Saran SH
Saran SH
Saran SH
FOUNDATION
PAPER 1
ACCOUNTING
The Institute of Chartered
Accountants of India
(Set up by an Act of Parliament)
Board of Studies
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PREFACE
The Board of Studies (BoS) is dedicated to delivering outstanding services to its students, tirelessly
striving for the highest standards of education and support. It imparts quality academic
education through its value added study materials, that explain concepts clearly and in simple
language. Illustrations and Test Your Knowledge Questions contained therein facilitate enhanced
understanding and application of concepts learnt. Revision Test Papers provides Questions &
Answers to help students to update themselves to revise the concepts by solving questions
contained therein. Suggested Answers containing the ideal manner of answering questions set at
examination which also helps students to revise for the forthcoming examination. Mock Test
Papers empower students to gauge their readiness ahead of each examination, ensuring
confidence and clarity. Additionally, BoS offers engaging live virtual classes led by distinguished
faculty, reaching students far and wide across the nation.
To effectively engage with its students, the Board of Studies (BoS) has been publishing subject-
specific capsules in its monthly Students’ Journal, "The Chartered Accountant Student," since 2017.
These capsules are aimed at facilitating efficient revision of concepts covered across various
topics at the Foundation, Intermediate, and Final levels of the Chartered Accountancy Course. This
initiative underscores the BoS's commitment to enhancing learning and comprehension among
its students through accessible and attractive educational materials. Each issue of the journal
includes a capsule relating to specific topic(s) in one subject at each of the three levels. In these
capsules, the concepts and provisions are presented in attractive colours in the form of tables,
diagrams and flow charts for facilitating easy retention and quick revision of topics.
The Board of Studies (BoS) is now introducing a comprehensive booklet titled 'Saransh - Last Mile
Referencer for Foundation Paper 1 - Accounting'. This booklet aims to consolidate significant
concepts across various topics in accounting, particularly those included in the syllabi at the
Foundation level of CA Course. It features diagrams, flow charts, tables, and illustrated journal
entries, providing a one-stop repository for key accounting topics.
However, the readers are advised to refer the study material for comprehensive study and
revision.Under no circumstances, this booklet substitutes the detailed study of the material
provided by the Board of Studies.Further, the readers are advised to enhance their ability to
address the issues and solve the problems based on fundamentals of Accounting, illustrations
and questions given in the study material, revision test papers and mock test papers.
By capturing essential points in a concise format, 'Saransh' will facilitate better understanding and
retention of critical accounting principles, enhancing the learning experience for students
preparing for their examinations and beyond. It will indeed serve as a valuable ready reckoner for
readers, enabling them to grasp the essence of the subject comprehensively.
Happy Reading!
PRESIDENT’S MESSAGE
It is with immense pride that I introduce the Saransh booklets, a meticulously curated resource
available across the Foundation, Intermediate, and Final levels of the Chartered Accountancy
course. ICAI has always been dedicated to providing our students with the best possible resources
to succeed in their studies and careers, and Saransh is a demonstration of this commitment.
The Saransh — Last Mile Referencers have been thoughtfully designed by the Board of Studies
(BoS) to serve as an invaluable companion for your studies and exam preparation. Our aim is to
simplify complex concepts and provisions, making them easier to understand, memorize, and
revise. However, Saransh is not a substitute for the detailed BoS study material but a
supplementary tool to complement your in-depth study.
The newly revamped Saransh booklets have been updated not only in content but also in their
presentation. With a more logical and organized structure, enhanced visual appeal, and a user-
friendly layout, these booklets are now more effective in aiding your studies.
We have extended the Saransh series to cover all core areas of the Chartered Accountancy
course. Whether you are studying Direct Tax Laws and International Taxation, Indirect Tax Laws,
Accounting Standards, Indian Accounting Standards, Auditing, Cost and Management
Accounting, Strategic Cost Management and Performance Evaluation, Company Law, or Financial
Management and Strategic Management, you will find a Saransh booklet for each subject.
Saransh is designed not only to help you grasp and recall essential concepts but also to guide
you in approaching each subject strategically. The insights provided in these booklets will help
you develop a structured approach to your studies, ensuring that you are well-prepared for your
examinations.
I urge you to make the most of the Saransh booklets. While these booklets will support you, it is
your dedication, perseverance, and hard work that will ultimately determine your success.
I wish each of you the very best in your studies and future careers.
Warm regards,
The paper of Accounting at CA Foundation Course is designed to provide students with a strong
conceptual understanding of essential accounting principles and practices and acquaint
students with the basic concepts, theories and accounting techniques followed by different
entities.
The paper of Accounting at Foundation Level is divided into 11 chapters which are again divided
into 5 sections. Each chapter is unique and important and should be understood thoroughly for
grasping the entirety of a subject.
Section I Section II
Accounting Process
Bank Reconciliation Statement
Theoretical Framework Inventories
Depreciation and Amortisation
Bills of Exchange and Promissory notes
You should practice all the practical questions thoroughly before the examination. Practice is key
to success in any examination, especially in subjects like accounting where application and
problem-solving skills are essential. Thorough practice of practical questions not only helps in
mastering the concepts but also improves speed and accuracy during exams. Regular practice
builds confidence and enables you to perform your best when faced with challenging problems.
It's essential to dedicate sufficient time to practice practical questions to excel in examinations.
It is advisable to attempt all the sub-parts of a question at one place. By answering all the
sub-parts of a question together, can improve the overall presentation of your answers.
The answers written on the answer sheet should be neat and working note should form part of
your answers. Maintaining neatness and including working notes in your answers is crucial for
effective communication of your understanding of concepts.
Wherever necessary, suitable assumptions may be made and disclosed by way of a note.
Your commitment to quality effort and effective time management will enhance your
understanding of the concepts and boost your performance in the CA examination. By thoroughly
preparing each subject, you can optimize your time, deepen your grasp of accounting principles,
and ultimately achieve success in your CA journey.
SARANSH THEORETICAL FRAMEWORK
The Committee on terminology set up by the American Institute of Certified Public Accountants
formulated the following definition of accounting in 1961:
“Accounting is the art of recording, classifying, and summarising in a significant manner and in
terms of money, transactions and events which are, in part at least, of a financial character, and
interpreting the result thereof.”
In 1970, the Accounting Principles Board (APB) of American Institute of Certified Public
Accountants (AICPA) enumerated the functions of accounting as follows:
ICAI BOS 1
SARANSH THEORETICAL FRAMEWORK
OBJECTIVES OF ACCOUNTING
Systematic Communicating
Recording of Ascertainment of Ascertainment of
Information to
Transaction Result Financial Position
various users
Book-keeping:
Manufacturing, Balance Financial
Journal,
Trading, Sheet Reports
Ledger and
Profit & Loss A/c
Trial Balance
FUNCTIONS OF ACCOUNTING
Decision-
Provide relevant information to the users of
making
accounts for rational decision making.
ICAI BOS 2
SARANSH THEORETICAL FRAMEWORK
Government
Provides necessary information to government
Regulation and
to exercise control.
Taxation
Using the
Generating
financial
financial
information
information
Generating Financial Information can be explained with the help of the following chart:
Generating
financial
Information
Summar Commun
Recording Classifying Analyzing Interpreting
ising icating
ICAI BOS 3
SARANSH THEORETICAL FRAMEWORK
PROCEDURE OF ACCOUNTING
ICAI BOS 4
SARANSH THEORETICAL FRAMEWORK
borrows money from a bank, buys oil from oil companies, sells tickets
to the customers, has staff to be paid salaries to, all these group of
people and entities are key stakeholders in that airlines business. They
company is going well or there are challenges for the company to run
ICAI BOS 5
SARANSH THEORETICAL FRAMEWORK
ACCOUNTING PROCESS
Identification of transactions
Input Accounting
Output
Cycle
Recording of
Identification of Communicating
transaction in the Book
economic events and information to users
of original entity.
transactions
measured in financial
terms.
Posting to Ledger
External users:
Internal users:
Investors
Boards of
Lenders
Directors
Preparation of Trial Suppliers
Partners
Balance Govt.
Managers
agencies
Officers
Customers
Preparation of
Final Accounts
ICAI BOS 6
SARANSH THEORETICAL FRAMEWORK
LIMITATIONS OF ACCOUNTING
The Balance sheet cannot reflect the value of certain factors like loyalty and
skill of the personnel which may be the most valuable asset of an enterprise
these days.
The Balance sheet cannot reflect the value of certain factors like loyalty and skill
of the personnel which may be the most valuable asset of an enterprise these
days.
Accounting ignores changes in some money factors like inflation etc.
There are occasions when accounting principles conflict with each other
Certain accounting estimates depend on the sheer personal judgement of the
accountant
Financial statements consider those assets which can be expressed in
monetary terms.
Different accounting policies for the treatment of same item adds to
the probability of manipulations.
In nutshell, it can be said that the language of accounting has certain practical
limitations.Therefore, the financial statements should be interpreted carefully keeping in mind all
various factors influencing the true picture.
BOOK KEEPING
Complete Recording of
Transactions
Objectives of
book-keeping
Ascertainment of
Financial Effect on the
Business
ICAI BOS 7
SARANSH THEORETICAL FRAMEWORK
Book-keeping Accounting
Financial statements do not form part of this Financial statements are prepared on the basis
process. of book-keeping records.
Financial position of the business cannot be Financial position of the business is ascertained
ascertained through book-keeping records. on the basis of the accounting reports.
Accountancy
Accounting
Book Keeping
ICAI BOS 8
SARANSH THEORETICAL FRAMEWORK
SUBFIELDS OF ACCOUNTING
Financial Accounting
Management Accounting
Cost Accounting
ICAI BOS 9
SARANSH THEORETICAL FRAMEWORK
Accounting concepts
define the assumptions
on the basis of which
financial statements of
a business entity are
prepared. Accounting principles are a
body of doctrines commonly
associated with theory and
procedures of accounting as
a guide for selection of
conventions or procedures
where alternatives exist. Accounting
conventions emerge
out of accounting
practices, adopted by
various organizations
over a period of time.
ACCOUNTING CONCEPTS
Entity concept
ICAI BOS 10
SARANSH THEORETICAL FRAMEWORK
Periodicity concept
Matching concept
ICAI BOS 11
SARANSH THEORETICAL FRAMEWORK
This concept is the core of double entry book-keeping. Every transaction or event has two
aspects:
Alternatively
Conservatism
Conservatism states that the accountant should not anticipate any future income
however they should provide for all possible losses. For this concept there should be at
least three qualitative characteristics of financial statements, namely,
Materiality
ICAI BOS 12
SARANSH THEORETICAL FRAMEWORK
Completeness
Substance
Prudence over Form
Understanda
Materiality
bility
Qualitative Characteristics of
Financial Statements
Relevance
Comparability
Neutrality Reliability
ICAI BOS 13
SARANSH THEORETICAL FRAMEWORK
Materiality
of the Relative proportion of the amount involved is another important
amount consideration in distinction between revenue and capital
involved
ICAI BOS 14
SARANSH THEORETICAL FRAMEWORK
There is uncertainty
As per the concept of in realisation of claim.
prudence as well as the It is possible that
present accounting recognition of contingent However, when the
These assets are
standards, an assets may result in realisation of
uncertain and may
enterprise should not recognition of income income is virtually
arise from a claim
recognise a that may certain, then the
which an enterprise
contingent asset. never be realised. related asset no
pursues through a
longer remains as
legal proceeding
contingent asset.
ICAI BOS 15
SARANSH THEORETICAL FRAMEWORK
Contingent Liability
a present obligation that arises from past
events but is not recognised because:
Although, the receipt of the notice The receipt of this notice does not
results into an event which suggest that Mr. X is liable to pay the
requires recognition of a amount, although this needs to be
contingent liability since there is a investigated and confirmed, as
possible obligation, and that can whether the damage arose due to
only be confirmed in future. any defect in the machine or it is due
to negligence while operating the
machine.
ICAI BOS 16
SARANSH THEORETICAL FRAMEWORK
ICAI BOS 17
SARANSH THEORETICAL FRAMEWORK
ACCOUNTING POLICIES
ACCOUNTING POLICIES
Substance
Prudence Materiality
over form
ICAI BOS 18
SARANSH THEORETICAL FRAMEWORK
Elements of Measurement
Measurement
Measurement is vital aspect of accounting.
Identification of
Primarily transactions and events are measured Objects and Events
in terms of money. Any measurement discipline
deals with three basic elements of
measurement viz., identification of objects and Selection of
events to be measured, selection of standard or Standards or Scale
scale to be used, and evaluation of dimension
of measurement standards or scale.
