key notes ipcc advanced accounting
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PREFACE
There is no dearth of textbooks on accounting. So it may be pertinent to ask why we need another book.
This is not a book that is written as a book. This book is evolved from the notes prepared for satisfying the
needs of students. The only motivation was to explain accounting in a logical manner, whereby one could
master the methodology based on a deeper insight into the basic structure of accounting. The emphasis
here is not so much on the mechanical practice but on the conceptual understanding of the methodology.
The objective is to ensure that the study of this book enables the reader to understand accounting numbers
in a clearer and better perspective.
Various aids have been included in the book to facilitate learning and make it interesting.
Case Studies: They not only make the concept clearer, the presentation leaves a vivid visual impact,
which has good recall value.
Pictures & Clipart: Uniformity in highlighting the important points and making reading interesting.
Concept Questions:Makes your concepts very clear and strengthen the base.
Class Work: It help students to recall and test their knowledge and, going a step further, their
power to analyse and derive. Class work need students to seek out what is not
obvious from the information provided
If this approach builds confidence in the minds of students about accounting methodology & if it makes it
possible to understand & apply it logically, I believe, I have achieved my goal.
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DEDIC TION
Dedicated to Her, My Infinite Happiness,My Wife Hemlata Bhangariya
I am Feeling the tranquillity and happiness when I come to lay this book in your lap.
Say youre surprised? Say you like it? Say its just what you wanted? Because its yours
because I love you.
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CA Anand R. Bhangariya 94220 26740 www.cavidya.com 1.1
CHAPTER
NO.NAME OF THE CHAPTER PAGE NO
1 CONCEPTUAL FRAMEWORK 1.11.7
2 UNDERWRITING OF SHARES 2.12.8
3 LIQUIDATION OF COMPANIES 3.13.19
4 BANKING COMPANIES 4.14.11
5 INSURANCE COMPANIES 5.1
5.16
6 ELECTRICITY COMPANIES 6.1 6.9
8 DISSOLUTION OF PARTNERSHIP ACCOUNTS 8.18. 19
9AMALGAMATION & SALE OF FIRM TO A COMPANY 9.1
9.11
10 DEPARTMENTAL ACCOUNTS 10.110. 6
12ESOP, BUYBACK, EQUITY SHARES WITH DIFFERENTIAL
RIGHTS12.112.11
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preparation of Financial Statements in compliance with AS.
Deal with the topics not covered by AS.
Development & review of AS
Promoting harmonisation of regulations, AS and procedures.
Interpretation of financial statements.
Applicable to all general purpose financial statements prepared annually by all commercial,
industrial and business enterprises (Public or private)
Special purpose financial reports like prospectus, Tax computations are outside the scope.
Framework cantoverride Accounting Standards.
There are three fundamental accounting assumption:
1) Going Concern
2) Consistency
3) Accrual
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BalanceSheet
Profit and lossaccount
(P & L A/C)
Cash FlowStatement
Notes to
accounts
Financial position Financial
performanceCash flows Other relevant
information
In India, FS means B/s, P&L A/c, notes to Accounts & cash flow statement.
Balance sheet
Liabilities AssetsRs. Rs.
Profit and Loss A/c
Debit CreditRs. Rs.
Cash flow statement
Particulars Rs
.
Notes to accounts
m
n
n
k
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Investors
Employees
Lenders
Suppliers
Govt.agencies
Customers
Whether to buy, sell / hold investment.
Ability of organisation to survive.
Ability of organisation to pay dividend.
Stability, continuity and growth of company.
Ability to provide remuneration, retirement and other
benefits.
Interested in repayment of Interest and Loan principal.
Ability to pay the dues
Decide credit policy
They want to know because they
Regulate the functioning of business for public good. Charge excise duties and taxes.
Control the prices.
Employment
Contribution to the local economy
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Understandability Relevance Reliability Comparability
Useful to a wide
range of users in
making economic
decisions
Relevant for
decision-making
needs of users
Free from
material error
and bias and can
be depended
upon by users
Within the entity
over time and
also between
different entities
True and Fair View
Application of the
principal qualitative
characteristics & of
appropriate
accountingstandards
Primarily transactions and events are measured in terms of money.
The three elements of measurement are:
1) Identification of objects and events to be measured;
2) Selection of standard or scale to be used;
3) Evaluation of dimension of measurement standard or scale.
Money as a scale of measurement is not stable. Thus information of one year measured in money
terms may not be comparable with that of another year.
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You have purchased one Car on 01.01.2001 for Rs. 10 Lakhs HistoricalCost
Today i.e. on 01.08.2011, if you want to sell this car after 10 years, it will
fetch you Rs. 3 Lakhs.Realisable Value
Today same car is available in the market for Rs. 15 Lakhs.
Current Cost
Historical Cost Current Cost Realisable value Present Value
Present Value: As per present value, an asset is carried at the present discounted value of the
future net cash inflows that the item is expected to generate in the normal course of business.
Your dad invested Rs. 1,00,000 in Fixed deposit with Bank of Baroda for 1 year @ 10% p.a.
Present Value Future Value
1,00,000 1,10,000
10000 X 110/100
1,10,000 X 100/110
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Capital refers to net assets of a business. Since a business uses its assets for its operations, a fall in
net assets will usually mean a fall in its activity level.
It is therefore important for any business to maintain its net assets in such way, as to ensure
continued operations at least at the same level year after year.
In other words, dividends should not exceed profit after appropriate provisions for replacement of
assets consumed in operations. For this reason, the Companies Act does not permit distribution of
dividend without providing for depreciation on fixed assets.
P = (CA - CL)(OAOL)C + D
P = Profit
CA = Closing Assets
CL = Closing Liabilities
OA = Opening Assets
OL = Opening Liabilities
C = Introduction of Capital
D = Dividend / Drawings
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Definition: Underwriting is an agreement, with or without conditions,
to subscribe to the securities of a body corporate when existing
shareholders of the corporate or the public do not subscribe to the
securities offered to them.
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Company issues
1,000 shares of Rs.
10 for Rs. 12 each. Public
Directors / Promoters
Underwriter
subscribed for
800 shares.
subscribed for
200 shares.
The underwriter is not eligible for
commission on shares taken by
the promoters, employees,
directors, their friends and
business associates.
Commission is paid on the
issue price
i.e. Rs. 12 X 800 = 9,600
The maximum amount of commission:
5% of the issue price of shares
2
% of the issue price of debentures
rate authorized by the articles
whichever is less.
Commission = 9,600 X 5%
= 480.
It may be paid in cash or in fully
paid-up shares or debentures
or a combination of all these.
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Public
Underwriter
If public do not subscribe the shares,
Underwriter will subscribe the same.Company
issue 1,00,000
shares & appointed
an underwriter.
7 Banks have underwritten 557.14 crores value
of shares TATA Steel.
The company may
enter into underwriting
arrangement with
number ofunderwriters. This
arrangement is called
Joint Underwriting.
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Company issue10000 sharesand
appointed an underwriter
HSBC will take 2,000
shares irrespective of
no. of shares appliedby public.
With condition that HSBC will take atleast 2,000 shares
Public applied for
12,000 shares.
Decided to issue10000 sharesand
appointed an underwriter
HSBC will take
remaining 4,000
shares.
Public
Public applied for
6,000 shares.
Public
underwriter agrees to take up a specified
number of shares irrespective of the number
of shares subscribed for by the public.
The underwriter agrees to take up agreed
proportion of shares, not taken up by the
public.
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Company
20,000 Unmarked applications
50,000 Applications 50,000 Applications
Distributed in the ratio of gross
liability i.e. 1 : 1.
Net Liability15,000 shares 25,000 shares
(-)
(-)
(-)
(-)
Issue1,00,000 shares for which they appointed underwriters with equal underwriting
Company received Marked Application for SBI 25,000, HSBC 15,000 and Unmarked 20,000
25,000 Applications
(Marked)15,000 Applications
(Marked)
10,000 Applications
(Unmarked)10,000 Applications
(Unmarked)
'Marked' applications are those
applications which bear the stamp
of anunderwriter.
