Admission of a Partner
Meaning
According to Section 31 of Indian Partnership Act 1932 "A Partner can be admitted only
consent of all the Existing Partners."
Adjustments required when a New Partner is Admitted
a. Calculation of New Profit Sharing Ratio / Sacrificing Ratio.
b. Valuation and Treatment of Goodwill.
c. Revaluation of Assets and Liabilities.
d. Adjustment of accumulated Profits, Reserve and Losses.
e. Necessary Adjustment of Capital Accounts of Partners.
Change in Profit Sharing Ratio
A New Partner Acquires his share from the Old Partner in any of the following Manners;
(i) In their old Profit Selling Ratio
(ii) In a Particular Ratio or Surrendered Ratio
(iii) In a particular fraction from some of the partner
Accounting Treatment of Goodwill
1. When Goodwill (Premium) is paid by
No Entry
the New Partner Privately
2. When Goodwill brought in Cash by the
New Partner
(i) Cash/Bank A/c
...Dr.
To Premium for Goodwill A/c
(ii) Premium for Goodwill A/c
... Dr.
To Sacrificing Partners' Capital A/c
(In Sacrificing Ratio)
To Sacrificing Partners' Current A/c s
(When Capital is Fixed)
3. Goodwill Withdrawn by the
Sacrificing (Old) Partners
4. Goodwill not brought in Cash
Sacrificing Partners' Capital A/c s
To Cash/Bank A/c
New Partner's Capital or Current A/c
To Sacrificing Partners' Capital or current A/c
[Sacrificing Ratio]
5. Goodwill brought in Kind
...Dr.
Assets A/c ...Dr.
To Premium for Goodwill A/c
195
... Dr.
Hidden or inferred goodwill
Sometimes the value of goodwill is not given at the time of admission of a new partner. In such a
situation, goodwill is calculated on the basis of net worth of the business. Hidden goodwill is the
excess of desired total capital of the firm over the actual combined capital of all partners’.
For Example
Capital of L and M are ` 2,00,000 and ` 1,50,000 respectively. They admit N as a Partner for
1/5 share with ` 1,00,000 as his Capital.
On the basis of N’s Capital, total Capital of the Firm should be ` 5,00,000 (1,00,000 × 5/1). But
the actual Capital of the Firm is ` 4,50,000 (2,00,000 +1,50,000 +1,00,000). Hence, Hidden
Goodwill:
= ` 5,00,000 - ` 4,50,000
= ` 50,000
Revaluation of Assets and Reassessment of Liabilities
Accounting Entries
(i) For increase in the value of Assets
Assets A/c (Individually)
.... Dr.
To Revaluation (or P & L Adjustment) A/C
(ii) For a decrease in the value of Assets
Revaluation A/c
....Dr.
To Assets A/c (Individually)
(iii) For an increase in the amount of Liabilities
Revaluation A/c
....Dr.
To Liabilities A/c (Individually)
(iv) For a decrease in the amount of Liabilities
Liability A/c (Individually)
....Dr.
To Revaluation A/c
(v) For an accounting unrecorded Assets
Assets A/c (Individually)
....Dr.
To Revaluation A/c
(vi) For accounting unrecorded Liabilities
Revaluation A/c
....Dr.
To Liability A/c (Individually)
Revaluation Account
Particulars
`
Particulars
`
To Decrease in value of assets
.....
To increase in value of liabilities
.....
By Increase in value of assets
.....
By Decrease in value of liabilities
.....
To Unrecorded liabilities
.....
By Unrecorded assets
.....
To Profit transfer to the old Partner's
.....
By Loss transfer to the old Partner's
.....
Capital A/c s (in the old ratio)
.....
Capital A/c s (in the old ratio)
.....
196
RESERVES AND ACCUMULATED (UNDISTRIBUTED) PROFITS /LOSSES
Accounting Entries
(i) For transfer of Reserves and Accumulated Profits:
Profit and Loss
...Dr.
Reserve Fund A/c or General Reserve
...Dr.
Workmen Compensation Reserve
...Dr. [Excess of Reserve
Liabilities]
Investment Fluctuation Reserve A/c
...Dr. [Excess of Reserve over the
difference between Book Value
over Actual
and market Value]
To Old Partners' Capital A/c s
[In old Ratio]
(Being the reserve and profit transferred to old partners in their old ratio)
(ii) For transfer of Reserves and Accumulated Losses:
Old Partners' Capital A/c s
...... Dr.
To Profit and Loss A/c
[In old Ratio]
To Deferred Revenue Expenditure A/c
(Like Advertisement Expenditure)
(Being the accumulated losses transferred to old partners in their old ratio
Adjustment of Partners' Capital
Case 1. Calculation of New Partner's Capital on the basis of Old Partners
Step 1. Calculate the adjustment closing capitals of old Partners (after all adjustments have
been made)
Step 2. Calculate the total closing Capital of New Firm as under:
Total capital of New Firm = Combined adjusted Closing Capitals of Old Partners X
Reciprocal of remaining share of profit of old partners.
Step 3. Calculate the proportionate Capital of New Partner as under:
New Partner's Capital =Total capital of new firm x New partner's proportion of share of
profit.
Case 2. Adjustment of Old Partners’ Capital on the basis of New Partner's
Capital
Step 1. Calculate total capital of new firm on the basis of new partner's capital i.e. new
partner's capital X Reciprocal of proportion of share profit of new partner.
197
Step 2. Calculate the new capital of old partners by dividing the total capital in their new
profit sharing ratio.
Step 3. Calculate the adjusted closing capitals of old partners (i.e. after all adjustments have
been made)
Step 4. Calculate the surplus /deficiency in each of the old partner's capital account by
comparing the new capital with their adjusted old capital which is adjusted through cash or
transferred to their Current A/c
Adjustment of Surplus/Deficiency through Cash:
(a) If Capital of Old Partners falls short (Deficit), bring in cash:
Cash/Bank A/c
....Dr.
To Partners' Capital A/c s
(b) If capital of old partner has a surplus, withdraw cash:
Partners' Capital A/cs
....Dr.
To Cash/Bank A/c
Adjustment of Surplus/Deficiency through Partner's Current Account:
(a) If the existing capital is more than his required capital (surplus)
Partner's Capital A/c
....Dr.
To Partner's Current A/c
(b) If the existing capital is less than his required capital (deficit)
Partner's Current A/c
....Dr.
To Partner's Capital A/c
If Current Account shows a Credit Balance, it is taken to the Liabilities side of the Balance
Sheet. However, if Current Account shows a Debit Balance, it is placed on the Assets side of the
Balance Sheet.
Retirement and Death of a Partner
Meaning
Retirement of a Partner means living the firm by a partner. A Partner may retire from the
firm in the following conditionsI. If there is an agreement about the retirement.
II. If all the partners consent to his retirement.
III. If the partnership is at will, by giving a notice in writing to all the other partners in
advance.
198
Adjustment for Retirement of a Partner
(a) Finding out the New Profit-Sharing Ratio and Gain Ratio.
(b) Treatment of Goodwill.
(c) Revaluation of Assets and Reassessment of Liabilities.
(d) Treatment related to Unrecorded Assets and Liabilities.
(e) Adjustments in respect to Accumulated Profits and Losses.
(f) Ascertain of Share of Profits or Losses up to the date of Retirement/Death.
(g) Adjustment of Capital if required.
(h) Settlement of Capital, if required.
(i) Change in Profit- Sharing Ratio
New Profit-Sharing Ratio
The New Profit-sharing Ratio on Retirement of a Partner is the Ratio in which the continuing or
remaining Partners decide to share the future Profits and Losses.
New Share of a Partner = Old Share + Acquired Share
Case 1. When one Partner Retires and the New Profit -Sharing Ratio among the Remaining
Partners is not given.
Case 2. When Remaining Partners Purchase the Share of the Retiring Partner in a Specific
Ratio.
Gaining Ratio
Ratio in which the Continue Partner acquires the Retiring of Deceased Partners' Share.
Calculation of Gaining Ratio under different situations is given below:
(i) When No Agreement Exists
In this case gain to the continuing partners is in the old profit-sharing ratio.
(ii) When the New Profit-sharing Ratio is given
In this case, the gaining ratio is calculated by deducting the old ratio from the new ratio.
Gaining Ratio=New Ratio - Old Ratio
Accounting Treatment of Goodwill
When a Partner Retires (or Dies) his Share of Profit is acquired by the Remaining Partners.
The following Entry is recorded for this purpose:
Remaining Partner's A/cs
....Dr. [Gaming Ratio]
To Retiring Partners' Capital
[Retiring Partner's
Share of Goodwill]
All Partners' Capital/Current A/cs
...Dr. [Old Ratio]
199
To Goodwill (or Premium) A/c
Revaluation of Assets and Reassessment of Liabilities
(Same as admission)
Adjustment for Reserves and Undistributed profits/Losses
For Distribution of Accumulated Profits:
General Reserve A/c
.....Dr.
Reserve Fund A/c
.....Dr.
Profit and Loss A/c
.....Dr. To All Partners' Capital A/c s
For Distribution of Accumulated Losses;
All Partners' Capital A/c
....Dr. To Profit and Loss A/c
Accounting treatment of joint life policy;
Case 1. When there is no Joint Life Policy is present in the Balance Sheet but Joint Life Policy
will paper in the Balance Sheet after Retirement.
Joint Life Policy A/c
....Dr.
(Surrender Value of J.L.P.)
To All Partners'Capital A/cs
(Old Ratio)
Case 2. When there is no Joint Life Policy in the present Balance Sheet and Joint Life Policy
will not be shown in the Balance Sheet after Retirement.
In this situation adjustment is carried out through Partners' Capital Accounts by passing the
following entry:
Continuing Partners' Capital A/cs
....Dr. (Gaining Ratio)
To Retiring Partner's Capital A/c
(Share of Surrender Value)
Case 3. When there is Joint Life Policy in the Balance Sheet: In this case, Joint Life Policy is
treated as an asset. Any Revaluation of Joint Life Policy is carried out through Revaluation
Account.
Calculation of amount due to the Retiring Partner
(i)
Capital on the date of the last Balance Sheet.
(ii)
Interest or salary, if any, payable to him.
(iii) Share of profit or losses till the date of retirement. (i) If the amount is paid in Cash or by
Cheque;
(iv) Share in the profits or losses on revaluation of assets and reassessment of liabilities.
(v)
Share in the goodwill of the firm.
(vi) Share in the general reserve or profits and losses account appearing in the Balance Sheet.
200
Settlement of the Account Due to the Retiring Partner
Retiring Partner's Capital A/c
....Dr.
To Cash/BankA/c
(ii) If the amount is not paid in cash;
Retiring Partner's Capital A/c
....Dr.
To Retiring Partner's Loan A/c
Construction of Retiring Partner's Loan Account
(i) For Interest due; Interest on Loan A/c
....Dr.
To Retiring Partner's Loan A/c
(ii) For payment of Instalment with Interest:
Retiring Partner's Loan A/c
....Dr.
To Cash /Bank A/c
Adjustment of partners’ capital in new profit sharing ratio
Adjustment of Partner's Capital in New Profit Sharing Ratio
(i) If Capital of Remaining Partner falls short, bring in Cash:
Cash/BankA/c
....Dr.
To Remaining Partner's Capital A/c
(ii) If capital of remaining partner has a surplus, withdraw Cash:
Remaining Partner's Capital A/c
....Dr.
To Cash/Bank A/c
(iii) If the deficit in their capital account is adjusted by transferring to their current
accounts:
Remaining Partner's Current A/c
...Dr.
To Remaining Partner's Capital A/c
(iv) If the surplus in their capital accounts is adjusted by transferring to their Current
Capital Account
Remaining Partner's Capital A/c
....Dr.
To Remaining Partner's Current A/c
Note: If no information is given then any surplus or deficiency should be adjusted in cash
and not by transferring it to partner's current account.
201
Death of a Partner
The Accounting Procedures on the Death of a Partner are very similar to the Retirement
of a Partner.
From Accounting Point of view the following point are Important;
(i) Calculation of New Ratio and Gaining Ratio.
(ii) Treatment of Goodwill.
(iii) Revaluation of Assets and Reassessment of Liabilities.
(iv) Distribution of Accumulated Profits and Losses.
(v) Treatment of Joint Life Policy: Insurance amount is distributed among all partners
including deceased partner in their old ratio.
(vi) Interest on capital, share of profit to the deceased partner till the date of death, drawings,
interest on drawings, is credited or debited to the deceased partner's account.
(vii) Preparation of deceased partner's capital account and its settlement
Having given effect to the above 6 points, the balance in the Deceased Partner's Capital
Account is transferred to his Executor's Account and may be paid in cash or transferred to
his Loan Account.
Note: The Executors of the Deceased Partner are entitled to the following:
(a) Balance of Capital and Current Account of the Deceased Partner.
(b) Share of Accumulated Profit/Loss.
(c) Share of Revaluation Profit/Loss.
(d) Share of Goodwill of the Firm.
(e) Share of Profit from the date of last Balance Sheet to the date of Death,
(f) Share of Joint Life Policy taken by the Firm.
Date of death is important/actor while calculating the balance of deceased Partner.
Date is considered
Date is not considered
(i) To calculate Share of Profit
(i) To calculate Share of Goodwill
(ii) To calculate Interest on Capital
(ii) To calculate Share of General Reserves
(iii) To calculate Interest on Drawings
(iii) To calculate Share of Joint Life Policy
(iv) To calculate Interest on Deceased
(iv) To calculate Share of Profit and Loss A/c
Partner’s loan A/c
(given in Balance Sheet)
202
Dissolution of Firm
Meaning
According to section 39 of Indian Partnership Act 1932, "Dissolution of a firm means the
dissolution of partnership among all the partners of the firm along the closing the firm's
business". In case of dissolution of a firm the assets are realized and the liabilities are paid.”
Mode of Dissolution of a Firm
(1) Dissolution by Mutual Agreement among the Partners.
(2) Compulsory Dissolution
(a) If all the Partners or all Except One Partner become Insolvent.
(b) If Business of the Firm become Unlawful.
(3) Dissolution on the Happening of the Certain Contingencies.
(a) On the Expiry of the Term for which the Firm was Formed.
(b) On the completion of venture (s) for which the firm was formed.
(c) On the death of a partner; and
(d) On the adjudication of a partner as an insolvent.
(4) Dissolution by Notice in Case of Partnership at Will.
A Court may pass order for the Dissolution of the Firm on the following Grounds when;
(i) A Partner becomes a Person of Unsound Mind.
(ii) A Partner is Permanently Incapacitated.
(iii) A Partner is Found Guilty of Misconduct.
(iv) Partnership Agreement is Breached Persistently by Some Partner.