Evaluation of Dimension
of Measurement
Standards or Scale
ICAI BOS 19
SARANSH THEORETICAL FRAMEWORK
VALUATION PRINCIPLES
There are four generally accepted measurement bases or valuation principles. These are:
Historical Cost
Current Cost
ICAI BOS 20
SARANSH THEORETICAL FRAMEWORK
ACCOUNTING ESTIMATES
There are certain items, which are not occurred therefore cannot be measured
using valuation principles but still they are necessary to record in the books of
account. For example, provision for doubtful debts.
In such a situation reasonable estimates based on the existing situation and past
experiences are made.
ACCOUNTING STANDARDS
(1) (2)
recognition of measurement of
events and these transactions
transactions in the and events;
financial
statements;
ICAI BOS 21
SARANSH THEORETICAL FRAMEWORK
(4)
the disclosure requirements
(3)
which should be there to enable
presentation of these
the public at large and the
transactions and events in
stakeholders and the potential
the financial statements in a
investors in particular, to get an
manner that is meaningful
insight into what these financial
and understandable to the
statements are trying to reflect
reader; and
and thereby facilitating them to
take prudent and informed
business decisions
Standards reduce to a
reasonable extent or The application of accounting
eliminate altogether standards would, to a limited extent,
confusing variations in the facilitate comparison of financial
accounting treatments statements of companies situated in
used to prepare financial different parts of the world and also of
statements. different companies situated in the
same country. However, it should be
noted in this respect that differences in
the institutions, traditions and legal
There are certain areas systems from one country to another
where important give rise to differences in accounting
information are not standards adopted in different
statutorily required to be countries.
disclosed. Standards may
call for disclosure beyond
that required by law.
ICAI BOS 22
SARANSH THEORETICAL FRAMEWORK
Preparation of draft and its circulation to council members of ICAI and specified outside
bodies
ICAI BOS 23
SARANSH THEORETICAL FRAMEWORK
There are three sets of Accounting Standards to cater different categories of entities
based on their nature, size, and legal framework under which they operate, ensuring
that each entity follows appropriate accounting principles for financial reporting These
are:
Indian Accounting Standards (Ind AS) are applicable to all listed companies and
Non-Banking Financial Companies (NBFCs) and to unlisted companies and unlisted
NBFCs with net worth of INR 250 crores or more.
Accounting Standards (AS) prescribed by ICAI are applicable for entities other than
companies.
Number of the
Sl. No. Title of the Accounting Standard
Accounting Standard (AS)
Net Profit or Loss for the Period, Prior Period Items and
5. AS 5 (Revised)
Changes in Accounting Policies
7. AS 9 Revenue Recognition
ICAI BOS 24
SARANSH THEORETICAL FRAMEWORK
ICAI BOS 26
SARANSH THEORETICAL FRAMEWORK
Number of the
Sl. No. Title of the Accounting Standard
Accounting Standard (AS)
17. AS 19 Leases
*Note: The list of accounting standards given above does not form part of syllabus. It has been
given here for the knowledge of students only.
ICAI BOS 25
SARANSH THEORETICAL FRAMEWORK
116 Leases
2 Inventories
12 Income Taxes
19 Employee Benefits
23 Borrowing Costs
36 Impairment of Assets
38 Intangible Assets
40 Investment Property
41 Agriculture
ICAI BOS 27
SARANSH THEORETICAL FRAMEWORK
Accounting Standards for local bodies are Accounting Standards that are applicable to the local
bodies whose primary objective is to deliver services to the public, rather than to make profits
and generate a return on equity to investors. Consequently, the performance of such entities can
be only partially evaluated by examination of financial position, financial performance and cash
flows.
5 Borrowing Costs
11 Construction Contracts
12 Inventories
13 Leases
16 Investment Property
18 Segment Reporting
ICAI BOS 28
SARANSH THEORETICAL FRAMEWORK
31 Intangible Assets
33 First-Time Adoption of Accrual Basis Accounting Standards for Local Bodies (ASLBs)
37 Joint Arrangements
39 Employee Benefits
40 Entity Combinations
42 Social Benefits
**Note: Ind AS and ASLB given above do not form part of the syllabus. They have been discussed
here for the knowledge of students only
ICAI BOS 29
SARANSH ACCOUNTING PROCESS
year
of one red
Advantages of 2
Double Entry
Resu lt
mpa
be co
may hose
of
with t nd
previo
reaso
us years a
ns for
the
ay be
Book Keeping The
pos financia
n ge m i
ch a
taine
d. asc tion ca l
ascer end
erta
in
n be
of e ed at th
thro a e
ugh ch peri
prep od,
of fi a
nan ration
The system permits stat cial
4 accounts to be kept in as
eme
nts.
much details as
necessary and, therefore
3
affords significant
information for the
purposes of control etc.
ICAI BOS 30
SARANSH ACCOUNTING PROCESS
ACCOUNT
In T-accounts, increase entries are made on the left side and decrease entries are made on the
right side of the accounts for assets respectively and vice-versa for liabilities. These two columns
are put usually in the form of an account, called the ‘T’ form.
FORMAT OF ACCOUNT
ICAI BOS 31
SARANSH ACCOUNTING PROCESS
Elements
Sr. No. Effects
of Financial Statements
1] Asset
2] Liability
3] Owner’s Capital
4] Expenses
5] Revenue/Income
The terms debit and credit should not be taken to mean, respectively, favourable and
unfavourable things. They merely describe the two sides of accounts.
A transaction is a type of event, which is generally external in nature. Transaction are analysed in
terms of money and supported by proper documents are recorded in the books of accounts
under double entry system. To analyse the dual aspect of each transaction, two approaches can
be followed:
Accounting
Traditional
Equation
Approach
Approach
ICAI BOS 32
SARANSH ACCOUNTING PROCESS
TRADITIONAL APPROACH
CLASSIFICATION OF ACCOUNTS 1
Personal transactions
Transactions in the
journal are recorded on
the basis of the rules of 2
debit and credit only. For Transactions related to
the purpose of recording, assets and properties
these transactions are
classified in three groups
3
Transactions related to expenses,
losses, income and gains
Classification of
Accounts
Personal Impersonal
Accounts Accounts
Ram, Seeta Etc. Company, Clubs, Land, Building, Cash in hand Expenses, losses, gains, profits
Co-Operative Eg- Salary , rent, interest
Representative Societies
ICAI BOS 33
SARANSH ACCOUNTING PROCESS
Real, nominal and personal accounts is the traditional classification of accounts. Now, let us see
the modern and more acceptable classification of accounts:-
Account to be
Normal balance of Account to be credited
Types of account debited when there
account when there is:
is:
JOURNAL
Transactions are first entered in this book to show which accounts should be debited and which
credited. Journal is also called subsidiary book. Recording of transactions in journal is termed as
journalizing the entries. It is the book of original entry in which transactions are entered on a daily
basis in a chronological order.
It would be difficult to maintain the records in an orderly manner. Debits and credits are listed
along with the appropriate explanations. There are basically two types of journals :-
Types of Journals
ICAI BOS 34
SARANSH ACCOUNTING PROCESS
PERFORMA OF JOURNAL
or compound entry
(i.e. one debit and
two or more credits or
two or more debits
and one credit or two
or more debits and
credits).
In such cases, it is
important to check
that the total of
both debits and
credits are equal.
ICAI BOS 35
SARANSH ACCOUNTING PROCESS
ADVANTAGES OF JOURNAL
ICAI BOS 36
SARANSH ACCOUNTING PROCESS
INTRODUCTION TO GST
ICAI BOS 37
SARANSH ACCOUNTING PROCESS
GST has a dual aspect with the Centre and States simultaneously levying on a common
tax base. There are three main components of GST which are:
1. Central Goods and Service Tax (CGST) is levied and collected by the Centre on the
“Intra -State” supply of goods and services.
2. State Goods and Services Tax (SGST) is levied and collected by the State
Governments (including Union Territories with legislature, for example Delhi,
Pondicherry, Jammu and Kashmir) on “Intra state” supply of goods and services
3. Union Territory Goods and Service Tax (UTGST) is levied and collected by Union
Territories without Legislatures [i.e. Andaman and Nicobar Islands,
Lakshadweep, Ladakh, Dadra and Nagar Haveli & Daman and Diu and Chandigarh]
on “intra-state” supply of goods and services.
4. Integrated Goods and services tax (IGST): It is the GST levied on the “inter state”
supply of goods and services and is collected by the Centre. IGST is equivalent to the
sum total of CGST and SGST.
CGST IGST
SGST
ICAI BOS 38
SARANSH ACCOUNTING PROCESS
Tax credit of CGST, SGST and IGST can be utilized in the following
manner:
Utilization of IGST Credit: IGST credit has to be first utilized against
IGST liability and if any balance is still available, the same can be
utilized against CGST or/and SGST in any order and in any
proportion.
Utilization of CGST Credit: CGST credit has to be first utilized
against CGST liability and if any balance is available, same can be
utilized against IGST. However, CGST credit cannot be utilized
against SGST.
Utilization of SGST Credit: SGST credit has to be first utilized
against SGST liability and if any balance is available, same can be
utilized against IGST. However, SGST credit cannot be utilized
against CGST.
Journal entry in case of Utilization of Input Tax Credit towards payment of Output Tax
Output CGST A/c Dr. Amount of GST liability
Output SGST A/c Dr. Amount of GST liability
Output IGST A/c Dr. Amount of GST liability
To Input CGST A/c Amount of output GST liability paid utilizing Input CGST
To Input SGST A/c Amount of output GST liability paid utilizing Input SGST
To Input IGST A/c Amount of output GST liability paid utilizing Input IGST
ICAI BOS 39
SARANSH ACCOUNTING PROCESS
UNIT 2LEDGERS
: LEDGERS
After recording the transactions in the journal, recorded entries are classified and grouped into
by preparation of accounts. The book which contains all set of accounts (viz. personal, real and
nominal accounts), is known as Ledger. It is known as principal books of account in which
account-wise balance of each account is determined.
Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
RULES REGARDING
POSTING OF ENTRIES
IN THE LEDGER
Separate account is opened in The concerned account debited
ledger book for each account in the journal should also be
and entries from ledger posted debited in the ledger but
to respective account reference should be of the
accordingly. respective credit account.
ICAI BOS 40
SARANSH ACCOUNTING PROCESS
BALANCING
The credit balance is
written on the credit side as “By
Balance c/d”, the totals then written on the debit side
are written on the two sides as as, “To Balance c/d”; c/d
shown above as then the debit
balance written on the debit
side as, “To Balance b/d”, as
AN means “carried down”. By
doing this, two sides will
the opening balance of the
new period. ACCOUNT be equal.
ICAI BOS 41
SARANSH ACCOUNTING PROCESS
TRIAL BALANCE
Preparation of trial balance is the third phase in the accounting process. After posting the
accounts in the ledger, a statement is prepared to show separately the debit and credit
balances. Such a statement is known as the trial balance.
It may also be prepared by listing each and every account and entering in separate columns the
totals of the debit and credit sides where, the totals of the two columns should agree.
Trial Balance
as at.......................
ICAI BOS 42
SARANSH ACCOUNTING PROCESS
Still, the preparation of the trial balance is very useful; without it, the
preparation of financial statement, the Profit and Loss Account and the
Balance Sheet, would be difficult.
Methods of preparation of
Trial Balance
Total And
Total Balance
Balance
Method Method
Method
ICAI BOS 43
SARANSH ACCOUNTING PROCESS
Under this method, the above two explained methods are combined. Under this method
statement of trial balance contains seven columns instead of five columns.
ICAI BOS 44
SARANSH ACCOUNTING PROCESS
Purchase Returns
6. 500 500
Account
Sale Returns
9. 100 100
Account
ADJUSTED TRIAL
This is a temporary
BALANCE account opened to
(THROUGH proceed further and to
prepare the financial
SUSPENSE statements timely.
ACCOUNT)
ICAI BOS 45
SARANSH ACCOUNTING PROCESS
•Assets
The balances of the •Expenses Accounts
Accounts placed in •Losses
the debit column of
•Drawings
the trial balance
•Cash and Bank
Balances
ICAI BOS 46
SARANSH ACCOUNTING PROCESS
SUBSIDIARY BOOKS
In a business, most of the transactions generally relate to receipts and payments of cash,
purchases and sales of goods. It is convenient to keep a separate register for each such class of
transactions one for receipts and payments of cash, one for purchase of goods and one for sale
of goods. Such register is called a book of original entry or prime entry.
The books of original or prime entry are also called Subsidiary Books
since ledger accounts are prepared on the basis of these books and
without ledger posting, a trial balance cannot be taken out.
CASH BOOK
to record cash receipts and
payments, including receipts
1 PURCHASES BOOK
into and payments out of the
bank. to record credit purchases of
goods dealt in or
4 of the
2 materials and stores required 5
in the factory.
