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SARANSH Last Mile Referencer for

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,

CA. Ranjeet Kumar Agarwal


President, ICAI
TABLE OF CONTENTS

S.No. Particulars Page No.

1 Chapter 1: Theoretical Framework 1-29

2 Chapter 2: Accounting Process 30-63

3 Chapter 3: Bank Reconciliation Statement 64-70

4 Chapter 4: Inventories 71-78

5 Chapter 5: Depreciation and Amortisation 79-94

6 Chapter 6: Bills of Exchange and Promissory notes 95-104

7 Chapter 7: Preparation of Final Accounts of Sole Proprietors 105-111

8 Chapter 8: Financial Statements of Not-For-Profit Organizations 112-116

9 Chapter 9: Accounts from Incomplete Records 117-120

10 Chapter 10: Partnership and LLP Accounts 121-145

11 Chapter 11: Company Accounts 146-191


BEFORE WE BEGIN
Accounting is a vital area of core competence for Chartered Accountancy students.The
significance of the subject can be judged from the fact that at every level of Chartered
Accountant (CA) course we have a paper on Accounting and that too, the first paper at every
level of CA Course. Accounting truly serves as the cornerstone of the Chartered Accountancy
profession, providing a solid foundation for many other areas of expertise in the field.

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.

Know your Syllabus

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

Section III Section IV Section V

Final Account for Sole


Proprietors Partnership and LLP Company Accounts
Financial Statement of Accounts
Not-for-Profit Organisation
Accounts from Incomplete
Records
At the time of preparation, you should follow the sequence of chapters given in study material. The
chapters of the accounting paper are structured in a logical sequence to facilitate the
understanding of bookkeeping, preparation of accounts, and presentation of financial statements.
This sequential arrangement helps to lay the groundwork to grasp fundamental accounting
concepts appropriately. Chapter 1 and 2 serves as a foundation for later chapters or topics of
accounting hence skipping or glossing over these chapters can lead to gaps in understanding
and comprehending the subject. Understanding each chapter thoroughly ensures a strong
foundation to build upon as you progress through your CA curriculum.

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.

How to write Answers during exams?


While solving the paper in exam hall, you should first write the answer which you know the best.
Starting with questions you are most comfortable with can boost your confidence and set a
positive tone for the rest of the exam. Plus, it allows you to secure marks early on, giving you
more time to tackle the more challenging questions later.

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.

How to manage time in examination?


The examination period of three hours is the most crucial time since it is the time when you apply
the knowledge and skills you've acquired throughout your study period. How well you manage
those three hours, how effectively you tackle the questions, and how accurately you present your
answers all reflect your level of preparation.
You should follow the following tips:

Make optimum use of


15 minutes given for reading.

Go through all the


questions quickly.

Select the questions that you


would be attempting from all
the questions.

Mark the question which you


will be attempting first.

Allocate an estimated time for


each question based on their
difficulty level and marks carried
keeping aside 10-15 minutes for
revisions. Adhere to time allocated.

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

CHAPTER 1: THEORETICAL FRAMEWORK


Every individual performs some kind of economic activity. Such economic activities are performed
through ‘transactions and events’.

Transaction is used to Event is used to mean ‘a


mean ‘a business, happening, as a
performance of an consequence of
act, an agreement’ transaction(s), a result.’

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:

“The function of accounting is to provide quantitative information, primarily of financial


nature, about economic entities, that is needed to be useful in making economic
decisions.”

Thus, accounting may be defined as the process of recording, classifying, summarising,


analysing and interpreting the financial transactions and communicating the results
thereof to the persons interested in such information.

HISTORY & DEVELOPMENT OF ACCOUNTING

Luca Pacioli’s, a Franciscan friar


(merchant class), book Summa de This book contains knowledge
Arithmetica, Geometria, Proportion of business and book-keeping.
at Proportionality (Review of He used the terms Debit (Dr.)
Arithmetic and Geometric and Credit (Cr.) in his books.
proportions) in Venice (1494) is These were the concepts used
considered as the first book on in latin terminology
double entry bookkeeping.

ICAI BOS 1
SARANSH THEORETICAL FRAMEWORK

Debit comes from the Italian debito


which comes from the Latin debita
and debeo which means owed to the
proprietor. Credit comes from the
Italian credito which comes from the
Latin ‘credo’ which means trust or
belief (in the proprietor or owed by
the proprietor).

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

Measurement Measures past performence and depicts


current finanacial position.

Forecasting Helps in forcasting future performance and


financial position.

Decision-
Provide relevant information to the users of
making
accounts for rational decision making.

ICAI BOS 2
SARANSH THEORETICAL FRAMEWORK

Access performance achieved in relation to


Comparison & targets and discloses information regarding
Evaluation accoutning policies for evaluationg and
comparing financial results.

Control Identifies weakness and provides feedbacks to


check weaknesses

Government
Provides necessary information to government
Regulation and
to exercise control.
Taxation

PROCEDURAL ASPECTS OF ACCOUNTING


On the basis of the above definitions, procedure of accounting can be basically divided into two
parts:

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

It is further be divided into


This is the basic function of
different types of subsidiary
Recording accounting where recording is
books as per the nature and
done in a book called "Journal."
size of the business.

This step is a systematic


classification of the recorded it enables to find total
Classifying data and then the classified expenditure incurred
information is recorded into under each head.
Ledgers.

It is concerned with the This process leads to the


preparation and presentation of preparation of
Summarising the classified data useful to the financial statements i.e. Trial
internal as well as the external Balance, Profit and Loss Account,
users of financial statements Balance Sheet, Cash-flow
Statement.

The term 'Analysis' means The figures given in the financial


methodical classification of the statements will not help anyone
Analysing
data given in the financial unless they are in a
statements. simplified form.

The recorded financial data is analysed and interpreted in a manner


that will enable the end-users to make a meaningful judgement
Interpreting
about the financial condition and profitability
of the business operations.

ICAI BOS 4
SARANSH THEORETICAL FRAMEWORK

Communicating It is concerned with the


transmission of summarised,
analysed & interpreted
information to the end-users to This is done through
enable them to make rational preparation and
decisions. distribution of
accounting reports.

USING THE FINANCIAL INFORMATION

There are certain users of accounts. Earlier it was viewed that

accounting is meant for the proprietor or owner of the business, but

changing social relationships diluted the earlier thinking.

It is now believed that besides the owner or the management of the

business enterprise, users of accounts include the investors,

employees, lenders, suppliers, customers, government and other

agencies and the public at large. For example, if an airlines company

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

would like to know and understand whether the business of the

company is going well or there are challenges for the company to run

the business. Accounting provides the art of presenting information

systematically to the users of accounts.

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

Book-keeping refers to the recording of financial data relating to


business operations in an and orderly manner.

Complete Recording of
Transactions

Objectives of
book-keeping

Ascertainment of
Financial Effect on the
Business

ICAI BOS 7
SARANSH THEORETICAL FRAMEWORK

DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTING

Book-keeping Accounting

Concerned with summarising of the recorded


Concerned with recording of transactions.
transactions.

Base of accounting Language of the business

Financial statements do not form part of this Financial statements are prepared on the basis
process. of book-keeping records.

Management takes decisions on the basis of


Managerial decisions cannot be taken.
these records.

It has several sub-fields like financial


There is no sub-field of book-keeping
accounting, management accounting etc.

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.

RELATIONSHIP OF ACCOUNTING AND BOOK-KEEPING CAN BE


DEPICTED IN THE FOLLOWING CHART AS

Accountancy

Accounting

Book Keeping

ICAI BOS 8
SARANSH THEORETICAL FRAMEWORK

SUBFIELDS OF ACCOUNTING

Financial Accounting

Covers the preparation and interpretation


of financial statements and
communication to the users of accounts

Management Accounting

Concerned with internal reporting to the managers of a


business unit. To discharge the functions of stewardship,
planning, control and decision- making, the management
needs variety of information. The different ways of grouping
information and preparing reports as desired by managers
for discharge their functions are referred to as
Management Accounting.

Cost Accounting

The process of accounting for cost which begins with


the recording of income and expenditure or the bases
on which they are calculated and ends with the
preparation of periodical statements and reports for
ascertaining and controlling costs.

Social Responsibility Accounting

Concerned with accounting for social costs


incurred by the enterprise and social
benefits created

Human Resource Accounting

An attempt to identify, quantify and report


investments made in human resources of an
organisation that are not presently accounted for
under conventional accounting practice.

ICAI BOS 9
SARANSH THEORETICAL FRAMEWORK

ACCOUNTING CONCEPTS, PRINCIPLES AND CONVENTIONS

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

Business enterprise is a separate identity


apart from its owner. All the business
transactions are recorded in the business
books of accounts in keeping business
affairs free from influence of personal
affairs of owner.
Money measurement concept

Only those transactions, which can be


measured in terms of money are recorded.
Transactions, even if, they affect the results
of the business materially, are not recorded
if they are not convertible in monetary
terms.

ICAI BOS 10
SARANSH THEORETICAL FRAMEWORK

Periodicity concept

This is also called the concept of definite accounting


period. As per going concern’ concept an indefinite life
of the entity is assumed. For a business entity it causes
inconvenience to measure performance achieved by
the entity in the ordinary course of business.
According to this concept, accounts should be
prepared after every period & not at the end of the life
of the entity. Usually, this period is one year.
Hence, the periodicity concept facilitates in:

Comparing of financial statements of different


periods
Uniform and consistent accounting treatment for
ascertaining the profit and assets of the business
Matching periodic revenues with expenses for
getting correct results of the business operations

Cost Concepts Realisation concept

The value of an asset is to be It closely follows the cost


determined on the basis of concept. Any change in value of
historical cost, in other words, an asset is to be recorded only
acquisition cost. Although there when the business realises it.
are various measurement If accountants anticipate
bases, accountants traditionally decrease in value they count it,
prefer this concept in the but if there is increase in value
interests of objectivity. they ignore it until it is realised.

Matching concept

All expenses matched with the revenue of that period


should only be taken into consideration. In the
financial statements of the organization if any
revenue is recognized then expenses related to earn
that revenue should also be recognized of the entity.
This concept is based on accrual concept as it
considers the occurrence of expenses and income
and do not concentrate on actual inflow or outflow of
cash

ICAI BOS 11
SARANSH THEORETICAL FRAMEWORK

Dual Aspect concept

This concept is the core of double entry book-keeping. Every transaction or event has two
aspects:

It increases one It increases an It decreases


Asset and It decreases one
Asset and one Asset,
simultaneously Asset, increases
decreases decreases a
increases another Asset;
other Asset; Liability.
Liability;

Alternatively

It increases It increases a It decreases It decreases


one Liability, Liability, Liability, Liability,
decreases increases an increases other decreases an
other Asset; Liability; Asset.
Liability;

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,

Prudence, i.e., Neutrality, i.e.,


Faithful judgement about unbiased outlook is
representation the possible future required to identify
of alternative losses which are to and record such
values. be guarded, as well possible losses, as
as gains which are well as to exclude
uncertain. uncertain gains,

Materiality

According to materiality Any insignificant item which


principle, all the items having will only increase the work of
significant economic effect the accountant but will not be
on the business of the relevant to the users’ need
enterprise should be should not be disclosed in the
disclosed in the financial financial statements.
statements.

ICAI BOS 12
SARANSH THEORETICAL FRAMEWORK

FUNDAMENTAL ACCOUNTING ASSUMPTIONS

Going Concern Consistency Accrual

The financial statements Accounting policies are The effects of


are prepared on the followed consistently from transactions and other
assumption that an one period to another and events are recognised on
enterprise is a going change in an accounting mercantile basis i.e. when
concern and will policy is made only in they occur, they are
continue in operation for certain exceptional recorded in the
the foreseeable future. circumstances. accounting records and
reported in the financial
statements of the
periods to which they
relate.

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

Completeness

Substance
Prudence over Form

Understanda
Materiality
bility

Qualitative Characteristics of
Financial Statements
Relevance
Comparability

Neutrality Reliability

Full, Fair &


Faithful
Adequate
Representation
Disclosures

ICAI BOS 13
SARANSH THEORETICAL FRAMEWORK

CAPITAL AND REVENUE EXPENDITURE AND RECEIPTS

Revenue Expense relates to


the operations of the Capital Expenditure, on the
business of an accounting other hand, generates
period or to the revenue enduring benefits and helps
earned during the period or in revenue generation over
the items of expenditure, more than one accounting
benefits of which do not period.
extend beyond that period.

Considerations in determining capital and revenue expenditures

The nature of business is a very important criteria in separating an


Nature of expenditure between capital and revenue.
eg: For a trader dealing in furniture, purchase of furniture is revenue
business
expenditure but for any other trade, the purchase of furniture should be
treated as capital expenditure and shown in the balance sheet as asset

If the frequency of an expense is quite often in an accounting year then


Recurring
it is said to be an expenditure of revenue nature while non-recurring
nature of
expenditure is infrequent in nature and do not occur often in an
expenditure
accounting year.

Expenses for repairs of machine may be incurred in course of normal


maintenance of the asset. Such expenses are revenue in nature.
Purpose of
expenses On the other hand, expenditure incurred for major repair of the asset so
as to increase its productive capacity is capital in nature.

The expenses which help to generate income/ revenue in the current


Effect on
revenue period are revenue in nature and should be matched against the
generating revenue earned in the current period.
capacity of If expenditure helps to generate revenue over more than one accounting
business period, it is generally called capital expenditure.

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

DIFFERENCES BETWEEN CAPITAL AND REVENUE EXPENDITURES

Key Differences Capital Expenditure Revenue Expenditure

Any expenditure incurred to


Any expenditure incurred to
provide a benefit during the
Period of benefit provide a benefit over a long-term
current period is revenue
period is capital expenditure.
expenditure.

Capital expenditure is incurred for


the purpose of increasing the
Revenue expenditure is incurred to
Enhancement vs capacity of the business.
maintain the earning capacity of
Maintenance Alternatively, it also includes an
the business.
expenditure to reduce the costs of
the business.

Purchase of machine, car, furniture, Repairs and maintenance, salary


Examples
etc. of accounting staff, etc.

CAPITAL AND REVENUE RECEIPTS

Receipts which are On the other hand,


obtained in course of receipts which are
normal business not revenue in
activities are revenue nature are capital
receipts receipts

CONTINGENT ASSETS AND CONTINGENT LIABILITIES

A possible asset arises from past events


Contingent Asset and their existence will be confirmed only
after occurrence or non-occurrence of one
or more uncertain future events.

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

a possible obligation that arises from


past events and the existence of which
will be confirmed only by the occurrence
or non-occurrence of one or more
uncertain future events not wholly within
the control of the enterprise; or

Contingent Liability
a present obligation that arises from past
events but is not recognised because:

(i) it is not probable that an outflow of


resources embodying economic benefits
will be required to settle the obligation; or
Example
(ii) a reliable estimate of the amount of the
obligation cannot be made.”

A few days later from the date of


Mr. X sells a machine to Mr.
sale of machine, Mr. X received a
Y. Any damages incurred
notice from Mr. Y who is claiming
by Mr. Y while using the
damages of ₹20 lac. The notice
machine need to be
mentioned that a worker met
compensated by Mr. X.
with an accident during the use
of the machine and is required to
be compensated.

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.

An enterprise should not recognise a contingent liability in balance


sheet, however it is required to be disclosed in the notes to accounts,
unless possibility of outflow of a resource embodying economic
benefits is remote.

ICAI BOS 16
SARANSH THEORETICAL FRAMEWORK

DISTINCTION BETWEEN CONTINGENT LIABILITIES AND LIABILITIES

A liability is defined as the On the other hand, in the case


present financial obligation of of contingent liability, either
an enterprise, which arises
outflow of resources to settle
from past events. The
the obligation is not probable
settlement of a liability results
or the amount expected to be
in an outflow from the
paid to settle the liability
enterprises of resources
embodying economic cannot be measured with
benefits. sufficient reliability.

DISTINCTION BETWEEN PROVISIONS AND CONTINGENT LIABILITIES

Provision Contingent liability

A Contingent liability is a possible


Provision is a present liability of uncertain
obligation that may or may not crystallise
amount, which can be measured reliably
(1) depending on the occurrence or non-
by using a substantial degree of
occurrence of one or more uncertain future
estimation.
events.

A contingent liability fails to meet the


(2) A provision meets the recognition criteria.
same.

Provision is recognised when Contingent liability includes present


(a) an enterprise has a present obligation obligations that do not meet the
arising from past events; an outflow of recognition criteria because either it is not
(3) resources embodying economic benefits probable that settlement of those
is probable, and obligations will require outflow of economic
(b) a reliable estimate can be made of the benefits, or the amount cannot be reliably
amount of the obligation. estimated.

If the management estimates that it is If the management estimates, that it is


probable that the settlement of an less likely that any economic benefit will
(4) obligation will result in outflow of outflow the firm to settle the obligation, it
economic benefits, it recognises a discloses the obligation as a contingent
provision in the balance sheet. liability.

ICAI BOS 17
SARANSH THEORETICAL FRAMEWORK

ACCOUNTING POLICIES

ACCOUNTING POLICIES

Accounting Policies refer to specific accounting principles and methods


of applying these principles adopted by the enterprise in the preparation
and presentation of financial statements. Policies are based on various
accounting concepts, principles and conventions.

The areas wherein different accounting policies are frequently


encountered can be given as follows:

(1) Valuation of Inventories;


(2) Valuation of Investments.

SELECTION OF ACCOUNTING POLICIES

Choice of accounting policy is an important policy


decision which affects the performance
measurement as well as financial position of the
business entity. Selection of inappropriate accounting
policy may lead to understatement or overstatement
of performance and financial position. Thus,
accounting policy should be selected with due care
after considering its effect on the financial
performance of the business enterprise from the
angle of various users of accounts.

Selection of Accounting Policies is based on

Substance
Prudence Materiality
over form

ICAI BOS 18
SARANSH THEORETICAL FRAMEWORK

Examples wherein selection from a set of accounting policies is made

Inventories are valued at Investments (long term)


cost except for finished are valued at their
goods and by-products. acquisition cost.
Finished goods are Provision for permanent
valued at lower of cost diminution in value has
or market value and by- been made wherever
products are valued at necessary.
net realizable value.

CHANGE IN ACCOUNTING POLICIES


A change in accounting policies should be made in the following conditions:

It is required by some Change would result


statute or for in more appropriate
compliance with an presentation of
Accounting Standard. financial statement.

ACCOUNTING AS A MEASUREMENT DISCIPLINE – VALUATION


PRINCIPLES, ACCOUNTING ESTIMATES

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

It means acquisition price.


For example, the businessman paid
₹7,00,000 to purchase the machine and Current cost gives an alternative
spend ₹1,00,000 on its installation, its measurement base. Assets are carried
acquisition price including installation out at the amount of cash or cash
charges is ₹8,00,000. The historical cost equivalent that would have to be paid if
of machine would be ₹8,00,000. the same or an equivalent asset was
acquired currently. Liabilities are
carried at the undiscounted amount of
cash or cash equivalents that would be
required to settle the obligation
currently.
Realizable Value

As per realisable value, assets are Present Value


carried at the amount of cash or cash
equivalents that could currently be
obtained by selling the assets in an
orderly disposal. Haphazard disposal
As per present value, an asset is carried
may yield something less. at the present discounted value of the
future net cash inflows that the item is
expected to generate in the normal
course of business. Liabilities are
carried at the present discounted value
of future net cash outflows that are
expected to be required to settle the
liabilities in the normal course of
business.

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.

As a result of the uncertainties inherent in business activities, many financial


statement items cannot be measured with precision but can only be estimated.

The process of estimation involves judgements based on the latest information


available.

An estimate may require revision. Change in accounting estimate means difference


arises between certain parameters estimated earlier and re-estimated.

ACCOUNTING STANDARDS

Accounting standards are written The ostensible purpose of the


policy documents issued by expert standard setting bodies is to
accounting body or by government promote the dissemination of
or other regulatory body covering timely and useful financial
the aspects of recognition, information to investors and
treatment, measurement, certain other parties having an
presentation and disclosure of interest in the company's
accounting transactions and events economic performance.
in the financial statements.

The accounting standards deal with the issues of :

(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

Accounting Standards standardise


diverse accounting policies with a
view to:

Eliminate the non-comparability of provide a set of standard


financial statements and thereby accounting policies, valuation
improving the reliability of financial norms and disclosure
statements; and requirements.

