43950663 accounting material for interviews

7/30/2019 43950663 Accounting Material for Interviews

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ACCOUNTING MATERIAL FOR INTERVIEWS

English Essay Writing 1 * 5 = 5 MarksEnglish Correct the Sentense 5 * 1 = 5 Marks

Multiple Choice QUestions 40 * 1 = 40 marks(Accounts & Finance)

Accounts & Finance Questions need to write Briefly 5 * 2 = 10 MarksSimple Arthamatic and Reasoning = 10 * 1 = 10 Marks

------------Total 70 Marks

------------If u select in Written test u will have Next HR Interview (Personal Questions) andTecchinal round (Questions on Accounts and finance).

Here i am attaching some imp Questions & Prepare well.3.Subject Interview

Accoounting Definations & Concepts and PrincipalsRatio's with definations , Shares & debetureParent & subsidary CompanyPublic ltd Company and Private Ltd Company

Revenue Income/Expendituredeffered Income/ExpenditureCapital Income/ExpenditureAccured Income/Expenditure

Time value of moneyZero based Budget

Fixed Cost, varible cost ,marginal cost and Break evenGood will

AmortisationDepriciation & TypesAssets and types of Assets (i.e Tangible and Intangible,ficticious Assets)patnership and Jointventure and Consignment

Trading P&L and Balance sheet (Format & Shedules) and Trail BalanceMinirioty Interest or minority ownership

Less than 50% ownership of a corporation's voting stock, or not enoughownership to control company operations.

From a purely accounting point of view, a parent company which owns less than100% but more than 50% of a subsidiary

presents the value of the remaining ownership (the minority ownership) on thebalance sheet in a separate account.In such cases, minority interest is shown as either a liability or an equity item onthe consolidated balance sheet,and the income (or loss) owed to the minority owners is subtracted from (oradded to) the parent's income to arrive

at a net income number (consolidated).Lease & its Types

Green shoe optionCash flow statements

LOng Term Debt/Short Term DebtNon Balance sheet Items (Leases Assets/Foot Notes Items)margin of safety,In FinanceFinancial Management , divined yeild and networth capital BudgetingFinancial services , Commercial Paper and Venture Capital and Mutual FundsPortfolio Management ,working Capital and types of Working capital,caliculationmethods

and Abt Project in the Acadamic----------------------------------------

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What is book building? -- --Book building is a process where by the company

seeks bids from prospective investors for its Public offer. Based upon the bidsreceived the offer price is fixed.

What is an IPO? ---- IPO stands for Initial Public offering. The shares are issuedfor the first time to the public as opposed to the secondary market.

What is an ADR?----ADR is American Depository Receipt. A non US companyissues ADRs in US in order to rise capital. An ADR will normally be in multiples ofEquity shares of that company.What are the various investing opportunities you have?Real Estate, Government securities, Debentures, Equity Shares, Preferenceshares, tax saving Bonds, Mutual funds, Insurance etc.

What is a merger?----A merger is a transaction between two companies whereby both companies merge into each other and as a result a new company is

formed.What is a subsidiary company? -- --A company which is controlled by itsholding company. The control could be because of any of the following factors.More than 50% of capital being owned by holding company.Majority of the Board of directors of subsidiary are from holding company.Who are promoters?----Promoters are the people who initiates the idea ofcreating the company. They may/may not join the Board of directors after thecompany is formed.

What are consolidated statements?----These are the financial statementsreported by a holding company and these statements include the financial

performance of its subsidiaries.What is stock option?----Stock option is an instrument that carries a right to

buy the underlying stock at a certain price during certain time frame. Normallyissued to the employees of the companies to motivate and retain them.

What is the rule of Nominal accounts? ----Debit all expenses and losses.

Credit all incomes and gains.What are the important financial ratios a banker looks into when you

approach for loan?Debt Service coverage ratio

Interest Coverage RatioWhat is a prospectus? - ---It is an invitation asking prospective investors to

invest in the company.

What is the financial year in India ?Jan-Dec or Apr-mar or July-June?-----Apr1-Mar31Give exmaple for the following:

Non Cash Expenditures : Depreciation, Write down of investments,Provisions.

Intangible assets : Goodwill, PATENTS, TRADEMARKSAdjustments after Net Income : Dividends, Interest on capital in case of

partnershipsContingent liabilities : GuaranteesFixed expenses : Rent, Insurance

All Items which are in Bold are important

1.all accounting concepts

2.revenue expendatures/deffered revenue expenditures/capital expenditure3.pvt ltd company,public ltd comp4.Types of shares

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5.share premium/discount on issue of shares6.memorentum of association

7.ariticles of association8.subsidary company or holding company

9.minority interst10.primary market or secondary market

11.stock exchanges in india and abroad12.depriciation-Acounting standard-613.depletion/amortization14.SEBI(security exchange board india )15.provision/reserve16.general reserve or capital reserve

17.debentures and bonus shares18.divedend-interium and final dividend

19.inventory valution and methods20.goodwill valution and methods21.cashflow and funds flow22.working capital

23.marginal cost/margin of safety/break evenpoint/vairiable cost/semivarible cost/fixed cost24.jointventure and partnership25.non recurring items in p&l account

Ex:sale of investment26.non cash expenditure acoount in p&l account

ex:depiriciatiaon27.diff. between revenue and income

28.accrued income29.debtor/creditor defenations30.write entry and postingoutstanding salaries

31.accounting treatment:loss of inventory---no insurance coverage

partly insurance coveragefully insurance coverage

32. ratio analysis----all ratios are prepared33. form of balance sheet---horizontal\vertical---schedule 6 very important fully covered

34.capital profit and revenue profit35.rebate u/s 88 of income tax act36.mutual fund / trade discount/cash discount37.duties of finance manager38.interim audit/statutory audit39.Sensex

Questions asked in Earlier interviews collected from frineds

Provisions Vs Reserves What is Balance sheet and Cash flow

Schedule 6 format

Trading A/c Vs P&L A/c Exampls of Non Recurring Expenditure

Revenue Vs Income

Ratio Analysis All formulas (Imp debt equity , optimim stage of debt equity)

what is cost of goods sold

Finance Manager Duties Capital expenditure and Fixed expenditure

What is IPO What is ADR

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Tell about Credit Rating agencies Diff b/w Gross profit and Net Profit

Leverages (operating and financial )

Leverages usage Closing stock ( Cost or Market value which is less)

PortFolio Management

Mutual funds What is "Limited " in company names means

Prospectues Qurom Diff b/w Pvt and Public Limited Company

Income Tax Paid is not treated as Expenditure for Income Tax

Time Value of Money, how it will useful in Capital Budgeting

Father of Economics -- Adam Smith

Father of Scientific MgtFW Taylor

Integrated and Non Integrated Accounts

Holding Vs subsidiary companies

Revaluation Reserve Recurring and Non Recurring Items in P&l a/c

Association not for profit Deductions

Accrual Basis and Cash Basis

GodWill Working Capital

Costing Basics and important topics

What is meant by B/sheet, Cashflow

How going concern concept reflects in B.sheet(Like margin of safety, varible cost, semi-variable cose)Q)depreciation,Amortization and Impairment?Q)cap expr and rev.exprQ)tangible-intangibleQ)associate & holding ---subsiif we r having 20 to 50% interest more than 50% subsi

Q)What is appropriation account and what are thecomponents of

appr.a/c?from Net profit --------toprovide reserves.Q)what is EPS and DPS?Q)Asset write-down arises, when on review by a

company, circumstances indicate that the carryingvalue of an asset, that an entity holds for usage

may not be recoverable, and if the sum of expectedfuture cash flows is less than the carrying value ofthe asset, an impairment is recognized to the extentthe carrying value exceeds the fair value of the

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asset.

Note: Asset write-down is not to be confused withdepreciation or amortization (which is a regular

charge of the cost of an asset over its estimated

useful life). Asset impairment arises as result ofreview of the long-lived assets by an entity, where

as depreciation is a uniform charge of the cost ofthe asset over its estimated useful life.Diff between Capital Resv and Revenue Resrv?What are the components of B/S?What is net-worth?What is differed Expenditure?Where can u find iton B/S?what is liquid ratio and acid ratio? Debt-Equity ratio?What is unearned revenue?Ex: Advanced incomeWhat is Working Capital?

Structure of cost sheet?Functions of financial Mgt?What is Primary market and Secondary market?SEBI?capital expenditure -- money spent for additionsor improvements to structures or equipment that areused to carry on the activities of an organizationor individual.

Q)capital gain or loss -- the gain or loss incurred

from the sale or disposition of assets including

securities and real estate.Q)accounting equation -- the basic equation ofdouble-entry accounting that reflects therelationship of assets, liabilities and net worth(reserves + stockholders equity + retainedearnings). The equation may be expressed in itssimplest form as: assets = liabilities + net worth.