(v) The Court Finds the Dissolution of the Firm Justified.
Settlement of accounts
Section-48 of the Indian Partnership Act 1932, deals with the Settlement of Account at a time
of Dissolution of Firm.
(i) Treatment of Losses;
Losses are to be paid first out of Profit, then out of Capital, and lastly if necessary by the
Partners Individually in the Proposition of their Profit- Sharing Ratio.
(ii) Application of Assets;
The amount realized from the Assets of the Firm including any sum of money contributed by
the Partners to makeup Deficiencies of Capital shall be applied in the following manner.
203
(a)
First to Pay Firm's Debt to the Third Parties, i.e. Outside Parties,
(b)
Then to Pay Loan from Partners,
(c)
Then to pay Capital of Partners.
(d)
Lastly the Surplus (if any) shall be Distributed among the Partners in their Profit-sharing
Ratio.
Payment of Firm’s Debts and private Debts;
Section-49 of IPA1932 deals the following is applied in Case of Firm's Debt and Private
Debt.
(i) Firm's Property is applied first in payment of Firm's Debts and if there is any surplus,
then the share of each Partner is applied in the payment of his Private Debts or paid to
him.
(ii) Partner's Private Property is applied first in payment of his Private Debts and the Surplus
(if any), in payment of Firm's Debts if the Firm's Liabilities exceed the Firm's Assets.
Accounting Treatment of Dissolution of a Partnership Firm
The following necessary Accounts are prepared at the time of Dissolution of a
Firm;
(1) Realisation Account: It is a Nominal Account which is prepared at a time of Dissolution
to determine the Profit or Loss on Realisation of Assets and payment of Liabilities.
The following necessary Steps are adopted for Accounting Treatment of Realisation
Account;
Step 1. Entry for transfer of all accounts except Partner's Loan A/c, Partners' Capital A/c s,
Undistributed Profit or Losses and Cash/Bank A/c given in the balance sheet:
(a) For Transfer of Assets to Realisation A/c;
Realisation A/c
......Dr. (at its Book value)
To Various Assets A/c (Individually by name)
(b) For Transfer of Outside Liabilities to Realisation A/c;
Various Liabilities A/c (Individually by name)
......Dr. (at its Book value)
To Realisation A/c
Step 2. Entry for collection of sale proceeds from assets
(a) For Cash Sales of Assets;
Cash/Bank A/c
......Dr.
To Realisation A/c
204
(b) For Assets taken over by a Partner;
Partner's Capital A/c
......Dr.
To Realisation A/c
(c) When the Assets are given away to any of the Creditors towards the Full / Partial
Payment of his Dues, there may be Three Situations;
(i) When a creditor accepts an asset as full and final settlement, no journal entry is required.
(ii) When a creditor accepts his payment by taking over an assets and part of his payment in
cash, the following entry will be made for cash payment only;
Realisation A/c
......Dr.
To Cash/Bank A/c
(iii) When a creditor accepts an asset where value is more than the amount due to him, he
will pay cash. Entry will be as follows;
Cash/BankA/c
.......Dr.
To Realisation A/c
Step 3. Entry for payment of Dissolution/Realisation expenses
(a) For cash payment of expenses:
Realisation A/c
......Dr.
To Cash/Bank A/c
Note: Realised against assets can be more than, less than or equal to Book value of the asset.
(b) For payment of expenses made by a partner or fixed amount for expenses is credited to
partner's capital account:
Realisation A/c
.......Dr.
To Partner's Capital A/c
(c) If any partner is to bear all expenses ofrealisation himself no journal entry is required.
(d) If the realisation expenses are paid by the firm on the behalf of bearing partner:
Partner's Capital A/c
......Dr,
To Cash/Bank A/c
(e) When Realisation Expenses are borne by one Partner and paid by another Partner:
Bearing Partner's Capital A/c
.......Dr.
To Paying Partner's Capital A/c
Step 4: Entry for payment of outside liabilities
(a) For Cash Payment of Liabilities :
Realisation A/c
.......Dr.
To Cash/Bank A/c
205
(b) For Liabilities Taken Over by a Partner:
RealisationA/c
.......Dr.
To Partner's Capital A/c
Step 5: Entry for Closing of Realisation Account
(a) Realisation Account Shows Profit: (When the Credit Side is Bigger)
Realisation A/c
.....Dr. (amount of profit)
To Partner's Capital A/c s
(share of partners'profit)
(b) Realisation Account shows Loss;(When the Debit side is Bigger)
Partners1 Capital A/c
.......Dr. (share of
partners'loss)
To Realisation A/c
(amount of loss)
Note: In the Case of Dissolution. Goodwill is like other Assets .So Same Treatment will be
given as given to other assets.
Realisation Account
Dr.
Cr.
Particulars
To Various Assets A/c s except Cash Bank,
Rs.
....
Particulars
Rs.
By Various Liabilities A/c s except
Dr. balance of Partner's Capital /Current A/c s,Undistributed profit, Partner's Capital/
Loan to Partner and Fictitious Assets
....
To Cash/Bank A/c (Payment of dissolution
expenses)
....
To Cash /Bank A/c(Payment of outside and
unrecorded liabilities)
Current A/c s, Loan from Partner
....
By Provision for any Assets, e.g., provision
....
for doubtful debts, Joint Life Policy fund etc.
By Cash/Bank A/c (Receipt on realization
....
of assets and unrecorded assets.)
To Partner's Capital A/c (Liability taken over
By Partner's Capital A/c (Assets taken
by a partner or any expenses paid by him
over by a partner)
or remuneration payable to him)
....
To Profit transferred to Partner's Capital A/c
....
....
By Loss transferred to Partner's Capital A/c
....
....
(2) Partners Loan Account
If partner has given any loan to the firm it will be shown credit side of partners loan account.
Partner's loan A/c
.......Dr.
To Cash/Bank A/c
(Being partner's loan paid off)
206
(3) Partners Capital Account
Balance of partners' capital accounts and current accounts are recorded in this account. If
partners have taken over firm's assets, these are recorded in the debit side of their capital
accounts or if they pay liabilities of the firm, these are credited in their capital accounts.
(a) On Transfer of Undistributed Profits and Reserves
Profit and Loss A/c
.......Dr.
Reserve Fund A/c
To Partners' Capital A/c
(b) In case of accumulated losses
Partners'Capital A/c s
.......Dr.
To profit and Loss A/c
Final Settlement with Partners
(a) On Bringing Cash by Partners for Deficiency in Capital
Cash/Bank
.......Dr.
To Partners' Capital A/c s
(b) On Payment to Partners or Closing the Partners' Capital Accounts
Partners' Capital A/c s
.......Dr.
To Cash/Bank A/c
(4) Cash and Bank account
This is an account which show the cash balance at a time of Dissolution of the Firm. The
opening balance of cash or bank will be shown on debit side of cash/ bank account. All the
receipts from sale of the assets and amount brought in by partners are shown on debit side while
all the payment of liabilities expenses and amount paid to partners' are shown on credit side.
(i) Partner’s Loan account;
Partner's Loan A/c
.......Dr.
To Cash/Bank A/c
(Being partner's loan paid off)
(ii) Partners' capital accounts;
(a) If Capital Account shows Debit Balance:
Cash/BankA/c
.......Dr.
To Partner's Capital A/c
(Being deficit amount of Capital brought in Cash)
207
(b) If Capital Account shows Credit Balance:
Partner's Capital A/c
.......Dr.
To Cash /Bank A/c
(Being final payment made to a partner)
(iii) Cash or bank account:
(a) For cash deposited into bank;
Bank A/c
.......Dr.
To Cash A/c
(b) For cash withdrawn from bank:
Cash A/c
.......Dr.
To Bank A/c
Accounting Treatment of Provision and Undistributed Profit and Loss
(i)Transfer of Provision to Realistion Account:
(a) Provision which has a credit balance will be transferred to the credit side of realisation
account and the following entry will be passed:
Provision for Depreciation A/c
Dr
Provision for Bad Debts A/c
Dr.
Provision for Discount on Debtors A/c
Dr.
Investment Fluctuation Fund A/c
Dr.
Joint Life Policy Fund A/c
Dr.
To Realisation A/c
(b) Provision which has a debit balance will be transferred to the debit side of
Realization account and the following entry will be passed:
RealisationA/c
Dr.
To Provision for Discount on Creditors A/c
(For provision against liabilities transferred to realisation account)
(ii) Transfer of Undistributed Profit/ Losses to Partner's Capital Accounts:
(a) Undistributed Profits such as General Reserve, Reserve Fund, Credit balance of Profit &
Loss Account etc. are not to be transferred to Realisation Account. These accounts are
transferred to partners’ capital or current accounts in their profit sharing ratio. The entry will be
passed as follows:
208
General Reserve A/c
Dr.
Reserve Fund A/c
Dr.
Profit & Loss A/c
Dr.
Workmens' Compensation Fund
Dr.
To Partners’ Capital/Current A/c s
(Being transfer of undistributed profits to partners1 accounts in their profit sharing ratio)
(b) Similarly if Undistributed Losses or Fictitious Assets, i.e. Debit balance of Profit & Loss
A/c, Advertisement Expenses A/c etc. are given in the Assets side of Balance Sheet, the
following entry will be passed;
Partners’ Capital /Current A/cs
Dr.
To Profit & Loss A/c
To Advertisement Expenses A/c
(Being transfer of undistributed loss to partners1 accounts in their profit sharing ratio)
Accounting Treatment for Unrecorded Assets and Unrecorded Liabilities
(i) Unrecorded Assets:
(a) If cash is realised from Unrecorded Assets:
Cash/BankA/c
Dr.
To Realisation A/c
(b) If Unrecorded Assets are taken over by a Partner:
Partner's Capital A/c
Dr.
To Realisation A/c Unrecorded liabilities:
(a) If cash payment is made for unrecorded liabilities:
Realisation A/c
Dr.
To Cash/Bank A/c
(b) If unrecorded liability is taken over by a partner:
RealisationA/c
Dr. To Partner's Capital A/c
Note: Both Unrecorded Assets and Unrecorded Liabilities are not transferred to Realisation
Account because they have no Account in the Books.
Accounting Treatment of Goodwill
In the case of Dissolution of a Firm, Goodwill should be treated just like other Assets and is
transferred to the Realisation account. If any amount is realised for Goodwill, Cash /Bank
Account is debited and the Realisation account is credited. If Goodwill is purchased by one of
the Partners, the concerned Partner's Capital Account is debited and Realization Account is
credited.
209
Memorandum Balance Sheet
This is preparing to ascertain Sundry Assets, when the Partner's' Capitals and other Liabilities are
given but not the total of Sundry Assets. However, the value realised from the Assets is given. In
such a case, Sundry Assets have to be ascertained. It is calculated by preparing the old Balance
Sheet. The amounts of Capitals and other Liabilities are added. The same sum total is the total
amount of Assets. Such a Balance Sheet is also called Memorandum Balance Sheet.
UNIT 3
Accounting for Share Capital
Share Capital of a Company
The total Capital of the Company is divided into small units, each unit is called a Share.
For Example;
The total Share Capital of a Company is ` 10,00,000 is divided into 1,00,000 Units of ` 10 each
then Each Unit of ` 10 is called a Share of ` 10 each.
SHARE CAPITAL
Meaning
It is the amount that a Company can raise or has raised by Issue of Shares.
Types of Share Capital
(i) Authorized Capital -This is the maximum Capital for which a Company authorized to
issue during its life time. It is mentioned in the Memorandum of Association.
(ii) Issued Capital- It is that part of Authorized Capital which is offered for Subscription.
(iii) Subscribed Capital- It is a part of Issued Capital which is Subscribed for by the Public.
(iv) Called up capital - It is that part of Subscribed Capital which is called up by the
Company.
(v) Paid-up-Capital - It is that part of Called-up-Capital that the members of the Company
have paid.
(vi) Unpaid Calls or Calls-in-arrears - It is the amount which has been called for by the
Company but has not been paid up by the Shareholders.
(vii) Reserve capital (Section 99 of 1C A 1956) - It is the Capital which has not been called
up by Company and the Company has decided not to call unless, until Company wound up.
Issue of shares
A Company collects its Capital by Issue of Shares. A Public Company can issue shares to the
public but a private company can not issue its shares to public. A company can issue its share
in two following ways;
210
(i) Issue of Shares for cash, and
(ii) Issue of Shares for consideration other than Cash.
(1) Issue of Shares for Cash
Share of a Company may be issued in any of the following three ways;
(i) Issue of Shares at Par:
If the shares are issued for an amount equal to the face value of share, they are said to be
issued at par i.e. face value of a share is ` 10 and issue price is also ` 10.
Accounting treatment
For Share Application money received:
Bank A/c
To Share Application A/c
For Allotment of Shares:
Share Application A/c
To Share Capital A/c
For Share Allotment money due:
Share Allotment A/c
To Share Capital A/c
For Share allotment money received:
Bank A/c
To Share Allotment A/c
For Call money due:
Share (First/Final) Call A/c
To Share Capital A/c
For Call money received:
Bank A/c
To Share (First/Final) Call A/c
....Dr.
....Dr.
....Dr.
....Dr.
....Dr.
....Dr.
(ii) Issue of shares at Premium (Section 78)
When the shares are issued more than the face value, e.g. A ` 100 share may be issued at `
105, it is said to have at premium of ` 5. Accounting Treatment
(i) When amount of premium is payable with the application money:
Bank A/c ... Dr. [With the total application money including premium money]
To Share Application A/c
(ii) When the share are allotted: Share Application A/c ... .Dr.
[With the total application money including premium]
211
To Share Capital A/c
[With the application money Payable towards share capital]
To Securities Premium A/c [With the amount of premium paid with application]
(iii) Shares Issued at Discount (Section 79)
When the shares are issued at a price less than its face value, e.g. A ` 10 share is issued for `
9 then it is called issued at a 10% discount
Accounting Treatment
Share Allotment A/c
....Dr. [With the amount due]
Discount on issue of Shares A/c
.... Dr. [With the amount of discount]
To Share Capital A/c
Note: The share, whether issued at par or at a premium, or at a discount may be payable
either in installments or in full on application.
Accounting Entries for Issue of Shares Payable in Lump Sum:
When Share are issued at par payable in one installment, are said to have been issued in lump
sum.
(i) BankA/c
...Dr.
To Share Application & Allotment A/c
(Being Application & Allotment money received)
(ii) Share Application & Allotment A/c
...Dr.
To Share Capital A/c
(Being the share allotted and money transferred Share Capital A/c)
Over Subscription of Shares
Oversubscription means, the number of share applied is more than the number of share
offered for subscription. However the company can not allot shares more than those offered
for subscription.