BENEFITS OF ACCOUNTING STANDARDS

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

LIMITATIONS OF ACCOUNTING STANDARDS

Difficulties in making choice


between different treatments: Restricted scope: Accounting
Alternative solutions to certain standards cannot override the
accounting problems may each have statute. The standards are
arguments to recommend them.
required to be framed within the
Therefore, the choice between
different alternative accounting ambit of prevailing statutes.
treatments may become difficult.

PROCESS OF FORMULATION OF ACCOUNTING STANDARDS (AS)

Identification of area for formulation of AS

Constitution of study group to prepare preliminary draft

Preparation of draft and its circulation to council members of ICAI and specified outside
bodies

Ascertainment of views of different bodies on draft

Finalisation of exposure draft (E.D)

Comments received on exposure draft (E.D)

Modification of the draft

Issue of Accounting Standard (AS)

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) notified under Companies (Accounting Standards) Rules,


2021, are applicable to the companies other than those following Ind AS, as given in
point (i). These companies are required to apply Accounting Standards (AS) notified
under the Companies Act as Companies (Accounting Standards) Rules, 2021.

Accounting Standards (AS) prescribed by ICAI are applicable for entities other than
companies.

LIST* OF ACCOUNTING STANDARDS IN INDIA

Number of the
Sl. No. Title of the Accounting Standard
Accounting Standard (AS)

1. AS 1 Disclosure of Accounting Policies

2. AS 2 (Revised) Valuation of Inventories

3. AS 3 (Revised) Cash Flow Statements

Contingencies and Events Occurring after the Balance


4. AS 4 (Revised)
Sheet Date

Net Profit or Loss for the Period, Prior Period Items and
5. AS 5 (Revised)
Changes in Accounting Policies

6. AS 7 (Revised) Accounting for Construction Contracts

7. AS 9 Revenue Recognition

8. AS 10 Property, Plant and Equipment

9. AS 11 (Revised) The Effects of Changes in Foreign Exchange Rates

10. AS 12 Accounting for Government Grants

11. AS 13 Accounting for Investments

12. AS 14 Accounting for Amalgamations

ICAI BOS 24
SARANSH THEORETICAL FRAMEWORK

The Government of India in consultation with the ICAI decided


to converge and not to adopt IFRSs issued by the IASB. The
decision of convergence rather than adoption was taken after
the detailed analysis of IFRS requirements and extensive
discussion with various stakeholders. Accordingly, while
formulating IFRS- converged Indian Accounting Standards
(Ind AS), efforts have been made to keep these Standards, as
far as possible, in line with the corresponding IFRS and
departures have been made where considered absolutely
essential. Certain changes have been made considering the
economic environment of the country, which is different as
compared to the economic environment presumed to be in
existence by IFRS.

LIST OF IND AS ON 1ST AUGUST, 2024

Ind AS Title of Ind AS

101 First -Time Adoption of Indian Accounting Standards

102 Share- Based Payment

103 Business Combinations

104 Insurance Contracts

105 Non-current Assets Held for Sale and Discontinued Operations

106 Exploration for and Evaluation of Mineral Resources

107 Financial Instruments: Disclosures

108 Operating Segments

109 Financial Instruments

110 Consolidated Financial Statements

111 Joint Arrangements

112 Disclosure of Interests in Other Entities

113 Fair Value Measurement

114 Regulatory Deferral Accounts

115 Revenue from Contracts with Customers

ICAI BOS 26
SARANSH THEORETICAL FRAMEWORK

Number of the
Sl. No. Title of the Accounting Standard
Accounting Standard (AS)

13. AS 15 (Revised) Employee Benefits

14. AS 16 Borrowing Costs

15. AS 17 Segment Reporting

16. AS 18 Related Party Disclosures

17. AS 19 Leases

18. AS 20 Earnings Per Share

19. AS 21 Consolidated Financial Statements

20. AS 22 Accounting for Taxes on Income

Accounting for Investments in Associates in


21. AS 23
Consolidated Financial Statements

22. AS 24 Discontinuing Operations

23. AS 25 Interim Financial Reporting

24. AS 26 Intangible Assets

25. AS 27 Financial Reporting of Interests in Joint Ventures

26. AS 28 Impairment of Assets

27. AS 29 Provisions, Contingent Liabilities & Contingent Assets

*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.

**INDIAN ACCOUNTING STANDARDS (IND AS)

The Institute of Chartered Accountants of India (ICAI) being the


accounting standards-setting body in India, way back in 2006,
initiated the process of moving towards the International Financial
Reporting Standards (IFRSs) issued by the International Accounting
Standards Board (IASB) with a view to enhance acceptability and
transparency of the financial information communicated by the Indian
corporates through their financial statements. This move towards IFRS
was subsequently accepted by the Government of India.

ICAI BOS 25
SARANSH THEORETICAL FRAMEWORK

Ind AS Title of Ind AS

116 Leases

1 Presentation of Financial Statements

2 Inventories

7 Statement of Cash Flows

8 Accounting Policies, Changes in Accounting Estimates and Errors

10 Events after the Reporting Period

12 Income Taxes

16 Property, Plant and Equipment

19 Employee Benefits

20 Accounting for Government Grants and Disclosure of Government Assistance

21 The Effects of Changes in Foreign Exchange Rates

23 Borrowing Costs

24 Related Party Disclosures

27 Separate Financial Statements

28 Investment in Associates and Joint Ventures

29 Financial Reporting in Hyperinflationary Economies

32 Financial Instruments: Presentation

33 Earnings per Share

34 Interim Financial Reporting

36 Impairment of Assets

37 Provisions, Contingent Liabilities and Contingent Assets

38 Intangible Assets

40 Investment Property

41 Agriculture

ICAI BOS 27
SARANSH THEORETICAL FRAMEWORK

**ACCOUNTING STANDARDS FOR LOCAL BODIES

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.

LIST OF ACCOUNTING STANDARDS FOR LOCAL BODIES (ASLB)

ASLB Title of ASLB

1 Presentation of Financial Statements

2 Cash Flow Statements

3 Accounting Policies, changes in Accounting Estimates and Errors

4 The Effects of Changes in Foreign Exchange Rates

5 Borrowing Costs

9 Revenue from Exchange Transactions

11 Construction Contracts

12 Inventories

13 Leases

14 Events After the Reporting Date

16 Investment Property

17 Property, Plant and Equipment

18 Segment Reporting

19 Provision, Contingent Liabilities and Contingent Assets

20 Related Party Disclosures

21 Impairment of Non-Cash-Generating Assets

23 Revenue from Non-Exchange Transaction (Taxes and Transfers)

24 Presentation of Budget Information in Financial Statements

26 Impairment of Cash-Generating Assets

ICAI BOS 28
SARANSH THEORETICAL FRAMEWORK

ASLB Title of ASLB

31 Intangible Assets

32 ‘Service Concession Arrangements: Grantor

33 First-Time Adoption of Accrual Basis Accounting Standards for Local Bodies (ASLBs)

34 Separate Financial Statements

35 Consolidated Financial Statements

36 Investment in Associates and Joint Ventures

37 Joint Arrangements

38 Disclosure of Interests in Other Entities

39 Employee Benefits

40 Entity Combinations

42 Social Benefits

Financial Reporting under Cash Basis of Accounting

**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

CHAPTER 2 : ACCOUNTING PROCESS

DOUBLE ENTRY BOOK KEEPING

Double entry system of book-keeping is a process of evolution of various accounting


techniques and is the only scientific system of accounting. As per double entry system, every
transaction has two-fold aspects–debit and credit and both the aspects are to be recorded
in the books of accounts. Therefore, in every transaction at least two accounts are effected.

ADVANTAGES OF DOUBLE ENTRY BOOK KEEPING

The accuracy of the 1


accounting work can be
established, through the The profit earned or
device of the trial balance. loss suffered during
a period can be
ascertained
together with
5 details.

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

Date Particulars Ref. Amount Date Particulars Ref. Amount

DEBIT AND CREDIT

Assets = Liabilities + Capital


or
Assets – Liabilities = Capital
To understand the equation better, let us expand it:-

Assets = Liabilities + Stockholders’ Equity

Assets = Liabilities + (contributed capital + beginning retained earnings + revenue -


expense - dividends)

the original capital introduced by the


Contributed capital =
owner.

Beginning Retained previous earnings not distributed to the


=
Earnings shareholders.

generated from the ongoing activities of


Revenue =
the business.

cost incurred for the operations of the


Expenses =
company.

earnings distributed to the shareholders


Dividends =
of the company.

ICAI BOS 31
SARANSH ACCOUNTING PROCESS

RULES FOR DEBIT AND CREDIT


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.

Elements
Sr. No. Effects
of Financial Statements

1] Asset

Increases Assets (Dr.)

Decreases Assets (Cr.)

2] Liability

Increases Liability (Cr.)

Decreases Liability (Dr.)

3] Owner’s Capital

Increases Capital (Cr.)

Decreases Capital (Dr.)

4] Expenses

Increases Expenses (Dr.)

Decreases Expenses (Cr.)

5] Revenue/Income

Increases Income (Cr.)

Decreases Income (Dr.)

6] Profit Capital (Cr.)

7] Loss Capital (Dr.)

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

ACCOUNTING EQUATION APPROACH


The relationship of assets with that of liabilities and owners’ equity in the equation form is known
as ‘Accounting Equation’. Basic accounting equation comes into picture when sum total of capital
and liabilities equalises assets, where assets are what the business owns and capital and
liabilities are what the business owes.
Under double entry system, every business transaction has two-fold effect on the business
enterprise where each transaction affects changes in assets, liabilities or capital in such a way
that an accounting equation is completed and equated
Equity + Liabilities = Assets
or, Equity + Long-Term Liabilities = Fixed Assets + Current Assets - Current Liabilities

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

Artificial Real Nominal


Natural
(Legal) Accounts Accounts

Ram, Seeta Etc. Company, Clubs, Land, Building, Cash in hand Expenses, losses, gains, profits
Co-Operative Eg- Salary , rent, interest
Representative Societies

O/s Liability, Capital, Drawings

ICAI BOS 33
SARANSH ACCOUNTING PROCESS

GOLDEN RULES OF ACCOUNTING

Types of Account Account to be Debited Account to be Credited

Personal Account Receiver Giver

Real Account What comes in What goes out

Nominal Account Expense and losses Income and gains

MODERN CLASSIFICATION OF ACCOUNTS

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:

Asset account Debit Increase Decrease

Liabilities account Credit Decrease Increase

Capital account Credit Decrease Increase

Revenue account Credit Decrease Increase

Expenditure account Debit Increase Decrease

Withdraw account Debit Increase Decrease

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

1 General Journal 2 Specialized Journal

ICAI BOS 34
SARANSH ACCOUNTING PROCESS

PERFORMA OF JOURNAL

Date Particulars L.F. Amount (Dr.) Amount (Cr.)

(1) (2) (3) (4) (5)

POINTS TO BE TAKEN INTO CARE WHILE RECORDING A TRANSACTION IN


THE JOURNAL

If journal entries are


recorded in several
pages then both the
amount column of
each page should be
totalled.

the balance should


be written at the end
of that page

the same total


should be carried
Journal entries can be
forward at the
single entry (i.e. one
beginning of the
debit and one credit)
next page.

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

ONE TWO THREE


As transactions are Entries recorded in Journal forms the
recorded on the journal are basis for posting the
chronological order, supported by a note entries in the ledger.
one can get termed as narration, This eases the
complete information which is a precise accountant in their
about the business explanation of the work and reduces
transactions on time transaction for the the chances of error.
basis. proper
understanding of the
entry. One can know
the correctness of
the entry through
these narrations.

ICAI BOS 36
SARANSH ACCOUNTING PROCESS

ACCOUNTING FOR GST

INTRODUCTION TO GST

Goods and Services Tax (GST) is a


comprehensive Indirect Tax which has
subsumed multiple Indirect Taxes in India such
as State Value added Tax (VAT) which was levied
on sale of goods, Excise Duty, which was levied
on manufacture or production of goods, Service
Tax which was levied on provision of services etc.
GST is a single tax on the supply of goods and
services, right from the manufacturer to
consumer.

SALIENT FEATURES OF GST

GST is levied on supply i.e., manufacture or sale of goods and provision of


services. In other words, supply is taxable event which own its occurrence
creates or attracts the liability to pay tax.
Under GST, tax in levied only the value added at each stage of the supply
chain.
GST is a destination-based consumption tax, i.e. the tax is levied at the
place where the goods or services are consumed, rather than the place
where they are produced.
There is no tax on tax or cascading of taxes under GST system.
Under GST, there is a harmonization of laws, procedures and rates of tax
across the country.

ICAI BOS 37
SARANSH ACCOUNTING PROCESS

TYPES OF TAXES UNDER GST

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.

GST is a “Consumption Based Tax“ i.e. the tax is received by


the State in which the goods or services are consumed
and not by the state in which the goods and services are
manufactured.

Intra State GST Intra State

CGST IGST
SGST

INPUT AND OUTPUT GST

Output tax means


the GST charged on Input tax means
supply of goods or the credit of Input
services made by a tax already paid.
supplier.

ICAI BOS 38
SARANSH ACCOUNTING PROCESS

UTILISATION OF INPUT TAX CREDIT UNDER GST

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.

DOUBLE ENTRY BOOK-KEEPING WITH GST


The Double entry book-keeping records need to show the GST values separately so that the
purchases, expenses and sales are posted net i.e. without the addition of GST.

Journal entry in case of Sales of Goods or services


Account Receivable/Debtors A/c Dr. Gross Amount (including GST)
To Sales A/c Net Amount (excluding GST)
To Output GST Amount of GST

Journal entry in case of Purchase of Goods or services


Purchases A/c Dr. Net Amount (excluding GST)
Input GST A/c Dr. Amount of GST
To Account Payable/Creditors Gross Amount (including GST)

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.

Specimen of Ledger Accounts


Dr. Account Cr.

Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)

The process of transferring the debit and


credit items from journal to classified
accounts in the ledger is known as posting.

It is a practice to use words ‘To’


and ‘By’ while posting
transactions in the ledger. The
word ‘To’ is used with the
accounts written on the debit
side while ‘By’ is used with the
accounts written on the credit
side.

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

If the credit side is


At the end of the every
bigger than the debit
month or year or any
side, it is a credit
particular day it may
balance. In the other
be necessary to
case it is a debit
ascertain the balance
balance.
in an account.

The debit balance similarly is

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.

Then the credit balance is


This is the opening
written on the credit side
balance for the new
as “By balance b/d (i.e.,
period.
brought down)”.

Since nominal Accounts are in the nature of


revenue/incomes/gains or expenses/losses.
The balance of all nominal accounts are
transferred to Profit and Loss account at Thus, the net result of all nominal accounts
the time of preparation of financial are reflected in profit and loss Account for
statements. an accounting period which is transferred to
Capital Account.

The balance of all the accounts relating to


assets and liabilities are reflected in the Balance Sheet at the
(personal or impersonal) end of accounting period.

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.

Also total of the debit


balances will be
equal to the total of The process of Trial Balance
the credit balances. follows Double Entry System where
Once this agreement is established,
the amount written on the debit
sides of various accounts is
there is reasonable confidence that
always equal to the amounts the accounting work is free from
entered on the credit sides of clerical errors, though it is not proof
other accounts and vice versa. of cent per cent accuracy, because
some errors of principle and
compensating errors may still
remain.

Because of Double entry system, trial balance OBJECTIVES OF PREPARING A


can be prepared any time but it is preferable
TRIAL BALANCE
to prepare it at the end of the accounting
year to ensure the arithmetic accuracy of all
the accounts before the preparation of the Helps to
financial statements. It may be noted that establish
trial balance is a statement and not an arithmetical
account. Trial Balance forms the basis for accuracy of the The trial
preparing final statement i.e. Profit and Loss books. balance serves
Statement and Balance Sheet. as a summary
of what is
Financial contained in
statements are the ledger.
normally prepared
on the basis of
agreed trial
FORM OF A TRIAL BALANCE
balance

Trial Balance
as at.......................

S.No Ledger Accounts L.F. Dr. Amount Cr. Amount

(Total or Balance) ₹ (Total or Balance) ₹

ICAI BOS 42
SARANSH ACCOUNTING PROCESS

LIMITATIONS OF A TRIAL BALANCE


One should note that the agreement of Trial Balance is not a conclusive proof of accuracy. In
other words, in spite of the agreement of the trial balance some errors may remain. These may
be of the following types:

Transaction has not been


entered at all in the
journal.

A wrong amount has


been written in both
LIMITATIONS OF A

columns of the journal.


TRIAL BALANCE

A wrong account has


been mentioned in the
journal.

An entry has not at all


been posted in the ledger.

Entry is posted twice in


the ledger

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

Methods of preparation of
Trial Balance

Total And
Total Balance
Balance
Method Method
Method

ICAI BOS 43
SARANSH ACCOUNTING PROCESS

TOTAL METHOD OF PREPARING A TRIAL BALANCE

Under this method,


every ledger account
is totalled and that Time taken to
total amount (both of balance the ledger
debit side and credit accounts is saved
side) is transferred to as balance can be
Trial balance can
trial balance. found out in the trial
be prepared as
balance itself.
soon as ledger The difference of
account is totalled. totals of each
ledger account is
the balance of that
particular account.
This method is not commonly used as it cannot help in the
preparation of the financial statements.

BALANCE METHOD OF PREPARING A TRIAL BALANCE

Financial statements are


prepared on the basis of the
balances of the ledger accounts.

This method is used commonly by


the accountants and helps in the
preparation of the financial
statements.

Under this method, every ledger


account is balanced and those
3

balances only are carried


forward to the trial balance.
2
1

TOTAL AND BALANCE METHOD OF PREPARING A TRIAL BALANCE

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

PROFORMA OF TRIAL BALANCE UNDER THIS METHOD


Trial Balance of X as at 31.03.2024
Debit Balance Credit Balance Debit Total Credit Total
Sl. No. Heads of Account L.F.
(₹) (₹) (₹) (₹)

1. Cash Account 7,500 35,500 28,000

2. Furniture Account 3,000 3,000

3. Salaries Account 2,500 2,500

4. Shyam’s Account 3,500 21,500 25,000

5. Purchases Account 26,000 26,000

Purchase Returns
6. 500 500
Account

7. Ram’s Account 4,900 30,000 25,100

8. Sales Account 30,500 30,500

Sale Returns
9. 100 100
Account

10. Capital Account 9,500 500 10,000

Total 44,000 44,000 1,19,100 1,19,100

ADJUSTED TRIAL BALANCE (THROUGH SUSPENSE ACCOUNT)

If the trial balance does then the trial balance is


not agree after transferring tallied by transferring
the balance of all ledger the difference of debit
accounts including cash and credit side to an
and bank balance and account known as
also errors are not located suspense account.
timely

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

RULES OF PREPARING THE TRIAL BALANCE


While preparing the trial balance from the given list of ledger balances, following rules should be
taken into care:

•Assets
The balances of the •Expenses Accounts
Accounts placed in •Losses
the debit column of
•Drawings
the trial balance
•Cash and Bank
Balances

The balances of the •Liabilities


Accounts placed in •Income Accounts
the credit column of •Profits
the trial balance •Capital

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.

Normally, the following subsidiarybooks are used in a business:

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

Sales Book For Credit Sales

Simple Cash Petty Cash


Book Book Purchase For Credit Purchases
Return Book Returns
Cash books Cash books with
with Discount Bank & Discount
Column Column Sales Return For Credit Sales
Returns
Book

Bill Receivable For Bills Receivable


Book Received

Bill Payable For Bills Accepted


Book

For record of
Journal transactions not
recorded anywhere

ICAI BOS 48
SARANSH ACCOUNTING PROCESS

ADVANTAGES OF SUBSIDIARY BOOKS

Division of work Specialisation and efficiency


Since in the place of one When the same work is
journal there will be so allotted to a particular person
many subsidiary books, over a period of time, he
the accounting work can becomes efficient in handling
be divided. it. Thus the accounting work
will be done efficiently.
Saving of the time
Various accounting
processes can be
undertaken simultaneously
because of the use of a
number of books. This will
lead to completing the
work quickly.
Facility in checking
Availability of information When the trial balance does
Since a separate register not agree, the location of the
or book is kept for each error or errors is facilitated by
class of transactions, the the existence of separate
information relating to books. Even the commission
each transaction will be of errors and frauds will be
available at one place. checked by various subsidiary
books.

PURCHASE BOOK

To record the credit purchases of goods dealt in or materials used in the


factory, a separate register called the Purchases Book or the Purchases
Journal,is usually maintained by firms.

Credit purchases of things other


Cash purchases are not
than goods or materials, such as
entered in this book since
office furniture or typewriters are
these will be entered in
not entered in the Purchases
the cash book.
Book.