Q)accounts payable -- amounts recorded as

liabilities on the books of a company, institutionor individual that are owed, but have not yet been

paid, to a creditor for previously purchased

merchandise or services.Q)accounts receivable -- amounts recorded as assets

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on the books of a company, institution or individual

that are due, but have not yet been collected, froma debtor for the previous purchase of merchandise or

services.employee stock options

minority interestconsolidated accountskinds of depreciation charge , employee stock options

Mergers and Amalgamations********Derivativesmutual fundsopen end and close end

option and warrants

FI Questionnaire

1. What is the difference between company and company code?2. How many chart of accounts can be attached to a company code?

3. How many chart of accounts does SAP define, and its purposes? 4. What are substitutions and validations? What is the precedent?5. What is a controlling area?6. Define relationship between controlling area and company code.

7. What is a fiscal year variant?8. What are special periods used for?9. What do you mean by year dependent in fiscal year variants?10.What are shortened fiscal year? When are they used?

11. What are posting periods?12.What are document types and what are they used for?

13.How are tolerance group for employees used?14.What are posting keys? State the purpose of defining posting keys?

15. What are field status groups?16.What are withholding tax types and tax codes?17.What is a transport request?18.What is dunning? What is the maximum level of dunning?19.What is automatic payment program and what are its pre-requisites?20.What are open items? What is open item clearing?

21.What are house banks? What are bank chains state the purpose ofhaving bank chains?

22.State the procedure of setting up cash journals?23. What is a Chart of depreciation?24.How many chart of depreciation can be assigned to a company code?25. What is a depreciation key?26. What are asset classes27.How is account determination done for assets?28.What are depreciation areas? What is the purpose of defining depreciation

area?

29.What are cost elements and what are cost element groups?

30.What are cost centers? Define cost center hierarchy?31.What are primary and secondary cost elements?

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32. How is FI and SD integrated?33. How is FI and MM integrated?34.How is FI and Asset module integrated?

35. What is a real Internal order?36.What is a statistical internal order?

37. What is assessment?38. What is distribution?39. What are commitment items?40. What are internal orders?41. How are internal orders settled?42. What is a settlement rule?

.

(1) __________ is concerned with the maximization of a firm's earnings aftertaxes.(a) Shareholder wealth maximization(b) Profit maximization(c) Stakeholder maximization(d) EPS maximizationAnswer : B

(2) Which of the following would generally have unlimited liability?(a) A limited partner in a partnership.

(b) A shareholder in a corporation.(c) The owner of a sole proprietorship.

(d) A member in a limited liability company (LLC).Answer : C

(3) Which of the following examples would be deductible as an expense on thecorporation's income statement?(a) Interest paid on outstanding bonds.(b) Cash dividends paid on outstanding common stock.

(c) Cash dividends paid on outstanding preferred stock.(d) All of the above.

Answer : A(4) In finance we refer to the market where new securities are bought and sold

for the first time as the __________ market.(a) money (b) capital(c) primary (d) secondaryAnswer : C

(5) Which of the following would not improve the current ratio?(a) Borrow short term to finance additional fixed assets.(b) Issue long-term debt to buy inventory.(c) Sell common stock to reduce current liabilities.

(d) Sell fixed assets to reduce accounts payable.Answer : A(6) Krisle and Kringle's debt-to-total assets ratio is.4. What is its debt-to-equityratio?(a) .2 (b) .77(c) .667 (d) .333Answer : C(7) Which group of ratios measures a firm's ability to meet short-termobligations?

(a) Liquidity ratios.

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(b) Debt ratios.(c) Coverage ratios.

(d) Profitability ratios.Answer : A(8) According to the accounting profession, which of the following would beconsidered a cash-flow item from a "financing" activity?

(a) A cash outflow to the government for taxes.(b) A cash outflow to repurchase the firm's own common stock.(c) A cash outflow to lenders as interest.(d) A cash outflow to purchase bonds issued by another company.Answer : B(9) Cash budgets are prepared from past:

(a) balance sheets.(b) income statements.

(c) income tax and depreciation data.(d) None of the above answers areAnswer : D

(10) The accounting statement of cash flows reports a firm's cash flowssegregated into what categorical order?(a) Operating, investing, and financing.(b) Investing, operating, and financing.

(c) Financing, operating and investing.(d) Financing, investing, and operating.

Answer : A(11) The firm had a net increase of $800,000 in net fixed assets over the lastperiod. The beginning and ending net fixed asset account balances were$9,100,000 and $9,900,000 respectively. If the firm purchased $2,000,000 inadditional fixed assets and sold $100,000 of fixed assets at book value, what was

the firm's depreciation expense over the period?(a) $800,000

(b) $1,100,000(c) $1,900,000

(d) $2,700,000Answer : B(12) If EOQ = 40 units, order costs are $2 per order, and carrying costs are $.20per unit, what is the usage in units?(a) 10 units. (b) 16 units.(c) 40 units. (d) 80 units.Answer : D

(13) What is the book value of common equity per share of common equityoutstanding for the following firm? The firm has 20,000 common shares

authorized of which 15,000 are outstanding at a par value of $1. Additional paid-in-capital represents $300,000 and retained earnings are an additional $300,000.

(a) $1 (b) $20(c) $21 (d) $41Answer : D(14) Upon close examination of the income statement, which of the followingmathematical expressions would be true?(a) Net Sales - Gross Profit = Income from Operations (b) Gross Profit + Selling, General and Administrative Expenses = Net Sales(c) Income from Operations - Interest Expense - Income Tax Expense = Net

Income(d) None of the above are true.Answer : C

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(15) Which of the following is not a correct expression of the accountingequation?(a) Assets - Liabilities = Owners' Equity(b) Net Assets = Equities

(c) Assets = Equities(d) Assets = Liabilities + Owners' Equity

Answer : B(16) The owners' equity section of a balance sheet contains two majorcomponents:(a) Common Stock and Additional Paid-in Capital(b) Paid-in Capital and Retained Earnings

(c) Common Stock and Retained Earnings(d) Net Income and Dividends

Answer : B(17) Which of the following would not be included on a balance sheet?(a) Accounts receivable.(b) Accounts payable.(c) Sales.(d) Cash.Ans:C(18) If total assets were $21,000 and total liabilities were $12,000 at the

beginning of the year, and if net income for the year was $5,000, what is totalowners' equity at the end of the year?

(a) $ 4,000 (b) 5,000(c) 9,000 (d) 14,000

Answer : D(19) Treasury stock involves shares which are:(a) issued and outstanding.(b) authorized but not yet issued.

(c) subscribed but not yet authorized.(d) issued but not currently outstanding.

Answer : D(20) If a transaction during the year caused one asset to increase by $40,000 and

another asset to decrease by $30,000, which of the following events may havecaused these effects?

(a) Merchandise inventory was purchased and paid for entirely with cash. (b) Cash was received in exchange for the issuance of common stock.(c) Equipment was purchased and paid for partly with cash and with an accountpayable for the difference.(d) None of the above could have caused these effects.Answer : C

(21) Net assets were $9,500 at the beginning of the year and $12,000 at the endof the year. Merchandise Inventory went up by $1,000 during the year, Accounts

Payable went down by $500, and Accounts Receivable went down by $2,000. Ifthe Cash account was the only other asset and there were no other liabilities,

what happened to cash during the year?(a) Cash increased by $2,000.(b) Cash increased by $3,000.(c) Cash decreased by $2,000.(d) None of the above.Answer : B(22) The term 'current assets' does not include-a) Payments in advance.

b) Bills receivable.

c) Long-term deferred charges.d) Cash at bank

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Ans:C

(23) The retained earnings balance for Matt & Anne's Food Center at December31, 2003 was $33,000. The balance at December 31, 2004 was $47,000. During

2004, dividends in the amount of $6,000 were declared and paid to stockholders.The only other change in retained earnings was due to net income. The net

income for 2004 was?(a) $8,000 (b) 14,000(c) 20,000 (d) 26,000Answer : C(24) The principle stating that all expenses incurred while earning revenuesshould be identified with the revenues when they are earned, and reported for

the same time period is the:(a) cost principle.

(b) revenue principle.(c) expense principle.(d) matching principle.Answer : D

(25) "The firm must be treated as financially separate and distinct form its'owner(s)". This rule is known as:(a) The account

E.O.Q: Economic order Quantity. It is a quality of material that Can be ordered atwhich both ordering cost and carring costs are minimum.