There three alternatives are followed by company;
(i) Rejection of Excess Applications:
In this alternative some applications are accepted in full and excess applications are rejected
and their application money is refunded. For example 10,000 shares were issued while
application money received for 15,000 shares, the excess 5,000 are not accepted and their
application money is refunded.
(ii) Partial or Pro-Rata Allotment:
In this case applicants are allotted in fixed proportion.
212
For Example;
10,000 shares were issued while application money received for 15000 Shares; the applicants
are allotted in the ratio of 10:15 or2:3.
(iii) Third Alter natives:
This alternatives is the combination of the above two alternatives. In this case same
applications may be accepted in full and some applications may be rejected and the
remaining are allotted in proportion.
Under Subscriptions of Shares
Under subscription means the number of shares subscribed are less than the number of shares
offered for subscription. For example number of shares offered for subscription is 10,000
while number of shares applied is 9000.
Calls-in-Arrears
Calls-in-Arrear is that part of called-up-money which has not been paid by the shareholders
till the last date fixed for the payment.
Accounting Treatment:
There are two alternative methods of dealing with the accounting of calls-in-arrears;
(i) Without opening Call-in-Arrears Account: It is not necessary to maintain a separate
account for calls-in-arrears. For example; if share first call money at ` 2 per share on 2,000
shares is called but out of this, share first call money on 1,900 shares is received. In such a
case, the following entries will be made as under:
(a) For share first call money due:
Share First call A/c
....Dr.
4,000
To Share Capital A/c
4,000
(b) For share first call money received:
Bank A/c
....Dr.
3,800
To Share First Call A/c
3,800
(ii) By opening Calls-in-Arrears account:
In some case, a separate account for calls-in-arrears is opened. If the amount of allotment/call
has not been paid by some shareholders; such amount is transferred to newly opened Callsin-Arrears Account.
The above example will be represented as follows:
(a) For Share First Call Money Due:
Share First Call A/c
....Dr.
4,000
To Share Capital A/c
4,000
213
(b) For share first call money received:
Bank A/c ....
Dr.
Calls-in-Arrears A/c
....
3,800
Dr.
200
To Share First Call A/c
4,000
Accounting Entries for Calls-in-Arrears
The following accounting entries are passed with respect to calls-in-arrears:
(i) On non-receipt of call till the day fixed:
Calls-in-Arrears A/c
.. .
Dr.
[With the amount not received]
To Relevant Call A/c
(ii) On receipt of calls-in-arrears at a subsequent date:
BankA/c ....Dr.
[With the calls-in-arrears received]
To Calls-in-Arrears A/c
Interest on Calls-in-Arrears Account
(iii) On making due the interest on calls-in-arrears:
Sundry Members A/c
....Dr.
[With the amount of interest received]
To Interest on Calls-in-Arrears A/c
(iv) On receipt of interest on calls-in-arrears:
Bank A/c ... Dr.
[With the amount of interest received]
To Sundry Members A/c
(v) On transfer of interest on calls-in-Arrears A/c to profit and Loss A/c at the end of the
accounting period:
Interest on Calls-in-Arrears A/c
.... Dr. [With the amount of interest]
To Profit and Loss A/c
Calls-in-Advance
Calls-in-Advance refer to the amount paid by shareholders in excess the amount due from
them. The Journal entry passed to record this is:
Bank A/c ....Dr. [With the amount of calls money received in advance]
To Calls-in-Advance A/c
It is adjusted as and when the respective call is made due. The entry is:
Calls-in-Advance A/c
....Dr.
To Particular Calls A/c
214
Interest on Calls-in-Advance
(a) When interest is paid in Cash:
Interest on Calls-in-Advance A/c .... Dr. [With the amount of calls money
received in advance]
To Bank A/c
(b) When interest is due:
Interest on Calls-in- Advance A/c ....Dr. [With the amount of interest
payable]
To Outstanding Interest A/c
To Sundry Shareholders (members) A/c
(c) On transferto ProfitandLossAccountat the endof'accountingperiod:
Profit and Loss A/c
..... Dr. [With the total amount of interest paid on
Calls-in-Advance]
To Interest on Calls-in-Advance A/c
Issue or Shares for Consideration other than Cash
Sometimes Company purchases some assets from vendors, in exchange it can issue Fully
Paid Shares.
In such a case, the following journal entries are required for this purpose,
(a) On Purchase of Assets;
Sundry Assets A/c ....Dr.
To Vendor's A/c
Shares can be issued to Vendors in any manner out of the following;
(i)At par Vendor’s A/c
....Dr.
To Share Capital A/c
(ii) At Premium Vendor's A/c
....Dr.
To Share Capital A/c
To Securities Premium A/c
215
(iii) At Discount
Vendor’sA/c
....Dr.
Discount on Issue of Share A/c
To Share Capital A/c
(b) On Purchase of Business
Sundry Assets A/c ....Dr. [Agreed value of Assets]
Goodwill A/c*
To Liabilities A/c
To Vendor* *
....Dr.
[Agreed value of Liabilities]
[Agreed Price Payable to the Vendor]
To Capital Reserve A/c***
*If purchase consideration is given and it is more than net assets, then difference shall be
debits to Goodwill Account.
** Vendor is credited by Purchase Consideration payable to him. It may be given in the
question; otherwise it will be equal to Net Assets, i.e. Sundry Assets minus Sundry Liabilities.
***If Purchase Consideration is given and it is less than Net Assets, then the difference shall
be credited to Capital Reserve Account.
NOTE: Number of shares to be issued=Purchase Price /Issue price of Share
Forfeiture of shares
Forfeiture of Shares means the cancellation of allotment of shares due to non-payment of any
call money by the Shareholder.
Accounting Treatment
(i) Forfeiture of shares which were origin ally issued at par;
Share Capital A/c
....Dr. (total amount called up)
To Share Forfeiture A/c
(amount already received)
To Various Unpaid call A/c
(amount due but not received)
(ii) Forfeiture of shares which were originally issued at premium;
(a) If premium has been paid by the shareholders
Share Capital A/c ....Dr.
To Share Allotment A/c
(Amount called up premium)
(amount not received on allotment)
To Share Call/Calls A/c
(amount not received on calls)
To Share Forfeiture A/c
(amount received so far)
216
(b) If premium has not been paid by the shareholders:
Share Capital A/c ... .Dr.
(amount called up so far less premium)
Securities premium A/c ....Dr.
(premium amount called up)
To Share Allotment A/c
(amount not received on allotment)
To Share Call/Calls A/c
(amount not received on calls)
To Share Forfeiture A/c
(amount received so far)
(iii) Forfeiture of shares which were issued at a discount:
Share Capital A/c ....Dr.
(amount called up so far plus discount)
To Discount on Issue of Shares A/c
(amount of share discount)
To Share Allotment A/c
(amount not received on allotment)
To Share Call/Calls A/c
(amount not received on calls)
To Share Forfeiture A/c
(amount received so far)
Reissue of Forfeited Shares
Forfeited shares become the property of the company and the directors have the authority to
reissue them at par, at premium or at a discount.
Journal Entries on Re-issue of Forfeited Shares
(i) If the forfeited shares are re-issued at Par:
Bank A/c ....Dr.
To Share Capital A/c
(Being forfeited shares re-issued at par)
(ii) If the forfeited shares are re-issued at premium:
Bank A/c ....Dr.
To Share Capital A/c
To Securities Premium A/c
(Being forfeited shares re-issued at premium)
(iii) If the forfeited shares are re-issue at discount:
Bank A/c ....Dr.
Share Forfeiture A/c
....Dr.
To Share Capital A/c
(Being forfeited shares re-issued at discount)
Transfer of balance in the Forfeited share Account
After re-issue of forfeited shares, the credit balance left in the share forfeiture account is a
capital profit and therefore it is transferred to Capital Reserve A/c’.
217
Share Forfeiture A/c
....Dr.
To Capital Reserve A/c
(Being share forfeiture account transferred to capital reserve account).
When share belonging to pro-rata category are forfeited: If the forfeited shares belonging
to pro rata category are, then we faces the problem of determining the amount in arrears on
allotment. For correct solution, the following steps should be taken:
1.
Calculate total share applied by the shareholder whose shares are being forfeited;
(Total shares applied/Total shares allotted) X share allotted by the company to
shareholder
2.
Multiply the number of shares as calculated in (1) with the amount of application
money. This gives total money sent by the shareholder with the applications. This
amount is forfeited on default and credited to share forfeited account.
3.
Deduct from the application money received, the amount due on application with the
help of shares allotted. The result is the excess application money is available for
adjustment towards allotment.
4.
Calculate the amount due on allotment and deduct from it the amount sent in advance
with applications. The result is the amount in arrears on allotment. This amount is
credited to share allotment account at the time of making entry for forfeiture.
Calculation of capital reserve when all forfeited share were not reissued = (No. of
reissued share / No. of forfeited share X profit on forfeiture)-Loss on forfeiture)
UNIT 4
Accounting for Debentures
Meaning
According to section 2(12) of the Indian companies Act 1956 "Debenture includes debenture
stock, bonds and other securities of the company whether constituting a charge on the company
assets or not."
Issue of Debenture
A company can issue its Debenture in two following ways;
(1) Issue of Debenture for cash, and
(2) Issue of Debenture for consideration other than cash.
(1) Issue of Debenture for cash
Debenture of a company may be issued in any of the following three ways;
(a) Issue of Debenture at par:
If the Debentures are issued for an amount equal to its face value, they are said to be issued at
par e.g. if a debenture of Rs. 100 is issued for Rs. 100, it will be known as issued at par.
218
Accounting treatment
(i) For Debenture Application money received
Bank A/c
....Dr.
To Debenture Application A/c
(ii) For Debenture Application Money adjusted:
Debenture Application A/c
....Dr.
To Debenture A/c
(iii) For Debenture Allotment money due:
Debenture Allotment A/c
....Dr.
To Debenture A/c
(iv) For Debenture allotment money received:
Bank A/c
....Dr.
To Debenture Allotment A/c
(V) For Call money due:
Debenture Call A/c
....Dr.
To Debenture A/c
(vi) For Call money received:
Bank A/c
....Dr.
To Debenture Call A/c
(b) Issue of Debenture at premium
When the Debentures are issued more than the face value, e.g. A Rs. 100 Debenture may be
issued atRs. 105, it is said to have at premium of Rs.5. Accounting Treatment
(i) When amount of premium is pay able with the application money.
Bank A/c
... Dr. [With total application money including premium]
To Debenture Application A/c
(ii) When the Debentures are allotted,
Debenture Application A/c
To Debenture A/c
To Securities Premium A/c
....Dr. [with the total application money
including premium]
[With the application money Payable towards share capital]
[With the amount
application]
219
of
premium
paid
with
(c) Debenture Issued at Discount
When the Debentures are issued at a price less than its face value, e. g. A ` 10 share is issued
for ` 9 then it is called issued at a 10% discount.
Debenture Allotment A/c
....Dr. [With the amount due]
Discount on issue of Debenture A/c
.... Dr. [With the amount of
discount]
To Debenture A/c
NOTE: The Debenture, whether issued at par or at a premium, or at a discount, may be
payable either in installments or in fall on application.
Issue or Debentures for consideration other than cash
Sometimes company purchases some assets from vendors, in exchange it can issue fully paid
debentures.
In such a case, the following journal entries are required for this purpose.
(a) On purchase of assets:
Sundry Assets A/c
....Dr.
To Vendor's A/c
Debentures can be issued to vendors in any manner out of the following;
(i) At par
Vendor's A/c
....Dr.
To Debenture A/c
(ii) At premium
Vendor's A/c
....Dr.
To Debenture A/c
To Securities Premium A/c
(iii) At discount
Vendor's A/c
....Dr.
Discount on Issue of Debenture A/c
To Debenture A/c
(b) On Purchase of Business
Sundry Assets A/c
....Dr. [Agreed value of assets]
Goodwill A/c*
....Dr.
220
To Liabilities A/c
To Vendor**
[Agreed value of liabilities]
[Agreed price payable to the vendor]
To Capital Reserve A/c***
* If purchase consideration is given and it is more than net assets, then difference shall be
debits to Goodwill Account.
** Vendor is credited by purchase consideration payable to him. It may be given in the
question; otherwise it will be equal to net assets, i.e. sundry assets minus sundry liabilities.
*** If purchase consideration is given and it is less than net assets, then the difference shall
be credited to Capital Reserve account.
NOTE:
Number of Debentures to be issued=Amount Due to Vendor / Issue Price of Debenture
Issue of Debenture as Collateral Security
It means issue of debentures as an additional security. Issue of debentures as a collateral security
may or may not be recorded in the books of account
If it is recorded in the books of account, the entry passed is:
Debenture Suspense A/c
....Dr.
To Debentures A/c
Various Cases from the point of view of Redemption
(i) When debentures are issued at par and are redeemable at par, i.e. redeemable value is
equal to the face value:
(a) Bank A/c
......Dr.
To Debenture Application A/c
(b) Debenture Application A/c V
........Dr;
To Debenture A/c
(ii) When debentures are issued at a discount but are redeemable at par:
(a)Bank A/c
......Dr.
To Debenture Application A/c
(b) Debenture Application A/c
Discount on issue of Debentures A/c
......Dr.
To Debenture A/c
(iii) When debentures are issued at a premium but are redeemable at par:
(a)Bank A/c
......Dr.
To Debenture Application A/c
221
(b) Debenture Application A/c
...... Dr.
To Debenture A/c
To Securities Premium A/c
(iv) When Debentures are issued at par but are redeemable at a premium, i.e. in excess of
the nominal value.
(a) Bank A/c
....Dr.
To Debenture Application A/c
(b) Debenture Application A/c
.....Dr.
Loss on Issue of Debentures A/c
.....Dr.
To Debentures A/c
.....Dr.[For providing premium
on
To Premium on Redemption of Debentures A/c
redemption]
(v) When Debentures are issued at a discount but are redeemable at a premium:
(a)Bank A/c
......Dr.
To Debenture Application A/c
(b) Debenture Application A/c
......Dr.
Discount on Issue of Debentures A/c .....Dr.
Loss on Issue of Debenture A/c
..... Dr.
To Debenture A/c
To Premium on Redemption of Debentures A/c
(vi) When Debentures are issued at a premium and are redeemable at a premium:
(a) Bank A/c
...... Dr. [With the application money received]
To Debenture Application A/c
(b) Debenture Application A/c .... .Dr. [With the application money]
Loss on Issue of Debentures A/c .....Dr. [With premium on redemption] To Debentures
A/c
[With nominal value]
To Securities Premium A/c
[With premium on issue]
222
Redemption of Debentures
Meaning
Redemption of Debenture means the repayment of the amount of Debentures to Debenture
olders.