Unmarked' applications are those
applications which does not bear
the stamp of anunderwriter.
1.The distinctionbetween marked
and unmarked applications
becomes immaterial when
The whole issue is subscribed
by only one underwriter.
The issue is fully subscribed
2.When there is more than one
underwriter, the unmarked
applications are divided amongst
underwriters in the ratio of their
gross liability.
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Decided to issue1,00,000 sharesand
appointed an underwriter
100% issue is underwritten by
underwriter.
Decided to issue 1,00,000 shares and
appointed an underwriter
80% issue is
underwritten by
underwriter
20% is treated as
having underwritten
by company
100% issue
underwritten by
Underwriter
20%
Company 80%
Underwriters
Marked applications = Total number of
applications received x percentage of
underwriting.
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Underwriters A B C
Gross liability
Less: Marked applications (excluding
firm underwriting)
Less: Unmarked applications allotted in
the ratio of gross liability
Less: Firm underwriting
Net Liability as per agreement
Statement Showing the Liability of Underwriters
[Figures - No. of shares]
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Whatever may be the reason for insolvency, all companies going into for liquidation has to undergo
following steps....
Court receives petitionfrom Creditors
Court Appoints official
liquidators
Step 1
Board of Directors upon theorder of High Court, preparesStatement of Affairs & submitsthe same to Liquidator.
Liquidator takes the custody ofproperty
Step 2
Liquidator submits"Liquidator Statement ofAccounts"
Court orders dissolution.
Step 3
Liquidator is the person
who conducts the
dissolution of the company
Liquidator Statement of Accounts provides
the details of his receipts & payments during
the liquidation process.
Prepares Statement of Affairs which provides the details like -
1) The assets of the company2) Its debts and liabilities;
3) The names of its creditors, stating separately the amount of
secured and unsecured debts;
4) The debts due to the company.
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CA Anand R. Bhangariya 94220 26740 www.cavidya.com 3.3
Particulars
EstimatedRealisableValues (Rs)
Assets not specifically pledged (as per list 'A')
Balance at Bank
Cash in Hand
Marketable Securities
Bills Receivable
Trade Debtors
Loans and AdvancesUnpaid Calls
Stock-in-trade
Work-in-progress
Freehold Property, Land and Buildings . .
Leasehold Property
Plant and Machinery
Furniture, Fittings, Utensils, etcInvestments other than marketable securities
Livestock
Vehicles, etc.
Other property, viz.
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CA Anand R. Bhangariya 94220 26740 www.cavidya.com 3.4
*Assets specifically pledged (as per list B')
(a) EstimatedRealisable
Value
(b) Due toSecuredCreditors
(c)DeficiencyRanking asUnsecured
(d)Surpluscarried to
lastcolumn
(Rs) (Rs) (Rs) (Rs)
Estimated surplus from assets specifically pledged
Estimated total assets available for preferential creditors, debentureholders secured by a floating charge, and unsecured creditors** (carriedforward)
Summary of Gross Assets
Rs
(d) Rs.
Gross realisable value of assets specifically pledged
Other AssetsGross Assets (Rs)
Estimated total assets available for preferential creditors,debenture holders secured by a floating charge, andunsecured creditors** (brought forward).
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Liabilities Rs
(e) (to be deducted from surplus or added to deficiency as the case maybe.)
Gross
Liabilities
Secured creditors (as per List 'B') to the extent to which claims are
estimated to be covered by assets specifically pledgedPreferential creditors (as per List 'C')
Estimated balance of assets available for Debenture holders securedby a floating charge and unsecured creditors Rs
Debenture Holders secured by a floating charge (as per List 'D')
Estimated Surplus / Deficiency as regards Debenture Holders
Unsecured Creditors (as per List 'E')
Estimated unsecured balance of claims of creditors partly secured
on specific assets, brought from preceding page(c)
Trade Accounts
Bills Payable
Outstanding Expenses
Contingent Liabilities (state nature)
Estimated Surplus / Deficiency as regards Creditors
Issued and Called-up Capital:
... preference shares of... each... called-up (as per List 'F')
... equity shares of... each... called-up (as per List G)
Estimated Surplus/Deficiency as regards Members** (as per List 'H')
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CA Anand R. Bhangariya 94220 26740 www.cavidya.com 3.7
Liability in respect of bills discounted by the company is contingent, any amount expected to be
paid in respect of bills discounted should be included in List E. This applies to all contingent
liabilities. Bills payable are creditors and hence should be included in the appropriate list according to the
securities held by the holders of the bills. Generally Bills payable are unsecured and hence
included in unsecured creditors (list E).
Debentures should be assumed to have a floating chare, 3 if nothing is mentioned regarding the
security held by the debenture-holders (List D).
Unclaimed dividends should be included in unsecured creditors.
Uncalled capital should not be treated as an asset but calls in arrears should be treated as an
asset (List A).
Personal guarantees by directors are not considered as security.
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As per section 530, there are in totality 7 dues which has to be paid first in case of liquidation
which are as follows.
i. All revenues, taxes, cesses and rates due to Central Government or State Government or local
authorities. The amount should have become due and payable within 12 months before the winding
up order.
ii. Wages or salaries of an employee for four months. The wages or salary for four months must be due
within 12 months next preceding to relevant date. The amount shall not exceed such sum as may be
notified by the Central Government (presently Rs 20,000) for any one claimant.iii. Accrued holiday remuneration which has become payable to an employee or in case of his death to
any other person.
iv. All amounts due in respect of contributions payable by the company as employer under any law.
However, this is not payable if the company is being voluntarily wound up for reconstruction or
amalgamation.
v. Compensation payable under the Workmen's Compensation Act, 1923 in respect of the death or
disablement of any officer or employee of the company.
vi. All sums due to any employee from the Provident Fund, Pension Fund, Gratuity Fund or any fund for
the welfare of the employee including any contribution due to the fund, and
vii. Any expenses of investigation held in pursuance of Section 235 and 237 and appointed as payable by
the company.
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However, even within these 7 dues, company has to first settle down the dues related to the
Workmen.
However, regular Secured Creditors of the company dontfind any place in Section 530
Secured CreditorWorkman
Amount Due is Rs. 1,00,000 Amount Due is Rs. 4,00,000
1,00,000 + 4,00,000 = 5,00,000
Realisable value of security
given to Secured Creditors
Rs. 3,00,000
Question is who will get thepayment first?
Workers because they are preferential creditorsas per section 530 or Secured Creditors because
they have security???
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Secured CreditorWorkman
Amount Due is Rs. 1,00,000 Amount Due is Rs. 4,00,000
1,00,000 + 4,00,000 = 5,00,000
Realisable value of security
given to Secured CreditorsRs. 3,00,000
Realisable value of
Security
Rs. 3,00,000
3,00,000 1/5 = 60,000
3,00,000 4/5 = 2,40,000
As per Section 529 A ,Workman & Secured Creditors are
treated as Overriding Preferential Payments i.e. they
have preference over other preferential creditors.
Balance unpaid amount of workmen (1,00,000-60,000) Rs. 40,000
Short amount paid to secured creditors due to sharing of workmen Rs. 60,000
Total Rs. 1, 00,000
Overriding Preferential Payment
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The liquidator must present an account of his receipts and payments at
least twice a year as long as he is in the office to
The court
(in case of compulsory winding up)
The Registrar
(in case of voluntary winding up)
Order of Payment :-
1) Workmen's dues and claims of the secured
creditors as mentioned in Section 529A
2) Overriding preferential payments
3) Legal charges,
4) Liquidator's remuneration
5) Cost of expenses of winding up, Section 530 (6)
6) Preferential creditors, Section 530 (1)
7) Creditors secured by floating charge
8) Unsecured creditors.
9) Preferential shareholders
10) Equity shareholders.