PURCHASE
RETURNS BOOK 3 SALES BOOK
to record the returns of goods
and materials previously
to record the sales of the
purchased.
goods dealt in by the firm.
4
SALE RETURNS
BOOK
5 BILLS RECEIVABLE
to record the returns made by BOOK
the customers.
to record the receiptsof
promissory notes or
6 hundies from various parties.
BILLS PAYABLE
BOOK
7 JOURNAL
to record the issue of the
promissory notes or hundies
to record the transactions
to other parties.
which cannot be recorded in
8 any of the above books
mentioned above.
ICAI BOS 47
SARANSH ACCOUNTING PROCESS
BIFURCATION OF
SUBSIDIARY BOOKS AND PRINCIPAL BOOKS
FINANCIAL BOOKS OF
ACCOUNTS
PRINCIPAL SUBSIDIARY
BOOKS BOOKS
Cash Book
Purchase For Credit Purchase
Ledger Book
For record of
Journal transactions not
recorded anywhere
ICAI BOS 48
SARANSH ACCOUNTING PROCESS
PURCHASE BOOK
ICAI BOS 49
SARANSH ACCOUNTING PROCESS
The Purchases
Book shows the Their accounts The total of The amount is
names of the have to be the amounts debited to the
parties from credited for the column shows Purchase
whom goods respective the credit Account to
have been amounts shown purchases indicate receipt
purchased on in the purchase made in a of goods.
credit. These book. period.
parties are now
trade payables.
SALES BOOK
ICAI BOS 50
SARANSH ACCOUNTING PROCESS
SINCE WE KNOW
Bill transactions
are entered in Cash
the Bills transactions are
Receivable Books recorded in the
or the Bills Cash Book
Payable books, if
these are
maintained.
Credit purchases Returns to
of goods are suppliers are
recorded in entered in the
the Purchases Purchase Returns
Book. Book.
ICAI BOS 51
SARANSH ACCOUNTING PROCESS
Closing entries
Opening entries At the end of the year the profit and
loss account has to be prepared.
When books are started for
For this purpose, the nominal accounts
the new year, the opening
are transferred to this
balance of assets and
account. This is done through journal
liabilities are journalised.
entries called closing entries.
Transfer entries
If some amount is to be Adjusting entries
transferred from one account to
another, the transfer will be At the end of the year, expenses or income may
made through a journal entry. have to be adjusted for amounts received in
advance or for amounts not yet settled in cash.
Such adjustments are done through journal
entries. Usually, the entries pertain to
outstanding expenses, prepaid expenses,
Rectification entries interest on capital and depreciation.
Apart from above few, other miscellaneous entries are also entered in journal
ICAI BOS 52
SARANSH ACCOUNTING PROCESS
CASH BOOK
Cash Book is a subsidiary book. All cash transactions are recorded in the Cash Book. It serves as
basis for preparing ledger accounts. It acts as the cash account and the bank account and the
balances are directly entered in the trial balance. The Cash Book, therefore, is part of the ledger
also. Hence, it is also to be treated as the principal book. Thus Cash Book is both a subsidiary book
and a principal book.
KINDS OF
CASH BOOK
Three
Simple Cash Column
Book Two Cash Book
Column
Cash Book
If along with columns to record cash receipts and cash payments another column is added on
each side to record the cash discount allowed or the discount received, or another column is
added on each side to record bank payments or the bank receipts. It is a double- column cash
book.
ICAI BOS 53
SARANSH ACCOUNTING PROCESS
BALANCING
Thus, a double column cash book should have two columns on each side comprising of either
cash and discount transaction or cash and bank transactions.
For writing up the three-column cash book the following points should be noted:
While commencing a new business, the amount is written in the cash column if cash is
introduced and in the bank column if it is directly put into the bank with the description “To
Capital Account”. If a new cash book is being started for an existing business, the opening
balances are written as : “To Balance b/d”
All receipts are written on the receipts side, cash in the cash column and cheques in the bank
column. Discount allowed in entered in the discount column.
All payments are written on the payments side, cash payment in the cash column and
payments by cheques in the bank column.Discount received is entered in the discount Column.
Often cash is withdrawn from bank for use in the office or cash is sent to the bank. In such a
cases the entries entered with the letter “C” should be written in the L.F. column, to indicate that
these are contra transaction and no further posting is required for them.
ICAI BOS 54
SARANSH ACCOUNTING PROCESS
If cheque sent to the bank is dishonoured, it is entered in the bank column on the credit side
with the name of the related party in the particulars column.
If cheque issued by the firm is not paid on presentation, it is entered in the Bank column on the
debit side with the name of the party to whom the cheque was given.
Incase, a cheque received may be given to some other party, i.e., endorsed. On receipt, it must
have been entered in the bank column on the debit side; on endorsement the amount will be
written in the bank column on the credit side.
In such a case,the
difference is written on the
debit side as “To Balance
c/d.” Then the totals are
written on the opposite
sides, and the balance is
then entered on the credit
side as “By Balance b/d.”
ICAI BOS 55
SARANSH ACCOUNTING PROCESS
Saving of time
of the chief Saving in labour in
ICAI BOS 56
SARANSH ACCOUNTING PROCESS
RECTIFICATION OF ERRORS
There are various unintentional errors that can be committed at the stage of collecting financial
information/data on the basis of which financial statements are drawn or at the stage of
recording this information. Also errors may occur as a result of mathematical mistakes, mistakes
in applying accounting policies, misinterpretation of facts, or oversight. To check the arithmetic
accuracy of the journal and ledger accounts, trial balance is prepared. If the trial balance does
not tally, then it can be said that there are errors in the accounts which require rectification
thereof. Some of these errors may affect the Trial Balance and some of these do not have any
impact on the Trial Balance although such errors may affect the determination of profit or loss,
assets and liabilities of the business.
WRONG ENTRY Wrong entry of the value of transactions and events in the
subsidiary books, Journal Proper and Cash Book may occur.
Example: Credit purchases ₹17,270 are entered in the
Purchases Day Book as ₹17,720. Credit sales of ₹15,000 gross
less 1% trade discount are wrongly entered in Sales Day
Book at ₹15,000.
WRONG CASTING OF Subsidiary books are totalled periodically and posted to the
SUBSIDIARY BOOKS appropriate ledger accounts. There may arise totalling
errors. Totalling errors may arise due to wrong entry or
simply these may be independent errors.
Example: For the month of January, 2024 total of credit sales
are ₹1,75,700, this is wrongly totalled as ₹1,76,700 and posted
to sales account as ₹1,76,700.
WRONG POSTING FROM Wrong amount may be posted to the ledger account or the
SUBSIDIARY BOOKS amount may be posted to the wrong side or to the wrong
account.
Example : Purchases from A may be posted to B’s account
WRONG CASTING Any ledger account balance may cast wrongly. Obviously
OF LEDGER wrong postings make the balance wrong; but that is not
BALANCES
wrong casting of balances. Whenever there arises
independent casting error that is called wrong casting of
ledger balances.
ICAI BOS 57
SARANSH ACCOUNTING PROCESS
STAGES OF ERRORS
Errors of principle
Wrong Totalling of a/cs
Errors of omission
Wrong Balancing of a/cs
Errors of commission
Errors of omission
Partial omission
Complete omission Errors of commission Errors of omission
Errors of commission
Posting to wrong account
Posting of wrong amount 1 Taking wrong account
Posting on the wrong side
Errors of Errors of
Principle Omission
ICAI BOS 58
SARANSH ACCOUNTING PROCESS
TYPES OF ERRORS
TYPES OF ERRORS
Clerical Errors of
errors principle
When a transaction is
recorded in
contravention of
Compensating Errors of Errors of
accounting principles,
Errors Commission Omission
like treating the
purchase of an asset
as an expense, it is an
error of principle.
Posting the
Wrong Posting an Wrong Writing the
wrong
balancing of amount on casting of wrong amount in
amount in
an account. the wrong subsidiary the subsidiary
the
Trial Balance side. Trial books. Trial books. Trial
ledger.Trial
will not Balance will Balance may Balance will
Balance will
agree. not agree. not agree. agree.
not agree.
ICAI BOS 59
SARANSH ACCOUNTING PROCESS
The two columns of the Trial Balance should be totalled again. If in place of a number of
accounts, only one amount has been written in the Trial Balance, the list of such accounts
should be checked and totalled again.
It should be seen that the cash and bank balances have been written in the trial balance.
The exact difference in the trial balance should be established. The ledger should be gone
through; it is possible that a balance equal to the difference has been omitted from the trial
balance. The difference should also be halved; it is possible that balance equal to half the
difference has been written in the wrong column.
The casting of subsidiary books should be checked again, especially if the difference is ₹100,
₹1,000 etc.
If the difference is very big, the balance in various accounts should be compared with the
corresponding accounts in the previous period. If the figures differ materially those cases
should be seen; it is possible that an error has been committed.
Postings of the amounts equal to the difference or half the difference should be checked. It is
possible that an amount has been omitted to be posted or has been posted on the wrong side.
If there is still a difference in the trial balance, a complete checking will be necessary. The
posting of all the entries including the opening entry should be checked. It may be better to
begin with the nominal accounts.
ICAI BOS 60
SARANSH ACCOUNTING PROCESS
There are some errors which affect one side of an account or which affect more than one
account in such a way that it is not possible to pass a complete rectification entry. It is important
to note that such errors may involve only one account or more than one account. This can be
explained with the help of following illustrations:
The sales book for November is undercast by ₹20,000. Only the Sales Accounts is to be
corrected by making an entry for ₹20,000 on the credit side: “By undercasting of Sales Book for
November ₹20,000.
While posting the discount column on the debit side of the cash book the discount of ₹1,000
allowed to Ramesh has not been posted. This is done by the entry “By omission of posting of
discount ----- ₹1,000”.
₹50,000 was received from Mahesh and entered on the debit side of the cash book but was not
posted to his account. This error affects only the account of Mahesh by ₹50,000. The
rectification will be by the entry. “By Omission of posting ₹50,000.”
Thus, from the above illustrations it is observed that errors affecting two accounts can always be
corrected by a journal entry is not always valid.
ICAI BOS 61
SARANSH ACCOUNTING PROCESS
Example: The sales book for November, 2024 is cast ₹15,000 short; as a consequence the trial
balance will not agree. To rectify the error the Sales Account will be credited. Since now one
error remains, the Suspense Account must be used- it will be debiting the Suspense Account.
The entry will be :
Suspense Account Dr. ₹15,000
To Sales Account ₹15,000
(Correction of error of undercasting the sales book for Nov. 2024)
Example: The Purchase Book was cast short by ₹1,000 in December, 2023 and a
Suspense Account was opened with the difference in the trial balance. If the error is
rectified next year and the entry passed is
It will mean that the Purchases Account for year 2024 will be ₹1,000 more than the
actual amount relating to year 2024 and thus the profit that year 2024 will be less
than the actual for that year. Thus, correction of errors in this manner will ‘falsify’ the
Profit and Loss Account.
ICAI BOS 62
SARANSH ACCOUNTING PROCESS
To avoid the above correction of all amounts concerning nominal accounts, i.e.,
expenses and incomes should be through “Prior Period Items” or “Profit and Loss
Adjustment Account”. The balance in the account should be transferred to the
Profit and Loss Account. However, these Prior Period Items should be charged after
deriving net profit of the current year
In brief, the errors at this stage should be rectified in the same manner
as we do in case of errors identified after the preparation of Trial
Balance but before Final accounts.
ICAI BOS 63
SARANSH BANK RECONCILIATION STATEMENT
The objective of Bank Reconciliation statement is to understand passbook and cash book
and reconciliation between the two. The reconciliation brings out any errors that may have
been committed either in the cash book or in the passbook. A regular reconciliation
discourages the accountant of the bank from embezzlement.
Banks are
essential A Bank accepts
deposits from Thus, money
institutions in a
people, in various which would
modern society.
forms, and lends have been
Now-a-days,
funds to those otherwise idle is
most of the
who need; put to use and is
transactions of
it also invests made available
the business are
some funds to those who
done through
need it.
bank whether it
is a receipt or a
1
in profitable
investments.
payment.
BANK PASSBOOK
ICAI BOS 64
SARANSH BANK RECONCILIATION STATEMENT
The cash book is maintained But most of the times these The statement which reconciles
by the person having the two balances do not match. the bank balance as per cash
bank account whereas the The process of eliminating book with the balance as per
bank statement is prepared this difference and bringing
the pass book by showing all the
by the bank. Therefore, the the two statements in line
causes of difference is known as
balance in both should be with each other is known as
“BANK RECONCILIATION
equal and opposite in nature. “Reconciliation”
STATEMENT”.
