTIFICATION OF ERRORS ...................................................... 1
Types of Errors ........................................................................................................................................ 1
Methods of Rectification of Errors .......................................................................................................... 1
2. FINANCIAL ACCOUNTING ─ CAPITAL AND REVENUE ............................................................ 5
3. FINANCIAL ACCOUNTING ─ FINAL ACCOUNTS ..................................................................... 8
Trading Account ...................................................................................................................................... 8
Manufacturing Account ......................................................................................................................... 10
Profit & Loss Account ............................................................................................................................ 11
Balance Sheet........................................................................................................................................ 12
Grouping of Assets & Liabilities ............................................................................................................. 13
Financial Statements with Adjustments Entries and their Accounting Treatment ................................. 14
4. FINANCIAL ACCOUNTING ─ PROVISION AND RESERVES..................................................... 17
5. FINANCIAL ACCOUNTING ─ MEASUREMENT OF BUSINESS INCOME.................................. 20
Objectives of Net Income ...................................................................................................................... 20
Definition of Income ............................................................................................................................. 20
Accounting Concept and Income Measurement .................................................................................... 21
Computation of Business Income .......................................................................................................... 22
Measurement of Business Income ........................................................................................................ 22
Measurement of Revenue ..................................................................................................................... 22
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Measurement of Expenses .................................................................................................................... 22
Matching Concept ................................................................................................................................. 23
Measurement of Costs .......................................................................................................................... 23
Basis of Measurement of Income .......................................................................................................... 24
6. FINANCIAL ACCOUNTING ─ BILLS OF EXCHANGE & PROMISSORY NOTES .......................... 25
7. FINANCIAL ACCOUNTING ─ INVENTORY VALUATION......................................................... 32
Importance of Inventory Valuation ....................................................................................................... 32
Methods of Taking Inventory ................................................................................................................ 32
Valuation of Inventory at Lower Cost or Market Price ........................................................................... 33
Methods of Valuation of Inventory ....................................................................................................... 33
8. FINANCIAL ACCOUNTING ─ ANALYSIS OF CHANGES IN INCOME........................................ 37
9. FINANCIAL ACCOUNTING ─ ACCOUNTING FOR CONSIGNMENT ........................................ 40
Meaning & Features of Consignment .................................................................................................... 40
Why is Consignment not a Sale?............................................................................................................ 40
Important Terms ................................................................................................................................... 41
Valuation of unsold Consignment ......................................................................................................... 42
Invoicing Goods higher than Cost .......................................................................................................... 42
Loss of Goods ........................................................................................................................................ 42
Summary of Accounting Entries ............................................................................................................ 44
10. FINANCIAL ACCOUNTING ─ JOINT VENTURE...................................................................... 46
Major Features and Characteristics of Joint Venture ............................................................................. 46
Partnership and Joint Venture............................................................................................................... 46
Joint Venture and Consignment ............................................................................................................ 47
Accounting Records ............................................................................................................................... 47
When one of the Venturers keeps Accounts.......................................................................................... 47
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When Separate Books of Accounts are kept for the Joint Venture ........................................................ 48
11. FINANCIAL ACCOUNTING ─ NON-TRADING ACCOUNTS ..................................................... 51
What is Non-Trading Account? .............................................................................................................. 51
Receipt and Payment Account .............................................................................................................. 51
Income & Expenditure Account ............................................................................................................. 52
Balance Sheet........................................................................................................................................ 52
Conversion of Receipt and Payment Account into Income & Expenditure Account ............................... 52
Items Peculiar to Non-Trading Concern ................................................................................................. 54
12. FINANCIAL ACCOUNTING ─ SINGLE ENTRY ........................................................................ 58
Meaning and Silent Features of SES ...................................................................................................... 58
Difference between SES and DES........................................................................................................... 58
Limitations of SES .................................................................................................................................. 58
Preparation of Statement of Affairs ...................................................................................................... 59
How does the Statement of affairs Differ from Balance-Sheet? ............................................................ 59
Ascertainment of Profit under SES ........................................................................................................ 59
13. FINANCIAL ACCOUNTING ─ LEASING ................................................................................. 63
Important Terms in Leasing ................................................................................................................... 63
Popularity of Leasing ............................................................................................................................. 64
Advantages of Leasing ........................................................................................................................... 64
Disadvantages of Leasing ...................................................................................................................... 65
Classification of Lease ........................................................................................................................... 65
14. FINANCIAL ACCOUNTING ─ INVESTMENT ACCOUNT ......................................................... 67
Meaning of Investment ......................................................................................................................... 67
Investment Account .............................................................................................................................. 67
Investment Transactions ....................................................................................................................... 68
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Equity Share Accounts ........................................................................................................................... 70
15. FINANCIAL ACCOUNTING ─ INSOLVENCY ACCOUNTS ........................................................ 71
When a Person / Entity can be Declared Insolvent ................................................................................ 71
Insolvency Law ...................................................................................................................................... 72
Insolvency Accounts .............................................................................................................................. 72
Important Points in Preparation of Statement of Affairs ....................................................................... 76
Difference between Balance Sheet and Statement of Affairs ................................................................ 76
Deficiency Account (List H) .................................................................................................................... 77
Insolvency of Partnership Firm .............................................................................................................. 77
16. FINANCIAL ACCOUNTING ─ STOCK EXCHANGE TRANSACTIONS......................................... 79
Meaning of Stock Exchange ................................................................................................................... 79
Features and Characteristics of Stock Exchange .................................................................................... 79
Functions and Services of Stock Exchange ............................................................................................. 79
Procedures for Dealing at Stock Exchange ............................................................................................. 80
Operators at Stock Exchange ................................................................................................................. 81
Important Terms used in Stock Exchange .............................................................................................. 82
SEBI ....................................................................................................................................................... 83
17. FINANCIAL ACCOUNTING ─ ACCOUNTS OF PRIVATE INDIVIDUALS .................................... 85
Maintenance of Accounts by Private Individuals ................................................................................... 85
Maintenance of Accounts by Professionals ........................................................................................... 85
Maintenance of Accounts by Doctors .................................................................................................... 86
Maintenance of Accounts of Educational Institutions ........................................................................... 88
Maintenance of Accounts of Student Hostels ........................................................................................ 92
Maintenance of Accounts of Hospitals .................................................................................................. 96
18. FINANCIAL ACCOUNTING ─ CO-OPERATIVE SOCIETIES .................................................... 101
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Types of Society .................................................................................................................................. 101
Accounts ............................................................................................................................................. 101
19. FINANCIAL ACCOUNTING ─ INSURANCE CLAIMS ............................................................. 104
Consequential Loss Insurance ............................................................................................................. 107
Accounting Entries .............................................................................................................................. 110
20. FINANCIAL ACCOUNTING ─ GOVERNMENT ACCOUNTING............................................... 111
Difference between Government & Commercial Accounting .............................................................. 111
Important Terms and Expressions of Government Finance ................................................................. 112
Government Fund ............................................................................................................................... 113
General Structure of Government Accounts ........................................................................................ 114
Compilation of Accounts ..................................................................................................................... 115
Principles of Government Accounting ................................................................................................. 115
CAG ..................................................................................................................................................... 115
21. FINANCIAL ACCOUNTING ─ CONTRACT ACCOUNT........................................................... 116
Features of Contract Accounting ......................................................................................................... 116
Types of Contract ................................................................................................................................ 116
Recording of Costs, Value, and Profit on Contract ............................................................................... 117
Recording of Value and Profit on Contracts ......................................................................................... 119
Modern Approach on Profit on Uncompleted Record ......................................................................... 122
22. FINANCIAL ACCOUNTING ─ DEPARTMENTAL ACCOUNTING ............................................ 125
Objectives of Departmental Accounting .............................................................................................. 125
Advantages of Departmental Accounting ............................................................................................ 125
Methods of Departmental Account ..................................................................................................... 125
Inter-Department Transfer .................................................................................................................. 127
Inter-Department Transfer Price ......................................................................................................... 127
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23. FINANCIAL ACCOUNTING ─ VOYAGE ACCOUNTING ......................................................... 130
Income ................................................................................................................................................ 130
Expenses ............................................................................................................................................. 130
Voyage in Progress .............................................................................................................................. 131
24. FINANCIAL ACCOUNTING ─ ROYALTY ACCOUNTS ............................................................ 133
Types of Royalties ............................................................................................................................... 133
Basis of Royalty ................................................................................................................................... 133
Important Terms ................................................................................................................................. 134
Sub Lease ............................................................................................................................................ 136
Accounting Entries .............................................................................................................................. 136
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1. Financial Accounting ─ Rectification of Errors
Financial accounting deals with recording and maintaining every monetary transaction of
an organization. However, sometimes, a few entries might be either incorrect or used at
the wrong place. In financial accounting, the process of correcting such mistakes is known
as Rectification of Errors.
Types of Errors
Two most common types of errors, which are usually occurred at the time of preparation
of Financial Statements are discussed below.
Error which Effect only One Account

 Omission of posting of balance in a Trial Balance.
 Error of carried forward of balance.
 Error of casting and posting.
Error which Effect Two or more Accounts

The nature of errors, which occur during the preparation of Financial Statements are:
 Error of posting in wrong account.
 Error of principle.
 Error of omission.
Methods of Rectification of Errors

There are three types of methods used in rectification of Errors:
Replacing Correct Figure by Striking Off the Wrong Figure

For example, cash payment of Rs. 989 on the account of stationery purchased written as
Rs. 998, will be corrected as:
Cash Book
By Stationery A/c 998
989
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Through Journal Entry

Normally, there are three types of errors, which can be rectified by passing Journal
Entries:-
1. Short credited or debit in one account and excess debit or credit in another account.
For example, purchase of stationery for Rs. 989 wrongly debited to purchase of
raw material account will be corrected as follows:
Journal Entry
Stationery Account Dr. 989
To Purchase Account 989
(Being Cash purchase of stationery wrongly

debited to Purchase account, now rectified)
2. If, by mistake one account is debited as well as credited with wrong amount
simultaneously. For example, Cash purchase of stationery of Rs. 989 booked with
an amount of Rs. 489 will be corrected as follows:
Journal Entry
Stationery Account Dr. 500
To Cash Account 500
(Being purchase of stationery for Rs. 989 wrongly

written as Rs. 489 now rectified)
3. If there is an omission of recording a transaction, it can be rectified by passing

journal entry to book that omitted transaction. For example, omission of recording
transaction of purchase of raw material for Rs. 5000 from Mr. X will be recorded
and corrected by passing the following journal Entry:
Journal Entry
Purchase Account Dr. 5000
To X Account 5000
(Being omitted entry of purchase of Rs. 5000 from

Mr. X now recorded and rectified)
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If there is a Mistake that Effects Trial Balance

 Before closing the books and transferring the difference in suspense account and
 After the agreed difference is transferred into the suspense account, following
accounting treatment will be done:
o Earlier entry debited or credited with fewer amount will be rectified by repeating
that entry with difference amount to complete that amount. For example, entry
done with Rs. 500 instead of Rs. 5000 will be rectified by doing same entry with an
amount of Rs. 4500. In case, where entry wrongly debited or credited to other
account may be rectified by doing reversal of old entry to nullify earlier effect.
If expense booked with less amount entry then:
Particular Expense Account Dr 4,500
To Cash/Personal Account 4,500
(Being wrong amount of posting, rectified with
Difference amount Rs. 4,500 (5000-500)
If income is booked with less amount, it will be rectified as:
Cash/Personal account Dr 4,500
To Income Account 4,500
(Being wrong amount of posting now
Rectified. 4500 (5000-500)
If posting done in wrong account that will be rectified as follows:
Stationery Account Dr **
To Office Expenses Account **
(Being wrongly debited earlier in office account, now
Rectified and posted in stationery account)
In case (ii) where difference has already been transferred to suspense account, further
amount will be debited or credited to respective account and correspondingly suspense
account will be debited or credited. Thus, these entries would reduce/nil the balance of
suspense account.
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Effect of Errors on Agreement of Trial Balance

The errors by which there is no change on both side of trial balance or wrong effect on
trial balance with same amount will not lead to effect on agreement of Trial Balance. Errors
of omission, error of posting with wrong amount on both side, or Error of principles are
the example of such errors. To find out such errors is a challenging job for any book keeper
or an accountant.
Effects of Errors on Financial Statements

Effect of error depends on the nature of effected accounts. If errors relate to nominal
account, it will either increase or reduce the profit and rectification will reduce excess profit
or Loss. Effect of error on Trading and Profit account ultimately effect the Balance-Sheet
of a company too, because reduced profit or excess profit ultimately transferred to capital
account, which is a part of the Balance Sheet.
There are some errors, which effect Trading or Profit and Loss account and Balance sheet
simultaneously, like entry of depreciation will affect profit as well as value of the Fixed
Assets.
Some entry may effect on Balance sheet only like, for instance omission of entry of cash
paid to purchase fixed assets will affect Balance Sheet of a firm only.
Rectification of Errors after Preparation of Final Accounts

To remain unaffected Profit or Loss of the current financial year, the errors, which took
place in last financial years are adjusted and rotated through a Profit & Loss adjustment
account. Balance of this account directly transferred to capital account of firm without
affecting the current year profit or loss.
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2. Financial Accounting ─ Capital andFinancial
RevenueAccounting
One of the major aspects of preparing a correct financial statement is to distinguish

revenue and capital in regard to revenue income, revenue expenditure, revenue
payments, revenue profits, and revenue losses of the company with capital income, capital
receipts, capital profit, or capital losses.
In fact, without differentiating, we cannot think of correctness of a financial statement.

Ultimately, it will mislead the end results where no one can conclude anything. As per this
principle, a revenue item should be recorded in the Trading and Profit & Loss account and
a capital item should be recorded in the Balance-Sheet of respective firm.
Capital Expenditure
Capital expenditure is the expenditure incurred to acquire fixed assets, capital leases,
office equipment, computer equipment, software development, purchase of tangible and
intangible assets, and such kind of any value addition in business with the purpose to
enhance the income. However, to decide nature of the capital expenditure, we need to
pay attention on:
 The expenditure, which benefit cannot be consumed or utilized in the same

accounting period, should be treated as capital expenditure.
 Expenditure incurred to acquire Fixed Assets for the company.
 Expenditure incurred to acquire fixed assets, erection and installation charges,

transportation of assets charges, and travelling expenses directly relates to the
purchase fixed assets, are covered under capital expenditure.
 Capital addition to any fixed assets, which increases the life or efficiency of those
assets for example, an addition to building.
Revenue Expenditure
Revenue expenditure is the expenditure incurred on the fixed assets for the ‘maintenance’
instead of increasing the earning capacity of the assets. Examples of some of the important
revenue expenditures are as follows:
 Wages/Salary
 Freight inward & outward
 Administrative Expenditure
 Selling and distribution Expenditure
 Assets purchased for resale purpose
 Repairs and renewal expenditure which are necessary to keep Fixed Assets in good
running and efficient conditions
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Revenue Expenditure Treated as Capital Expenditure

Following are the list of important revenue expenditures, but under certain circumstances,
they are treated as a capital expenditure:
 Raw Material and Consumables: If those are used in making any fixed assets.
 Cartage and Freight: If those are incurred to bring Fixed Assets.
 Repairs & Renewals: If incurred to enhance life of the assets or efficiency of the
assets.
 Preliminary Expenditures: Expenditure incurred during the formation of a business

should be treated as capital expenditure.
 Interest on Capital: If paid for the construction work before the commencement of
production or business.
 Development Expenditure: In some businesses, long period of development and

heavy amount of investment are required before starting the production especially
in a Tea or Rubber plantation. Usually, these expenditure should be treated as the
capital expenditure.
 Wages: If paid to build up assets or for the erection and installation of Plant and
Machinery.
Deferred Revenue Expenditure

Some non-recurring and special nature of expenditure for which heavy amount incurred
and benefit for the same will spread in up-coming years, to be treated as capital
expenditure and will be shown as the assets of the firm. Part of the expenditure should be
debited to Profit & Loss account every year. For example, if heavy amount paid for the
advertisement of a product, which benefits are expected to be received in next four years,
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then it should be debited as ¼ of the part in Profit & Loss account as the revenue expenses
and balance ¾ will be shown as the assets in the Balance-Sheet.
Capital and Revenue Profit

The premium received on issue of shares, and the profit on sale of fixed assets are the
major examples of capital profit and should not be treated as revenue profit. Capital profit
should be transferred to the capital reserve account, which is used to set off capital losses
in future if any.
Capital and Revenue Receipts

Sale of fixed assets, capital employed or invested, and loans are the example of capital
receipts. On the other hand, sale of stock, commission received, and interest on
investment received are the main examples of revenue receipts. Revenue receipts will be
credited to the profit and loss account and on the other hand, capital receipts will affect
the Balance-sheet.
Capital and Revenue Losses

Discount on issue of shares and losses on sale of fixed assets are the capital loss and
would be set off against the capital profits only. Revenue losses on normal business activity
are part of the profit and loss account.
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3. Financial Accounting ─ Final Accounts
Final Accounts are the accounts, which are prepared at the end of a fiscal year. It gives a
precise idea of the financial position of the business/organization to the owners,
management, or other interested parties. Financial statements are primarily recorded in a
journal; then transferred to a ledger; and thereafter, the final account is prepared (as
shown in the illustration).
Usually, a final account includes the following components:
 Trading Account
 Manufacturing Account
 Profit and Loss Account
 Balance Sheet
Now, let us discuss each of them in detail:
Trading Account
Trading accounts represents the Gross Profit/Gross Loss of the concern out of sale
and purchase for the particular accounting period.
Study of Debit side of Trading Account

 Opening Stock: Unsold closing stock of the last financial year is appeared in debit
side of the Trading Account as “To Opening Stock“ of the current financial year.
 Purchases: Total purchases (net of purchase return) including cash purchase and
credit purchase of traded goods during the current financial year appeared as “To
Purchases” in the debit side of Trading Account.
 Direct Expenses: Expenses incurred to bring traded goods at business

premises/warehouse called direct expenses. Freight charges, cartage or carriage
charges, custom and import duty in case of import, gas, electricity fuel, water,
packing material, wages, and any other expenses incurred in this regards comes
under the debit side of Trading Account and appeared as “To Particular Name of
the Expenses”.
 Sales Account: Total Sale of the traded goods including cash and credit sales will
appear at outer column of the credit side of Trading Account as “By Sales.” Sales
should be on net releasable value excluding Central Sales Tax, Vat, Custom, and
Excise Duty.
 Closing Stock: Total Value of unsold stock of the current financial year is called
as closing stock and will appear at the credit side of Trading Account.
𝑪𝒍𝒐𝒔𝒊𝒏𝒈 𝑺𝒕𝒐𝒄𝒌 = 𝑶𝒑𝒆𝒏𝒊𝒏𝒈 𝑺𝒕𝒐𝒄𝒌 + 𝑵𝒆𝒕 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔 – 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆
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 Gross Profit: Gross profit is the difference of revenue and the cost of providing
services or making products. However, it is calculated before deducting payroll,
taxation, overhead, and other interest payments. Gross Margin is used in the US
English and carries same meaning as the Gross Profit.
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 = 𝑺𝒂𝒍𝒆𝒔 − 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑮𝒐𝒐𝒅𝒔 𝑺𝒐𝒍𝒅
 Operating Profit: Operating profit is the difference of revenue and the costs
generated by ordinary operations. However, it is calculated before deducting
taxes, interest payments, investment gains/losses, and many other non-recurring
items.
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 = 𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 – 𝑻𝒐𝒕𝒂𝒍 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔
 Net Profit: Net profit is the difference of total revenue and the total expenses of
the company. It is also known as net income or net earnings.
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 = 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 – (𝑻𝒂𝒙𝒆𝒔 + 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕)
Format of Trading Account
Trading Account of M/s ABC Limited
(For the period ending 31-03-2014)
Particulars Amount Particulars Amount
To Opening Stock XX By Sales XX
To Purchases XX By Closing Stock XX
To Direct Expenses XX By Gross Loss c/d XXX
To Gross Profit c/d XXX
Total XXXX Total XXXX
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Manufacturing Account
Manufacturing account prepared in a case where goods are manufactured by the firm
itself. Manufacturing accounts represent cost of production. Cost of production then
transferred to Trading account where other traded goods also treated in a same manner
as Trading account.
Important Point Related to Manufacturing Account

Apart from the points discussed under the section of Trading account, there are a few
additional important points that need to be discuss here:
 Raw Material: Raw material is used to produce products and there may be
opening stock, purchases, and closing stock of Raw material. Raw material is the
main and basic material to produce items.
 Work-in-Progress: Work-in-progress means the products, which are still partially

finished, but they are important parts of the opening and closing stock. To know
the correct value of the cost of production, it is necessary to calculate the correct
cost of it.
 Finished Product: Finished product is the final product, which is manufactured by

the concerned business and transferred to trading account for sale.
 Raw Material Consumed (RMC): It is calculated as:
𝑹𝑴𝑪 = 𝑶𝒑𝒆𝒏𝒊𝒏𝒈 𝑺𝒕𝒐𝒄𝒌 𝒐𝒇 𝑹𝒂𝒘 𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 + 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔 – 𝑪𝒍𝒐𝒔𝒊𝒏𝒈 𝑺𝒕𝒐𝒄𝒌
 Cost of Production: Cost of production is the balancing figure of Manufacturing

account as per the format given below:
Manufacturing Account
(For the year ending……….)
To Opening Stock of Work- XX By Closing Stock of XX

in-Progress Work-in-progress
To Raw Material Consumed XX By Scrap Sale XX
To Wages XX By Cost of Production XXX
To Factory overhead xx (Balancing figure)
Power or fuel xx
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Dep. Of Plant xx
Rent- Factory xx
Other Factory Exp. xx xxx
Profit & Loss Account

Profit & Loss account represents the Gross profit as transferred from Trading Account on
the credit side of it along with any other income received by the firm like interest,
Commission, etc.
Debit side of profit and loss account is a summary of all the indirect expenses as incurred
by the firm during that particular accounting year. For example, Administrative Expenses,
Personal Expenses, Financial Expenses, Selling, and Distribution Expenses, Depreciation,
Bad Debts, Interest, Discount, etc. Balancing figure of profit and loss accounts represents
the true and net profit as earned at the end of the accounting period and transferred to
the Balance Sheet.
Profit & Loss Account of M/s ………
(For the period ending ………..)
To Salaries XX By Gross Profit b/d XXX
To Rent XX
To Office Expenses XX By Bank Interest received XX
To Bank charges XX By Discount XX
To Bank Interest XX By Commission Income XX
To Electricity Expenses XX By Net Loss transfer to XX
Balance sheet
To Staff Welfare XX
Expenses
To Audit Fees XX
To Repair & Renewal XX
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To Commission XX
To Sundry Expenses XX
To Depreciation XX
To Net Profit transfer to XX

Balance sheet
Balance Sheet
A balance sheet reflects the financial position of a business for the specific period of time.
The balance sheet is prepared by tabulating the assets (fixed assets + current assets) and
the liabilities (long term liability + current liability) on a specific date.
Assets
Assets are the economic resources for the businesses. It can be categorized as:
 Fixed Assets: Fixed assets are the purchased/constructed assets, used to earn
profit not only in current year, but also in next coming years. However, it also
depends upon the life and utility of the assets. Fixed assets may be tangible or
intangible. Plant & machinery, land & building, furniture, and fixture are the
examples of a few Fixed Assets.
 Current Assets: The assets, which are easily available to discharge current
liabilities of the firm called as Current Assets. Cash at bank, stock, and sundry
debtors are the examples of current assets.
 Fictitious Assets: Accumulated losses and expenses, which are not actually any
virtual assets called as Fictitious Assets. Discount on issue of shares, Profit & Loss
account, and capitalized expenditure for time being are the main examples of
fictitious assets.
 Cash & Cash Equivalents: Cash balance, cash at bank, and securities which are
redeemable in next three months are called as Cash & Cash equivalents.
 Wasting Assets: The assets, which are reduce or exhausted in value because of
their use are called as Wasting Assets. For example, mines, queries, etc.
 Tangible Assets: The assets, which can be touched, seen, and have volume such
as cash, stock, building, etc. are called as Tangible Assets.
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Account Working Cash & Cash

Receivable Capital Equi.
Intangible
Wasting Asset Tangible Asset
Asset
Fictitious
Fixed Asset Current Asset
Asset
Assets
 Intangible Assets: The assets, which are valuable in nature, but cannot be seen,
touched, and not have any volume such as patents, goodwill, and trademarks are
the important examples of intangible assets.
 Accounts Receivables: The bills receivables and sundry debtors come under the
category of Accounts Receivables.
 Working Capital: Difference between the Current Assets and the Current
Liabilities are called as Working Capital.
Liability
A liability is the obligation of a business/firm/company arises because of the past
transactions/events. Its settlement/repayments is expected to result in an outflow from
the resources of respective firm.
There are two major types of Liability:
 Current Liabilities: The liabilities which are expected to be liquidated by the end
of current year are called as Current Liabilities. For example, taxes, accounts
payable, wages, partial payments of long term loans, etc.
 Long-term Liabilities: The liabilities which are expected to be liquidated in more

than a year are called as Long-term Liabilities. For example, mortgages, long-term
loan, long-term bonds, pension obligations, etc.
Grouping of Assets & Liabilities