E.O.Q = 2AO

A= Annual usage unitsO= ordering cost per AnnamC= Carring cost per unit per AnnamSemi Variable Cost : These costs are partly fixed and partly, variable inrelation to out putFor Example:- Telephone bill, Electricity bill

Angle of Incidents:- When both the cost curve and sales curve cuts or meet at apoint. That point is called as Break even point.

- The angle left after profit angle (or) Angle of IncidentsMargin of safety:- Difference between told actual sales-break even salesMargin of safety = Total sales B.E.PMargin of safety will be reached faster if angle of Incidents is Total sales = 30000

Margin safety = 30000-20000BEP sales = 20000 = 10000Means Excess actual sales over break even sales is called margin of safety.Absorption Costing: Each and every item of cost i.e, variable cost and fixed cost

is charged to the product.

Case 1: In this case fixed cost are charged to the product on the basis of normalcapacity.

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[Normal Capacity The number of units Normallyproduced by the Company

case 2: In case of under Absorption. That cannot should be charged to the P & LA/C

Case 1: Ex: Normal units 10000Actual production 12000

Fixed over heads 100000The absorption rate= fixed overheads/Normal units =100000/00000

And total Absorption should be Restrited to 100000.In any case. The absorbed Amount should not exceed the actual fixed cost.

Case 2: if the actual production is 8000 units

The absorption Rate = 100000/10000=10// per unitThe amount absorbed Amount= 100000-80000

= 20000which is charged to the P& L A/C

Marginal Costing:- In the case of Marginal costing only variable cost areabsorbed by the product.

- In this case the fixed costs are considered as period cost and this shouldbe charged to P & L A/C

Costing: The process of determining cost is called as costingVariable cost:- 1. Cost which is changing with every change in production

additionally if you want to producing one more unit we need to expend additionalcost variable cost in expected to fluctuate in 10 units 100/- total directly in

proportionate the changes for 11th unit additionally 10/- in value of production(or) sales.

2. Cost for unit will not change but there is change in total cost 10 units 100RsCost per unit = cost/unit=100/10=10/-11units 110/-Cost per unit=110/11=10/-

Fixed Cost:- 1. This cost is fixed will not change with Increase or decrease inproduction

Ex:- Factory rent2. The total cost will not change but cost per unit will change.

Rent 100001 person share 10000

2 persons share 50000 each4 persons share 2500 eachP.V Ratio: Profit value Ratio. It is a Ratio between contribution and salesP/V Ratio= Contrubution/salesX100Contribution per unit=sale price-variable costBreak Even Point (B.E.P)

This is a point at which there is no profit no loss.At this point to total amount received is equal to the total cost

Total sales Amount-Total Cost Amount (Variable Cost + Fixed cost)Total contribution=Total fixed cost

Ex: Selling price 10/- P/V=10-5Variable cost 5/- =5/-Fixed Cost 10000/- 5/100X100=50%

B.E.P (Units) = Fixed Cost/Contribution per unit10000/5=200units

B.E.P(Value) = Fixed cost/P/v Ratio 10000/50X100=20000Statement of Marginal Cost:-Total Sales-variable cost= contribution

Contribution-fixed cost=profit

Ratio:1. Current Ratio: Current Assets/Current liabilities

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Current Assets are those which can be converted in to cash in the short runThe term short run means-generally a period of one year

Current Assets: Inventories + Sundry debtors + cash and bank balance + shortterm loans & Advances + Marketable non trade Securities + prepaid Expences.

Current Liabilities:- cash credit + bank O.D + short term borrowings + creditors

+ proposed dividend + unclaimed dividend + provision for taxation (provision fortax Advance tax paid)

2. Quick Ratio:- Quick Assets/Quick liabilitiesQuick Assets = Current Assets-Stock and prepaid expences-other liquid portion ofcurrent Assets

Quick Liabilities = Current Liabilities cash credit, Bank, Borrowing and othershort term Borrowings

3. Debt Equity Ratio:- Debt/EqityDebt=Secured loan and unsecured loan less cash credit and Bank O.DEquity= paid up share capital including preference capital and free reserves4. Debt service Coverage Ratio:-

profit after tax+ Interest + Depreciation + non cash items/ Intrest + DebtInstalment5. Intrest coverage Ratio:-Earnings available to equity share holders/Number of Equity shares

6. P.E Ratio= Price earnings Ratiomarket price per share/Earnings per share

7. Dividend yield Ratio = Dividend per share/ market price per share8. Operating Leverage = Contribution/Earnings before Intrest & Tax

9. Finance Leverage = Earnings Before Intrest & Tax/Earnings Before TaxTotal Leverage = operating Leverage / Finance LeverageMOA Defines companies Contribution and Scope MOA is the contribution of theCompany this document Represents Rules and Regulation of the Company

MEMORANDUMS ARTICLES

It is a primary document It is Secondary document

It is subordinate to the Act It is subordinate to MOA & the Act

It is a must for every Company Can be written or taken from CompanyAct

Strict provisions for alteration Special Resolution is sufficient exceptwhere the amendment brings in toeffect a private from public

Ultra virus MOA even all the members.Cannot ratify it

Ultra virus AOA but intra virus the MOAcan be Ratified

SHARES DEBENTUREShares are a part of the capital of the

company

Debentures contribute a loan

Share holders are members or Oweners

of the compny

Debenture holders are creditors

When recommended by the Board

dividend could be declared to shareholders

Fixed amount of Intrest on debentures

paid before dividend declaration

Shares do not carry on any charge Debentures generally have a charge onthe asset of the company

Shares have restrictions Issue at adiscount

Debentures do not have RestrictionsIssue at a discount

Share holders have voting Rights Debenture holders do not have votingrights

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Dividend is payable only when profitsare there

Dividend is payable whether profits arethere or not

No fixed dividend Rate of Intrest is fixed

SHARE HOLDER DEBENTURE HOLDER

One of the owners of the Company andhas proprietory intrest in the Company

Only a creditor of the Company

When the Company makes profits andthe board recommends, share holdergets a share in the profits

Gets a fixed rate of Intrest whether theCompany makes profit

No security for his Investment Normally debentures are security

Eligible for voting rights No voting Rights

On liquidation, share holders are paidlast

Ranks priority with regard repaid

SHARE STOCK

Has a nominal value No Nominal value

May be fully paid or partly paid Always fully paid

Can be transferred is whole numbersand not in fractions

Can be transferred in fractions

Each and every shares shall be of equaldenomination

May be of unequal amount

Shares are identified with distinctivenumbers

Do not have any distinctive numbers

Can be issued directly to the public Only fully paid up shares can beconverted in to stock and cannot beissued Directly

PROMISSORY NOTE BILL OF EXCHANGEIn a pro-note there is a promise to pay In a bill there is an order to pay

In a pronote there are two parties themaker and the payee

In a bill there are there parties1. Drawer 2. Drawee3. Payee

Pronote cannot be made payable to themaker himself

In a bill the drawer and the payee maybe the same

The maker a pronote is primarily liable The maker of a bill is liable only whenthe drawee does not accept or pay

A pronote is signed by the person liableto pay. so no acceptance is needed

A bill has to be accepted by the draweebefore he can be held liable

JOURNAL LEDGERJournal is the book of first or originalentry. It is also called the Book of firstentry

The ledger is the Book of second entry

Transaction in the Journal will be

recorded Immediately

Depending upon his conveniences the

trader Records of the transaction in theledger

When once the entries are posted toledger the Journal Looses itsImportance

It will never Loose importance as it isthe main book of Accounts which isrelied upon permanently

In the preparation of final A/Cs Journalis not useful

In the preparation of trial balance andfinal A/Cs Ledger is a must

The tax authorities generally may notdepend on Journal In the finalization of income tax to bepaid, the tax authorities depend onledger.

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TRIAL BALANCE BALANCE SHEET

The trial Balance is prepared to checkthe arithmetical accuracy of the Booksof Accounts

Balance sheet is prepared to knowledgetrue position of Assts and liabilitiesparticular date

Trial balance doesnot show the financialposition of business

The financial position can be knowledgefrom balance sheet

The trials balance is prepared based onthe Ledger Accounts

The balance sheet is prepared on thebase of information from trial balance

The preparation of trial balance is notcompulsory

The preparation of balance sheet ismust

Trial balance can not be shown as adocumentary evidence

But balance sheet will be acceptdocumentary evidences by tax

authorities and courts

PROFIT & LOSS ACCOUNT BALANCE SHEET

Objective of preparing P&L A/C toascertain the Net profit cost it loss ofthe business during the year

The objective of preparing balancesheet is to know financial position ofthe business on a specific date

Is an account having debit and creditas such TO and BY are usedrecorded in the P & L A/C

Balance sheet is a statement and henceTO and BY are not used

Revenue expenditure and Incomes areaccorded in the P & L A/C

Capital Incomes and expenditures areshown in the balance sheet

Balancing figure of this Account eithernet profit or Net loss

Balance sheet will not show anybalancing figure. A total of liabilities andAssets side should always be equal

Fixed Assets:- These assets are acquired for long term use in the business

Liquid assets:- These assets also known as circulating, fluctuating or currentassets can be converted is to cash as early as possible.

