Professional Documents
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Advanced-Accounting
Advanced-Accounting
Layyah Campus
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Course Outline
Advance Accounting
CH#01 Departmental account
Recommended book:
Advance Accounting
INDEX
No Separate Book
Separate Book
Consignment
Branch Account
Classification of Branches
Departmental Accounts
Hire Purchase
Installment Purchase
Distinguish between Hire Purchase & Installment Purchase
Share s
Nature of Share
Classes of Share
Debentures
Kinds of Debentures
Redemption in Installment
Redemption by Conversion
Redemption in Lump Sum
Right Issue
Advantages of Right Issue
Bonus Issue
From Company's point of view
From Shareholder's point of view
Companies
Preparation of Final Accounts
Formation of Company
Promotion Stage
Incorporate Stage
Meaning
Content of Article
Amalgamation
Absorption
Reconstruction
Short Working
Interim Dividend
JOINT VENTURE
Definition: A joint venture is a temporary partnership of two or more persons engaged in any
particular business adventure of enterprise of short or seasonal duration. It may in connection
with spectacular in shares underwriting of share and debentures of new company or any other
similar temporary or seasonal business enterprise. As the parties to a joint venture does business
in union with other, they also share profit & loss between themselves in some agreed proportion.
Advantages: The advantages of joint venture enterprise are that perhaps one party may buy
goods at a much cheaper rate, but has no capital; a sound person may perhaps advance the
requisite capital but has no business. While a third individual is a good salesman and can sell the
goods readily at a margin. In case to, combine their energy and work for a mutual gain.
Ownership: Co venture are the owners In consignment the consigner is the owner
their the
Account Sales: Co venture are the relevant Consignee is required to send
formation no regular repent are account sales to
There are two ways in which joint venture account can be kept e.g.
1. Where no separate books are kept and record joint venture transactions.
No Separate Book: When it is not possible to maintain a separate set of books for joint
venture transaction cash party will use his ordinary business books for recording such
transactions. Each party will open a joint venture account and the account of other parties in his
books. Suppose „A‟ and „B‟ enter into a joint venture then „B‟ will open in his books a joint
venture account and the account of „A‟.
Separate Books: The method considered so per in value the maintenance of accounts in
respect of the joint venture in the book of the parties to the joint venture transactions can
however, is recorded in a completely separate set of books under this method a separate joint
books account is opened. The amount contributed by each partner as his share of his investment
in the joint venture is deposited in a joint bank account. Accounts of the parties concerned are
also open in a separate set of books.
CONSIGNMENT
The word consignment can be generally defined as the act of sending quality of goods by
the manufacturers and the producer of one country or place to their agents in another place at the
sick of principals for the purpose of sale.
Explanation: Goods to send are known as a consignment the sender of the goods is called the
consignor. Generally the manufacturers or the producer are the consigner. The person to whom
goods are forwarded for the purpose of sale is known as the consignee.
Goods sent on consignment don‟t become the pro party of the consignee. He has
not bought them. The ownership remains with the sender or the consignor. If goods are
destroyed, the consignee is not at all responsible. The loss will fall on the consignor. The
consignee tries to sell the goods according to the instructions of the consignor. When the goods
have been sold, he shall deduct his expenses, commission etc from the sale proceeds and the
balance is remitted to the consignor. The relation between consignor and consignee is that of
principal & agent. The consignor is the principal and the consignee is the agent.
Consignment Sale
Legal owner ship: In case of a In case of a sale of goods the legal ownership is
consignment of goods, the legal transferred to the purchaser of goods.
ownership of the goods is not transferred
to the consignee.
Relationship: In case of consignment, In case of sale of goods, the relation between
the relation between consignor and the seller and the purchaser of the goods is that of a
consignee is that of a principal and an creditor and debtor.
agent.
Risks: In case of consignment, risk In case of sale, risk attached the goods sold is
attached to the consignor till the transferred to the purchaser of goods.
consignee sells the goods consigned.
Return of Goods: In case of In sale, return of goods is not possible as goods
consignment account sale, returns of once sold are not return able.
goods are possible if the goods are not
sold by the consignee.
Account sale: In case of consignment, In case of sale no account is required to be
account sale is required to submit submitted by the purchaser to the seller.
periodically by the consignor to the
consignee.