Methods of Redemption of Debentures
(i) By lump sum payment after stipulated period
(ii) In Installments by draw in lots;
(iii) By Purchase of own Debentures in the Open Market;
(iv) By Conversion into Shares or new Debentures;
(v) At the Option of the Company
Journal Entries on Redemption of Debenture For the amount of Debentures due;
(a) When the debentures are redeemed at par:
Debenture A/c
....Dr.
To Debenture holders A/c
(b) When the Debentures are redeemed at a premium:
Debentures A/c
....Dr.
Debenture Redemption Premium A/c ...Dr.
To Debenture holders A/c
(c) When the Debentures are redeemed at a discount:
Debentures A/c
......Dr.
To Debenture holders A/c
To Gain/Profit on Redemption of Debenture A/c
For payment made to debenture holders:
Debenture holders A/c
......Dr.
To Bank A/c
Sources of Funds (Finance) for the Redemption of Debentures: A company
may adopt any of the following options for redeeming debentures,,
(1) Redemption Out of Capital
223
(a) For the amount of Debentures due on Redemption:
Debentures A/c
Debenture Redemption Premium A/c
...Dr.
...Dr. (if premium is payable)
To Debenture holders A/c
(b) For payment made to Debenture holders:
Debenture holders A/c
...Dr.
To Bank A/c
(2) Redemption out of Profit:
(i) On transfer of profit to Debenture Redemption Reserve:
Profit & Loss Appropriation A/c
...Dr.
To Debenture Redemption Reserve A/c
(ii) On Redemption of Debentures:
(a) For the amount of Debentures due on Redemption:
Debenture A/c
...Dr.
To Debenture holder’s A/c
(b) For payment made to Debenture holders:
Debenture A/c
...Dr.
To Bank A/c
(iii) When all the Debentures are Redeemed* the balance of Debenture Redemption
Reserve is transferred to General Reserve.
Debenture Redemption Reserve A/c
...Dr.
To General Reserve A/c
(3) Redemption of Debentures by Conversion in Shares or New Debentures; (i) For
amount due to Debenture holders:
(a) Redemption at par:
Debenture A/c
...Dr.
To Debenture holders A/c
(b) Redemption at premium:
Debentures A/c
...Dr.
Debenture Redemption Premium A/c
...Dr.
To Debenture holders A/c
(ii) Discharging obligation by issuing shares or Debentures:
224
Debenture holders A/c
...Dr.
To Equity Share Capital A/c or
To % Debentures A/c (new)
(IV) Interest on own Debentures:
(i) For interest on Debentures due:
Interest on debentures A/c .. .Dr.
(with total interest)
To Debentures A/c
(interest payable to outsiders)
To Interest on Own Deb. A/c
(interest payable to company itself)
(ii) For payment of interest to Debenture holders:
Debenture holders A/c
...Dr.
To Bank A/c
(iii) For transfer of interest on Debentures to Profit & Loss A/c:
Profit & Loss A/c
...Dr.
To Interest on Debentures A/c
(iv) For transfer of Interest on Own Debentures to Profit & Loss A/c:
Interest on Own Debentures A/c
...Dr.
To Profit & Loss A/c
UNIT -11
FINANCIAL STATEMENTS OF A COMPANY
Meaning
The Financial Statements are the end product of the Financial Accounting. The Financial
Statements are the Summarized Statements of Accounting Data produced at the end of the
Accounting Process by an enterprise to communicate the financial information in concise and
capsule form about operating results and financial position of the business to the internal and
external users. Financial Statements normally include:
(i) Income Statement, i.e. Profit and Loss Account; and
(ii) Position Statement, i.e. Balance Sheet.
Balance Sheet
A company’s Balance Sheet is prepared in the prescribed form, as given in Schedule VI, Part I of
the Companies Act, 1956. Revised Schedule VI is given in Text Books.
225
FINANCIAL STATEMENT ANALYSIS
Meaning
Analysis of Financial Statements is a systematic process of identifying process of identifying
the financial strengths and weaknesses of the firm by establishing of the firm by establishing
the relationship between the items of Financial Statements.
Objectives of Analyzing Financial Statements
(i) To Judge the financial stability of an enterprise.
(ii) To Assess solvency of the firm.
(iii) To Assess profitability of the firm.
(iv) To Compare intra-firm position and inter-firm position.
(v) To Assess the future prospects of the enterprise.
Limitations of Analysis of Financial Statements
(i) Different accounting policies.
(ii) Does not reflect the Price-level changes.
(iii) Lack of Qualitative aspect.
(iv) Not free from bias.
(v) Window - Dressing.
(vi) Historical analysis.
TOOLS FOR FINANCIAL STATEMENT ANALYSIS
Comparative Financial Statements: It Contain information of two or more Financial
Statements (item wise) in columnar form. They also provide for columns to indicate the change
in item amounts in absolute terms as well as in percentage.
Objective or Purposes of Comparative Financial Statements
(i) To know the nature of changes influencing financial position.
(ii) To know the weaknesses and soundness about liquidity, profitability and solvency of the
enterprise.
(iii) To forecast and plan.
Inter-Firm Comparison - When Financial Statements of two or more firms are compared, it
is known as an inter-firm comparison.
Intra-Firm comparison - The comparison of Financial Statements of two or more years of
the same firm is referred to as an intra-firm comparison,
226
Tools for Comparison
(i) Comparative Balance Sheet: Comparative Balance Sheet analysis is that study of the
trend of same items group of items and computed items in two or more balance sheets of the
same business enterprise on different dates.
(ii) Comparative Income Statement: A Comparative Income Statement shows the
operating results for a number of accounting periods so that changes in data in terms of money
and percentage from one period to another may be ascertained.
(iii) Common-Size Statement: In Common-Size Statement, figures reported are converted
into percentages of some common base.
RATIO ANALYSIS
An Accounting Ratio is a Mathematical Relationship between two items or groups of items in
the Financial Statements.
Ratio Analysis is an important technique of Financial Analysis. It is the process of computing,
determining and presenting the relationship of items and groups of items in the Financial
Statements.
Objectives of Ratio Analysis
(i) To judge the earning capacity, financial soundness and operating efficiency of an
enterprise.
(ii) To simplify the accounting information.
(iii) To help in comparative analysis.
Major Classification of Ratios
(1) Liquidity Ratios: It measures the Short-term Solvency of the Firm.
(2) Solvency Ratios: It measures Long-term Solvency of the Firm.
(3) Activity Ratios: It measures Efficiency as to the Utilisation of Asset of the Firm.
(4) Profitability Ratios: It measures the Profitability in relation to Sales and Investment of
the Firm.
(1) Liquidity Ratios
(i) Current Ratio –
This ratio shows Short-term Financial Position of the Firm.
Current Ratio = Current Assets /Current Liabilities
It is expressed as a Number of Times.
227
A Low Ratio indicates that the enterprise may not be able to meet its current liabilities on
time. A High Ratio indicates that funds are not used efficiently. 2:1 is considered to be an
ideal current ratio.
Current Assets:
Cash and Bank Balance, Debtors (After deducting provision), Bills Receivable, Stock,
Marketable Securities, Prepaid Expenses etc.
Current Liabilities:
Creditors, Bills Payable, Bank Overdraft, Short-term Loans, Outstanding Expenses,
provision for Tax, Unclaimed Dividend etc.
(ii) Quick Ratio or Liquid Ratio or Acid Test Ratio –
It is the relationship between Current Assets and Current Liabilities of the Firm.
Quick or Liquidity Ratio=
Liquid Assets or Quick Assets / Current Liabilities
Quick Assets=Current Assets - (Stock + Prepaid Expenses) It is expressed as a number of
times.
Higher the quick ratio shows better short-term financial position. A quick ratio of 1:1 is
usually considered an ideal ratio.
(2) Solvency Ratios
(i) Debt-Equity Ratio –
This ratio shows long-term financial position and soundness of the firm.
Debt-Equity Ratio = Debt (Long-term Loan) /Equity (Shareholders’ funds)
Debt=long-term loans ,i.e., debenture loans (loan-term) form financial institutions.
Equity = shareholders fund, i.e., preference share capital equity share capital, reserves less
losses and fictitious assets like preliminary expenses.
It is expressed as a number of times. A Higher ratio indicates a risky financial position while
a lower ratio indicates safer financial position. Satisfactory ratio is 2:1.
(ii) Total Assets to Debt Ratio Total Assets to Debt Ratio establishes a relationship between total assets and total longterm debts.
Total Assets to Debt Ratio = Total Assets/Long-term Debts
Total Assets: It includes both fixed and current assets, it does not include fictitious assets
like preliminary expenses, discount on issue of shares/ debentures and debit balance of Profit
and Loss Account.
Long-term Debts: Long- term debts refers to debts that will mature after one year. It
includes debentures, bonds and loans from financial institutions.
228
A Higher Ratio represents higher security to lenders for extending long-term loans to the
business. On the other hand, a low ratio represents a risky financial position as it means
that the business depends heavily on outside loans for its existence.
(iii) Proprietary Ratio –
Propriety Ratio establishes the relationship between proprietor’s funds and total assets.
Proprietor’s funds means share capital plus reserves and surplus both of capital and
revenue nature.
Proprietary Ratio =
Proprietor’s Funds or Shareholder’s Funds/Total Assets (Excluding Fictitious Assets)
It is expressed as a number of times.
A high ratio indicates adequate safety for creditors, on the other hand a low ratio indicates
inadequate or low safety cover for the creditors Pureratiois2:l.
(3) Activity Ratios
(i) Stock Turnover Ratio –
Inventory Turnover Ratio relationship between the costs of goods sold and average stock.
Inventory (Stock) Turnover Ratio = Cost of goods/Average stock or Inventory
Cost of Goods Sold-Opening Stock + Purchases* Direct Expenses Closing Stock
Or
Cost of Goods Sold=Sales- Gross Profit.
Average Stock or Inventory = (Opening Stock + Closing Stock)/2
It is expressed as a Number of Times.
This ratio measures as to how7 quickly the inventory is sold. It provides a yardstick to
judge the efficiency of inventory management.
(ii) Debtors Turnover Ratio Debtors Turnover Ratio is relationship between net credit sales and average debtors (or
receivables) of the year.
Debtors Turnover Ratio=Net credit sales/Average accounts receivable (Debtors +Bill
receivable)
It is expressed as a number of times.
A high ratio is better since it would indicate that debts are being collected more promptly.
(iii) Creditors Turnover Ratio –
Creditors Turnover Ratio is relationship between the credit purchases and average
creditors plus average bills payable.
Creditors Turnover Ratio = Credit Purchases/Average Creditors* Average Bills
Payable
229
It is expressed as a number of times.
A high creditor turnover ratio may indicate strict credit terms granted by the supplier A
low ratio may be an indication of liberal credit terms granted by the supplier
(iv) Working Capital Turnover Ratio –
Working Capital Turnover Ratio relationship between working capital and sales.
Working Capital Turnover Ratio = Sale/Working Capital
Working Capital = Current Assets -Current Liabilities
It is expressed as a number of times.
A high ratio is considered better.
(v) Fixed Assets Turnover Ratio –
Fixed Assets Turnover Ratio is the relationship between Fixed Assets and Net Sales.
Fixed Assets Turnover Ratio = Net sales/Net Fixed Assets
Net fixed Assets = Fixed Assets - Depreciation
It is expressed as a number of times.
A high ratio indicates efficient utilization of fixed assets.
(4) Profitability Ratios
(i) Gross Profit Ratio - Gross profit Ratio is relationship of gross profit on sales to net sales
of a firm, which is expressed in percentage.
Gross Profit Ratio = Gross Profit /Net Sales x 100 Net Sale = Gross Sales (Cash + Credit) Sales Returns.
(ii) Operating Ratio The Operating Ratio is relationship between operating costs and net sales. It is expressed
in percentage
Operating Ratio = (Cost of goods sold + Operating expenses)/Net sales X100
Or
Operating Ratio = Operating cost/Net sales X100 Cost of Goods Sold = Opening Stock +
Purchases + Direct Expenses* Manufacturing Expenses Closing Stock
Or
Cost of Goods Sold=Sales -- Gross Profit.
Operating Expenses -- Administrative Expenses + Selling and Distribution Expenses.
(iii) Net Profit ratio It shows overall efficiency of the business. Higher the net profit ratio, better the business.
Net Profit Ratio=Net profit/Net sales x 100
(iv) Return on investment or Return on Capital Employed 230
It judges the overall performance of the enterprise. It measures, how efficiently the
sources entrusted to the business are used.
ROI = Profit before interest, Tax and Dividend/Capital Employed x 100 Capital
Employed=
Share capital + Reserves +Long term loans -fictitious assets- Non- operating assets.
(v) Earning Per Share This ratio helps in evaluating the market price of share in the light of profit earning
capacity. This ratio is expressed as per share.
Earning per Share = Net profit after tax - Preference Dividend/No of Equity shares
(vi) Dividend Per Share This ratio is measure the dividend distribution per equity share. Higher the DPS better it
is and vice-versa. This ratio is expressed as per share.
DPS = Dividend Paid to Equity shareholders/No. of Equity shares
(vii) Price Earning Ratio:
This ratio is found out expectation of the shareholders. A high price earning ratio
indicates investors’ faith instability and appreciation of company earnings.
This ratio is expressed as number of times.
Price Earning Ratio = Market price per share/Earning per share
CASH FLOW STATEMENTS
Meaning
Cash Flow Statement is a statement which shows inflows and outflows of cash and cash
equivalent during a given period.
Classification of Activities: While preparing the Cash Flow Statement according to AS-3
(Revised), the activities are classified into three groups:
(i) Operating Activities; (ii) Investing Activities: and (iii) financing Activities.
(i) Operating Activities: Operating Activities are the principle revenue- producing activities
of the enterprise and other activities that are not investing or financing activities.
(ii) Investing Activities: Investing Activities are the acquisition and disposal of long-term
assets.
(iii) Financing Activities: Financing Activities are activities that result in change in the size
composition of the owners’ capital (including preference share capital in the case of a company)
borrowings of the enterprise.
231
Format of Cash Flow Statement (Indirect Method)
`
Particulars
A.
`
Cash flow from / (used in) Operating Activities:
Net profit before Tax and extraordinary items Add: Noncash and non-operating items:
Depreciation on fixed assets charged during the year
…………
…………
Loss on sale of fixed assets and investments
…………
Writing off fictitious and Intangible assets such as …………
preliminary
Expenses, Discount on Issuer of Shares, Goodwill etc.