There may be two types of Marshalling and grouping of the assets and liabilities:
 In order of Liquidity: In this case, assets and liabilities are arranged according
to their liquidity.
13
 In order of Permanence: In this case, order of the arrangement of assets and

liabilities are reversed as followed in order of liquidity.
Financial Statements with Adjustments Entries and their Accounting

Treatment
In order to prepare a true and fair financial statement, there are some very important
adjustments those have to be done before finalization of the accounts (as shown in the
following illustration):
S. No. Adjustments Accounting Treatments
First Treatment:
Closing Stock: Where an opening and closing stock adjusted
Unsold stock at the end of through a purchase account and the value of
Financial year called Closing Closing Stock given in Trial Balance:
1
stock and valued at “ Cost Closing stock will be shown as adjusted
or market value purchase account on the debit side of Trading
whichever is less” account and will appear in the Balance Sheet
under current Assets.
Accounting Treatment:
Outstanding Expenses:
Outstanding expenses will be added in
2 Expenses which are due or Trading or Profit & Loss account in particular
not paid called as expense account and will appear in liabilities
outstanding expenses. side of the Balance Sheet under the current
liabilities.
Prepaid Expenses:
Prepaid Expenses will be deducted from the
3 Expenses which are paid in
particular expenses as appear in Trading &
advance are called as
Profit & Loss account and will be shown in the
Prepaid Expenses.
Balance Sheet under the current assets.
Accrued Income:
The income, which is earned
Accrued income will be added to a particular
4 during the year, but not yet
income under the Profit & Loss account and
received at the end of the
will be shown in the Balance Sheet as current
Financial Year is called as
assets.
Accrued Income.
Income Received in Accounting Treatment:

Advance:
An income to be reduced by the amount of
5 An income received in advance income in profit & loss account and
advance, but not earned like will appear as current liabilities in the Balance
advance rent etc. Sheet.
14
Interest on Capital: Accounting Treatment:

Where an interest paid on  Debit Side of Profit & Loss account
6 the capital introduced by the
proprietor or partner of the  Add to capital account (Credit side of
firm. Capital account).
Interest on Drawing: Accounting Treatment:

Where an interest paid on  Credit Side of Profit & Loss account
7 the capital introduced by the
proprietor or partner of the  Reduced from capital account (Debit
firm side of Drawing account).
Provision for Doubtful Accounting Treatment:

Debts:  Debit Side of Profit & Loss Account
8
If there is any doubt on the  In a Balance Sheet, provision for the
recovery from Sundry Doubtful will be deducted from the
Debtors. Sundry Debtors’ Account.
Provision for Discount on Accounting Treatment:

Debtors:  Debit Side of Profit & Loss Account
9 If there is any offer of  In a Balance Sheet, provision for the
discount to pay the debtors Discount on Debtors will be deducted
within certain period. from the Sundry Debtors Account.
Bad Debts:  Debit Side of Profit & Loss Account
10 Unrecovered debts or  In a Balance Sheet, Sundry debtors
irrecoverable debts will be shown after deducting the Bad
Debts.
Reserve for Discount on Accounting Treatment:

Creditors:
 Credit Side of Profit & Loss Account
11 If there is any chance to get
discount on the payment of  In a Balance Sheet, Sundry Creditors
sundry creditors within will be shown after deducting the
certain period. Reserve for Discount.
Loss of Stock by fire: 1. If Stock is fully insured

12 There may be three  Credit Side of Trading Account
conditions in this case  Assets side of Balance Sheet
(With full value of loss)
15
2. If Stock is partially insured
 Credit side of Trading Account
(With Total value of Loss)
 Debit side of Profit & Loss a/c
(With value of loss unrecoverable)
 Asset Side of Balance Sheet
( With value recoverable)
3. If Stock is not insured
 Credit Side of Trading Account
 Debit side of Profit & Loss Account
13 Reserve Fund:  Debit side of Profit & Loss Account
 Liabilities side of Balance Sheet
Free Sample to Accounting Treatment:
14 Customers:  Credit side of Trading Account
 Debit Side of Profit & Loss Account
Managerial Commission:  Debit side of Profit & Loss Account
15
 Liabilities side of Balance Sheet as
commission payable
 Sales Account Dr
Goods on Sale or
Approval Basis: To Debtors A/c
16 If there is any un-approved (With Sale Price)

stock lying with the
customers at the end of  Stock Account Dr
financial year.
To Trading Account
(with cost price)
16
4. Financial Accounting ─ Provision and Reserves
Meaning of Provisions
“Any amount written off or retained by the way of providing depreciation or diminution in
the value of assets or for providing any known liability of which the amount cannot be
determined with substantial accuracy.”
- The Institute of Chartered Accountants of India
“Liabilities which can be measured only by using a substantial degree of estimation.”
- AS-29 issued by Institute of Chartered Accountants of India
AS 29 also defines liabilities as “a present obligation of the enterprises arising from past
events, the settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.”
Debiting Profit and Loss account, provisions are created and shown either deducting assets
side or on the liabilities side under relevant sub-head of Balance Sheet.
Provision for bad and doubtful debts, Provisions for Repair & Renewals, and Provision for
discounts & depreciation are the most common examples.
Meaning of Reserves
“That portion of earnings, receipts or other surplus of an enterprise (whether capital or
revenue) appropriated by the management for general or a specific purpose other than a
provision for depreciation or diminution in the value of assets or for a known liability.”
-ICAI
Reserve is an appropriation of profits; on the other hand, Provision is a charge against

profit. Reserves are not meant to meet out contingencies or liabilities of a business.
Reserve increases working capital of a company to strengthen the financial position.
There are two types of reserves:
1. Capital Reserve: Capital reserve is not readily available for distribution as the
dividends among the shareholders of the company, and it creates only out of capital
profit of the company. It is like Premium on issue of shares or debentures and Profit
prior to incorporation.
2. Revenue Reserve: Revenue reserves are readily available for the distribution of
profit as dividend to the shareholders of the company. Some of the examples of
this are general reserve, staff welfare fund, dividend equalization reserve,
debenture redemption reserve, contingency reserve, and investment fluctuation
reserves.
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Distinction between Provisions and Reserves

 Reserve can be made only out of profit and provisions are the charge to profit.
 Reserves reduce divisible profits and provisions reduce the profit.
 Reserves, if remain un-utilized for some period can be distributed as dividends, but
provisions cannot be transferred to General Reserve for the distribution.
 Purpose of provision is very specific, but reserve is created to meet out any
probable future liabilities or losses.
 Creation of provisions is legally necessary, but reserves are created to save a

concern from the future losses and liabilities.
Secret Reserves
Banking Company, Insurance Company, and Electricity Companies create secret reserves,
where the public confidence is required. In this case, to create secret reserve, assets
showed at lower cost or liabilities at higher value. Some of the examples of it are as
follows:
 By undervaluing goodwill or stock
 By excessive depreciation
 By creating excessive provisions
 Showing free reserves as creditors
 By charging capital expenditure to profit and loss account
Advantages of Secret Reserves

Some of the important advantages are given below:
 Without disclosing to its shareholders, it increases working capital of a concern,

which is a clear indication of the sound financial position.
 With the help of secret reserves, directors can maintain the rate of dividends during
the unfavorable time.
 Non-disclosure of a big profit is useful to avoid an un-due competition.
Limitations of Secret Reserves

Major limitations or objections of secret reserves are as follows:
 Due to non-disclosure of actual profit, financial statements do not presents true

and fair view of the state of affairs.
 There are lots of chances of misuse of reserves by the directors for their personal
benefits.
 Due to secret reserves, chances for the concealment of worst position of a company
are very high.
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 Company will get very lower amount of claim of insurance at the time of loss of
stock or other assets, as valuation of the assets are done at very low value to
create secret reserve.
General and Specific Reserves

Specific reserves are created and utilized for the purpose only for which they are created,
like dividend equalization reserve and debenture redemption reserve.
General reserves are created for any future contingency or to utilize at the time of
expansion of a business. Purpose of creation of General reserve is to strengthen the
financial position of the company and to increase the working capital.
Sinking Fund
For the purpose to repay of any liabilities or to replace any fixed assets after particular
period, sinking funds are created. For this, some amount are charged or appropriated from
the profit and loss account every year and invested in any outside securities. Without any
extra ordinary burden, replacement of an asset may be done in a systematic manner or
pay any known liability on maturity of the sinking fund.
Investment of Reserves
It is a controversial issue, whether a reserve should be invested in outside securities or
not. Thus, to decide anything, it is important to study the need and requirement of a firm
according to the financial position of a firm. Therefore, investment in outside securities is
justified only in a case where company has the extra fund to invest.
Nature of Reserve
In-spite of showing reserves on the liabilities side of a Balance Sheet, reserves are actually
not at all any liabilities of a firm. Reserve represents as accumulated profits, which are
available to disburse among the shareholders.
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5. Financial Accounting ─ Measurement of Business
Income
One of the most significant accounting concepts is “Concept of Income”. Similarly,

measurement of a business income is also an important function of an accountant.
In General term, payment received in lieu of services or goods are called income, for
example, salary received by any employee is his income. There may be different type of
incomes like Gross income, Net income, National Income, and Personal income, but we
are here more concerned for a business income. Surplus revenue over expenses incurred
is called as “Business Income.”
Objectives of Net Income

Following are the important objectives of a net income:
 Historical income figure is the base for future projections.
 Ascertainment of a net income is necessary to give portion of profit to employees.
 To evaluate the activities, which give higher return on scarce resources are
preferred. It helps to increase the wealth of a firm.
 Ascertainment of a net income is helpful for paying dividends to the shareholders

of any company.
 Return of income on capital employed, gives an idea of overall efficiency of a

business.
Definition of Income
The most authentic definition is given by the American Accounting Association as:
“The realized net income of an enterprise measures its effectiveness as an operative unit
and is the change in its net assets arising out of a (a) the excess or deficiency of revenue
compared with related expired cost, and (b) other gains or losses to the enterprise from
sales, exchange or other conversion of assets:”.
According to the American Accounting Association, to be as business income, income

should be realized. For example, to be a business income, only appreciation in value of
assets of a company is not enough, for this, asset has really been disposed of.
Accounting Period
For the measurement of any income concerns, instead of a point of time, a span of time
is required. Creditors, investors, owners, and government, all of them require systematic
accounting reports at regular and proper intervals. The maximum interval between reports
is one year, as it helps a businessman to take any corrective action.
An accounting period concept is directly related to matching concept and realization

concept; in the absence of any of them, we could not measure income of the concerns.
On the basis of matching concept, expenses should be determined in a particular
accounting period (usually a year) and matched with the revenue (based on realization
concept) and the result will be income or loss of the accounting period.
20
Accounting Concept and Income Measurement

The measurement of accounting income is the subject to several accounting concepts and
conventions. Impact of accounting concepts and convention on measurement of the
accounting income is given below:
Conservatism
Where an income of one period may be shifted to another period for the measurement of
income is called as ‘conservatism approach.’
According to the convention of conservatism, the policy of playing safe is followed while
determining a business income and an accountant seeks to ensure that the reported profit
is not over stated. Measurement of a stock at cost or market price, whichever is less is
one of the important examples as applied to measurement of income. But it must be
insured that providing excessive depreciation or excessive provisions for a doubt full debt
or excessive reserve should not be there.
Consistency
According to this concept, the principle of consistency should be followed in accounting
practice. For example, in the treatment of assets, liabilities, revenues, and expenses to
insure the comparison of accounting results of one period with another period.
Therefore, the accounting profession and the corporate laws of most of the counties
require that financial statement must be made out on the basis that the figures stated are
consistent with those of the preceding year.
Entity Concept
Proprietor and business are the two separate and different entities according to the entity
concept. For example, an interest on capital is business expenditure, but for a proprietor,
it is an income. Thus, we cannot treat a business income as personal income or vice-versa.
Going Concern Concept

According to this concept, it is assumed that business will continue for a long time. Thus,
charging depreciation on a Fixed Asset is based on this concept.
Accrual Concept
According to this concept, an income must be recognized in the period in which it was
realized and costs must be matched with the revenue of that period.
Accounting Period
It is desirable to adopt a calendar year or natural business year to know the results of
business.
21
Computation of Business Income

To compute business income, following are the two methods:
Balance Sheet Approach

Comparison of the closing values (Assets minus outsider’s liabilities) of a firm with the
values at the beginning of that accounting period is called as Balance Sheet approach. In
above value, an addition to capital will be subtracted and addition of drawings will be
added while computing the business income of a firm. Since, income is calculated with the
help of Balance Sheet hence called as Balance Sheet approach.
Transaction Approach
Transactions are mostly related to production or the purchase of goods and the sale of
goods and all these transactions directly or indirectly related to the revenue or to the cost.
Therefore, surplus collection of the revenue by selling goods, spent over for production or
purchasing the goods is the measure of income. This system is widely followed by the
enterprises where double entry system adopted.
Measurement of Business Income

There are following two factors which are helpful in the estimation of an income:
 Revenues: Sale of goods and rendering of services are the way to generate
revenue. Therefore, it can be defined as consideration, recovered by the business
for rendering services and goods to its customers.
 Expenses: An expense is an expired cost. We can say the cost that have been
consumed in a process of producing revenue are the expired cost. Expenses tell us
- how assets are decreased as a result of the services performed by a business.
Measurement of Revenue
Measurement of the revenue is based on an accrual concept. Accounting period, in which
revenue earned, is the period of revenue accrues. Therefore, a receipt of cash and revenue
earned are the two different things. We can say that revenue is earned only when it is
actually realized and not necessarily, when it is received.
Measurement of Expenses
 In case of delivery of goods to its customers is a direct identification with the
revenue.
 Rent and office salaries are an indirect association with the revenue.
There are four types of events (given below) that need proper consideration about as an
expense of a given period and expenditure and cash payment made in connection with
those items:
 Expenditure, which are expenses of the current year.
22
 Some expenditure, which are made prior to this period and has become expense
of the current year.
 Expenditure, which is made this year, becomes expense in the next accounting
periods. For example, purchase of fixed assets and depreciation in next up-coming
years.
 Expense of this year, which will be paid in next accounting years. For example,
outstanding expenses.
Matching Concept
It is a problem of recognition of revenue during the year and allocation of expired cost to
the period.
Recognition of Revenue
Most frequent criteria, which are used in recognition of the revenue are as follows:
 Point of Sale: Transfer of ownership title to a buyer is point of sale, in case of sale
of commodity.
 Receipt of Payment: Criteria of cash basis is widely used by the attorneys,

physicians, and other professionals in which revenue is considered to be earned at
the time of collection of cash.
 Instalment Method: Instalment method is widely used in retail trading specially

in consumer durables. In this system, revenue earned is treated in the same
manner as is used in any other credit sale.
 Gold Mines: The accounting period in which gold is mined is the period of revenue
earned.
 Contracts: Degree of contract completion, especially in long term construction

contracts is based on percentage of completion of a contract in a single accounting
year. It is based on total estimated life of the contract.
Allocation of Costs
Matching of expired revenue and expired costs on a periodic time basis is the satisfactory
basis of allocation of cost as stated earlier.
Measurement of Costs
Measurement of costs can be determined by:
 Historical Costs: To determine periodic net income and financial status, historical
cost is important. Historical cost actually means - outflow of cash or cash
equivalents for goods and services acquired.
 Replacement Costs: Replacing any asset at the current market price is called as
replacement cost.
23
Basis of Measurement of Income

Following are the two significant basis of measurement of income:
 Accrual Basis: In an accrual basis accounting, incomes are recognized in a

company’s books at the time when revenue is actually earned (however, not
essentially received) and expenses is recorded when liabilities are incurred
(however, not essentially paid for). Further, expenses are compared with revenues
on the income statement when the expenses expire or title has been transferred
to the buyer, and not at the time when the expenses are paid.
 Cash Basis: In a cash basis accounting, revenues and expenses are recognized at
the time of physical cash is actually received or paid out.
Change in the Basis of Accounting

We have to pass adjustment entries whenever accounting records change from cash basis
to accrual basis or vice versa specially in respect of the prepaid expenses, outstanding
expenses, accrued income, income received in advance, bad debts & provisions,
depreciation, and stock in trade.
Features of Accounting Income

Followings are the main features of accounting income:
 Matching revenue with related cost or expenses is a matter of accounting income.
 Accounting income is based on an accounting period concept.
 Expenses are measured in terms of a historical cost and determination of expenses

is based on a cost concept.
 It is based on a realization principal.
 Revenue items are considered to ascertain a correct accounting income.
24
6. Financial Accounting ─ Bills of Exchange &
Promissory Notes
“An Instrument in writing containing an unconditional order, signed by the maker,

directing a certain person, to pay a certain sum of money only to, or to the order of a
certain person or to the bearer of the instrument.”
Section 5, Negotiable Instrument Act, 1881
Essentials of Bills of Exchange

Following are the essentials of a bill of exchange:
 Bill of exchange should be in written.
 The seller who makes the bill is termed as “Drawer,” the purchaser upon whom the
bill is drawn is known as “Drawee” and must be a person.
 Bill of exchange must be carrying certain amount and only in terms of money, and
not in terms of goods or services.
 Order to pay the money, should be unconditional.
Specimen of Bill
Rs. 10,000/ B-30 Civil Lines,
Opposite Convent School,
Hyderabad – (A.P.)
May 15, 2014
Three months after date, pay to us or on our order, the sum of rupees ten thousand only for the
Value received.
For ABC & Company
To, Atul Bihari Chaturvedi
Proprietor
XYZ & Company
Focal Point, STAMP
Surat, Gujrat
Apart from all these (given above), we also need to pay attention on the following points:
Parties to Bill of Exchange

Following are the parties of ‘Bill of Exchange:”
 The Drawer: Seller of goods is termed as drawer of “bills of exchange.”

 The Drawee: Drawee or purchaser is a person who accepts the bill of a certain
amount to be paid after a specific time.
 The Payee: Payee and drawer may be same person who gets the payment or
may be a different person. In case of same parties, will be reduced to two instead
of three.
25
Important Terms
 Stamp: Amount in excess of certain limit should be paid and signed on affixed
revenue stamp according to above specimen. In these days, threshold limit is INR
5,000/.
 Amount: Amount of bill must be written in figure as well as in words as shown in

above specimen.
 Date: Date on bill will be written on face of it as above.
 Value and Terms: Both are essential part of it and must be written as shown
above.
Acceptance of Bills
To make it a legal document, it must be signed by “Drawee.” Acceptance may be general
acceptance i.e. Drawee agrees with the full content of the bill without any change and it
may be conditional, which is called as qualified acceptance.
Classification of Bills of Exchange

Bill of exchange may be classified as viz…
 Inland Bill: Bill, which is drawn in India, both the Drawer and the Drawee are from
India and also payable in India called Inland Bill.
 Foreign Bill: Bill, which is drawn outside India, drawn on a person residing in India,
payable in India or vice versa. Due date of foreign bill starts from the date on which
Drawee sees it and accepts it.
Definition of Promissory Notes

As per Section 4 of the Indian Negotiable Instrument Act, 1881
“An instrument in writing (not being a Bank note or a currency note) containing an
unconditional undertaking, signed by the maker, to pay a certain sum of money only to,
or the order of a certain person, or to the bearer of the instrument.”
Difference between Promissory Notes and Bills of Exchange
Promissory Note Bill of Exchange
It is an unconditional promise to pay. Bill of Exchange is unconditional order to

pay.
Debtor make the promise to pay to the Bill of Exchange drawn by a seller of goods
creditor. or services and he makes an order to debtor
to make the payment.
26
Foreign promissory note make in a set of Foreign Bills of Exchange drawn in a set of
one only. three.
Promissory note payable on demand, Bill of Exchange payable on demand does

requires stamp duty. not require stamp duty.
Promissory note has only two parties i.e. Bill of exchange may have three parties,
drawer and payee. drawer, drawee and may be payee.
Since debtor himself makes the promise To be a legal document, it must be accepted
to make the payment, hence no by Drawee.
acceptance required in this case.
Advantages of Bills of Exchange and Promissory Notes

Followings are the important advantages of Bills of Exchange and Promissory Notes:
 Facilitation of the credit transactions is helpful in increasing the size of business.
 Both are the proof of purchase of goods or services in credit.
 Being a legal document, both can be produced in a court, in case of its dishonor.
 Since date of payment is fixed, it is helpful for both debtors and creditors; and,
they may manage their payment schedule accordingly.
 In case of any urgency of payment, creditor can get the bill discounted from the
bank.
 Being a negotiable instrument, promissory note is easily transferable from one

person to another.
Accounting Treatment
Bills of exchange and Promissory notes are treated as bills receivable and bills payable in
regards to accounting treatment:
 Bills Receivable: If we have to receive the payment against bills of exchange or

promissory note, it will be called as “Bills Receivable” and will be shown in the Asset
side of Balance-sheet under Current Assets.
 Bills Payable: Bills payable is current liabilities in hand of Drawee.
 Accounting Entries: When the Bill received and retained in possession till due
date:
Accounting entries to be done in the books of Drawer and Payee as:
S. No. In the Books of Drawer Entries in the Books of Acceptor
1 Customer A/c Dr Goods Purchase A/c Dr
To Sales A/c To Supplier A/c
27
(Being Goods sold on credit) (Being Goods Purchased on credit)
2 Bills Receivable A/c Dr Supplier A/c Dr
To Customer A/c To Bills Payable A/c
(Being Bill accepted by Customer) (Being Bill accepted drawn by supplier

of goods)
3 Cash/Bank A/c Dr Bills Payable A/c Dr
To Bills Receivable A/c To Cash/Bank
(Being Amount of bill received on (Being Amount paid on due date and
due date) bills payable received back)
When Bill is Discounted with the Bank

 In the Book of Drawer: The drawer of a bill may get the bill discounted from his
bank before due date of that bill. In this case, bank charges some interest on bill
amount according to waiting time. For example, if bill is drawn on 1st January for 3
months and drawer may get bill discounted on 1st February, in this case, bank will
charge interest for two months at applicable rate say 14% and drawer of bill may
pass following entry:-
Cash / Bank A/c Dr

Discount A/c Dr
To bills Receivable A/c
(Being bill discounted with bank @ 14% p.a.
discount charge debited by bank for 2 months)
 In the book of Drawee: Drawee has no need to pass entry on above, he just needs
to pass the entry at the time of payment on maturity of bill as explained earlier.
When Bill of Exchange Endorsed in Favor of a Creditor

If Drawer of the bill of exchange endorsed the bill to his creditor for his own liabilities and
bill is met on maturity, following journal entries will be passed:-
In the book of Drawer:
Creditors A/c Dr
To bills Receivable A/c
(Being bill receivable endorsed to
creditor )
Note: Drawer has no need to pass any entry at the time of maturity of a Bill.
28
In the book of Drawee: Drawee has no need to pass any entry at the time of
endorsement of Bill. Entries will remain same as explained earlier.
Dishonor of a Bill of Exchange

In case where the acceptor of a Bill of Exchange failed to pay the bill on due date of
maturity or refused to pay, it is called as dishonor of a Bill of Exchange. As a proof of
dishonor of a Bill, payee may get a certificate from a Notary Officer appointed by the
Government for this purpose. Notary officer charges some fees in this regard called as
“Noting Charges.”
Following entries will pass in the books of Drawer and Drawee:
S.No. In the Books of Drawer
1 If bill is kept by the Drawer with himself till the date of maturity:
Customer/Acceptor A/c Dr (with total Bill amount + Noting Charges)
To Bills Receivable A/c (with Bill Receivable amount)
To Cash/Bank (Noting Charges paid)
(Being Bills receivable dishonor and noting charges paid)
2 If bill is discounted with the bank:
To Bank A/c (with total Bill amount + Noting Charges)
(Being discounted Bills receivable dishonor and noting charges paid)
3 If bill is endorsed by the Drawer in favor of a Creditor:
To Creditor A/c (with total Bill amount + Noting Charges)
(Being endorsed Bills receivable dishonor and noting charges paid)
Entries in the Books of Acceptor/Debtors
In all above three case acceptor will pass only one journal entry:
Bills payable A/c Dr (with the bills payable amount)
Noting Charges A/c Dr (with Noting Charges )
To Drawer/Creditor A/c (with total Bill amount + Noting Charges)
(Being Goods Purchase on credit)
29
Renewal of Bill
There may be a situation when the acceptor of bill may not be in position to pay the bill
on due date and he may request drawer to cancel the old bill and draw a new bill on him
(i.e. Renewal of Bill). Drawer of bill may charge some interest on mutually agreed terms
and that amount of interest may be paid in cash or may be included in the bill amount.
Entries in the Books of Drawer and Drawee