It helps in
Any undue delay finding out the
The reconciliation in the clearance A regular actual position It will ensure
will bring out any of cheques will be reconciliation of the bank accounting of all
errors that may shown up by the discourages the balance. financial
have been reconciliation. accountant of the transactions
committed either in bank from incurred by a
the cash book or in embezzlement of company during a
the passbook. funds. particular FY.
CAUSES OF DIFFERENCE
The difference in bank balance as per cash book and passbook may arise because of the
following reasons:-
3
ERRORS
1
Mistakes or errors made in
TIMING
preparing the accounts either
2
by the bank or the customer
Sometimes a transaction is can also result in
recorded at two different TRANSACTIONS
disagreement of the two
times in cash book and the statements. For this reason
passbook. There are various
rectification of errors is
transactions which the bank
carries out by itself without required to be done in both
intimating the customer. the statements before
preparing any Bank
Reconciliation Statement.
ICAI BOS 65
SARANSH BANK RECONCILIATION STATEMENT
If the bank has allowed interest to the iv) Interest and expenses charged by the bank
customer, the entry will normally be made Like (iii) above, the interest charged by the bank
in the customer’s account and later shown and the bank charges are entered in the
in the pass book. The customer usually customer account and later in the pass book.
comes to know about the interest amount The customer makes the required entries only
by pursuing the pass book and only then he after he sees the pass book. These are debited to
makes relevant entry in the cash book. customer account by bank therefore, bank
balance as per pass book is less than bank
balance as per cash book.
ICAI BOS 66
SARANSH BANK RECONCILIATION STATEMENT
Payment done by
At the time of presenting
the account holder At the time of issuing
1. the cheque to the bank for
through issuing a the cheque.
payment.
cheque.
At the time of
Receipt by the At the time of collection of
depositing the cheque
2. account holder amount from the account
into the bank.
through a cheque. of the issuing party.
Collection of bills/
When the entry is
cheque directly on When the amount is
3. posted in the pass
behalf of the collected by the bank.
book.
account holder.
Direct payment to
the third party on When the entry is
When the amount is paid
4. behalf posted in the pass
by the bank.
of the account book.
holder.
ICAI BOS 67
SARANSH BANK RECONCILIATION STATEMENT
It means that you can start bank reconciliation from any of the following four balances i.e.
Compare the debit entries of cash book with the One should also take into care that whether
credit entries of the pass-book and vice-versa. opening balance of both the books at particular
The entries, which do not tally, are the causes of point of time from where the books are
difference in the balances of both the books. compared, tallies or not. If opening balances are
Once the causes are located, their effects on not same then unticked items are divided into
both the books are analysed and then two categories i.e., one relating to reconciliation
reconciliation statement is prepared to arrive at of opening balance and other relating to
the actual bank balance. reconciliation of closing balance.
ICAI BOS 68
SARANSH BANK RECONCILIATION STATEMENT
If answer is
If answer is positive If answer is positive If answer is positive
positive then
then unfavourable then favourable then unfavourable
favourable
balance(Dr.) as per balance (Dr.) as per balance (Cr.) as per
balance (Cr.) as
pass-book and if cash-book and if cash book and if
Final Balance per pass-book and
negative then negative then negative then
if negative then
favourable balance unfavourable favourable balance
unfavourable
(Cr.) as per pass- balance (Cr.) as per (Dr.) as per cash-
balance (Dr.) as
book. cash-book book.
per pass-book.
ICAI BOS 69
SARANSH BANK RECONCILIATION STATEMENT
Adjusted Cash
Book
When the balance in the
cash book is first adjusted
for certain adjustments
before taking it to the
But if reconciliation is
bank reconciliation
done at the end of the
statement, then it is
accounting year or
known as adjusted cash
financial year, the
book balance.
cashbook should be
adjusted so as to
reflect the correct bank
balance in the balance
sheet.
Adjusting the cash-
book before preparing
the bank reconciliation
statement is
completely optional, if
reconciliation is done
during different
months.
ICAI BOS 70
SARANSH INVENTORIES
CHAPTER 4: INVENTORIES
INTRODUCTION
TYPES OF INVENTORY
In case of
Manufacturing In case of
concerns Trading
concerns
Raw Packing
Material Work-in- Traded
Finished Stores and Material
Progress Goods
Goods Spares
INVENTORY VALUATION
Inventory is generally the most significant component of the current assets held by a
trading or manufacturing enterprise. Both excess of inventory and its shortage affects the
production activity, and the profitability of the enterprise whether it is a manufacturing or
a trading business.
(i) Determination of Income: The valuation of inventory is necessary for determining the true
income earned by a business entity during a particular period. To determine gross profit, cost of
goods sold is matched with revenue of the accounting period. The effect of over or
understatement of inventory may be explained as:
ICAI BOS 71
SARANSH INVENTORIES
(ii) Ascertainment of Financial Position: Inventories are classified as current assets. The value
of inventory on the date of balance sheet is required to determine the financial position of the
business. If inventory is not properly valued, the balance sheet will not disclose the truthful
financial position of the business.
(iii) Liquidity Analysis: Inventory is classified as a current asset, it is one of the components of
net working capital which reveals the liquidity position of the business. Current ratio which
studies the relationship between current assets and current liabilities is significantly affected by
the value of inventory.
(iv) Statutory Compliance: Schedule III to the Companies Act, 2013 requires valuation of each
class of goods i.e. raw material, work-in-progress and finished goods under broad head to be
disclosed in the financial statements.
whichever is less
ICAI BOS 72
SARANSH INVENTORIES
COST
As per Accounting Standards, cost of inventories should comprise
COST OF PURCHASE
Includes any amount paid to the seller reduced by
any discounts/rebates given by the seller. Similarly,
any duties paid to the supplier will be part of cost of
the inventory unless the enterprises can recover
these taxes duties from the authorities.
COST OF CONVERSION
Inventories include costs directly related to the
units of production, such as direct labour. They
also include a systematic allocation of fixed
and variable overheads.
OTHER COSTS
May include administrative overheads incurred to
bring the inventory into present location and
condition or any cost specifically incurred on
inventory of a specified customer. Interest and other
borrowing costs are generally not included in the cost
of inventory.
ICAI BOS 73
SARANSH INVENTORIES
This is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
In case of finished goods and Net realisable value means selling price
traded goods reduced by selling and distribution expenses.
closing
Opening Purchases Cost of
inventory
inventory (Known) goods
(physically
(Known) sold
counted)
ICAI BOS 74
SARANSH INVENTORIES
Closing
Opening Purchases Cost of
Stock
inventory (Known) goods
(balancing
(Known) sold
figure)
This system determines inventory and It directly determines cost of goods sold
3. takes cost of goods sold as residual and computes inventory as balancing
figure. figure.
Cost of goods sold includes loss of Closing inventory includes loss of goods
4. goods as goods not in inventory are as all unsold goods are assumed to be
assumed to be sold. in Inventory.
Under this method, inventory control is Inventory control can be exercised under
5.
not possible. this system.
ICAI BOS 75
SARANSH INVENTORIES
Inventory Valuation
Techniques
ICAI BOS 76
SARANSH INVENTORIES
The LIFO formula assigns to cost of goods sold, the cost of goods that
(iii) have been purchased last though the actual issues may be made out of
LIFO the earliest lot on hand to prevent unnecessary deterioration in value.
Under this basis, goods issued are valued at the price paid for the latest
(Last in first
lot of goods on hand which means inventory of goods inhand is valued
out) Method at price paid for the earlier lot of goods.
The price paid for the earliest consignments is used for valuing closing
inventory.
(iv)
Simple In Simple Average Price method, all the different prices are added
Average Price together and then divided by the number of prices.
The closing inventory is then valued according to the price ascertained.
Method
Under Weighted Average Price method, cost of goods available for sale
(v) during the period is aggregated and then divided by number of units
Weighted available for sale during the period to calculate weighted average
price per unit. Thus,
Average Price
Weighted average price per unit =
Method Total cost of goods available for sale during that period
Total number of units available for sale during that period
Closing inventory = No. of units in inventory × Weighted average price
per unit
Cost of goods sold = No. of units sold ×Weighted average price per
unit.
ICAI BOS 77
SARANSH INVENTORIES
INVENTORY TAKING
Normally all operations are suspended for one or two days during the financial year and physical
inventory is taken for everything in the godown or the store periodically. For the year-end inventory
valuation, physical inventory taking is done during the last week of the financial year or during the first
week of next financial year. If inventory taking is finished on 26th March, whereas accounting year ends
on 31st March purchases and sales between 26th and 31st March are then separately adjusted. Later, a
value is put on each item. The principle of cost or Net realizable value, whichever is lower, is applied
either for the inventory as a whole or item by item.
ICAI BOS 78
SARANSH DEPRECIATION AND AMORTISATION
MEANING OF DEPRECIATION
CONCEPT OF PPE
Property, plant and equipment (PPE) are tangible items that:
(a) are held for use in the production (b) are expected to be used during
or supply of goods or services, for more than a period of twelve
rental to others, or for administrative months.
purposes; and
ICAI BOS 79
SARANSH DEPRECIATION AND AMORTISATION
Further depreciation by itself does not create funds it merely draws attention to the fact that out
of gross revenue receipts, a certain amount should be retained for replacement of assets used
for carrying on operation.
1 2 3
Residual value of the
Estimated life Cost of the asset asset at the end of
of asset
the of its estimated
useful life
ICAI BOS 80
SARANSH DEPRECIATION AND AMORTISATION
It may be noted that Accounting Standards as well as the Companies Act, 2013 requires
depreciation to be charged
on a component basis.
with a cost that is significant in relation to the total cost of the item
the amount initially recognised in respect of an item of property, plant and equipment
based on the useful life and residual value of each particular component.
Here it is important to
note that a part of
Property, Plant &
Equipment to be
(a) significant cost
identified as a
when compared to
separate component (b) and estimated
overall cost of item of
should have both: useful life or
property, plant and
equipment and depreciation method
different from rest of
the parts of the
property, plant and
equipment
ICAI BOS 81
SARANSH DEPRECIATION AND AMORTISATION
DEPRECIABLE AMOUNT
‘USEFUL LIFE’
ICAI BOS 82
SARANSH DEPRECIATION AND AMORTISATION
If such value is
it is normally
considered as
regarded as nil.
insignificant,
Residual
value
it is estimated at the time of
If the residual
acquisition/ installation, or
value is
at the time of subsequent
considered
revaluation of asset.
significant,
A significant part of an item of property, plant and equipment may have a useful
life and a depreciation method that are the same as the useful life and the
depreciation method of another significant part of that same item. Such parts
may be grouped in determining the depreciation charge.
Thus all the expenses which are necessary for asset to bring it in condition and location
of desired use will become part of cost of the asset.
ICAI BOS 83
SARANSH DEPRECIATION AND AMORTISATION
Once an asset has been brought to its intended condition and location of use, no
cost should recognized as part of cost of the asset unless there is major repair or
addition which increases the useful life of the asset or improves the production
capacity of the asset. Accordingly, cost incurred while an item is capable of
operating in intended manner but it is not yet put to use or is used at less than full
capacity should not be capitalized as part of cost of the asset.
Similarly, cost of relocation of an asset should not be capitalized. Any additions made to a
particular item of property, plant and equipment after it is initially put to use are
depreciated over the remaining useful life of the asset. Therefore, it is important to
maintain an asset register capturing asset wise details of cost, rate of depreciation, date
of capitalization etc. All these details need to be captured for any additions to existing
assets as well. In the absence of the adequate information, it will be very difficult to
compute depreciation expense year on year. Also, at the time of disposal or discard of a
particular asset, it will not be possible to compute gain or loss on such disposal/ discard.
ICAI BOS 84
SARANSH DEPRECIATION AND AMORTISATION
Methods of Depreciation
Units of
Straight-line Diminishing
Production
Method Balance Method
Method
Results in a
constant charge Results in a Results in a
over the useful life decreasing charge decreasing charge
if the residual value over the useful life over the useful life
of the asset does
not change
According to this method, an equal amount is written off every year during the working life
of an asset so as to reduce the cost of the asset to nil or its residual value at the end of its useful
life.
The advantage of this method is that it is simple to apply and gives accurate results
especially in case of leases, and also in case of plant and machinery.
According to this method, an equal amount is written off every year during the working
life of an asset so as to reduce the cost of the asset to nil or its residual value at the end of its
useful life.
ICAI BOS 85
SARANSH DEPRECIATION AND AMORTISATION
The underlying assumption of this method is that the particular tangible asset generates equal
utility during its lifetime. But this cannot be true under all circumstances.