ICAI BOS 49
SARANSH ACCOUNTING PROCESS

POSTING THE PURCHASE BOOK

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

The Sales Book is a register specially kept to record


credit sales of goods dealt in by the firm.

Credit sales of things other


Cash sales are not
than goods dealt in by the
entered in this book
firm are not entered in the
since these will be
Sales Book.
entered in the cash book.

POSTING THE SALES BOOK

The total of the


The names
The accounts Sales Book
appearing in the
of the parties shows the credit
Sales Book are
have to be sales made
of those parties
debited with during the
which have
the respective period
received the
amounts. concerned; the
goods.
amount is
credited
to the Sales
Account.

ICAI BOS 50
SARANSH ACCOUNTING PROCESS

Sales Return or Purchase Return Bills Receivable


Return Inward or Return and Bills Payable
Book Outward Book Book
If customers frequently Such a book If the firm usually
return the goods sold to conveniently records receives /issues a
them, it would be return of goods or number of promissory
convenient to record the material purchased to notes or hundies, it
returns in a separate the suppliers if however, would be convenient to
book, which is named as the returns are not record the transaction in
the Sales Returns Book or frequent, it may be a separate book called
the Returns Inward Book. sufficient to record the the Bills Receivable/ Bills
transaction in the Payable Book.
This Book is similar to the journal.
Sales Book and entries
are also made in the This Book is similar to the
same manner. Purchases Book and
entries are also made in
the same manner.

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.

Returns from Credit sales of


customers are goods are
recorded in the recorded in the
Sale Returns Book Sales Book.

ICAI BOS 51
SARANSH ACCOUNTING PROCESS

ROLE OF THE JOURNAL


Except the transactions discussed previously, there are some other entries also which have to be
recorded. For them the proper place is the journal. In fact, if there is no special book meant to
record a transaction, it is recorded in the journal.
The role of the journal is thus restricted to the following types of entries:

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.

If an error has been


committed, it is rectified
through a journal entry.

ENTRIES ON DISHONOUR OF BILLS


If a promissory note (or bill) is dishonored
on the due date, a journal entry will be
necessary to record the non-payment or
dishonour.

Apart from above few, other miscellaneous entries are also entered in journal

Credit purchase An allowance Receipt or issue An amount Effects of


other than given to the of promissory becoming accidents such
goods or customers or notes if irrecoverable, as loss of
materials a charge to be separate bill say, because, property by fire.
required for made to them books are not customer
production of after the maintained. becoming Transfer of net
goods. issue of the insolvent. profit to capital
invoice. account.

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

SIMPLE CASH BOOK


The totals are then
entered in the two
columns opposite to
The simple
The total of Dr. cash book is The difference one another and then
side is always is written on on the debit side the
like an
The left-hand greater than balance is written as
ordinary the credit side
side records the total of Cr. “To Balance b/d”, to
Only the cash account and as ‘By balance
receipts of side since the is balanced in show cash balance in
receipts and cash and the c/d.’
payment the same way hand in the beginning
cash payments right-hand cannot exceed as other of next period.
are recorded. side the accounts.
the available
payments. cash.

DOUBLE 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.

In the Cash Column, In the Discount column,


In the Bank Column,
on the Debit Side actual cash received is the amount of the
all receipts through
entered discount allowed is
bank are entered.
entered

In the Cash Column, In the Discount column,


In the Bank Column,
on the Credit Side actual cash paid is the amount of the
all payments through
entered discount received is
bank are entered.
entered

ICAI BOS 53
SARANSH ACCOUNTING PROCESS

BALANCING

Discount columns are not balanced,


they are merely totalled. The total of The bank columns
the receipts shows total discount are also balanced The Cash
allowed to customers and is and the balancing columns are
debited to the Discount Account. figure is called bank balanced.
The total of payments shows total balance.
discount received and is credited to
the Discount Account.

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.

THREE COLUMN CASH BOOK

A firm normally keeps the bulk of its funds at a bank.


Probably payments into and out of the bank are more
numerous than strict cash transactions. Therefore, it is
very convenient if, on each side in the cash book,
another column is added to record cash deposited at
bank (on the receipt side of the cash book) and
payments out of the bank (on the payment side of the
cash book)

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.

The discount columns are Balancing


totalled but not balanced.
The cash and bank
column are balanced .

It is possible, that the bank


may allow the firm to
withdraw more than the
amount deposited i.e., to
have an overdraft.

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.”

PETTY CASH BOOK

In a business, a number of small payments, such as for conveyance, taxi fare,


cartage, etc., have to be made. If all these payments are recorded in the cash book, it
will become unnecessarily heavy. Therefore, it is usual for firms to appoint a person as
‘Petty Cashier’ and to entrust the task of making small payments say below a definite
amount to him. Later on, he will be reimbursed for the payments made and the
respective account may be debited.

ICAI BOS 55
SARANSH ACCOUNTING PROCESS

IMPREST SYSTEM OF PETTY CASH

It is convenient to entrust a Thus, he will


Such a system is
definite sum of money to again have the
known as the
the petty cashier in the fixed amount in
Imprest System of
beginning of a period and to the beginning of
Petty Cash.
reimburse him for payments the new period.
made at the end of the
period

ADVANTAGES OF PETTY CASH BOOK

Saving of time
of the chief Saving in labour in

cashier writing up the cash Control over


book and posting small
into the ledger payments

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.

ILLUSTRATIVE CASE OF ERRORS AND THEIR NATURE

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 CASTING IN Wrong casting in cash book


CASH BOOK

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

At the stage of At the stage of At the stage of At the stage of


recording the posting the balancing the preparing trail
transaction in entries in Ledger Ledger Account balance
Journal

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

Taking wrong amount 2

3 Taking to the wrong side

Errors of Errors of
Principle Omission

We can classify the errors in


four broad categories
Compensating Errors of
Errors Commission

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.

If the effect of errors If an amount is If a transaction is


committed cancel posted in the completely or
out, the errors will wrong account partially omitted Trial Balance
Trial Balance
be called or it is written on from the books of will agree.
will agree.
compensating the wrong side or account, it will be a
errors the totals are case of omission.
wrong or a wrong
balance is struck,
it will be a case
of “errors of Omitting to post the Omitting an entry
commission. ledger account from completely from
Trial Balance
the subsidiary books. the subsidiary
will agree.
Trial Balance will not books. Trial Balance
agree. will agree.

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

STEPS TO LOCATE ERRORS


Even if there is only a very small difference in the trial balance, the errors leading to it must be
located and rectified. A small difference may be the result of a number of errors. The following
steps will be useful in locating errors :

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 ledger accounts should be balanced again.

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

Errors should never be corrected by overwriting. If


immediately after making an entry it is clear that an error
has been committed, it may be corrected by neatly
crossing out the wrong entry and making the correct
entry. If however the errors are located after some time,
the correction should be made by making another
suitable entry, called rectification entry. In fact the
rectification of an error depends on the fact that at which
stage it is detected. An error can be detected at any one
of the following stages:

After Trial After final


Before Balance but accounts, i.e., in
preparation of before the final the next
Trial Balance accounts are accounting
drawn period

ERRORS BEFORE PREPARATION OF TRIAL BALANCE

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

AFTER TRIAL BALANCE BUT BEFORE FINAL ACCOUNTS

This method of correction of error is appropriate when the


errors have been located before the end of the accounting
period. Each and every error detected at this stage can only be
corrected by a complete journal entry. Those errors for which
complete journal entries were not possible in the earlier stage
of rectification (i.e., before trial balance) can now be rectified
by way of journal entry(s) with the help of suspense account.

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)

CORRECTION IN THE NEXT ACCOUNTING PERIOD

Rectification of errors discussed so far assumes that it


was carried out before the books were closed for the
concerned year. However, sometimes, the rectification
is carried out in the next year, carrying forward the
balance in the Suspense Account or even transferring it
to the Capital Account.

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

Purchase Account Dr. ₹1,000


To Suspense Account ₹1,000

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.

The only difference is that all Nominal accounts in the rectification


entries shall be substituted by Profit/Loss Adjustment account.

The balance of Profit and Loss Adjustment account will be transferred


to capital account.

ICAI BOS 63
SARANSH BANK RECONCILIATION STATEMENT

CHAPTER 3: BANK RECONCILIATION STATEMENT


INTRODUCTION

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

The bank balance shown in the passbook


Bank passbook is a copy of the
is known as pass book balance for
customer’s account in the book of a
reconciliation purpose. The credit
bank where all deposits and
balance as per passbook is the deposit
withdrawals made by the customer
made by the customer while debit
during the particular period is
balance is the overdraft balance for the
recorded.
customer

BANK RECONCILIATION STATEMENT

To reconcile means to find out the difference between two and


BRS eliminating that difference. Whenever we deposit or withdraw money
from banks, it is always recorded at two places:-

Bank column of the Bank statement


Cash Book Pass Book
(in customer books); (i.e. in the banks books)

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”.

SALIENT FEATURES OF BANK 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.

IMPORTANCE OF BANK RECONCILIATION STATEMENT

It helps in detecting errors,


frauds and irregularities
It is a very important
occurred, if any, at the time of
tool for internal control
passing entries in the cash book
of cash flows.
or in the pass book, whether
intentionally or unintentionally.

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

SOME OF THE ITEMS THAT FREQUENTLY CAUSE A DIFFERENCE ARE AS FOLLOWS:

i) Cheques issued but not


ii) Cheques paid into the bank
presented for payment
but not cleared
The entry in the cash book is made As soon as cheques are sent to the bank,
immediately on issue of cheque but entry entries are made on the debit side of the
will be made by the bank only when the bank column of the cash book. But usually
cheque is presented for payment. There will banks credit the customer’s account only
thus be a gap of some days between the when they have received the payment from
entry in the cash book and in the pass book. the bank concerned due to which there will
be gap between the entry in both books.

iii) Interest allowed by bank

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.

v) Interest and dividends collected by


the bank
vi) Direct payments by the bank
Sometimes investments are left with The bank may be given standing
the bank in the safe custody; the instructions for certain payments for
bank itself sees to it that the interest eg. insurance premium. In this case
or the dividend is collected on the also, the customer may come to
due dates. know of the payment only on seeing
the pass book.

vii) Direct payment into the bank by a


customer
viii) Dishonour of a bill discounted
If such a payment is received by the with the bank
bank, it will be entered in the customer’s
If the bank is not able to receive payment
account and also in the pass book; the on promissory notes discounted by it, it will
account holder may come to know of the debit the customer’s account together with
amount only when he sees the pass book. the charges it may have incurred. The
customer will make the entry only when he
sees the pass book.

ix) Bills collected by the bank on


behalf of the customer
If goods are sold, the documents may x) Errors
be sent through the bank. If the bank is While recording the entries, error
able to collect the amount, it will credit can occur in both cash book and
the customer’s account. The customer pass book. A bank rarely makes any
may make the entry only on receiving error but if does, the balance in the
the pass book. pass book will naturally differ from
cash book.

ICAI BOS 66
SARANSH BANK RECONCILIATION STATEMENT

TABLE SUMMARISING IN BRIEF THE TIMINGS OF DIFFERENT TRANSACTIONS

Time of recording in Time of recording in


Sl. No. Transaction
cash book pass book

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.

Dishonour of When the entry is


When the cheque is
5. cheque/bills posted in the pass
dishonoured.
receivable. book.

When the entry is


Bank charges levied When charges are levied
6. posted in the pass
by the bank. by the bank.
book.

Interest and When the entry is When interest or dividend


7. dividend credited by posted in the pass is allowed or collected by
the bank. book. the bank.

When the entry is


Interest debited by When interest is
8. posted in the pass
the bank. charged by the bank.
book.

ICAI BOS 67
SARANSH BANK RECONCILIATION STATEMENT

PROCEDURE FOR RECONCILING THE CASH BOOK BALANCE WITH THE


PASS BOOK BALANCE

Similarly ‘Cr. balance as per cash


‘Dr. balance as per cash book’ book’ means excess amount over
means deposits in the bank or deposits withdrawn by the
cash at bank or Cr. balance as per account holder or overdraft
pass book. balance or Dr. balance as per pass
book

It means that you can start bank reconciliation from any of the following four balances i.e.

Dr. balance as per Dr. balance as per


cash book pass book

Cr. balance as per


cash book Cr. balance as per
pass book

TYPES OF PRACTICAL PROBLMES


When causes of difference are given When causes of difference are not given

When causes of difference are given

Given the causes of If a reconciliation starts from debit


disagreement, the balance of the balance of cash book and after all
other book can be either more or adjustments the balance arrived is
less. If the balance of the other positive then it is known as Cr.
book is more then add the balance as per the pass book and if
amount and if the balance of the the balance is negative then it is
other book is less then subtract said to be Dr. balance as per the
the amount. pass book and vice-versa.

But if causes of differences are not given

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

TABLE SUMMARISING IN BRIEF THE TIMINGS OF DIFFERENT TRANSACTIONS


Favourable Unfavourable Favourable balance Unfavourable
Causes of differences balance (Dr.) as balance (Cr.) as per (Cr.) as per pass- balance (Dr.) as
per cash- book cash-book book per pass-book

Cheque deposited but not


Subtract Add Add Subtract
cleared

Cheque issued but not


Add Subtract Subtract Add
presented to bank

Cheque directly deposited in


Add Subtract Subtract Add
bank by a customer

Income (e.g., interest from UTI)


Add Subtract Subtract Add
directly received by bank

Expenses (e.g., telephone bills,


Insurance charges) directly
Subtract Add Add Subtract
paid by bank on standing
instructions

Bank charges levied by bank Subtract Add Add Subtract

Locker rent levied by bank Subtract Add Add Subtract

Wrong debit in the cash book Subtract Add Add Subtract

Wrong credit in the cash book Add Subtract Subtract Add

Wrong debit in the pass book Subtract Add Add Subtract

Wrong credit in pass book Add Subtract Subtract Add

Undercasting of Dr. side of bank


Add Subtract Subtract Add
account in the cash book

Overcasting of Dr. side of bank


Subtract Add Add Subtract
account in cash book

Undercasting of Cr. side of bank


Subtract Add Add Subtract
account in cash book

Overcasting of Cr. side of bank


Add Subtract Subtract Add
account in cash book

Bill receivable collected directly


Add Subtract Subtract Add
by bank

Interest on bank overdraft


Subtract Add Add Subtract
charged

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

BANK RECONCILIATION STATEMENTAFTER THE PREPARATION OF


ADJUSTED CASHBOOK

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.

While adjusting cash-book, the following adjustments are considered:-

All the errors (like wrong amount


recorded in the cash-book, entry
posted twice in the cash-book, Omissions (like bank charges
over/ undercasting of the balance recorded in the pass-book only,
etc.) and interest debited by the bank,
direct receiptor payment
by the bank, dishonour of
cheques/bills etc.) by the cash-
book are taken into care

ICAI BOS 70
SARANSH INVENTORIES

CHAPTER 4: INVENTORIES
INTRODUCTION

Inventory can be defined as

for consumption in the


production of goods or
assets held for in the process of services for sale, including
sale in the production for such maintenance supplies and
ordinary course of sale, or consumables other than
machinery spares, servicing
business, or
equipment and standby
equipment.

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.

THE SIGNIFICANCE OF INVENTORY VALUATION ARISES DUE TO VARIOUS


REASONS AS EXPLAINED IN THE FOLLOWING POINTS

(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

When opening When closing When opening


When closing
inventory is inventory is inventory is
inventory is
overstated, net understated, net understated,
overstated, net
income for the income for the net income for the
income for the
accounting accounting accounting
accounting period period will be
period will be period will be
will be overstated. understated.
understated. overstated.

(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.

As per the requirements of the Accounting Standards, the financial


statements should disclose:

(a) the accounting (b) the total carrying


policies adopted in amount of inventories
measuring inventories, and its classification
including the cost appropriate to the
formula used, and enterprise.

BASIS OF INVENTORY VALUATION


Inventory Valuation
The above principle is governed by
‘Principle of Conservative Accounting’
under which any expenses or losses
from transactions entered or event
Net occurred are to be recognized
Cost
Realizable immediately, however, any gains or
Value profits are recognized until it becomes
due or are actually realized.

whichever is less

ICAI BOS 72
SARANSH INVENTORIES

COST
As per Accounting Standards, cost of inventories should comprise

costs of conversion other costs incurred


All cost of (primarily for in bringing the
purchase finished goods and inventories to their
work in progress) present location
and condition

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.

EXCLUSIONS FROM COST OF INVENTORIES


administrative
storage costs, overheads that do
abnormal amounts
unless those costs not contribute to selling and
of wasted materials,
are necessary in the bringing the distribution costs.
labour or other
production process inventories to their
production
prior to further present location
overheads;
production stage; and condition; and

ICAI BOS 73
SARANSH INVENTORIES

NET REALISABLE VALUE

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.

replacement cost is generally considered as


In case of raw materials
net realisable value.

Net realisable value mean expenses and


overheads required to be incurred to convert
In case of work in progress work in progress into finished goods and
making it ready for sale as reduced from
selling price.

In case of finished goods and Net realisable value means selling price
traded goods reduced by selling and distribution expenses.

INVENTORY RECORD SYSTEM


There are two principal systems of determining the physical quantities and monetary value
of inventories sold and in hand. One system is known as ‘Periodic Inventory System’ and the
other as the ‘Perpetual Inventory System’. The periodic system is less expensive to use than
the perpetual method. But the useful information obtained from perpetual system is more
than cost incurred on it.

PERIODIC INVENTORY SYSTEM


Periodic inventory system is a method of ascertaining inventory by taking an actual physical
count (or measure or weight) of all the inventory items on hand at a particular date on
which inventory is valued. The cost of goods sold is determined as shown below:

closing
Opening Purchases Cost of
inventory
inventory (Known) goods
(physically
(Known) sold
counted)

Physical count of goods As cost of goods sold is


Physical inventory taking is taken as residual figure, it is
requires closure of
required more than once a year not possible to identify loss
normal operations of
for preparation of quarterly or of goods due to pilferage,
business.
half yearly financial statements damage or even fraud.
thereby making this system more
expensive.
Books of accounts does not
reflect inventory in hand and its Inventory control is not
This system is used by small enterprises
value therefore, it is difficult to possible under this
where it is easy to control physical
plan operations e.g. how much system.
inventory. This system is not considered
or when to order/manufacture.
suitable for medium or larger enterprises
which generally use Perpetual Inventory
system.

ICAI BOS 74
SARANSH INVENTORIES

PERPETUAL INVENTORY SYSTEM


Perpetual inventory system is a system of recording inventory balances after each receipt
and issue. In order to ensure accuracy of perpetual inventory records, physical inventory
should be checked and compared with recorded balances. Under this system, cost of goods
issued is directly determined and inventory of goods is taken as residual figure with the help
of inventory ledger in which flow of goods is recorded on continuous basis.
Closing inventory is determined as follows:

Closing
Opening Purchases Cost of
Stock
inventory (Known) goods
(balancing
(Known) sold
figure)

Sl. No. Periodic Inventory System Perpetual Inventory System

This system is based on physical


1. It is based on book records.
verification.

This system provides information about


It provides continuous information about
2. inventory and cost of goods sold at a
inventory and cost of sales.
particular date.

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.

6. This system is simple and less expensive. It is costlier method.

Periodic system requires closure of Inventory can be determined without


7.
business for counting of inventory. affecting the operations of the business.

ICAI BOS 75
SARANSH INVENTORIES

METHODS TO DETERMINE COST OF INVENTORY

Inventory Valuation
Techniques

Historical Cost Methods Non-Historical Cost Methods

Inventory, not ordinarily Inventory, ordinarily Adjusted Standard Cost


Interchangeable Interchangeable Selling Price Method

Specific Identification Method

Historical Cost Method

Simple/ Weighted Average


FIFO LIFO
Price Method

ICAI BOS 76
SARANSH INVENTORIES

HISTORICAL COST METHODS


The different techniques for Valuation of Inventory have been discussed below:

It attributes specific costs to identified goods and requires keeping


(i) different lots purchased separately to identify the lot out of which units in
Specific inventories are left. The historical costs of such specific purpose
inventories may be determined on the basis of their specific purchase
Identification
price or production cost.
Method This method is generally used to ascertain the cost of inventories of
items that are not ordinarily interchangeable and their value is high like
expensive medical equipments.