Following accounting entries to be done in the books of Drawer and Drawee:
S.No. In the Books of Drawer Entries In the Books Acceptor
1 Cancellation of old bill: Cancellation of old bill:
Customer/Acceptor A/c Dr Bills Payable A/c Dr
To Bill receivable A/c To Creditor A/c
(Being old bill cancelled) (Being request for cancellation of old

bill accepted by Creditor)
2 Interest received in cash: Interest paid in cash:
Cash A/c Dr Interest A/c Dr
To Interest A/c To Cash A/c
(Being interest received on delayed (Being Interest paid on renewal of Bill)

payment)
3 In case interest not payable in In case interest not payable in

cash: cash:
Customer/Acceptor A/c Dr Interest A/c Dr
To Interest A/c To Creditor A/c
(Being Interest due on renewal of bill) (Being Interest on renewal of bill due)
4 On renewal of bill: On renewal of bill:
Bills Receivable A/c Dr Supplier A/c Dr
To Customer/Acceptor A/c To Bills Payable A/c
(Being renewal of bill including (Being Bill accepted after cancellation

amount of interest) of a new bill including interest)
30
Retiring of a Bill under Rebate

Sometimes, acceptor may approach to drawer of a bill to make early payment before due
date of a bill, following journal entries will pass in this case:
S.No. Entry In the Books of Drawer Entries In the Books of Acceptor
1 Cash/Bank A/c Dr Bills Payable A/c Dr
Rebate A/c Dr To Cash/Bank A/c
To Bills Receivable A/c To Rebate A/c
(Being Amount of bill received before (Being Amount paid before due date
due date and rebate allowed to on rebate)
customer)
Bill sent to Bank for Collection

To manage several numbers of bills receivable, drawer sent those bills to the bank for
collection and bank gives credit to the customer whenever a bill is collected from a drawee.
Following journal entries will be passed:
Entry In the Books of Drawer
1. When a bill is sent to the bank for collection:

Bills sent for Collection A/c Dr
To Bank A/c
(Being bills receivable sent to the bank for collection)
2. On collection of payment by bank:

Bank A/c Dr
To Bills sent for Collection A/c (Being
Collection of bills receivable by bank)
Accommodation Bill
A bill of exchange may be accepted to oblige a friend or any known person at the time of
his need or to provide him a loan or else to accommodate one or more parties is called as
accommodation bill.”
31
7. Financial Accounting ─ InventoryFinancial
ValuationAccounting
The Institute of Chartered Accountant of India as per Accounting Standard-2 (Revised)

defines inventory as the assets held:
 For sale in the ordinary course of a business or
 In the process of production for such a sale or
 In the form of materials or supplies to be consumed in the production process or

in rendering of the services.
Thus, the term inventory includes:
 Raw Material and supplies,
 Work in progress, and
 Finished goods.
Importance of Inventory Valuation

Proper valuation of inventory is important because of the following three reasons:-
 Importance of sufficient Inventory: An inventory represents major current

asset investment of any trading or manufacturing concern. Shortage of inventory
may close down the business. Realization of profit from resale of an inventory
makes valuation of inventory. Therefore, the point is that every business unit has
to follow a proper method of inventory valuation.
 To Determine True Financial Position: Proper valuation of an inventory can only

give true and fair view of the financial position of a business unit, as it constitutes
a significant portion of the current assets.
 For Proper Determination of Income: Proper determination of income and

profit depends on correct valuation of the inventories. Over valuation of closing
inventory may overstate the profit figure and vice-versa. Therefore, proper
valuation of an inventory is necessary to determine the true income and profit by
the business concern.
Methods of Taking Inventory

Following are the two important methods of taking inventory:
 Periodic Inventory Method and
 Perpetual Inventory Method
Let’s discuss each of them separately:
Periodic Inventory Method

This method of stock valuation is also known as physical stock taking method or annual
stock taking method. Under this system of taking inventories, stock is determined by
32
physical counting at the end of the accounting period i.e. the date of preparation of final
accounts. This system is very simple and useful in small business organizations.
Perpetual Inventory Method

This system of inventory valuation records every movement of stock on the receipt and
issue of material reflecting running balances of different kind of inventories through
preparation of store ledgers for raw material, work-in- progress, and finished goods. To
insure the accuracy of store records, a periodic reconciliation of records is done by taking
physical inventories.
Valuation of Inventory at Lower Cost or Market Price

An inventory is valued at a cost or market price, whichever is lower to ensure that the
anticipated profit should not be accounted for and full provision for anticipated losses
should be done.
As per American Institute of Certified Public Accountants: “A departure from the

cost basis of pricing the inventory is required when the utility of the goods is no longer as
great as its cost. Where there is evidence that the utility of goods, in their disposal in the
ordinary course of business, will be less than cost, whether due to physical deterioration,
obsolescence, changes in price levels, or other causes, the difference should be recognized
as loss of the current period. This is generally accomplished by stating such goods at a
lower level commonly designated as market.”
Methods of Valuation of Inventory

The following illustration shows the methods of Valuation of Inventory:
Specific Valuation of
Market Price
Identification Closing Stock
Average Cost Base Stock Inflated Price
FIFO LIFO HIFO
Methods of
Valuation of
Inventory
Let’s discuss each one of the methods in detail.
33
First in First out (FIFO) Method

FIFO is the most popular method of an inventory valuation, which is based on assumption
that the material first received or purchased are the first to be sold or issued. It means,
closing stock is out of the last or latest received or manufactured goods.
It will clear with a small and simple example as given below:
Date No. of Item Rate Value
Opening stock 100 10 1000
Purchased on 01-04-13 500 10 5000
Purchased on 01-07-13 500 12 6000
Purchased on 01-01-14 1000 15 15000
Total Purchases 2100 27000
Item Sold 1700
Closing stock 400 15 6000
In above example, it is assumed that closing stock of 400 items was out 1000 items
purchased on 01-01-2014.
Last in First out (LIFO) Method

As name suggests, closing stock is valued on the basis of oldest purchased or
manufactured items. First time, this method was used by the U.S.A., at the time of Second
World War to get the advantage of hike in prices. In the above example, closing stock will
be valued at 400 items @ Rs. 10 each = Rs. 4000
Note: Here 100 items from opening stock and 300 items were out of
purchases made on
01-04- 2013
Average Cost Method

Average cost method is used where identification of stock with rate or value of stock is not
possible. It is of two types Viz…
 Simple Average Price Method
 Weighted Average Price Method
34
Simple Average Price Method

Simple average price method may be explained as below:
Suppose, four types of items are in stock as follows:
500 units purchased @ Rs. 10 per unit = Rs. 5000
Total Units 1850 for = Rs. 22400
Simple average method ignored the inventory at cost, therefore the valuation of stock of
1850 units will be = 12 x 1850 = Rs. 22,200 whereas the actual cost is Rs. 22,400
So, if we want to choose average method then weighted price method should be followed
under which valuation will be done as hereunder.
Weighted Average Price Method

In the above example, Rs. 22,400 will be divided by 1850 units and the average price will
be Rs. 12.1081.
Highest in First out (HIFO) Method

This method is based on the assumption that the highest value of material always
consumed first and closing stock will be valued at the lowest cost of purchased or
manufactured material. This method is not a popular method of valuation of inventory and
so, used only by the business units having monopoly products or who are dealing with the
cost + contract.
Base Stock Method

Base stock means — minimum level of stock maintained by a business unit to run his
business without any interruption or which is according to AS-2 issued by The Institute
of Chartered Accountants of India as “the base stock formula proceeds on the
assumption that a minimum quantity of inventory (base stock) must be held at all times
in order to carry on business.”
Note: This method can be followed only when LIFO method is used.
Inflated Price Method

This method of valuation covers normal losses, increasing price of purchases to calculate
closing value of an inventory. For example, if 550 units purchased for Rs. 2000 and due
to normal loss units, remain 500 then the cost per unit will be 2000/500 = Rs. 4 per unit,
and while calculating closing stock value for 100 unit, cost will be Rs. 400 (100 x 4).
35
Specific Identification Method

Under this method, where identification of items with price is possible, then closing stock
will be valued accordingly.
Market Price Method

Under this method of valuation, stock is valued at current market price. It is also called
replacement price or realizable price method.
Method of Valuation of Closing Stock when it is not given

In case, where the value of closing stock is not given, we may calculate it as:
Opening stock xx
Add: Net Purchases xx
Less : Cost of Sales xx
Less: Gross Profit xx
Value of Closing stock xx
Putting value in above formula, we may also calculate the value of opening stock.
36
8. Financial Accounting ─ Analysis of Changes in Income
The purpose of preparing a financial statement is not only to know the net income or losses
of concern for the current year, but also to know the change in net income or losses of a
firm in comparisons to the preceding years.
There are two types of financial statements, which reflect two types of profits i.e. trading
account shows the gross profit and Profit & Loss accounts shows the net profit of the
concern for a specific accounting period. Under this chapter, we will discuss the reasons
for changes in Gross Profit Ratio.
Gross Profit Ratio (GPR)

Gross profit means, excess of sales over cost of goods sold. This ratio also indicates the
losses due to damage or mismanagement. More the ratio is high more it is good for a
financial health of a concern. Chances of higher net income are more in an organization
where ratio of gross profit is high (formula is given below):
Higher gross profit provides leverage to the management to meet their indirect expenses
and to spare net income for the distribution of profit and to increase the reserves.
Gross Profit Margin

When Gross profit margin is presented in percentage, it is called as Gross profit margin
(formula is given below):
Chances of Increase in GPR may be due to following Reasons:

 Without increase in corresponding costs, if there is an increase in selling price.
 Without decrease in selling price, if there is decrease in cost of production of products.
 There may be equal decrease or increase in selling price and cost of production
without affecting gross profit of the current year.
 There may be chances that the valuations of closing stocks are done with higher price.
 It is also possible that the opening stock of a concern is valued at very lower rate.
 There is a possibility that given sales are inclusive of consignment sale due to any
mistake or otherwise.
 Omission of purchase invoices in the books of accounts may also be one of the
reasons for higher gross profit.
37
Chances of Decrease in GPR may be due to following Reasons:

 If cost price remains same, but decrease in selling price.
 Sale price remains same, but increase in cost of production.
 Personal used goods debited to purchase account.
 Closing stock may be valued at very low price.
 Opening stock may be valued at very high price.
 Any omission or mistake while valuation of closing stock.
It is necessary for survival and progress of any business to keep its margin of gross profit
high as much as possible to enable it to cover its operative expenses as well as indirect
expenses.
Analysis of Gross Profit

Analysis of changes in gross profit is the first step in determination of a net income. Change
of gross profit in current year may be due to the following reasons:
 Change in sale amount may be due to following three reasons:
o Change in selling price.
o Change in quantity sold without change in sale price.
o Change in sale price as well as quantity of goods sold.
 Change in cost of goods sold may be due to following reasons:
o Change in cost of production.
o Change quantity of goods sold.
o Change in quantity as well as cost of goods sold.
Example
Make an analysis of changes from the information given below:
Particulars Year 2012 Year 2013 Changes

(Rs.) (Rs.) (Increase or
decrease)
Sales 3,50,000 4,80,000 1,30,000
Number of Unit 5,000 6,000 1,000

sold
Selling Price per 70 80 10

Unit
38
Solution
Increase in sales amount due to price:
Increase in price per unit x Number of unit sold in current year
= 10 x 6000 = 60,000
Increase in sales amount due to Quantity:
Increase in number of unit sold x price of last year
= 1,000 x 70 = 70,000
Combined effect of change in quantity and price (A+B)
= 1, 30,000
39
9. Financial Accounting ─ Accounting forFinancial Accounting
Consignment
Due to increasing size of market, it is quite obvious that manufacturers or whole sellers
cannot approach directly to every customer around the state or nation. To overcome this
limitation, manufacturers normally appoint reliable agents at every desired location to
reach the customers directly. He makes an agreement with local traders who can sell
goods on his behalf on commission basis.
Meaning & Features of Consignment

Consignment is a process under which the owner consigns/handovers his materials to his
agent/salesman for the purpose of shipping, transfer, sale etc.
Following are the points that throw more light on the nature and scope of a consignment:
 Here, ultimate ownership of the goods remains with the manufacturer or whole
seller who handovers goods to his agent for sale on commission basis. Consignment
is merely a transfer of possession of goods not an ownership.
 Since ownership of goods remain with the manufacturer (consignor), consignee

(agent) is not responsible for any loss or destruction of goods.
 The goods are sold on owner’s risk and hence, profit/loss goes to owner.
 Consignee only gets re-imbursement of expenses incurred by him and commission

on sale made by him, because sale that proceeds, belongs to owner (consignor).
Why is Consignment not a Sale?

Following are the reasons that explain why consignment is not a sale:
 Ownership: Ownership of goods need to be transferred from seller to buyer in

case of sale, but ownership of goods remains with the consignor, till the goods are
sold by the consignee.
 Risk: In case of a consignment, normally, risk remains with the consignor in the
event of goods being lost or destroyed.
 Relationship: The relation between a seller and a buyer will be of debtor and creditor
in case where goods are sold on credit basis. On the other hand, the relationship
between a consignor and a consignee is that of principal and agent.
 Goods Return: Usually, the sold goods cannot be returned back; however, if there is
any manufacturing defect or any other technical fault, seller is obliged to take
them back. On the other hand, consignee may return the unsold stock of goods to
consignor anytime.
40
Important Terms
Pro-forma Invoice
Invoice implies that the sale has taken place, but pro-forma invoice is not an invoice. Pro-
forma invoice is a statement prepared by the consignor of goods showing quantity, quality,
and price of the goods. Such pro-forma invoice is issued by the consignor to consignee
regarding the goods before the sale actually takes place.
Account Sale
Statement showing the details of goods received, goods sold, expenses incurred,
commission charged, remittances made, and due balance is called Account Sale and it is
remitted by the consignee to the consignor of goods on a periodic basis.
Commission
There are three types of commission payable to consignee on sale of the goods:
 Simple Commission: This is usually a fixed percentage on the total sale,

calculated as per mutually agreed terms.
 Over-riding Commission: In case of an extra-ordinary sale of the goods, some

specific amount is payable to consignee in the form of an incentive is called over-
riding commission. Over-riding commission is also calculated on the total sales.
 Del-credere Commission: “An agreement by which an agent or factor, in

consideration of an additional premium or commission (called a del credere
commission), engages, when he sells goods on credit, to insure, warrant, or
guarantee to his principal the solvency of the purchaser, the engagement of the
factor being to pay the debt himself if it is not punctually discharged by the buyer
when it becomes due.”
C. & G. Merriam Co.
A del credere commission is paid by the consignor to his agent for taking additional risk of
recovery of debts from the consignee on an account of credit sales made by him (agent)
on consignor's behalf.
Direct Expenses
Expenses, which increases the cost of the goods and are of non-recurring nature and
incurred till the goods reach the warehouse of consignee may called direct expenses.
Indirect Expenses
Warehouse rent, storage charges, advertisement expenses, salaries, etc. comes under the
category of the indirect expenses. The distinctions between direct and indirect expenses
are important especially at the time of valuation of the unsold closing stock.
Advance
Amount paid in advance by a consignee to consigner as security called as advance.
41
Valuation of unsold Consignment

Valuation of unsold stock will be done like a closing stock of a Trading concern and should
be valued at the cost or the market price whichever is low. This stock will be valued at:
 Proportionate cost price and

 Proportionate direct expenses.
Here, proportionate direct expenses mean — all expenses incurred by the consignor and
the expenses of consignee, which are incurred by him till the goods reach the warehouse.
Invoicing Goods higher than Cost

Under this method, goods are charged at the cost + profit and the pro-forma invoice also
shows this higher price of such goods. To know the actual profit, at the end of an
accounting period, consignment account will be credited with excess price so charged.
Value of the stock will also be adjusted to the extent of profit element. Main reason to
adopt this policy by consignor is:
 To hide actual profit from consignee.
 Valuation of a stock at the consignor’s warehouse is comparatively easy in this

case.
 In this case, consignor usually directs consignee to sale goods on invoice price only.
It prevents different sale price to different customers.
Loss of Goods
There may be two types of losses as explained below:
Normal Loss: Normal loss may occur due to inherent characteristics of goods like
evaporation, drying up of goods, etc. It is not separately shown in the consignment
account, but included in the cost of goods sold and the closing stock by inflating the rate
per unit. To calculate the value of unsold stock, following formula is used:
𝐓𝐨𝐭𝐚𝐥 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐠𝐨𝐨𝐝𝐬 𝐬𝐞𝐧𝐭
𝐕𝐚𝐥𝐮𝐞 𝐨𝐟 𝐜𝐥𝐨𝐬𝐢𝐧𝐠 𝐬𝐭𝐨𝐜𝐤 = × 𝐔𝐧𝐬𝐨𝐥𝐝 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲
𝐍𝐞𝐭 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐫𝐞𝐜𝐞𝐢𝐯𝐞𝐝 𝐛𝐲 𝐜𝐨𝐧𝐬𝐢𝐠𝐧𝐞𝐞
N𝐞𝐭 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐫𝐞𝐜𝐞𝐢𝐯𝐞𝐝 = 𝐆𝐨𝐨𝐝𝐬 𝐜𝐨𝐧𝐬𝐢𝐠𝐧𝐞𝐝 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 − 𝐍𝐨𝐫𝐦𝐚𝐥 𝐥𝐨𝐬𝐬 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲
Abnormal Loss: An abnormal loss may occur due to any accidental reason. It is credited
to the consignment account to calculate actual profitability. Valuation of closing stock is
done on the same basis as explained earlier i.e. proportionate cost + proportionate direct
expenses.
42
Abnormal Loss and Insurance

If, there is an insurance policy in respect of the consigned goods; following entries will be
passed in the books of a consignor:
1. Payment of Insurance Consignment A/c Dr

Premium:
To Cash A/c
(a) If insurance premium is paid by the
consignor, then cash will be credited. Or
(b) If Insurance premium is paid by To Consignee A/c

the consignee, then consignee’s A/c
will be credited. (Being Insurance premium paid)
Abnormal Loss A/c Dr
2. At the time of Abnormal Loss To Consignment A/c
(Being Loss Incurred)
Insurance Company (Name of the insurer) A/c
Dr
3. Acceptance of Claim by
Insurance Company To Abnormal Loss A/c
(Being claim admitted)
Bank A/c Dr
4. On receipt of Claim To Insurance Company A/c
(Being amount of claim received)
Profit & Loss A/c Dr
5. In Case of Loss To Abnormal Loss A/c
(Being amount of Abnormal Loss transferred)
43
Summary of Accounting Entries

Following Accounting Entries (Except for Loss) will be done in the books of consignor and
consignee for transactions related to the consignment:
In the Books of Consignor In the Books of Consignee
1. When goods are sent to the

consignee:
No need to do any Entry in this case
Consignment A/c Dr
To Goods Sent on Consignment A/c
(Being Goods Sent on Consignment)
2.Expenses Incurred by Consignor:
Consignment A/c Dr Not Applicable
To Cash/Bank A/c
(Being Expenses incurred on

consignment)
3. Advance given by consignee:
Cash/Bank A/c Dr Consigner A/c Dr
To Consignee’s A/c To Bank/Cash A/c
(Being advance received from (Being Advance amount paid to Consignor)

consignee)
4. Expenses Incurred by Consignee:
Consignment A/c Dr Consigner A/c Dr
(Being Expenses incurred by consignee) (Being Expenses incurred on goods

received on consignment)
5. Sale by Consignee: Cash (for cash sale) A/c Dr
Consignee’s A/c Dr Debtors (for Credit Sale) A/c Dr
To Consignment A/c To Consignor A/c
(Being Expenses incurred by consignee) (Being goods sold)
6. Commission to Consignee:
Consignment A/c Dr Consigner A/c Dr
To Consignee’s A/c To Commission A/c
44
(Being Commission on sale due to (Being Commission earned)

consignee)
7. Remittance from Consignee:
Cash/Bank A/c Dr Consigner A/c Dr
(Being due amount received from (Being Balance due Payment made to
consignee) consignor)
8. Entry for Profit on Consignment;
Profit & Loss A/c Dr Not Applicable
To Consignment A/c
(Being Profit earned on consignment)
9. Loss on Consignment:
Consignment A/c Dr Not Applicable
To Profit & Loss A/c
(Being Loss incurred on Consignment

transferred to the profit & Loss Account)
Note: The goods sent on consignment account will be closed by transferring balance into
the Purchase account or the Trading account.
45
10. Financial Accounting ─ Joint Venture
An association of two or more persons or we may say temporary partnership combined for
the carrying out a specific business, and divide profit or loss thereof in agreed ratio is
called a Joint Venture. Concerned parties to joint venture are known as co-venturers.
The liabilities of co-venturers are limited to their profit sharing ratio or as per agreed
terms:
Suppose ‘A’ and ‘B’ undertake the job to develop a park for a consideration of Rs. 50,000/-
Lacs. Since they come together for a work on a specific project, it will termed as joint
venture and each of them (A and B) will be called as a co-venturer. Further, this venture
will automatically terminate once the project is completed.
Major Features and Characteristics of Joint Venture

Following are the major features of a joint venture:
 There is an agreement between two or more persons.
 Joint venture is made for the specific execution of a business plan/project.
 It is a temporary partnership without the use of a firm name.
 Agreement for joint ventures is automatically dissolved as soon as specific project

is over.
 Profit & Share are shared on the same terms and conditions agreed upon. However,
in the absence of any agreement, profit & share will be divided equally.
Partnership and Joint Venture

There are following differences between partnership and joint venture:
 Partnership always carried on with firm’s name, but for the joint venture, no such
firm’s name is required.
 The persons who run the business on partnership are called as partners and the
persons who agreed to take the project as joint venture are called as co-venturers.
 Normally, a partnership is constituted for a long period (including various projects),

whereas joint venture is formed to complete a specific job/project.
 Partnership is governed under the Partnership Act, 1932, whereas there is no

enactment of such kind for the joint ventures. However, as a matter of fact in law,
a joint venture is treated as a partnership.
 There is no limit specified for the numbers of co-venturers, but the number of
partners is limited to 10 under banking business and 20 for any other trade or
business.
 Liability of a partner is unlimited and may extent of his business and personal
estate, whereas under joint venture, liabilities of co-venturers are limited to the
particular assignment or project agreed upon.
46
Joint Venture and Consignment

Major differences between joint venture and consignment may be summarized as:
 Relationship: The co-venturers of a Joint venture are the owners of a Joint

venture, whereas relationship of a consignor and consignee is of owner and Agent.
 Sharing of Profits: There is no distribution of profit between a consignor and

consignee, consignee only gets commission on sale made by him. On the other
hand, the co-venturers of a joint venture share profits as per the agreed profit
sharing ratio.
 Ownership of Goods: Ownership of the goods remains with the consignor.