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CA Anand R. Bhangariya 94220 26740 www.cavidya.com 3.13
Receipts Rs. Payments Rs.
To Cash and Bank Balances By legal charges
To Realisation of Assets (individually) By Liquidatorsremuneration
To Surplus from secured creditors % on amounts distributed
To Calls in arrears realized % on realisation
To Calls on contributories realised % on amounts paid to shareholders
By Cost of winding up
By Debenture holders creditors(having a floating charge) +outstanding interest
By Preferential
By Unsecured creditors
By Payment to contributoriesPreference shareholders +Arrear dividends
By Equity shareholders
Total Total
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Balance Sheet (Extract) of Insolvent Ltd.
Particulars Rs.
Land & Building 5,00,000Furniture 2,00,000
Stock 1,50,000
Cash in hand 25,000
Cash at bank 45,000
Loan from bank
(secured by pledge of stock) 1,00,000
a) Liquidator is entitled to remuneration @
5% of the amount of asset realised by
him.
Particulars Rs.
Nil
Land & Building
Furniture
Stock [1,50,000 1,00,000
Cash in hand
Cash at bank
5,00,000
2,00,000
50,000
[It is assumed that secured creditorsthemselves realize the asset. Hence,
liquidator is eligible for remuneration
only on surplus]
Not entitled to get any
commission on cash &
bank balance
Total 7,50,0005% remuneration 37,500
If the amount available is insufficient to pay
unsecured creditors fully, the commission
due to the liquidator is calculated as per the
following formula
Commission =
100+
.
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Liquidated on 30-09-2011
Solvent Insolvent
Insolvent Ltd.
Outstanding 12%
debenture of Rs.
5,00,000Liquidator repays debentureholders on
31-12-2011
Interest is payable upto the
date of actual payment loan
01-04-2011 to 31-12-2011
i.e. 5,00,000 X 12/100 X 9/12= 45,000
Interest is payable upto the
date of liquidation
01-04-2011 to 30-09-2011
i.e. 5,00,000 X 12/100 X 6/12= 30,000
Rule is applicable for all the
debts
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Particulars Rs.
Particulars Rs.
Particulars Rs. Particulars Rs.
Equity share capital
Preference share capital
Pref. dividend (payable) :
2008-09
2009-10
2010-11
1,00,000
1,00,000
1,00,000
10,00,000
35,00,000
50,00,000Cash
If not declared by company, treated as Arrears
If declared by company in GM, treated as Debt.
Debt
50,00,000
3,00,000
47,00,000
Cash = 50,00,000
(-) 10,00,000
40,00,000
Equity =
Preference shares =(-) 35,00,000
5,00,000
Dividend on PS (-) 3,00,000
2,00,000
Cash
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Liabilities Rs.
Share Capital, Authorised and Subscribed:
5,000 6% Preference Shares of Rs.100 each fully paid 5,00,000*2,500 Equity Shares of Rs. 100 each Rs. 75 paid up 1,87,500
7,500 Equity Shares of Rs. 100 each Rs. 60 paid up 4,50,000
Deficit = 56,750
Liabilities Rs.
Total equity capital paid up (Rs 4,50,000 + 1,87,500)Add: Deficit (Given)
Loss to be borne by 10,000 equity shareholders
Loss per share Rs 6,94,250 10,000
Amount of call for 7,500 equity shares of Rs. 100 each Rs. 60 paid (69.42 - 60)
Total Amount collected (7,500 shares x Rs. 9.425)
Amount of refund for 2,500 equity shares of Rs. 100 each Rs. 75 paid
(75 69.425)
Total amount refunded (2,500 shares x Rs. 5.575)
6,37,50056,750
6,94,250
69.425
9.425
70687.5
5.575
13937.5
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Liability Of ' B' List Of Contributors
List A List B
The 'A' list contains the names of persons
who are membersfor a period of one
year prior to the date of winding up.
The 'B' list contains the name of persons
who were members with a period of one
year prior to the date of winding up.
In case present shareholders (List A) fail to pay, money shall be called from the past shareholders (List
B) subject to certain conditions.
1) A past member holding partly paid shares who has ceased to be a member for one year or
upwards before the commencement of the winding up shall not be liable to contribute. Only
those members who have ceased to be members within one year before the commencement of
winding up may be called upon to contribute. Such contributories are called 'B' listcontributories.
2) A 'B' list contributory will be liable to pay only for those creditors or debts which were
contracted before he ceased to be member.
3) 'B' list contributory will be liable only if present member is unable to make payment.
4) Maximum amount which may be called from him will be the amount unpaid on his shares.
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A A b NPA h i i
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Nature
Term loan Overdraft / cash credit Agriculture
advances
Interest or Instalment
of principal has
remained overdue for
a period exceeding
90 days.
Mr. Sam Mr. John Mr. Ramesh Farmer
An Asset becomes NPA when it ceases to generate income.
Bill purchased and
discounted
Took loan of Rs. 25 lakhs
Due date = 31.12.2011
Bank dont receiveany amount towards
Installment till
31.3.2012
Difference of 90 days
The account has
remained out-of-
order for a period
exceeding 90 days
The bill remains
overdue for a period
exceeding 90 days.
The instalment of
principal or interest
thereon remainsoverdue-
Short Duration Crops
Two Crop Seasons
Long Duration Crops-
One Crop Seasons
Overdraft = 1,00,000
Date of withdrawal =
31-12-2011
If Mr. John do not pay
any amount in the bank
then the account is
treated as Out of
Order
Out of order for
90 days
discounted bills of
exchange
Drawee dishonoured
the bill on due date
i.e. 31-12-2011
The bill remains
overdueup to
31.3.2012
Difference of 90 days
took agriculture
advance for short
duration crop.
He does not repay
any amount for aperiod of two crop
season then it is
treated as NPA
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Standard Assets Sub-standard Assets Doubtful Assets Loss Assets
Asset which do not
pose any problems
and which do not
carry more than
normal risk
attatched to the
business. They arenot NPAs.
Assets which have
remained an NPA
for a period not
exceeding 12
months.
An asset classified
as doubtful if it
remained in the
sub-standard
category for 12
months.
Asset, where loss has
been identified by
the bank or internal
/ External Auditors
or by the RBI
Inspection.
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 4.3
Term Loan taken on 31stJan. 2006
Maturity on 30thJune 2006
Upto 1stOct. 2006 Term loan will be treated as NPA
From 1stOct. 2006 to 30thSept. 2007Substandard Asset
After 1stOct. 2007Doubtful Asset
Customer do not repay the loan
till 30thSept. 2006 i.e. default
continues for 90 days after
maturity.
If Auditor stamps doubtful
asset as a bad, then it is Loss
Asset.
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Particulars Rs. Rs.Balance Outstanding XXXX
Less: Realisable Value of Security XXXX
Unsecured Portion XXXX
Less: Extent of ECGC Cover
Net Unsecured Portion
XXXX
XXXXProvisioning Required:
1. For net Unsecured Portion (100% x Net Unsecured Portion)
2. For Secured Portion of Advance (Amount x Appropriate %)
XXXX
XXXX
Total Provision Required XXXX
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 4.5
Security
Realisable value
= 20 lakhs
Loan Rs.
70,00,000
Gives guarantee to the extent of 40%.
Particulars Rs.
Term loan
(-) Security (Building)
(-) ECGC (50,00,00 X 40%)
Unsecured portion
70,00,000
20,00,000
50,00,000
20,00,000
30,00,000
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Ram discounts bill with bank of amount Rs.
10,000 for 3 months @ 5% on 01.03.2011
Discount of Rs. 125 10,000 3
5% is Income for Bank
which they credited to its Revenue Account.
As per
accrual
concept
Mr. Ram
1stMarch 2011 31th
May 201131stMarch 2011
Discount of Rs. 41.67
(125 3)
Discount of Rs. 83.33
(125 3)
F. Y.2010-2011 F. Y.2011-2012
This unearned discount of Rs.83 which belongs to next F.Y. is
called as Rebate on Bill Discounted.