Premium on Redemption of Debentures and Preference
Shares
Interest paid on Debentures and Long-term Loans
…………
…………
Less: Non-Cash and Non-Operating Incomes:
Profit on sale of fixed Assets and Investment
…………
…………
Interest Received
Dividend Received
…………
Rent Received
…………
Operating profit before working capital changes
…………
Adjustment for change in Current Assets and Current …………
Liabilities
…………
Add : Decrease in Current Assets (except cash and cash
equivalents)
Increase in Current Liabilities (except Bank Overdraft)
Less: Increase in Current Assets (except cash and cash
equivalents)
…………
Decrease in Current Liabilities (except Bank overdraft)......
(.......)
…………
Cash Generated from operations
Less: income Tax paid
…………
Cash flow before Extraordinary items
Add/ Less: Cash flow from Extraordinary items (.......)
Net cash flow from (or used in) Operating Activities
232
…………
…………
B. Cash Flow from (used in) Investing Activities:
…………
Sale of long-term Investments
Sale of Fixed Assets
…………
Interest Received
Dividend Received
Rent received
…………
Purchase of Fixed Assets
…………
Purchase of Long-Term Investments
…………
Net Cash Flow from /(used in) Investing Activities
…………
(C) Cash Flow from (/used in) Financing Activities:
…………
Proceeds from Issue of Shares
…………
Proceeds from Issue of Debentures
…………
Proceeds from Long-term Borrowings
…………
Repayments of Long-term Borrowings
…………
Interest paid
Dividend paid
…………
Premium or Redemption of Debentures and Preference …………
Shares
…………
Net cash from /(used in) Financing Activities
…………
D. Net Increase (or decrease) in Cash and Cash …………
Equivalents (A+B+C
…………
E. Cash and Cash Equivalents : Opening Balance
…………
F. Cash and Cash Equivalents: Closing Balance(D-E)
…………
…………
…………
233
…………
…………
…………
…………
Practical Implications of Revised Schedule VI on various
Chapters of Class XII - Accountancy
CBSE has released ‘Outline Guidance Notes regarding adoption of Revised Schedule VI to
the Companies Act, 1956 in the subject of Accountancy – Effective for Board Examination,
2013’. It contains 11 practical illustrations pertaining to format of Revised Schedule VI and
Comparative Statement of Profit and Loss. Besides this, an effort has been made here to
illustrate the impact of Revised Schedule VI on various chapters of Class XII - Accountancy.
Chapter – Financial Statements of a Company
Following examples are in addition to those given in the ‘Outline Guidance Notes’ issued by
CBSE to avoid the duplication of the subject matter :Illustration – 1
State any five items which are shown under the heading ‘Reserves and Surplus’ in the
Balance Sheet of a company as per revised Schedule VI to Companies Act, 1956.
Solution – The items under the head, ‘Reserves and Surplus’ are now shown in ‘Notes to
Accounts’
Notes to Accounts
Reserves and Surplus
Rs.
Capital Reserves
......
Capital Redemption Reserve
......
Securities Premium A/c
......
Debenture Redemption Reserve
......
Revaluation Reserve
......
Statement of Profit and Loss (Dr./Cr. Balance)
......
Illustration – 2
How will you show the following items in the balance sheet of Rama Ltd. as on 31st March,
2013?
i.
Company issued 10,000 equity shares of Rs. 100 each payable Rs. 50 on application and
balance on allotment. Company received applications for 9,000 shares and company hopes
to allot shares to all the applicants.
234
ii.
Issued 10% Debentures of Rs. 100 each for Rs. 6,00,000 which are redeemable in 3 equal
annual installments commencing with this year.
iii.
Creditors for plant purchased Rs. 5,00,000 payable after 2 years
iv.
Provision for Tax for the year was Rs. 4,00,000 though as per tax authorities, the liability
of tax comes to Rs. 3,00,000 only.
Solution –
Balance Sheet of Rama Ltd.
as at 31st March, 2013
Particulars
Note No.
Rs.
I Equity and Liabilities
1. Shareholders’ Fund
-
2. Share Application Money Pending Allotment
1
4,50,000
a) Long-term Borrowings
2
4,00,000
b) Deferred Tax Liability
3
1,00,000
c) Other Long-term Liabilities
4
5,00,000
c) Other Current Liabilities
5
2,00,000
d) Short-Term Provisions
6
3,00,000
3. Non-Current Liabilities
4. Current Liabilities.
Notes to Accounts
Rs.
Note No. 1
Share Applications Money Pending Allotment
9,000 Equity Shares of Rs. 100 each, Rs. 50 paid on application
4,50,000
Note No. 2
Long-term Borrowings
10% Debentures (2 installments)
4,00,000
Note No. 3
Deferred Tax Liability (Net)
(Rs. 4,00,000 – Rs. 3,00,000 Provision for Tax
235
1,00,000
Note No. 4
Other long-term Liabilities
Trade Payable for Plant
5,00,000
Note No. 5
Other Current Liabilities
10% Debentures (1 installment)
2,00,000
Note No. 6
Short-term Provisions
Provision for Tax
3,00,000
Illustration – 3
Under what head and sub-head, the following items will appear in the balance sheet of a
company as per schedule VI?:(i)
Profit & Loss (Dr) balance
(ii)
Raw material purchased
(iii)
Loss on Issue of Debentures
(iv)
Loan repayable on demand to Bank
(v)
Employees earned leaves payable on retirement
(vi)
Bonus payable to employees
(vii)
Employees earned leaves encashable
(viii) Proposed Dividend
(ix)
Uncalled liability on partly paid shares purchased
(x)
Security Deposit
Solution
S. No.
Items
Headings
Sub-headings
(i)
Profit & Loss (Dr)balance
Shareholders’ Fund
Reserves & Surplus
(ii)
Raw material purchased
Current Assets
Inventories
(iii)
Loss on Issue of Debentures
Current/Non-Current
Assets
* Other Current/NonCurrent Assets
* Unamortised expenses depending on whether they will be amortised within 12 months or
thereafter.
236
Current Liabilities
Short-Term borrowings
(iv)
Loan repayable on demand to Bank
(v)
Employees earned leaves payable on Non-Current Liabilities
retirement
(vi)
Bonus payable to employees
Current Liabilities
Short-Term Provisions
(vii)
Employees earned leaves encashable Current Liabilities
Short-Term Provisions
(viii)
Proposed Dividend
Current Liabilities
Short-Term Provisions
(ix)
Uncalled liability on partly paid Contingent Liability & Below the Balance
Sheet as commitments
Commitments
shares purchased
(x)
Security Deposit
Non-Current Assets
Long-Term Provisions
Long-term
Advances
Loans
&
Illustration – 4
Under what heading and sub-heading will you show the following items in the Balance Sheet of
a Company as per Revised Schedule VI?
(i)
Building
(ii)
Computer Software
(iii)
Provident Fund
(iv)
Creditors and B/P
(v)
Calls-in-Arrears
(vi)
Calls-in-Advance
(vii)
Debtors and B/R
(viii) Goods in Transit
(ix)
Bank Deposit for more than 12 months
(x)
Investment in Property
Solution
S. No.
Items
Headings
Sub-headings
(i)
Building
Non-Current Assets
Fixed Assets - Tangible
(ii)
Computer Software
Non-Current Assets
Fixed Assets - Intangible
(iii)
Provident Fund
Non-Current Liabilities
Other
Liabilities
237
long-term
(iv)
Creditors and B/P
Current Liabilities
Trade Payables
(v)
Calls-in-Arrears
Shareholders’ Fund
Deduction from share
capital in notes to A/cs
(vi)
Calls-in-Advance
Current Liabilities
Other current liabilities
(vii)
Debtors and B/R
Current Assets
Trade Receivables
(viii)
Goods in Transit
Current Assets
Inventories
(ix)
Bank Deposit for more than 12 Current Assets
months
(x)
Investment in Property
Cash & Cash equivalents
in Notes
Non-Current Assets
Non-current investments
Chapter - Comparative Statements
Illustration 5
Prepare Comparative Balance Sheet of Delta Ltd. from the following information as on 31st
March 2011 and 2012:Particulars
31-3-2011
31-3-2012
Rs.
Rs.
I Equity and Liabilities
1. Shareholders’ Fund
a) Share Capital
8,00,000
10,00,000
b) Reserves & Surplus
3,00,000
4,50,000
c) Money received against Share Warrants
1,00,000
1,00,000
Long-Term Borrowings (Debentures)
5,00,000
7,00,000
Other Long-term Liabilities
1,00,000
1,40,000
Trade Payables
2,50,000
3,60,000
Short-Term Provisions
1,50,000
2,50,000
22,00,000
30,00,000
2. Non-Current Liabilities
3. Current Liabilities
238
II Assets
1. Non-Current Assets
Fixed Assets
i)
Tangible
9,00,000
11,00,000
ii)
Intangibles
1,00,000
2,30,000
Non-Current Investments
3,00,000
4,50,000
Inventories
3,50,000
5,00,000
Trade Receivables
5,00,000
6,80,000
50,000
40,000
22,00,000
30,00,000
2. Current Assets
Other Current Assets
Solution:
Comparative Balance Sheet of Delta Ltd.
as on 31st March, 2011 and 2012
Particulars
31-3-2011
31-3-2012
Rs.
Rs.
Absolute
Change
Rs.
Percentag
e change
(%)
I Equity and Liabilities
1. Shareholders’ Fund
a) Share Capital
8,00,000
10,00,000
2,00,000
25%
b) Reserves & Surplus
3,00,000
4,50,000
1,50,000
50%
c) Money received against Share
Warrants
1,00,000
1,00,000
Long-term Borrowings (Debentures)
5,00,000
7,00,000
2,00,000
40%
Other Long-term Liabilities
1,00,000
1,40,000
40,000
40%
Trade Payables
2,50,000
3,60,000
1,10,000
44%
Short-term Provisions
1,50,000
2,50,000
1,00,000
66.67%
22,00,000
30,00,000
8,00,000
36.36%
-
-
2. Non-Current Liabilities
3. Current Liabilities
239
II Assets
1. Non-Current Assets
Fixed Assets
i.
Tangible
9,00,000
11,00,000
2,00,000
22.22%
ii.
Intangibles
1,00,000
2,30,000
1,30,000
130%
Non-Current Investments
3,00,000
4,50,000
1,50,000
50%
Inventories
3,50,000
5,00,000
1,50,000
42.86%
Trade Receivables
5,00,000
6,80,000
1,80,000
36%
50,000
40,000
-(10,000)
-20%
22,00,000
30,00,000
8,00,000
36.36%
2. Current Assets
Other Current Assets
Illustration – 6
Prepare Comparative Income Statement of X Ltd. from the following information:-
Particulars
Revenue from Operations Expenses:-
31-3-2011
31-3-2012
Rs.
Rs.
20,00,000
30,00,000
6,00,000
10,70,000
+1,00,000
(-)(50,000)
3,00,000
6,50,000
50,000
80,000
Other Expenses
2,50,000
4,50,000
Total Expenses
13,00,000
22,00,000
2,00,000
2,50,000
50%
50%
Purchase of Stock-in-Trade
Change in Inventories
Employee Benefits Expenses
Depreciation
Other Income
Tax Rate
Note – (-) represent negative figure.
240
Solution
Comparative Income Statement of X Ltd.
for the year ending 31-03-12
Particulars
I.
Revenue from Operations
II. Other Income
III. Total Income (I+II)
31-3-2011
31-3-2012
Rs.
Rs.
20,00,000
2,00,000
22,00,000
Absolute
Change
Rs.
Percentage
change %
30,00,000 10,00,000
50%
2,50,000
50,000
32,50,000 10,50,000
25%
47.73%
IV. Expenses:
Purchase of Stock
6,00,000
10,70,000
Change in Inventories
1,00,000
(50,000)
3,20,000
45.7%
Employee Benefit Expenses
3,00,000
6,50,000
3,50,000
116.6%
50,000
80,000
Other Expenses
2,50,000
Total Expenses
Depreciation
30,000
60%
4,50,000
2,00,000
80%
13,00,000
22,00,000
9,00,000
69.23%
V. Profit Before Tax (III-IV)
9,00,000
10,50,000
1,50,000
16.67%
VI. Less : Tax @ 50%
4,50,000
5,25,000
75,000
16.67%
VII.Profit after Tax
4,50,000
5,25,000
75,000
16.67%
Comments
1. Revenue from operation during the year has increased by 50% while total expenses have
gone up by 69.23%. The management should exercise control on employee benefit
expenses which have gone up by 116.6%. Similarly other expenses have also gone up by
80% so it requires to be controlled in future.
2. Other income has gone up by 25% during the period under study which is quite good.
3. The disproportionate increase in employee benefit expenses and other expenses have
resulted in increase in profit before tax by 16.67% only.
241
Chapter - Common Size Statements
Illustration 7
Prepare Common Size Balance Sheet of Roma Ltd. from the following Balance Sheet:Particulars
31-3-2011
31-3-2012
Rs.
Rs.
a) Share Capital
5,00,000
6,00,000
b) Reserves & Surplus
1,00,000
1,50,000
3,20,000
3,50,000
Trade Payables
70,000
80,000
Short-Term Provisions
10,000
20,000
10,00,000
12,00,000
Fixed Assets
5,00,000
6,50,000
Intangibles
1,00,000
1,00,000
Inventories
2,00,000
2,10,000
Trade Receivables
1,50,000
1,70,000
50,000
70,000
10,00,000
12,00,000
I Equity and Liabilities
1. Shareholders’ Fund
2. Non-Current Liabilities
Long-term borrowings (Debentures)
3. Current Liabilities
II Assets
1. Non-Current Assets
2. Current Assets
Cash & Cash Equivalent
242
Solution:
Common Size Balance Sheet of Roma Ltd.
as on 31st March, 2011 and 2012
Particulars
Absolute Amount
2011
2012
Rs.
Rs.
Percentage to B/S
Total
2011
2012
I Equity and Liabilities
1. Shareholders’ Fund
Share Capital
5,00,000
6,00,000
50%
50%
Reserves & Surplus
1,00,000
1,50,000
10%
12.5%
6,00,000
7,50,000
60%
62.5%
3,20,000
3,50,000
32%
29.17%
Trade Payables
70,000
80,000
7%
6.67%
Short-term Provisions
10,000
20,000
1%
1.67%
Total
80,000
1,00,000
8%
8.33%
10,00,000 12,00,000
100%
100%
2. Non-Current Liabilities
Long-term Borrowings (Debentures)
3. Current Liabilities
Total of Balance Sheet (1+2+3)
II Assets
1. Non-Current Assets
Fixed Assets
5,00,000
6,50,000
50%
54.17%
Investments
1,00,000
1,00,000
10%
8.33%
Total
6,00,000
7,50,000
60%
62.50%
Inventories
2,00,000
2,10,000
20%
17.5%
Trade Receivables
1,50,000
1,70,000
15%
14.17%
50,000
70,000
5%
5.83%
4,00,000
4,50,000
40%
37.5%
10,00,000 12,00,000
100%
100%
2. Current Assets
Cash & Cash Equivalent
Total of Balance Sheet (1+2)
243
Illustration – 8
Prepare Common Size Statement of Profit and Loss of Beta Ltd. from the following
information:-
Particulars
31-3-2011
31-3-2012
Rs.