This method is based on the assumption that cost should be charged to


(ii) revenue in the order in which they are incurred, that is, it is assumed that
FIFO the issue of goods is usually from the earliest lot on hand. The FIFO
formula assumes that the items of inventories which were purchased or
(First in first
produced first are consumed or sold first and consequently items
out) Method remaining in the inventory at the end of the period are those most
recently purchased or produced.
Thus, the closing inventory is valued at the price paid for latest
consignments.

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

NON HISTORICAL COST METHODS

(i) Adjusted selling price method

This method is also called retail inventory method. It


is used widely in retail business or in business where
the inventory comprises of items, the individual costs
of which are not readily ascertainable. The cost of
the inventory is determined by reducing from the
sales value of the inventory an appropriate
percentage of gross margin. The percentage used
takes into consideration inventory which has been
marked below its original selling price. An average
percentage for each retail department is often used.

(ii) Standard Cost method

This method is used when there is


frequent change in the price per unit of
the goods and goods are purchased
frequently by the business e.g. crude oil.
Based on the experience a standard cost
is determined on the basis of frequent
changes in prices and inventory is valued
on that price per unit.

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

CHAPTER 5: DEPRECIATION AND AMORTISATION

MEANING OF DEPRECIATION

Depreciation is the systematic allocation of the


depreciable amount of an asset over its useful life.
The depreciable amount of an asset is the cost of
As per Schedule II an asset or other amount substituted for cost, less
under the its residual value.
Companies Act, 2013, The useful life of an asset is the period over which
an asset is expected to be available for use by an
entity, or the number of production or similar units
expected to be obtained from the asset by the
entity.

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

OBJECTIVES OF PROVIDING DEPRECIATION

Depreciation should be charged for proper estimation


of periodic profit or loss. In case an enterprise does not
Correct income account for depreciation on Property, Plant &
measurement Equipment, it will not be considering loss in value of
property, plant & equipment due to their use in
production or operations of the enterprise and will not
result in true profit or loss for the period.

Value of the Property, Plant & Equipment should be


adjusted for depreciation charged in order to depict
True position
the actual financial position. In case depreciation is not
statement
accounted for appropriately, the property, plant and
equipment would be disclosed in financial statements
at a value higher than their true value.

ICAI BOS 79
SARANSH DEPRECIATION AND AMORTISATION

Generation of adequate funds in the hands of the


business for replacement of the asset at the end of its
Funds for useful life. Depreciation is a good indication of the
replacement amount that an enterprise should set aside to replace a
fixed asset after its economic useful life is over. However,
the replacement cost of a fixed asset may be impacted
by inflation or other technological changes.

For ascertaining the cost of the production, it is


necessary to charge depreciation as an item of cost of
Ascertainment of true production. Further depreciation is a non-cash expense
cost of production and unlike other normal expenditure (e.g. wages, rent,
etc.) which does not result in any cash outflow.

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.

REASONS FOR DECREASE IN VALUE OF AN ASSET

Value of an assets decreases with passage


of time mainly due to following reasons :

1. Wear and tear due to its use in business.


2. Efflux of time even when it is not being used.
3. Obsolescence due to technological or other
changes.
4. Decrease in market value.
5. Depletion mainly in case of mines and other
natural reserves.

FACTORS AFFECTING THE AMOUNT OF DEPRECIATION

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

DEPRECIATION ON COMPONENTS OF AN ASSET

It may be noted that Accounting Standards as well as the Companies Act, 2013 requires

depreciation to be charged

on a component basis.

Each part of an item of Property, Plant and Equipment

with a cost that is significant in relation to the total cost of the item

should be depreciated separately.

An enterprise should allocate

the amount initially recognised in respect of an item of property, plant and equipment

to its significant parts/components and

should depreciate each such part separately

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

Depreciable amount of a depreciable asset


A significant part of an item
of property, plant and
is its historical cost or equipment may have a
useful life and a
depreciation method that
are the same as the useful
other amount substituted for historical cost
life and the depreciation
method of another
significant part of that
in the financial statements,
same item. Such parts may
be grouped in determining
the depreciation charge.
less

the estimated residual value

‘USEFUL LIFE’

‘Useful Life’ is either

(ii) the number of


(i) the period over
production or similar
which a depreciable
units expected to be
asset is expected to be
obtained from the
used by the enterprise
use of the asset by
or
the enterprise.

Determination is normally based on various factors


of the useful life
including experience with similar
type of assets.
is a matter of
Several other factors like estimated
estimation and
working hours, production capacity,
repairs and renewals, etc.

ICAI BOS 82
SARANSH DEPRECIATION AND AMORTISATION

DETERMINATION OF THE RESIDUAL VALUE

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.

COST OF PROPERTY, PLANT AND EQUIPMENT

(a) its purchase


price, including
non-refundable (b) any cost directly
(c) the initial
import duties and attributable to bring
estimate of the
purchase taxes, the asset to the
costs of Cost of
after deducting location and
dismantling, Property,
trade discounts condition necessary Plant
removing, the
and rebates. for it to be capable of and
item and restoring
operating in a Equipment
the site on which
manner intended by
an asset is
the enterprise.
located.

EXAMPLES OF DIRECTLY ATTRIBUTABLE COSTS ARE

(e) cost of testing


(a) cost of whether the asset is
employee benefits functioning properly, (f) professional fees
arising directly from (b) cost of site (c) initial delivery (d) installation and after deducting the e.g. engineers hired
acquisition or preparation and handling costs assembly costs net proceeds from for helping in
construction of an selling the items installation of a
produced while machine
item of property,
testing (such as
plant and samples produced
equipment. while testing)

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

EXPENSES THAT DOES NOT BECOME PART OF COST OF ASSET

(a) costs of opening (c) cost of conducting


new facility or business in a new
business, such as location or with a new
inauguration costs; class of customer
(including cost of staff
training); and

(b) cost of introducing


new product or service
(for example cost of (d) administration
advertisement or and other general
promotional activities). overhead costs

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.

METHODS FOR PROVIDING DEPRECIATION

Generally, methods for providing depreciation are based on formula,


developed on a study of the behavior of the assets over a period of years for
readily computing the amount of depreciation suffered by different forms of
assets. Each of the methods, however, should be applied only after carefully
considering nature of the asset and the conditions under which it is being used.

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

STRAIGHT LINE METHOD

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.

This method is also known as Fixed Installment Method.

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.

Straight Line Depreciation = Cost of Asset – Scrap Value


Useful life

Straight Line Straight Line Depreciation


× 100
Depreciation Rate = Cost of Asset

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.

REDUCING OR DIMINISHING BALANCE METHOD

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.

Limitation of Reducing or Diminishing Balance Method


Among the disadvantages of this method is the danger that too low a percentage may be
adopted as depreciation with the result that over the life of the asset full depreciation may not
be provided; also if assets are grouped in such a way that individual assets are difficult to
identify, the residue of an asset may lie in the asset account even after the asset has been
scrapped.

ICAI BOS 86
SARANSH DEPRECIATION AND AMORTISATION

MACHINE HOUR METHOD

The machine hour rate of the depreciation, is


calculated after estimating the total number
of hours that machine would work during its
whole life; however, it may have to be varied
from time to time, on a consideration of the
changes in the economic and technological
conditions which might take place, to ensure
that the amount provided for depreciation
corresponds to that considered appropriate
in the changed circumstances.

It would be observed that


the method is only a slight
variation of the Straight Line
Method under which
depreciation is calculated
per year.

Under this method it is calculated


for each hour the machine works.
Schedule II to the Companies Act
2013, prescribes estimated useful
life of different assets for
companies, also recognizes this
method to some extent.

It prescribes that depreciation should be


charged using estimate useful life
suggested in it, however, in certain
category of plant and machinery it
prescribes to charge higher amount of
depreciation if these assets are used for
2 shifts or 3 shifts. In a way, schedule II
combines straight line method and
machine hour method.

ICAI BOS 87
SARANSH DEPRECIATION AND AMORTISATION

The last mentioned difficulty could be, however, overcome if a Plant


register is maintained. The rate of depreciation under this method
may be determined by the following formula:

1-n Residual Value × 100


Cost of asset

where, n = useful life


Similar to straight line method, in this method also period of use in a
particular year e.g. year of purchase or sale an item of property plant
and equipment needs to be considered while computing the
depreciation amount.

Accounting Entries:
There are two alternative approaches for recording accounting entries for depreciation.

First Alternative Second Alternative


A provision for depreciation account is Amount of Depreciation is credited to the
opened to accumulate the balance of Asset Account every year and the Asset
depreciation and the assets are carried at Account is carried at historical cost less
historical cost. depreciation.

Accounting entries: Accounting entries:

Depreciation Account Dr. Depreciation Account Dr.

To Provision for Depreciation Account To Asset Account

Profit and Loss Account Dr Profit and Loss Account Dr

To Depreciation Account To Depreciation Account

SUM OF YEARS OF DIGITS METHOD


It is variation of the “Reducing Balance Method”

In this case, the annual


depreciation is calculated by
multiplying the original cost of the The number of years (including the present year) of
asset less its estimated scrap remaining life of the asset / Total of all digits of the
value by the fraction represented life of the asset (in years)
by:

ICAI BOS 88
SARANSH DEPRECIATION AND AMORTISATION

PRODUCTION UNITS METHOD

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

The method is applicable to machines producing product of uniform specifications.

DEPLETION METHOD

This method is used in case of mines, quarries etc. containing only a


certain quantity of product.

The depreciation rate is calculated by dividing the cost of the asset by


the estimated quantity of product likely to be available.

Annual depreciation will be the quantity extracted multiplied by the rate


per unit.

PROFIT OR LOSS ON THE SALE /DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT

Whenever any depreciable asset is sold


during the year, depreciation is charged on it
for the period it has

been used in the sale year.

The written down value after charging such


depreciation is used for calculating the profit
or loss on the sale of that asset.

The resulting profit or loss on sale of the asset


is ultimately transferred to profit and loss
account.

ICAI BOS 89
SARANSH DEPRECIATION AND AMORTISATION

CHANGE IN THE METHOD OF DEPRECIATION

The depreciation method applied to


an asset should be reviewed,

at least at each financial


year-end and,

if there has been a


significant change,

in the expected pattern of


consumption of the future economic
benefits embodied in the asset,

the method should be changed to


reflect the changed pattern.

Whenever any change in depreciation


method is made such change in method is
treated as change in accounting estimate
as per Accounting Standards.

Its effect needs to be quantified and


disclosed.

REVISION OF THE ESTIMATED USEFUL LIFE OF PROPERTY, PLANT AND EQUIPMENT


The residual value and the useful life of an asset should be reviewed at least at each financial
year-end and, if expectations differ from previous estimates, the change(s) should be
accounted for as a change in an accounting estimate in accordance with Accounting
Standards.

Whenever there is a revision in the estimated useful life of the asset,

the unamortised depreciable amount

should be charged over the

revised remaining estimated useful life of the asset.

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)

Depreciation on SLM charged for three years = ₹60,000 × 3 years = ₹1,80,000

Book value of the computer at the end of third year = ₹6,00,000 – ₹1,80,000 = ₹4,20,000.

Remaining useful life as per previous estimate = 7 years


Remaining useful life as per revised estimate = 5 years
Depreciation from the fourth year onwards = ₹4,20,000 / 5 = ₹84,000 per annum

REVALUATION OF PROPERTY, PLANT AND EQUIPMENT

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

Credited directly to Exception: When it is Charged to the


Exception: When it is
owners’ interests under subsequent Statement of
subsequent Decrease
the heading of Increase (Initially profit and loss
(Initially Increase)
Revaluation surplus Decrease)

Decrease should be debited


Recognised in the Statement directly to owners' interests
of Profit and loss to the extent under the heading of
that it reverses a revaluation Revaluation surplus to the
decrease of the same asset extent of any credit balance
previously recognised in the existing in the Revaluation
Statement of profit and loss surplus in respect of that asset

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.

Depreciable amount after revaluation = ₹8,40,000 + ₹60,000 = ₹9,00,000


Remaining useful life as per previous estimate = 7 years
Remaining useful life as per revised estimate = 9 years
Depreciation for the fourth year onwards = ₹9,00,000 / 9 = ₹1,00,000.

INTANGIBLE ASSETS

An intangible asset is an identifiable non-monetary asset, without


physical substance, held for use in the production or supply of goods
or services, for rental to others, or for administrative purposes.
Examples of intangible assets include:

Broadcasting rights of events


such as the Cricket World
Cup, the Indian Premier
Landing rights / time slots
League, the Pro Kabaddi
Broadcasting rights of at airports which permit
League etc.
events such as the Cricket aircrafts to land or take-
World Cup, the Indian off during a particular
Premier League, the Pro time frame.
Streaming rights of movies /
Kabaddi League etc.
TV shows / web series on
platforms like Netflix, Disney
Hot Star, Amazon Prime /
Sony LIV etc. Computer Software.

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.

It is probable that the


future economic benefits The cost of the intangible
attributable to the asset asset can be measured
will flow to the enterprise; reliably.
and

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:

Any directly attributable


expenditure on making the
Any import duties and taxes
asset ready for its intended
(other than those
Purchase price use e.g., professional fees
subsequently recoverable by
towards legal services. Any
the enterprise from the tax
trade discounts and rebates
authorities)
are deducted in arriving at
the cost.

ICAI BOS 93
SARANSH DEPRECIATION AND AMORTISATION

Tangible Assets Intangible Assets

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.

Intangible Assets have a finite life based on


Tangible Assets have a finite life based on contractual terms. In some cases, intangible
expected usage. assets could also have an indefinite life e.g.
purchased goodwill.

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.

Intangible Assets are amortised over the


Tangible Assets are depreciated over the
useful life. In other words, writing off the value
useful life. In other words, writing off the value
of intangible assets on an annual basis is
of tangible assets on an annual basis is
known as
known as depreciation.
amortisation.

Examples include Property, Machinery, Examples include software, streaming rights,


Vehicles etc. landing rights, trademarks, patents etc.

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

Residual value is the amount which an enterprise


expects to obtain for an asset at the end of its useful
life after deducting the expected costs of disposal.

The depreciable amount of an intangible asset should


be allocated on a systematic basis over the best
estimate of its useful life. Amortisation should
commence when the asset is available for use.

ICAI BOS 94
SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES

CHAPTER 6: BILLS OF EXCHANGE AND PROMISSORY NOTES


BILL OF EXCHANGE

Bill of Exchange Promissory Note

Normal Trading Accomodation

A Bill of Exchange has been defined as an “instrument in writing containing an unconditional


order signed by the maker directing certain person to pay a certain sum of money only to or to
the order of a certain person or to the bearer of the instrument”. When such an order is accepted
in writing on the face of the order itself, it becomes a valid bill of exchange.
A Bill of Exchange has the following characteristics:

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”)

The money must


be payable to a
The draft must be
definite person or
accepted for
to his order to the
payment by the
bearer.
party to whom
the order is made.

ICAI BOS 95
SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES

Drawee

The party to whom the


amount has to be paid is
Acceptor known as the payee.

The party which accepts


the order is known as the Remember:
Drawer acceptor. The drawer and the payee
can be the same.
The party which makes the
order is known as the drawer.

A Bill of Exchange can be passed on to


another person by endorsement.
Endorsement on a bill of exchange is made
exactly as it is done in the case of a cheque.

The primary liability on a bill of exchange is


that of the acceptor.

If he does not pay, a holder can recover the


amount from any of the previous endorsers
or the 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.

A Promissory Note has the following characteristics:

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.

The payee (the


PROMISSORY
person to whom The sum payable
the payment is
promised) must NOTES must be certain.
“I promise to pay
also be certain. ₹50,000 plus all
fine” is not
certain.

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

DIFFERENCES BETWEEN BILL OF EXCHANGE AND PROMISSORY NOTE

Bill of Exchange Promissory Note

A bill contains an order to pay A promissory note contains only a promise to


pay certain sum of money.

There are generally 3 parties (Drawer, Drawee There are 2 parties (Maker and Payee) in
and Payee) in bill of exchange. promissory note.

A bill is paid by acceptor A promissory note is paid by maker.

A bill is drawn by creditor A promissory note is made by debtor

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 a bill of exchange the liability of drawer is


secondary and conditional. He will be liable In a promissory note the liability of a maker is
only in case the acceptor does not honour primary and absolute.
the bill.

A bill of exchange can be accepted A promissory note cannot be made


conditionally. conditionally.

In a bill of exchange, notice of dishonour Notice of dishonour is not required in case of


must be given. promissory note.

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

RECORD OF BILLS OF EXCHANGE AND PROMISSORY NOTES

Particulars Books of Drawer Drawee

Debtors/Drawee A/c --- Dr. Purchases A/c --- Dr.


A transaction is executed
To Sales To Cred. /drawer

Bills receivable A/c --- Dr. Drawer a/c --- Dr.


Bills drawn
To Debtors /drawee A/c To Bills Payable A/c

Retained :- No entry

Discounted:-
Bank/Cash A/c --- Dr.
Discount A/c --- Dr.
To Bills Receivable A/c

Options after bills drawn


Endorsed :-
Creditors/Endorsee A/c --Dr.
To Bills Receivable A/c

Sent for collection :-


Bill sent for collection Dr.
To Bills Receivable A/c

Retained :-
Bank A/c ----- Dr.
To Bills Receivable A/c

Bills Payable A/c Dr.


On due date – Bill Honored Endorsed :- No entry
To Bank A/c

Sent for collection:-


Bank A/c --- Dr.
To Bill sent for coll. 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

Bills sent for collection :-


Drawee A/c --- Dr.
To Bill sent for coll. A/c

ICAI BOS 99
SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES

TERM OF A BILL

The term of bill of When a bill is drawn When a bill is drawn


exchange may be of any after sight, the term of after date, the term of
duration. Usually the the bill begins to run the bill begins to run
term does not exceed 90 from the date of from the date of
days from the date of ‘sighting’, i.e., when the drawing the bill.
the bill. bill is accepted.

EXPIRY / DUE DATE OF A BILL & DAYS OF GRACE

The date on which the term of Every instrument payable


the bill terminates is called as otherwise than on demand is
‘Expiry/Due Date of the bill’. entitled to three days of grace.

DATE OF MATURITY OF BILL

Every promissory note or


bill of exchange gets
The date which The maturity of a matured on the third day
comes after promissory note or after the day on which it is
adding three days bill of exchange is expressed to be payable,
of grace to the the date at which except when it is expressed
expiry/due date of it falls due. to be payable:
a bill, is called the
(i) on demand,
date of maturity.
(ii) at sight, or
(iii) on presentment

BILL AT SIGHT

Bill at Sight means the instruments in which no time for payment is mentioned. A cheque is
always payable on demand

ICAI BOS 100


SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES

when no time for


A promissory note payment is
or bill of exchange specified, or
is payable on
demand

when it is expressed
to be payable on
demand, or at sight
or on presentment.

BILL AFTER DATE

after a specified period.

on a specific day

Bill after date means the


instrument in which time
for payment is mentioned.
A promissory note or bill of after sight
exchange is a time
instrument when it is
expressed to be payable:

on the happening of event


which is certain to happen

ICAI BOS 101


SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES

HOW TO CALCULATE DUE DATE OF A BILL


The due date of each bill is calculated as follows:

Case Due Date

(a) When the bill is made payable on a


(a) That specific date will be the due date.
specific date.

(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.

(c) That date which comes after adding


(c) When the bill is made payable at a stated
stated number of days to the date of bill,
number of days after date.
shall be the due date.

(d) The preceding business day will be the


(d) When the due date is a public holiday.
due date.

(e) When the due date is an emergency/


(e) The next following day will be the date.
unforeseen holiday.

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

ICAI BOS 102


SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES

RENEWAL OF BILL

If acceptor is unable to pay amt. of bill on


maturity date.

Renewal means giving further time for


making payment.

Drawer charges interest on delayed


period.

RETIREMENT OF BILLS OF EXCHANGE & REBATE

Renewal of bill is made Whereas, Retirement


when a person doesn’t of bill is when acceptor
have sufficient fund to has funds before
pay. Drawee is required maturity of due date.
to pay interest on In such cases, the
delayed payment. acceptor gets certain
rebate or interest for
pre-mature payment.

INSOLVENCY

Insolvency of a person means that he is unable to pay his liabilities. This means that bills
accepted by him will be dishonored.

When it is known that a When and if an amount is In the books of drawee of


person has become received, the journal entry the bill, the amount not
insolvent, entry for will be: ultimately paid by him due
dishonor of his acceptance to insolvency, should be
Cash A/c Dr (Amt recoverd)
must be passed. Later on, credited to Deficiency
Bad Debts A/c Dr (Bal Fig)
something may be To Debtors A/c (Amt receivable) Account.
received from his estate.