Fictitious assets: Fictitious assets are those assets, which do not have physical

Form. They do not have any real valueEx: loss on issue of shares, preliminary Expences.

Intaugible assets:- Intaugible assets are those having no physical existence andcan not fouchEx: Goodwill, Trademarks

Contingent liabilities :- These are not the real liabilities they are not actualliabilities at present. They right become liability in future on condition that the

contemplated evint

SHARE CERTIFICATE SHARE WARRANT

The holder is a registered member of

the compound

The bearer of a shares warrant is not a

registered member

The holder of a share certificate is

essentially a member

The bearer of a share warrant can be a

member only if the article so providedin AOA

For the issue of share certificate mayrequired approval of the central Govt.

Share warrant can be issued centralGovt. approval is must

All Companies must issue sharecertificates

Share warrants can be only by publiccompanies

Share certificate is issued is partly (or)fully paid shares

Share warrant can be issued only fullypaid shares

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Share certificate in not negotiable Share warrant is negotiable

The holder of a share certificate canpresent a petition for winding up

The holder of a share warrant can notpresent a petition winding up

Bookkeeping :- is complementary to the Accounting process Book keeping is thesystematic recording of financial and Economic transactions.Accounting is the snalysis and Interpretation of book keeping records.

Realization concept:Revenues will be Recorded in book only when they are realized

Cash Book:the cash book is a sub-divisinal of the Book of original entry recordingtransactions involving receipts and payments of cash.All cash transactions are first entered in the cash book and these posted fromcash book in to the ledger

- transactions are recorded chronologically in the cash bookBill of exchange:-Is a instrument in writing containing can un conditional order signed by the laker

PRUDENCE :Incomes are recognized, when they are realised all possible expences are provide

Realization Concept :

In this concept Assets are recorded at the realization value of Assets and not thehistocal cost basisSo now a days realization convention is not accepted professional Accordingbodys.

TERM LOANS:

Term loans represents by secured borrowing and at present are the mostimportant source of finance for new projects

The generally carry a rate of interest these loans are generally repayable over aperiod of years in annual , semi annual , quantity installments

Term loans are also provided by banks, state financial institutions and all Indialending institutions

CASH PROFITCash profit is arrived by adjusting the non cash transactions to the net profit

CASH FLOW STATEMENT

Accounting standard 3 explain about this- this statement shows how much cash is generated and expensed in the

organization during the year , it also opening and closing balance of cash- it is use full for investors and creditors- it provides vital(important) information about companies ability to

generate future cash flow to satisfy investors and creditors expectationsMethods of preparing cash flows:- There are two methods

1. Direct method = Gross receipts gross payments2. indirect method

= net profit

add non cash expenditureless nosh income (credit sales)

= net cash flowCLASSIFICATION OF CASH FLOW

- Operating cash flow- Investing cash flow- Financing cash flow

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CASH: Purchasing power in hand called cashCASH EXPENSES

Cash in paid for expenses incurred eg wages paid, salaries paidNON CASH EXPENSES:- That is cash is not going to out of business

- Eg depreciation, writing off goodwill , patents- Writing off preliminary expenses

- Discount on issue of shares and debentureCAPITAL EXPENDITURE

- Expenses incurred of on long term investment- The benefits will flow or enjoyed by the organization for more than one

year eg plant machinery- The item dealt is called as issued it is expressed or identified in its own

name eg plant machinery- Assets is purchased for utilization in the business in the normal course of

business- Depreciation is to be considered for the life of asset

REVENUE EXPENDITURE- These expenses shown in the debit side of p&l account

- Expenditure incurred for short term investment- The benefits for the expenditure will flow or enjoyed by the organization

for the current year only eg salaries- The item dealt is called goods and merchandise

Plant goods

T v - goodsGoods are purchased with an intention to sell.

There no need of depreciationCOMPANY

- Company cones in to existence only when it is registered under thecompanies act

- Membership incase of a company minimum private -2nos public-7nos

maximum private-50 nos, public unlimited- A company on its incorporation enjoys a separate legal entity- Incase of company members liability is limited

PARTNER SHIP- A Firm is created by mutual agreement between partners, registration is

optional- Membership incase of firm two partners minimum, and maximum banking

business -10 nos , other business 20 nos- A firm does not have a separate legal entity- In case of firm partners are jointly & severally liable

COMPANY : A company is a trading association, a company is required to beregistration under the companies act

CLUB: Club is a on trading association, registration of a club is not mandatoryDELECREDORY COMMSSION: It is extra commission paid to bare the bad debtscollection loss

DEMAT ACCOUNT:- Demat Means the meterilised Account

- It is a separate Account maintained for Investment (shares, securities,debentures, bonds Extra---

- It gives Information about shares bought and sold prices at which shareswere bought and sold. shares presently holding amount held.

I.R.R: (Internal Rate of Return)This method takes is to consideration time value.It can be said as discounted Rate of ReturnPurchase Consideration:

consideration paid by the transferor company to the share of transfree company.

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Economic value Addes :A company or business earning profit which is more than cost of capital (Return

Expected by Investors)Impairment: Permanent decline in value of Asset

A.B.C ANALYSIS:ABC Analysis is a Method of Inventors control it is popular system of Inventory

control

The item of inventors is generally classified in to three types. Those are ABCA= is usage value is Maximum and No.of items is MinimumB= is usage value is medium and no.of itmes is mediumC= is usage value is lowest and no.of itmes is highest.

Annual Report:Annual Report is a Report

- which will contain the all financial statements of the company and- auditors Report and performance of Company and- Auditors opinion of the company- with previous Reports

Sweat equity shares :Equity shares issued by the company to employees directorssuch issue should be authorized by a special Resolution passed by the company ingeneral meeting.

Memorandum:memorandum means memorandum of association as originally framed alter from

time to time is pursuance of any previous company law or of this act.MEMBER:

- Name entered in the Register of Members- Member is also a share holder- Share warrant holder is not a memberSHAREHOLDER

- Name not entered in the Register of members- Share holder is not a member unless name is entered in the register of

members- Share warrant holder is share holder

PARTNER- Partner is one of the owner

- Partnership is governed by partnership act 1932- Partner has a un limited liability

DIRECTOR- Director is one of the member of the executive bsodu- Companies is governed by companies act 1956- Director is generally not liable

ISSUE OF SHARES AT DISCOUNTShares can be issued at a discount, if the following conditions are fulfilled

- the issue of shares at a discount must be by a resolutions passed by themembers at the general meeting

- the issue should be sanctioned by the Company law tribunal- the resolution authorizing t;h3e issue of shares specified the maximum

rate of discount at which the shares are to be issued- the rate of discount shall not exceed 10% unless comp any law tribunal

allowed such excess under special circumstances- the issue can be made only after one year has elapsed since the Company

was entitled to commence business- the shares shall be issued with in two months of the sanction by the

Company law tribunal or such other period as permitted

SHARES ISSUED AT A PRI CE LESS THAN THE NOMINAL VALUES

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Then it is called shares issued at discount the difference between the issuedprice and nominal value is discount on issue of share. It is shown in balance

sheet under head of miscellaneous expenditures no write offGOODWILL

Is to be Calculated basically on the basis of following methods:Capitalization Method

Super profit MethodCapitalization Method:Normal capital employed=future maintainable profits/Normal Rate of ReturnGoodwill = normal capital employed-actual closing capital employedSuper profit Method:Super profit Method=future Maintainable profits-Actual Capital employee X

Normal Rate of ReturnGoodwill = super profit X No. of years for which super profit

can be Maintainedcapital employed= Total Assets of the Company-out siders liabilitiesGoodwill :It is an Amount paid over and above the value of Assets and liabilities of the

under takingGoodwill is the Reputation of the business. This reputation is due to ExcessSales and profit made then normal sales and profit reasons for good will are:1. good reputation

2. favorable location3. ability and skill of employees

4. good management extra-goodwill is of two types

1. purchased goodwill2. developed goodwillpurchased goodwill: More Amount paid for Assets than requireEx: Total Assets 100000

Amount paid 150000Developed good will : This goodwill not to be written in books

Shares at a premium:When a Company issues shares at a price higher than the nominal value of

the (Securities) then the difference in the nominal value and the issue price isthe premium.

- The premium may be received in cash or in kind- But the share premium collected by a Company on issue of shares in

required to be retained in a separate Accounts titled as (security) premiumAccount.