Consignor transfers only possession to the consignee, but every co-venturer of a
joint venture is the co-owner of the goods/project.
 Contribution of Funds: Investment is done by the consignor only. On the other

hand, funds are contributed by all co-ventures in a certain agreed proportion.
 Continuity of Business: In case of a joint venture, there is no continuity of the

business once project is completed. On the other hand, if, everything goes smooth,
consignment is a continuous process.
Accounting Records
To keep a record of the joint venture transactions, there are three following types of
accounting methods:
 When one of the Venturers keeps Accounts,
 When Separate Books of Accounts are kept for the Joint Venture, and
 When Separate Books of Accounts are not kept for the Joint Venture.
Let’s discuss each of them separately:
When one of the Venturers keeps Accounts

If one of the co-venturers is appointed to manage the joint venture, he is awarded an
extra commission or remuneration out of the profit for his services.
Journal Entries
1. When share of investment Cash/Bank A/c Dr

received from other co-venturers To Co-venturers A/c
Joint Venture A/c Dr
To Cash A/c (in case of cash purchase)

2. When goods are purchased
Or
To Creditors A/c (for credit purchase)
47
Joint Venture A/c Dr

3. When expenses incurred
To Cash A/c
Cash A/c Dr
Or
4. When goods are sold
Debtors A/c Dr
To Joint Venture A/c
5. When commission allowed to Joint Venture A/c Dr

working co-venturer To Commission A/c
6. In case of Profit balance of

joint venture, account will be Joint Venture A/c Dr
transferred to profit & Loss (own
To Profit & Loss A/c
share of working co-venturer)
and other co-venture’s personal To Co-venturers personal A/c
accounts
Profit & Loss A/c Dr
7. In case of Loss Co-venturers personal A/c Dr
To Joint Venture A/c
All Co-venturer A/c Dr

8. On settlement of accounts
To Cash/Bank A/c
When Separate Books of Accounts are kept for the Joint Venture
Under this method, all co-venturers contribute their share of investment and deposit their
shares in a Joint Bank account — newly opened for the specific purpose of the Joint
Venture. They may use this bank account to make any kind of payments and to deposit
sale proceeds or any other kind of receipts.
In addition to Bank account, a Joint venture account is also opened in the books to keep
records of all transactions routed through this account.
This category of accounts is a personal account of the each co-venturer. Thus following
three accounts are opened:
 Joint Bank Account

 Joint Venture Account
 Personal account of co-venturers
48
When Separate Books of Accounts are not kept for the Joint Venture
It is of two types:
 When all venturers keep separate accounts
 Memorandum joint venture method
When all Venturers keep Separate Accounts:

 Separate Joint venture account and personal accounts of other co-venturers are
opened under this method of accounting.
 Joint venture account is debited and bank account or creditor account is credited
on the account of goods purchased or expensed.
 Joint venture account is credited and a bank account or debtor account is debited
in case of either cash sale or credit sale.
 Each co-venturer debits joint venture account and credits personal accounts of
other co-venturer on the account of either goods purchased or expensed by other
co-venturers.
 Joint venture account is credited and personal account of others co-venturer

account is debited in case of sale made by other co-venturers.
 Joint venture account is debited and commission account is credited if, commission
is receivable, but if commission is receivable by other co-venturer, then the
concerned co-venturer account will be credited instead of the commission account.
 If unsold stock is taken, then goods account will be debited by crediting Joint
venture account. On the other hand, if unsold stock is taken by any other co-
venturer, then personal account of the co-venturer will be debited.
 Balance in the joint venture accounts represents profit or loss and later that amount
of profit or loss will be transferred to the personal accounts of co-venturers.
Note: Above transactions are possible only when all the co-venturers exchange
information’s on regular basis.
Memorandum Joint Venture Method

Important features of memorandum method are given as hereunder:
 Only one personal account is opened by each co-venturer in his book named Joint
Venture account with…………… (Name of other co-venturer). Same process will be
followed by other co-venturer in his books of accounts.
 Only one personal account will be opened by each co-venturer irrespective of the
fact, how many other co-venturers are exists. For example, there is a joint venture
of 4 person A,B,C, & D; now, A in his books will open only one personal account
named as Joint venture with B,C, & D account.
 Each party will record only those transactions in his book, which are done by him;
the transactions done by other co-venturers will be ignored.
49
 In addition to above said personal account, a combined account named as

“memorandum joint venture account” will also be opened.
 Memorandum account is merely a combined account of personal accounts opened

by each co-venturer. Debit side of personal account will be transferred to the
memorandum account and the credit side of personal account will be transferred
to the credit side of memorandum account.
 Transactions done by co-venturers among themselves including cash received or

paid by one co-venturer to other will be ignored at the time of preparation of a
memorandum account.
 Balance of memorandum joint venture account will represent profit or loss of the
particular business. Further, the profit or loss will be transferred to the individual
co-venturer account in their profit sharing ratio.
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11. Financial Accounting ─ Non-Trading Accounts
Some of the organizations or institutions are constituted to provide valuable services to

the society with the objective not to earn profit. These organizations normally offer the
services such as education, medical, social clubs, charitable trusts, trade unions, etc.
However, we can summarize these organizations in the following three types of categories:
 Clubs, associations, or society’s works for the welfare of their members.
 Charitable institutions like hospitals, students’ hostels, and other educational

institutions providing education to poor children as well as illiterate young and old
groups.
 Professional firms of lawyers, chartered accountants, architects, doctors, solicitors,

etc.
What is Non-Trading Account?

Maintenance of proper books of accounts is necessary to safeguard the money of its
members and general public from any kind of misuse or misappropriations. It is important
to know the total receipts, total payments, and also to know financial status of an
institution. Hence, the account opened and maintained for and by the organizations
discussed above is known as Non-trading account.
Normally, registration of members, minute book, cash receipt journal, cash payment
journal, etc. are main record which is maintained by these organizations/ institutions in
their non-trading accounts. At the end of an accounting period, these institutions prepares
its final accounts, which include the following:
 Receipt and Payment Account
 Income and Expenditure Account
 Balance-Sheet
Let’s discuss each of these in detail.
Receipt and Payment Account

It is a real account. Basic rule of double entries is followed to prepare this account. It is
prepared from a cash book at the end of the accounting period. Every transaction
regarding the cash transactions is recorded in the Cash Book in a chronological order. We
may say that the Receipt and Payment account is a summary of cash payment and cash
receipts during the current year.
For example, if rent and salary paid on monthly basis all over the accounting period, and
donation or subscription received during the current year recorded in a cash book date
wise, but at the end of the accounting period, the Receipt and Payment account will contain
total amount of rent paid, salary paid, subscription received and donation received. All
cash receipt will be recorded on the debit side and all cash payment will be recorded on
the credit side.
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Income & Expenditure Account

Income and expenditure account is a nominal account and as an equivalent to Profit and
Loss account.
The essential features of an income and expenditure account are as follows:
 Expenses and losses are recorded in the debit side of it and all incomes and gains
are recorded on the credit side.
 Capital income and expenditure are excluded and revenue income and expenses
are included in it.
 It is based on a mercantile system of accounting, therefore, the income and

expenses related to preceding years or subsequent years are excluded while
preparing the income and expenditure account.
 The credit balance of an income and expenditure account shows surplus. Further,
excess of income over the expenditure and the debit balance of it show deficit i.e.
excess of the expenditure over income.
 Only nominal accounts are considered in preparation of this account.
Balance Sheet
The date on which a balance sheet is prepared, particulars of all the assets and liabilities
are recorded in the same manner as we do in any other profit making firms. Its capital
fund is made up of surplus income over expenditure and other incomes capitalized in the
given period of time. Sometimes, two balance sheets need to be prepared viz…
 At the beginning of the accounting year to know the opening capital fund and
 At the end of the financial year to know the financial position of the organization.
Conversion of Receipt and Payment Account into Income &

Expenditure Account
Following are the steps required to convert receipt and payment account into income &
expenditure account:
 Opening balance and closing balance of a receipt and payment account

representing opening cash in hand, opening cash at bank, closing cash in hand,
and closing cash at bank need to be ignored.
 Items of capital receipts and capital payment will be excluded while preparing an
income and expenditure account.
 Revenue items of an income and expenditure will be considered only at the time of
preparation of an income & expenditure account from the receipt and payment
account.
 All adjustment regarding the outstanding expenses, prepaid expenses, provision

for bad debts, provision for depreciation, income received in advance, and income
receivable will be done.
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 An income and expenditure relating to preceding year or subsequent year will be

ignored, and the items only related to the current year will be considered.
Method to Calculation
With the help of ledger accounts, we may calculate the value of income or expenses.
The following two examples describe the method of calculation:
Example (1) — to calculate the amount of expenses of the current year, we need to
prepare a ledger account of a particular expense and then the balancing figure of it will
represent the amount of expense for the current year.
From the following particulars, please find out the amount of rent need to be shown in
income & expenditure account:
Particulars Amount
(in Rs.)
Outstanding Rent at the beginning of the year
(as on 01-04-2013) 6,000
Amount as shown in the receipt and payment account 26,000
Outstanding Rent at the end of the year (31-03-14) 4,000
Solution:
Rent Account
Date Particulars Amount Date Particulars Amount
01-04-13 By Balance b/d 6,000
To Cash Paid 26,000 31-03-14 By Income and 24,000

expenditure a/c
(As per receipt
and payment (Balancing
account) Figure)*
31-03-14 To Balance C/d 4,000
Total 30,000 Total 30,000
It is very clear from the above example that the balancing figure represents rent for the
current year i.e. to be transferred and shown in the debit side of the income & expenditure
account. Following the same method, we can calculate the amount of any other expenses.
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Items Peculiar to Non-Trading Concern

There are certain peculiar items in the case of non-trading concerns, which require a
special treatment:
Donations
Non-trading concerns may receive donations time to time. The treatment of donation
depends upon nature of donation.
There are two types of donation as explained below:
 Specific Donation: Some donation may be received for any specific purpose, for
example, for the construction of a room or building and then donation is termed as
specific donation. The amount of such donation cannot be used for any other
purpose. It should be shown on liabilities side of the Balance-sheet and used only
for the same purpose it is meant for.
 General Donation: When a donation is received for a common purpose is termed

as General Donation. If the amount of donation is small, it will be treated as
recurring income and will be recorded in the credit side of income & expenditure
account.
Donation of the big amount should be fairly treated as capital receipts and will be
shown in the liabilities side of the Balance sheet. However, donation is of a small
amount or a big amount may depend upon the size of a concern and amount.
Legacy
Sometimes, as per the will of a person, an amount received is called as legacy. It is as
good as donation. It is of a non-recurring nature, therefore should be treated as a capital
receipt, and hence will be appeared in the liabilities side of a Balance sheet. However, it
may also be treated as an income and may be taken to income & expenditure account.
Entrance Fees
A club or society usually charge admission fees or entrance fees for the membership. In
case of club etc., admission fees or entrance fees usually charged as capital receipts, but
in case of a hospital or educational institution, it is treated as a recurring income.
Life Membership Fees

The life membership fees may be taken from the members of institution only once in their
lifetimes. On the basis of lifetime membership, members may enjoy certain benefits.
Amount received as the Life Membership might be transferred to the “Life Membership
Fees Account” of the institution and can be dealt in the accounts by any of the following
methods:
 May be taken as liabilities side of a Balance sheet as Life Membership Fees.”
 Normal subscriptions of the members may be transferred from the Life Membership
Fees account to the subscription account as an income and the balance may be
carried forward to the following years.
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 On the basis of average life of a member, the amount may be transferred to the
income and expenditure account annually and rest will be carried forward towards
the following years.
Sale of Scrap or Old Newspapers

Without any dispute, it will be treated as recurring income and will appear in the credit
side of an income and expenditure account.
Subscription
Subscription is the major source of an income for the non-trading concerns. Subscriptions
are received from the members of a club or institution. A receipt and payment account
records all the actual subscription received during the current year and an income &
expenditure account shows the subscriptions, which relates to the current accounting
period. Therefore, some adjustments require to calculate the subscription of the current
year.
Example (1) - to calculate the amount of Subscription for the current year, the ledger
account of a subscription account needs to be drawn and the balancing figure of this will
represent the amount of subscription of the current year.
With the following particulars, please find out the amount of subscription to be shown in
an income & expenditure account:
Particulars Amount
(in Rs.)
Outstanding subscription at the beginning of the year
(as on 01-04-2013) 6,000
Amount as shown in the receipt and payment account 26,000
Outstanding subscription at the end of the year (31-03-14) 4,000
Subscription received in advance for the next year 2,000
Solution:
Subscription Account
01-04-13 To balance b/d 6,000 31-03-2014 By Cash 28,000
31-03-14 To Advance 2,000

Subscription (to
be shown as
55
Liabilities in
Balance Sheet)
31-03-14 To Income & 24,000 31-03-14 By balance 4,000

Expenditure c/d
Account
(Balancing
Figure)*
It is very clear from the above example that the balancing figure represents subscription
for the current year, which needs to be transferred to the income & expenditure account
as an income.
Special Funds
Some special funds are created by the respective institutions for specific purpose. For
example, a prize fund may be created to give the best player of the year award. Any
income relating to those funds should be added to the funds and deficit, if any may be
charged from the income & expenditure account.
Example (2) — to calculate the amount of an income related to the current year, we need
to prepare a ledger account of the particular income. Further, the balancing figure of this
account will represent the amount of an income for the current year.
From the following particulars, please find out the amount of Subscription that needs to
be shown in the Income & Expenditure account:
Particulars Amount
(in Rs.)
Outstanding Subscription at the beginning of the year
(as on 01-04-2013) 6,000
Amount as shown in the receipt and the payment account 26,000
Outstanding subscription at the end of the year (31-03-14) 4,000
Solution
Subscription Account
01-04-13 To Balance b/d 6,000
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By Income and 24,000 31-03-14 By Cash (As per 26,000

expenditure a/c receipt and
payment
(Balancing account)
Figure)*
31-03-14 To Balance C/d 4,000
It is very clear from the above example that balancing figure represents Subscription for
the current year i.e. to be transferred and shown in the credit side of the income &
expenditure account.
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12. Financial Accounting ─ SingleFinancial
EntryAccounting
As we know, there are two systems of recording transactions in our books of accounts. In
the previous chapters, we have learned about the double entry system, now let’s discuss
another system of accounting i.e. Single Entry System (SES).
Meaning and Silent Features of SES

For every accounting transaction, everyone does not follow the principle of double entry
system of accounts. Some of the small business units do not keep their books of accounts
as per double entry system. In simple words, single entry system of accounts mean — the
business unit, which does not follow the principle of double entry system.
There are following two types of SES of accounts:
 Pure Single Entry System: Personal accounts like sundry debtors and sundry
creditor’s accounts are maintained, but real and nominal accounts are not opened
under this system.
 Popular Sense: Under this system, three types of treatment are done:
o Double entry system followed for cash received from the debtors and the
cash paid to the creditors.
o Single entry system followed for expenses paid, purchases of goods,

purchases of fixed assets etc.
o Provisional entries like bad debts, depreciation, etc. are not done.
Difference between SES and DES

 Single entry is an in-complete system of accounting, whereas double entry system
(DES) is a complete system of accounting transactions.
 There is no reliability on books in a single entry system, whereas double entry

system is a reliable accounting system.
 Checking of the arithmetical accuracy is possible in a double entry system through

preparation of trial balance, whereas it is not possible under a single entry system.
 Since, single entry system does not maintain Trading, and Profit & Loss Account,
and Balance Sheet; hence, ascertainment of the actual profit and exact financial
position of the firms is not possible, on the other hand, all above is quite possible
under the double entry system of accounting.
Limitations of SES
 Single entry system of accounts do not record two-fold aspects of each and every
transactions, hence, it is not a scientific system of keeping accounting records.
 Checking of the arithmetical accuracy is not possible due to non-preparation of a

trial balance. Preparation of a trial balance is not possible, because the method of
double entry system is not followed for each business transaction.
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 Ascertainment of the actual profit of a concern is not possible, as nominal accounts

are kept under single entry system. In the absence of nominal accounts, Trading
and Profit & Loss account cannot be prepared.
 It is not possible to find the exact financial position of a firm in the absence of real
accounts, because without real accounts, it is not possible to prepare the Balance
sheet of a firm on a particular day.
 Outsiders never rely on the books of accounts of a firm.
 In case where owner of the business wants to sell his business, ascertainment of
exact value of the business is not possible, especially goodwill value of the firm.
 Single entry system is practiced only by the small business units.
Preparation of Statement of Affairs

To know the financial position of a business, the list of assets & liabilities and statement
of affairs are prepared on the last date of accounting period. As stated earlier, in the
absence of real accounts, it is not possible to prepare a Balance sheet.
Following points are required to prepare the statement of affairs:
 With the help of personal accounts, a list of debtors and creditors should be
prepared.
 Stock valuation method will be either on cost or market price, whichever is lower.
 Cash book balance should be physically verified with the cash book.
 Bank balance should also be reconciled with the Bank statements.
 Statement of affairs should contain the income received in advance and the
expenses paid in advance.
 Excess of assets over liabilities will be capital of the proprietor or firm.
 Basis for the valuation of fixed assets will be the purchased voucher and any other
available evidence.
How does the Statement of affairs Differ from Balance-Sheet?

Main difference between the statement of affairs and the Balance sheet is —reliability on
first is prepared through incomplete information and on later is based on the scientific
method of the double entry system of accounts.
Ascertainment of Profit under SES

We have the following two methods to ascertain the profit under single entry system:
 Statement of Affairs or Net worth Method and

 Conversion Method
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Net worth Method

Under the single entry system, the ascertainment of the profit can be done without
preparing a Trading and Profit & Loss account. For example,
To know the capital at the beginning of the year or at the last date of the
1 preceding accounting year, first step is to prepare the statement of affairs at
the beginning of the year.
One statement of affairs should be prepared on the last date of accounting

2
year to ascertain.
Drawing should be added to the amount of capital as ascertained at the end

3 of the year and the capital introduced if, any, during the year will be
subtracted.
4 Capital introduced if, any, during the year will be subtracted.
Difference of (3) – (1) will be the profit or loss for the year. If, (3) is more
5
than (1), then it is a profit or vice versa.
The amount of profit or loss as calculated by the step No. (4) above, will be
6 adjusted by the interest on capital and the interest on drawing (to ascertain
Net Profit of the firm).
Conversion Method
Under the conversion method system of accounting, change from the single entry system
to the double entry system on a particular date can be done by the following procedure:
 Statement of affairs should prepare on the date on which the change need to be
made. After the proper checking and verification of such balances from available
records, all the balances like cash balance, bank balance, assets, liabilities, debtors,
and creditors should appear in the statement of affairs.
 An opening journal entry should be made to bring into the books as:
Journal Entry
Asset A A/c Dr
Asset B A/c Dr
Asset C A/c Dr
Liabilities A A/c
Liabilities B A/c
Liabilities C A/c
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Being all assets and all liabilities brought forward from the
statement of affairs a/c.
Above entry will be a base entry to open all new books under the double entry system of
accounts and all the future transactions will be booked according to the double entry
system as explained earlier.
Conversion of Books of Last Year from SES into DES

To convert books of the last year from single entry to double entry system, it will be
assumed that all the subsidiary books are maintained properly under the single entry
system. However, following procedures need to be followed:
Where Cash Book, Personal Books, and Subsidiary Books are Maintained:
 Opening statement of the affairs should be prepared at the beginning of the period.
 All the impersonal accounts as appeared in the cash book should be posted in the
respective impersonal accounts, if it has not been done earlier.
 New impersonal accounts need to be opened through total of the subsidiary books.
For example, with the total of sales book and purchase book, sale account will be
credited and purchase account will be debited, vice versa in case of returns.
 All the new account should be opened for the entries relating to discount, rebates,
bad debts, etc. which are not passed through the subsidiary books. This procedure
will give two-folds effect of such transaction as appeared in the personal accounts.
 Month-wise positing should be done to the ledger accounts through petty cash
book, if, maintained by the firm.
 After completion of the above procedure, a trial balance should be prepared to

confirm the arithmetical accuracy of the books of accounts.
 After completion of the above procedure of trial balance, Trading and Profit & Loss
account and Balance sheet should be prepared (after considering all the
adjustments like prepaid expenses, outstanding expenses, income received in
advance, or receivables as well as the provisions for depreciations, doubtful debts
etc.
Where only Cash Book and Personal Books are Maintained

In this case, a different procedure of conversion will be followed:
 As described earlier, an opening statement of the affairs should be prepared at the

beginning of the period.
 All the real and nominal accounts as appeared in the cash book and not posted
earlier in any account, should be posted in respective accounts.
 An analysis of debit and credit side of personal accounts like debtors accounts and
creditors accounts will be done as per the method given below:
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Summary of Analysis to be Done
Debit side of Creditors’ Accounts Debit side of Debtors’ Accounts
1 Bills payables Opening balance as appeared in

opening Statement of Affairs
2 Discounts and rebates received Sale (Credit)
3 Return inward (Purchase returns) Transfers
4 Transfers Bills receivables (Dishonored)
5 Cash paid to Creditors
6 Endorsement of Bills Receivables in

favor of Creditors
Credit side of Debtors’ Accounts Credit side of Creditors’

accounts
1 Cash received Opening balance as appeared in

opening Statement of Affairs
2 Discount Allowed Purchases (Credit)
3 Bills receivables received Transfers
4 Discount and allowances Bills payables (dishonored)
5 Transfers
6 Goods returned (Sales returns)
7 Bad Debts
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13. Financial Accounting ─ Leasing
In the field of real estate, leasing is a popular term because it is advantageous to own land
and building. Today, most of the businesses run their offices on the leased premises.
A Lease is an agreement under which lessee (the person/entity, who takes possession of
the property) get the right to use the premises for the agreed period of time in lieu of the
rent as agreed between both Lessor (owner) and lessee. Lessor has an ownership right of
assets, but still lessee has an unrestricted right to use that asset.
Every lease contract should cover the following terms:
 Period of lease.
 Timing of the payment to be made along with the amount of rent.
 About maintenance expenses, taxes, insurance, provision for renewal of lease

agreement.
The Accounting Standard 19, issued by the Council of the Institute of Chartered
Accountants of India, covers the disclosure of appropriate accounting policies in the
financial statements.
Standards 19 are mandatory in nature and applicable to all lease agreements except some
given below:
 Lands to be used under the lease agreement.
 For use of natural resources like oil, gas, timber, metal, etc.
 Video recording, films, motion picture, patents, and copyrights.
Important Terms in Leasing

Following important terms are commonly used in lease accounting:
 Lessee: Lessee is a person who possess the right to use the asset in lieu of agreed
rent for a certain period of time (as per the lease agreement).
 Lessor: Lessor is the owner who gives right to the lessee to use his asset/property
in lieu of rent for a certain period of time.
 Lease Term: Usually, lease agreement is contracted for a fixed and non-
cancellable period called as lease term. It is also known as ‘Lease Period.’ Lease
term may be further extended as agreed with or without further amendment/s.
 Fair Value: Fair value is an amount on which an asset can be exchanged or it may
be the value of liability settled.
 Useful Life: It can be:
o A period over which an asset could be used by the lessee.

o Expected number of units that can be produced by that asset.
 Inception of Lease: It is the date on which principal provision of the lease are
committed to.
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 Residual Value: An estimated fair value of an asset at the end of the lease term
is called as residual value.
 Minimum Lease Payment: Total payment to be made by lessee to lessor during

the lease terms excluding taxes, insurance, maintenance charges, contingent rent,
etc.
 Contingent Rent: It is based on a factor other than passage of time, lease

payments i.e. percentage of sale, etc.
 Unguaranteed Residual Value: An expected fair value at the end of the lease
period is called as Unguaranteed Residual Value.
Popularity of Leasing
One of the main reasons behind the popularity of leasing is its simplicity to both the parties
i.e. lessor as well as lessee. It is beneficial in terms of its documentation and also provides
tax advantage. Selection and purchase of asset come under the purview of leasing
company, and use and rent payment of the assets are the part of lessee.
Since lessor remains owner of the assets, so he can claim for the depreciation in his books.
Interestingly, he can enjoy the tax benefit against the depreciation. Similarly, lessee pays
the rent and records such rent in his books as expenses for the purpose of tax benefit.
Advantages of Leasing
Main advantage of leasing is given hereunder:
 Lessee can use the asset without actually purchasing it, means full finance without
any margin money.
 It provides flexibility in fixation of the rent and the lease period as per the
requirements.
 In the Balance sheet of a lessee, leased assets are not shown as asset or liability
of the company, hence the credit capacity of the lessee remains un-affected.
 Leasing provides an opportunity to lessee to earn additional profit and to improve

earnings per share.
 Deduction of a rent is eligible to claim tax benefit (as business expenditure).
 Without heavy investment, lease rent can be paid out from the income generated
by the use of the assets.
 Tax benefit of the depreciation may be claimed by lessor according to the Income
Tax Act.
 Taking advantage of the full utilization of the asset is possible under a lease
agreement; chances of ignorance are high, where company purchases asset as its
own.
 In case of a closely held company, it provides better wealth planning solutions.
 It provides protection to lessee against the inflation.
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 Strict provisions of the financial institutions for acquiring an asset can be avoided
through a lease agreement.
Disadvantages of Leasing
Some of the disadvantages of leasing are:
 Leasing is not very much useful for some of the new businesses, as earning through
the business comes much after the investment.
 Some of the incentives as provided by the state and the central government, cannot
be enjoyed due to lease agreement.
 The assets, whose values are likely to appreciate, should be purchased instead of
leasing.
 In case of variation clause in a lease agreement, rental structure can be changed

due to change in the rate of interest, rate of depreciation, etc.
Classification of Lease
According to AS-19, following are the two categories of Leasing:
 Operating lease
 Finance Lease
Operating Lease
Operating lease is an agreement wherein the lessor (owner) allows the renter (lessee) to
use the agreed asset for a particular period. Usually, the lease period is shorter than the
economic life of the asset. Further, lessor does not actually transfer the ownership rights.
The Lessor gives the right to the lessee to use the asset in return of regular payments for
an agreed period of time.
As per AS-19, following are the accounting treatment in the books of lessor and lessee:
In the books of Lessor:
 Assets should be treated as the fixed assets in the Balance sheet of a lessor.
 Rental income should be treated as an income in the Profit and Loss account.
 Depreciation should be treated as expenses and should be debited from the Profit
& Loss account.
 An initial cost can be deferred to the lease period of the asset or may be booked
as expenses in the year, in which actually incurred.
 Depreciation will be charged as per AS-6.
In the books of Lessee:
 Lessee should treat a rental payment as expenses in the profit and loss account.
65
Finance Lease
In case where lease is able to secure for lessor the recovery of his capital outlays plus a
reasonable return on the fund invested during the lease period is called financing lease.
Finance lease in non-cancellable contract and also, lessor is not responsible for any
expenses and taxes of the leased asset.
In the books of Lessor:
 Total value of the investment plus income receivable on it will be treated as

receivables in the Balance sheet.
 Direct expenses may be directly debited from the profit and Loss account in the
year of expenses incurred or may be deferred up to the lease period.
In the books of Lessee:
 Initial direct cost will be treated as an asset.
 Fair value of the leased assets should be considered as an asset and a liability in
the finance lease.
 It is an appropriate to show liability separately in the Balance sheet.
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14. Financial Accounting ─ Investment Account
Anyone can buy and sell securities from a stock exchange with the purpose to increase
his/her (monetary) assets. Sale and purchase of the securities is done through banks. The
stockbrokers help people in trading by paying the amount of commission, stamp duty, and
brokerage on it, which are the essential parts of security trading.
At the time of selling of these securities, charges should be deducted from the sale, as
proceeds to get the actual sale price. Most of the time, market price is different from the
face value of securities, which depends upon different regulating factors. If market value
of the securities is equal to face value, it is called as at par; if market value is less
than face value, it is called as on discount; and if market value is higher than
face value, it is said to be on premium.
Meaning of Investment
Investment means either buying or creating an asset with the future expectation of capital
appreciation, dividends (profit), rents, interest earnings, or some combination of these
returns. However, normally, investment inherent with some form of risk, such as
investment in equities, property, and even fixed interest securities, among other things,
are the subject to inflation risk.
Further, among all these, securities are held as long term investment to earn income. It
is said to be fixed assets, but where objective of an organization is to sell and buy securities
in short term fund to utilize its surplus fund, would come under the category of current
assets.
There may be two types of securities:
 Fixed Interest Securities: Holders of fixed interest securities get fixed rate of
interest.
 Variable Yield Securities: Under this category, return on investment may differ
from year to year.
Investment Account
Investment account is an account opened for the purpose of the investment. Further, if
the number of investment is large, a separate account for each investment should be
opened.
Accounting entry on the purchase of any investments are given as hereunder:
Investment A/c Dr
To Cash/Bank A/c
On purchase of investment (Being Investment made)
Note: Investment account is inclusive of

purchase expenses like stamp duty,
Commission, and brokerage.
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On Sale of investments Cash/Bank A/c Dr
To Investment A/c
(Being Investment made)
Note: Investment account will be credited

with net realized value of investment.
Interest and dividend account Cash/Bank/Investment A/c Dr
To Dividend/Interest A/c
(Being Interest/dividend received on

investments)
Note: Investments account will be credited

in case, interest/dividend accrue and
cash/bank account will be debited (in case)
with net realized value of investment.
Investment Transactions
We normally have the following two types of investments transactions:
 Cum Dividend or Cum Interest Quotations and
 Ex-Dividend or Ex-Interest Quotations
Let’s discuss these two types of investment transactions in detail.
Cum Dividend or Cum Interest Quotations