The expenditure incurred on repairs and maintenance will be low in earlier years, whereas the
same will be high as the asset becomes old.
Apart from this the asset may also have varying capacities over the years, indicating logic for
unequal depreciation provision.
However, many assets have insignificant repairs and maintenance expenditures for which
straight line method can be applied.
While using this method the period of use of an asset in a particular year should also be
considered. In the year of purchase of an asset it may have been available for use for part of the
year only, accordingly depreciation should be proportioned to reflect the period for which it was
available for use.
Under this system, a fixed percentage of the diminishing value of the asset is written off
each year so as to reduce the asset to its residual value at the end of its life.
Repairs and small renewals are charged to revenue.
This method is commonly used for plant, fixtures, etc. Under this method, the annual
charge for depreciation decreases from year to year, so that the earlier years suffer to
the benefit of the later years.
Also, under this method, the value of asset can never be completely extinguished,
which happens in the earlier explained Straight Line Method.
However, it is very simple to operate.
This method is based on the assumption that cost of repairs will increase as the asset
get old, therefore, depreciation in earlier year should be high when the repair cost is
expected to be low and depreciation in later years should be low when the repair cost
is expected to be high.
Therefore, this method will result in almost equal burden in all the years of use of the
asset as depreciation will reduce with increase in repair costs will increase with every
passing year.
On the other hand, under the Straight Line Method, the charge for depreciation is
constant, while repairs tend to increase with the life of the asset.
ICAI BOS 86
SARANSH DEPRECIATION AND AMORTISATION
ICAI BOS 87
SARANSH DEPRECIATION AND AMORTISATION
Accounting Entries:
There are two alternative approaches for recording accounting entries for depreciation.
ICAI BOS 88
SARANSH DEPRECIATION AND AMORTISATION
Depreciation of the asset is determined by comparing the annual production with the
estimated total production.
×
Depreciation for the Depreciable Production during the period
period Amount Estimated total production
DEPLETION METHOD
ICAI BOS 89
SARANSH DEPRECIATION AND AMORTISATION
ICAI BOS 90
SARANSH DEPRECIATION AND AMORTISATION
EXAMPLE:
A Machine costing ₹6,00,000 is depreciated on straight line basis having useful life of 10 years
and Nil residual value, for three years. The estimate of remaining useful life after third year was
reassessed at 5 years. In this case, Depreciation per year will be = ₹60,000 (₹6,00,000 / 10)
Book value of the computer at the end of third year = ₹6,00,000 – ₹1,80,000 = ₹4,20,000.
After recognizing an asset initially, the asset whose fair value could be reliably measured
could be carried at the revalued amount, being the fair value at revaluation date and
reduced by successively accumulated depreciation and successive accumulated
impairment losses (permanent decline in value) (if any).
It may be pertinent to note that revaluation of Property, Plant and Equipment is an
accounting policy choice, and not mandatory under the accounting standards or the
Companies Act, 2013.
Revaluation
Increase Decrease
ICAI BOS 91
SARANSH DEPRECIATION AND AMORTISATION
EXAMPLE:
A machine of cost ₹12,00,000 is depreciated straight-line having useful life of 10 years and
zero residual value for three years. At the end of third year, the machine was revalued
upwards by ₹60,000 the remaining useful life was reassessed at 9 years.
In this case,
Depreciation per year charged for three years = ₹12,00,000 / 10 = ₹1,20,000
WDV of the machine at the end of third year = ₹12,00,000 – ₹1,20,000 × 3 = ₹8,40,000.
INTANGIBLE ASSETS
Goodwill (purchased)
Customer data collected by
the entities such as customer Patents, Trademarks,
contact numbers / email IDs Copyrights and Long-term
and spending data at stores customer contracts.
like Pantaloons, Westside etc.
could be a major intangible
asset for these entities.
ICAI BOS 92
SARANSH DEPRECIATION AND AMORTISATION
Intangible assets can be recognized in the financial statements provided they meet the
following conditions:
The intangible asset is identifiable. Being The enterprise can exercise control
identifiable means the entity could rent, over such intangible asset. Control
sell, exchange or distribute the specific means the power available with the
future economic benefits attributable to enterprise to obtain economic
the asset without disposing of future benefits from the asset and at the
economic benefits that flow from other same time, can restrict access of
assets used in the same revenue
others to those benefits.
earning activity.
An intangible asset acquired separately usually measured at cost, as cost can be measured
reliably in such cases. The cost of the intangible asset would comprise of:
ICAI BOS 93
SARANSH DEPRECIATION AND AMORTISATION
These are assets that have a physical These are identifiable assets that do NOT have
substance i.e., they can be seen and a physical substance, held for use in the
touched, held for use in the production or production or supply of goods or services, for
supply of goods or services, for rental to rental to others, or for administrative
others, or for administrative purposes. purposes.
Useful life is based on expected usage, with Useful life of Intangible Assets is presumed not
no presumption laid down to exceed 10 years unless evidence exists to
for the same. the contrary.
AMORTISATION
Amortisation can be defined as ‘the systematic allocation of the depreciable amount of an
intangible asset over its useful life’. Depreciable amount is the cost of an asset less its residual
value. Useful life is either:
the number of production or
similar units expected to be
obtained from the asset by
the enterprise.
the period of time over
which an asset is expected
to be used by the enterprise
ICAI BOS 94
SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES
It must be in
writing and It
must be 5
dated. It must contain an
order to pay a
certain sum of
money.
Payment
must be in
legal
currency of
the country.
The promise to
pay must be
unconditional.
It should be
properly stamped
(except in case of
bills payable ‘‘on
demand”)
ICAI BOS 95
SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES
Drawee
ICAI BOS 96
SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES
PROMISSORY NOTES
A promissory note is an instrument in writing, not being a bank note or currency note containing
an unconditional undertaking signed by the maker to pay a certain sum of money only to or to
the order of a certain person. Under Section 31(2) of the Reserve Bank of India Act a promissory
note cannot be made payable to bearer.
It must contain a
clear promise to
pay. Mere The promise to
acknowledgeme pay must be
It must be in nt of a debt is not unconditional.
writing. a promissory “I promise to pay
note. ₹50,000 as soon
as I can” is not an
unconditional
promise.
The promiser or
maker must sign
the promissory
The maker must
note. be a certain
person.
Payment must be
in legal currency It does not
of the country. require any
It should not be acceptance.
It should be
made payable to properly
the bearer. stamped.
ICAI BOS 97
SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES
There are generally 3 parties (Drawer, Drawee There are 2 parties (Maker and Payee) in
and Payee) in bill of exchange. promissory note.
The drawer and payee may be same person In promissory note maker and payee cannot
in case of bill of exchange be same person
In case of dishonour, a bill of exchange must Noting and protest is not required in case of
be noted and protested. dishonour of a promissory note.
ICAI BOS 98
SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES
Retained :- No entry
Discounted:-
Bank/Cash A/c --- Dr.
Discount A/c --- Dr.
To Bills Receivable A/c
Retained :-
Bank A/c ----- Dr.
To Bills Receivable A/c
Retained :-
Drawee A/c --- Dr.
To Bills Receivable A/c
Discounted :-
Drawee A/c --- Dr.
To Bank A/c
Bills Payable A/c Dr.
On due – Bill dishonoured
To Drawer A/c
Endorsed :-
Drawee A/c ---- Dr.
To Creditor A/c
ICAI BOS 99
SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES
TERM OF A BILL
BILL AT SIGHT
Bill at Sight means the instruments in which no time for payment is mentioned. A cheque is
always payable on demand
when it is expressed
to be payable on
demand, or at sight
or on presentment.
on a specific day
(b) When the bill is made payable at a stated (b) That date on which the term of the bill
number of months(s) after date. shall expire will be the due date.
Note: The term of a Bill after sight commences from the date of acceptance of the bill whereas
the term of a Bill after date commences from the date of drawing of bill.
NOTING CHARGES
When bill is Notary public will Charges of notary Noting charges are
dishonored, bill is note the fact of public are known paid by holder &
to be presented to dishonor, so it as noting charges. recovered from
notary public becomes evidence drawee.
(govt. appointed for court cases.
authority)
1 2 3 4
RENEWAL OF BILL
INSOLVENCY
Insolvency of a person means that he is unable to pay his liabilities. This means that bills
accepted by him will be dishonored.
ACCOMMODATION BILLS
Accomodation
Bills
It is not a trade bill.
BUSINESS ENTITIES
Business Entity
Manufacturing Non-Manufacturing
Business Entities Business Entities
Final Accounts
Final Accounts
MANUFACTURING ENTITIES
The manufacturing entities generally prepare a separate Manufacturing Account as a part of
Final accounts in addition to Trading Account, Profit and Loss Account and Balance Sheet. The
objective of preparing Manufacturing Account is to determine manufacturing costs of finished
goods for assessing the cost effectiveness of manufacturing activities. Manufacturing costs of
finished goods are then transferred from the Manufacturing Account to Trading Account.
Trading account shows Gross Profit Manufacturing account deals with the
while Manufacturing Account raw material, and work in progress
shows cost of goods sold which while the trading account would deal
includes direct expenses. with finished goods only.
MANUFACTURING COSTS
Manufacturing costs are classified into:
NON-MANUFACTURING ENTITIES
Profit or loss is disclosed in the Income It exhibits assets and liabilities of the business
Statement prepared at the close of the as at the close of the financial year.
financial year.
Income Statement is sub-divided into Apart from balance sheet to judge financial
following two parts for a non- manufacturing position of the business, sometimes additional
concern: statements are also prepared like cash flow
(i)Trading account; and statement, value added statement etc. which
(ii) Profit and Loss account is not mandatory for non-corporate entities.
These additional statements are prepared for
the better understanding of the financial
position of the business.
Income Statement discloses net profit of the Position statement discloses the assets and
businessafter adjusting from the income liabilities positionas on a particular date.
earned during the year, all the expenditures of
the business incurred in that year.
Having regard to these basic principles, the various matters to which attention should be paid
for determining the different aspects of transactions, a record of which should be kept, and the
different heads of account under which various items of income and expenditure should be
accumulated, are stated below:
(a) Distinction between personal and (b) Record only current period
business income:- Since the final transactions:- Though the record of
statements of account are intended to transactions should be maintained
show the profitability of the business continuously, at the end of each
and not that of its proprietors, it is accounting period, the transactions of
essential that all personal income and the closing accounting period should
expenditure should be separated from be cut off from those of the
business income and expenditure succeeding period.
MATCHING PRINCIPLE
This principle demands that expenses incurred to earn the revenue should be properly
matched. This means the following:
(a) If a certain revenue and income is entered in the Trading / Profit and Loss Account all the
expenses relating to it, whether or not payment has been actually made, should be debited to
the Trading / Profit and Loss Account. This is why at the end of the year an entry is passed to
bring into account the outstanding expenses. That is also the reason why the opening
inventory of goods is debited to the Trading Account since the relevant sale is credited in the
same account.
(b) If some expense has been incurred but against it sale will take place in the next year or
income will be received next year, the expense should not be debited to the current year’s
Profit and Loss Account but should be carried forward as an asset and shown in the Balance
Sheet. It will be debited to the Profit and Loss Account only when the relevant income will also
be credited. The same reason applies to depreciation of assets also. The part of the cost which
is used to earn current year revenue is debited in same year.
(c) If an income or revenue is received in the current year but the work against it has to be
done and the cost in respect of it has to be incurred next year, i.e. income received in advance
the income or the revenue is considered to be of next year. It should be shown in the Balance
Sheet on the liabilities side as “income received in advance” and should be credited to the
Profit and Loss Account of the next year. E.g. Newspapers or magazines usually receive
subscriptions in advance for a year. The part of subscription that covers copies to be supplied
in the next year is treated as income received in advance.
An exception: There appears to be one exception to the rule that only such costs as have
yielded or is expected to yield revenue should only be debited to Profit and Loss Account. For
example, if a fire has occurred and has damaged the firm’s property the loss must be debited
to the Profit and Loss Account to the extent it is not covered by insurance. A loss, resulting from
the fall of selling price below the cost or from some debts turning bad, must similarly be
debited to the Profit and Loss Account. If this is not done the profit will be over-stated.
Treatment in
Treatment in Treatment in
Adjustment Adjustment Entry Profit & Loss
Trading A/c Balance Sheet
A/c
Goods
Added to
purchased but Purchases A/c Dr.