Securities premium account can be used only for1. paying up of fully paid bonus shares to be issued by the Company to its

members2. To write off preliminary expences

3. to write off underwriting expences /commission paid discount allowed on anyissue of shares or debentures of the Company

4. To provide premium payable by a Company on Redemption of redeemableshares or Redemption of debentures of the Company.Distribution of securities premium amount as dividend is not permitted.Security premium is not a free reserves it is in the nature of capital reserve.Accounting Concepts:1) Business entity Concept: In Accounting language business is separate personis Business entity (and the person who has invested money in that Business ornot the same so the person who is Investing money must be treated as loan

given)

If the invest money in business should be share as capacity.- the owner of the Business is business it self

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- both business and person investing are two different persons so every personactivities must be written saperately

- Business activities must be written is business books- person activities must be written is personal books

- capital is shown as liability in B/S. the reason Investing this is business inlending money from the person investing

- this is also called as SAPERATE LEGAL ENTITY2) Money measurement concept:business records only those transactions which are Expressed in money terms.They will not record transactions if only expressed in other unit of measurement.3) cost concept: transactions in books are recorded at cost at the actual AmountIncured market value is not considered

ex: 10 Laks worth land if purchased 1 Lakwe shall record at one laks only.

4) Going concern concept:- It is assumed but overly business will be running for future seable- That the business entity desent have any intension to stop an Business activitiesin year future

- If we feel that the Business will not run or has to be stop in year foreseeablefuture. Then all the things have to recorded at realizable values.5) Dual Aspct Concept:- each transaction as two activities

a. power to receive some thing (goods purchased)b. Duty to pay some thing (duty to pay money)

6) Accrual concept:not only cash items are recorded in the books but also credit items are to be

recorded.Cash Accounting system:Only cash transactions are recorded if the system is followingMatching Principle:

Revenues are matched with relevant expences for getting that revenue in thatperiod.

- all expences incurred or matched with relevant incomes

Out Standing Expenditure: Expenditure incurred but the payment for which isnot yet paid will be shown in the balance sheet liabilities side and profit and lossaccount debited.Accrued expenses: The expenditure which is incurred and the payment thereofmight or might not be paid.

Working capital: For running day to day activities a business, some capital isrequired which is called working capital

Working capital: current assets current liabilitiesExcess of total current assets over current liabilities

Working capital cycle/ operating cycle: there is a complete cycle from cash tocash , Operating cycle is the time duration required to convert cash in to cash

a. conversion of cash in to Raw materialb. conversion of raw material in to work in progressc. conversion of work in progress in to finished goodsd. conversion of finished goods debtors ande. conversion of debtors in to cash

No operating cycle: No of days in year / operating cycle period

Stock exchange: stock exchange is the place , where stocks shares and othersecurities of the listed companies bought and sold

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Mutual fund: Mutual fund is fund ,a. which collects the investments of small saving holders

b. and re- Invest in capital market ,c. like share market , debt market, It clearly link between small saving

holders and capital markets EX: UTI mutual fundDebt- Securitization:

a. It is a mode of Financingb. Where in securities are issued on the basis of package of assets , this

involves the following process of activitiesOrganizing functionPooling functionSecuritization function

Primary market: Shares are purchased directs at the time of allotment by the

companySecondary market: Shares are purchased from market through the stockexchangeMemorandum of association:

a. It is the main document of the companyb. If this document represents constitution of that companyc. It contains 1. name clause

2. Objective clause

3. State clause4. capital clause

5. liability clause6. situation clause

Articles of association:This document represents rules and regulations of the company, it definesduties , rights and powers of the governing body between themselves andcompany

Limited liability: liability is limited to the face value of share

Minority interest: In a subsidiary company , the majority shares is held by holdingcompany ( say suppose 80% of shares taken by holding company remaining 20%

is held by some other people who are little interested in the company. This littleinterest is called as minority interest, these people are called as minority share

holdersSubsidiary company: A company who is selling more than 51% of shares toanother company is called subsidiary companyHolding company: A company who is buying more than 51% of shares fromanother company is called holding companyPubic limited company:

1. minimum members -72. maximum members unlimited

3. minimum directors-34. After getting business commencement certificate , they can do

business( but not after incorporation)5. public limited company can go to public issue

private limited company:1. minimum members -22. maximum members 503. minimum directors 24. can start business after incorporation5. private limited company shall not issue shares to outsiders

Government company: A government company is a company in which not less

than 51% of the paid up share capital of the company is held by Central

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government, state government, partly by the central govt, and partly one ormore

General Reserve: It is reserve which is created to meet any meet any future

unknown liability , it can be utilized as dividendCapital reserve: profits in the nature of capital or profits in the form of capital

natureReserve capital: reserve capital is called up only at the time of liquidation ifassets held are not sufficient to meat the liabilities

PROVISIONS

- Provisions is charge against profits- is made for known liability or expenditure

- it is utilized for that purpose only- is shown above the line- above the line means profit and loss account

RESERVE- Reserve in an appropriation profits- it is made for future unknown liability- it can be utilized for any future purpose

- is known below the line- below the line means p&l appropriation account

PRIMARY MARKET

- Shares are purchased directly at the time of allotment by the company

SECONDARY MARKET

- Shares are purchased from market through the stock exchange

STOCK EXCHANGE

- Stock exchange is the place, where stocks shares and other securities of the listed companies

bought and sold

DEBT SECURITAZATION

- It is a mode of financing

- Where in securities are issued on the basis of package of assets called polio- This involves the following process of activities

- Organizing function

- Pooling function

- Securitization function

WORKING CAPITAL

- For planning day to day activities of a business

- Current assets current liabilities , excess of total current assets overcurrent liabilities

WORKING CAPITL CYCLE/ OPERATING CYCLE

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- There is complete cycle from cash to cash

- Conversion of cash in to raw material

- Conversion of raw material in to work in progress

- Conversion of work in progress in to finished goods

- Conversion of finished goods in to debtors and

- Conversion of debtors in to cash

No of operating cycle= no of days in a year/operating cycle period

-

ACCRUED INCOME

Income earned but which not due ( no right to receive on this date) Earned during the current

accounting year but not have been actually received by the end of the same year

OUT STANDING INCOME

Income accrued and due but was not received

DEBTORS

Means taken goods on credit, who owes an amount to some body, People who has taken loan ormoney

CREDITORS

Means from whom have taken goods on credit people to whom we owes

ACCRUED EXPENSES

The expenditure which is incurred and the payment there of might or might not be paid

PREPAID EXPENDITURE

The amount paid for the expenditure relating to the future years

OUT STANDING EXPENDITURE

The expenditure incurred but the payment for which is not yet paid and will be shown in the balance

sheet liabilities side and debited to profit and loss account

AMORTISATION

Writing of intangible assets eg patents, goodwill this assets there is no physical existence

RECURRING EXPENSES

Items which are repeated eg sales and wages

NON RECURRING EXPENSES

Items which are not regular and repeated eg buying of machinery or other fixed assets, insuranceclaims

DELCREDERE COMMISSION

Consignment of goods it is extra commission paid to bare the bad debts collection

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STOCK EXCHANGE

Stock exchange is the place where stocks shows and other securities of the listed companies bought andsold

LIMITED COMPANY

Liability is limited to the face value of shares

MINORITY INTEREST

In a subsidiary company the majority shares is held by holding company

ACCOUNTING DEFINITION:Accounting is the art of recording, classifying and summarizing in a significantmanner and in terms of money, transactions and events which are, in partatleast, of a financial character, and interpreting the result thereof.

SUB-FIELDS OF ACCOUNTING:1. BOOK-KEEPING: It covers procedural aspects of accounting work andembraces record keeping function. Obviously book-keeping procedures governed

by the end product, the financial statements, i.e. profit and loss account, andbalance sheet including schedules and notes forming part of accounts.

Profit and Loss account gives result of economic activities for a period andBalance Sheet states the financial position at the end of the period.

Record keeping also requires suitable classification of transactions andevents. This is also determined with reference to the requirements of financial

statements.

2. FINANCIAL ACCOUNTING: It covers the preparation and interpretation of

financial statements and communication to the users of accounts.

3. MANAGEMENT ACCOUNTING: It covers the generation of accountinginformation for management decisions. So it addresses to a single user group, themanagement. It includes cost accounting which deals with keeping cost records,measurement of cost of product/service and cost control methods.

ACCOUNTING EQUATION: EQUITY + LIABILITIES = ASSETS (or)EQUITY + LONG TERM LIABILITIES = FIXED

ASSETS +CURRENT ASSETS CURRENT LIABILITIES.