Interest and dividend on the fixed investments accrued on regular interval, but payment
of those are made only on fixed dates. Dividends are always paid to the persons, who are
shareholder at the time of payouts. Suppose a shareholder sold his shares after keeping
those shares in his hand up to ten months, then dividends on those shares will be paid to
the buyer or we can say, to new shareholder.
So, a seller at the time of selling shares normally charge value of the accrued dividends
up to the date of sale, and this is called ‘CUM DIVIDEND” or “CUM INTEREST”. Since, the
sale price is inclusive of the value of a share and interest or dividend, therefore at the time
of entry in the books of accounts, normal price of share should be booked in the investment
account and the value of dividend or interest should be debited to dividend or interest
account.
At the time of receiving dividend or interest, dividend or interests account will be credited,
debiting cash or bank account. On the other hand, in the books of seller, normal price of
the share should be credited to Investment account and the price of accrued dividend or
interest should be credited to the dividend or interest account as the case may be.
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Accounting Entries: It can be understand through the following table:
In the Books of Buyer
Investment A/c Dr
1. On purchase of Dividend or Interest A/c

investment To Cash/Bank A/c
(Being Investment made)
Cash/Bank A/c Dr
2. On receipt of dividend
To Dividend or Interest A/c
or interest
(Being dividend or interest received)
Accrued Interest A/c Dr
3. for Accrued Interest To Interest A/c
(Being interest accrued)
In the Books of Seller
Cash/Bank A/c Dr
To Investment A/c
1. On Sale of investments
(Being Investment Sold )
Cash/Bank A/c Dr
2. On receipt of dividend or
Interest
(Being dividend or interest received)
Ex-Dividend or Ex-Interest Quotations

The buyer of shares when he is quoted ex-dividend is not entitled to receive the payment.
It is the interval between the record date and the payment date during which the stock
trades without its dividend. Therefore, the person who owns the security on the ex-
dividend date will be awarded the payment, regardless of who currently holds the stock.
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Difference between Cum-dividend and Ex-Dividend

Major differences between them are given as hereunder:
 Cum interest or dividend prices are inclusive of the interest or dividend accrued at
the date of purchase, whereas in case of the ex-dividend, prices are excluding value
of the dividend or interest.
 The purchase price is higher than normal purchase price in case of Cum-dividend,
whereas purchase price is the real price in case of ex-dividend.
 Nothing is payable additional in case of Cum-Interest, whereas separate amount of

the dividend or interest has to be paid in case of the ex-dividend or ex-interest.
Balancing the Investment Account

Difference of debit and credit side of the investment account is Profit or Loss in case where
all the investments are sold.
In case where part of the investments are sold and the balance investments stand unsold,
it should be carried forward to the next accounting period and remaining balance of the
two sides (debit and credit) will represent profit or loss on the sale of investment.
In case where investments are the fixed assets, then the profit or loss will be of capital
revenue or capital loss and should be treated accordingly.
Equity Share Accounts

Main features of investment account regarding the equity shares are given as hereunder:
 Bonus Shares: Bonus shares are issued by the profitable companies to the existing
shareholders of the company without any additional amount. Purpose of the bonus
share is to capitalize reserves of the company. Only number of the shares will be
added in face value column, and principle or capital column will remain unchanged.
 Right Shares: Right shares are first offered to the existing shareholders of the company
as a matter of the right, hence called as right shares. As per Companies Act, right
shares can be issued after two years of the establishment of a company or after one
year of first issue.
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15. Financial Accounting ─ InsolvencyFinancial
AccountsAccounting
Insolvency is a financial stringency i.e. when an individual or an organization/company is

no longer capable to pay the debts he/it owes. Insolvency usually leads to insolvency
proceedings, in which legal action can be taken against the insolvent, and assets may be
liquidated to pay off the outstanding debts.
When a Person / Entity can be Declared Insolvent

Before declaring an entity or a person as insolvent, a competent court defines two
conditions:
 A person or entity should be debtor and

 He/it should had done any act of insolvency.
Act of insolvency means, when a person (debtor) shows that he is not able to pay his
liabilities.
An order of adjudication must be passed by the court of law, before legally declaring any
person insolvent. To pass an order of adjudication by the court of law, a petition should
be filed by any of the creditor or creditors or by the debtor himself. Petition by the creditor
may be filled only in following conditions;
 Debt should be at least for Rs. 500/- or more
 Within three months of petition, an act of insolvency should be done by debtors.
After filing the petition, the competent court will fix date of hearing and then it may
declares that the debtor is insolvent or not. If insolvency of a person starts from an earlier
date, and not from the date of adjudication passed by the court. This is known as Doctrine
of Relation Back.
Under Presidency Towns Act, to conduct the insolvency proceedings, an official is

appointed by the court is known as Official Assignee and in case of Provincial Insolvency
Act, known as Official Receiver. The property of the insolvent vests in the official
assignee or receiver to realize the assets and distribute the sale proceeds of the assets in
the manner given below:
 Secured creditors will be paid in full.
 Remuneration and expenses of the official receiver.
 To Preferential Creditors.
 To unsecured creditors + partly secured creditors to the extent remain un-secured.
The Order of Discharge

Order of discharge is an order issued by the court of law to the insolvent. Normally, this
order releases the insolvent from all current and provable debts and liberates him from
the legal obligations imposed on as insolvent. The order of discharge is issued on the basis
of the report submitted by the official receiver and on the application of the insolvent.
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Interest
An interest @ 6% pa will be paid to the creditors for the period, after the order of
adjudication, if, any surplus remains, after full payment to the creditors.
Voluntary Transfer
As per the Presidency Towns Insolvency Act, any property transferred by the insolvent
without any consideration during the two years preceding the order of adjudication shall
be void. Under the Provincial Insolvency Act, such transfer became inoperative, if made
with two years of petition of the insolvency except followings:
 For consideration of marriage and made before and
 To purchase valuable consideration in good faith.
Insolvency Law
The Insolvency Act in India is based on English Bankruptcy Act and following two acts are
applicable on the Indian Territory:
 The Presidency Towns Insolvency Act, 1909: Applicable to Mumbai, Kolkata,

and Chennai.
 The Provisional Insolvency Act, 1920: Applicable to the rest of India except
Mumbai, Kolkata, and Chennai.
Above Insolvency Acts are applicable to any Individual, Partnership Firm, and Hindu
Undivided Family only. Companies Act, 1956 applies to Joint stock companies and the term
liquidation is used instead of Insolvency. In case of insolvency, a person is not able to pay
his liabilities but in case of liquidation, company may be liquidated even it has the sufficient
amount to pay its liabilities.
Insolvency Accounts
Under the Presidency Towns Insolvency Act, insolvent has to submit following documents
to the court of law:
 Statement of Affairs as on date of order and
 Deficiency Account.
No provision, for the submission of a Statement of Affairs under Provincial Insolvency Act.
The form of Statement of Affairs as prescribed by the rule made under Presidency Towns
Act is given below:
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Statement of Affairs
(As required by the Indian Insolvency Act)
In the Court of Justice
In insolvency
To the insolvent – you are required to fill up carefully and accurately, this sheet and the
several sheets, A,B,C,D,E,F,G, and H, showing the state of your affairs on the day on which
the order of adjudication was made against you viz. the …………day of …………..20…….
Such sheets, when filled up will constitute your Schedule and must be verified by Oath or
Declaration.
Gross Liabilities Expected Assets Estimated

Liabilities To rank to
(as stated and (as stated and estimated
produce
(Rs.) estimated by the by the debtors)
debtor)
Unsecured Creditors Property as per List E,

as per List A viz.
Fully Secured a) Cash at Bank

Creditors as per list
B b) Cash in hand
Less: Estimated c) Cash deposited

value of Securities with solicitor for
cost of petition
Less: Amount
thereof carried to d) Stock in trade
List C e) Machinery
Balance thereof f) Trade Fixture,
contra Fitting, Utensils,
Partly secured etc.
creditors as per List g) Furniture
C
h) Life Insurance
Less: Estimated Policies
value of Securities
i) Other property
Preferential
Creditors as per List
D (Creditors for
rent, taxes, salaries Book debts as per list F,
and wages, etc.) viz.
payable in full as per Good
contra
Doubtful
Bad
Estimated to produce
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Bills of exchange or
other similar
Securities on hand as per

List G
Estimated to produce
Surplus from securities

in the hands of creditors
fully secured (per contra)
Deduct: Creditors for

preferential rent, rates,
taxes, wages, etc. (per
contra)
Deficiency as per
explained in list H
I /We ………………make oath, solemnly affirm, and say, that the above statement and the
several lists hereunto annexed marked A,B,C,D,E,F,G, and H are to the best of my/our
knowledge and belief, a full and complete of my/our affairs on the date of the above-
mentioned order of adjudication made against me/us.
Affirmed
------------------ at. ………….this……………day of
Sworn
Before Commissioner Signature………………………
Just like Balance sheet, the statement of affairs is divided in to two part of Assets and
Liabilities and liabilities of the insolvent are classified as:
Unsecured Creditors as per List A

Trade creditors, stridhan ornament and personal belongings etc. of lady) of Mrs., bills
payable, bank overdraft, partly paid shares held, uncompleted contracts guarantees given
for others, etc., wages, rent, salaries, etc.
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Loan from Wife

Loan taken from wife is usually treated like any other loan taken and makes wife creditor
of the insolvent. In case, it is proved that loan is paid by wife out of amount received from
insolvent, then be treated as the capital of insolvent.
Interest
@ 6% interest will be paid to the creditors after the date of adjudication, if there is a
sufficient balance left after the payments to creditors.
Fully Secured Creditors as per List B

The creditors who have sufficient securities against their claims will be included in this list
and after paying these creditors, balance amount will be shown on the asset side of the
statement of affairs as available balance to distribute among other creditors.
Partly Un- secured Creditors as per List C

Un-paid or unsatisfied amount of the partly secured creditors will be shown as expected
to rank column as unsecured creditors, to be divided for unpaid amount.
Preferential Creditors as per List D

Following creditors comes under the category of preferential creditors and such creditors
get preference over the un-secured creditors.
As per the law, following creditors come under category of the preferential creditors:
 Government and local authority.
 Salary and wages for the service rendered for four months preceding the date of
the presentation of the insolvency petition.
 Under Presidency Town Insolvency Act, one month rent comes under the category
of preferential creditors, but rent is not at all comes under the preferential creditors
category as per the Provincial Insolvency Act.
The assets as shown in the statement of affairs of insolvent are classified into the four
categories as follows:
 Property as per List E: Other than the bills receivable in hand and the assets
as kept by creditors as fully and partly secured debts are comes under this list.
 Property as per List F: Following are the three categories of book debts:
 Good
 Doubtful Debts
 Bad
 Assets as per List G: Bills of exchange and other similar securities comes under
this list.
 Deficiency Account as per List H: As name suggests, deficiency account

means the deficiency, which the insolvent debtor is not able to pay.
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Important Points in Preparation of Statement of Affairs

 In case of an individual insolvent, no distinction will be made between the private
assets and the business assets while preparing a Statement of Affairs. Personal
assets are included in the Statement of Affairs to pay the business liabilities. In
case of partnership firm, after paying personal liabilities from the personal assets
of the partner, surplus if any, may be included in the statement of affairs of
Partnership firm to pay the business liabilities.
 Value exceeding Rs. 300/- of tools, wearing apparel, bedding, cooking utensils, etc.
will be included in the statement of affairs under the Presidency Towns Insolvency
Act. Assets, as pledged against secured and partly secured creditors, may be shown
in the statement of affairs only, if, became surplus after paying the fully and partly
secured creditors.
 Fully secured assets are not shown in the ‘expected to rank’ column.
 Partly secured assets after paying partly secured debts will be shown in the column
of ‘expected to rank.’
 The bills discounted to be dishonored are included in the un-secured creditors as

per the list A.
Difference between Balance Sheet and Statement of Affairs

Following are the main differences between Balance Sheet and Statement of Affairs:
 The value of assets is shown as books value as well as releasable value in the
statement of affairs; however, it is shown as only book value as in the case of
Balance sheet.
 In the Statement of Affairs, prepaid expenses and goodwill are not included,
whereas all fictitious assets are included in the Balance sheet.
 Statement of Affairs does not include capital, drawings, profit, or loss, interest on
capital, whereas Balance sheet includes all such items.
 Balance sheet does not show the amount of deficiency as shown in the Statement
of Affairs.
 Balance sheet is prepared at the end of accounting period, whereas Statement of

Affairs is prepared on the date on which order of adjudication is passed.
 Statement of affairs is prepared as per the rule of Insolvency Act, whereas Balance
sheet is a routine work to maintain the accounting record.
 Balance sheet of a firm does not include personal assets and liabilities, whereas
Statement of Affairs includes the same as discussed above in this chapter.
 Statement of Affairs includes contingent liabilities, whereas in the Balance sheet,

contingent liabilities are shown as footnote only.
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Deficiency Account (List H)

Specimen of Deficiency Account List H
Amount Amount
(Rs.) (Rs.)
Excess of Assets over liabilities Excess of Liabilities over

i.e. capital on …….. assets
Net profit arising from carrying on Net Loss arising from

business after deducting usual carrying on business after
trade expenses, income or profit deduction from profit, usual
from other source i.e. trade expenses
i) Interest on capital Bad debts as per list F
ii) Excess of private assets Expenses incurred since…….

over private liabilities
Other than usual trade
iii) Profit on realization of any expenses, viz.
assets
House hold expenses
Deficiency as per statement of (Drawings)
Affairs
Other Losses:
 Loss on realization of
Assets
 Loss through
dishonor of
discounted bills
Speculation losses
Losses through betting
Excess of private liabilities

over private assets, etc.
From the above, it is clear that debit side of the deficiency account shows capital account
and credit side of the deficiency accounts shows losses and drawing and the difference of
two sides is a deficiency as shown in the Statement of affairs Account.
Insolvency of Partnership Firm

Insolvency of the partnership firm differs from the insolvency of any individual or HUF
(Hindu undivided family). The assets of an individual are used to pay the business
liabilities, but in case of partnership firm, assets of the partners are used to pay his
personal liabilities first, and then balance, if any, may be utilized to pay the business debts.
After paying the personal debts of a partner, surplus assets will appear in the Statement
of Affairs and will be shown as “Property as per List E.”
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In case, if personal asset of a partner is in possession of any creditor as security, still such
creditor will get his dues first as unsecured creditor from the firm and then for the balance
amount, he may sell the property, owned by him to recover his dues.
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16. Financial Accounting ─ Stock Exchange Transactions
Stock exchange is an organized market where sale and purchase of listed securities of all
description i.e. shares, stocks, debentures, government securities, etc. are done. It is a
government approved market place where buyer and seller of securities of all kind find
each other to buy and sell securities on the market price.
Meaning of Stock Exchange

“ An association, organization or body of individuals, whether incorporated or not,
established for the purpose of assisting, regulating and controlling business in buying,
selling and dealing in securities.”
- The Securities Contracts (Regulation) Act, 1956
A stock exchange is a common and authorized point of exchange, which offers the services
for stock brokers and traders to buy or sell stocks, bonds, and other securities of such
kind. Further, it also provides facilities for issue and redemption of securities, other
financial instruments, and capital events. For example, payment of income and dividends.
Features and Characteristics of Stock Exchange

Following are the main features and characteristics of a stock exchange:
 Stock exchange is the market place where trading of listed securities can be done.
 Trading of un-listed securities is not allowed.
 There are certain rules and regulations that need to be followed while trading.
 Stock exchange is an association of persons, whether incorporated or not.
 Anyone can buy or sell securities whether he is investor or speculator.
 For doing business transaction i.e. sale & purchase of securities, membership is
compulsory. Non-members are not allowed to do business transactions.
Membership can be applied only when there is a vacancy in any stock exchange
and after paying the prescribed fees of respective stock exchange, membership can
be acquired. Members of stock exchange are called as brokers and commission
charged by them for the transaction done is called as brokerage.
 Only a broker (member) can buy or sell securities, therefore, investors or

speculators can do transaction through members only.
Functions and Services of Stock Exchange

Followings functions are performed by Stock Exchange:
 Anyone can sell and buy any industrial, financial, and Government securities. Stock
Exchange is an organized ready market to do all this.
 Liquidity is provided by the stock exchange. Investors and speculators can buy and
sell their securities at any time.
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 Stock exchange provides collateral value to the securities that is helpful in

borrowing from the bank on easy terms.
 Capital for the industrial growth is provided by the stock exchange that is helpful
for the investor to participate in the industrial development.
 Price list and reports are prepared and published in the newspapers and
broadcasted through the TV channels by stock exchange. It is helpful in knowing
the true value of the investments. With the help of this, an investor or speculator
can get to know the fair market value of his securities as per the latest market
trend.
 Listing of securities is encouraged by the stock exchange. Listing of securities

means — “a permission to trade” that is given by the stock exchange only after
fulfillment of the prescribed standards.
 Listed companies have to provide the financial statements, reports, and other
statements time to time to stock exchange — necessary for the maintaining the
record and deciding the value of securities.
Thus, stock exchange works as the center of providing business information at one
platform.
Procedures for Dealing at Stock Exchange

Following procedures are normally followed for dealing at stock exchange:
 No one can directly deal in stock exchange, therefore, any person who wants to
sell or buy securities, requires a broker through whom selling or buying of securities
can be done.
 After finalization of a member or a broker, intending buyer or seller of the

securities, places an order according to his choice, mentioning tentative quantity,
and price. Thereupon, broker opens a new account for each client and start trading
in the best possible way.
 After getting an order, broker tries to finalize the deal between seller and buyer.
After finalization of deal, seller and buyer of securities send a selling and buying
note respectively mentioning the detail of traded securities.
 Finally, settlement of account may be done in the following three manners:
o When the settlement of account is done as per the fixed and agreed date, it is
called as “liquidation in full.”
o When only difference of agreed price and ruling price is settled on the fixed
date, it is called as “liquidation by payment of difference.”
o When a settlement is carried forward to the next settlement period, it is known

as “carried over to next settlement period”.
In case, when purchase is delayed and charge debited by the broker to purchaser is known
as “contango” (Contango charge is also known as “Badla” Charge) and in case, where
sale is delayed by the seller and charge debited by the broker is known as
“backwardation.”
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Operators at Stock Exchange

The following figure shows the three operators at the Stock Exchange:
Operators at Stock Exchange

Broker
Sub-Broker
Jobber
Broker
As studied earlier, no one can deal directly in stock exchange and every intended seller or
buyer, who wants to sell or buy securities has to deal through members known as brokers.
Broker is duly certified by SEBI (Stock and Exchange Board of India) under its 1992 rule.
Membership of the stock exchange is restricted to prescribed numbers of members, to
financially sound persons who have sufficient experience in dealing in securities.
A broker cannot buy or sell securities on his personal capacity. He charges commission
from the parties, sellers, and buyers and deals on the behalf of his non-member clients.
Sub-broker
Sub-brokers are non-members of the stock exchange and deal only on behalf of the
members or registered brokers. Commission is received by sub-brokers on the business
procured by them out of total commission received by the brokers. Sub brokers are known
as “half commission men” and “remisiers” too.
Jobbers
Jobbers are the independent dealers, who deal in securities at their own. A jobber cannot
sell or buy securities on the behalf of others, but he deals in securities for his own profit
through fluctuation of the prices. Difference between sale price and purchase price of
securities is the profit of a jobber.
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Important Terms used in Stock Exchange

Following are the significant terms more commonly used in stock exchange:
 Bull: Bulls are those brokers who strongly expect price hike of securities and with
this hope, they buy shares to sell them at later stage (when price gets increased).
Thus bull market means when buying of the securities are on much higher side
instead of selling of the securities. Bulls first buy securities and sell when the price
of securities is high.
 Bear: Bear is pessimist, who expect fall in the price of certain securities. A Bear
first sells his securities and purchases at later stage when the price of securities
are low and the difference of both is his profit.
 Stag: A cautious investor or speculator is known as a stag. Stag doesn’t sell or

buy shares in his hand, but he tries to buy shares of new company with a hope that
price of those shares will increase in the future.
 Blue Chips: Shares of well-recognized, well-renowned, financially strong, and

well-established companies.
 Cash Shares: Settlement of some of the transactions are completed in cash are
known as cash shares. These transactions are done by real and genuine investors
who want to buy or sell shares for the actual investment purpose.
Bull Bear Stage Blue chips
Cash Shares Cleared Shares Carry Over Kerb Market
Secondary
Short Selling Arbitrage Primary Market
Market
Stock
Exchange
Terms
 Cleared Shares: Speculators are normally deals in such type of shares. In these
types of shares, settlement of the payments are done by the differential amounts
only; however, actual delivery of the securities may not be done.
 Carry Over or Badla System: Speculator earns money by foreseeing the

future. If their expectations come true, they earn profit and if not, they lose money.
Speculator mostly does transactions on forward basis, when any speculator
forwards his transactions from one settlement date to another, he has to pay
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charges called “Badla charge.” Transaction of these natures is called as Badla

System.
 Kerb Market: Transactions that done before and after the official hours are known
as kerb market.
 Short Selling: Short selling means where the large volumes of securities are sold
by the bear speculator without actually possessing.
 Arbitrage: Securities are traded at the different stock exchanges and there is
normally a little difference in prices (among different stock exchanges). Therefore,
arbitrage is practiced to take advantage of different rates.
 Primary Market: Primary market is the market where new securities are issued
for the capital formation in the form of a new issue or in the form of a right issue
to the existing shareholders.
 Secondary Market: Secondary market is the market where subsequent trading

(sale and purchase) of securities are done called as secondary market and the
transactions are known as secondary transactions.
 Group A Shares: Actively traded shares of the reputed companies are called a
Group A shares.
 Group B Shares: Not actively traded shares or the shares of different stock
exchanges are called as Group B shares.
SEBI
The Securities and Exchange Board of India (SEBI) is the regulatory board. It regulates
affairs of stock exchange in India, similar to Securities Exchange Commission of the United
States. To protect the rights of investors and to enforce an orderly growth of securities
market, SEBI came into existence by an Act of Parliament known as “Securities and
Exchange Board of India Act, 1992”.
OTCEI
The Over the Counter Exchange of India (OTCEI) was established in India in 1990. It is
the latest concept and a new way to do securities business in India similar to Electronic
Exchange in the United States. Brokers located at the different regions, communicate
through latest means of technologies such as Telephones, Faxes, Mobile phones, and
Computers.
Selectors are allowed to select the prices as shown on the computer screen among the
competitive markets, without the floor meeting of brokers. It is the most efficient,
economic, and courageous way of the trading of securities. The latest market prices of the
securities are displayed on the computer screens. Since, listing of the securities is not
required on OTCEI, hence it is the most suitable way for the small and medium size
companies.
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Over-the-Counter Exchange of India