Rs.
Revenue from operation
15,00,000
22,00,000
70%
74%
Expenses (%of Revenue from operation)
Tax Rate @ 40%
Solution:
Common Size Statement of Profit & Loss
for the year ended 31st March, 2011 & 2012
Particulars
Absolute Amount
2011
2012
Rs.
Rs.
Percentage of
Revenue from
operation
2011
2012
A. Revenue from operation
15,00,000 22,00,000
100%
100%
B. Less : Expenses
10,50,000 16,28,000
70%
74%
C. Profit before Tax (A-B)
4,50,000
5,72,000
30%
26%
D. Less : Tax @ 40%
1,80,000
2,28,800
12%
10.4%
E. Profit after Tax (C-D)
2,70,000
3,43,200
18%
15.6%
Chapter – Ratio Analysis
Here, we are discussing specific questions based on balance sheet only as per revised schedule
VI to demonstrate the impact of revised schedule VI on formulae of Ratio Analysis and their
computation. However, the formulae will not change if factual information is not given in
Balance Sheet form.
244
Illustration – 9
From the following Balance Sheet of Z Ltd. as on 31st December, 2012. Calculate Liquidity
Ratios and Debt-Equity Ratio.
Particulars
I.
Rs.
Equity and Liabilities
1. Shareholders’ Fund
Share Capital
4,00,000
Reserves and Surplus
1,75,000
2. Non-Current Liabilities
Long-term Borrowings
1,50,000
3. Current Liabilities
Trade Payables
1,40,000
Other Current Liabilities
10,000
Short-term Provisions
25,000
9,00,000
II.
Assets
1. Non-Current Assets
Fixed Assets
3,60,000
Investments
1,00,000
Other Non-current Assets (Unamortized expenses)
30,000
2. Current Asset
Current Investments
80,000
Inventories
1,50,000
Trade Receivables
1,20,000
Cash & Cash Equivalents
50,000
Other Current Assets (Unamortized expenses)
10,000
9,00,000
245
Solution
Liquidity Ratio include – (i) Current Ratio and (ii) Liquid Ratio
1. Current Ratio
=
=
=
=
2. Liquid Ratio =
=
=
=
=
Current Assets
Current Liabilities
Current Assets – Other Current Assets (Unamortized expenses)
Current Liabilities
(80,000 + 1,50,000 + 1,20,000 + 50,000 + 10,000) – 10,000
1,40,000 + 10,000 + 25,000
4,10,000 – 10,000
1,75,000
4,00,000
1,75,000
= 2.28 : 1
Liquid Assets
Current Liabilities
Current Investments * + Trade Receivables + Cash & Cash Equivalents
Current Liabilities
80,000 + 1,20,000 + 50,000
1,75,000
2,50,000
1,75,000
= 1.43 : 1
* Current Investments have been considered as Marketable Securities.
246
3. Debt-Equity Ratio
=
Long-term Loans
Shareholders' Funds
where Shareholders’ Fund = (Share Capital + Reserves & Surplus + Money Received
against share warrants) – other current /other non-current
Assets (Unamortised expenses)
= (4,00,000 + 1,75,000) – (30,000 + 10,000)
= 5,75,000 – 40,000
= Rs. 5,35,000
Debt-Equity Ratio
=
1,50,000
5,35,000
= .28 : 1
Illustration – 10
From the following Balance Sheet of Alpha Ltd. for the year ended 31st March, 2012, compute
(i) Debt-Equity Ratio (ii) Proprietary Ratio (iii) Total Assets to Debt Ratio and (iv) Current Ratio
Particulars
I.
Rs.
Equity and Liabilities
1. Shareholders’ Fund
Share Capital
3,50,000
Reserves & Surplus
1,50,000
2. Application Money Pending Allotment
1,00,000
3. Non-Current Liabilities
Long-term Borrowings
3,70,000
4. Current Liabilities
Trade Payables
1,30,000
11,00,000
II.
Assets
1. Non-Current Assets
Fixed Assets
6,00,000
247
Investments
1,00,000
Other Non-Current Assets (Unamortised expenses)
20,000
2. Current Assets
Inventories
1,20,000
Trade Receivables
1,30,000
Cash and Cash Equivalents
1,20,000
Other Current Assets (Unamortised expenses)
10,000
11,00,000
Solution
1. Debt-Equity Ratio
=
Long-Term Loans
Shareholders' Fund
where Shareholders’ Fund = Share Capital + Reserves & Surplus – Other Current /NonCurrent Assets (Unamortised expenses)
= 3,50,000 + 1,50,000 – (20,000 + 10,000)
= Rs. 4,70,000
 Debt-Equity Ratio =
2. Proprietary Ratio
=
,
,
,
,
= 0.787 : 1
Shareholders' Fund
Total Assets
where Total Asset = Non-Current Assets + Current Assets – Other Current/
Non-Current Assets (Unamortised expenses)
= 7,20,000 + 3,80,000 – (20,000 + 10,000)
= 11,00,000 – 30,000 = 10,70,000
 Proprietary Ratio =
,
,
,
,
= 0.439 : 1 or 43.9 %
248
3. Total Assets to Debt Ratio =
4. Current Ratio
=
Total Assets
Long-term Debts
=
10,70,000
3,70,000
= 2.89 : 1
Current Assets
Current Liabilities
where Current Asset = Current Assets -(Other Current Assets (Unamortised expenses)
– Cash & Cash Equivalent (Application Money Pending
Allotment)
= 3,80,000 – (10,000) – (1,00,000)
= Rs. 2,70,000
 Current Ratio =
,
,
,
,
= 2.07 : 1
Note – Cash & Cash Equivalent includes “Application Money Pending Allotment”. This
money is deposited in a separate scheduled bank as per provisions of Companies Act,
1956 and is not available for general use till the allotment of shares is made.
Illustration – 11
Following is the Balance Sheet of X Ltd. as on 31st December, 2012
Particulars
I.
Rs.
Equity and Liabilities
1. Shareholders’ Fund
Share Capital
3,00,000
Reserves & Surplus
1,00,000
2. Non-Current Liabilities
Long-term Borrowings
3,50,000
3. Current Liabilities
Trade Payables
1,80,000
Short-term Provisions
70,000
10,00,000
249
II.
Assets
1. Non-Current Assets
Fixed Assets
6,00,000
Other Non-Current Assets (Unamortised expenses)
30,000
2. Current Assets
Current Investments
50,000
Inventories
1,20,000
Trade Receivables
1,10,000
Cash and Cash Equivalents
80,000
Other Current Assets (Unamortised expenses)
10,000
10,00,000
Sales during year amounted to Rs. 9,60,000
Calculate
(i)
Working Capital Turnover Ratio
(ii)
Debt-Equity Ratio
Solution
1. Working Capital Turnover Ratio
a) Current Assets
=
Net Sales
Net Working Capital
=
Current Investment + Inventories + Trade Receivable +
Cash & Cash Equivalent
=
Rs. 50,000 + 1,20,000 + 1,10,000 + 80,000 = Rs. 3,60,000
OR
Current Assets – Other Current Assets (unamortised
expenses)
=
b) Current Liabilities =
=
Rs. 3,70,000 – 10,000 = Rs. 3,60,000
Trade Payable + Short-term Provisions
Rs. 1,80,000 + 70,000 = 2,50,000
250
c) Net Working Capital =
Current Assets – Current Liabilities
=
Rs. 3,60,000 – 2,50,000 = 1,10,000
Working Capital Turnover Ratio =
2. Debt-Equity Ratio
. ,
,
.
,
,
= 8.72 Times
=
where
Shareholders’ Fund =
Debt-Equity Ratio
Shareholders’ Fund – Other Current/Other Non-Current
Assets (Unamortised expenses)
=
4,00,000 – (10,000 + 30,000)
=
Rs. 3,60,000
=
.
,
,
.
,
,
= 0.97 : 1
Illustration – 12
Calculate Return on Investment from the following Balance Sheet of Brown Ltd. as on
31-3-2012
Particulars
I.
Rs.
Equity and Liabilities
1. Shareholders’ Fund
Share Capital
4,00,000
Reserves and Surplus
3,00,000
2. Non-Current Liabilities
Long-term Borrowings 8%
5,00,000
3. Current Liabilities
4,00,000
16,00,000
251
II.
Assets
1. Non-Current Assets
Fixed Assets
9,00,000
10% Investments
1,50,000
Other Non-Current Assets (Unamortised expenses)
2. Current Assets
40,000
5,10,000
(including unamortised expenses Rs. 10,000)
16,00,000
Profit before tax is Rs. 1,50,000
Solution
Return on Investment (ROI) =
Pro it before Interest & Tax
× 100
Capital Employed
where
1. Profit before Tax (means profit after Interest on long-term borrowings)
Add : Interest on long-term borrowings (8% on Rs. 5,00,000)
1,50,000
40,000
1,90,000
Less : Interest on Investments (10% on 1,50,000)
Profit before Interest & Tax
2. Capital Employed
15,000
1,75,000
=
Shareholders’ Fund + Non-Current Liabilities –
10% Investment – Other Current/Other Non-Current
Assets (Unamortised expenses)
=
Rs. 7,00,000 + 5,00,000 – 1,50,000 – (40,000 + 10,000)
=
Rs. 10,00,000
OR
Capital Employed
=
Non-Current Assets + Working Capital (i.e. Current
Assets – Current Liabilities) – Investments – Other
Current/Non-Current Assets (unamortised expenses)
252
ROI
=
Rs. 10,90,000 + (5,10,000 – 4,00,000) – 1,50,000 –
(40,000+10,000)
=
Rs. 10,90,000 + 1,10,000 – 1,50,000 – 50,000
=
Rs. 10,00,000
. ,
=
=
.
,
,
,
× 100
17.5%
Note – 10% Investment is a non-operating asset.
Based on Cash Flow Statement
Illustration -13
Prepare Cash Flow Statement of Z Ltd. from the following Balance Sheets:Particulars
I.
31-3-2011
31-3-2012
Rs.
Rs.
3,00,000
4,00,000
35,000
55,000
70,000
90,000
Trade Payables
95,000
1,13,000
Short-Term Provisions (for Tax)
22,000
32,000
5,22,000
6,90,000
1,12,000
1,95,000
70,000
50,000
Equity and Liabilities
1. Shareholders’ Fund
Share Capital
Reserves & Surplus
2. Non-Current Liabilities
Long-term borrowings
3. Current Liabilities
II. Assets
1. Non-Current Assets
Fixed Assets
i)
Tangible - Plant
ii)
Intangibles – Goodwill
253
1,50,000
1,85,000
10,000
5,000
Current Investments (marketable securities)
14,000
46,000
Inventories
40,000
70,000
Trade Receivables
80,000
90,000
Cash & Cash Equivalent
36,000
44,000
Other Current Assets (unamortised expenses)
10,000
5,000
5,22,000
6,90,000
Investments
Other Non-Current Assets (unamortised expenses)
3. Current Assets
Other Informations were :i)
Interest paid on borrowing was Rs. 7,000
ii)
Depreciation charged was Rs. 11,000
iii)
Interest received on Investment was Rs. 5,000
Solution
Cash Flow Statement (Indirect Method)
for the year ended 31st March, 2012
S.
Particulars
No.
A.
Detail
Amount
(Rs.)
(Rs.)
Cash Flow from Operating Activities :Net Profit before tax & extra ordinary items:
Reserves & Surplus (Rs. 55,000 – 35,000)
20,000
Add : Provision for Tax
32,000
52,000
Adjustments for :Add :
Goodwill written off
20,000
Depreciation
11,000
Unamortised expenses
10,000
(Other Current/Other Non-Current Assets)
254
(5,000 + 5,000)
Interest Paid on Loan
7,000
1,00,000
Less :
Interest on Investment
5,000
Operating Profit before Working Capital Changes
Add :
Increase in Current Liabilities
Trade Payables
Less :
95,000
18,000
Increase in Current Assets
Inventories
30,000
Trade Receivables
10,000
1,13,000
(40,000)
73,000
B.
Less : Payment of Tax (2011)
22,000
Net Cash from Operating Activities
51,000
Cash Flow from Investing Activities
Interest received on Investments
5,000
Purchase of Plant
(94,000)
Purchase of Investments
(35,000)
Total
C.
(1,24,000)
(1,24,000)
Cash Flow from Financing Activities
Issue of Share Capital
1,00,000
Issue of Long-term Loan
20,000
Interest paid on Loan
(7,000)
1,13,000
D.
51,000
1,13,000
Net Increase in Cash & Cash Equivalents (A+B+C)
40,000
Cash & Cash Equivalent : Opening Balance
50,000
Cash & Cash Equivalent : Closing Balance
90,000
255
Note : Marketable securities is a part of cash equivalent.
Plants A/c
To Balance b/d
1,12,000 By Depreciation
To Cash (Purchase)
11,000
94,000 By Balance c/d
1,95,000
2,06,000
2,06,000
Provision for Tax A/c
To Cash
22,000 By Balance b/d
22,000
To Balance c/d
32,000 By Statement of P&L
32,000
54,000
54,000
Illustration -14
Prepare Cash Flow Statement from the following Balance Sheets:Particulars
31-3-2011
31-3-2012
Rs.
Rs.
1,50,000
2,00,000
Reserves & Surplus
45,000
1,00,000
Money Received against share warrants
50,000
-
20,000
-
55,000
60,000
-
5,000
20,000
25,000
3,40,000
3,90,000
1,95,000
2,33,000
10,000
5,000
I. Equity and Liabilities
1. Shareholders’ Fund
Share Capital
2. Non-Current Liabilities
Long-term borrowings (10% Loans)
3. Current Liabilities
Trade Payables
Other Current Liabilities (unclaimed dividend)
Short-Term Provisions (Provision for Tax)
II. Assets
1. Non-Current Assets
Fixed Assets (Plants)
Other Non-Current Assets (umamortised expenses)
256
2. Current Assets
Inventories
50,000
60,000
Trade Receivables
70,000
65,000
Cash & Cash Equivalent
10,000
22,000
5,000
5,000
3,40,000
3,90,000
Other Current Assets (unamortised expenses)
Additional Information:i)
Depreciation Rs. 20,000
ii)
Interim Dividend @ 10%
iii)
Tax Paid during year Rs. 18,000
iv)
Share Warrants were converted into share capital as on 1st April, 2012
Solution:
Cash Flow Statement (Indirect Method)
for the year ended 31st March, 2012
S.