MEASUREMENT BASES:

There are four generally accepted measurement bases. These are:i) Historical Costii) Current Costiii) Realisable Valueiv) Present Value

HISTORICAL COST: It means acquisition price. Assets are recorded at an

amount of cash or cash equivalent paid or the fair value of consideration given atthe time of acquisition. Liabilities are recorded at the amount of proceedsreceived in exchange for the obligation. In some circumstances a liability is

recorded at the amount of cash or cash equivalent expected to be paid to satisfyit in normal course of business.

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CURRENT COST: Assets are recorded at the amount of cash or cash equivalentthat would have to be paid if the same or an equivalent asset was acquired

currently. Liabilities are carried at the discounted amount of cash or cashequivalents that would be required to settle the obligation currently.

REALISABLE VALUE: As per realizable value, assets are carried at the amount

of cash or equivalent that could currently be obtained by selling the assets in anorderly disposal. Haphazard disposal may yield something less. Liabilities arecarried at their settlement values; i.e., the undiscounted amounts of cash or cashequivalents expressed to be paid to satisfy the liabilities in the normal course ofbusiness.

PRESENT VALUE: As per present value, an asset is carried at the presentdiscounted value of the future net cash inflows that the item is expected to

generate in the normal course of business. Liabilities are carried at the presentdiscounted value of future net cash outflows that are expected to be required tosettle the liabilities in the normal course of business.

EX: Mr. X found that he can get Rs.20,00,000/- if he would sell the machinepurchased, on 1-1-82 paying Rs.7,00,000/- and which would cost Rs.25,00,000/-in case he would buy it currently.

ACCOUNTING CONCEPTS:

Accounting Concept is generally used to mean a Notion only or mental idea

about something. For example, Cost, Income and Capital, Debit and Credit,Assets and Liabilities etc., are concepts i.e., basic assumptions or conditions uponwhich science of accounting is based. There is no authoritative list of theseconcepts. In other words, concept means such ideas which are coupled with

different accounting procedures e.g. Appropriation and Charge, Reserve andProvisions, Depletion and Amortisation etc. The following are some of the

important generally acceptable concepts: (ICWA)

Accounting is the language of business; affairs of a business unit arecommunicated to others as well as to those who own or manage it through

accounting information which has to be suitably recorded, classified, summarizedand presented. To make it full of meaning, accountants have agreed on a numberof concepts which they try to follow. These are given below: (SHUKLA)

BUSINESS ENTITY CONCEPT: Accountants treat a business as distinct from thepersons who own it; then it becomes possible to record transactions of the

business with the proprietor also. Without such a distinction, the affairs of thefirm will be all mixed up with the private affairs of the proprietor and the true

picture of the firm will not be available.

This concept has now been extended to accounting separately for variousdivision of a firm in order to ascertain the results for each division separately. Ithas been of immense value in determining results by each responsibility centre Responsibility Accounting.

MONEY MEASUREMENT CONCEPT: Accounting records only those transactionswhich are expressed in monetary terms, though quantitative records are alsokept. An event, even though important, like a quarrel between the production

manager and the sales manager, will not be recorded unless its monetary effect

can be measured with a fair degree of accuracy. It should be remembered that

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money enables various things of divers nature to be added up only throughmoney values and not otherwise.

COST CONCEPT: Transactions are entered in the books of account at the

amounts actually involved. Suppose a firm purchases a piece of land for Rs.1,50,000/- but considers it as worth Rs.3,00,000/-. The purchase will be recorded

at Rs.1,50,000/- and not any more. This is one of the most important concepts it prevents arbitrary values being put on transactions, chiefly those resulting inacquisition of assets. Another way of saying the same thing would be that theamount to be recorded is objectively arrived at as a result of the mutualagreement of the two parties involved.

Of course, sometimes accountants have necessarily to be satisfied with anestimate only the amount of depreciation to be charged each year in respect of

machinery is an example; the amount has to be an estimate since the future lifeof the machinery cannot be known precisely.

GOING CONCERN CONCEPT: It is assumed that the business will exist for a

long time and transactions are recorded from this point of view. It is this thatnecessitates distinction between expenditure that will render benefit over a longperiod and that whose benefit will be exhausted quickly, say, within the year, ofcourse, if it is certain that the concerned venture will exist only for a limited time,

the accounting record will be kept accordingly.

DUAL ASPECT CONCEPT: Each transaction has two aspects, if a business hasacquired an asset, it must have resulted in one of the following:

a) some other asset has been given up; orb) the obligation to pay for it has arisen; or rather,c) there has been a profit, leading to an increase in the amount that the

business owes to the proprietor; or

d) the proprietor has contributed money for the acquisition of the asset.The reserve is also true. If, for instance, there is an increase in the

money owed to others, there must have been an increase in assets or aloss. At any time:

Assets = Liabilities + Capital; or, rather,

Capital = Assets - Liabilities

In other words, capital, i.e., the owners share of the assets of the firm, isalways what is left out of assets after paying off outsiders. This is called theAccounting Equation. It is self evident but very useful.

REALISATION CONCEPT: Accounting is a historical record of transactions; itrecords what has happened. It does not anticipate events though anticipated

adverse effects of events that have already occurred are usually recorded. This isof great importance in stopping business firms from inflating their profits by

recording sales and incomes that are likely to accrue. Unless money has beenrealized either cash has been received or a legal obligation to pay has beenassumed by the customer no sale can be said to have taken place and no profitor income can be said to have arisen.

ACCRUAL CONCEPT: If an event has occurred or a transaction has been enteredinto, its consequences will follow. Normally, all transactions are settled in cashbut even if cash settlement has not yet taken place, it is proper to bring the

transaction or the event concerned into the books. Income or profit arises only

out of business operations when there has been an increase in the ownersshare of the assets of the firm (called owners equity) but not if the increase has

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resulted from money contributed by the owner himself. Any increase in theowners equity is called revenue and anything that reduces the owners equity is

expense (or loss); profit results only when the total of revenues exceeds the totalof expenses or losses

MATCHING CONCEPT: This concept recognizes that the determination of profit

or loss on a particular accounting period is a problem of matching the expiredcost allocated to an activity period. In other words, the expenses which areactually incurred during a specific activity period, in order to earn the revenue forthe said period, must be matched against the revenue which are realized for thatperiod. For this purpose, expenses which are specially incurred for earning therevenue which are realized period are to be considered. In short, all expenses

incurred during the activity period must not be taken. Only relevant cost shouldbe deducted from the revenue of a period for periodic income statement, i.e., the

expenses that are related to the accounting period shall be considered for thepurpose of matching. This process of relating costs to revenue is called matchingprocess. It should be remembered that cost of fixed asset is not taken but onlythe depreciation on such fixed asset related to the accounting period is taken.

(For the purpose of matching, prepaid expenses are excluded from the total costsbut outstanding expenses are added to the total cost for ascertaining the costrelated to the period). Like costs, all revenues earned during the period are nottaken, but revenue which are related to the accounting period are considered.

Application of matching concept creates some problems which are noted

below:a) Some special items of expenses, e.g., preliminary expenses, expenses in

connection with the issue of shares and debentures, advertisement expenses etc.,cannot be easily identified and matched against revenues of a particular period.b) Another problem is that how much of the capital expenditure should be writtenoff by way of depreciation for a particular period for matching against revenue

creates the problems of finding out the expected life of the asset. As such,accurate matching is not possible.

c) In case of long term contracts, usually, amount is not received in proportion tothe work done. As a result, expenditures which are carried forward and not

related to the income received, may create some problems.

CONVENTIONS:

It refers to the general agreement on the usage and practices in social oreconomic life, it is a customary practice, rule, method or usage. In other words, it

is an accounting procedure followed by the accounting community on the basis oflong standing customs.

Accounting Conventions can be used as follows:

CONSISTENCY: The accounting practices should remain in the same from oneyear to another for instance, it would not be proper to value stock-in-tradeaccording to one method one year and according to another method next year. Ifa change becomes necessary, the change and its effect should be stated clearly.

DISCLOSURE: Apart from legal requirements, good accounting practice alsodemands that all significant information should be disclosed. Not only variousassets, for example, have to be stated but also the mode of valuation should be

disclosed. Various types of revenues to be stated but also the mode of valuation

should be disclosed. Whether something should be disclosed or not will depend on

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whether it is material or not. Materially depends on the amounts involved inrelation to the asset or transaction group involved or to profits.

CONVERVATISM: Financial Statements are usually drawn up on rather a

conservative basis. Window-dressing, i.e., showing a position better that what itis, is not permitted. It is also not proper to show a position substantially worse

than what it is. In other words, secret reserves are not permitted.