Brokers require and maintain following books of accounts as per the SEBI rules, 1992:
 Cash Book
 Bank Book (Pass Book)
 General Ledger
 Client Ledger
 Register of Transaction
 Journal
 Document Register (Showing Particulars of the Securities received and delivered)
 Members Contract Book
 Duplicates of Contract Notes issued to clients
 Written consent of clients
 Margin Deposit Books
 Register of accounts of Sub Brokers
 An agreement with a Sub-Broker.
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17. Financial Accounting ─ Accounts Financial
of PrivateAccounting
Individuals
Most of the private individuals never keep their accounts to record earned income or
expenditure incurred by them. It is advisable for everyone to maintain an account to know
what he has earned during a particular period, what he spent, and what was his saving
out of that income. It is helpful to track the record of income and expenditure. It also
helps to increase the income (as need arises) and control on the expenditure.
Maintenance of Accounts by Private Individuals

Private individual should keep his books on cash basis system, ignoring accrued system in
different heads like insurance premium paid, medical insurance, school fees, taxes,
household expenses, medical expenses, clothing, salary received, bank interest, income
from mutual fund, rent received, and other income received.
For all these, one should keep a cash book, which can be summarized on monthly basis
as per the abstract of cash Book given below:
Abstract Cash Book

Particulars (of Income) Amount Particulars (of Expenditure) Amount
To Balance b/d xx By Kitchen Expenses xx
To Salary xx By Electricity Expenses xx
To Rent received xx By School/College fees xx
To Saving Bank Interest xx By Clothing xx
To Interest on FDR xx By Insurance Premium xx
To Income from Investment xx (Life insurance, medi-claim,
To Income from profession or xx accidental insurance, other
Business Insurance like fire, theft etc.)
Total xxxx Total xxxx
In case of professional individual, one more column can be added in the cash book to show
professional transaction and personal transaction separately. In addition to above, an
individual may keep a register to maintain the record for his assets including car, building,
investments, etc.
Maintenance of Accounts by Professionals

A cash basis of accounting is the most suitable system for any professional including
doctor, accountant, or solicitor instead of a mercantile system to fulfill the following
purposes:
 To ascertain the professional income earned by him correctly for a specific

accounting period, and also to calculate the net professional income after deducting
the related expenses from the professional income.
 To correctly record all items of income and expenditure.
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Following records should be maintained by a professional:
Cash Book
All receipts and payments should be recorded in a cash book, and a memorandum book
should be maintained to keep record of credit transactions. The credit transactions will be
scored off at the time of actually cash receipt or at the time of payment made and should
be entered in the cash book.
A cash book can be summarized under various heads on monthly, quarterly, half yearly,
or annual basis as per the suitability and requirements.
Stock Register
Two separate stock registers should be maintained, one for resale items and other to keep
record of the items of personal use. Resale items may be medicine, surgical items, the
stationery items, electrical items, computers, and any other items or asset.
Receipt and Expenditure Account

A receipt and expenditure account is similar to a profit and loss account; therefore, it is
prepared by the professionals to know the professional income and expenditure for a
specific period. Outstanding incomes are ignored to prepare it, but outstanding expenses
are included in it. Therefore, it is known as Receipt & Expenditure account instead of
Receipt & Payment account. It means, incomes are recorded on a cash basis and
expenditure on an accrual basis.
Maintenance of Accounts by Doctors

Doctors usually maintain a register that may also be known as diary or note book in which
all the particulars of the patients including charges, fees, physical conditions of patient,
etc. are recorded. After grouping, the extracted entries of diary are recorded in the cash
book under different heads of income. Similarly, expenses are also recorded under various
heads.
In case, where the number of doctors is two or more than two and they run their clinic in
the partnership, income may be recorded in the cash book under various heads (Doctor
Wise), similar to a petty cash book pattern. Similarly, the expenses relating to each doctor
may be recorded under various heads of the expenses.
Thus, cash book, stock register, memorandum book, Receipt and expenditure account,
and Balance sheet are prepared by the doctors.
Illustration
Dr. Ortho starts his medical practice on 1st January 2013 and introduced a capital of Rs.
300,000/. Receipt and payment account as on 31-12-2013.
Amount Payment Amount

Receipt
(Rs.) (Rs.)
2,500,000 By Clinic Rent 240,000

To Consultation Charges
300,000 By Salary to Staff 300,000
To Capital Introduced
86
By Books & Periodicals 15,000

By Medical Equipment 450,000
By Other expenses 38,000
By Balance c/d
Cash in hand 57,000
Cash at Bank 1,700,000
2800,000 Total 28,00,000

Total
 Outstanding salary Rs. 50,000
 Medical equipment was purchased on 01-04-2013
 Depreciation on Equipment is Rs. 15%
Solution:
Receipt & Expenditure Account of Dr. Ortho
For the year ended 31-12-2013
Expenditure Amount Receipt Amount

To Clinical Rent 240,000 By Consultation Charges 25,00,000
To Salary to Staff 300,000
Add: Outstanding
Salary 50,000 350,000
------------
To Books & Periodicals 15,000
To Other Expenses 38,000
To Depreciation on Equipment 50,625
To Surplus – Excess of Receipt over
Expenditure 1806,375
Total 25,00,000 Total 25,00,000

Dr. Ortho
Balance Sheet
As on 31-12-2013
Expenditure Amount Receipt Amount

Capital Introduced 300,000 Cash in hand 57,000
Add: Surplus 1,806,375 Cash at Bank 1,700,000
_________ 2,106,375 Medical Equipment 450,000
Outstanding Salary 50,000 Less: Depreciation 50,625
_______ 399,375
Total 2,156,375 Total 2,156,375
87
Maintenance of Accounts of Educational Institutions

Most of the educational institutions are registered under Indian Society Registration Act,
1860. The core purpose of formation of the educational institutions is to educate people
at large and not to earn profit.
Generally, following financial transactions are being incurred by the educational

institutions:
Main Sources of Collection Types of Expenses/Payments
1. Salary, allowances, and provident fund

contribution to teaching and non-
teaching staffs.
2. Examination expenses
3. Stationery & printing expenses
4. Distribution of scholarships and stipends
5. Purchase and repair of furniture &

fixture.
1. Admission fees, tuition fees,
Examination fees, fines etc. 6. Prizes
2. Security deposit by students 7. Expenses on sports and games
3. Donations from public

8. Festival and function expenses
4. Grants from Government- for

9. Library books, newspaper, magazines,
building, prizes, maintenance, etc.
etc.
10. Medical expenses- medicine and

examination
11. Audit fees and audit expenses

12. Electricity expenses
13. Telephone expenses
14. Laboratory running & maintenance
15. Laboratory equipment
16. Building Repair & maintenance
Separate collection register should be maintained to record these collections from the
above mention sources. Separate ledger for students should also be maintained for each
student to record the fees — due, received, and outstanding if any.
88
Normally, all accounting records are maintained on the basis of financial year i.e. from 1st
April to 31st March in most of the educational institutions. Educational institutions maintain
income and expenditure account to keep the records of surplus or deficiency and also to
prepare a Balance sheet to know the financial position of the institution.
Consolidation of Accounts of various Educational Institutions

Consolidation of accounts is done step by step, where various institutions are run under
one society.
The given example is an illustration of the simplified procedures:
Consolidation of Fees
Institute wise consolidation will be done as hereunder:
Opening Balance of Fees Due XXX
Add: Fees due during the current financial year XXX
XXXXX
Less: Fees collected during the current Financial Year XXX
Outstanding Fees at the end of the year XXX
Illustration
Trial Balance of the Brilliant education society as on 31st March, 2013 is given as here
under, please prepare an Income and Expenditure Account and a Balance sheet on that
date:
Particulars Amount (Debit) Amount
(Credit)
Cash in Hand 68,000
Cash at Bank 802,000
Scholarship Fund Investment 800,000
Miscellaneous Expenses 420,000
Interest received on Scholarship 80,000

Fund
Interest Received on Investment 55,000
89
Investment 550,000
Sundry Creditors 236,000
Building 1,700,000
Furniture & Fixture 200,000
Addition to Furniture & Fixture 25000
Vehicles 280,000
Sundry Debtors 260,000
Capital Fund 2,400,000
Donation for Capital Fund 500,000
Entrance Fees 40,000
Course Fees 1,600,000
Examination Fees 70,000
Auditorium Rent Received 850,000
Salary 1,100,000
Printing & Stationery 50,000
Scholarship Awarded 36,000
Scholarship Fund Reserve 360,000
Government Grant Received 100,000
Total 6,291,000 6,291,000
90
Additional Information
 Salary for one month is outstanding
 Outstanding Auditorium is Rs, 50,000/- and Rs. 25,000 received in advance.
 Depreciation is to be provided at 5% on building, 10% on Furniture & Fixture, and

15% on vehicles.
Solution
In the Books of Brilliant Education Society
For the Year ended 31st March, 2013
Expenditure Amount Income Amount
To Printing & Stationery 50,000 By Entrance Fees 40,000

To Salary 1,100,000 By Examination Fees 70,000
(+) Outstanding By Course Fees 1,600,000
Salary 100,000 By Auditorium Rent 850,000
-------------- 1,200,000 (+) Outstanding
To Miscellaneous Expenses 420,000 Rent 50,000
To Scholarship awarded 36,000 ------------
To Depreciation: 900,000
Building @ 5% 85,000 (-) Advance Rent
Furniture & Fixture 22,500 Received 25,000
Vehicles @ 15% 42,000 149,500 ----------- 875,000
------------ By Government Grants 100,000
To Surplus of Income over By Interest received on
Expenditure 964,500 scholarship fund 80,000
55,000
Total 2,820,000 Total 2,820,000
Balance Sheet
As on 31-03-2013
Liabilities Amount Assets Amount

Capital Fund 2,400,000 Building 1,700,000
Add: Donation 500,000 (-) Depreciation@ 5% 85,000
--------------- --------------- 1,615,000
2,900,000 Furniture & Fixture 200,000
Add: Surplus 964,500 (+) Addition 25,000
-------------- 3,864,500 --------------
Scholarship Fund 360,000 225,000
Sundry Creditors 236,000 (-) Depreciation @10% 22,500
Salary outstanding 100,000 ------------- 202,500
Rent received in advance 25,000 Vehicles 280,000
(-) Depreciation @15% 42,000
------------- 238,000
Investments 550,000
Scholarship Fund Investment 800,000
91

Rent receivable 50,000
Cash in hand 68,000
Total 4,585,500 4,585,500
Maintenance of Accounts of Student Hostels

Hostels are run by most of the educational institutions to provide boarding facility to the
students, coming from remote places, for their education. Hostels are usually run on no
profit basis. Government also grants some fund to these hostels to provide cheaper living
space to the students.
Like any other non-profit organization, hostels also have accountants who record and
maintain their financial transactions as:
 Receipt & Payment Account
 Income & Expenditure Account
 Balance Sheet
Following are the common lists of incomes and expenditures incurred by Hostels:
Main Source of Collection Types of Expenses/Payments
1. Admission fees 1. Electricity expenses

2. Security (refundable at the time of 2. Water charges
entering into the hostel) 3. Building repair & maintenance
3. Room rent 4. Grocery & provisions for mess
4. Electricity, water, fans, coolers, heaters 5. Rent for hostel Accommodation
& geysers charges etc. (In case or rented premises)
5. Government grants 6. Salary (Warden, watchman,
6. Fees for reading room & common room. sweeper etc.)
7. Mess charges 7. Telephone expenses
8. Medical Fee. 8. Newspaper and magazines
Illustration
From the given information and Trial Balance, please prepare an Income & Expenditure
account and Balance sheet of Divya Jyoti hostels (for the girls) for the year ending 31-03-
2014:
Particulars Amount Amount
(Debit) (Credit)
Opening Stock:
Food 31,500
92
Fuel 4,500
Drinks 3,000
Sundries 6,000
Purchases:
Food 1,065,000
Fuel 90,000
Drinks 135,000
Sundries 15,000
Wages:
Mess 337,500
Others 97,500
Annual Day Collection 10,500
Building 6,300,000
Common Room Expenses 24,000
Electricity and Water Charges 28,500
Electricity and Water Charges 42,000
Fans 75,000
General Fund 450,000
Grants- Youth welfare Departments 300,000
Heaters 7,500
Income From Investments 82,500
93
Indoor Games Material 22,500
Investments 750,000
Land 750,000
Medical Expenses 19,500
Mess Charges (for guests) 30,000
Mess Fees 1,770,000
Rent for fan Heater etc. 16,500
Repair & Maintenance 33,000
Room Rent 352,500
Room Service Charges 9,000
Security Deposits 400,500
Total 10,500,000 10,500,000
 Depreciation to be provided @ 5% on Building, Furniture, & Fixture; and 15% on
heater and Fans.
 Closing stock: Food Rs. 22,500, Fuel Rs. 7,500, Drinks Rs. 4,500, and sundries Rs.
3,000.
Solution:
In the Books of Divya Jyoti Hostels

To Mess Expenses By Room Rent 352,500
Food: Opening Stock 31,500 By Rent for Heater, Fans, etc. 16,500
Add: Purchases 1,065,000 By Grants-Youth Welfare 300,000
-------------- By Income From Investments 82,500
1,096,500 By Annual Day Collection 10,500
Less: Closing Stock 22,500 1,074,000 By Mess Fees 1,770,000
-------------- By Mess Charges for Grants 30,000
94
Fuel: Opening Stock 4,500 By Room Service Charges 9,000

Add: Purchases 90,000 By Electricity & Water Charges 28,500
--------------
94,500
Less: Closing Stock 7,500
-------------- 87,000
Drinks: Opening Stock 3,000
Add: Purchases 135,000
--------------
138,000
Less: Closing Stock 4,500
-------------- 133,500
Sundries: Opening Stock 6.000
Add: Purchases 15,000
--------------
21,000
Less: Closing Stock 3,000 18,000
--------------
To Wages : Mess 337,500
Others 97,500 435,000
To Electricity & Water Charges 42,000
To Repair & Maintenance 33,000
To Indoor Games Material 22,500
To Common Room Expenses 24,000
To Medical Expenses 19,500
To Depreciation:
Building 5% 315,000
Furniture 10% 22,500
Heaters 15% 1,125
Fans 15% 11,250
-------------- 3,49,875
To Excess of Income Over
Expenditure 3,61,125
Total 2,599,500 Total 2,599,500
Balance Sheet
As on 31-03-2014

Capital Fund 7,050,000 Land 750,000
General Fund 450,000 Building 6,300,000
Add: Surplus 361,125 811,125 (-) Depreciation@ 5% 315,000
-------------- --------------- 5,985,000
Security Deposits 400,500 Furniture & Fixture 225,000
------------- 202,500
Heaters 7,500
------------- 6,375
Fans 75,000
95

------------- 63,750
Investments 750,000
Closing Stocks:
Food 22,500
Fuel 7,500
Drinks 4,500
Sundries 3,000
---------- 37,500
Total 8,261,625 8,261,625
Maintenance of Accounts of Hospitals

Being a non-profit organization, hospitals also maintain Receipt & Payment accounts,
Income & Expenditure account, and Balance Sheet.
An illustration of the income and expenditure of a hospital is shown below:
Main Items of Income Types of Expenses/Payments
 Room Rent  Electricity & Water Charges

 Medical Care  Pharmacy Charges
 Dentistry Charges  Salaries and Wages
 Delivery Room Charges  Pharmacy Expenses
 Anesthesia Charges  Building repair & Maintenance
 Laboratory Charges  Laundry Charges
 Grants for operating needs of  Rent for Nursing Hostel
Hospital Accommodation (In case or rented
premises)
 Grants for fixed Assets
 Telephone Expenses
 Donations
 Laboratory Expenses
 Miscellaneous Income
 Surgery Expenses
 Interest on Investments
 Operation Tools and Equipment
 Fees from Nursing & Training
Expenses
School
 Depreciation
 Bed Charges
 Operating Room Charges
 X-ray Charges
 Pharmacy Charges
 Physiotherapy Charges
96
Illustration
A charitable hospital and pharmacy are run by Rehmat Ali trust; following are the balances
as extracted from its books for the year ended 31-03-2014:
(Debit) (Credit)
Consumption of
360,000
 Medicines
270,000
 Foodstuff
90,000
 Drugs and Chemicals
Closing Stock of
 Medicines 60,000
 Foodstuff 12,000
 Drugs and Chemicals 3,000
Salary 540,000
Electricity 315,000
Pharmacy:
 Opening Stock 165,000
 Purchase 900,000
 Sale 930,000
 Salary 45,000
 Electricity 6,000
97
Ambulance 90,000
Telephone Expenses 78,000
Subscription 63,000
Ambulance Charges 2,400
Consumption of Housekeeping Items 2,70,000
Bank Deposits @ 15% 1,500,000
Cash in hand 105,000
Sundry Creditors 824,100
Remuneration to Trustees 63,000
Donation 1,800,000
Fees 900,000
Rent 825,000
Food Supply 420,000
Building 960,000
Equipment 1,365,000
Total 8,401,500 8,401,500
 Depreciation to be provided @ 5% on Building; 10% on Furniture; 15% on
Equipment; and 30% on Ambulance.
 Closing stock of medicine at pharmacy Rs. 120,000
 15% of the fees received from patients to be paid to specialist doctors.
98
 Supply of medicines from pharmacy to the hospital Rs. 180,000 for which no
adjustment has been made in the books of accounts.
Solution:
In the Books of Rehmat Ali Trust
Income & Expenditure Account of the Pharmacy

To Opening Stock 165,000 By Sale (Medicines) 930,000
(Medicines) 900,000 By Medicine to Hospital 180,000
To Purchase of Medicine 45,000 By Closing Stock 120,000
To Salaries 6,000
To Electricity Expenses
To Surplus of Income over 114,000
Expenditure
Total 1,230,000 Total 1,230,000
Income & Expenditure Account of the Hospital

To Consumption of By Fees 900,000
Medicines 360,000 By Rent 825,000
Add: Medicine from By Recovery of Food supply 420,000
Pharmacy 180,000 By Ambulance Charges 2,400
-------------- 540,000 By Deficit (Excess of expenditure
To Consumption of Food Stuff 270,000 Over Income 457,350
To Consumption of Drugs &
Chemicals 90,000
To Consumption of House Keeping 270,000
To Salaries 540,000
To Electricity Expenses 315,000
To Subscription 63,000
To Fees to specialist 15% of fees 135,000
To Telephone Expenses 78,000
To Depreciation:
Building 5% 48,000
Furniture 10% 24,000
Equipment 15% 204,750
Ambulance 30% 27,000 303,750
-------------- 2,391,750 2,391,750
Total Total
99
Income & Expenditure Account of Trust

To Deficit (Hospital A/c) 457,350 By Surplus (Pharmacy) 114,000
To Remuneration to Trustee 63,000 By Interest due on fixed deposit 225,000
By Net Deficit 181,350
Total 520,350 Total 520,350
Statement of Affairs of Rehmat Ali Trust
As on 31-03-2014

Capital Fund 2,700,000 Building 960,000
Add: Donation 1,800,000 (-) Depreciation@ 5% 48,000
---------------- --------------- 912,000
4,500,000 Furniture & Fixture 240,000
Less: Net Deficit (-) 181,350 (-) Depreciation @10% 24,000 216,000
-------------- 4,318,650 -------------
Equipment 1,365,000
Sundry Creditors 824,100 (-) Depreciation @15% 204,750 1,160,250
Fees Payable to specialist 135,000 -------------
Ambulance 90,000
------------- 63,000
Bank Deposits 1,500,000

Add: Interest Due 225,000 1,725,000
--------------
Closing Stocks:
Medicine 60,000
Foodstuff 12,000
Drugs & Medicine 3,000
Pharmacy 120,000 195,000
------------
Cash in hand 105,000
Total 5,277,750 Total 5,277,750
100
18. Financial Accounting ─ Co-Operative Societies
Any ten persons who are competent to contract may file an application to the Registrar of
Co-operative Societies as per Section 6 of the Co-operative Societies Act, 1912. By law,
may be framed by each society and should be registered with the Co-operative Societies.
Effectiveness of change by the law of societies is applicable only when changes are
approved by the Registrar of Society.
Types of Society
There are two types of society:
 Limited liabilities society
 Unlimited liabilities society
Any member is not liable to pay more than the nominal value of the share held by him
and no member can own more than 20% of the shares of society.
Today, government is encouraging co-operative societies to help society at large. Co-

operative societies are operative in various sectors like consumer, industrial, services,
marketing, etc.
Under accounting system of Co-operative societies, the term Receipt and Payment is used
for two fold aspects of double entry system.
Accounts
Following accounts usually maintained by the Co-operative societies:
 Day Book (Journal)
 Day Book (Cash Account)
 Day Book (Cash Book with Adjustment Column)
Day Book (Journal)

Day book is a book of original entries. In a day book, all types of cash or non-cash
transactions are recorded, according to the principle of double entry system.
As per the practice followed in the co-operative societies, a separate journal book is not
prepared rather all transactions are directly recorded in the day book. Day book has two
sides Receipt (debit) and payment (credit) and there are two columns in each side of a
day book, one for the cash transactions and second for the adjustment.
Transaction for the cash receipt and cash payment are recorded in cash column and
payment side respectively. Similarly, entries are done in debit and credit side of a day
book in the adjustment column.
101
Day Book (Ledger for Cash Account)

Since, all the cash transactions are recorded directly in a day book, it might be called as
ledger account of cash book.
Day Book with Cash and Adjustment Columns

Specimen
Day Book with Cash and Adjustment Columns
Date Parti R. No. Cash Adjustment Date Particular R. No. L.F Cash Adjustment
cular
Ledger
In the co-operative societies, posting of ledger is not done on the double entry system.
Receipt side of the day book on debit side of the ledger account and payment side of the
day book posted on the credit side of the ledger account.
Closing of Ledgers
In the co-operative societies, balancing of a personal account is done at the time when
any member clear his account or a new account is opened. Totals of all other accounts
(receipt and payments) are kept as it is. Balancing of receipt and payment accounts are
not required.
Receipt and Payment Account

A receipt and payment account is the summary of a day book and prepared for a specified
period. Receipt and payment account is prepared from the totals of receipts and payment
sides of the ledger accounts.
Final Accounts
Trading & Profit and Loss account and Balance sheet are prepared from the receipt and
payment accounting after consideration of the adjustment entries. Items appear under the
receipt side are treated as income, and items of the payment side are as expenditure.
102
Rules Appropriated as:

 First 25% of the net profit should be transferred to the reserve fund account.
 As per section 35 of Co-operative Societies Act, 1912, distribution of the profit

should not be more than 6.25%.
 Contribution to charitable funds as defined in section 2 of Charitable Endowment

Act, 1890, which says that contribution may be done with the prior permission of
the Registrar. Maximum contribution is restricted to 10% of the available profit,
after transferring profit to reserve account.
 Unlimited liabilities, co-operative society may distribute profit only after general or
special order of the State Government.
103
19. Financial Accounting ─ Insurance Claims
Every business entity keeps sufficient stock as per the need and size of its respective
business for smooth running of the business, but at the same time risk of loss by fire or
by means is also there. To safeguard the businesses from any unforeseen circumstantial
loss, most of the business entities buy insurance policy, which covers loss of stock (by
fire) — is known as stock policy.
In consideration of the premium, insurance company takes the responsibility to

compensate — if any loss occurs by fire or by other means, applicable under the insurance
terms. It is in the best interest of the firm to take fire insurance policy because it covers
wide range of losses (by fire) including Building damage, Furniture and Fixture loss, Plant
& Machinery destruction, etc.
Following are the important points to be considered for the estimation of stock:
Gross Profit on Sale

Gross profit is calculated by deducting net sales from the cost of goods sold. To know the
gross profit of the last year, “Trading” account of the last year should be referred.
Memorandum Trading Account (for Current Year)

In case of fire, Memorandum Trading account is required to find the value of estimated
Stock. It is prepared with the help of Gross Profit ratio of the last year, Opening Stock,
Purchase, Sale, and Direct Expenses.
Value of Salvaged Stock

Value of stock as calculated at step-2 will be reduced by the value of salvaged stock to
arrive at the value of Insurance Claim.
Other Important Points