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 4.6
Rebate on bills
discounted refers to
theunearned
discount on those bills
that will mature after
the date of closing of
accounts or that
portion of the discount
which relates to the
period falling afterthe close of the year.
Unearned interest = bill value
X discount rate X (No. of daysto maturity on balance sheet
date / 365 days)
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CA Anand R. Bhangariya 94220 26740 www.cavidya.com 4.7
No Particulars L.F. Debit Credit
1.For discounting of bill by customer and recording the discount
income:
Bill Discounted A/c Dr.
To Customers A/c (at Present Value)
To Discount on Bills A/c (Balancing figure=Income of the Bank)
2. For transfer of unearned discount to Rebate on Bills Discounted:
Discount on Bill A/c Dr.
To Rebate on Bills Discounted A/c (at Unearned Discount)
3.For transfer of Opening Balance of unearned interest to Interest
and Discount for the year:
Rebate on Bills Discounted A/c Dr.To Discount on Bills A/c
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=
+
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 4.8
Mr. Ram Mr. Mohan
banks are required to
maintain capital adequacy
ratio of 9%.
1,000 X 9% = Rs. 90
Ti I i l i i l d dil il bl h i f i i
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TierI capital is permanent capital and are readily available at the time of crisis.
TierII capitalis less permanent and are less readily available.
Computation of TierI Capital Rs. Rs.
Paid up Equity Share Capital50 crore shares of Rs. 10 each XXX
Add: (i) Statutory Reserve XXX
(ii) Share Premium XXX
(iii) Other free reserves XXX
(iv) Capital Reserve arising out of surplus from sale of assets XXX XXX
XXX
Less: (i) Equity Investment in Subsidiaries XXX
(ii) Intangible Assets XXX
(iii) Current and brought forward losses XXX XXX
XXX
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 4.9
Any deferred revenue expenditure related to Voluntary Retirement Scheme (VRS) would not be
deducted from TierI capital
Computation of TierII Capital Rs. Rs.
(ii) Cumulative perpetual preference shares XXX
(iii) Revaluation reserve at a discount of 55% XXX
(iv) Contingency and Loss Reserves XXX
XXX
TierII capital is limited to maximum of 100% of TierI capital.
C i f Off B l Sh I
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CA Anand R. Bhangariya 94220 26740 www.cavidya.com 5.10
No Asset % Weight to Book Value
I Cash and Balance with RBI 0
II Balances with banks
Money at call and short notice
0
0
III
Investmentsa. Government and other approved securities
b. Others
0
100
IV Advances
Bills purchased and discounted and other credit facilities
a. Claims guaranteed by Government of India
b. Claims guaranteed by State of Government
c. Claims on Public sector undertakings
d. Others
0
0
100
100
V Fixed Assets (net of depreciation) 100
VI Other Assets
a. Advance income tax, TDS, Interest accrued on Government
securities and interest accrued on balance with RBI
b. Others
0
100
Acceptances, Endorsements, Other obligations, etc.
a. Guaranteed by Central / State Government
b. Others
0
100
Computation of Off Balance Sheet Items
Computation of Risk Weighted Assets
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Covers the risk on
account of
Fire Flood
Theft
Covers the risk on
account of
Accidental Death Death on account
of disease
CA Anand R. Bhangariya 94220 26740 www.cavidya.com
Insurance cover on property.
Insurable value determinable.
Policy cant be cancelled.
Claims is payable by insurance company in
the event of loss suffered by insured due
to a specialised cause.
Insurance cover on life of human
Insurable value determined by policy
holder.
Policy can be terminated.
Claims is payable either on death or on
expiry of stipulated period in the policy.
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Insurance policy
Term of policy
Sum Insured
The period for which an insurance policy is taken
is known as Term of the Policy.
The document which
contains all the term
& conditions of
insurance & risk
covered.
Businessman
AgentInsurance Company
Insurance contract
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 5.3
Premium
Premiumis thepayment made by
the insured as
considerationfor
the grant of the
insurance.
The contract in which insurance company
undertakes to indemnify the insuredon the
happening of certain event in considerationof a specified amount.
The amount for which the insurance policy is takenis called as Sum Insured
Agents Balance: It has a Credit balance. It also include the premium collected by
them from the policyholders. It has a Debit balance.
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Businessman LIC
Taken insurance on his life.
Term of policy = 10 years
Claim is payable in
case of
DeathMaturity of
policy
OR
Car
Taken insurance on vehicle.
Term of policy 1 yr.
(Every year needs renewal)
Claim arises only when the loss occurs or
the liability arises.
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 5.4
The surrender value under an Insurance Policy is the value of the insured is eligible to receive on closure or
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Mr. X
1-1-2011 31-12-202031-12-2015
Mr. X taken Insurance policy of Rs. 10 Lakhs for 10 years on 1-1-2011
LIC
Premium paid
for 5 years
Could not pay
premium decided to
discontinuethe
policy. The amount paid on discontinue of
the policy is called Surrender value.
CA Anand R. Bhangariya 94220 26740 www.cavidya.com
The surrender value under an Insurance Policy is the value of the insured is eligible to receive on closure or
surrender of a life insurance before its claim falls due.
Could not pay
premium but
decided to continue
the policy.
Paid Up Value = Sum Assured x
(No. of Premium Paid Total
Number of Premium Payable)
Paid Up Value = 10,00,000 5
= 5,00,000.
Paid up policy is the policy converted in case the insured is unable to continue paying premiums on his life
policy, and discontinues the payment.
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Mr. X Mr. Y
CA Anand R. Bhangariya 94220 26740 www.cavidya.com
LIC
Taken Life Insurance policy Rs. 10 Lakhs each.
Company earned profit of Rs. 2.5 Crores.
On Maturity
Mr. X Mr. Y
Policy Amount 10,00,000 10,00,000Share in profit 10,000
Bonus is the share of policy holders in the surplus balance in Life Fund.
With profit policy:-Under this policy, a policy holder is entitled to participate in profits of life insurance
company in addition to fixed sum payable on maturity.
Without profit policy:-Under this policy the insured is not entitled to share profit of life insurancecompany. The insured receives only fixed sum of money on maturity. The premium on this policy is
comparatively less than in the case of with profit policies.
The bonus can be distributed either in cash or by reduction in the future premium or may be distributed
upon maturity of the policy.
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1-1-2011 31-12-203031-12-2025
Mr. X has taken policy of 15 years on 1-1-2011.
15 Premiums
On attaining the age of 45, insurance company will
pay fixed annual payment to Mr. X till death.
Death
Fixed annualpayment (Annuity)
CA Anand R. Bhangariya 94220 26740 www.cavidya.com
Mr. XLIC
Insurance Company guarantees to pay money regularly as long as one lives, in consideration of
lump sum money received from the insured.
The payment of annuity depends upon the age of annuitant and the prevailing rate of interest.
The annual (or regular) payment is called annuity and the lump sum money received is called
"Consideration for annuities granted".
Annuity paid represents an expenditure of the life insurance business and consideration received
for annuities is an item of income.
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Bajaj Allianz GeneralInsurance Company
Insured
From Bajaj
Allianz point
of view,
Insurance isCeded.
From TATA
AIG point of
view,
Insurance isAccepted.
CA Anand R. Bhangariya 94220 26740 www.cavidya.com
Insured approachesBajaj Allianz forInsurance Cover
Bajaj Allianz contactsTATA AIG to cover
itself against largerrisk.
First Insured will paypremium to Bajaj
Allianz
Bajaj Allianz willtransfer the premium
to TATA AIG for riskundertaken
TATA AIG will paycommission to BajajAllianz for business
received
On the happening ofuncertain event
covered under policy
Bajaj Allianz will paythe claims to the
insured.
TATA AIG will repaythe amount of claim
to Bajaj Allianz
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Particulars Rs.