ICAI BOS 103


SARANSH BILLS OF EXCHANGE AND PROMISSORY NOTES

ACCOMMODATION BILLS

When 2 parties are in need


of funds.

One party draws a bill and


second party accepts the bill.

There is no purchase & sell


between 2 parties.

Accomodation
Bills
It is not a trade bill.

This mechanism is utilized


to raise finance.

At the end, drawer sends


certain amount to drawee
for settlement of the bill.

ICAI BOS 104


SARANSH PREPARATION OF FINAL ACCOUNTS OF SOLE PROPRIETORS

PREPRATION OF FINAL ACCOUNTS OF SOLE PROPRIETORS

BUSINESS ENTITIES

Business Entity

Manufacturing Non-Manufacturing
Business Entities Business Entities

Final Accounts
Final Accounts

Profit & Loss Balance Sheet (for


Manufacturing Trading Accounts
Accounts for Net Position of Assets
Account (for Gross Profit)
Profit and Liabilities)

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 account serves the following functions:

It shows the total cost of The Manufacturing Account


manufacturing the finished may also be used for various
It provides details of factory
products and sets out in other purposes. For example, if
cost and facilitates
detail, with appropriate the output is carried to the
reconciliation of financial
classifications, the Trading Account at market
books with cost records and
constituent elements of such prices, it discloses the profit or
also serves as a basis of
cost. It is, therefore, debited loss on manufacture. Similarly,
comparison of
with the cost of materials, it may also be used to fix the
manufacturing operations
manufacturing wages and amount of production of profit
from year to year.
expenses incurred directly or sharing bonus when such
indirectly on manufacture. schemes are in force.

ICAI BOS 105


SARANSH PREPARATION OF FINAL ACCOUNTS OF SOLE PROPRIETORS

MANUFACTURING COSTS
Manufacturing costs are classified into:

Raw Material Consumed xxx

+Direct Manufacturing Wages xxx

+Direct Manufacturing Expenses xxx

Direct Manufacturing Cost xxx

+Indirect Manufacturing expenses or xxx

Manufacturing Overhead xxx

Total Manufacturing Cost xxx

DIRECT MANUFACTURING EXPENSES


Direct manufacturing expenses are costs,
other than material or wages, which are
incurred for a specific product or saleable
service. Examples of direct manufacturing expenses are
(i) Royalties for using license or technology if based on
units produced,
(ii) Hire charge of the plant and machinery used on
hire, if based on units produced, etc.

INDIRECT MANUFACTURING EXPENSESOR OVERHEAD EXPENSES

These are also called


Manufacturing overhead,
Overhead =
Production overhead, Works
Indirect Material
overhead, etc. Overhead is
+ Indirect Wages
defined as total cost of
+ Indirect Expenses
indirectmaterial, indirect wages
and indirect expenses.

NON-MANUFACTURING ENTITIES

Non-manufacturing entities are At the end of the accounting


the trading entities, which are year, the entity must be
engaged in the purchase and interested in knowing the results
sale of goods at profit without of the business so they prepare
changing the form of the goods. financial statements at the end
of the year.

ICAI BOS 106


SARANSH PREPARATION OF FINAL ACCOUNTS OF SOLE PROPRIETORS

INCOME STATEMENT POSITION STATEMENTS

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.

PREPARATION OF FINAL ACCOUNTS

The BASIC PRINCIPLES in regard to accumulation of accounting period data are:


(i) a distinction should be made between capital and revenue receipts and payments;
(ii)also income and expenses relating to a period of account should be separated from
those of another period.
(iii) different items of income and expenditure should be accumulated under significant
heads so as to disclose the sources from which capital has been procured and the
nature of liabilities, which are outstanding for payment.

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.

ICAI BOS 107


SARANSH PREPARATION OF FINAL ACCOUNTS OF SOLE PROPRIETORS

(c) Distinction between capital and revenue


expenditure:- A distinction should be made
between capital and revenue, both receipts and
expenditure. Different types of income and
expenditure should be classified under separate
heads. Assets should be included in the Balance
Sheet by following accounting principles and
accounting standards. Likewise, a provision for
income and expenses which have accrued but not
paid, should be made by estimation or otherwise on
the same basis as in the previous year.

(d) All material information to be disclosed:- Every


information, considered material for judging the
profitability of the business or its financial position,
should be disclosed. For example, when the labour
charges have increased on account of bonus having
been paid to workmen, the amount of bonus paid
should be disclosed. Similarly, if some of the items of
inventory are not readily saleable, these should be
valued at their approximate net realisable value and
the basis of valuation and value of such inventory
should be shown separately.

(e) Only transactions completed before close of


accounts should be given effect:- It should be
seen that only the effect of transactions, which
were concluded before the close of period of
account, has been adjusted in the accounts of
the year. For example, when a sale of goods is to
take place only after the goods have been
inspected by the purchaser and the inspection
had not been made before the close of the year,
it would be incorrect to treat the goods as a sale
in the accounts of the year.

ICAI BOS 108


SARANSH PREPARATION OF FINAL ACCOUNTS OF SOLE PROPRIETORS

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.

ICAI BOS 109


SARANSH PREPARATION OF FINAL ACCOUNTS OF SOLE PROPRIETORS

Treatment in
Treatment in Treatment in
Adjustment Adjustment Entry Profit & Loss
Trading A/c Balance Sheet
A/c

Closing Stock A/c Dr. Shown on Shown on the


1 Closing Stock
To Trading A/c credit side assets side

Goods sold but Added to sales Added to


Debtors A/c Dr.
2 omitted to be on the credit Debtors on the
To Sales A/c
recorded side assets side

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

Goods Deducted from


Free sample A/c Dr. Shown on the
5 distributed as purchases on
To Purchase A/c debt side
free samples the debt side

Deducted from Deducted from


Drawings in Drawing A/c Dr.
6 purchases on capital on the
goods To Purchase A/c
the debt side liabilities 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

ICAI BOS 110


SARANSH PREPARATION OF FINAL ACCOUNTS OF SOLE PROPRIETORS

Treatment in
Treatment in Treatment in
Adjustment Adjustment Entry Profit & Loss
Trading A/c Balance Sheet
A/c

Added to the Added to the


Outstanding Expenses A/c Dr. respective respective Shown on the
11
Expenses To O/s Expenses A/c expense on the expense of the liabilities side
debt side debit side

Deducted from Deducted from


Prepaid or
Prepaid Expenses A/c Dr. the respective the respective Shown on the
12 unexpired
To Expenses A/c expense on the expense on the assets side
expenses
debt side debit side

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

Charity in Deducted from


Charity A/c Dr. Shown on the
19 the form of purchases on
To Purchase A/c debit side
goods the debit side

Manager’s Manager’s Comm. A/c Dr. Shown on the Shown on the


20
Commission To O/s Commission A/c debit side liabilities side

ICAI BOS 111


SARANSH FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS

CHAPTER 8: FINANCIAL STATEMENTS OF NOT-FOR-PROFIT


ORGANISATIONS

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.

RECEIPTS AND PAYMENTS ACCOUNT

A Receipts and Payments The receipts are entered


It consists of a classified on the left hand side, and
Account is a summary of the
summary of cash/bank payments on the right
cash book without date column. It
receipts and payments over hand side i.e., same way
is commonly adopted by not for
a certain period together as they appear in Cash
profit making concerns such as
with the cash balances at Book.
hospitals, clubs, societies,
the beginning and close of
Temples, churches etc., for
the period.
presenting the result of their
working periodically.

FEATURES OF RECEIPT AND PAYMENT ACCOUNT

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

ICAI BOS 112


SARANSH FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS

LIMITATIONS OF RECEIPT AND PAYMENT ACCOUNT

The increase in the


Receipt and Payment Due to these
cash and bank
account includes items drawbacks, the
balances at the end of
relating to all the preparation of
the year, as compared
periods and all types Receipts and
to those in beginning,
whether capital or Payments Account is
does not truly
revenue. Hence, it does not favored except
represent the surplus
not ascertain whether where the activities of
for the year, since it
for a current year the organization, the
does not consider
income is sufficient to results of which are to
outstanding
meet the current be exhibited, are
subscription or
expenses. simple and modest.
subscription received
in advance, etc.

INCOME AND EXPENDITURE ACCOUNT

The income and expenditure Only items of revenue nature


account is equivalent to the Profit pertaining to the period of account
and Loss Account of a business are included therein. This requires
enterprise. This account is adjustment in relevant accounts in
prepared by following accrual respect of outstanding and
principle. advance items of Income and
Expenditure Account.

Non-profit organizations registered


It resembles a Profit and Loss under section 8 of the Companies
Account and serves the same Act, 2013 are required to prepare their
function in respect of a non-profit Income and Expenditure account and
making concern. The only Balance Sheet as per the Schedule III
difference is profit is termed as to the Companies Act, 2013.
surplus and loss is termed as
deficit.

FEATURES OF INCOME AND EXPENDITURE ACCOUNT


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

ICAI BOS 113


SARANSH FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS

MAIN SOURCES OF INCOME

These are subscriptions,


Any amount raised
ordinary donations, Any receipt of
membership fees or for a special activity,
capital nature shall
entrances fees (if the e.g. on sale of match
not be shown as
amount is normal or tickets, is deducted
income but will be
provided according to from the expenditure
credited to the
byelaws of the society), of that activity and
Capital Fund or
recurring grants from net amount is shown
local authorities and special purpose
in the income and
income from fund.
expenditure account.
investments, etc.

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.

DISTINCTION BETWEEN RECEIPTS AND PAYMENTS


ACCOUNT AND INCOME AND EXPENDITURE ACCOUNT

Receipt and Payment Account Income and Expenditure Account

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.

ICAI BOS 114


SARANSH FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS

PREPARATION OF INCOME AND EXPENDITURE ACCOUNT FROM


RECEIPTS AND PAYMENTS ACCOUNT

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.

Open ledger accounts Post from the debit of the


Compute the opening
of various items of Receipts & Payments
balance of the
income and Account to the credit of
Accumulated Fund, or
expenditure The the Income and
Capital Fund of the
balance of the ledger Expenditure Account
Institution with the
accounts therefore be and vice-versa
help of making
transferred to the (accruals and
opening balance
Income and outstanding amount
sheet.
Expenditure Account. have to be adjusted).

Prepare a Balance Post the items of


Sheet by including receipts and Transfer the balance
therein all the payments of capital of Income and
balances left over nature to the Expenditure Account
after transfers to the appropriate asset or to the Accumulated
Income and liability account for Fund/Capital Fund
Expenditure Account incorporating in the Account.
have been made. Balance Sheet.

BALANCE SHEET

In not for profit organizations, The surplus or deficit, if any,


the excess of total assets over on the year's working as
A Balance Sheet is the
total outside liabilities is disclosed by the Income
statement of assets
known as Capital Fund. The and Expenditure Account is
and liabilities of an
Capital fund represents the shown either as an addition
accounting unit at a
amount contributed by to or deduction from the
given date.
members, legacies, special Capital / Accumulated
donations, entrance fees and Fund brought forward from
accumulated surplus over the the previous period.
years.

ICAI BOS 115


SARANSH FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS

PREPARATION OF BALANCE SHEET


PREPARATION OF OPENING BALANCE SHEET AND CALCULATION OF SURPLUS:
If capital fund or accumulated surplus in the beginning of the year is not given,
it is calculated by deducting liabilities from assets in the beginning of year.
While calculating opening capital fund, prepaid expenses and accrued
incomes should be included as assets and outstanding expenses and
advance incomes as liabilities. Any surplus earned / deficit suffered during the
year is to be added to / deducted from the opening capital fund.

CASH AND BANK BALANCE:


Closing cash and bank balance is shown in the assets side of Balance Sheet.
Bank overdraft is to be shown on the liabilities side of the 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.

ACCOUNTING TREATMENT OF SOME SPECIAL ITEMS

Donations Entrance & Admission Fees

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.

ICAI BOS 116


SARANSH ACCOUNTS FROM INCOMPLETE RECORDS

CHAPTER 9: ACCOUNTS FROM INCOMPLETE RECORDS


OVERVIEW

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

DEFINITION OF SINGLE ENTRY SYSTEM


The term “Single Entry System” is popularly used to describe the problems of accounts from incomplete
records.

Single Entry Ignores concept Followed by Sole


System of duality trading concerns or
Partnership firms

FEATURES OF SINGLE ENTRY SYSTEM

Inaccurate,
unscientific and
unsystematic

Cash book mixes Record is kept


up business and for cash
personal transactions
transactions of
the owners
Features of
Single Entry
System
No record of real
No uniformity in and personal
maintaining the accounts
records

Estimate of
profits and
financial
position based
on available
information

ICAI BOS 117


SARANSH ACCOUNTS FROM INCOMPLETE RECORDS

TYPES OF SINGLE ENTRY SYSTEM

Pure Single Simple Single Quasi Single


Entry Entry Entry

Only personal Personal accounts Personal accounts,


accounts are and cash book are cash book and
maintained maintained subsidiary books are
maintained

ASCERTAINMENT OF PROFIT BY CAPITAL


COMPARISON AT DIFFERENT POINTS OF TIME

Net Worth method or


Statement of Affairs Method.

(Less) (Equals)
Closing Capital Opening Capital Profit/ Loss

Particulars ₹

Capital at the end (a) xxx

Add: Drawings xxx

Less: Fresh capital introduced xxx

Capital at the beginning (b) xxx

Profit/Loss (a-b) xxx

PREPARATION OF STATEMENT OF AFFAIRS


Sources utilized by accountant

Bank pass Personal Inventory List of fixed


Cash book
book for ledger for by actual assets for
for cash
bank debtors, counting, statement of
balance
balance creditors valuation. affairs

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

ICAI BOS 118


SARANSH ACCOUNTS FROM INCOMPLETE RECORDS

DESIGN OF STATEMENT OF AFFAIRS


Statement of Affairs as at..........
Liabilities Amount Assets Amount

Capital (Bal. Fig.) xxx Building xxx

Loans, Bank overdraft xxx Machinery xxx

Sundry creditors xxx Furniture xxx

Bills payable xxx Inventory xxx

Outstanding expenses xxx Sundry Debtors xxx

Bills receivable xxx

Loans and advances xxx

Cash and bank xxx

Prepaid expenses xxx

TOTAL xxx TOTAL xxx

PREPARATION OF STATEMENT OF AFFAIRS

Basis Statement of affairs Balance sheet

Reliability It is prepared on the basis of It is based on transactions recorded


transactions partly recorded on the strictly on the basis of double entry
basis of double entry book keeping book keeping.
and partly on the basis of single entry.

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.

Basis of The valuation of assets is generally The valuation of assets is done on


Valuation done in an arbitrary manner; no scientific basis. Method of valuation
method of valuation is disclosed. is disclosed.

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.

ICAI BOS 119


SARANSH ACCOUNTS FROM INCOMPLETE RECORDS

TECHNIQUES OF OBTAINING COMPLETE ACCOUNTING INFORMATION

01 02 03 04 05

Incomplete Completion Preparation Preparation


of double Accounting
books of of Trial of Financial
entry in all process
accounts Balance Statements
transactions

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

ICAI BOS 120


SARANSH PARTNERSHIP AND LLP ACCOUNTS

CHAPTER 10: PARTNERSHIP AND LLP 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

Partnership is the relation


As per Section 4 of the Partnership Act, 1932 between persons who have
agreed to share the profit of
a business carried on by all or
any of them acting for all.

ACCOUNTS OF PARTNERSHIP FIRM

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

Existence of an agreement Business


The relation of partnership arises A partnership can exist only for
from contract between parties and business. Section 2 (b) of Indian
not from status as it happens in case Partnership Act, 1932 states that
of HUF (Hindu Undivided Family). A business includes every trade,
formal or written agreement is not occupation and profession.
necessary to create 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.

ICAI BOS 121


SARANSH PARTNERSHIP AND LLP ACCOUNTS

NUMBER OF PARTNERS

Minimum Partners: Maximum Partners:


Two (2) Fifty (50)*

*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.

LIMITED LIABILITY PARTNERSHIP

The Limited Liability Partnership The LLP will be a separate legal


(LLP) is viewed as an alternative entity, liable to the full extent of its
corporate business proposal that assets, with the liability of the
provides the benefits of limited partners being limited to their
liability but allows its members, the agreed contribution in the LLP
flexibility of organizing their which may be of tangible or
internal structure as a partnership, intangible nature or both tangible
which is based on a mutually and intangible in nature.
arrived agreement.

The liabilities of the LLP and


partners who are found to have
No partner would be liable on acted with intent to defraud
account of the independent or un- Creditors or for any fraudulent
authorized actions of other purpose shall be unlimited for all
partners or their misconduct. or any of the debts or other
liabilities of the LLP

An LLP has the special characteristic


of being a separate legal personality
distinct from its partners. The LLP is a
The main benefit in an LLP is that
body corporate in nature. The Limited
it is taxed as a partnership, but
Liability P a r t n e r s h i p s (LLPs) in
has the benefits of being a
India were introduced by Limited
corporate, or more significantly, a
Liability Partnership Act, 2008 which
juristic entity with limited liability
lay down the law for the formation
and regulation of Limited Liability
Partnerships.

DEFINITION OF LLP

Limited Liability Partnership as a partnership formed and


Section 2 of the registered under this Act; and limited liability partnership
Limited Liability agreement means any written agreement between the
Partnership (LLP’s) partners of the limited liability partnership or between the
Act, 2008 defines limited liability partnership and its partners which determines
the mutual rights and duties of the partners and their rights
and duties in relation to that limited liability partnership.

ICAI BOS 122


SARANSH PARTNERSHIP AND LLP ACCOUNTS

MINIMUM NUMBER OF PARTNERS IN CASE OF LLP


As per the LLP Act, any individual or body corporate may be a partner in a limited liability
partnership; provided that an individual shall not be capable of becoming a partner of a limited
liability partnership, if

he has been found to be of he has applied to be


unsound mind by a Court of he is an undischarged adjudicated as an insolvent
competent jurisdiction and the insolvent; or and his application is
finding is in force; pending.

If at any time the number of partners of a limited liability


partnership is reduced below two and the limited liability
Every limited liability partnership carries on business for more than six months while the
partnership shall number is so reduced, the person, who is the only partner of the
have atleast two limited liability partnership during the time that it so carries on
partners. business after those six months and has the knowledge of the fact
that it is carrying on business with him alone, shall be liable
personally for the obligations of the limited liability partnership
incurred during that period.

NATURE OF LIMITED LIABILITY PARTNERSHIP

A limited liability partnership is a


body corporate formed and
A limited liability
incorporated under this Act and is a
partnership should have
legal entity separate from that of its
perpetual succession.
partners.

Non-applicability of the lndian


Partnership Act, 1932

Provisions of the Indian Partnership Act, 1932


should not apply to a limited liability Any change in the partners of a
partnership. limited liability partnership should
not affect the existence, rights or
liabilities of the limited liability
partnership.

ICAI BOS 123


SARANSH PARTNERSHIP AND LLP ACCOUNTS

DISTINCTION BETWEEN AN ORDINARY PARTNERSHIP FIRM AND AN LLP

S.No. Key Elements Partnerships LLPs

1. Applicable Law Indian Partnership Act 1932 The Limited Liability Partnerships
Act, 2008.

2. Registration Optional Compulsory with ROC

3. Creation Created by an Agreement Created by Law

4. Body No Yes
Corporate

5. Separate Legal No Yes


Entity

6. Perpetual Partnerships do not have It has perpetual succession and


Succession perpetual succession individual partners may come
and go

7. Number of Minimum 2 and Maximum Minimum 2 but no maximum


Partners 50 limit

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.