 In case, where stock is not valued at the cost, first it will be valued at the cost in
the last year trading account and then in the memorandum account of the current
year. For example, if it is given that stock of Rs. 80,750 is valued at 85% of the
cost in the last year, then first it should be valued as (80,750/85 x100) = 95,000
in the last year and then in the current year memorandum Trading account.
 Cost of the sample given free of cost or withdrawal of stock by proprietor or partner
of the firm for personal use, it should be adjusted in the Trading Account of the last
year as well as in the current year’s memorandum trading account.
 In case, where gross profits of the last several years are given, average gross profit
should be taken to determine the gross profit of the current year. However, in case
where clear upward trend of the gross profit or downward trend of the gross profit
is identified, weighted average gross profit or reasonable trend of upward or
downward trend should be applied to determine the gross profit of the current year.
 To find out the gross profit on normal sales, poor selling sale should be eliminated
from the sale of the current year. Similarly, poor selling items should be eliminated
104
from the opening and closing stock of the last years to prepare the trading account
of the current year.
Average Clause
An average clause is applied to find out the value of a claim where value of the stock on
the date of fire is more than the value of insured stock. Average clause is applied by the
insurance companies to discourage the under insurance of stock or any other assets.
Following illustration help you to understand it in a better way:
Suppose, value of insurance policy is Rs. 1,500,000 and at the date of fire, value of stock
in hand is Rs1,800,000, out of which approx. worth of 1,200,000 stock is destroyed, then
the value of the claim admitted will be:
1,500,000
Value of Claim = x1,200,000 = 1,000,000
1,800,000
Value of stock of Rs. 1,200,000 will not be admissible to the insured, rather admissible
claim will be Rs. 1,000,000.
Illustration
Fire occurred on the business premises of ‘Style India’ on 1st April, 2014 and most of the
stock destroyed. Please ascertain the insurance claim from the following given particulars:
(Year 2013) (01 Jan to 31st

March 2014)
Sale 2,500,000 750,000
Purchases 1,800,000 350,000
Opening Stock (01-01-2013) 270000
Closing Stock (31-12-2013) 498,750
Direct Expenses (Freight & wages) 150,000 30,000
 Stock as on 01-01-2013, valued 10% less at the cost.
 Stock as on 31-12-2013 value 5% more at the cost.
 Value of stock salvaged Rs. 45,000.
 Insurance policy (for fire) was for Rs. 300,000.
105
Solution
Trading Account of M/s Style India
(For the year ending on 31st December, 2013)

To Opening Stock 300,000 By Sales 2,500,000
270,000 500,000
475,000
------------- x 100 𝐵𝑦 𝑆𝑡𝑜𝑐𝑘 = 𝑥100
105
90
To Purchases 1,800,000
To Direct Expenses 150,000
To Gross Profit (29%) 725,000
2,975,000 2,975,000
Memorandum Trading Account of M/s Style India
(Up to 01-4-2014)

To Opening Stock 475,000 By Sales 750,000
To Purchases 350,000 By Stock (Balancing Figure) 322,500
To Direct Expenses 30,000
To Gross Profit 217,500
(29% of 750,000)
1,072,500 1,072,500
Value of Stock = Rs. 322,500
Less: Stock Salvage = Rs. 45,000
Insurance Claim to be lodged will be:

300,000
Value of Claim = × 277,500 = 258,140
322,500
Here an average clause will be applied because the value of insurance policy (Rs.300,000)
is less than the value of stock (Rs. 322,500) on the date of fire.
106
Consequential Loss Insurance

A normal fire policy only indemnifies loss of stock or assets, and fails to insure any loss of
profit suffered by the concerned business. Therefore, a consequential loss policy should
be taken to cover the Loss of profit, Loss of Fixed expenditure, etc.
Following are the important terms used in loss of profit policy:
 Insured Standing Charges: Salaries to staff, Rent rates & Taxes, Wages to
skilled workers, Auditors’ fees, Directors’ fees, Advertisement Expenses, Travelling
Expenses, Interest on debentures, and unspecified expenses (not more than 5%
of the specified expenses) are the charges that have to mention on the policy form
at the time of buying policy (so that all charges get insured).
 Turnover: Turnover includes sold goods or services for which amount is payable;
it also needs to be insured.
 Annual Turnover: Turnover for the last 12 months, immediately preceding to the
date of fire.
 Standard Turnover: Standard turnover means, turnover for the period

corresponding with the indemnity period during the preceding accounting year. It
also needs to be adjusted to notice the trend during the accounting year, in which
incident took place.
 Gross Profit: It is calculated as:
Gross profit = Net profit + Insured standing charges

 Net Profit: To calculate net profit — profit (excluding tax), insured standing
charges, other charges, depreciation, and other provisions of such kind need to be
adjusted.
 Indemnity Period: Maximum twelve months (from the date of damage), during
which the result of the business affected due to damage. Period of indemnity is
selected by the insured person.
Computation of Claim
Following steps need to be taken to compute insurance claim on the loss of the profit,
which is occurred due to dislocation of the business:
Short Sale: Short sale means loss of sale due to the incident of fire and subsequent
dislocation of the business. The difference of standard turnover and the actual turnover
during the period of indemnity is called short sale. It is illustrated in the following example.
Example
Calculate short sale according to the particulars given below:
Date of Fire occurs 01-06-2013
Period of dislocation of business 4 months
107
Standard Sale 500,00
Increased trend 15%
Actual Sale 300,000
Solution
Computation of Short Sale
Standard turnover 575,000
(Rs. 50,000 + 15%) (A)
Less: Actual Sale (B) 300,000
Short Sale (A-B) 275,000
Rate of Gross Profit: It is calculated as:

Net Profit + Insured Standing Charges
Rate of Gross Profit = x100
Turnover
Note: All figures given above are related to the last accounting year:
Insured Standing Charges − Net Loss
In Case of Loss = x100
Turnover
Note: All figures given above are related to the last accounting year:
In case where all the standing charges are not insured, amount of net loss need to reduce
as:
Insured Standing Charges
= xNet Loss
All standing Charges
Loss Due to Short Sale: It is calculated ad
Loss due to Short Sale = Short Sale x Rate of Gross profi𝑡

Increased Cost of Working: Increased cost of working means, certain additional
expenses those have to be incurred by insured person to keep the business in running
condition during the indemnity period.
Least of following figures will be considered as increased cost of working:

= xIncreased Cost of Working
Net Profit + All standing Charges
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Illustration
Calculate permissible increased cost of working with following given particulars:
Net Profit 45,000
Insured Standing Charges 25,000
Uninsured Standing Charges 25,000
Short Sale 100,000
Rate of Gross Profit 15%
Increased Working Expenses 10,000
Short sale avoided through Increased Cost of 50,000

Working
Solution
Least of the following will be permissible increased cost of working:
= × Increased Cost of Working
Net Profit + All standing Charges
45,000 + 25,000
= × 10,000 = 7,368
45,000 + 50,000
Short sale avoided x Rate of Gross profit = 50,000 × 15% = 7,500
So, Rs. 7,368 will be permissible claim of the increased cost of working.
Note: Overall permissible limit of claim for short sale + increased cost of working cannot
exceed the following limit:
Maximum permissible limit of claim = Standard Sale × Rate of Gross profit
Saving in Expenses: Saving in expenses due to fire will be deducted from the amount
calculated as above.
Average Clause: In case where the value of sum insured is less than the value of policy
for which policy have been taken, average clause will be applied as applied for the stock
insurance (above).
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Accounting Entries
In case of loss of stock
Insurance company A/c Dr
To Stock Damaged A/c
To Stock Destroyed A/c
(Being Claim admitted for stock destroyed and stock damaged)
Stock destroyed A/c Dr
Stock Damaged A/c Dr
To Trading A/c
(Being actual cost of stock destroyed and stock damaged to trading account)
Bank A/c Dr
To Stock Damaged A/c
(Being realization made on sale of damaged Stock)
Note: Difference of stock destroyed account and damaged account will be

transferred to Profit & Loss account)
In case of loss of Profit
Insurance company A/c Dr
To Profit & Loss A/c Dr
To Profit & Loss Suspense A/c
(Being Loss of profit for next year)
Bank A/c Dr
To Insurance Company A/c
110
20. Financial Accounting ─ GovernmentFinancial Accounting
Accounting
Government accounting is a scientific procedure of collecting, classifying, recording,

summarizing, and interpreting all the financial transactions including revenues and
expenditures of all the government offices. It keeps the record of public funds.
Followings are the main objectives of the Government Accounting:
 Information about Revenues: One of the most important functions of the Government
accounting is to maintain the transactions of generation and collection of revenues
during the financial year (and maintain all the past years’ financial data). Under
the ‘Right to Information Act,’ if someone asks to have the information regarding
the financial transactions of a government office, it is oblige to provide that.
 Information about Expenditures: One of the most important objectives of the

Government accounting is to provide information about the expenditures incurred
on various heads. It is checked by the Parliament in case of Central Government
and state legislature in case of the State Government.
 Information about Deposits and Loans: Government has to provide information about
the loan granted by the Government to others and repayment of the deposits.
 Information about Availability of Cash: It has to provide information about the

present and the future cash availability.
Difference between Government & Commercial Accounting

There are following notable differences between the Government accounting and the
commercial accounting:
Headings Govt. Accounting Comm. Accounting
Maintain the records of trading

Administration and management
and manufacturing of goods or to
Objective of all the financial activities of the
provide services to calculate
government.
profits.
Normally, it has double entry

It has single entry system — Govt.
system — need to prepare
Date Entry does not work to earn profit; so, it
Trading & Profit & Loss account
System does not need cross-check the
and Balance Sheet at the end of
accounting records.
the accounting period.
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Accounting statements are also

prepared on the basis of single
entry system. Most of the
Basis of Accounting statements are
statements are merely statements
Accounting prepared on the basis of double
of collections of revenue and
statements entry system.
expenditures done, except where
the Government acts like a banker
or lender or borrower.
Important Terms and Expressions of Government Finance

Following are the important terms and expressions used in Government accounting:
 Demand for Grant: Without sanction from the Parliament, no expenditure can be
incurred by any Government Authority. Public Authority can request for the grant
of expenditure to the Government, this request is called “Demand for Grant”.
 Supplementary Grant: Sometimes, grants are sanctioned before the end of the
financial year, in case where annual budget might be inadequate. Supplementary
demand can be made, if need arises to meet the expenditure. For example, amount
granted for the Natural Disaster Relief fund, may be found inadequate due to
extraordinary disaster by the flood; in such a condition, an additional grant may be
asked by the concerned state or ministry.
 Treasuries: Treasuries are the units of fiscal system in India. Every Indian States
and Union Territory is divided into different districts’ headquarters and every
district headquarters has one or more than one treasury. Treasuries are conducted
by the State Bank of India as an agent of the Reserve Bank of India. Central
Government and State Government keep their separate accounts and differences
of Central and State Govt. are adjusted by the Reserve Bank of India.
 Votable and Non-votable Items: To incur some expenditures, Parliamentary

approval is not required; so, these expenditures may be charged from the
Consolidated fund or the Public account, these items are known as Non-votable
items. Some items of expenditure require sanction of the Parliament and cannot
be incurred without its grant. Thus, demand for grant for that expenditure may be
placed to the government, such items are called as Votable Items.
 Appropriation Act: After the approval of the budget proposal in the Parliament or
Legislature, an Appropriation Bill has to be introduced, when this Bill is passed, it
becomes Appropriation Act. Now, money can be withdrawn from the Consolidated
Fund of India or the concerned State to meet the grants.
 Vote on Account: In certain condition, when government has no time to place full
budget in the Parliament, then it uses the special provision of ‘Vote on Account.’
Under this provision, government obtains the vote of the Parliament for the amount
required to incur the expenditure of the items in demand. After sanction obtained
in the Parliament, government obtains money from the Consolidated Fund of India.
 Public Accounts Committee (PAC): Public Account Committee is formed by the

Parliament and each Legislature to scrutinize the Appropriation account and Audit
the report thereon. All the reports on financial statements those are to be submitted
to the President of Indian and in the Parliament are examined by the Public
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Accounts Committee (PAC). Examination by the PAC is similar to post-mortem of

the reports. Members of the PAC are appointed from the Opposition Parties of the
Parliament. Member of the ruling party cannot be part of this committee, as this
committee is working as a watchdog to look after the affairs of ruling party.
 Local Government Accounting: Accounting of the Local government is based on

the concept of “fund accounting” and on the budget. Urban local government
entities and rural local government entities are two types of local government
entities. Accounting of the Local Government in India comprises budget, Receipt,
and payment accounts.
Government Fund
Government of India has following three types of Funds for marinating the records of all
sorts of financial transactions:
 Consolidated Funds of India
 Contingency Funds of India
 Public Account
Let’s discuss each of them succinctly:
Consolidated Funds of India

As per the Clause 1 of the Article 266 of the Indian Constitution:
“All revenues received by the Government by way of taxes like Income Tax, Central Excise,
Customs and other receipts flowing to the Government in connection with the conduct of
Government business i.e. Non-Tax Revenues are credited into the Consolidated Fund
constituted. Similarly, all loans raised by the Government by issue of Public notifications,
treasury bills (internal debt) and loans obtained from foreign governments and
international institutions (external debt) are credited into this fund. All expenditure of the
government is incurred from this fund and no amount can be withdrawn from the Fund
without authorization from the Parliament.”
Contingency Funds of India

As per the Article 267 of the Indian Constitution:
“The Contingency Fund of India records the transactions connected with Contingency Fund
set by the Government of India. The corpus of this fund is Rs. 50 crores. Advances from
the fund are made for the purposes of meeting unforeseen expenditure which are resumed
to the Fund to the full extent as soon as Parliament authorizes additional expenditure.
Thus, this fund acts more or less like an imprest account of Government of India and is
held on behalf of President by the Secretary to the Government of India, Ministry of
Finance, and Department of Economic Affairs.”
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Public Account
The Public Account is constituted under Clause 2 of Article 267 of the Indian Constitution,
which says:
“The transactions relate to debt other than those included in the Consolidated Fund of
India. The transactions under Debt, Deposits and Advances in this part are those in respect
of which Government incurs a liability to repay the money received or has a claim to
recover the amounts paid. The transactions relating to ‘Remittance’ and `Suspense’ shall
embrace all adjusting heads. The initial debits or credits to these heads will be cleared
eventually by corresponding receipts or payments. The receipts under Public Account do
not constitute normal receipts of Government. Parliamentary authorization for payments
from the Public Account is therefore not required.”
Similarly, all 29 states of India has the same structure as described above.
General Structure of Government Accounts

The general structure of the government accounts is illustrated below:
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Compilation of Accounts
Treasury and other government departments, initially compile their receipt and payment
accounts on monthly basis for central government and state government separately and
then send to respective Accountant General of India.
Collection of revenue and disbursement are directly made by Railway, Defense, Post &
Telegraphs, Forest, and public departments and lump sum payments are made by treasury
through the departmental officers. Detail of accounts on monthly basis is maintained by
the departmental Accounts officers.
Monthly accounts submitted by the treasury and account officer are compiled by the
Accountant General, for the central government as a whole and for each state separately.
The compiled report shows progressive figure of each month from 1 st April to 31st March
of every year. Complied accounts along with appropriation accounts are submitted by
Comptroller and Auditor General of India to the President of India, to the Governor of each
state, or to the Administrator of the Union Territory accordingly.
Principles of Government Accounting

 Charges or expenditure on a new project like constructions, new equipment, plant
& machinery installation, maintenance, improvement, and service should be
allocated to the capital account as per the rule made by competent authority.
 Working charges of the project should be allocated to the revenue account.
 In case of renewal and replacement and cost of the genuine replacement should
be charged to capital account.
 In case of damage due to extraordinary calamities, charged should be debited from

the capital account or revenue account or from both. However, it will be determined
by the government according to the case and circumstances.
 Capital receipts during the new project should be credited to the capital account to
reduce the capital expenditure of the project.
CAG
Comptroller and Audit General (CAG) is an independent Constitutional body. Special status
has been given to safeguard his independence and enable him to discharge his duty
without fear or favor.
As per the Article 148 of the Constitution of India, the comptroller and Auditor-General
will be appointed by the President of India. The provision of removal of CAG is the same
as of the judges of the Supreme Court. He can be removed only on the basis of proven
misbehavior or incapacity.
As per the Article 150 of the Constitution of India — the accounts of the Union and of the
States shall be kept in such form as the President may prescribed, on the advice of the
Comptroller & Auditor General.
Article 151 of the Constitution provides that the audit reports of the Comptroller & Auditor
General relating to the accounts of the Union shall be submitted to the President, who
shall cause them to be laid before each House of Parliament.
115
21. Financial Accounting ─ ContractFinancial
Account Accounting
Contracts are undertaken to customer’s requirements, which is generally of constructional.

For example, construction of buildings, ships, Bridges, Roads, etc. In all the above cases,
contract account is opened. A unique number is allotted to each contract and a separate
account is maintained for each individual contract.
Features of Contract Accounting

Following are the important features of a contract accounting:
 Direct Costs: Direct cost is the main proportion of expenses in a contract account.
However, indirect nature of expenses is also treated as direct expenses in a
contract account.
 Indirect Costs: Proportion of the indirect cost is very low in a contract accounting
such as expenses related to the head office in case of various contracts.
 Cost Control: Cost control is the main challenge in a contract account especially
in the large scale contracts. For example, control over the material cost, labor cost,
loss, damages, etc. are difficult to regulate.
 Surplus Material: After completion of the constructional project, if any material

such as cement, iron and steel, marbles, etc. is remained unused, is known as
surplus material. Surplus materials are normally disposed of to get back the
invested amount.
Types of Contract
There are three types of contracts, as depicted in the following figure.
Fixed Price Contract

Types of Contract
Fixed Price contract subject

to Escalation Clause
Cost Plus Contract
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Recording of Costs, Value, and Profit on Contract

Recording of each contract will be done as under:
Material
Cost of “Material” will be debited from the contract account in the following manners:
 Direct purchase
 Supplied from stores
 Transfer from other project/contract
Contract account will be credited:
 Material returned to stores
 Sale proceed of surplus material
Amount will be transferred to Profit & Loss account:
 Profit or Loss on sale of surplus of material
 Damaged, Lost, or stolen material (except normal wastage of material that will be
charged directly to concerned contract account).
Labor
Labor or wages directly charged to concerned contract account and outstanding wages
should be debited from the contract account.
Direct Expenses
In addition to material and labor, all other expenses, which are directly attributable to the
specific contract account are called direct expenses and will be debited from the contract
account.
Plant & Machinery

Following are the two methods for charging value of Plant & machinery to a contract
account:
a) Contract account will be debited with the full value of Plant & Machinery:
Contract A/c Dr (With full value)
To Plant & Machinery A/c (With Full Value)
Contract account will be credited with the depreciated value of Plant &
Machinery at the end of the contract:
117
Plant & Machinery A/c Dr (with Depreciated Value)
To Contract A/c
b) Contract account will be debited with hourly rate of Depreciation:
This is much better and scientific approach as compared to the first method. On the
basis of time, contract will be debited with hourly rate of depreciation.
Indirect Expenses
The expenses, which cannot be directly charged to such contract are known as indirect
expenses.
On the basis of some percentage, these expenses may be distributed among several
contracts. For example, charges of supervisor, engineer, administrative expenses etc.
Sub Contract
When a main or prime contractor assigns some specific work to another contractor as part
of the main contract called as sub contract. Sub-contractors are paid by the main
contractor. Sub-contractors normally do some specialized work, in which they are
specialized. Charges paid to the sub-contractor will be shown in the debit side of the
contract account.
Extra Work Charges

Any additional works in addition to the main contract, done by contractor as per the
requirement of the Contractee, may be charged to same contract account. However, in
case where volume of the extra work is not substantial; so, the amount received in lieu of
that extra work should be added to the contract price.
In case where extra work is of substantial amount, a separate contract account should be
prepared, as explained above.
118
Recording of Value and Profit on Contracts
Certification of Work Done

During the period of contract, Contractee has to pay sums of amount to contractor
especially where a contractor is engaged in a big and long term contract. This amount is
paid on the basis of certification of work done by surveyors or architects on behalf of the
Contractee, who certified the value of the work done by the contractor.
Usually, some percentage of the certified amounts is paid by Contractee and the balance
amount called as “retention money.” The retention amount remains with the Contractee
until the work is completed to safeguard and keep in favorable position. Completed work,
which is not certified is called “uncertified work.”
Following accounting procedure should be followed after getting certificate:
a) Contractee personal A/c Dr
To Contract A/c
Note: 1. Above entry will be done with certified value

2. Balance amount in personal account will represent retention money as debtors.
b) Contractee personal A/c Dr
Retention Money A/c Dr
To Contract A/c
c) Under this method, any amount received from the Contractee

till the completion of contract will be crediting to Contractee’s
personal account debiting cash/bank. Amount so received will
represent advance received from Contractee and will be shown as
(work in progress less advance received) in the Balance sheet.
Profit on Incomplete Contract

Actual ascertainment of the cost is possible only after fully completion of the contract.
Therefore, it is not possible to know the profit or loss on contract till it is completed.
However, following principles are adopted to estimate profit on uncompleted contracts:
a) No profit is ascertained and transferred to profit and loss account where work is
completed up to 25% of the total contract.
b) In case where contract is completed from 33.33% to approximately 75%, one-third

amount of the notional profit may retain to suspense account as a provision for
future loss and balance; two third is transferred to the profit and loss account.
Sometime notional profit is further reduced in the ratio of the cash received and
the work certified, the formula is:
2 Cash Received
Notional Profit × ×
3 Work Certified
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c) In case where a contract is almost completed, proportion of an estimated profit is

transferred to the profit & loss account by one of the most popular formula as given
below:
Work Certified
Estimated Profit ×
Contract Price
Note: In case of any loss that should be transferred to Profit & Loss account.
Work in Progress
Uncompleted contracts at the end of the financial year, which are known as work-in-
progress will be accounted as:
 Work-in-progress will be shown at the asset side of the Balance sheet on the
account of expenses incurred the un-completed contracts.
 Value of the work-in-progress will be inclusive of Profit.
 Cash received from the Contractee will be deducted from the value of work-in-
progress.
 Contractee will be treated as a debtor only after completion of the contract.
 Contractee will not be shown as creditor on account of cash received from him.
 Cost of plant and material at the site will be shown separately as “Plant at site” and
“Material at site” on the asset side of the Balance sheet.
Illustration
Please prepare a Contract Account, Contractee Account and Extract of Balance sheet from
the following information as received from M/s “Solid Building Contractor’ for the period
01-04-2013 to 31-03-2014.
Particulars Amount
Contract Price 18,000,000
Material Issued to contract 3,060,000
Wages & Salary 4,800,000
Plant used for Contract 900,000
Other Miscellaneous Expenses 300,000
Cartage paid on Material 60,000
120
Loss of Plant at site 180,000
Plant returned to store on 31-03-2014 120,000
Loss of Material at site 150,000
Material in hand at site on 31-03-2014 138,000
Cash received 80% of work certified 7,680,000
Uncertified work 60,000
Depreciation on Plant 15%
Profit transferred to Profit & loss account 2/3rd
Solution
M/s Solid Building Contractor
Contract Account
(For the period 01-04-2013 to 31-03-2014)

To Material 3,060,000 By Material at site 138,000
To Wages & Salary 4,800,000 By Profit & Loss A/c
To Plant 900,000 Material Lost 150,000
To Cartage 60,000 Plant Lost 180,000 330,000
To Misc. Expenses 300,000 -----------
To Notional Profit c/d 1,620,000 -
By Plant return to store 120,000 102,000
Less: Dep. 18000
----------
- 510,000
By Plant at site 600,000
Less: Dep. 90,000
----------
- 9,660,000
By Work In progress A/c
Work certified 9,600,000
Work uncertified 60,000
--------------
Total 107,400,000 Total 107,400,000
To Profit & Loss A/c By Notional Profit b/d 1,620,000
121
2 4
1,620,000 𝑥 𝑥 864,000
3 5
To Work in Progress A/c 756,000
(Reserve)
Total 1,620,000 Total 1,620,000
Contractee Account

To Balance c/d 7,680,000 By Cash Received 7,680,000
Total 7,680,000 Total 7,680,000
Balance-Sheet
(As on 31-03-2014)

Profit & Loss A/c 864,000 Plant 720,000
Less: Loss of 330,000 534,000 Less: Dep. 15% 108,000
Plant & Material ----------- ------------ 612,000
Material at site 138,000
Work-in-progress
Work Certified 9,600,000
Uncertified work 60,000
-------------
9,660,000
Less: Reserve 756,000
--------------
8,904,000
Less: Cash Received 7,680,000
--------------- 1,224,000
Modern Approach on Profit on Uncompleted Record

Following are the two methods of calculating the profits on uncompleted contracts:
 Where profit is ascertained only after completion of the contract or after

substantially completion of the contract is called ‘completion contract method.’
 Under the second approach, it is ascertained at the end of each and every
accounting period on percentage basis, which comes before completion of the
entire contract.
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Work-in-Progress
Work-in-progress means total expenditure incurred up to the end of financial or accounting
year known as work-in-progress account.
Following example is described for better understanding:
Illustration:
Please evaluate the profit of the period by using both of the given methods:
a) Percentage of completion method and
b) The completed contract method.
Please also find the value of work-in-progress in the Balance sheet by assuming, the
contractor received Rs. 460,000 on completion of the first stage.
Stages Estimates Actual Cost Contract Price
Original Revised
(Rs.) (Rs.)
1. Certified 345,000 368,000 356,500 460,000
2. Completed but not
certified 115,000 126,500 120,750 172,500
3. Completed 75% 115,000 126,500 95,450 149,500
4. Completed 25% 230,000 276,000 71,300 345,000
5. Incomplete 138,000 172,500 -- 161,000
943,000 1,069,500 644,000 1,288,000
Solutions:
On the Basis of Percentage of Completion Method:

Stages Actual Cost % of Balance Total Contract Profit or
completion estimates Rs. Price Loss
(Rs.)
1 356,500 356,500 460,000 103,500
2 120,750 120,750 172,500 51,750
3 95,450 25% 31,625 127,075 149,500 --
4 71,300 75% 207,000 278,300 345,000 --
5 -- 100% 172,500 172,500 161,000 (11,500)
644,000 411,125 1,055,125 1,288,000 143,750
123
Balance Sheet
Advances 460,000 Work in Progress 787,750
(Actual cost + Profit) 644,000 + 143,750
On the Basis of Completion Contract Method:

No profit will be ascertained before the completion of contract:
Balance Sheet
Advances 460,000 Work in Progress 644,000
Cost Plus Contract

In some cases, it is not possible in advance to know the exact cost of contracts; therefore,
cost plus contract clause need to be applied, in which the value of contract is ascertain
by adding certain percentage of the profit in cost.
Escalation Clause
An Escalation clause is applied to cover up the changes in price due to change in prices of
the raw material or change in utilization of the production capacity. Escalation clause
safeguards both the contractor and the contractee against any unfavorable change in the
cost or the price.
Target Costing
Under this method of a contract, contractee gives target of the production with target of
the expenditure. Contractor cannot increase the cost of contract without increasing the
production. It means, expenditure is fixed with the target of the production.
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22. Financial Accounting ─ Departmental Accounting
Departmental stores have many types of stores under a single roof, for example one
departmental store may have a cosmetic store, shoe store, stationery store, readymade
departmental store, grocery stores, medicines, and many more.
It is essential to know the profit and loss account of each departmental store at the end
of the accounting year. However, it can be done by maintaining the department wise
Trading & Profit and Loss account.
Objectives of Departmental Accounting

Following are the main objectives of the departmental accounting:
 To know the financial position of each and every department separately, it is helpful
to make a comparison.
 Calculate commission of the managers department wise.
 Evaluate performance, planning, and control.
Advantages of Departmental Accounting

Following are the advantages of a department accounting:
 It is helpful in evaluating the result of each department.
 It helps to know the profitability of each department.
 Investors and outsiders may know the detailed information.
 It is helpful in making comparison of each expenses (same department) of the

different accounting years and different expenses (other departments) of the same
accounting year.
Methods of Departmental Account

There are two methods of keeping Departmental Accounts:
 Separate Set of Books for each department

 Accounting in Columnar Books form
Separate Set of Books for each Department

Under this method of accounting, each department is treated as a separate unit and
separate set of books are maintained for each unit. Financial results of each unit are
combined at the end of accounting year to know the overall result of the store.
Due to high cost, this method of accounting is followed only by very big business houses
or where to do so is compulsory as per the law. Insurance business is one of the best
examples, where to follow this system is compulsory.
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Accounting in Columnar Books Form

Small trading unit generally uses this system of accounting, where accounts of all
departments are maintained together by central accounts department in the columnar
books form. Under this method, sale, purchase, stock, expenses, etc. are maintained in a
columnar form.
It is necessary that to prepare a departmental Trading and Profit and Loss Account,
preparation of subsidiary books of accounts having different columns for the different
department is required. Purchase Book, Purchase Return Book, Sale Book, Sales return
books etc. are the examples of the subsidiary books.
Specimen of a Sale Book is given below:
Sales Book
Date Particulars L.F. Department Department Department Department

A B C D
A Trading account in columnar form is prepared to know the department wise gross profit
of the concern.
Function wise classification may also be done in a business unit like Production
department, Finance department, Purchase department, Sale department, etc.
Allocation of Department Expenses

 Some expenses, which are specially incurred for a particular department may be
charged directly to the respective department. For example, hiring charges of the
transport for delivery of goods to customer may be charged to the selling and
distribution department.
 Some of the expenses may be allocated according to their uses. For example,
electricity expenses may be divided according to the sub meter of each department.
Following are the examples of some expenses, which are not directly related to any
particular department may be divide as:
 Cartage Freight Inward Account: Above expenses may be divided according to

purchase of each department.
 Depreciation: Depreciation may be divided according to the value of assets

employed in each department.
 Repairs and Renewal Charges: Repair and renewal of the assets may be divided
according to the value of the assets used by each department.
 Managerial Salary: Managerial salary should be divided according to the time

spent by the manager in each department.
 Building Repair, Rents & Taxes, Building Insurance, etc.: All the expenses
related to the building should be divided according to the floor space occupied by
each department.
126
 Selling and Distribution Expenses: All the expenses relating to selling and
distribution expenses should be divided according to the sales of each department,
such as freight outward, travelling expenses of sales personals, salary and
commission paid to salesmen, after sales services expenses, discount and bad
debts, etc.
 Insurance of Plant & Machinery: The value of such Plant & Machinery in each
department is the basis of the insurance.
 Employee/worker Insurance: Charges of a group insurance should be divided

according to the direct wage expenses of each department.
 Power & Fuel: Power & fuel will be allocated according to the working hours and
power of the machine (i.e. Hours worked x Horse power).
Inter-Department Transfer
An inter-department analysis sheet is prepared at a regular interval such as weekly or
monthly basis to record all the inter-departmental transfers of goods and services. It is
necessary, as each department is working as a separate profit center. Transfer of the
prices of such transactions can be cost base, market price, or duel basis.
Following Journal entry will pass at the end of that period (weekly or monthly):
Journal Entry
Receiving Department A/c Dr
To Supplying Department A/c
Inter-Department Transfer Price

There are three types of transfer prices:
 Cost based transfer price: Where the transfer price is based on standard, actual,
or total cost, or marginal cost is called cost based transfer price.
 Market based transfer price: Where the goods are transferred at selling price
from one department to another is known as market based price. Therefore,
unrealized profit on the goods sold is debited from the selling department in the
form of a stock reserve for both the opening and the closing stock.
 Dual pricing system: Under this system, the goods are transferred on the selling
price by the transferor department and booked at the cost price by the transferee
department.
127
Illustration
Please prepare a Departmental Trading and Profit and Loss Account & General Profit and
Loss Account for the year ended 31-12-2014 of M/s Andhra & Company where department
A sells goods to department B on Normal selling price.
Dept. A Dept. B
Particulars
175,000 -
Opening stock
4,025,000 350,000
Purchases
- 1,225,000
Inter Transfer of Goods
175,000 280,000
Wages
17,500 245,000
Electricity Expenses
875,000 315,000
Closing Stock (at cost)
4,025,000 2,625,000
Sales
35,000 28,000
Office Expenses
Combined Expenses for both Department
472,500
Salaries (2:1 Ratio)
157,500
Printing and Stationery Expenses (3:1 Ratio)
1,400,000
Advertisement Expenses ( Sale Ratio)
21,000
Depreciation (1:3 Ratio)
Solution
M/s Andhra & Company
Departmental Trading and Profit and Loss Account
Dept. A Dept. B Particulars Dept. A Dept. B

Particulars
175,000 -- By Sales 4,025,000 2,625,000
To Opening Stock
4,025,000 350,000 By Transfer to B 1,225,000 ----
To Purchases
1,225,000 By Closing Stock 875,000 315,000
To Transfer from A
175,000 280,000
To Wages
1,750,000 1,085,000
To Gross Profit c/d
6,125,000 2,940,000 Total 6,125,000 2,940,000

Total
17,500 245,000 By Gross Profit b/d 1,750,000 1,085,000
To Electricity Expenses
35,000 28,000
128
To Office Expenses 315,000 157,500

To Salaries (2:1 ratio)
To Printing & 118,125 39,375
Stationery (3:1 Ratio) 847,368 552,632
To Advertisement Exp.
( Sales Ratio 40.25 :26.25) 5,250 15,750
To Depreciation
(1:3 Ratio) 411,757 46,743
To Net Profit
1,750,000 1,085,000 Total 1,750,000 1,085,000
General Profit and Loss Account
Dept. A Particulars Dept. B

Particulars
81,667 By Departmental Net Profit b/d
To Stock reserve (Dept. B)
376,833 Dept. A 411,757
To Net Profit c/d
Dept. B 46,743 458,500
-------------
458,500 Total 458,500

Total
129
23. Financial Accounting ─ Voyage Accounting
To know the financial results of a marine business, voyage accounting is prepared. Voyage
account is similar to a Profit and Loss account; all expenses are debited to Voyage account
and all incomes are credited to Voyage account. Voyage account is prepared to ascertain
the profit or Loss of voyage. It covers both inward and outward travelling. It is very
important that separate Voyage account should be prepared for each vessel.
Income
Following are the main sources of income of a Voyage:
 Freight: Freight charges are the main income collected against the transportation
of the goods.
 Passage Money: Passage money is collected from the passengers, in case it is

passengers’ vessel.
 Primage: Primage is an additional freight in the form of surcharge on the freight.
Expenses
Following are the various ways of expenses of a vessel:
 Brokerage & Commission: Brokerage and commission is calculated on the

freight charges including primage and it is paid to the charters agent. Address
commission is payable to the brokers on procurements of freight from the different
parties.
 Insurance: The insurance charges on proportionate basis might be debited from

the voyage account. For example, if insurance is for one year and journey of voyage
is for three month, insurance charges will be debited from the voyage account on
1/4th ratio.
 Stores: Stores, which are purchased for voyage are debited from the voyage
account on consumption basis i.e. opening stock + purchases – closing stock.
 Depreciation: Depreciation on ship is charged from the voyage account in the

proportion of the period of a journey.
 Bunker Cost: Cost of water, coal, diesel, fuel, etc. used for the purpose of voyage
is called bunker cost and may debited from the voyage account.
 Port Charges: Port authorities charge fees for allowing ships to use port for the
loading/unloading the cargo. This fee amount is debited from the voyage account.
 Stevedoring Charges: Loading and unloading of cargo called stevedoring

charges and should be debited from the voyage account.
130
Voyage in Progress
At the end of the accounting year where voyage is not completed and is still in progress,
following accounting treatments are required:
Freight Received
Total freight received credited to the voyage account and the provision for incomplete
voyage is debited from the voyage account. Provision is created for the voyage-in-progress
in proportion of the incomplete journey.
Expenses
To complete matching concept, an income as well as expenses related to the incomplete
voyage might be carried forward to the next accounting year on the respective account.
Provision for the income earned should be debited from the voyage account and provision
for the expenses should also be credited to the voyage account.
Basis of the expenses to be carried forward is as hereunder:
 Expenses which are related to the freight, need to be carried forward in a proportion
to return freight. For example, if total freight is Rs. 2,500,000 out of which return
freight is Rs. 1,200,000 and total expenses are Rs. 500,000, then expenses to be
carried forward to the next accounting year — will be Rs. 240,000:
1,200,000
= × 500,000
2,500,000
 In case of the standing expenses, if return journey is incomplete, ½ of the standing
charges to be carried forward.
 In case where return journey is halfway back and the total expenses of voyage
given ½ of the total expenses to be carried forward.
 When the return journey is halfway back and the expenses till date are given 1/3rd
of the expense are to be carried forward.
 When one round of the trip is completed and on his half way back for single way
and total expenses of voyage are given, then 1/3rd expenses are to be carried
forward.
 When one round trip is completed and on his half way back for single way and
expenses till date are given, then 1/5rd expenses are to be carried forward.
131
Pro-forma
In the books of M/s Titanic Shipping Company
Voyage Account
For the period ending 31-12-2014
Amount Particulars Amount

Particulars
By Freight Xx
To Coal By Primage Xx
Opening Stock xx
Add: Purchases xx
---------
xxxx
Less: Closing Stock xx xx
--------- xx
To Port Charges xx
To Captain Expenses xx
To Harbor Wages xx
To Address Commission xx
To Brokerage xx
To Insurance Premium xx
To Salary & Wages xx
To Stores xx
To Deprecation
To Provision for Incomplete xx
Voyage xx
To Net Profit
(trf. To Profit & Loss A/c)
XXXX XXXX
132
24. Financial Accounting ─ Royalty Accounts
Royalty is payable by a user to the owner of the property or something on which an owner
has some special rights. A royalty agreement is prepared between the owner and the user
of such property or rights. If payment is made to purchase the right or property that will
be treated as capital expenditure instead of a Royalty.
Payment made by the lessee on account of a royalty is normal business expenditure and
will be debited to the Royalty account. It is a nominal account and at the end of the
accounting year, balance of Royalty account need to be transferred to the normal Trading
and Profit & Loss account. Royalty, based on the production or output, will strictly go to
the Manufacturing or Production account. In case, where the Royalty is payable on sale
basis, it will be part of the selling expenses.
Types of Royalties
There are following types of Royalties:
 Copyright: Copyright provides a legal right to the author (of his book/s), the
photographer (on his photographs), or any such kind of intellectual works.
Copyright royalty is payable by the publisher (lessee) of a book to the author
(lessor) of that book or to the photographer, based on the sale made by the
publisher.
 Mining Royalty: Lessee of a mine or quarry pays royalty to lessor of the mine or
quarry, which is generally based on the output basis.
Types of Royalty
Copyright
Mining Royalty
Patent Royalty
 Patent Royalty: Patent royalty is paid by the lessee to lessor on the basis of
output or production of the respective goods.
Basis of Royalty
In case of the patent, publisher of the book pays royalty to the author of the book on the
basis of number of books sold. So, holder of patent gets royalty on the basis of output and
the mine owner gets royalty on the basis of production.
133
Important Terms
Following are the important terms, which are used in Royalty agreements:
Royalty
A periodic payment, which may be based on a sale or output is called Royalty. Royalty is
payable by the lessee of a mine to the lessor, by publisher of the book to the author of
the book, by the manufacturer to the patentee, etc.
Landlord
Landlords are the persons who have the legal rights on mine or quarry or patent right or
copybook rights.
Tenet
An Author or publisher; lessee or patentor who takes out rights (usually commercial or
personal rights) from the owner on lease against the consideration is called tenet.
Minimum Rent
According to the lease agreement, minimum rent, fixed rent, or dead rent is a type of
guarantee made by the lessee to the lessor, in case of shortage of output or production or
sale. It means, lessor will receive a minimum fix rent irrespective of the reason/s of the
shortage of production.
Payment of royalty will be minimum rent or actual royalty, whichever is higher for
example:
M/s Hyderabad publication printed a book on Java on the minimum rent of Rs. 1,000,000/-
per annum royalty being payable @ Rs. 20 per book sold. In the first year of publication,
Hyderabad publication sold 75,000 copy of the books and in the second year, number of
sold books fell down to 45,000 only. Amount of royalty will be payable as under:
Minimum Rent Royalty Payable
Ist Year 1,000,000 Rs. 1,500,000
75,000 Books X Rs. 20 per book = Rs. 1,500,000
IInd Year 1,000,000 Rs. 1,000,000
45,000 Books X Rs. 20 per book= Rs. 900,000
Shortworkings
Difference of minimum rent and actual royalty is known as shortworkings where payment
of Royalty is payable on the basis of minimum rent due to shortage in the production or
sale. For example, if calculated royalty is Rs. 900,000/- as per sale of books based on the
above example, but royalty payable is Rs. 1000,000 as per minimum rent, shortworking
will be Rs. 100,000 (Rs. 1,000,000 – Rs. 9,00,000).
134
Ground Rent
The rent, paid to the landlord for the use of land or surface on the yearly or half yearly
basis is known as Ground Rent or Surface Rent.
Right of Recouping
It may contain in the royalty agreement that excess of minimum rent paid over the actual
royalty (i.e. shortworkings), may be recoverable in the subsequent years. So, when the
royalty is in excess of the minimum rent is called the right of recoupment (of
shortworkings).
Right of recoupment will be decided for the fixed period or for the floating period. When
the right of recoupment is fixed for the certain starting years from the date of royalty
agreement, it is said to be fixed or restricted. On the other hand, when the lessee is eligible
to recoup the shortworkings in next 2 or 3 years from the year of its commencement, it is
said to be floating.
Shortworking will be shown on the asset side of Balance sheet up to allowable year of
recouping after that it will be transferred to profit & loss account (after expiry of allowable
period).
Lease Premium
An Extra payment in addition to royalty, if any, paid by lessee to lessor is called Lease
premium and will be treated as capital expenditure and it will be written off on yearly basis
through profit and loss account as per the suitable method.
TDS (Tax Deducted at Source)

If there is an applicability of TDS (Tax deducted at source) as per Income Tax Act, lessee
will make the payment to lessor after deducting TDS as per applicable rate and lessee is
liable to deposit it to the credit of Central Government. Amount of royalty will be gross
amount of royalty (inclusive of TDS), that will be charged to profit and loss account.
For example, if royalty amount is 1,000,000/-& rate of TDS is 10%, then lessee will pay
Rs. 900,000/- to lessor. Amount of royalty charge to profit and loss account will be Rs.
1,000,000/- and balance amount of Rs. 100,000/- will be deposited in the credit of central
Government account.
Stoppage of Work
Sometime, there may be stoppage of work due to conditions beyond control like strike,
flood, etc. in this case, minimum rent is required to be revised as provided in the
agreement.
Revision of the minimum rent will be:
 Reduction of minimum rent in the proportion of the stoppage of work;
 On the basis of fixed percentage; or
 By a fixed amount in the year of stoppage.
135
Sub Lease
Sometime, landlord or lessor allows lessee to sublet some part of the mine or land as a
sub-lessee. In this case, lessee will become lessor for sub lessee and lessee for main
landlord.
In such a case, as Lessee, he will maintain the following books of accounts:
As a Lessee: As a Sub Lessor:
1) Landlord Account 1) Royalties Receivable Account

2) Minimum Rent Account 2) Sub Lessee Account
3) Royalty Account 3) Shortworkings Allowable Account
4) Shortworkings Recoupable Accounts
Accounting Entries
(a) Minimum Rent A/c Dr
To Landlord A/c
1. When there is no royalty in the year
(b) Shortworking A/c Dr
To Minimum Rent A/c
(c) Minimum Rent A/c Dr

To Landlord A/c
(d) Royalties A/c Dr

Shortworkings A/c Dr
2. Where Royalties are less than To Minimum Rent A/c
minimum rent and shortworkings are
recoverable in next years. (e) Landlord A/c Dr
To Bank A/c
(f) Profit & Loss A/c Dr
To Royalty A/c
(g) Royalties A/c Dr

To short workings A/c
3. When Short workings are recouped To Landlord A/c
(h) Landlord A/c Dr
To Bank A/c
4. Transfer of irrecoverable Short (i) Profit & Loss A/c Dr

workings To Short workings A/c
136
Illustration
From the given information, please prepare the necessary accounts in the books of M/s
Black Diamond Limited.
 Company leased a colliery on 01-01-2010 at a minimum rent of Rs. 75,000.
 Royalty Rate@ Rs. 1/- per ton.
 Right of recouping of shortworkings is restricted to first 3 years.
 Output for the first four years of the lease was 40,000, 65,000, 105,000, and
90,000 tons respectively.
Solution:
Analytical Table
Year Output Royalties Short- Surplus Recoupment Un- Payable to

(Tons) @ Rs. 1 workings recoupable Landlord
Per ton Short
workings
2010 40,000 40,000 35,000 -- 75,000
2011 65,000 65,000 10,000 -- 75,000
2012 105,000 105,000 -- 30,000 30,000 15,000 75,000
2013 90,000 90,000 15,000 90,000
300,000 300,000 45,000 45,000 30,000 15,000 315,000
In the Books of
M/s Black Diamonds Ltd
Royalties Account

31-12-2010 To Landlord A/c 40,000 31-12-2010 By Production A/c 40,000
31-12-2012 By Production A/c

105,000 105,000
31-12-2012 To Landlord A/c
Landlord Account

31-12-2010 To Bank A/c 75,000 31-12-2010 By Royalties A/c 40,000
By Shortworkings A/c 35,000
75,000 75,000

By Shortworkings A/c 10,000
137
75,000 75,000
31-12-2012 To Shortworkings A/c 30,000 31-12-2012 By Royalties A/c 105,000

31-12-2012 To Bank A/c 75,000
105,000 105,000
90,000 90,000
Shortworkings Account

31-12-2010 To Landlord A/c 35,000 31-12-2010 By Balance C/d 35,000
35,000 35,000
01-01-2011 To Balance b/d 35,000 31-12-2011 By Balance c/d 45,000

To Landlord A/c 10,000
45,000 45,000
01-01-2012 To Balance b/d 31-12-2012 By Landlord A/c
45,000 30,000
15,000
31-12-2012 By Profit & Loss A/c
45,000 45,000
138

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Copyright & Disclaimer

Copyright & Disclaimer ............................................................................................................................. i

Table of Contents .................................................................................................................................... ii

1. FINANCIAL ACCOUNTING ─ RECTIFICATION OF ERRORS ...................................................... 1

Types of Errors ........................................................................................................................................ 1

Methods of Rectification of Errors .......................................................................................................... 1

2. FINANCIAL ACCOUNTING ─ CAPITAL AND REVENUE ............................................................ 5

3. FINANCIAL ACCOUNTING ─ FINAL ACCOUNTS ..................................................................... 8

Trading Account ...................................................................................................................................... 8

Manufacturing Account ......................................................................................................................... 10

Profit & Loss Account ............................................................................................................................ 11

Grouping of Assets & Liabilities ............................................................................................................. 13

4. FINANCIAL ACCOUNTING ─ PROVISION AND RESERVES..................................................... 17

5. FINANCIAL ACCOUNTING ─ MEASUREMENT OF BUSINESS INCOME.................................. 20

Objectives of Net Income ...................................................................................................................... 20

Definition of Income ............................................................................................................................. 20

Accounting Concept and Income Measurement .................................................................................... 21

Computation of Business Income .......................................................................................................... 22

Measurement of Business Income ........................................................................................................ 22

Measurement of Revenue ..................................................................................................................... 22

Measurement of Expenses .................................................................................................................... 22

Matching Concept ................................................................................................................................. 23

Measurement of Costs .......................................................................................................................... 23

Basis of Measurement of Income .......................................................................................................... 24

6. FINANCIAL ACCOUNTING ─ BILLS OF EXCHANGE & PROMISSORY NOTES .......................... 25

7. FINANCIAL ACCOUNTING ─ INVENTORY VALUATION......................................................... 32

Importance of Inventory Valuation ....................................................................................................... 32

Methods of Taking Inventory ................................................................................................................ 32

Valuation of Inventory at Lower Cost or Market Price ........................................................................... 33

Methods of Valuation of Inventory ....................................................................................................... 33

8. FINANCIAL ACCOUNTING ─ ANALYSIS OF CHANGES IN INCOME........................................ 37

9. FINANCIAL ACCOUNTING ─ ACCOUNTING FOR CONSIGNMENT ........................................ 40

Meaning & Features of Consignment .................................................................................................... 40

Why is Consignment not a Sale?............................................................................................................ 40

Important Terms ................................................................................................................................... 41

Valuation of unsold Consignment ......................................................................................................... 42

Invoicing Goods higher than Cost .......................................................................................................... 42

Loss of Goods ........................................................................................................................................ 42

Summary of Accounting Entries ............................................................................................................ 44

10. FINANCIAL ACCOUNTING ─ JOINT VENTURE...................................................................... 46

Major Features and Characteristics of Joint Venture ............................................................................. 46

Partnership and Joint Venture............................................................................................................... 46

Joint Venture and Consignment ............................................................................................................ 47

Accounting Records ............................................................................................................................... 47

When one of the Venturers keeps Accounts.......................................................................................... 47

11. FINANCIAL ACCOUNTING ─ NON-TRADING ACCOUNTS ..................................................... 51

What is Non-Trading Account? .............................................................................................................. 51

Receipt and Payment Account .............................................................................................................. 51

Income & Expenditure Account ............................................................................................................. 52

Items Peculiar to Non-Trading Concern ................................................................................................. 54

12. FINANCIAL ACCOUNTING ─ SINGLE ENTRY ........................................................................ 58

Meaning and Silent Features of SES ...................................................................................................... 58

Difference between SES and DES........................................................................................................... 58

Limitations of SES .................................................................................................................................. 58

Preparation of Statement of Affairs ...................................................................................................... 59

How does the Statement of affairs Differ from Balance-Sheet? ............................................................ 59

Ascertainment of Profit under SES ........................................................................................................ 59

13. FINANCIAL ACCOUNTING ─ LEASING ................................................................................. 63

Important Terms in Leasing ................................................................................................................... 63

Popularity of Leasing ............................................................................................................................. 64

Advantages of Leasing ........................................................................................................................... 64