Total claims paid on direct business (Including all incidental expenses incurred
in settlement of claims)
Add: Claims on reinsurance accepted
Claims o/s at the end of the year
Less: Claims paid on reinsurance ceded
Claims o/s paid for last year
Transfer to revenue a/c
Claims Less Reinsurance:
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Mr. X
Mr. X insured his Car on 1-1-2011 for a period
of 1 year.
Policy is taken for one year.i.e. Risk is for one year
1-1-2011 31-12-201131-3-2011
financial year ends On 31-3-2011 company has to make provision for
unexpired risk for the next financial year.
Marine Hull Insurance100% of Net Premium
Fire, Marine Cargo and Miscellaneous Business50% of Net Premium
This is the voluntary reserve and
company will decide its percentage
on net premium.
If company feels that reserves is not sufficient to meet
claims to the date of closing of the financial year, they
may build up additional reserves for unexpired risks.
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CA Anand R. Bhangariya 94220 26740 www.cavidya.com
Form Financial Statement Schedule
No. Name
B - RA Revenue A/c 1 Premiums earnednet
2 Claims Incurred (Net)3 Commission
4 Operating Expenses related to Insurance Business
B - PL Profit and Loss A/c - -
B - BS Balance Sheet 5 Share Capital
6 Reserves and Surplus
7 Borrowings
8 Investments
9 Loans
10 Fixed Assets
11 Cash and Bank Balances
12 Advances and Other Assets
13 Current Liabilities
14 Provisions
15 Miscellaneous Expenditure
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This represents the excess of revenue receipts over revenue expenditure relating to life insurance
business.
The fund is available to meet the aggregate liability on all policies outstanding.
Revenue account is prepared every year to ascertain the balance of life insurance fund at the end ofthe year.
Closing Balance of Life Insurance Fund:
Particulars Amount
Opening balance
Add : Revenue Income
Less : Revenue Expenses
Closing balance
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a) The balance in the life assurance fund can not be taken as the profit made by the life insurance
business.
b) For the purpose of ascertaining the profit insurance company has to calculate its net liability on all
outstanding policies.
c) For calculating net liability, the actuaries calculate the present value of liability on all the policies in forceas well as present value of future premium to be received on policies in force.
d) The excess of the present value of future liability over the present value of future premium is called the
net liability.
e) If the life insurance fund is more than the net liability, the difference represents the profit.
f) On the other hand, the excess of net liability over the life assurance fund represents the loss for the
inter-valuation period.
g) 95 % of the profit of life business must be distributed to the policy holders by way of "Bonus ", on withprofit policies and the remaining 5 % has to the utilised for such purpose as the Government may
determine.
h) The profit or loss to the life insurance business is ascertained by preparing a statement called "Valuation
Balance Sheet.
CA Anand R. Bhangariya 94220 26740 www.cavidya.com
Valuation Balance Sheet As on
Particulars Amount Particulars Amount
XXX XXX
XXX XXX
XXX XXX
To Net Liability as per Actuarial
Valuation
To Surplus (Net Profit)
By Life Assurance Fund as per
Balance Sheet
By Deficiency (Net Loss)
Total Total
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Particulars Rs.
XXX
XXXXXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Profit as per Valuation Balance Sheet
Add: Interim Bonus paid
Less: Loss on sale of Investments
Less: Provision for taxation
Profit made during the Year
Add: Balance Brought Forward
Total Profit
Less: Transfer to Fund
Available for Distribution
Distribution to Shareholders (@ 5%)
Distribution to Policyholders (@ 95%)
Less: Interim Bonus paid
Amount due to policyholders
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CA Anand R. Bhangariya 94220 26740 www.cavidya.com
Form Financial Statement Schedule
No. Name
A - RA Revenue A/c 1 Premiums earnednet
2 Commission3 Operating Expenses related to Insurance Business
4 Benefits Paid (Net)
A - PL Profit and Loss A/c - -
A - BS Balance Sheet 5 Share Capital
6 Reserves and Surplus
7 Borrowings
8 Investments
9 Loans
10 Fixed Assets
11 Cash and Bank Balances
12 Advances and Other Assets
13 Current Liabilities
14 Provisions
15 Miscellaneous Expenditure
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Double Account System is a special method of presenting the Final accounts rather than a special
system of keeping accounts. The main objective of this system is to disclose how much capital has
been raised and how much capital has been utilised in the acquisition of assets.
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 6.2
Amount spent for Extension as well as
Repairs jointly
Particulars Rs.
Amount equal to the present cost of
replacement of the old asset
XXX
LessSale proceeds of scrap of the old
aset
XXX
LessValue of materials of old asset
used in rebuilding the new asset
XXX
Charged to Revenue XXX
Particulars Rs.
Total cost of replacement XXX
AddValue of materials of old asset used
in rebuilding the new assetXXX
Less present cost of replacement of the
old assetXXX
Capitalised XXX
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CA Anand R. Bhangariya 94220 26740 www.cavidya.com 6.3
No Particulars L.F. Debit Credit
1. For Cash Expenses incurred
New Main A/c Dr.Replacement A/c Dr.
To Bank A/c
2. For use of old materials in new construction
New Main A/c Dr.
To Replacement A/c
3. For sale of old materials
Bank A/c Dr.
To Replacement A/c
4. For closing replacement account
Revenue A/c Dr.
To Replacement A/c
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1. Contingency Reserve:
A sum equal to not less than 1/4 % and not more 1/2 % of the original cost of fixed assets must be
transferred from the Revenue Account to Contigency Reserve until it equals 5 % of the original cost of
fixed assets. The amount of the reserve is required to be kept invested in trust securities.
The balance in reserve can be utilised with the approval of the State Government for the followingpurposes:
a) To meet expenses or loss of profits arising out of accidents, strikes or circumstances beyond the
control of the management;
b) To meet expenses on replacement or removal of plant or works other than the expenses necessary
for normal maintenance or renewal; and
c) to pay compensation payable under law for which no other provision has been made.
2. Consumer Rebate reserve: This reserve is used for reduction in rates or otherwise return to the
consumers.
3. Tariffs and Dividend control reserve: This can be utilised whenever the clear profit is less than the
reasonable return. This is like Dividend Equalisation Reserve.
4. General Reserve:
a) Section 67 of the Act, lays down that after interest and depreciation have been provided, a
contribution to general reserve shall be made at the rate not exceeding 1/2% of the original cost
of the fixed assets until the total of such reserve come to 8 % of the original cost of the Assets.
b) This applies only to the Electricity Boards though there is nothing to stop electricity companies
from building up reserves.
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The Electricity (Supply) Act, 1948 provides that an electricity company can not charge any rates as they
like.
They are entitled to charge such rates which gives them a reasonable return.
They must so adjust the rate that the amount of clear profit in any year does not exceed thereasonable return by more than 20%.
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 6.5
1) Objective:
The law seeks to prevent an Electricity Company from earning very high profit,. For the purpose,concept of Reasonable Return has been propounded. Reasonable Return is the normal which a
Electricity Company can e expected to earn.
2) Standard Rate:
Standard Rate is determined for the purpose of determining yield on the Capital Base in
computation of Reasonable Return. Standard Rate = Reserve Bank of India Rate + 2%
3) Computation of Reasonable Return
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a) The original cost of fixed assets available for use and necessary for the purpose of the
undertaking less contribution, if any, made by the consumers for construction of service
lines.
b) The cost of intangible assets.
c) The original cost of works in progress.
d) The amount of investments made compulsorily against Contingency Reserve;
e) The monthly average of stores, materials, supplies and cash and bank balances. [Monthly
average of Current Assets, excluding amount due from Consumer].
Less:i. Depreciation on tangible assets and amounts written off from intangible assets.
ii. Loans advanced by the Board;
iii. Loans from approved institutions
iv. Debentures
v. Security deposits of consumers held in cash
vi. The amount standing to the credit of the Tariff and Dividends Control Reservevii. The amount set apart for the Development Reserve and
viii. Balance in consumer Rebate/ Benefit Reserve.