3 purchases on
omitted to be To Creditors A/c
the debt side
recorded
Deducted from
Deducted from
sales on the
(i) Sales A/c Dr. debtors on the
credit side
Sale of goods To Debtors A/c assets side
4 on approval
Added to
basis (ii) Closing Stock A/c Dr. Added to
closing stock
To Trading A/c closing stock on
on the credit
the assets side
side
Deducted from
Depreciation A/c Dr. Shown on the the concerned
7 Depreciation
To Asset A/c debt side asset on the
assets side
Added to
Deducted from
Provision Profit & Los A/c Dr. Bad-debts
8 debtors on the
Doubtful debts To Prov. for Doubtful Debts A/c on the debit
assets side
side
Shown on the
Provision for Deducted from
Profit & Los A/c Dr. debit side as
9 discount on debtors on the
To Prov. for Disc. on Debtors A/c a separate
debtors assets side
item
Added to
Bad-debits
Deducted from
Further Bad- Bad-debts A/c Dr. (given in Trial
10 debtors on the
debts To Sundry Debtors A/c Balance) on
assets side
the debit
side
Treatment in
Treatment in Treatment in
Adjustment Adjustment Entry Profit & Loss
Trading A/c Balance Sheet
A/c
Accrued
Income Added to the
(Income Accrued Income A/c Dr. respective Shown on the
13
earned but To Income A/c income on the assets side
not credit side
received)
Unearned
Deducted from
Income
Income A/c Dr. the respective Shown on the
14 (Income
To Unearned Income A/c income on the liabilities side
received in
credit side
advance)
Added to the
Interest on Interest on capital A/c Dr. Shown on the
15 capital on the
capital To Capital A/c debit side
liabilities side
Added to the
Interest on Interest on Drawings A/c Dr. Shown on the drawings and then
16
Drawings To Interest on Drawings A/c credit side deducted from
Capital
Interest on
loan (taken Interest on Loan A/c Dr. Shown on the Added to the loan
17
from To Loan A/c debit side on the liabilities side
someone)
Amount not
Total amount of recovered from Amount recovered
Insurance Company A/c Dr.
Abnormal loss is deducted the insurance from the insurance
18 Profit & Loss A/c Dr.
loss of stock from purchases company is company is shown
To Purchases A/c
on the debt side shown on the on the assets side
debit side
A non-profit organization is a legal accounting entity that is operated for the benefit of the
society as a whole, rather than for the benefit of a sole proprietor or a group of partners or
shareholders. Non-profit making organisations such as public hospitals, public educational
institutions, clubs, temples, churches etc., as a part of their final accounts prepare Receipts
and Payments Account and Income and Expenditure Account to show periodic performance
and Balance Sheet to show financial position at the end of the period.
Financial statements of
Not-for-profit
Organisations
Receipts
and Pay e
Account ments Balanc
equivale Income and t
nt to She e
Cash Bo Expenditure Account
ok
equivalent to Profit
and Loss Account
Donations, Entrance and Admission Fees, Subscription, Life Membership Fee are some of the sources of
incomes for the nonprofit organizations. These items have separate treatment, some being capitalized while
others are treated on accrual basis.
This account is
It is the summary of
usually not a part Surplus or deficit for
the cash and bank It starts with
of the double entry an accounting
transactions like opening cash and
system as it period cannot be
cash book, all the bank balances
includes all cash ascertained from
receipts (capital or and also ends
and bank receipts this account, since,
revenue) are with their closing
and payments, it shows only the
debited, similarly, all balances.
whether they are Cash/Bank position
the expenditures
related to current, and excludes all
(capital or revenue)
past or future non cash items.
are credited.
periods
’
ent years
Only curr
enue ared by ex penses
It is a rev It is prep and non- l income a n d
repared
at expenses Both cash All capita dered.
acc o u n t p
ma tc hin g
such as s and are consi
d o f th e inst the cash ite m s,
expend itu re
rp lu s/ deficit is
the en aga tion, a re The su ce
g period of that deprecia incomes th Balan
e
accountin re ve n u e
into . taken to
g out the ncerned. are ta ke n excluded Sheet an
d is
for findin period co ation.
eficit of nsi d er educted
surp lu s or d co added/d e
d. ec tiv ely with th
that p ioer re sp
fu nd.
ca p ita l
It may be noted that after various accounts have been adjusted and all the revenue
accounts have been closed off by transfer to the Income and Expenditure Account,
there will still be a number of balances left over. These are included in the Balance
Sheet.
This account consist of a classified This Account resembles a Profit and Loss
summary of cash receipts and payments Account and serves the same function in
over a certain period together with cash respect of a non-profit making concern.
balances at the beginning and close of the Income and Expenditure Account is drawn up
period. in the same form as the Profit and Loss
Account.
Receipts and payments includes items Income and Expenditure Account contains all
relating to all the periods whether of revenue incomes and expenditures relevant to the
or capital nature. current period only, whether received or paid
out as well as that which have fallen due for
recovery or payment. Capital Receipts,
prepayments of income and capital
expenditures, prepaid expenses are
excluded.
The balance of the account at the end of a The closing balance represents the amount
period represents the difference between the by which the income exceeds the
amount of cash received and paid up. It is expenditure only or vice versa.
always in debit since it is made up of cash in
hand and at bank.
Situations may require compilation of Income and Expenditure Account and the Balance Sheet
from the Receipts and Payments Account after making adjustments in respect of Income
accrued but not collected and expenses outstanding. The preparation of Balance Sheet in such
a case is also necessary since an Income and Expenditure Account must always be
accompanied by a Balance Sheet. The procedure which should be followed in this regard is
briefly outlined below.
BALANCE SHEET
FIXED ASSETS:
Opening balances of Fixed Assets(Furniture, building, equipment, etc.) are
increased by the amount of purchases and reduced by sales of the same and
depreciation on the same.
LIABILITIES:
Opening balances of liabilities should be adjusted for any increase or decrease
in the same.
These may have been raised either for Such fees which are payable by a
meeting some revenue or capital member on admission to club or
expenditure and are credited directly to society are normally considered capital
the Income and Expenditure Account receipts and credited to Capital Fund.
but if the donors have declared their Where the amount is small, it could be
specific intention, are credited to treated as income and can be included
special fund account and in the in the Income and Expenditure Account.
absence thereof, to the Capital Fund If the question is silent then always take
Account. it to be capital receipt.
Subscription
Subscriptions being an income should be
allocated over the period of their accrual.
If some subscriptions is received in
advance, their amount is also indicated.
In such cases, it is always desirable to set
up a Subscription Account for
determining the amount of subscription
pertaining for the period for which
accounts are being prepared.
Technique of
Determination Statement of obtaining
Definition of of profit by
Single Entry Affairs and its complete
Types of Single comparing comparison information for
System and its entry system capitals at with Balance preparation of
features different sheet financial
points of time
statements
Inaccurate,
unscientific and
unsystematic
Estimate of
profits and
financial
position based
on available
information
(Less) (Equals)
Closing Capital Opening Capital Profit/ Loss
Particulars ₹
Sources utilized by accountant- Collection of necessary information about assets and liabilities
Derivation of opening and closing capitals - Statement of Affairs at different points of time
Capital In this statement, capital is merely a Capital is derived from the capital
balancing figure being excess of account in the ledger and total of
assets over capital. Hence assets need assets side will always be equal to the
not be equal to liabilities. total of liabilities side.
Omission Since this statement is prepared on All items are properly recorded. It is
basis of incomplete records, it is easy to locate missing items since the
difficult to locate assets and liabilities, balance sheet will not agree.
if they are omitted from the books.
Objective The object of preparing this statement The object of preparing the balance
in the calculation of capital figures in sheet is to ascertain the financial
beginning and at end of accounting position on a date.
period respectively.
01 02 03 04 05
General
Techniques
Fresh
Derivation of
Investment by
proprietors/
Techniques of Information
from Cash
partners obtaining complete
Book
accounting
information
Analysis of
Distinction
Sales Ledger,
between
Purchase
Business
Ledger and
Expenses and
Nominal
Drawings
accounts
Business An
An Sharing of
carried on Unlimited agreement
association profits and Existence of
by all or any liability of entered
of two or losses of a business
one of them all partners into by all
more the
acting for all persons
persons business
concerned
DEFINITION OF PARTNERSHIP
Capital accounts of
Trading and Profit and Loss
partners: fixed capital
Profit and Loss Account Appropriation Account
method or fluctuating
and Balance Sheet
capital method
FEATURES OF A PARTNERSHIP
Mutual agency
Sharing of profit
It means that the business is to be
The persons concerned must agree to carried on by all or any of them acting for
share the profits of the business. all. Thus, if the person carrying on the
Section 4 of Indian Partnership Act, business acts not only for himself but for
1932 does not insist upon sharing of others also so that they stand in the
losses. Thus, a provision for sharing of positions of principals and agents, they
loss is not necessary. are partners.
NUMBER OF PARTNERS
*As per Section 464 of the Companies Act, 2013, no association or partnership consisting of more
than 100 number of persons as may be prescribed shall be formed for the purpose of carrying on
any business. Rule 10 of Companies (incorporation) Rules 2014 specifies the limit as 50 .Thus,
maximum number of members in a partnership firm are 50.
DEFINITION OF LLP
1. Applicable Law Indian Partnership Act 1932 The Limited Liability Partnerships
Act, 2008.
4. Body No Yes
Corporate
8. Ownership of Firm cannot own any assets. The LLP as an independent entity
Assets The partners own the assets can own assets.
of the firm.
10. Principal Agent Partners are the agents of Partners are agents of the firm
Relationship the firm and of each other only and not of other partners
2
Method of valuing goodwill on
9
Commencement and
the occasions of changes in
duration of business
the constitution of the firm;
3 10
Amount of capital to be Procedure by which a partner
may retire and the method of
contributed by each partner
payment of his dues
5 12
Treatment of losses arising
each partner on his capital and
out of the insolvency of a
on his loan to the firm, and to be
charged on his drawings.
partner
6 13
Procedure to be allowed for
The ratio in which profits or
settlement of disputes
losses are to be shared
among partners
POWERS OF PARTNERS
In certain cases an individual partner has no power to bind the firm. This is to say that third
parties cannot bind the firm unless all the partners have agreed. These cases are:
ACCOUNTS
Partnership Act doesn’t specifiy any format for preparation of accounts of Partnership Firm
and thus accounts are prepared as per Basic rules of Partnership accounts.
There is not much difference between the accounts of a partnership firm and that of sole
proprietorship (provided there is no change in the firm itself).
The only difference to be noted is that instead of one Capital Account there will be as many
Capital Accounts as there are partners.
When a partner takes money out of the firms for his domestic purpose, either his Capital
Account can be debited or a separate account, named as Drawings Account, can be
opened in his name and the account may be debited.
In a Trial Balance of a partnership firm, one may find Capital Accounts of partners as well as
Drawings Accounts.
Finally the Drawings Account of a partner may be transferred to his Capital Account so that
a net figure is available.
Generally the Drawings Account or Current Account (as it is usually called) remains
separate.
METHODS OF ACCOUNTING
INTEREST ON CAPITAL
INTEREST ON DRAWINGS
Calculation of Interest on Drawings: Total Drawings x Interest Rate x Multiplication Factor
Note: Where the date of drawings not given then interest on drawing is always calculated for 6
months /multiplication factor will be 6/12
In such case, allocation of profit is done in a normal way if the share of partner,
who has been guaranteed minimum profit, is more than the amount of
guaranteed profit.
However, if share of the partner is less than the guaranteed amount, he takes
minimum profit and the excess of guaranteed share of profit over the actual share
is borne by the remaining partners as per the agreement.
If the question is silent about the nature of guarantee, the burden of guarantee is
borne by the remaining partners in their mutual profit sharing ratio.
CAPITAL RATIO
Partners may agree to share profits and losses in the capital ratio.
If capitals are
fluctuating and
If capitals are fixed partners introduce
or withdraw capitals
during the year
VALUATION OF GOODWILL
Goodwill is the value of reputation of a firm in respect of profits expected in future over and
above the normal rate of profits.
Admission of partner
Annuity basis
Goodwill=Super Profit x Annuity Number
Capitalization
Goodwill = Super Profit / Normal Rate of Return
basis
ADMISSION OF A
NEW PARTNER
ACCOUNTING ENTRIES
2. Assets Account (Individually) Dr. with the increase in the value of the of assets
To Revaluation Account
3. Revaluation Account Dr. with the profit in the old profit sharing ratio.
Or
Capital A/cs of the old partners Dr. with the loss in old profit sharing ratio.
To Revaluation Account
Whenever a new
partner is admitted, should be transferred to
in the old profit
any reserve etc. lying the Capital Accounts of
sharing ratio.
in the Balance Sheet the old partners.
GAINING PARTNERS
The partners whose profit shares have increased as a result of change are known as gaining
partners.