MATERIALITY: Materiality means relative importance. In other words, whether amatter should be disclosed or not in the financial statements depends on itsmateriality, i.e., whether it is material or not. American Accounting Associationdefines Materiality as under:

An item should be regarded as material if there is reason to believe that

knowledge of it would influence the decision of informed investors.

An accountant cannot ignore the consideration of materiality ofprocedures. The term itself is a subjective term. As such, an accountant should

record an item of material even though it is of small amount if the sameinfluences the decisions of the users, viz. proprietors, auditors, or investors etc.On the other hand if it is found that an information is not sufficiently important toinfluence the quality of periodical financial statements, the same should be

treated as immaterial and hence should be avoided.

It has been stated above that materiality depends on the amountsinvolved and the account so affected. As a result, whether a particular item is

material or immaterial depends on the amount and nature of the same. Because,the material information helps the management to avoid unnecessary wastage oftime and money on principal matters. It should be noted that this doctrine ofmateriality refers to separate disclosure of information in the published financial

statements for the user of the same. In short, material items should separatelybe disclosed whereas immaterial items may not be disclosed separately but may

be combined in a consolidated form in the published financial statements.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS:

Certain fundamental accounting assumptions underlie the preparation offinancial statements. They are usually not specifically stated because theiracceptance and use are assumed. Disclosure is necessary if they are not followed,together with the reasons.

The following are recognized by the International Accounting Standards

Committee as fundamental accounting assumptions.:

a) Going Concern: The Enterprise is normally viewed as a going concern,that is as continuing in operation for the foreseeable future. It is assumed that

the enterprise has neither the intention nor the necessity of liquidation or ofcurtaining the scale of its operations.

b) Consistency: It is assumed that accounting policies are consistentwith one period to another.

c) Accrual: Revenues and costs are accrued, that is, recognized as theyare earned or incurred (and not as money is received or paid) and recorded in the

financial statements or the periods to which they relate. (The considerations

affecting the process of matching costs with revenues under the accrualassumption are not dealt with in this statement).

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NOTES TO ACCOUNTS:

Notes to accounts are the explanation of the management about the itemsin the financial statements i.e., profit and loss account and balance sheet. Themanagement gives more explanation and information about the item of profit andloss account and the balance sheet and any other items, by way of notes ofaccounts

Notes to accounts are integral part of financial statement.

ACCOUNTING STANDARDS:

An Accounting Standard is a selected set of accounting policies or broadguidelines regarding the principles and methods to be chosen out of several

alternatives. Standards conform to applicable laws, customs, usages and businessenvironment. So there is no universally acceptable set of standards. In India,Accounting Standards Board (ASB) has the authority of issuing AccountingStandards. The sole objective of Accounting Standards is to harmonise the

diversified policies to make the system more useful and effective.

The Council of the ICAI has so far issued twenty eight AccountingStandards. However, AS-8 on Research & Development is withdrawn

consequent to issue of AS-26 Intangible Assets. These are as follows:

AS Title of the AS

Date from whichmandatory

(accounting periodscommencing on or

after)

Enterprises towhich

applicable atpresent

1 Disclosure of Accounting Policies 1-4-1993 All

2(Revised)

Valuation of Inventories1-4-1999

All

3(Revised)

Cash Flow Statements1-4-2001

See Note - 2

4(Revised)

Contingencies and Events Occurringafter the Balance Sheet Date

1-4-1995All

5

(Revised)

Net Profit or Loss for the period,Prior Period Items and Changes in

Accounting Policies

1-4-1996All

6(Revised)

Depreciation Accounting1-4-1995

--

7(Revised)

Accounting for ConstructionContracts

1-4-2003All

8Accounting for Research &Development

Withdrawn and includedin AS-26

All

9 Revenue Recognition 1-4-1993 All

10 Accounting for Fixed Assets 1-4-1993 All

11

(Revised)

The Effects of Changes in Foreign

Exchange Rates

1-4-2004

(Any foreign exchangetransaction entered

before 1-4-2004 shall beaccounted for as per

All

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Revised AS - 11(2004)

12 Accounting for Government Grants 1-4-1994 All

13 Accounting for Investments 1-4-1995 All

14 Accounting for Amalgamations 1-4-1995 All

15Accounting for retirement benefitsin Financial Statements ofEmployers

1-4-1995All

16 Borrowing Costs 1-4-2000 All

17 Segment Reporting 1-4-2001 See Note - 2

18 Related Party Disclosures 1-4-2001 All

19 Leases 1-4-2001 All

20 Earning Per Share 1-4-2001 See Note - 2

21 Consolidated Financial Statements 1-4-2001 See Note - 3

22 Accounting for Taxes on Income See Note - 4 See Note - 4

23Accounting for Investment inAssociates in Consolidated FinancialStatements

1-4-2002All

24 Discontinuing Operations 1-4-2004 All25 Interim Financial Reporting 1-4-2002 All

26 Intangible Assets 1-4-2003 All

27Financial Reporting of Interest inJoint Venture

1-4-2004All

28 Impairment of Asset1-4-20041-4-2005

See Note - 2All

29Provisions, Contingent Liabilities

and Contingent Assets

1-4-2004 All(with certain

exceptions inrespect of

paragraphs 66

& 67 of theStandard)

NOTE 1: a) Sole Proprietary concerns / Individualsb) Partnership Firms

c) Societies registered under the Societies Registration Actd) Trusts

e) Hindu Undivided Familyf) Association of persons

NOTE 2: AS - 3, AS - 17, and AS - 20 have been made mandatory in respect offollowing enterprises:

i) Enterprises whose equity or debt securities are listed on arecognized stock exchange in India, and enterprises that are in theprocess of issuing or debt securities that will be listed on a recognizedstock exchange in India as evidenced by the board of directors resolutionin this regard.

ii) All other commercial, industrial and business reporting

enterprising, whose turnover for the accounting period exceeds Rs. 50Crores.

NOTE 3: AS - 21 is mandatory if an enterprise presents consolidated financialstatements. In other words,

the accounting standard does not mandate an enterprise to present

consolidated financial

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statements but, if the enterprise presents consolidated financialstatements for complying with the

requirements of any status or otherwise, it should prepare and presentconsolidated financial

statements in accordance with AS - 21.

NOTE 4: AS - 22 comes into effect in respect of accounting period commencingon or after 1-4-2001. It is mandatory in nature for:

(a) All the accounting periods commencing on or after 1-4-2001, inrespect of the following:

(i) Enterprise whose equity or debt securities are listed on arecognized stock exchange in India and enterprises that are in the process

of issuing equity or debt securities that will be listed on a recognized stockexchange in India as evidenced by the board of directors resolution in this

regard.(ii) All the enterprises of a group, if the parent consolidated

financial statements and the Accounting Standard is mandatory in natureof respect of any of the enterprises of that group in terms of (i) above.

(b) All the accounting periods commencing on or after 1-4-2002, inrespect of companies not covered by (a) above

(c) All the accounting periods commencing on or after 1-4-2003, in respectof all other enterprises.

E.O.Q. (Economic Order Quantity):It is a quality of material that can be occurred at which both ordering costs andcarrying costs are minimum.

E.O.Q.= Root 2AO/C

A= Annual ConsumptionO= Ordering Cost per order

C= Carrying Cost per unit per annum

Semi-Variable Cost:These costs are partly fixed and partly variable, in relation to output.

Ex: Telephone Bill, Electricity Bill.

Angle of Incidence:When both the cost curve and sales curve cuts or meet at a point that point iscalled as Break Even Point.The angle left after their inter section is called profit angle or angle of incidents.

Sales Curve

Margin of Safety:Difference between Total Actual Sales - Break Even SalesMargin of Safety = Total Sales - B.E.P.Margin of Safety will be reached faster if angle of incidents is more and viceversa.Ex: Total Sales = 30000 ; B.E.P. Sales = 20000

therefore Margin of Safety = 30000 - 20000 = Rs. 10000

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Absorption Costing :Each and every item of cost i.e., variable cost and fixed cost is charged to the

product.Case 1 :In this case fixed cost are charged to the product on the basis of normal

capacity.[Normal capacity The number of units normally produced by the company]

Case 2: in case of under absorption, that amount should be charged to the P&LA/c

Ex:Case-1 : Normal units = 10,000

Actual production = 12,000Fixed over heads = Rs.1,00,000/-

The absorption rate : fixed over heads = 1,00,000Normal units 1,0000

= Rs.10/- per unit

And total absorption should be Restricted to Rs.1,00,000/-In any case the absorbed amount should not exceed the actual fixed cost.

Case-2 : if the actual production is 8,000 units

The absorption Rate :1,00,000 =Rs.10/- per unit10,000

The amount absorbed =8000X10 = Rs.80,000Under absorbed Amount : 1,00,000 - 80,000= Rs.20,000/-

Which is charged to the Profit and Loss A/c.