9. Liability of Unlimited: Partners are Limited to the extent of their


Partners / severally and jointly liable contribution towards LLP except
Members for actions of other partners in case of intentional fraud or
and the firm and their wrongful act of omission or
liability extends to personal commission by a partner.
assets

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

ICAI BOS 124


SARANSH PARTNERSHIP AND LLP ACCOUNTS

MAIN CLAUSES REQUIRED IN A PARTNERSHIP DEED

Name of the firm and the


partners 1 8 Any variations in the mutual
rights and duties of 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

Amount to be allowed to Basis of the determination of


each partner as drawings
and the timings of such
drawings.
4 11 the executors of a deceased
partner and the method of
payment

Rate of interest to be allowed to

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

Whether a partner will be


allowed to draw any salary 7 14 Preparation of accounts and
their audit

RULES IN THE ABSENCE OF PARTNERSHIP DEED

No partner has the


right to a salary

No interest is to be allowed on capital


Note:
In the absence of an
No interest is to be charged on the drawings agreement, the interest
and salary payable to a
partner may be paid only
Interest at the rate of 6% p.a is to be if there is profit.
allowed on a partner’s loan to the firm

Profits and losses are to be


shared equally

ICAI BOS 125


SARANSH PARTNERSHIP AND LLP ACCOUNTS

POWERS OF PARTNERS

Buying and selling of goods

Receiving payments on behalf of the firm and giving valid receipt

Drawing cheques and drawing, accepting and endorsing bills of


exchange and promissory notes in the name of the firm

Borrowing money on behalf of the firm with or without pledging the


inventories-in-trade

Engaging servants for the business of the firm

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:

Submitting a dispute relating to the


firm arbitration

Opening a bank account on behalf of


the firm in the name of a partner

Compromise or relinquishment of any


claim or portion of claim by the firm

Withdrawal of a suit or proceeding filed


on behalf of the firm

Admission of any liability in a suit or


proceedings against the firm

Acquisition of immovable property


belonging to the firm

Entering into partnership on behalf of


the firm
The rights, duties and power of partners
can be changed by mutual consent.

ICAI BOS 126


SARANSH PARTNERSHIP AND LLP ACCOUNTS

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.

PROFIT AND LOSS APPROPRIATION ACCOUNT

The Profit and Loss The final accounts of


Account will show the a sole proprietorship
profit earned by the concern will not differ
During the course of firm or loss suffered from the accounts of
business, a partnership firm by it. a partnership firm.
will prepare Trading
Account and a Profit and
Loss Account at the end of
every year. This profit or loss has to be
transferred to the Capital Accounts
of partners according to the terms
of the Partnership Deed or
according to the provisions of the
Indian Partnership Act (if there is
no Partnership Deed or if the Deed
is silent on a particular point).

METHODS OF ACCOUNTING

Two Methods of Accounting:


1. Fluctuating capital method
2. Fixed capital method

ICAI BOS 127


SARANSH PARTNERSHIP AND LLP ACCOUNTS

Fixed capital method


Fluctuating capital method

No current account is maintained. All Generally initial capital contributions


such transactions and events are by the partners are credited to
passed through capital accounts. partners’ capital accounts and all
Naturally, capital account balance of subsequent transactions and events
the partners fluctuates every time. So, are dealt with through current
in fixed capital method, a fixed capital accounts. Unless a decision is taken to
balance is maintained over a period of change it, initial capital account
time while in fluctuating capital balance is not changed.
method capital account balances
fluctuate all the time.

INTEREST ON CAPITAL

The amount of interest is


debited to interest on capital
Alternatively, credit
accounts and credited to the
the capital (or
capital accounts, if capitals
current) account of
are fluctuating and current
the partner
accounts, if capitals are
concerned and debit
fixed. Interest on capital
the profit and loss
account is then closed by
appropriation
transfer to profit and loss
account.
appropriation account.

FOR ALLOWING INTEREST ON CAPITAL


Profit and Loss Appropriation Account ........................................................Dr.
To (Individual) Capital (or Current) Accounts of Partners

Subject to contract between the partners,


interest on capitals is to be provided out of
profits only. Thus in case of loss, no interest
is provided. But in case of insufficient profits
(i.e. net profit less than the amount of
interest on capital), the amount of profit is
distributed in the ratio of capital as partners
get profit by way of interest on capital only.
Net loss and Interest on Capital

ICAI BOS 128


SARANSH PARTNERSHIP AND LLP ACCOUNTS

INTEREST ON DRAWINGS
Calculation of Interest on Drawings: Total Drawings x Interest Rate x Multiplication Factor

(a) Fixed Amount is drawn:

Time of drawings Multiplication Factor Time of drawings Multiplication factor

Beginning of every 6.5/12 Beginning of each 7.5/12


month quarter

Middle of every month 6/12 Middle of each quarter 6/12

End of every month 5.5/12 End of each quarter 4.5/12

Note: Where the date of drawings not given then interest on drawing is always calculated for 6
months /multiplication factor will be 6/12

(b) Different amount is withdrawn at various dates: use product method


For charging interest on drawings
(Individual) Capital (or Current) Accounts of Partners Account ........................................................Dr.
To Profit and Loss Appropriation Account

GUARANTEE OF MINIMUM PROFIT


Sometimes, one partner can enjoy the right to have minimum amount of profit in a
year as per the terms of the partnership agreement.

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.

There are three possibilities as far as share of deficiency by other partners is


concerned. These are as follows:
Excess is payable by one of the remaining partners.
Excess is payable by at least two or all the partners in an agreed ratio.
Excess is payable by remaining partners in their mutual profit sharing ratio.

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.

ICAI BOS 129


SARANSH PARTNERSHIP AND LLP ACCOUNTS

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

the capitals for the


purpose of ratio would
profits will be shared
be determined with
in the ratio of given
reference to time on
capitals
the basis of weighted
average method

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.

Necessity for valuation of goodwill

Change in Profit Sharing Ratio

Admission of partner

When business is dissolved or sold

Retirement or death of partner

Methods of valuation of Goodwill

Super profit Capitalization Average profit


Annuity basis
basis basis basis

ICAI BOS 130


SARANSH PARTNERSHIP AND LLP ACCOUNTS

Average Profit = Total profit/ Number of years


Average profit Goodwill = Average Profit x No. of Years’ purchased
basis The profits taken into consideration are adjusted with
abnormal losses, abnormal gains, return on non trade
investments and errors.

Calculate Capital Employed


Super profit Assets …….
basis Less: Liability …….
Capital Employed ……..
Calculate the normal Rate of Return(NRR)
Calculate Normal Profit=Capital Employed X Normal rate of Return
Calculate Average Actual Profit
Calculate Super Profit=Average Actual Profit-Normal Profit
Calculate Goodwill=Super Profit X Number of Years Purchased

Annuity basis
Goodwill=Super Profit x Annuity Number

Capitalization
Goodwill = Super Profit / Normal Rate of Return
basis

ADMISSION OF A NEW PARTNER


New partners are admitted for the benefit of the partnership firm. New partner is admitted either
for increasing the partnership capital or for strengthening the management of the firm.

ADMISSION OF A
NEW PARTNER

Revaluation Reserve lying in the


Account or Profit Adjustment of Profit/loss on balance sheet
and Loss goodwill amongst revaluation account transferred to the
Adjustment the old partners in is transfer to old capital accounts of
Account for their sacrificing partners in their old old partners in their
revaluation of gaining ratio profit sharing ratio old profit sharing
assets and liabilities ratio

ICAI BOS 131


SARANSH PARTNERSHIP AND LLP ACCOUNTS

Revaluation Account or Profit and Loss Adjustment Account


When a new partner is admitted into the partnership, assets are revalued and liabilities are
reassessed. A Revaluation Account (or Profit and Loss Adjustment Account) is opened for the
purpose.
This account is debited with all reduction in the value of assets and increase in liabilities and
credited with increase in the value of assets and decrease in the value of liabilities.
The difference in two sides of the account will show profit or loss. This is transferred to the
Capital Accounts of old partners in the old profit sharing ratio.

ACCOUNTING ENTRIES

1. Revaluation Account Dr.

To Assets Account with the reduction in the value of the assets

(Individually which show a decrease)

To the Liabilities Accounts with the increase in the liabilities.

(Individually which have to be Increased)

2. Assets Account (Individually) Dr. with the increase in the value of the of assets

Liabilities Accounts Dr. with the reduction in the amount liabilities

To Revaluation Account

3. Revaluation Account Dr. with the profit in the old profit sharing ratio.

To Capital A/cs of the old partners

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.

ICAI BOS 132


SARANSH PARTNERSHIP AND LLP ACCOUNTS

GAINING RATIO

have agreed in profit the other


The ratio in which
to gain their from partner or
the partners
shares partners.

GAINING difference between new profit


shares and old profit shares
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

Incoming partner’s capital x Reciprocal of share of incoming partner xxx

Less: Total capital after taking into consideration the capital brought in by incoming xxx
partner

Value of Goodwill xxx

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

ICAI BOS 133


SARANSH PARTNERSHIP AND LLP ACCOUNTS

REVALUATION OF ASSETS AND LIABILITIES ON


RETIREMENT OF A PARTNER

On retirement of a partner, it is required to revalue assets and liabilities.

To arrive at profit or loss on revaluation of assets and liabilities, a Revaluation


Account or Profit and Loss Adjustment Account is opened.

Profit or loss on revaluation , such profit or loss should be distributed amongst


the existing partners including the retiring partner at the existing profit sharing
ratio.

Revaluation Account or Profit and Loss Adjustment Account is closed


automatically by transfer of profit or loss balance to the Partners’ Capital
Accounts.

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.

FINAL PAYMENT TO A RETIRING PARTNER


The following adjustments are necessary in the Capital A/c:

(ii) Transfer of goodwill (iii) Transfer of profit/loss


(i) Transferof reserve
on revaluation

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

ICAI BOS 134


SARANSH PARTNERSHIP AND LLP ACCOUNTS

Sometimes the retiring partner agrees to


retain some portion of his claim in the
partnership as loan. The journal entry will be
Retiring Partner’s Capital A/c ..........Dr.
To Retiring Partner’s Loan A/c
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.

An annuity may be paid to a retired partner


for life or for an agreed number of years for
the life of some dependent.

PAYING A PARTNER’S LOAN IN INSTALMENT

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.

The interest for the


period should be
In such case, loan
calculated and the
payment should should be divided
consist of the into equal parts.
instalment on account
of the loan plus
interest for the period.

ICAI BOS 135


SARANSH PARTNERSHIP AND LLP ACCOUNTS

DEATH OF A PARTNER
When the partner dies the amount payable to him/her is paid to his/ her legal representatives.

Right of outgoing partner in certain cases to share subsequent profits

As per provisions of Section 37 of the Indian Partnership Act., Where


any member of a firm has died or otherwise ceased to be a partner,
and the surviving or continuing partners carry on the business of the
firm with the property of the firm without any final settlement of
accounts as between them and the outgoing partner or his estate,
then, in the absence of a contract to the contrary, the outgoing
partner or his estate is entitled at the option of himself or his
representatives to such share of the profits made since he ceased to
be a partner as may be attributable to the use of his share of the
property of the firm or to interest at the rate of six per cent per
annum on the amount of his share in the property of the firm.

Provided that whereby contract between the partners an option is given


to surviving or continuing partners to purchase the interest of a
deceased or outgoing partner, and that option is duly exercised, the
estate of the deceased partner, or the outgoing partner or his estate, as
the case may be, is not entitled to any further or other share of profits;
but if any partner assuming to act in exercise of the option does not in all
material respects comply with the terms thereof, he is liable to account
under the foregoing provisions of this section. This way, the outgoing
partner has the option to receive, interest at the rate of 6% p.a. or the
share of profit earned on the unsettled amounts for the period till his
dues are settled by the firm in the absence of any contract made to the
contrary.

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.

AMOUNT PAYABLE TO LEGAL REPRESENTATIVES OF DEAD PARTNER

The representatives of dead partners are entitled to

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

ICAI BOS 136


SARANSH PARTNERSHIP AND LLP ACCOUNTS

CALCULATION OF PROFIT UPTO THE DATE OF DEATH OF A PARTNER

Such Profit is calculated through


P&L Suspense account. After If the death of a partner occurs
ascertaining the amount due to during the year, the
the deceased partner, it should representatives of the deceased
be credited to his Executor’s partner are entitled to his/her
Account. share of profits* earned till the
date of his/her death.

*Such profit is ascertained by either of the


following methods

Time Basis Turnover or Sales Basis

It is assumed that profit We have to take into consideration


has been earned the profit and the total sales of the
uniformly throughout the last year. Thereafter the profit up to
year the date of death is estimated on the
basis of the sale of the last year. Profit
is assumed to be earned uniformly at
the same rate.

ICAI BOS 137


SARANSH PARTNERSHIP AND LLP ACCOUNTS

DISSOLUTION OF PARTNERSHIP FIRMS AND LLP

First of all, it is required to comprehend the circumstances leading to the dissolution of a


partnership firm and accounting treatment necessary to close its books of accounts. Also, the
special adjustments relating to the insolvency of partners and the settlement of the partnership's
liabilities must be thoroughly understood.
Let us understand the difference between Dissolution of Partnership and Dissolution of
Partnership Firm.
Distinction between Dissolution of Partnership and Dissolution of Partnership Firm

Dissolution of Partnership Dissolution of Partnership Firm

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.

There can be change in profit sharing ratio


or admission/ death/retirement of a Dissolution of partnership firm occurs.
partner.

In event of dissolution of the partnership, the


In event of the dissolution of the firm, the
business continues as usual, but the
business ceases to end.
partnership is reconstituted.

Court has the inherent power to intervene. By


There is no intervention by the court.
its order, a firm can be dissolved.

Economic relationships among partners Economic relationship among partners


may remain same or change. comes to an end.

Assets are realized and liabilities are


Assets and liabilities are revalued.
paid off.

Revaluation account is prepared. Realization account is prepared.

Assets and liabilities are revalued after Assets and liabilities are settled on winding
winding up of the existing partnership. up of a firm.

Books of accounts are not closed. Books of accounts are closed.

Circumstances Leading to Dissolution of Partnership

A partnership dissolves or comes to an end on:


The expiry of the term for
which it was formed Death of a partner

Completion of the venture


for which it was entered into Insolvency of a partner

ICAI BOS 138


SARANSH PARTNERSHIP AND LLP ACCOUNTS

The partners or remaining partners (in case of death or insolvency of a


partner) may continue to do the business. In such a case there will be a
new partnership, but the firm will continue. When the business comes to
an end then only it will be said that the firm has been dissolved.

A firm stands dissolved in the following cases:

The partners agree that the firm


The business
should be dissolved
becomes illegal

In case of partnership
at will, a partner gives notice of
dissolution All partners except one become
insolvent

The court orders


dissolution

A partner has become of unsound mind;


A partner suffers from permanent incapacity;
A partner is guilty of misconduct of the
business;
The court has the A partner persistently disregards the
option to order partnership agreement;
dissolution of a firm if A partner transfers his interest or share to a
third party;
The business cannot be carried on except at a
loss; and
It appears to be just and equitable.

ICAI BOS 139


SARANSH PARTNERSHIP AND LLP ACCOUNTS

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.

Then the amount


realized, is applied first
towards repayment of
liabilities to outsiders
and loans taken from
partners;

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

ICAI BOS 140


SARANSH PARTNERSHIP AND LLP ACCOUNTS

DISSOLUTION BEFORE THE EXPIRY OF A FIXED TERM

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.

No claim in this respect will arise if

Firm is dissolved due Dissolution is in pursuance of


Dissolution is mainly due to
to the death of a an agreement containing no
the partner’s (claiming
partner; provision for the return of the
refund) own misconduct;
premium or any part of it.

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.

CLOSING OF PARTNERSHIP BOOKS ON DISSOLUTION

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 Sundry Assets By Sundry Liabilities


(Excluding Cash/Bank, Debit (Excluding CreditBalance of
Balance of P&L A/c, Partners’ P&L A/c,Partners’ Capital,
Capital, and Loan A/cs) and Loan A/c)

To Bank/Cash
By Provision on Assets
(expenses for realization)

To Bank/Cash A/c By Bank/Cash A/c (Amount


(Amount paid for liabilities and realized from assets and
unrecorded liabilities) unrecorded assets)

By Partners’ Capital
To Partners’ Capital
A/cs
A/cs (Expenses or Liabilities
(Assets taken over by
paid by partners)
partners)

To Partners’ Capital A/cs By Partners’ Capital A/cs


(Profit on realization (Loss on realization
distributed among partners in profit distributed among partners in
sharing ratio) profit sharing ratio)

ICAI BOS 141


SARANSH PARTNERSHIP AND LLP ACCOUNTS

KEY POINTS

If any of the assets are taken over by a


partner at a value mutually agreed to Pay off the liabilities (if not transferred
by the partners, debit the Partner’s to Realization A/c) crediting cash, and
Capital Account and credit Realization debiting the liability accounts, the
Account with the price of asset taken difference between the book figure and
over. the amount paid being transferred to
the Realization Account.

Liabilities to outsiders may also be transferred to the


Realization Account. In that case, the amount paid in
respect of the liabilities in cash should be debited to
the Realization Account, Cash Account being
credited. If liability is taken over by a partner,
Realization Account should be debited and the
Partners’ Capital A/cs credited at the figure agreed
upon.

The balance of the Realization Account will


represent either the profit or loss on realization.
Divide it between the partners in the proportion
in which they shared profits and losses. In the
case of a loss, credit Realization Account and
Pay off the partners’ loans or advances debit various Partners’ Capital Accounts; follow
which are separate from the capital (if the opposite course in the case of a profit.
any) contributed by them, after setting
off against them any debit balance in
the capital account of the concerned
partner.

The balance of the cash account at the end


will be exactly equal to the balance of capital
account, provided they are in credit; credit
cash, and debit the partners’ capital account
with the amount payable to them to close
their accounts.

ICAI BOS 142


SARANSH PARTNERSHIP AND LLP ACCOUNTS

CONSEQUENCES OF INSOLVENCY OF A PARTNER

If a partner goes insolvent, the following are the consequences:

The firm is dissolved on


The partner adjudicated as
the date of the order of
insolvent ceases to be a
adjudication unless there
partner on the date on which
is a contract to the
the order of adjudication is
contrary.
made.

The estate of the insolvent The firm cannot be held


partner is not liable for liable for any acts of the
any act of the firm after insolvent partner after the
the date of the order of date of the order of
adjudication. adjudication

LOSS ARISING FROM INSOLVENCY OF A PARTNER


When a partner is unable to pay his debt due to the firm, he is said to be insolvent and the share
of loss is to be borne by other solvent partners following the decision in the English case of
Garner vs. Murray.

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.

DETERMINATION OF CAPITAL RATIO ON INSOLVENCY

If the partners are maintaining capitals at fixed amounts


The partners are free then all adjustments regarding their share of profits,
to have either fixed interest on capitals, drawings, interest on drawings, salary,
or fluctuating etc. are done through Current Accounts, which may have
capitals in the firm. debit or credit balances, and insolvency loss is distributed
in the ratio of fixed capitals.

ICAI BOS 143


SARANSH PARTNERSHIP AND LLP ACCOUNTS

If capitals are not fixed and all transactions relating to


If some partner is having
drawings, profits, interest, etc., are passed through
a debit balance in his
Capital Accounts then capital ratio will be determined
Capital Account and is not
after adjusting all the reserves and accumulated profits
insolvent then he cannot
to the date of dissolution, all drawings to the date of
be called upon to bear the
dissolution, all interest on capitals and drawings to the
loss on account of the
date of dissolution but before adjusting profit or loss on
insolvency of other
Realization.
partner.

INSOLVENCY OF ALL PARTNERS

The balance of the creditors


accounts is transferred to
Deficiency Account. Creditors may
When the liabilities of the firm cannot be be paid the amount available
paid in full out of the firm's assets as well including the amount contributed
as personal assets of the partners, then all by the partners.
the partners of the firm are said to be
insolvent. Under such circumstances, it is
better not to transfer the amount of
creditors to Realization Account.
The unsatisfied portion of the
creditor account is transferred to
the Capital Accounts of the
partners in the profit-sharing ratio.
Then Capital Accounts are closed.

PIECEMEAL PAYMENTS

Generally, the assets


sold upon dissolution of
In such circumstances, the
partnership are realised
choice is either to distribute
only in small instalments
whatever is collected or to
over a period of time. In order to ensure that the
wait till the whole amount is
collected. Usually, the first distribution of cash among the
course is adopted. partners is in proportion to their
interest in the partnership
concern either of the two
methods described below may
be followed for determining the
order of payments.

ICAI BOS 144


SARANSH PARTNERSHIP AND LLP ACCOUNTS

Maximum
Each installment realised is
Loss Method
considered to be the final
payment i.e., outstanding assets

and claims are considered worthless and


partners’ accounts are adjusted on that basis
each time when a distribution is made, following
either Garner vs. Murray Rule or the profit-sharing
ratio.

Highest Relative The partner who has the higher relative


Capital Method capital, that is, whose capital is greater
in proportion to his profit-sharing ratio, is
first paid off.

For determining the amount by which the capital of each partner


is in excess of his relative capital, partners’ capitals are first
divided by figures that are in proportion to their profit-sharing
ratio; the smallest quotient will indicate the basic capital. Having
ascertained the partner who has the smallest basic capital, the
amount of capital of other partners proportionate to the profit-
sharing ratio of the basic capital is calculated.