“When the parts of goods remain unsold at the case of financial period”
When all the goods sent on consignment have not been sold and party of goods
remain useless at the case of financial period the value of unsold useless goods in hands of the
consignee must be ascertained and the profit or loss should be find out by taking this stock into
account, for this purpose we will create stock on consignment account and this entry will passed.
The valuation of sock lying with the consignee at the time of final closing of the
account of the consignor is generally made at cost or market price “Plus” all expenses which are
occurred to the move the goods from the consignor‟s premises to the premises of the consignee
Why branch accounts are maintained: L.C Crapper calls branch accounts “Departments
conducted at a distance” and William Pickles regards a branch as “A section of business
segregated physically from the main section”.
Several big business establishments have their branches scaled far and near. In a
legal and expended business several branches of business in the other city are necessary, where
it is essential that complete record be kept of the transactions relating to each branch, so that the
head office prepare such accounts. Such records show the working results and each individual
branch as well as the business as a whole.
It is thus possible for the management to see which of the branches are working
profitably and which requires also attention in order to secure better results. The question of
branch‟s entrails is an important one which requires that the proper books of accounts and cash
at record of all transaction be kept at head office in case of dependent branches and in case of
independent branches.
Proper record of stock should be kept on the branch. All types of goods supplied
from the head office should be recorded separately showing quantity, saleable price and the
goods sold each day.
separate account to avoid buss as by reason of bad debts, the branch must furnish details as to
the amount and age of the debts so that arrangement for collection may be made without loss of
time.
A firm which has branches would like to know the profit or loss made by at each
branch can be ascertained easily.
The above facts indicates that the branch accounts serve most important purpose
on which the success and failure of whole business depends.
Classification branch accounts
According to the nature branch and its working system of accounting designed
and installed to record the branch transactions will very from business to business. However
from the stand of accounting the branches may be divided in the following classes.
A branch which receive goods only from the head office, sells goods only for
cash, remits cash to the head office and the expenses of the branch are not remitted from head
office.
(2) Except that the head office invoices that goods at selling price or cost plus profit.
The first three types of branches don‟t keep the books of accounts. The head
office does that branch are required to prepare statement of stock required, sold, refit cash
statements. Branches that are allowed to make credit sells will also maintain accounts of credit
customers.
BRANCH ACCOUNTING
Introduction
Large business entities open up branches in
diversified geographic segments such as towns and
cities and even in different countries. Segmenting
their business geographically facilitate the business
to market its products/services over a large
territory and thus increase its profits. Here we must
make this distinction that departments are business
segments whereas, branches are geographic segments.
A branch may be defined as a segment of an enterprise
that is geographically separated from the rest of the
entity, controlled by a head office, and generally
carrying on the same or substantially same activities
as of the entity.
For example in our daily life we observe branches of
banks, bakeries, shoes stores, schools, hotels and
restaurants etc.
It is worth mentioning here that a branch is not a
separate legal entity, it is simply a segment of an
entity. From accounting perspective, a branch is
identified as a profit centre and if it is an
independent branch then it becomes an investment
centre.
To have clear picture of the performance, profits of
each branches are calculated separately and then are
consolidated in the accounts of the head office.
Depending upon the size of the branch, the decision
is taken regarding the accounting system to be
implemented there. If the branch size is small, there
would have been single entry system. Where the branch
size is considerable large and it can afford a
complete accounts department there we will follow the
double entry accounting system, such are often
independent branches.
Classification of Branches
For accounting purposes branches are classified as
under:
2. Domestic Branch
a. Independent branch (investment centre)
Domestic branch
Independent
Dependent
Independent Branch
Whole sale branch
Debtors system
Foreign branch
Domestic branch
Independent
Dependent
.