GAINING RATIO
HIDDEN GOODWILL
When the value of the goodwill of the firm is not specifically given, the value of goodwill has to be
inferred as follows:
Particulars
Less: Total capital after taking into consideration the capital brought in by incoming xxx
partner
RETIREMENT OF A PARTNER
Revaluation
Account or Profit Adjustment of Transfer of Profit/loss on
and Loss goodwill amongst reserves goodwill, revaluation is
Adjustment Account the remaining Transfer of profit/ transferred to old
for revaluation of partners in their loss on revaluation partners in their old
assets and liabilities profit gaining ratio to retiring partner profit sharing ratio
RETIREMENT OF A PARTNER
If it is decided that revalued figures of assets and liabilities will not appear in
the balance sheet of the continuing partners, then a journal entry should be
passed with the amount payable or chargeable to the retiring partner which
the continuing partners will share at the ratio of gain.
RESERVES
On the retirement of a partner any Alternatively, only the retiring partner’s share
undistributed profit or reserve standing at the may be transferred to his Capital Account if
Balance Sheet is to be credited to the Partners’ the others continue at the same profit sharing
Capital Accounts in the old profit sharing ratio. ratio.
After adjustment of the above The continuing partners may discharge the
mentioned items, the Capital whole claim at the time of retirement. Then the
Account balance standing to the journal entry will be
credit of the retiring partner
represents amount to be paid to him. Retiring Partner’s Capital A/c ..........Dr.
To Bank A/c
As a rule, the payment is made according to terms of partnership agreement which might
provide one of the following alternatives:
A.
Repayment may be made in instalments
over a period of time and the interest is paid
on outstanding balance which will be treated
B.
as a loan of the outgoing partner. The amount due may be treated as a loan
to the firm and in return the firm will either
pay interest at a fixed rate or share of the
C. profit of the firm.
Sometimes it is
Paying a
stated that the loan
partner’s loan is is to be paid off in
only a matter of equal instalments
arranging and that the
finance. balance is to carry
interest.
DEATH OF A PARTNER
When the partner dies the amount payable to him/her is paid to his/ her legal representatives.
It may be noted that the outgoing partner is not bound to make election until the
share of the profit that would be payable to him has been ascertained.
The amount
Share of profit
standing to the
Share of goodwill on the
credit to the Share of Joint
of the firm revaluation
capital account of Life Policy
of assets and
the deceased Interest on
liabilities
partner capital, if Share of Share of profit
provided in undistributed upto the date of
the partnership profit or death
deed upto the reserves
date of death
Dissolution of a partnership refers to the Dissolution of the firm implies that the entire
discontinuance of the relation between the firm ceases to exist, including the relation
partners of the firm. among all the partners.
Assets and liabilities are revalued after Assets and liabilities are settled on winding
winding up of the existing partnership. up of a firm.
In case of partnership
at will, a partner gives notice of
dissolution All partners except one become
insolvent
CONSEQUENCES OF DISSOLUTION
On the dissolution
Afterwards, the capital
of a partnership,
contributed by
firstly, the assets of
partners is repaid and,
the firm, including
if there is still a surplus,
goodwill, are
it is distributed among
realized;
the partners in their
profit-sharing ratio.
Conversely, after payment of liabilities of the firm and repayment of loans from partners, if the
assets of the firm leftover are insufficient to repay in full the capital contributed by each partner,
the deficiency is borne by the partners in their profit-sharing ratio.
According to the provisions contained in the Partnership Act, upon dissolution of the partnership,
the mutual rights of the partners, unless otherwise agreed upon, are settled in the following
manner:
The assets of the firm, including any Losses including deficiencies of capital are
sums contributed by the partners to paid, first out of profits, next out of capital,
make up deficiencies of capital have to and, lastly, if necessary, by the partners
be applied in the following manner and individually in the proportion in which they
order: are entitled to share profits.
in paying the in paying the debts in in paying the debts in the residue, if
debts of the paying to each partner paying to each partner any, to be
firm to third what is due to him on rateably what is due to him divided among
parties account of capital. from the firm in respect of the partners in
advances as distinguished the proportion
from capital of the firm to in which they
third parties are entitled to
share profits
A partner who, on admission, pays a premium to the other partners with a stipulation
that the firm will not be dissolved before the expiry of a certain term, will be entitled to
a suitable refund of premium or of such part as may be reasonable, if the firm is
dissolved before the term has expired.
The amount to be repaid will be such as is reasonable having regard to the terms upon which the
admission was made and to the length of the period agreed upon and that already expired. Any
amount that becomes due will be borne by other partners in their profit- sharing ratio.
To close books of accounts of Partnership Firm, we need to transfer all the assets and liabilities
to Realization Account.
Specimen of Realization Account
Particulars ₹ Particulars ₹
To Bank/Cash
By Provision on Assets
(expenses for realization)
By Partners’ Capital
To Partners’ Capital
A/cs
A/cs (Expenses or Liabilities
(Assets taken over by
paid by partners)
partners)
KEY POINTS
As per the above decision, solvent partners have to bear the loss due to
insolvency of a partner and have to categorically put that the normal loss
on realization of assets to be borne by all partners (including insolvent
partner) in the profit-sharing ratio but a loss due to insolvency of a partner
has to be borne by the solvent partners in the capital ratio.
The provisions of the Indian Partnership Act are not contrary to Garner vs. Murray rule. However, if
the partnership deed provides for a specific method to be followed in case of insolvency of a
partner, the provisions as per the deed should be applied.
PIECEMEAL PAYMENTS
Maximum
Each installment realised is
Loss Method
considered to be the final
payment i.e., outstanding assets
The amount of hypothetical capital of each partner is then subtracted from the amount of his
actual capital; the resultant figure will be the amount of excess capital held by him. By repeating
the process once or twice, as may be necessary between the partners having excess capital, the
amount by which the capital of each partner is in excess will be ascertained. The partner with the
largest excess capital will be paid off first, followed by payment to the other or others who rank
next to him until the capitals of partners are reduced to their profit-sharing ratio.
under the
formed and Companies
incorporated Act, 2013 or
is termed as
Company
an entity
under any of
formed the previous
an existing
and company
company
registered laws.
TYPES OF COMPANIES
Incorporated
Not a citizen
Association
Separate
Legal Entity Transferability of
Shares
Distinction
Maintenance
between
Perpetual of Books
Ownership and
Existence Management
Periodic Audit
Right of Access to
Common Seal Limited Liability Information
financial
Under Section of the state of
statements shall
129 of the affairs of the
give a true and
Companies Act, company
fair view
2013,
shall be in the
form or forms
comply with the different class
as
notified accounting or classes of
may be
standards and companies,
provided
for
as
Schedule III to
prescribed in
the Companies
Act, 2013
PROVISIONS APPLICABLE
financial
In case of all corporate entities:
Under Section statements shalldeals with the
Schedule III to the Companies Act, 2013
129 of the give a trueHowever,
and
format of the financial statements. Schedule
Companies Act, fair view
III contains
2013, three divisions either based on the
applicability of the standards or on the nature of the
entity. Each division of Schedule III contains parts
dealing with formats of financial statements. Part I
prescribes the format of Balance Sheet while Part II
shall be in the
prescribes the format of Statement of Profit and Loss.
form or forms
as different class
may be or classes of
provided companies,
Applicability of Divisions as given under Schedule III has been explained below:
for
Companies that are required to apply Accounting Standards notified under the
Division I
Companies Act, 2013.
Companies that are required to apply Indian Accounting Standards notified under
Division II
the Companies Act, 2013.
FINANCIAL STATEMENTS
Notes to Accounts
SHARE CAPITAL
re
d Sha Issu
rize r ed
S
tho ital o Cap hare
Au p al
Ca ital
min l
No a
pit
Ca
Su re C
l
Sh
ita
bs
re C p
a
Sha id-u
ap
cri pita
Share capital of a
be
Pa
a
company
d
is divided into various
l
categories
l
Sha lled-u
Res apita
C
r
e
a
e
erv
C
C
re
api
Sha
tal
p
TYPES OF SHARES
Types of shares
SUBSCRIPTION OF SHARES
ISSUE OF SHARES
Shares issued at
Discount Premium
According to Section 52
of the Companies Act,
*To provide for
2013, Securities
premium on the
Premium Account may
redemption of *To write off
be used by the
redeemable preliminary
company
reference shares or expenses
debentures of the of the company.
company. To write off the
expenses of, or
commission paid, or
discount allowed on
any of the securities
or debentures of the
company.
Calls-in-
Calls-in-arrears advance i.e.
Share installment
i.e. money money of future
money received
received is less installments
in full
than due received before
hand
“Calls-in-
“Calls-in-arrears advance A/c” is
“Bank A/c” is
A/c” and Bank A/c credited and
debited with full
(money received) Bank A/c is
money received
is debited debited (money
received)
As per Table F maximum prescribed rate is As per Table F maximum prescribed rate is 12%.
10%.
Period considered: From the date call money Period Considered: From the date money was
was due to the date money is finally received. received to the day call was finally made due.
Directors have a right to waive off such Shareholders are not entitled for any dividend
interest in individual cases at their own on calls in advance.
discretion.
FORFEITURE OF SHARES
When shares are forfeited, the title of such shareholder is extinguished but the
amount paid to date is not refunded to him.
The shareholder has no further claim on the company.
The power of forfeiture must be exercised strictly having regard to the rules
and regulations provided in the Articles of Association and it should be bona
fide in the interests of the company.
Directors also have the right to cancel such forfeiture before the forfeited
shares are re-allotted.
Where the amounts due on allotment, first call and final call is not received, the entry will be:
Share Capital Account Dr. [No. of shares x called-up value per share]
Where all amounts due on allotment, first call and final call have been transferred to Calls-in-
Arrears Account, the entry will be:
Share Capital Account Dr. [No. of shares x called-up value per share]
If the loss on re-issue is less than the amount forfeited, the surplus should be transferred
to Capital Reserve.
The forfeited amount on shares (amount originally paid-up) not yet reissued should be
shown under the heading ‘share capital.’
When only a portion of the forfeited shares are re-issued, then the profit made on reissue
of such portion of shares only must be transferred to Capital Reserve.
When the shares are re-issued at a loss, such loss is to be debited to “Forfeited Shares
Account”.
If the shares are re-issued at a price which is more than the face value of the shares, the
excess amount will be credited to Securities Premium Account.
If the re-issued amount and forfeited amount (taken together) exceeds the face value of
the shares re-issued, it is not necessary to transfer such amount to Securities Premium
Account.
ACCOUNTING ENTRIES
ISSUE OF DEBENTURES
Meaning
A debenture is a bond issued by a company under its seal, acknowledging a debt and
containing provisions as regards repayment of the principal and interest. If a charge has
been created on any or on the entire assets of the company, the nature of the charge and
the assets charged are described therein. Since the charge is not valid unless registered
with the Registrar, and the certificate registering the charge is printed on the bond. It is also
customary to create a trusteeship in favour of one or more persons in the case of
mortgage debentures. The trustees of debenture holders have all powers of a mortgage of
a property and can act in whatever way they think necessary to safeguard the interest of
debenture holders.
Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture” includes
debenture stock, bonds or any other instrument of a company evidencing a debt, whether
constituting a charge on the assets of the company or not.
FEATURES OF DEBENTURES
2. It is a fixed interest-bearing
security where interest falls due on
specific dates.
3. Interest is payable at a
predetermined fixed rate, regardless
of the level of profit.
Periodic Audit
5. It may or may not create a
charge on the assets of a
company as security.
Debentures Shares
2. Debenture holders have no voting rights and 2. Shareholders have voting rights and
consequently do not pose any threat to the consequently control the total affairs of the
existing control of the company. company.
8. Debentures cannot be forfeited for non- 8. Shares can be forfeited for non-payment of
payment of call moneys. allotment and call moneys.
TYPES OF DEBENTURES
Types of Debentures
1. SECURITY
2. CONVERTIBILITY
3. PERMANENCE
4. NEGOTIABILITY
5. PRIORITY
Students can note that instead of passing the separate entries, a compound entry can be
passed:
Bank A/c Dr.
Loss on issue of debenture A/c Dr.
To …% Debenture A/c
To Debenture redemption premium A/c
Alternatively, the Discount on issue of debentures and Loss on Issue of Debentures may be
combined and debited to Loss on issue of debentures A/c. In that case, the journal entry will be
Debenture Allotment A/c Dr.
Discount/Loss on issue of debenture A/c Dr. [Amount equal to the discount on issue of
debenture plus premium on redemption of debenture]
To …% Debenture A/c
To Debentures Redemption Premium A/c
(c) For receipt of call made on allotment
Bank A/c Dr.
To Debenture Allotment A/c
Students can note that instead of passing the separate entries, a compound entry can be
passed:
Bank A/c Dr.