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.

ICAI BOS 145


SARANSH COMPANY ACCOUNTS

CHAPTER 11: COMPANY ACCOUNTS


MEANING OF A COMPANY

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

Government Listed Company


Company Unlimited Company
Foreign Company Company limited by
Private Company Shares
Public Company Company limited by
One Person Guarantee
Company Holding Company
Small Company Subsidiary Company

SALIENT FEATURES OF A COMPANY

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

ICAI BOS 146


SARANSH COMPANY ACCOUNTS

PREPARATION OF FINANCIAL STATEMENTS

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

REQUISITES OF FINANCIAL STATEMENTS


It shall give a true and fair view of the state of affairs of the company as at the end of the
financial year.

PROVISIONS APPLICABLE

Specific Act is Applicable


For instance, any
(a) Insurance company
(b) Banking company or
(c) Any company engaged in generation or supply of
electricity or
(d) Any other class of company for which a Form of
balance sheet or Profit and loss account has been
prescribed under the Act governing such class of
company.

ICAI BOS 147


SARANSH COMPANY ACCOUNTS

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

Division Applicable to:

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.

Non-Banking Finance Companies (NBFCs) that are required to apply Indian


Division III
Accounting Standards notified under the Companies Act, 2013.

FINANCIAL STATEMENTS

Balance Sheet Statement of Profit


and loss

Financial Statements as per


Section 2(40) of the
Companies Act, 2013,
inter-alia include - Statement of
changes in Cash Flow
equity Statement

Notes to Accounts

ICAI BOS 148


SARANSH COMPANY ACCOUNTS

SHARE CAPITAL

The total capital of the company is divided into shares,


the capital of the company is called ‘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

Issued Capital Unissued Capital Authorised Capital

Calls in arrears if any


Paid up Capital Called up Capital
Less Calls in advance
if any

Subscribed Capital can be equal to or greater than or less than


Issued Capital resulting in
3 situations respectively:
Fully Subscribed;
Over Subscribed and
Under Subscribed.

ICAI BOS 149


SARANSH COMPANY ACCOUNTS

TYPES OF SHARES

Share issued by a company can be divided into following categories:

Types of shares

Preference Shares Equity Shares

Cumulative Preference Shares

Non-cumulative Preference Shares

Participating Preference Shares

Non-participating Preference Shares

Redeemable Preference Shares

Non-redeemable Preference Shares

Convertible Preference Shares

Non-convertible Preference Shares

ICAI BOS 150


SARANSH COMPANY ACCOUNTS

SUBSCRIPTION OF SHARES

Accounting for issue of shares depends upon the type of


subscription. Whenever a company decides to issue shares to
public, it invites applications for subscription by issuing a
prospectus. It is not necessary that company receives applications
for the exact number of shares to be issued by it. There may be
three possibilities:

Shares subscribed by public

Full Subscription Under Subscription Over Subscription

Applications Applications Applications


received is equal received are less received are more
to issued shares than shares issued than shares issued

Minimum Minimum Pro-rata allotment


subscription subscription made by Directors
received not received

Directors make Allotment money Further calls


All application
allotment for shares received made and call
money returned
applied money received

Further calls made


Allotment money
and call money
received
received

ICAI BOS 151


SARANSH COMPANY ACCOUNTS

ISSUE OF SHARES

Shares issued at

Discount Premium

Issue price is less than the Issue price is more than


nominal or par value of shares the face value

Issue of shares at discount


Premium amount is credited
shall be void except in the
to a separate account called
case of issue of sweat equity
“Securities Premium Account.
shares (issued to employees
and directors).

ACCOUNTING TREATMENT OF SECURITIES PREMIUM

Securities Premium is not a part of share capital. It


represents a gain of capital nature to the
company.
Being a credit balance, Securities premium
Account is shown under the heading, “Reserves
and Surplus”. However, ‘Reserves and Surplus’ is
shown as ‘shareholders funds’ in the Balance
Sheet as per Schedule III.

ICAI BOS 152


SARANSH COMPANY ACCOUNTS

Towards issue of un-


For the purchase of issued shares of the
own shares or other company to be issued
securities. to members of the
company as fully paid
bonus securities.

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.

* Companies whose financial statements comply with AS prescribed under


Section 133 cannot use Securities premium for this purpose.

CALLS-IN-ARREARS AND CALLS-IN-ADVANCE

Receipt of value of shares in instalments (calls)

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)

ICAI BOS 153


SARANSH COMPANY ACCOUNTS

INTEREST ON CALLS-IN-ARREARS AND CALLS-IN-ADVANCE

Interest on calls in arrears Interest on Calls in advance

It is payable by shareholders to company on It is payable by the Company to Shareholders


the calls due but remaining unpaid. on the call money received in advance but not
yet due.

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.

It is a nominal account in nature and is It is a nominal account in nature with interest


credited to statement of profit and loss as being an expense for the company.
an income.

FORFEITURE OF SHARES

The term ‘forfeit’ actually


means taking away of
property on breach of a
condition. It is very common
Forfeiture of shares is
that one or more
the action taken by a
shareholders fail to pay their
company to cancel the
allotment and/or calls on the
shares.
due dates. Failure to pay call
money results in 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.

ICAI BOS 154


SARANSH COMPANY ACCOUNTS

FORFEITURE OF SHARES WHICH WERE ISSUED AT PAR

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]

To Forfeited Shares Account [Amount already received on forfeited shares]


To Share Allotment Account [If amount due, but not paid]
To Share First Call Account [If amount due, but not paid]
To Share Final Call Account [If amount due, but not paid]

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]

To Calls-in-Arrears Account [Total amount due, but not paid]


To Forfeited Shares Account [Amount received]

FORFEITURE OF SHARES WHICH WERE ISSUED AT A PREMIUM


If the premium is already received by the company, it cannot be cancelled even of the shares
are forfeited in the future

If premium not received, the entry will be:

Share capital A/c Dr. [Called-up value]


Securities Premium A/c Dr. [Amount of Security premium not received]

To Share Allotment Account [If amount due, but not paid]


To Share First Call Account [If amount due, but not paid]
To Share Final Call Account [If amount due, but not paid]
To Forfeited Shares Account [Amount received on forfeited shares]

If premium received, the entry will be:

Share capital A/c Dr. [Called-up value]

To Share Allotment Account [If amount due, but not paid]


To Share First Call Account [If amount due, but not paid]
To Share Final Call Account [If amount due, but not paid]
To Forfeited Shares Account [Amount received on forfeited shares]

ICAI BOS 155


SARANSH COMPANY ACCOUNTS

FORFEITURE OF FULLY PAID-UP SHARES

Forfeiture for non-payment of calls, premium, or the


unpaid portion of the face value of the shares is one
of the many causes for which a share may be
forfeited. But fully paid-up shares may be forfeited
for realization of debts of the shareholder if the
Articles specifically provide it.

RE-ISSUE OF FORFEITED SHARES

A forfeited share is merely a share available to


the company for sale and remains vested in the
company for that purpose only. Reissue of
forfeited shares is not allotment of shares but
only a sale.

POINTS FOR CONSIDERATION

Loss on re-issue should not exceed the forfeited amount.

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.

ICAI BOS 156


SARANSH COMPANY ACCOUNTS

ACCOUNTING ENTRIES

(a) Bank Account Dr. [Actual amount received]


Forfeited Shares Account Dr. [Loss on re-issue]
To Share Capital Account
(Being the re-issue of….shares @ ₹... each as per Board’s Resolution No…. dated.)

(b) Forfeited Shares Account Dr.


To Capital Reserve Account
(Being the profit on re-issue, transferred to capital reserve).

ICAI BOS 157


SARANSH COMPANY ACCOUNTS

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

1. It is a document which evidences


a loan made to a company.

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.

4. The original sum is repaid at a


specified future date or it is converted
into shares or other debentures.

Periodic Audit
5. It may or may not create a
charge on the assets of a
company as security.

6. It can generally be bought or sold


through the stock exchange at a
price above or below its face value.

ICAI BOS 158


SARANSH COMPANY ACCOUNTS

DISTINCTION BETWEEN DEBENTURES AND SHARES

Debentures Shares

1. Debenture holders are the creditors of the


1. Shareholders are the owners of the company.
company.

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.

3. Debenture interest is generally paid at a pre-


3. Dividend on equity shares is paid at a
determined fixed rate. It is payable, whether
variable rate which is vastly affected by the
there is any profit or not. Debentures rank
profits of the company (however, dividend on
ahead of all types of shares for payment of the
preference shares is paid at a fixed rate).
interest due on them.

4. Interest on debentures are the charges


4. Dividends are appropriation of profit and
against profits and they are deductible as an
these are not deductible in determining
expense in determining taxable profit of the
taxable profit of the company.
company.

5. There are different kinds of debentures, such


as Secured/ Unsecured; Redeemable/ 5. There are only two kinds of shares–Equity
Irredeemable; Registered / Bearer; Convertible/ Shares and Preference Shares.
Non-convertible, etc.

6. In the Company’s Balance Sheet, shares are


6. In the Company’s Balance Sheet, Debentures
shown under “Shareholder’s Fund” detailed in
are shown under “Long Term Borrowings”.
‘Share Capital’ of Notes to Accounts.

7. Debentures can be converted into other


7. Shares cannot be converted into other
debentures or shares as per the terms of issue
shares in any circumstances.
of debentures.

8. Debentures cannot be forfeited for non- 8. Shares can be forfeited for non-payment of
payment of call moneys. allotment and call moneys.

9. Equity shareholders cannot get back their


9. At maturity, debenture holders get back their
money before the liquidation of the company
money as per the terms and conditions of
(however, preference shareholders can get
redemption.
back their money before liquidation).

10. At the time of liquidation shareholders are


10. At the time of liquidation, debenture
paid at last, after paying debenture holders,
holders are paid-off before the shareholders.
Trade payable, etc.

ICAI BOS 159


SARANSH COMPANY ACCOUNTS

TYPES OF DEBENTURES

Types of Debentures

Security Convertibility Permanence Negotiability Priority

Secured Convertible Redeemable Registered First Mortgage


Debentures Debentures Debentures Debentures Debentures
Periodic Audit

Unsecured Non-convertible Irredeemable Bearer Second Mortgage


Debentures Debentures Debentures Debentures Debentures

1. SECURITY

(a) Secured Debentures:


A fixed charge is a mortgage on specific
assets. These assets cannot be sold
These debentures are secured by a
without the consent of the debenture
charge upon some or all assets of the holders. The sale proceeds of these assets
are utilized first for repaying debenture
company. There are two types of charges:
holders.
(i) Fixed charge; and
(ii) Floating charge.

(b) Unsecured or “Naked” Debentures:

These debentures are not secured by any


charge upon any assets. A company merely
A floating charge generally
covers all the assets of the promises to pay interest on due dates and
company including future one. to repay the amount due on maturity date.
These types of debentures are very risky
from the view point of investors.

ICAI BOS 160


SARANSH COMPANY ACCOUNTS

2. CONVERTIBILITY

(a) Convertible Debentures:


(b) Non-Convertible
These are debentures which
Debentures:
will be converted into equity
These are debentures
shares (either at par or
which cannot be
premium or discount) after a
converted into shares
certain period of time from
in future. As per the
the date of its issue. These
terms of issue, these
debentures may be fully or
debentures are
partly convertible. In future,
repaid.
these debenture holders get
a chance to become the
shareholders of the
company.

3. PERMANENCE

(a) Redeemable (b) Irredeemable


Debentures: Debentures: These
These debentures are debentures are not
repayable as per the repayable during the life
terms of issue, for time of the company.
example, after 8 years These are also called
from the date of issue. perpetual debentures.
These are repaid only at
the time of liquidation.

4. NEGOTIABILITY

(a) Registered Debentures: These debentures are payable to


a registered holder whose name, address and particulars of
holding is recorded in the Register of Debenture holders. They
are not easily transferable. The provisions of the Companies
Act, 2013 are to be complied with for effecting transfer of these
debentures. Debenture interest is paid either to the order of
registered holder as expressed in the warrant issued by the
company or the bearer of the interest coupons.

ICAI BOS 161


SARANSH COMPANY ACCOUNTS

(a) Bearer Debentures: These debentures are


transferable by delivery. These are negotiable
instruments payable to the bearer. No kind of record
is kept by the company in respect of the holders of
such debentures. Therefore, the interest on it is paid
to the holder irrespective of any identity. No transfer
deed is required for transfer of such debentures.

5. PRIORITY

(a) First Mortgage Debentures:


These debentures are payable first
out of the property charged.

(b) Second Mortgage Debentures:


These debentures are payable after
satisfying the first mortgage debentures.

ACCOUNTING ENTRIES FOR ISSUE OF REDEEMABLE DEBENTURES

Journal entries in each of the above cases are discussed below:

1. Debentures issued at par redeemable at par:


When debenture are issued at par, the issue price is equal to par value, in this regard the
following entries are recorded:

(a) For receipt of application money :


Bank A/c Dr.
To Debenture Application A/c

(b) For transfer of application money to debentures account :


Debenture Application A/c Dr.
To …% Debenture A/c

ICAI BOS 162


SARANSH COMPANY ACCOUNTS

2. Debentures issued at Discount and Redeemable at par or at discount :


When debentures are issued at discount, issue price will be less than par value. The difference
between the two is considered as loss on issue on debentures and is to be written-off over the
life of debentures.
The entries with regards to issue are given below :
(a) For receipt of application money
Bank A/c Dr.
To Debenture Application A/c

(b) At the time of making allotment


(i) Debenture Application A/c Dr.
Discount on issue of deb. A/c Dr.
To …% Debentures A/c

3. Debentures Issued at Premium and Redeemable at par or at discount


When debenture are issued at premium, the issue price is more than the par value. The
premium is transferred to securities premium account. In this regard, the following journal
entries are recorded:
When premium amount is received at the time of application;
(a) For receipt of application money
Bank A/c Dr.
To Debenture Application A/c
(b) For transfer of application of money at the time of allotment
Debenture application A/c Dr.
To …% Debentures A/c
To Securities Premium A/c

When debentures are issued at par or premium


value but redeemed at discount, then it means
that the company will gain by paying less. This
gain will not be recognised in the books at the
time of issue of debentures as per the
conservatism concept. The utilisation of premium
on debentures shall be based on the provisions
of Section 52 of Companies Act, 2013.

ICAI BOS 163


SARANSH COMPANY ACCOUNTS

4. Debentures issued at par and redeemable at a premium


(a) For receipt of application money
Bank A/c Dr.
To Debenture application A/c

(b) At the time of making allotment


(i) Transfer of application money to debenture account
Debenture Application A/c Dr.
To …% Debenture A/c
(ii) Call made consequent upon allotment
Debenture Allotment A/c Dr.
Loss on issue of deb. A/c Dr. [Equal to Debenture Redemption Premium]
To …% Debenture A/c
To Debenture redemption premium A/c

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

5. Debentures Issued at discount and redeemable at premium


(a) For the receipt of application money
Bank A/c Dr.
To Debenture Application A/c

(b) At the time of making allotment


(i) Transfer of application money to debenture account
Debenture Application A/c Dr.
To % Debentures A/c
(ii) Call made consequent upon allotment of debentures at discount and redeemable
at premium
Debenture Allotment A/c Dr.
Discount on issue of debenture A/c Dr. [Amount equal to the discount on issue
of debenture]
Loss on issue of Debentures A/c Dr. [Amount equal to premium on redemption
of debenture]
To …% Debenture A/c
To Debentures Redemption Premium A/c

ICAI BOS 164


SARANSH COMPANY ACCOUNTS

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

6. Debentures Issued at premium and redeemable at premium


(a) For the receipt of application money
Bank A/c Dr.
To Debenture Application A/c

(b) At the time of making allotment


(i) Transfer of application money to debenture account
Debenture Application A/c Dr.
To % Debentures 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]

ICAI BOS 165


SARANSH COMPANY ACCOUNTS

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

ICAI BOS 166


SARANSH COMPANY ACCOUNTS

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.

This recognition involves loss on issue of debentures A/c (i.e. discount


on issue of debentures) and Premium on redemption A/c.

*Alternatively, the discount on issue of debentures, can be combined


with loss on issue of debentures A/c as both discount and redemption
premium represent loss to the company.

Accounting for issue of


debentures payable in
Debentures Payable in Full on Application
installments
Where the amount due on debentures are
Just like shares, money payable
payable in full on application, it is usual to open
on debentures may be paid either
a separate Debentures Application Account for
in full with application or by
each class of debentures, such as 10%
instalments. Accounting entries
Debentures Application Account or 12%
will differ to some extent in either
Debentures Application Account. These
case.
accounts record moneys received from the
applicants of debentures. If an issue is over-
subscribed, these accounts can be used to
record the refund of moneys to the
unsuccessful applicants. At the time of
allotment of debentures, the amount in
Debentures Issued at Par Debentures Application Account is transferred
The debentures which are to the respective Debentures Account.
issued at par are issued at the Debentures may be issued at par, at a
same price as their nominal premium, or at a discount.
value; that is, if a debenture
with a nominal value of ₹100 is
issued at par, the company
receives ₹100.

ICAI BOS 167


SARANSH COMPANY ACCOUNTS

Debentures Issued at Par:


The accounting entries would be as follows:
(a) When cash is received
Bank A/c Dr.
To Debentures Application A/c
(Being money received on…. debentures @ ₹ ….each)
(b) When excess money is refunded or adjusted for future calls
Debentures Application A/c Dr.
To Bank A/c (Amount refunded)
To Debenture Allotment A/c (Amount adjusted for allotment)
(Being excess money…debentures adjusted as per Board’s Resolution No….dated…..)
(c) When the debentures are allotted
Debentures Application A/c Dr.
To % Debentures A/c
(Being the allotment of…debentures of ₹ ….each as per Board’s Resolution No….dated….)
(d) On Allotment money being called
Debenture Allotment A/c Dr.
To % Debentures A/c
(Being Allotment Money Called)

(e) On Allotment money being received


Bank A/c Dr.
To Debenture Allotment A/c
(Being Allotment money received)
(f) On Debenture Call money being called
Debenture Calls A/c Dr.
To % Debentures A/c
(Being Call money made due)
(g) On Debenture Call money being called
Bank A/c Dr.
To Debenture Calls A/c
(Being Call money received)

Debentures Issued at a Premium


A company issues debentures at a premium when the market rate of interest is
lower than the debentures interest rate. The debentures, which are issued at a
premium, are issued at a higher price than their nominal value. if a debenture with
a nominal value of ₹100 is issued at 10% premium, the company receives at ₹110
where the investor gets slightly less interest than stated in the debenture

ICAI BOS 168


SARANSH COMPANY ACCOUNTS

The premium on debentures is credited to ‘Securities Premium Account’ as


‘Debentures’ are covered in the definition of ‘securities’ specified in the clause
(h) of section 2 of the Securities Contracts (Regulation) Act. Therefore, restriction
of utilization of debentures (securities) premium will also be governed by Section
52 of the Companies Act, 2013.

The accounting entries would be as follows:


(a) When cash is received
Bank A/c Dr. [Nominal value plus premium]
To Debentures Application A/c
(Being money received on….debentures @ ₹….. each including premium of ₹ …..)

(b) When excess money is refunded


Debentures Application A/c Dr.
To Bank A/c
(Being refund of money on….debentures @ ₹ …. each, as per Board’s Resolution
No…..dated….)

(c) When the debentures are allotted


Debentures Application A/c Dr.
To % Debentures A/c
To Securities Premium A/c
(Being the allotment of….debentures, premium transferred to Securities Premium A/c, as per
Board’s Resolution No….dated….)

4. Debentures Issued at a Discount


The Companies Act does not impose any restriction on the price at
which debentures can be issued. Unlike shares, there is no limit for
discount on issue of debentures. This is why it is very common for
debentures to be issued at a discount. The debentures which are
issued at a discount are issued at a lower price than nominal value,
that is, if a debenture with a nominal value of ₹100 is issued at 10%
discount, the company receives ₹90 only. The issue of debentures
at a discount slightly increases the true rate of interest payable.

ICAI BOS 169


SARANSH COMPANY ACCOUNTS

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.

The accounting entries would be as follows :


(a) When Cash is received
Bank A/c Dr. [Actual cash received]
To Debentures Application A/c
(Being money received on….debentures @₹ ……each)
(b) When excess money is refunded
Debentures Application A/c Dr.
To Bank A/c
(Being excess money on…debentures refunded as per Board’s Resolution No…..dated….)