Marginal Costing:This is a technique of Decision Making.

In the case of Marginal Costing only variable cost are absorbed by the product.In this case the fixed costs are considered as period cost and this should be

charged to P & L A/c.

Costing:The Process of determining cost is called as costing.

Variable Cost:1. Cost which is changing with every change in production additionally if you wantto producing one more unit we need to expend additional cost.

Ex: for 10 units Rs.100/-for 11th unit additionally Rs.10/-

2. Cost per unit will not change but there is change in total cost.

Ex: for 10 units Rs.100/-Cost per unit = cost/unit =100/10= Rs.10/-

11 units 110/-Cost per unit= 110/11 = Rs.10/-

Fixed Cost:1. This cost is fixed will not change with increase or decrease in production.

Ex: Factory rent

2. The total cost will not change but cost per unit will change.

Ex: Rent = Rs.10000/-

1 person share =Rs.10000/-2 persons share= Rs.5000/- each

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4 persons share = Rs.2500/- each

P/V Ratio (Profit - Volume Ratio) :It is a Ratio between Contribution and Sales.

P/V Ratio = Contribution / Sales x 100

Contribution per unit: Selling Price per unit - Variable Cost per unit

Break - Even - Point (B.E.P.):This is a point at which there is no profit or no loss.

At this point to total amount received is equal to the total cost incurred.

Total Sales amount= Total Cost Amount (Fixed Cost + Variable Cost)Total Contribution = Total Fixed Cost

Ex: Selling Price = Rs.10/-Variable Cost= Rs.5/-Fixed Cost= Rs.10000/-

Contribution= Rs.10-Rs.5 = Rs.5/-

P/V Ratio = Contribution x 100 = 5/10x100=50%Sales

B.E.P.Units= Fixed Cost/ Contribution per unit = 10000/5= 2000 units.B.E.P.Value= Fixed Cost/ PV Ratio = 10000/50x100 = Rs.20000/-

Statement of Marginal Cost:Total Sales - Variable Cost = ContributionContribution - Fixed Cost = Profit

Current Ratio: Current Assets / Current LiabilitiesCurrent Assets are those which can be converted into cash in the short run.The term short run means - generally a period of one year.

Current Assets = Inventories + Sundry Debtors + Cash and Bank Balances +Short Term Loans & Advances +

Marketable Non-Trade Securities + Prepaid Expenses.Current Liabilities = Cash Credit + Bank O.D. + Short Term Borrowings +

Creditors + Proposed Dividend + UnclaimedDividend + Provision for Taxation (Provision for Tax -

Advance Tax Paid)

Quick Ratio: Quick Assets / Quick LiabilitiesQuick Assets = Current Assets - Stock and Prepaid Expenses - Other LiquidPortion of Current AssetsQuick Liabilities = Current Liabilities Cash Credit, Bank Borrowings and Other

Short Term Borrowings

Debt Equity Ratio: Debt / EquityDebt = Secured Loan and Unsecured Loan minus Cash Credit and Bank O.D.

Equity = Paid-up Share Capital including Preference Capital and Pre-Reserves

Capital Employed = Net Fixed Assets + Working Capital

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Debt Service Coverage Ratio = Profit after Tax + Interest + Depreciation +

Non-Cash ItemsInterest + Debt Installment

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Interest Coverage Ratio = Earning Before Interest

Interest

P.E.Ratio (Price Earning Ratio) = Market Price Per ShareEarning Per Share

Dividend Yield Ratio = Dividend Per ShareMarket Price Per Share

Operating Leverage = Contribution___________Earning Before Interest & Tax (EBIT)

Finance Leverage = Earning Before Interest & Tax (EBIT)

Earning Before Tax

Total Leverage = Operating Leverage x Finance Leverage

EPS = Earnings available to Equity ShareholdersNo.of Equity Shares outstanding

Memorandum of Association(MOA)

Articles of Association (AOA)

1 Memorandum defines the companies

constitution and scope. MOA is thecompanies constitution and scope.

AOA represents Rules and Regulations

of the company.

2 It is a primary document. It is a secondary document.

3 It is subordinate to the Act. It is subordinate to MOA and Act.

4 It is a must for every company. Can be written or taken fromCompanys Act.

5 Strict provisions for alteration. Special resolution is sufficient exceptwhere the amendment brings into

effect a private from public.

6 Ultra virus MOA even all the

members cannot ratify it. (change).

Ultra virus AOA but intra virus the

MOA can be ratified.

Shares Debentures

1 Shares are part of the capital of thecompany.

Debentures constitute a loan.

2 Shareholders are members orowners of the company.

Debenture holders are creditors.

3 When recommended by the boarddividend could be declared toshareholders.

Fixed amount of interest ondebentures paid before dividenddeclaration.

4 Shares do not carry on any charge. Debentures generally have a chargeon the asset of the company.

5 Shares have restrictions issue at a

discount.

Debentures do not have restrictions

issue at a discount.6 Shareholders have voting rights. Debenture holders do not have voting

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rights.

7 Dividend is payable only whenprofits are there.

Interest is payable whether profitsare there or not.

8 No fixed dividend. Rate of interest is fixed.

Shareholder Debenture holder

1 One of the owner of the companyand has proprietary interest in the

company.

Only a creditor of the company

2 When the company makes profits

and the board recommends,shareholder gets a share in the

profits.

Get a fixed rate of interest whether

the company makes profit or not.

3 No security for his investment. Normally debentures are secured.

4 Eligible for voting rights. No voting rights.

5 On liquidation, shareholders are paid

last.

Ranks priority with regard repayment.

Shares Stock

1 Has a nominal value. No nominal value.

2 May be fully paid or partly paid. Always fully paid.

3 Can be transferred in whole numbers

and not in fractions.

Can be transferred in fractions also.

4 Each and every share shall be of

equal denominations.

May be unequal amounts.

5 Shares are identified with distance

numbers.

Do not have any distinctive numbers.

6 Can be issued directly to the public. Only fully paid up shares can beconverted in to stock and cannot beissued directly.

Capital expenditure Revenue expenditure

1 Expenditure for the purchase and

installation of asset.

Expenditure incurred for the

maintenance of asset.

2 These assets are shown at the

assets side of the balance sheet

These expenses are shown in the

debit side of profit and loss account.

3 Expenses are incurred for long term

investment.

Expenditure incurred for short term

investment.

4 The benefits will flow or enjoyed by

the organization for more than oneyear.Ex: plant and machinery

The benefits for the expenditure will

flow or enjoyed by the organizationfor the current year only.Ex: salaries, printing & stationary etc.

5 The item dealt is called as asset. Itis expressed or identified in its ownname.Plant Plant ; T.V. T.V.

The item dealt is called goods ormerchandise.Plant Goods ; T.V. Goods.

6 Asset is purchased for utilization inthe business, in the normal courseof business.

Goods are purchased with an intentionto sell.

7 Depreciation is to be considered forthe life of asset.

There is no need of depreciation.

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Profit and Loss Account Balance Sheet

1 Objective of preparing P & L Accountto ascertain the net profit or loss ofthe business during the year.

The objective of the preparing BalanceSheet is to know the financial positionof the business on a specific date.

2 In this account having debit andcredit as such To and By areused

Balance Sheet is a statement andhence To and By are not used.

3 Revenue expenditure and incomesare recorded in the Profit and LossAccount.

Capital incomes and expenditures areshown in the Balance Sheet.

4 Balancing figure of this accounteither net profit or net loss.

Balance Sheet will not show anybalancing figure. A total of Liabilitiesand Assets side should always beequal.

Recurring Expenses Non-Recurring Expenses

Items which are repeated.Ex: Salaries & Wages

Items Which Are Not Regular AndRepeated.Ex: Buying of Machinery or OtherFixed Assets, Legal Expenses, Loss orProfit on sale of Asset, InsuranceClaims.

Public Limited Company Private Limited Company

1 Minimum number of members are 7. Minimum number of members are 2.

2 Maximum number of members are

unlimited.

Maximum number of members are 50.

3 Minimum directors are 3. Minimum directors are 2.4 After getting businesscommencement certificate they can

do business.

Can start business after incorporation.

5 Public Limited Company can go for

public issue.

Private Limited Company shall not

issue its shares to outsiders.

Provision Reserve

1 Provision is a charge against theprofits.

Reserve is an appropriation on profits.

2 Is made for known liability orexpenditure.

It is made for future unknown liability.

3 It is utilized for that purpose only. It can be utilized for any futurepurpose.

4 Is shown above the line. Is shown below the line.

5 Above the line means Profit and Loss

Account.

Below the line means Profit and Loss

Appropriation Ac

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