Particulars
No.
A.
Detail
Amount
(Rs.)
(Rs.)
Cash Flow from Operating Activities :Net Profit before tax & extra ordinary items:
Profit (Rs. 1,00,000 – 45,000)
55,000
Add : Interim Dividend
20,000
Add : Provision for Tax
23,000
98,000
Adjustments for :Add :
Depreciation
20,000
Unamortised expenses
5,000
Operating Profit before Working Capital Changes :
Add :
1,23,000
Decrease in Current Assets
Trade Receivables
5,000
257
Increase in Current Liabilities
Trade Payables
5,000
1,33,000
Less :
Increase in Current Assets (Inventories)
(10,000)
Inventories (10,000)
1,23,000
Tax paid (given)
(18,000)
Net Cash from operating activities
1,05,000
1,05,000
(58,000)
(58,000)
Less :
B.
Cash Flow from Investing Activities
Plant Purchased
C.
Cash Flow from Financing Activities
10% Loan Paid
(20,000)
Interim Dividend Paid (Rs. 20,000 – 5,000 unclaimed)
(15,000)
(35,000)
(35,000)
D.
Net Increase in Cash & Cash Equivalents (A+B+C)
12,000
E.
Cash & Cash Equivalent : Opening
10,000
F.
Cash & Cash Equivalent : Closing
22,000
Note –
1. Share Warrants have been converted into share capital. So it is neither inflow nor outflow
of cash.
Provision for Tax A/c
To Cash (Tax Paid)
18,000 By Balance b/d
20,000
To Balance c/d
25,000 By P & L A/c (Prov.)
23,000
43,000
43,000
Plant A/c
To Balance b/d
To Cash (Purchased)
(Bal fig.)
1,95,000 By Depreciation A/c
58,000 By Balance c/d
2,53,000
20,000
2,33,000
2,53,000
258
Based on Issue of Share Capital (Presentation of Balance Sheet only)
Illustration – 15
Mona Ltd. issued 25,000 shares of Rs. 10 each at a discount of 10% payable Rs. 3 on
application; Rs. 4 on allotment and Rs. 2 on first and final call.
Company received application for 23,000 shares and all of these were accepted. All money is
duly received.
Show these informations in the Balance Sheet of the Company.
Solution –
Balance Sheet of Mona Ltd.
as at 31st March, 2012 (assumed)
Particulars
Note No.
Amount
Rs.
I. Equity and Liabilities
1
1. Shareholders’ Fund
2,30,000
II. Assets
2
1. Non-Current Assets
Other Non-Current Assets
23,000
2. Current Assets
Cash & Cash Equivalent
3
2,07,000
2,30,000
Notes to Accounts
Note No. 1
Share Capital
Authorised Capital
___ shares of Rs. 10 each
Issued Capital
25,000 shares of Rs. 10 each
2,50,000
Subscribed and Fully paid
23,000 shares of Rs. 10 each
2,30,000
259
Note No. 2
Other Non-Current Assets
Unamortised expenses
23,000
Note No. 3
Cash and Cash Equivalent
Cash at Bank
2,07,000
Illustration – 16
A Ltd. issued 20,000 shares of Rs. 10 each at a premium of 10% payable Rs. 2 on application;
Rs. 4 on allotment (including premium); Rs. 3 on first call and Rs. 2 on final call. All the shares
were subscribed, allotted and both the calls were made.
A holder of 400 shares did not pay final call while another holder of 500 shares paid the entire
sum on allotment.
Company also issued 10,000 shares of Rs. 10 each against purchase of plant from Raja & Co. for
Rs. 1,00,000.
Show these informations in the Balance Sheet of the Company.
Solution –
Balance Sheet of Mona Ltd.
as at 31st March, 2012 (assumed)
Particulars
Note No.
Amount
Rs.
I.
Equity and Liabilities
1. Shareholders’ Fund
Share Capital
1
2,99,200
Reserves & Surplus
2
20,000
3,19,200
II. Assets
1. Non-Current Assets
Fixed Assets
3
260
1,00,000
2. Current Assets
Cash & Cash Equivalent
4
2,19,200
3,19,200
Notes to Accounts
Note No. 1
Share Capital
Issued Capital
30,000 shares of Rs. 10 each
3,00,000
Subscribed and Fully paid
10,000 shares of Rs. 10 each each issued against purchase of
plant
1,00,000
Subscribed but not fully paid
20,000 shares of Rs. 10 each
Less : Calls in Arrears (400 @ Rs. 2)
2,00,000
800
1,99,200
2,99,200
Note No. 2
Reserves & Surplus
Securities Premium A/c
20,000
Note No. 3
Fixed Assets – Tangible (Plant)
1,00,000
Note No. 4
Cash & Cash Equivalent
Cash at Bank
2,19,200
261
Based on Debentures (Presentation of B/S)
Illustration – 17
X Ltd. had Rs. 12,00,000; 11% Debentures outstanding on 1st April 2011. During the year, it
took loan at Rs. 4 each from Dena Bank for which it deposited debentures of Rs. 5 lakh as
collateral security.
How these transactions will appear in the Balance Sheet of the company?
Solution –
Balance Sheet of Mona Ltd.
as at 31st March, 2012 (assumed)
Particulars
Note No.
Amount
Rs.
I.
Equity and Liabilities
Non-Current Liabilities
Long-term Borrowings
1
16,00,000
Notes to Accounts
Note No. 1
Long-term Borrowings
11% Debentures
Less : Debenture Suspense A/c
17,00,000
5,00,000
Bank Loan (on collateral security of Rs. 5 lakh Debentures)
12,00,000
4,00,00
16,00,000
262
Illustration – 18
Give two examples each of contingent liabilities and commitments.
Solution –
Contingent Liabilities
1. Claim against company not acknowledged as debt
2. Case of bonus pending in Court
Commitments
1. Uncalled liability on partly paid shares purchased
2. Dividend payable on cumulative preference shares.
263
Project Work in Commerce
Group Project Work In Business Studies
And Accountancy
Abstract
Project work has been part of curriculum of Business Studies for class XI and in Accountancy
for Class XII. From this session 2011-12 CBSE has introduced project work in Accountancy
for Class XI and Business Studies for class XII (session 2012-13). But it has not been taken
up as seriously and methodically as it should be done to bring out desirable
behavioral/constructive outcomes. If planned and executed methodically it is a source of joyful
learning and brings a long lasting benefit.
In our classes, taking up Individual Projects are regular feature but Group Projects have been
neglected. Group projects should be taken up seriously for desirable outcomes of Cooperative
and Team Learning. The present write –up gives you insights as to how this can be taken up
and executed in the areas of both Business Studies and Accountancy effectively.
Introduction
Project work is an important component of curriculum of Business Studies and Accountancy. Let
us first look at the prescribed components of the syllabi in these two subjects before discussing
how group projects can be used in the curriculum transaction.
Why Group Project Work?
Group project work fulfills certain important educational objectives namely
1.
It teaches the value of team work which a pupil does not learn otherwise. Teamwork is
very important for any success in the present times.
2.
It develops cooperative learning.
3.
Leadership skills take shape.
4.
Communication skills are developed.
5.
Conflict resolution and managing disagreements is also inculcated.
6.
It enables student of different abilities to work together to complete a given task
264
Steps In Group Project Work
Group project work can be organized by taking the following steps:
1.
Formation of groups: These can be formed on any basis like on the basis of roll
numbers, by student themselves out of their own choice, by common interest of
students or on any other suitable basis.
2.
Assignment of project to the group.
3.
Project planning.
4.
Assigning task to individual student by the group leader.
5.
Work by each team member.
6.
Peer review of the work.
7.
Improving the work after peer review.
8.
Finalization of the project work.
9.
Presentation of results by the team and review by the teacher and the entire class.
Curriculum
ACCOUNTANCY (CLASS XI)
Unit 12: Project Work (Any One)
Periods- 22, Marks-10
1. Collection of Source Documents, Preparation of Vouchers, Recording of Transactions
with the help of vouchers.
2. Preparation of Bank Reconciliation Statement with the help of given Cash book and Pass
book.
3. Project Work on any Windows based Accounting package: Installing & starting the
package, setting up a new Company, Setting up account heads, voucher entry, viewing
and editing data.
ACCOUNTANCY (CLASS XII)
In this component of curriculum two units namely Ratio Analysis and Cash Flow Statement are
covered. It carries a weightage of 20 marks break up of which is as under:1. Marks for Report File =
2. Marks for Viva
3. Written examination
04
= 04
= 12
265
I BUSINESS STUDIES
CLASS XI
10 Marks
The project work consists of Projects such as:
1.
Auxiliaries to Trade: Find out the names of five companies each related to different
auxiliaries, i.e. Banking, Insurance, Warehousing, Transportation, Communication and
Advertising from real life.
2.
Cooperative Society: Find out names of five different types of Co-operative Societies
around you. Also give details of business activities of any one of them.
3.
Private, Public and Global Enterprises: Give five names each of different types of
Public Sector enterprises (including all 3 types), Global enterprises, Joint Ventures and
Public Private Partnerships. Also give details of business activities of any one of them.
4.
Banking-SB Account: Visit a nearby bank to find out the procedure for opening a
Saving Bank Account. Collect the required documents and prepare a report on the same.
5.
Banking-Remittance: Visit a bank and remit Rs. 100 to any of your relatives. Write the
formalities completed by you for the same.
6.
E-Banking: Write the procedure for transferring funds through RTGS or NEFT.
7.
External Trade: Imagine yourself to be an exporter or importer. Collect documents used
in your trade. Fill them up and present in a file.
8.
Insurance: Compare life insurance policies targeting children of any two insurance
companies.
9.
Social Responsibilities: Select any two companies/firms and give an account of the steps
taken by them for discharging their social responsibilities.
II
BUSINESS STUDIES-
CLASS XII
10 MARKS
1.
Consumer Protection: File at least 10 complaints of consumer exploitation of different
types (defective goods and deficient services). Also, mention the decisions thereof.
2.
Marketing-Objectionable Advertisements:
Collect information related to five
objectionable advertisements presented through any media and explains the objections.
3.
Marketing-Useful Advertisements: Collect five printed advertisements and interpret
their message.
4.
Marketing-Physical Distribution: Observe the marketing plan of any two companies
and find the levels adopted by them for distribution of their products.
266
5.
Consumer Protection- Role of NGO’s: As a consumer, contact an NGO for a
complaint against any defective good or deficient service and report the assistance
provided by them.
6.
Marketing- Sales Promotion: Select any two famous firms/companies and find out the
sales promotion techniques generally adopted by them.
Group Project Work In Business Studies
In Business Studies Project Work can be made very interesting if group method is used. One of
the benefits is that the group project work covers a larger area. Let us take the example of group
project work on Insurance. The work can be assigned to the group as under to cover the
following topics assigning one to each member of the group:1.
General Principles of Insurance and need for Insurance
2.
Life Insurance: - Types of life insurance policies and their salient features.
3.
Comparison of policies offered by LIC and other companies.
4.
Fire Insurance
5.
Marine Insurance
6.
Careers in Insurance Industry
7.
Role of IRDA (Insurance Regulatory and Development Authority) in regulating and
promoting Insurance business in India.
8.
Insurance Planning for a family: - How much Insurance does one need and how to
decide on the same for different types of Insurance -Life and General.
It is evident that this group project will cover nearly all aspects of Insurance. When the
project is presented to the entire class is done then it should result in a fairly
comprehensive understanding of the topic.
Group Project Work In Accountancy
In accountancy also group project work can result in all the benefits listed above. Let us take an
example of ‘COLLECTION OF SOURCE DOCUMENTS, PREPARATION OF VOUCHERS
AND RECORDING OF TRANSACTIONS WITH THE HELP OF VOUCHERS’. The task can
be divided among the students as under:1.
Collection of source documents related to Bank like Pass book, pay in slips and
cheques etc.
267
2.
Collection of other source documents like cash memos, Invoices, debit note, credit
notes, railway receipts and delivery challans etc.
3.
Collection of blank accounting vouchers- debit voucher, credit voucher and transfer
vouchers
4.
Model transactions of banks on source documents.
5.
Model transactions on other source documents like cash memos. Invoices, debit and
credit notes.
6.
Preparation of accounting vouchers based on source documents.
7.
Recording of transactions based on accounting vouchers.
Thus we can notice that seven students can be assigned tasks in this group project.
More students can be associated with presentation of the results and class discussion at
that stage. This will result in constructivist and experiential learning where the
students would be benefitted the most.
Precautions To Make Group Project Work Successful
Students get many benefits when working in groups. But it is also essential to take some steps to
make the group project work successful. Some of them are:1.
Discuss the skills needed to work in groups with the students like listening skills, being
tolerant to other members of the group and managing disagreements etc.
2.
The method of grading the project should also be made clear to the students.
3.
Give time to the members of groups to meet together and plan their work, discuss their
roles etc. This will increase their cohesiveness and increase coordination.
4.
If there are some problems in the group then they can be redesigned by transferring the
students to other groups etc. This flexibility will increase group effectiveness.
5.
If the group members develop enough understanding then they can be used or other
constructivist curriculum transaction activities also like discussing a case study in
Business Studies and presenting the solution in class, group tests and group problem
solving etc. All this will make teaching learning process more joyful and effective.
Evaluating And Grading A Group Project
The work of each student needs to be assessed and also the work of a group as a whole should be
evaluated. This can be done by various ways and a combination thereof:268
1.
Evaluation by peers i.e. group members.
2.
Evaluation by the students of the class when presentation of the project and
question answer session is taking place.
3.
Evaluation by the teacher.
*It would be good if grades are assigned by all the above three ways and a cumulative grade is
given based on the average of the three grades. This process will make evaluation more
objective and effective.
Concluding Note
There should be no doubt in the minds of all stake holders that if group project work is done in
the ways described above it will result in effective curriculum transaction which will make
teaching learning process more joyful.
Be creative and think out of box while guiding students for taking up Group projects.
Newspapers, Magazines, various search engines and other sources will enable Teachers and
Students to take up projects which expose them to the World of Work which is the spirit
behind National Curriculum Framework’ 2005
269
Frequently Asked Questions (FAQ)
Business Studies -XII
Based on Business Studies Class XII Syllabus, some FAQs along with answers from
different units have been given for practice and for use in Classroom interactions. Give
practice to students and develop your own question bank.
Unit I. Nature and Significance of Management
Q.1
What is the aim of Management Process?
A.
The aim of management process is to achieve organizational goals effectively and
efficiently.
Q.2
A Petrol Pump needs to be managed as much as hospital. Which characteristics of
management are highlighted?