(c) When the debentures are allotted


Debentures Application A/c Dr. [Actual cash received]
Discount on Issue of Debentures A/c Dr. [Discount on debentures]
To% Debentures A/c [Nominal value of debentures]
(Being the allotment of…debentures of ₹….each @ ₹ …..each as per Board’s Resolution
No…..dated…)

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.

Issue of debentures as collateral security

Collateral security means secondary or supporting security for a loan,


which can be realised by the lender in the event of the original loan not
being repaid on the due date. Under this arrangement, the borrower
agrees that a particular asset or a group of assets will be realized and
the proceeds there from will be applied to repay the loan in the event
that the amount due, cannot be paid.

ICAI BOS 170


SARANSH COMPANY ACCOUNTS

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.

Issue of Debentures in Consideration other than for Cash


Just like shares, debentures can also be issued for consideration other than for cash, such
as for purchase of land, machinery, etc. In this case, the following entries are passed:

(a) Sundry Assets Account Dr. [Assets taken over]


To Sundry Liabilities Account [Liabilities assumed]
To Vendors Account [Purchase consideration]
(Being the assets and liabilities taken over)
(b) Vendors Account Dr.
To Debentures Account
(Being the issue of….debentures to satisfy purchase consideration)

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:-

1. When debentures are issued at par


No. of Debentures = Purchase consideration
Per Value

2. When debentures are issued at premium


No. of Debentures = Purchase consideration
Per Value + Premium

3. When debentures are issued at discount


No. of Debentures = Purchase consideration
Per Value - Discount

ICAI BOS 171


SARANSH COMPANY ACCOUNTS

Treatment of Discount/Loss on Issue of Debentures

The discount on issue of debentures is amortised* over a period between the


issuance date and redemption date. It should be written-off in the following manner
depending upon the terms of redemption:

(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.

ICAI BOS 172


SARANSH COMPANY ACCOUNTS

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

ICAI BOS 173


SARANSH COMPANY ACCOUNTS

ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE


OVERVIEW
Provisions of the Companies Act, 2013
Definition of Bonus Shares & its Effects

Accounting treatment

Right Issue & its Effects


Value of Right

DEFINITION OF BONUS ISSUE

Issue of shares at no cost


to current shareholders in Based upon the
a company number of shares That the shareholder
already owns

PROVISIONS OF THE COMPANIES ACT

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.

ICAI BOS 174


SARANSH COMPANY ACCOUNTS

CONDITIONS FOR ISSUE OF BONUS SHARES

Authorised by its articles

Authorised in the general


meeting of the company

Partly paid-up shares, if any outstanding


are made fully paid-up

Company not defaulted for payment of


statutory dues of the employees

Company not defaulted in payment of


interest / principal of fixed deposits/ debt
securities issued by it

EFFECTS OF BONUS ISSUE

Reduction in EPS and


other per share values

Adjustment in
market price

Effects of Favourable act


considered by
Bonus markets
Issue

Increase in share
capital

Reduction in
accumulated profits

ICAI BOS 175


SARANSH COMPANY ACCOUNTS

ACCOUNTING ENTRIES

Upon issue of bonus shares


Upon the sanction of an issue of
bonus shares
Bonus to Shareholders A/c Dr.
Capital Redemption Reserve A/c Dr.
To Share Capital A/c
Securities Premium A/c Dr.
General Reserve A/c Dr.
Profit & Loss A/c Dr.
To Bonus to Shareholders A/c
On making the final call due

Share Final Call A/c Dr.


To Share Capital A/c

Upon the sanction of bonus by


converting partly paid shares into
fully paid shares

General Reserve A/c Dr. On adjustment of final call


Profit & Loss A/c Dr.
To Bonus to Shareholders A/c Bonus to Shareholders A/c Dr.
To Share Final Call A/c

RIGHT ISSUE; VALUE OF RIGHT AND RIGHT OF RENUNCIATION


The existing shareholders have a right to subscribe to any fresh issue of shares by the
company in proportion to their existing holding for shares.

Value of right = Cum-right value of share Less Ex-right value of share

[Cum-right value of the existing (Existing Number


Ex-right value of
= shares + (Rights shares X Issue Divided by of shares + No. of
the shares
Price)] right shares)

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.

ICAI BOS 176


SARANSH COMPANY ACCOUNTS

EFFECTS OF RIGHT ISSUE

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

CONDITIONS FOR RIGHT ISSUE AS PER THE COMPANIES ACT

Notice specifying the After the expiry of the time


Offer to include a right specified in notice or on receipt of
number of shares
exercisable by the person earlier intimation from person
offered and limiting a
concerned to renounce that he declines to accept the
time not being < 15 days
the shares offered to him shares offered, BoD may dispose
and not > 30 days from
unless articles provide of them in a manner which is not
the date of the offer
otherwise disadvantageous to shareholders
and company

EXCEPTION TO THE RIGHTS OF EXISTING EQUITY SHAREHOLDERS

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

When loan has been


Any persons, either for When companies obtained from the
cash or for a borrow money through
Employees government, and
consideration other debentures / loans
under a scheme government in public
than cash, if the price and give their creditor
of ESOP interest, directs the
of such shares is an option to buy debentures / loan to be
determined by equity shares of a converted into equity
registered valuer company. shares.

ACCOUNTING TREATMENT

Same as Equity share capital


Bank A/c debited
ordinary share A/c credited

ICAI BOS 177


SARANSH COMPANY ACCOUNTS

REDEMPTION OF PREFERENCE SHARES


INTRODUCTION

Redemption is the process of repaying an obligation, at prearranged amounts and timings. It is


a contract giving the right to redeem preference shares within or at the end of a given time
period at an agreed price. The redeemable shares are issued on the terms that shareholders
will at a future date be repaid the amount which they invested in the company (along with
frequent payment of a specified amount as return on investment during the tenure of the
preference shares).

PURPOSE OF ISSUING REDEEMABLE PREFERENCE SHARES

A company may issue redeemable preference shares because of the following:


It is a proper way of raising Finance in dull market.
A company may face difficulty in raising share capital, if its shares are not traded on
the stock exchange.
The preference shares may be redeemed when there is a surplus of capital and the
surplus funds cannot be utilised in the business for profitable use.
No dividend is required to be paid, if there is a loss of no profit.

PROVISIONS OF THE COMPANIES ACT


A company limited by shares, if so authorised by its Articles, may issue preference shares which
at the option of the company, are liable to be redeemed within a period, normally not exceeding
20 years from the date of their issue. It should be noted that:

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;

no such shares can be redeemed unless they are fully paid;

(i) in case of prescribed companies whose


financial statements comply with the in case of other companies (not falling under
accounting standards prescribed for such (i) above), the premium, if any payable on
class of companies under Section 133 of redemption shall be provided for out of the
the Companies Act, the premium, if any, profits of the company or out of the
payable on redemption shall be provided company’s securities premium account,
for out of the profits of the company, before before such shares are redeemed.
the shares are redeemed;

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.

ICAI BOS 178


SARANSH COMPANY ACCOUNTS

The utilisation of CRR Account is further restricted to issuance of fully paid-up bonus shares
only.

Section 55 of the Companies Act, 2013, deals


On the redemption of redeemable preference
with provisions relating to redemption of
shares out of accumulated profits it will be
preference shares. It ensures that there is no
necessary to transfer to the Capital
reduction in shareholders’ funds due to
Redemption Reserve Account an amount
redemption and, thus, the interest of outsiders
equal to the amount repaid on the redemption
is not affected. For this, it requires that either
of preference shares on account of face value
fresh issue of shares is made or distributable
less proceeds of a fresh issue of capital made
profits are retained and transferred to ‘Capital
for the purpose of redemption.
Redemption Reserve Account’.

METHODS OF REDEMPTION OF FULLY PAID-UP SHARES


Methods of redemption of redeemable preference shares

(b) the
(a) the proceeds capitalisation of (c) combination
of a fresh issue undistributed of (a) and (b).
of shares; profits; or

REDEMPTION OF PREFERENCE SHARES BY FRESH ISSUE OF SHARES

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.

(a) Towards issue of un-issued shares of the company to


be issued to members of the company as fully paid
bonus securities

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:

(d) To provide for premium on the redemption of


redeemable preference shares or debentures of the
company.

(e) For the purchase of its own shares or other securities.

ICAI BOS 179


SARANSH COMPANY ACCOUNTS

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.

REASONS FOR ISSUE OF NEW EQUITY SHARES

A company may prefer issue of new equity shares for the following reasons:

When the balance of


profit, which would
When the company has come to otherwise be available
realise that the capital is needed for dividend, is
permanently and it makes more insufficient.
sense to issue Equity Shares in
place of Redeemable Preference
Shares which carry a fixed rate of When the liquidity
dividend.
position of the
company is not
good enough.

ADVANTAGES AND DISADVANTAGES OF REDEMPTION OF PREFERENCE


SHARES BY ISSUE OF FRESH EQUITY SHARES

Advantages

No cash outflow of money – now or later.

New equity shares may be issued at a premium.

Shareholders retain their equity interest.

Disadvantages

There will be dilution of future earnings.

Share-holding pattern in the company is


changed.

ICAI BOS 180


SARANSH COMPANY ACCOUNTS

CALCULATION OF MINIMUM FRESH ISSUE OF SHARES TO PROVIDE FUNDS FOR


REDEMPTION

Maximum amount of reserves


and surplus available for
redemption is ascertained
taking into account the
balances appearing in the
balance sheet before Make adjustment for premium
redemption and the additional payable on redemption out of profits
information provided in the and then compute
problem.
Minimum Proceeds of Fresh Issue
of shares :

Nominal value of preference shares


to be redeemed – Maximum
amount of reserve and surplus
available for redemption.

After computation of minimum


proceeds, calculate

Minimum Number of Shares

Minimum proceeds divided by Thus to calculate minimum


face value of one share number of fresh shares to be
issued to provide funds,
amount payable to preference
shareholders is compared with
funds available for redemption
and the balance of funds to be
raised by fresh issue of shares
are calculated.

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.

ICAI BOS 181


SARANSH COMPANY ACCOUNTS

REDEMPTION OF PREFERENCE SHARES BY CAPITALIZATION OF


UNDISTRIBUTED PROFITS

Another method for redemption of When shares are redeemed by utilising


preference shares, as per the distributable profit, an amount equal to
Companies Act, is to use the the face value of shares redeemed is
distributable profits in place of issuing transferred to Capital Redemption
new shares. Reserve Account by debiting the
distributable profit.

ADVANTAGES AND DISADVANTAGES OF REDEMPTION OF PREFERENCE


SHARES BY CAPITALISATION OF UNDISTRIBUTED PROFITS

Advantages Disadvantage

No change in the percentage


There may be a
of equity share-holding of reduction in liquidity.
the company;
Surplus funds can be used.

REDEMPTION OF PREFERENCE SHARES BY COMBINATION OF FRESH ISSUE AND


CAPITALISATION OF UNDISTRIBUTED PROFITS
A company can redeem the preference shares partly from the proceeds from new issue and
partly out of profits.

Amount to be Transferred to Capital Redemption Reserve


Face value of shares redeemed xxx
Less: Proceeds from new issue xxx

Proceeds to be collected from New Issue


Face value of shares redeemed xxx
Less: Profits available for distribution as dividend xxx

Companies may have sufficient investments, which can be sold, in the market to arrange
funds for redemption of preference shares.

ICAI BOS 182


SARANSH COMPANY ACCOUNTS

REDEMPTION OF FULLY CALLED BUT PARTLY PAID-UP PREFERENCE SHARES


The problem of unpaid calls on fully called up shares may be studied under following categories:

When Calls-In-Arrears is received by the Company

If the amount of unpaid calls is


After receipt of calls in arrears,
received by the Company before
the shares become fully paid up
redemption, the entry passed is
and, then, company can
as under:
proceed with redemption in the
normal course.
Bank A/c Dr.
To Calls-in-Arrears A/c

In Case of Forfeited Shares


If, on getting a proper notice from the company, the shareholders fail to pay the
unpaid calls, the Board of Directors may decide to forfeit the shares and cancel
these shares instead of reissuing the forfeited shares because redemption of
these shares is due immediately or in near future. In this case, entry for forfeiture
is passed as usual.

ACCOUNTING ENTRIES FOR REDEMPTION OF PREFERENCE SHARES

When preference shares are redeemed at par

Redeemable Preference Share Capital Account....................... Dr.


To Preference Shareholders Account

When preference shares are redeemed at a premium

Redeemable Preference Share Capital Account ...................................Dr.


Premium on Redemption of Preference Shares Account .................Dr.
To Preference Shareholders Account

When payment is made to preference shareholders

Preference Shareholders Account........................ Dr.


To Bank Account

For adjustment of premium on redemption

Profit and Loss Account............................................................................. Dr.


To Premium on Redemption of Preference Shares Account

For transferring nominal amount of shares redeemed to Capital Redemption Reserve Account

General Reserve Account.........................................................................................Dr.


Profit and Loss Account..............................................................................................Dr.
To Capital Redemption Reserve Account

ICAI BOS 183


SARANSH COMPANY ACCOUNTS

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

First Mortgage Debentures


Priority
Second Mortgage Debentures

METHODS OF REDEMPTION OF 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.

ICAI BOS 184


SARANSH COMPANY ACCOUNTS
Provisions under the Companies Act, 2013 for issue of debentures

Where debentures are issued by a


company, the specified companies
A company may issue need to create a debenture
debentures with an option redemption reserve account out of
to convert such No company can issue the profits of the company
debentures into shares, any debentures which available for payment of dividend
either wholly or partly at carry any voting rights. and the amount credited to such
the time of redemption. account should not be utilized by
the company for any purpose other
than the redemption of debentures.

Provided that the issue of debentures with an option to


convert such debentures into shares, wholly or partly,
should be approved by a special resolution passed at a
duly convened general meeting.

Debentures are usually redeemable i.e. either redeemed in cash or convertible after a
specified time period.

Redeemable debentures may


be redeemed:

after a fixed number of years; or


any time after a certain number of
years has elapsed since their issue;
or
on giving a specified notice; or
by annual drawing.

A company may also purchase its debentures,


as and when convenient, in the open market
1
and when debentures are quoted at a discount
An issue of secured
on the Stock Exchange, it may be profitable for
debentures may be
the company to purchase and cancel them. As
made, provided the date
per Rule 18 (1) of the Companies (Share Capital
of its redemption shall not
and Debentures) Rules, 2014, a company shall
exceed ten years from
not issue secured debentures, unless it
the date of issue:
complies with the following conditions, namely:

ICAI BOS 185


SARANSH COMPANY ACCOUNTS

Provided that the following classes of companies may issue secured debentures for a
period exceeding ten years but not exceeding thirty years,

Companies engaged in setting up of infrastructure projects;

Infrastructure Finance Companies' as defined in clause (viia) of sub-direction (1) of


direction 2 of Non-Banking Financial (Non-deposit Accepting or Holding) Companies
Prudential Norms (Reserve Bank) Directions, 2007;

Infrastructure Debt Fund Non-Banking Financial Companies' as defined in clause (b) of


direction 3 of Infrastructure Debt Fund Non-Banking Financial Companies (Reserve
Bank) Directions, 2011;

Companies permitted by a Ministry or Department of the Central Government or by


Reserve Bank of India or by the National Housing Bank or by any other statutory authority
to issue debentures for a period exceeding ten years.

Such an issue of debentures shall be secured by the creation of a charge on

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

The security for the debentures by way of a charge or mortgage shall be

4 created in favour of the debenture trustee on-

any specific movable property of the company or its holding company or


subsidiaries or associate companies or otherwise.
any specific immovable property wherever situate, or any interest therein:

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.

ICAI BOS 186


SARANSH COMPANY ACCOUNTS

DEBENTURE REDEMPTION RESERVE

A company issuing debentures may be required


to create a debenture redemption reserve
account (DRR) out of the profits available for
distribution of dividend and amounts credited to
such account cannot be utilised by the company
except for redemption of debentures. Such an
arrangement would ensure that the company
will have sufficient liquid funds for the
redemption of debentures at the time they fall
due for payment.

An appropriate amount is transferred from


profits every year to Debenture Redemption
Reserve and its investment is termed as
Debenture Redemption Reserve Investment (or
Debenture Redemption Fund). In the last year
or at the time of redemption of debentures,
Debenture Redemption Reserve Investments
are encashed and the amount so obtained is
used for the redemption of debentures.

REQUIREMENT TO CREATE DEBENTURE REDEMPTION RESERVE

Section 71 of the Companies Act 2013 covers the requirement of creating a debenture
redemption reserve account. This states as follows:

(1) Where a company issues


debentures under this section, it (2) The amounts credited to the

should create a debenture debenture redemption reserve

redemption reserve account out of should not be utilised by the

its profits which are available for company for any purpose except

distribution of dividend every year for the purpose aforesaid.

until such debentures are


redeemed.

ICAI BOS 187


SARANSH COMPANY ACCOUNTS

(4) Where a company fails to redeem


(3) The company should the debentures on the date of maturity
pay interest and redeem or fails to pay the interest on
the debentures in debentures when they fall due, the
accordance with the Tribunal may, on the application of any
terms and conditions of
or all the holders of debentures or
their issue.
debenture trustee and, after hearing
the parties concerned, direct, by order,
the company to redeem the
debentures forthwith by the payment of
principal and interest due thereon.

BALANCE IN DEBENTURE REDEMPTION RESERVE

When the company is required to create DRR, the


amount prescribed, is credited to the Debenture
Redemption Reserve account and debited to
profit and loss account. That shows the intention
of the company to set aside sum of money to
build up a fund for redeeming debentures.
Immediately, the company should also purchase
outside investments. The entry for the purpose
naturally will be to debit Debenture Redemption
Reserve Investments and credit Bank.

ADEQUACY OF DEBENTURE REDEMPTION RESERVE

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.

ICAI BOS 188


SARANSH COMPANY ACCOUNTS

Adequacy of Debenture
S. NO Debentures issued by Redemption Reserve
(DRR)

All India Financial Institutions (AIFIs) regulated by


1. Reserve Bank of India and Banking Companies for No DRR is required
both public as well as privately placed debentures

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):

All listed NBFCs (registered with RBI under section 45-


IA of the RBI Act,) and listed HFCs (Housing Finance
a. No DRR is required
Companies registered with National Housing Bank) for
both public as well as privately placed debentures

Other listed companies for both public as well as


b. No DRR is required
privately placed debentures

For unlisted companies (other than AIFIs and Banking Companies as specified in
4.
Sr. No. 1 above

All unlisted NBFCs (registered with RBI under section


45-IA of the RBI (Amendment) Act, 1997) and unlisted
a. HFCs (Housing Finance Companies registered with No DRR is required
National Housing Bank) for privately placed
debentures

DRR shall be 10% of the


b. Other unlisted companies value of the outstanding
debentures issued

ICAI BOS 189


SARANSH COMPANY ACCOUNTS

INVESTMENT OF DEBENTURE REDEMPTION RESERVE (DRR) AMOUNT

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:

a) in deposits with any scheduled bank, free from charge or lien;


b) in unencumbered securities of the Central Government or of any State Government;
c) in unencumbered securities mentioned in clauses (a) to (d) and (ee) of Section 20 of the
Indian Trusts Act, 1882;
d) in unencumbered bonds issued by any other company which is notified under clause (f) of
Section 20 of the Indian Trusts Act, 1882.

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:

1. After allotment of debentures

a. For setting aside the fixed amount of profit for redemption

Profit and Loss A/c Dr.


To Debenture Redemption Reserve A/c

b. For investing the amount set aside for redemption

Debenture Redemption Reserve Investment A/c Dr.


To Bank A/c

ICAI BOS 190


SARANSH COMPANY ACCOUNTS

c. For receipt of interest on Debenture Redemption Reserve Investments (DRRI)

Bank A/c Dr.


To Interest on Debenture Redemption Reserve Investment A/c

d. For transfer of interest on Debenture Redemption Reserve Investments (DRRI)

Interest on Debenture Redemption Reserve Investment A/c Dr.


To Profit and loss A/c*

* Considering the fact that interest is received each year through cash/ bank account.

2. At the time of redemption of debentures

a. For encashment of Debenture Redemption Reserve Investments

Bank A/c Dr.


To Debenture Redemption Reserve Investment A/c

b. For amount due to debenture holders on redemption

Debentures A/c Dr.


To Debenture holders A/c

c. For payment to debenture holders

Debenture holders A/c Dr.


To Bank A/c

d. After redemption of debentures, Debenture Redemption Reserve A/c should be


transferred to general reserve

Debenture Redemption Reserve A/c Dr.


To General Reserve

ICAI BOS 191

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