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1) Meaning: Clear Profit is the difference between the amount of income and the sum of
expenditure including specific appropriations. It is the net Profit of the Company.
2) Computation of Clear Profit:
Particulars Rs Particulars Rs
To Losses brought forward from
previous year
By Net Profit after usual working
charges and interest.
To Income Tax
To Intangible asset written off
To Contribution to Contingency Reserve
To Arrears of Depreciation
To Development Reserve
To Other appropriations permitted by:
State Government.
To Balance beingCLEAR PROFIT
Total Total
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Disposal of Surplus
20% of Reasonable Return Balance (D)
Consumer Rebate Reserve
Electricity Company (A) Least of thefollowing:
1/3rd of 20% of Reasonable Return
5% of reasonable return
Balance
(B) = 50% of Balance
50% Transfer to Tariff and
Dividend Control Reserve
(C) = 50% of Balance
50% Transfer to Consumer
Control Rebate Reserve
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 6.9
Surplusis the difference between the Clear Profit and the Reasonable Return.
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Dissolution of Partnership Dissolution of Firm
Change in existing relationship between the
partners.
Firm continues its business as before
It may take place in following ways.
a) Change in existing PSR among partners
b) Admission of new partnerc) Retirement of a Partner.
d) Death of a Partner
e) Insolvency of a Partner
f) Completion of the venture if partnership is
formed for that
g) Expiry of the period of partnership, if it is
for the specific period of the time.
According to Section 39 of the
partnership Act 1932, the dissolution of
partnership between all the partners of a
firm is called the Dissolution of The Firm.
That means the Act recognises the
difference in the breaking of relationshipbetween all the partners of a firm and
between some of the partners;
Death of Partner
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Prepare BalanceSheet of the firm ason date ofdissolution.
Non cash assets areconverted into cash
Profit or loss on sale ofassets is transferred toRealisation account.
Balance in Realisationaccount is transferred toCapital account.
Available cash isdistributed to creditors& partners.
Last StepFirst Step
Second Step
Object of Realisation Account
Whatever may be the reason for dissolving the partnership, the accounts have to be closed. A
special account called Realisation Account is used to record the closing transactions, showing net
gain or loss that has resulted from the realisation of assets & settlement of liabilities.
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No Particulars L.F. Debit Credit
(a) Transfer of recorded Assets to Realisation A/c
Realisation A/c (With the total) Dr.
To Sundry Assets A/c (With their individual book values)
(b) Transfer of Liabilities, Provisions to Realisation A/c
Liabilities A/c (With their individual book figures) Dr.
Provision for Doubtful Debt A/c Dr.
Provision for Depreciation A/c Dr.
To Realisation A/c (with the total)
(c) Realisation all Assets (whether recorded or unrecorded)
1. When assets are sold for cash
Cash/ Bank A/c Dr.
To Realisation A/c
2. Assets are taken away by partner
Partners Capital A/c Dr.
To Realisation A/c
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No Particulars L.F. Debit Credit
3. Assets are given away to any of the creditors towards the
full/partial payment of his dues.
No Journal Entry may be passed
(d) Discharge of outsiders Liabilities (whether recorded or
unrecorded)
1. When Liabilities are discharged in cash
Realisation A/c Dr.
To Cash / Bank A/c
2. Partner agreeing to discharge a liability
Realisation A/c Dr.
To Respective Partners Capital A/c
(e) Payment of Realisation Expenses
1. When expenses are paid in cash
Realisation A/c Dr.
To Cash / Bank A/c
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No Particulars L.F. Debit Credit
2. When expenses are paid by partner
Realisation A/c Dr.
To Partners Capital A/c
3. When any of the partners agrees to do dissolution work for
an agreed remuneration
Realisation A/c Dr.
To Concerned PartnersCapital A/c
4. When expenses are paid by a partner who has to bear such
expenses
No Entry
5. When exps. are paid by the firm on behalf of a partner who
has to bear such expenses
Concerned Partners Capital A/c Dr.
To Cash/ Bank A/c
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No Particulars L.F. Debit Credit
(f) Transfer of Profit in PSR on Realisation
Realisation A/c Dr.
To All Partners Capital A/cs
(g) Transfer of Loss in PSR on Realisation Dr.
All Partners capital A/cs
To Realisation A/c
(h) Payment of Partner Loan/ Advances
Partners Loan/ Advance A/c Dr.
To Capital A/c (Only to the extent of Dr. Balance in capital A/c)
To Cash A/c (with the Balance)
(i) Transfer of Accumulated Profit in PSR
Profit & Loss A/c Dr.
General Reserve A/c Dr.
To All PartnersCapital A/c
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No Particulars L.F. Debit Credit
(j) Transfer of Accumulated Losses in PSR
All PartnersCapital A/c Dr.
To Profit & Loss A/c
To Deferred Revenue Expenditure A/c
(k) Transfer of the Balance in Current Account(s)
1. In case of debit balance in a Current Account of a partner
Concerned PartnersCapital A/c Dr.To concerned PartnersCurrent A/c
2. In case of credit balance in a Current Account of a Partner
Concerned PartnersCurrent A/c Dr.
To concerned PartnersCapital A/c
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No Particulars L.F. Debit Credit
(l) Payment to/by a Partner
1. In case of payment by a partner having a debit balance in
his Capital A/cCash /Bank A/c Dr.
To Concerned PartnersCapital A/c
2. Payment to a partner having a credit balance in his Capital
A/c
Concerned partnersCapital A/c Dr.
To Cash/ Bank A/c
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The treatment of goodwill in case of dissolution of a firm may be summarized as follows:
No. Particulars If Goodwill is Already
appearing in the Books
If Goodwill is not Appearing in
the Books
(a) On Transfer to Realisation A/c Dr. The question of transfer
Realisation A/c To Goodwill A/c does not arise at all
(b) On sale for cash Cash/ Bank A/c Dr. Cash/Bank A/c
To Realisation A/c To Realisation A/c
(c) On being taken over Concerned Partners Capital A/c
Dr.
Concerned Partners Capital A/c
Dr.
By any of the partners To Realisation A/c To Realisation A/c
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Particulars Rs.
Debtors 3,50,000
Less: Provision for bad debts 50,000
3,00,000
Trial Balance
Realisation A/c
Debtors 3,00,000
Realisation A/c
Debtors 3,50,000 Provision 50,000
1) An Asset against which a provision or reserve has been created, should be transferred at its
gross figure and not at its net figure e.g. Debtors
2) Provision/Reserve against an asset is a separate account and thus, it should be transferred toRealisation Account separately like other liabilities, e.g. Provision for Doubtful Debts A/c,
Machinery Replacement Reserve
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Particulars Rs.
Creditors 5,00,000
Provision for discount on creditors 1,00,000
Trial Balance
Realisation A/c
Creditors 4,00,000
(5,00,0001,00,000)
Realisation A/c
Provis. 1,00,000 Creditors 5,00,000
1) Provision /Reserve against a liability is a separate account and thus, it should be transferred to
Realisation A/c separately like other assets, e.g. Provisions for Discount on Creditors.
2) A liability against which a provision or reserve has been created, should be transferred at its
gross figure and not at its net figure, e.g., Creditors.
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Particulars Rs.
Bank balance 2,00,000
Trial Balance
Realisation A/c
Bank 2,00,000Cash & bank is never realized but same is
distributed in its present form.
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Particulars Rs.