A.
management is Pervasive (Pervasive means– function which is found behind every
activity)/universal is being highlighted.
Q.3
McDonalds, the fast food chain made major changes in its menu to be able to survive in
the Indian Market. Which characteristics of management are reflected in this change?
A.
Management is Dynamic in nature.
(Hint: Indians are more inclined towards Indian spices and hence had no/less taste for
non-spicy fast food) Therefore McDonalds made changes in its menu to suit to Indian
taste, therefore, the initiative and changes are proactive and dynamic in nature)
Q.4
Suman works at middle level, give any two designations of this level.
A.
i) Purchase Manager
Q.5
The dabbawallas of Mumbai is a successful business enterprise. Which process has led to
their success?
A.
Co-ordination is the process which had led to their success.
ii) Divisional Manager
(As teacher explain students that here control/monopoly function should not be
highlighted instead it is the process and co-ordination at various levels which has led to
the success.)
Unit II- Principles of Management
Q.1
For which of his works is Taylor most remembered for?
A.
Taylor is most remembered for his Time and Motion studies.
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Q.2
“Management Principles enable a better understanding of the relation between human
and material resources in accomplishing organizational goals”. Which nature of
management principles has been highlighted here?
A.
The nature of management principles which has been highlighted here is ‘Mainly
Behavioral.
Q.3
What is the focus of Scientific Management?
A.
The focus of Scientific Management is to increase Productivity through Scientific
processes and methods. (Hint: Scientific Management runs on Scientific Principles)
Q.4
Hira and Harish are typists in a company having same educational qualification. Hira is
getting Rs. 3000 p.m. and Harish Rs. 4000 p.m. for the same working hours. Which
Principle of management is violated in this case?
A.
Principle of Equity
Q.5
In an organization, persons with technical mastery and intelligence are given planning
work. Those with good health are given execution work. What technique of management
is this?
A.
Functional Foremanship.
Q.6
In a situation of financial crisis, an organization is trying to cut down its costs. But the
employers are demanding more salary. The organization decided not to
A.
Principle of subordination of Individual interest to General/Organasation Interest.
Unit III- Management and Business Environment
Q.1
State any two salient features of the New Trade Policy of India?
A.
Abolishing of Service Tax on all Exports; Simplification of Export Procedure.
Q.2
How do social trends present various opportunities and threats to business enterprises?
Give examples.
A.
Health & Fitness trends have created demand for health foods & gymnasium.
Q.3
List the broad features of the new industrial policy of India in 1991?
A.
De- licensing, De- reservation, Disinvestment, FDI.
Unit IV- Planning
Q.1
Give two broad categories of Limitations of Planning.
A.
Planning has following two types of limitations
1. Internal
Q.2
2. External
“ABC Ltd. has a plan of profit maximization and has devoted to it a lot of money and
time. But the competition starts increasing and it could not change his plan to beat its
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competitors because huge amount of money it has already devoted to the pre-decided
plan causing the occurrence of losses in the organization”.
Which limitation of planning is highlighted in case mentioned above?
A.
Planning leads to rigidity.
Q.3
“Natural disaster like floods in Gujarat has been responsible for failure of production in
sales plan of Textile Industry”. Which limitation of planning is highlighted above?
A.
Planning does not work in dynamic environment.
Q.4
In which type of plan should the steps are followed in a chronological order?
A.
In ‘Procedures’ the steps are performed in a chronological order.
Q.5
Which type of plan does not allow for any discretion or flexibility?
A.
‘Rules’ do not allow any discretion or flexibility.
Q.6
“A. Co. needs a detailed plan covering the entire gamut of activities for its new project –
“Construction of a Mall” What type of plan is being referred to?
A.
‘Programme’ is the type of plan that is being referred here.
Q.7
Which plan quantifies future facts and figures?
A.
‘Budget’ quantifies future facts and figure.
Q.8
Which plan defines the organization’s direction and scope in the long-run in terms of the
external environment?
A.
Strategy
Q.9
Which plan may be defined as the general response to a particular problem or situation?
A.
A ‘Policy’ may be defined as the general response to a particular problem or situation.
Q.10
Which plan serves as a guide for overall business planning?
A.
Objectives serve as a guide for overall business planning.
Unit V -Organizing
Q.1
Why is delegation pre-requisite to the efficient functioning of an organization? Identify
the management principle here?
A.
It is because it enables the manager to use his style on high priority activities. (Here the
management by Exception” Principle is exercised.)
Management of Exception: Top Management must focus on priority issues which
require decision making whereas the least priority at execution/middle level is delegated.
Q.2
What happens if a company continues with the same organizational structure for a long
time?
A.
Continuation with the same structure leads to stagnancy which is detrimental to growth
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Unit VI Q.1
If a worker is paid according to the number of units produced by him/her, which wage
payment plan is used here?
A.
Performance- based plan is used here. (Wages are paid as per the no. of units produced in
a given time)
Q.2
Quality of production is not as per standards. On investigation it was observed that most
of the workers were not fully aware of proper operation of the machinery. Which element
of staffing is being ignored here?
A.
Training element of staffing is ignored here.
Unit VII- Directing
Q.1
In which Communication Network is a subordinate allowed to communicate with his
immediate superior as well as his superior’s superior?
A.
Inverted ‘V’.
Q.2
What are the types of networks that could be formed informally in a grapevine network?
A.
Single strand, Gossip, Probability, Cluster.
Q.3
In which kind of Informal Communication Network is a sequence followed while
communicating?
A.
Single Strand
Q.4
Name the Informal Communication Network Communication is done by all to all, on a
non-selective basis.
A.
Gossip/Grapevine
Q.5
In which Informal Communication Network does person randomly communicate with the
other?
A.
Probability
Q.6
Which is the type of Informal Communication Network where an individual will
communicate with only those whom he trusts the most?
A.
Cluster
Q.7
Give two examples of organizational facilities which will encourage free flow of
communication.
A.
Suggestion Box, Complaint Box.
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Unit VIII Controlling
Q.1
Which two sets of ‘Process of Control’ are concerned with compelling events to confirm
to the plan?
A.
1. Comparison of actual Performance with Standards
2. Taking corrective Action
Unit IX Financial Management
Q.1
Define Financial Management
Q.2
State the Primary objective of Financial Management
Unit X- Financial Markets
Q.1
What is settlement cycle of NSE?
A.
T+2 (Trading Day + 2 days)
Q.2
Who carries out the clearing and settlement operations of NSE?
A.
NSCCL
Unit XI- Marketing
Q.1
What is referred to as Essence of Market?
A.
Exchange is referred to as Essence of Market.
Q.2
Identify the type of product which is purchased frequently, immediately with least time
and effort.
A.
Convenience Product
Q.3
Which type of goods facilitates the developing or managing the finished products?
A.
Supplies or Business Services.
Q.4
ABC Ltd. keeps the price of the products at lower levels so that more people are attracted
to buy its product, which objective of pricing is the firm trying to achieve?
A.
‘Obtaining market share leadership’ – objective
Q.5
If a car manufacturer offers to sell a particular brand of car at a discount of Rs. 10000 for
a Ltd. Period. What kind of Sales Promotion activity is used?
A.
Rebate
Q.6
By offering a scheme such as “Buy two get one free” to consumers. What kind of Sales
Promotion Activity is the seller implementing?
A.
Quantity Gift.
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Q.7
If the offer is of a pack of half kg of rice with the purchase of a bag of Atta, What kind of
Sale Promotion activity is in effect?
A.
Product Combination
Q.8
What is the non-personal form of promotion where the information is disseminated by an
independent source?
A.
Publicity
Q.9
If a company offers a packet of a recently launched brand of biscuits for free. What kind
of ‘Sale Promotion’ activity is being undertaken?
A.
Sampling
Q.10
According to critics, which tools of promotion may undermine social values and promote
materialism.
A.
Advertising
Q.11
Automobiles Ltd. Offered to sell their new bike at about Rs. 4000 less than usual price is
an example of which of the technique of Sales Promotion.
A.
Rebate
Unit XII
Q.1
Who is referred to as a King in a free Market Economy?
A.
A consumer is referred to as a king in a free market economy.
Q.2
What do you mean by ‘Caveat de emptor’
A.
‘Caveat emptor’ means ‘Let the buyer beware’.
Q.3
Which act provides safeguards to consumers against unfair trade practices?
A.
The consumer Protection Act, 1986 provides safeguards to consumers against unfair
trade practices.
Q.4
Which Act provides safeguards in case the goods purchased do not comply with express
or implied conditions or warranties?
A.
It is the Sale of Goods Act, 1930.
Q.5
Which Act provides for the setting up of three tier judicial machinery for redressal of
consumer complaint?
A.
The Consumer Protection Act, 1986.
Q.6
Which Act aims to check adulteration of food articles and ensure their purity.
A.
The Prevention of Food Adulteration Act, 1954.
Q.7
Which Act provides protection of consumers against the malpractice of underweight or
under-measure?
A.
The Standards of Weights and Measures Act, 1976.
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Q.8
Which Act has repeated and replaced the Trade and Merchandise Marks Act, 1958.
A.
The Trade Marks Act, 1999.
Q.9
What does the Trade Marks Act, 1999 aim at?
A.
It prevents the use of fraudulent marks on products.
Q.10
What does the Competition Act, 2002 aim at?
A.
It provides protection to the consumer in case of practice adopted by business firms
which hamper competition in the market.
Unit XII
Q.1
Who is referred to as a king in a free Market Economy?
A.
A consumer is referred to as a king in a free market economy.
Q.2
What do you mean by ‘Caveat emptor’
A.
‘Caveat emptor’ means ‘Let the buyer beware’.
Q.3
Which act provides safeguards to consumers against unfair trade practices?
A.
The consumer Protection Act, 1986 provides safeguards to consumers against unfair trade
practices.
Q.4
Which Act provides safeguards in case the goods purchased do not comply with express
or implied conditions or warranties?
A.
It is the Sale of Goods Act, 1930.
Q.5
Which Act provides for the setting up of three tier judicial machinery for redressal of
consumer complaint?
A.
The Consumer Protection Act, 1986.
Q.6
Which Act aims to check adulteration of food articles and ensure their purity?
A.
The Prevention of Food Adulteration Act, 1954.
Q.7
Which Act provides protection of consumers against the malpractice of underweight or
under-measure?
A.
The Standards of Weights and Measures Act, 1976.
Q.8
Which Act has repeated and replaced the Trade and Merchandise Marks Act, 1958.
A.
The Trade Marks Act, 1999.
Q.9
What does the Trade Marks Act, 1999 aim at?
A.
It prevents the use of fraudulent marks on products.
Q.10
What does the Consumer Protection Act, 2002 aim at?
A.
It provides protection to the consumer in case of practice adopted by business firms
which hamper competition in the market.
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Using Commerce Laboratory and Internet for
Enhancing Teaching Learning Process and for
Personal Development
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List of Useful Websites For
Commerce Teachers
The list contains useful websites for commerce teachers where they can find good teaching
resources for curriculum transaction of Business Studies and Accountancy as per stated
objectives fulfilling the requirements of Constructive experiential learning. Internet is a very
widely used source of information. If the teacher and students of commerce make use of the
websites listed in this article they can contribute to joyful and useful learning of the subject.
Suggested Websites
The following websites (URL’s) can be accessed by teachers and students alike for better
learning in commerce subjects (Business Studies and Accountancy):1. www.google.com:- This website is the master of all searches on the world wide web. It
is used to locate other websites which have the desired information. The trick lies in
selection of appropriate search words so that the exact required information is accessed.
2. www.edudel.nic.in:- This the website of Directorate of Education which helps in getting
information regarding the latest developments in Govt. schools of Delhi. It also helps the
students and teachers in their day to day affairs.
3. www.cbse.nic.in:- This is the website of Central Board of Secondary Education which
gives information regarding the latest curriculum, learning materials and examination
related queries of teachers and students.
4. www.education.gov.in:- This is the official website of Ministry of Human Resource
Development. It gives the required information on government of India policy on
education etc.
5. www.righttoeducation.in:- This website gives all the required information regarding
Right to Education which is the biggest educational reform and affects all those engaged
in the field of education alike.
6. www.nseindia.com/in.:- This is the website of national stock exchange which gives all
the stock market information of interest to all those connected with commerce education.
7. www.bseindia.com/in.:_ This website is of Bombay stock exchange which is also useful
for getting information about the stocks listed in it.
8. www.incometaxindia.gov.in:- This is the website of Income Tax Department which will
help to get information in Income Tax with which all of us are affected. The resource
available on it can be used by commerce teachers as teaching resources.
9. www.mce.gov.in:- This is the website of Ministry of Corporate Affairs which gives
information on all the legislations affecting the Corporate sector in India, like schedule
VI (Presentation of company’s Financial Statements etc.). Appropriate teaching tools can
be found on this website.
10. www.youtube.com:- This is the most popular website for locating useful videos in
accountancy and business studies which can be used by teachers for class room
transaction.
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11. www.nios.ac.in:- This is the website of national institute of open schooling which has
very useful lessons in both business studies and accountancy.
12. www.businesstoday.com/in:- This website contains useful material on business news and
case studies which can be used profitably by all the teachers and students.
13. www.businessindia.com/in:- This website contains useful resources from this popular
business magazine which is useful in locating many relevant teaching resources.
14. www.khelostocks.com:- This website is useful for learning stock market operations. It
also gives its registered user virtual money which can be used for demo live stock trading
like placing a buy and sell orders and then seeing the actual gain or loss in its portfolio.
15. www.wsj.com:- This is the website of a very popular New York financial news paper
‘The Wall Street Journal’ which will help in keeping in touch with the global financial
trends.
16. www.ocw.mit.edu:- This website contains ‘Open Course Ware’ of Massachusetts
Institute of Technology and its associated institutes like ‘Sloan School of Management’.
It will be useful in locating appropriate business resources.
17. www.yojna.in:- This is the website of a popular magazine of planning commission which
contains useful articles on economic policy.
18. www.rbi.gov.in:- This is the website of ‘Reserve Bank of India’ which will help in
locating useful resources on Govt. Monetary and Fiscal policy.
19. www.india.gov.in:- This is the website of Government of India which contains links to all
other government websites.
20. www.ted.com:- This website contains videos of speeches of many business leaders and
innovative people which will help the users to gain useful insight into many issues.
*The list is not exhaustive. Besides the websites given above, there are many other
websites which can be used for effective curriculum transaction of commerce subjects.
Explore on your own other relevant websites.
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CLASS
Outline Guidance Notes regarding adoption of
Revised Schedule VI to the
Companies Act 1956 in the subject of
Accountancy
(Effective for Board Examination 2013)
Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110 092 India
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Statement
the
required
the
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(a) Share Capital
9,00,000
1 Mark
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