Discount/Loss on issue of debentures A/c Dr.
To …% Debentures A/c
To Debenture redemption premium A/c
(ii) Call made consequent upon allotment of debenture at premium and Redeemable at
premium
Debenture Allotment A/c Dr.
Loss on issue of debenture A/c Dr. [Amount equal to the premium on redemption]
To …% Debenture A/c
To Securities Premium A/c [Amount equal to premium on issue]
To Premium on Redemption of Debentures A/c [Amount equal to Debentures
premium on redemption]
Students can note that instead of passing the separate entries, a compound entry can be
passed:
Bank A/c Dr.
Loss on issue of Debentures A/c Dr.
To …% Debentures A/c
To Securities Premium A/c
To Premium on redemption of debentures A/c
The Debenture Application A/c and Debenture allotment A/c are closed after the allotment of
debentures.
The net effect of the above 6 situations can be summarised as given below:
Condition under
which Debenture issued at par or discount
Debenture redemption at premium
debentures are or premium
issued
Bank A/c Dr
Debentures Bank A/c Dr Loss on issue of Debentures A/c Dr
issued at par To Debentures A/c (Face value) To Debentures A/c (Face value)
To Premium on Redemption of Deb. A/c
Bank A/c Dr
Debentures Bank A/c Dr Loss on issue of Debentures A/c Dr
issued at To Debentures A/c (Face value) To Debentures A/c (Face value)
premium To Securities premium (premium) To Securities premium (premium)
To Premium on Redemption of Deb. A/c
Bank A/c Dr
Discount on issue of Deb. A/c Dr
Loss on issue of Debentures A/c Dr
To Debentures A/c (Face value)
Debentures Bank A/c Dr
To Premium on Redemption of Deb. A/c
issued at Discount on issue of deb. A/c Dr
OR
Discount To Debentures A/c (Face value)
Bank A/c Dr
Loss on issue of Deb. A/c Dr
To Debentures A/c (Face value)
To Premium on Redemption of Deb. A/c
When the debentures are redeemed at a premium (as per terms and
conditions of issue), the premium payable on redemption should be
recognised at the time of issue of debenture itself considering the
principle of conservatism or prudence.
The company issues debentures at a discount when the market rate of interest is higher than
the debenture interest rate. Like shares, Debentures Account is credited with the nominal value.
The difference between the nominal value of debentures and cash received is transferred to
“Discount on Issue of Debentures Account. In the subsequent years, Discount on Issue of
Debentures is written-off proportionately by charging to the Statement of Profit and Loss. It is
considered a normal practice to amortize discount on issue of debentures over the period of
benefit, i.e., normally 3 to 5 years. However, this cannot go beyond tenure of debentures.
In fact, the discount on issue of debentures is considered as incremental interest expense. The
true expense (net borrowing cost) for a particular accounting period is, therefore, the total
interest payment plus the discount amortised.
Sometimes companies issue their own debentures as collateral security for a loan or a
fluctuating overdraft. When the loan is repaid on the due date, these debentures are at once
released with the main security. In case, the company cannot repay its loan and the interest
thereon on the due date, the lender becomes the debenture holder who can exercise all the
rights of a debenture holder.
In such cases, the holder of such debentures is entitled to interest only on the amount of loan,
but not on the debentures.
Further it should be noted that these debentures can be issued at par, premium and at
discount. In each case the second entry for issue of debentures would be done
accordingly. Number of debentures to be issued is calculated as follows:-
(a) If the debentures are redeemable after a certain period of time, say at the end of
5 years, the total amount of discount should be written-off equally throughout the life
of the debentures (applying the straight line method). The main advantage of this
method is that it spreads the burden of discount equally over the years.
(b) If the debentures are redeemable at different dates, the total amount of discount
should be written-off in the ratio of debenture amount outstanding in each year. This
method is suitable when debentures are redeemed by unequal instalments.
The accounting entries would be as follows :
Profit and Loss Account Dr.
To Discount on Issue of Debentures Account
(Being the amount of discount on issue of debentures written-off)
Loss on issue of debentures is also a capital loss and should be written off in a similar
manner as discount on debentures issued. In the balance sheet both the items
(Discount and Loss) are shown as Non-current/current assets depending upon the
period for which it has to be written off.
* Accounting Standard 16 Borrowing Costs states that ancillary borrowing costs and discounts or premiums related
to borrowings can be amortized over the loan period. It also states that share issue expenses, discount on shares,
and ancillary costs—such as discount premiums on borrowing—are excluded from the scope of Accounting
Standard 26 Intangible Assets.
Keeping this in view, Guidance Note clarified that following the generally accepted accounting principle to amortize
these expenses over the period of benefit, typically 3 to 5 years is acceptable.
Interest on Debentures
Interest payable on coupon debenture is treated as a charge against the
profits of the company. Interest on debenture is paid periodically and is
calculated at coupon rate on the nominal value of debentures. The
company will pay interest net of tax to the debenture holders because the
company is under obligation to deduct tax at source at the rates applicable
as per the provisions of the Income tax act 1961. The companies will deposit
the tax so deducted with income tax authorities.
Following accounting entries are to be recorded in this regard:
1. For making interest due
Interest A/c Dr.
To Debenture holders’ A/c
2. For making payment of interest and deduction of tax at source (TDS)
Debenture holders A/c Dr.
To TDS Payable A/c
To Bank A/c
3. For making payment of tax deducted at source
TDS payable A/c Dr.
To Bank A/c
4. For transferring interest to profit and loss account
Profit and Loss A/c Dr.
To Interest A/c
Accounting treatment
Section 63 allows
companies to issue fully
paid-up bonus shares
Bonus shares
from Free reserves
Securities
Can’t be
premium
issued
Capital
redemption
reserve Out of reserves
created by
revaluation of
assets
in lieu of
As per Section 63(2) of The Companies Act, 2013, Bonus shares cannot dividend
be issued unless partly paid up shares are made fully paid up.
Adjustment in
market price
Increase in share
capital
Reduction in
accumulated profits
ACCOUNTING ENTRIES
Right of renunciation refers to the right of the shareholder to surrender his right to
buy the securities and transfer such right to any other person.
Maintenance of
existing shareholders’
proportional holding Convenience Dilution in the Image
in company and in handling value of enhancement
retain their financial share.
issue
and governance
rights
Situations when shares can be offered, without being offered to the existing shareholders,
provided the company has passed a special resolution and shares are offered to
ACCOUNTING TREATMENT
no shares can be redeemed except out of profit of the company which would otherwise be
available for dividend or out of proceeds of fresh issue of shares made for the purpose of
redemption;
where any such shares are proposed to be redeemed out of the profits of the company,
there shall, out of profits which would otherwise have been available for dividends, be
transferred to a reserve account to be called Capital Redemption Reserve Account, a sum
equal to the nominal amount of the shares redeemed; and the provisions of the Act relating
to the reduction of the share capital of a company shall, except as provided in the
Companies Act, apply as if the Capital Redemption Reserve (CRR) Account were the paid-
up share capital of the company.
The utilisation of CRR Account is further restricted to issuance of fully paid-up bonus shares
only.
(b) the
(a) the proceeds capitalisation of (c) combination
of a fresh issue undistributed of (a) and (b).
of shares; profits; or
A company can issue new shares (equity share or preference share) and the proceeds
from such new shares can be used for redemption of preference shares.
The proceeds from issue of debentures cannot be utilised for the purpose.
Section 52 of the
Companies Act, 2013 (b) To write off preliminary expenses of the company
provides that the
securities premium (c) To write off the expenses of, or commission paid, or
account may be discount allowed on any of the securities or debentures of
applied by the the company
company:
Note: If may be noted that certain class of Companies whose financial statements
comply with the Accounting Standards as prescribed under Section 133 of the
Companies Act, 2013, can’t apply the securities premium account for the purposes
(b) and (d).
Any other way, except the above prescribed ways, in which securities premium
account is utilized will be in contravention of law.
The proceeds of a fresh issue of shares will not include the amount of securities
premium for the purpose of redemption of preference shares.
A company may prefer issue of new equity shares for the following reasons:
Advantages
Disadvantages
if minimum number of shares as per (3) above includes a fraction, it must be approximated
to the next higher figure to ensure that provisions of Section 55 are not violated.
Advantages Disadvantage
Companies may have sufficient investments, which can be sold, in the market to arrange
funds for redemption of preference shares.
For transferring nominal amount of shares redeemed to Capital Redemption Reserve Account
REDEMPTION OF DEBENTURES
A debenture is an instrument issued by a company under its seal, acknowledging a debt and
contains provisions as regards repayment of the principal and interest. Under Section 71 (1) of
the Companies Act, 2013, a company may issue debentures with an option to convert such
debentures into shares, either wholly or partly at the time of redemption.
Secured Debentures
Security
Unsecured Debentures
Convertible Debentures
Types of Debentures
Convertibility
Non-Convertible Debentures
Redeemable Debentures
Permanence
Irredeemable Debentures
Registered Debentures
Negotiability
Bearer Debentures
Redemption by paying off the debt on account of debentures issued can be done by one of
these methods:
By payment in lumpsum
By payment in Instalments
At maturity or at the
expiry of a specified
period of debenture, Purchase of Debentures in
The payment of
the payment of entire Open Market
specified portion of
debentures is made in
debenture is made in
one lot.
instalments at
specified intervals. Debentures
sometimes are
purchased in open
market, by debiting
own debentures
account.
Debentures are usually redeemable i.e. either redeemed in cash or convertible after a
specified time period.
Provided that the following classes of companies may issue secured debentures for a
period exceeding ten years but not exceeding thirty years,
2
the properties or assets of the company or its subsidiaries or its holding
company or its associates companies, having a value which is sufficient for
the due repayment of the amount of debentures and interest thereon.
The company shall appoint a debenture trustee before the issue of prospectus
3 or letter of offer for subscription of its debentures and not later than sixty days
after the allotment of the debentures, execute a debenture trust deed to
protect the interest of the debenture holders; and
Provided that in case of a non-banking financial company, the charge or mortgage under sub-
clause (i) may be created on any movable property.
Note: Provided further that in case of any issue of debentures by a Government company which is
fully secured by the guarantee given by the Central Government or one or more State
Government or by both, the requirement for creation of charge under this sub-rule shall not
apply.
Provided also that in case of any loan taken by a subsidiary company from any bank or financial
institution the charge or mortgage under this sub-rule may also be created on the properties or
assets of the holding company.
Section 71 of the Companies Act 2013 covers the requirement of creating a debenture
redemption reserve account. This states as follows:
its profits which are available for company for any purpose except
As per Rule 18 (7) of the Companies (Share Debenture Redemption Reserve shall be
Capital and Debentures) Amendment created out of the profits of the
Rules, 2019, the company shall comply with company available for payment of
the requirements with regard to Debenture dividend;
Redemption Reserve (DRR) and investment
or deposit of sum in respect of debentures the limits with respect to adequacy of
maturing during the year ending on the 31st DRR and investment or deposits, as the
day of March of next year in accordance case may be, shall be as per the table
with the conditions. given on the next page.
Adequacy of Debenture
S. NO Debentures issued by Redemption Reserve
(DRR)
Other Financial Institutions (FIs) within the meaning of DRR will be as applicable
2. clause (72) of section 2 of the Companies to NBFCs registered with
Act, 2013 RBI (as per (3) below)
For listed companies (other than AIFIs and Banking Companies as specified in Sr.
3.
No. 1 above):
For unlisted companies (other than AIFIs and Banking Companies as specified in
4.
Sr. No. 1 above
As per Rule 18 (7) of the Companies (Share Capital and Debentures) Amendment Rules, 2019,
all listed NBFCs; all listed HFCs; all other listed companies (other than AIFIs, Banking
Companies and Other FIs); and all unlisted companies which are not NBFCs and HFCs shall
on or before the 30th day of April in each year, in respect of debentures issued, deposit or
invest, as the case may be, a sum which should not be less than 15% of the amount of its
debentures maturing during the year ending on the 31st day of March of next year, in any one
or more of the following methods, namely:
The amount deposited or invested, as the case may be, above should not be utilised for
any purpose other than for the redemption of debentures maturing during the year
referred to above.
Provided that the amount remaining deposited or invested, as the case may be, shall not
at any time fall below 15% of the amount of debentures maturing during the 31st day of
March of that year.
In case of partly convertible debentures, DRR shall be created in respect of non-
convertible portion of debentures issued.
The amount credited to DRR shall not be utilised by the company except for the purpose
of redemption of debentures.
JOURNAL ENTRIES
The necessary journal entries passed in the books of a company are given below:
* Considering the fact that interest is received each year through cash/ bank account.