Assets Realised 1,00,000
Loan from Relatives of the partners 30,000
Creditors 20,000
Partners Loan 40,000
Trial Balance
Realisation A/c
To Bank
Partners Loan 40,000
Realisation A/c
By Bank 1,00,000
Creditors 20,000
Loan frm. Rel. 30,000
By Bank 1,00,000 To Bank
Partners Loan 40,000
Creditors 20,000
Loan frm. Rel. 30,000At par
Loan from relative of partner = external liability = at par with the creditors
Loan from partner = payment is made after paying creditors, but before repayment of capital
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When all Partners are
Solvent
Different Ways of Dissolution
Not all but some of the
partners are solvent
When all partners are
Insolvent
When all partners solvent, before balancing capital account of partners, the loan from any
partner is to be paid first. And if any partner has taken any loan from firm, he has to bring
necessary cash in to the business.
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) A h i f di l i f hi fi h i l f h
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a) At the time of dissolution of a partnership firm, the capital account of a partner may show a
debit balance after his share of any profit or loss on realisation has been included in his account.
But if he cannot make good the whole or part of a deficiency, then what should be done?
b) This deficiency must be shared by all the solvent partners.
In their profit sharing ratio (like
any business loss)
Ratio to share deficiency by
Solvent partners
In the ratio of their last agreed capitals.
(This issue was upheld in the case of
Garner Vs. Murray.)
No. Case Meaning of Last Agreed Capital
a) In Case of Fixed Capitals Last Agreed Capital means the Fixed Capital (given in the Balance
Sheet) without any adjustment.
b) In Case of FluctuatingCapitals
Last Agreed Capital Means the Capital after making adjustmentsfor past accumulated reserves, profits or losses, drawings,
interest on capitals, interest on drawings, remuneration to a
partner etc. to the date of dissolution but before making
adjustment for profit or loss on realisation.
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When all the partners are insolvent and the the assets of the firm are inadequate to meet thefirms liabilities, the firm is said to be insolvent.
In case of insolvency of firm, the creditors ofthe firm cannot be paid in full. The availablecash with the firm is first used to payrealisation expenses
The balance amount is paid to creditorsproportionately. Any balance remainingunpaid to them represent their sacrifice onaccount of insolvency of partners.
In order to close the acounts of firm, Realisation account is prepared in the usual manner.
However if loss on realisation is to bedetermined before considering the amountultimately paid to creditors, the creditors arenot transferred to Realisation account.
if loss on realisation is to be determined afterconsidering the amount ultimately paid tocreditors, the creditors are transferred toRealisation account.
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1 Till ll th ti l ti t di l ti (i ti f l f t ) b d
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1. Till now, all the questions relating to dissolution (ireespective of solvency of partners) are based
on the assumptions that all the assets are reallised & all the liabilities are setteled together
before the partners are paid off.
2. In actual practice, it may not be possible to realise all assets on the date of dissolution and paythe liabilities on that date. Assets are realised and cash collected gradually.
3. Cash available is applied in following order:
a) Realisation expenses
b) Outside Creditors
c) Partners Loan
d) Provision for Contingent Liability
e) Partners Capital.
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Capital of the partners are
in PSR
Distribution of Cash
Distribution of cash in
PSR
Capital of the partners are
not in PSR
Proportionate
Capital Method
Maximum loss
Method
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Amalgamating Firms
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Sun Associates Moon Associates
Decides to amalgamate and to form new partnership firm
Sun Moon Associates
Separate existence of Sun Associates and Moon Associates comes
to an end & a new firm Sun Moon Associates is formed.
Under amalgamation, two or more firms transfer their business to a new firm which isformed to take over such businesses.
Usually all the assets and liabilities are revalued in order to ascertain the true position as
on the date of amalgamation.
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N P i l L F D bi C di
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No Particulars L.F. Debit Credit
1 For Goodwill
the value of the goodwill will be ascertained in case of each firm
and amount will be credited to partners capital account in old PSR
Good will A/c Dr.
To partners capital A/c
2. For Reserves and other undistributed profits
Profit & Loss A/c Dr.
General Reserve A/c Dr.
To All Partners Capital A/c
3. For increase in value of assets or decrease in value of
liabilities
Assets /Liabilities A/c Dr.
To P & L Adjustment A/c
4. For decrease in value of assets or increase in value of
liabilities
P & L Adjustment A/c Dr.
To Assets /Liabilities A/c
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No Particulars L.F. Debit Credit
5. For profit on Revaluation
P & L Adjustment A/c Dr.
To partners capital A/c(For loss on revaluation entry will be reversed)
6. For an Assets taken over by a partner
Partners Capital A/c Dr.
To Asset A/c
7. For an Liabilities taken over by a partner
Liabilities A/c Dr.
To Respective Partners Capital A/c
8. For an Assets & Liabilities taken over by new firm
New Firm A/c Dr.
Liabilities Taken Over A/c Dr.
To Assets Taken Over A/c
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No Particulars L.F. Debit Credit
9. Assets/Liabilities no taken over the new firm will be either sold
away or paid off and any profit or loss on such selling or payment
will be transferred to Partners capital A/c in ratio of their capitals.
10. Transfer of partners Capital A/c
Partners Capital A/c Dr.
To New Firm A/c
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No Particulars L.F. Debit Credit
1. For an Assets & Liabilities taken over
Assets taken over A/c Dr.
To Partners Capital A/c
To Liabilities taken over
2. For any further contribution towards capital by the partners
Bank A/c Dr.
To Partners Capital A/c
3. For any capital withdrawn by the partners
Partners Capital A/c Dr.
To Bank A/c
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Sometimes the business of the Partnership Firm may be sold to a limited company.
Procedure regarding closing of the books of account of Partnership firm is the same
as in case of dissolution of a firm.
Tom & Jerry Associates
Sold its business to a
Disney Ltd.
Existence of Tom & Jerry Associates comes
to an end
i.e. nothing but dissolution
We are going to follow same accounting treatment that we have followed in
Dissolution of Firm
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Disney Ltd. Tom & Jerry Associates
Will pay Purchase Consideration to
For Assets & Liabilities taken over by it.
Purchase Consideration
When Lump sumfigure is given When Lump sumfigure is not given
PC = Lump Sum Figure
For Eg. The company took over
the firms business for a total
consideration of Rs. 1,05,000
Payment Method Net Asset Method
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To arrive at Purchase consideration all payments made by the company to the firm are added
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To arrive at Purchase consideration all payments made by the company to the firm are added
together. It is done as under :
Particulars Rs.
Cash PaidIssue price of Equity shares
Issue price of Preference shares
XXXXXX
XXX
Issue price of Debentures XXX
Total payment being the amount of Purchase consideration XXX
Example :- The purchase consideration was to be satisfied by a cash payment of Rs. 56,000, the
allotment of 8,000 equity shares of Rs. 10 each at 10% discount and the allotment of 2,000, 12%
preference shares of Rs. 10 each.
Solution :-
Particulars Rs.
Bank
Equity shares (8,000 X 9)
Preference shares (2,000 X 10)
56,000
72,000
20,000
Total payment being the amount of Purchase consideration 1,48,000
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 9.9
The value of net assets taken over by the company is the amount payable It is computed as follows
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The value of net assets taken over by the company is the amount payable. It is computed as follows
Particulars Rs.
Agreed value of the Individual Assets taken over
Less : Agreed value of Individual Liabilities taken over
Value of Net Assets Taken Over (Purchasing Consideration)
XXX
XXX
XXX
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l h d l f d b l f h f f ll
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Example : The agreed value of assets and Liabilities of partnership firm is as follows :
Land and Building Rs. 3,00,000; Plant Rs. 1,50,000; Sundry Debtors Rs. 47,500; Stock Rs.
1,40,000; Bills receivable50,000; Sundry CreditorsRs. 38,000 and Bills Payable80,000.
Solution :-
Particulars Rs.
Land and Building 3,00,000
Plants 1,50,000
Sundry Debtors 47,500
Stock 1,40,000Bills Receivable 50,000
Cash 1,00,000
Less : 38,000Sundry Creditors
80,000Bills Payable
6,69,500Total (Purchase consideration)
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Separate set of books are
kept for each department
All the departments are kept
together in columnar form
This method of
Acconting is
employed when
the size of the
organisation isvery large or As
per the law.
Each department
is regarded as a
separate unit and
Accounts are kept
independently.
At the year end the
trading results of all
the departments are
combined to get the
trading results of the
organisation as a
whole
A departmentdoes not maintain
a full double-entry
book-keeping
system of its own.
The central Accounts departmentgenerally maintains columnar
Purchase and Sales Day Book to
distinguish between the purchases
and sales of different departments.
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Allocation of direct expenses to each department is easy.
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But in case of common expenses like Rent, Electricity, Insurance allocation of these expenses is
difficult.
SI. Expenses Basis
1. (a) Travelling salesman's salary and commission
(b) Selling expenses
(d) Discount allowed
(e) Freight outwards
(f) Provision for discounts on debtors
(g) Sales manager's salary and other benefits
(c) After-sales service
Sales of each department (Excluding
inter-departmental transfers)
2. (a) Rent, rates and taxes
(b) Air conditioning expenses
(c) Heating
Area or value of floor space
3. Lighting Light points4. Insurance on Stock
5. Insurance on Building
6. Insurance on Plant & Machinery
Average stock carried
Area
Value of Plant & Machinery
Direct wages7. Group insurance premium
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SI Expenses Basis
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SI. Expenses Basis8. Power H.P. or H.P. x Hours worked
9. (a) Depreciation
(b) Repairs and renewalsValue of assets in each department
10. (a) Canteen expenses
(b) Workman Compensation Insurance
(c) Labour welfare expenses
Number of employees
11. Works manager's salary Time spent in each department
12. Carriage inwards Purchases of each department13. Expenses directly related to a particular
departmentCharged to respective department.
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Some material has been transferred from grocery section to
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Some material has been transferred from grocery section to
Fruits & Vegetables section.
Grocery Section Fruits & Vegetables
Section
Cost is Rs. 100.00 But transfer is
made at Rs. 125.00
i.e. it includes profit element of Grocery
Section @25% on cost
At the end of FY, Fruits & Vegetable section will value its closing stock at its cost price i.e. Rs.125.00 which is transfer price of Grocery section
Rs. 25 is unrealised profit which is equal to profit of grocery section. it is necessary to provide for
unrealised profit on stock held out of inter departmental transfer.
=
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 10.5
No Particulars L F Debit Credit
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Accounting entry:
No Particulars L.F. Debit Credit
1. For Unrealised profit on stock
Profit and Loss Account Dr.
To Stock Reserve Account
2.At the beginning of the next year reverse entry will be
passed.
Stock Reserve Account Dr.
To Profit and Loss Account
Balance Sheet
Liabilities Amount Assets Amount
Current Assets
Closing Stock
Less: Stock Reserve
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Definition :- The Companies (Amendment) Act 2000 has inserted a new
clause (15A) in section 2 of the Companies Act, 1956, which states that
Employee Stock Option means the option given to the whole time directors,
officers or employees of a company, which gives such directors, officers or
employees the benefit or right to purchase or subscribe at a future date , thesecurities offered by the company at a pre determined price
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 12.1
Proposal contains
1) Mr. Joy should work with the
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XYZ Co.Mr. Joy
(Director)Company put the proposal inMeeting to offer ESOP Mr. Joy
for approval.
company at least 5 years.
2) Mr. Joy should be able to grab
the Indonesia Project.
3) Mr. Joy should achieve his yearlytargets, as decided.
Grant Date
Grant
Vesting
Conditions
Mr. Joy is required to achieve
these conditions within a time
span of 6 years. i.e.(15.09.201115.09.2017)
15.09.201115.09.2018
Vesting Period
Expected Life
of an OptionExercise
Price
Exercise
Period
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S M J hi th diti i i
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Say, Mr. Joy achieves the conditions given in
proposal on 01.09.2017
Company offered Mr. Joy shares @ Rs.
150 but actual price of the shares in
the market at the time of exercise of
option is Rs. 100
Mr. Joy will not
exercise the option
If market price of the share at the time
of exercise of option is Rs. 500.
Will apply for the
shares
Its employees right to purchase the shares or not but its the obligation of the
company to sell the shares whatever may be the price of share.
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Ethical LtdOn 01.01.2011, gives offer to its
To purchase 1,000 shares each at future date between 01.01.2014 - 01.01.2015
at a predetermined price of Rs. 200 subject to fulfillment of conditions on or
before 01.01.2014.
On 01.01.2015, market price of
the shares is Rs. 500
i.e. market price is generally
lower than exercise price.
If employees want, they are free
to dispose of the shares subject to
lock-in-period if any.
Employees
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No Particulars L.F. Debit Credit
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1.
In respect of options granted during any accounting period, the
accounting value of the options shall be treated as another form
of employee compensation in the financial statement of the
company.The accounting value of the option = Number of options granted
* (Market PriceExercise Price)
Employee Compensation Expenses A/c Dr.
To Employee Stock Options Outstanding A/c
2. Stock option exercised by employees during exercise period
Bank A/c Dr.
Employee Stock Options Outstanding A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
3. Stock option lapsed on expiry of exercise period
Employee Stock Options Outstanding A/c Dr.
To General Reserve A/c
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4. Transfer of balance in Employee Compensation
Expenses A/c Dr.
Profit & Loss A/c Dr.
To Employee Compensation Expenses A/c
Magical Ltd.
(Listed Co.)
As a part of public offer, Company gives offer to Mr. Roy to purchase 1,000 shares at a price
of Rs.200 immediately whose market price is Rs. 350 now to retain him in a company.
Decides to issue the shares to the
public at large on 01.01.2011.
Mr. Roy can subscribe to the shares of the company, if & only if he is ready to
work in a organisation for a period of 5 years. (i.e. Lock in Period)
Mr. Roy
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Company offers performance bonus to Ms. Rozy, that is
linked to the performance of the company.
Shares of the company are trading at Rs.250 on 01.01.2011
After 5 years, i.e. on 01.01.2016, Value of
share becomes Rs. 900.
Now instead of giving her shares, Company
will pay her appreciation in the value of
shares of the company
Empire Ltd. Ms. Rozy
i.e. Company will pay her (Rs. 900 Rs.
250) i.e. Rs. 650 per share.
If the value of Share becomes Rs. 100 on
01.01.2016, then option cant be exercised.
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Equity Settled
Types of ESOP for Accounting Purpose
Cash Settled
Employee share based
payment plans with cash
alternative
Under this plan,
employees receives the
shares.
Under this plans, the
employees receive cash
based on the price of
enterprises shares.
Under these plans, either the
enterprise or the employee has
a choice of whether the
enterprise settles the payment
in cash or by issue of shares.
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No Particulars L.F. Debit Credit
A. Fresh issue of shares
1. Application money received
Bank A/c Dr.
To Share application & allotment A/c
2. Allotment of sharesShare application & allotment A/c Dr.
Discount on issue of shares A/c Dr.
To Equity Share Capital
To Securities Premium A/c
CA Anand R. Bhangariya 94220 26740 www.cavidya.com 12.9
No Particulars L.F. Debit Credit
B. Transfer of profits to Capital Redemption Reserve A/c
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p p p /
(to the extent of nominal value of shares purchased)
General Reserve A/c Dr.
Profit & Loss A/c Dr.
Other Reserves A/c Dr.
To Capital Redemption Reserve A/c
C. Amount due under Buy back
Equity Share Capital A/c Dr.
Securities Premium A/c Dr.
Divisible Profit A/c Dr.
To Equity Shareholders A/c
D. Payment of amount due
Equity Shareholders A/c Dr.
To Bank A/c
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1) The Companies Amendment Act, 2000 has allowed companies to issue equity shares with
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) p , p q y
disproportionate rights.
2) The share capital of company limited by shares shall be only of two kinds, namely :
a) Preference Share capital
b) Equity share Capital
i. With voting rights ; or
ii. With differential rights as to dividend, voting or otherwise in accordance with such
rules and subject to such conditions as may be prescribed.
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