Accounting Entries in the Books of Head Office
Branch a/c
Branch assets a/c (individual accounts)
Branch a/c
Goods sent to branch a/c
Branch a/c
Cash/Bank a/c
Cash/Bank a/c
Branch a/c
Branch a/c
Branch liabilities a/c (individual accounts)
9. For closing goods sent to branch account.
Questions
From the following information relating to the
st
Sialkot Branch for the year ending 31 March, 2007,
prepare the Branch Account in the books of head
office. Opening Stock at Branch 37,500 Cheque sent to
Branch Opening Debtors in Branch 75,000 Salaries
22,500 Opening Petty Cash at Branch 750 Rent & Taxes
3,750 Goods Sent to Branch 630,000 Petty Cash 2,750
Cash Sales 150,000 Closing Stock at Branch 62,500
Cash Received from Debtors 525,000 Closing Debtors at
Branch 120,000 Goods Returned by Branch 5,000 Closing
Petty Cash at Branch 500
Credit Sales 570,000
Questions
Excellent Garments of Multan has a branch at Lahore.
Goods are supplied to the branch at cost. The
expenses of the branch are paid from Multan and the
branch keeps a sales journal and the debtors‟ ledger
only. From the following information supplied by the
branch, prepare a Branch Account in the books of the
head office. (All figures in rupees) Opening Stock
24,000 Closing Debtors 9,150 Closing Stock 18,000
Opening Debtors ? Goods received from HO 33,600 Bad
Debt 140
Credit Sales 41,000 Exp. paid by Head office 10,400
Cash Sales 17,500 Cash received from Debtors 37,900
Pilferage of goods by the employees (Normal Loss)
2,000
Questions
From the following particulars of a dependent branch.
Prepare Branch a/c showing the profit or loss of the
branch for the year ended 31-12-2007: (all figures
are in Rs.) Opening stock 30,000 Goods sent to branch
90,000 Cash sent by head office Cash sales 120,000
for salaries 10,000
for other expenses 4,000
Closing stock could not be ascertained but it is know
that the branch usually sells at cost plus 20% of the
cost.
9
Branch a/c
Branch assets a/c (individual accounts)
Branch a/c
Goods sent to branch a/c
10
4. For return of goods by the branch
Branch a/c
Cash/Bank a/c
Branch a/c
Branch liabilities a/c (individual accounts)
Incase of profit
Branch a/c
Profit & loss a/c
Incase of loss
Profit & loss a/c
Branch a/c
Questions
Opening stock at invoice price (1 Jan, 2008) Rs.
3,000
Goods sent to branch at invoice price Rs. 24,000
Remittance from branch Rs. 25,000
Cash paid by the head office for sundry expenses Rs.
4,500
Return from the branch invoice price Rs. 150
Closing stock at invoice price Rs. 8,000
Reconciliation
Reconciliation of the balance of head office account
appearing in the books of Branch with the balance of
branch account appearing in the books of head office
Reasons of Difference
The two balances might be different because of
following reasons:
1. Cash in transit
2. Goods in transit
Accounting Entries
Books of head office
Allocation of head office expense
Branch A/C
Specific Expense A/C
Depreciation of branch assets
Branch A/C
Provision for depreciation A/C
Inter branch transfers
Receiving Branch A/C
Transferring Branch A/C
Books of branch
Allocation of head office expense
Specific Expense A/C
Head office A/C
Depreciation of branch assets
Depreciation Expense A/C
Head office A/C
Inter branch transfers
Books of Transferring Branch
Head office A/C
Goods returned to head office
Books of Receiving Branch
Goods received from head office
Head office A/C
Incorporation
Meanings:
Incorporation of branch trial balance into the
books of head office. (Consolidation)
21
Note: Accounting entries for incorporation are passed
in the books of head office only
Accounting Entries
To incorporate Branch other income
Branch A/C
Profit & Loss A/C (income)
To incorporate Branch Assets
All assets (individually)
Branch A/C
To incorporate Branch Liabilities
Branch A/C
All Liabilities (individually)
Note: After passing the accounting entries for
incorporation the branch account Appearing in the
trial balance of head office will give Nil Balance.
BRANCH ACCOUNTING
(Incorporation of branch)
Questions
The following is the Trial Balance of Murree Branch
st
as on 31 December, 2007.
Particulars Dr. Cr. Particular Dr. Cr.
(Rs.) (Rs.) s (Rs.) (Rs.)
Lahore head 3,240 138,000 Debtors 3,700 1,850
office 6,000 6,000 Creditors 1,960
st
Stock 1 Jan. 97,800 Rent 1,470
2007 19,000 Sundry 1,780
Purchases 4,500 office 6,000
Goods received expenses 400
from H O Cash at
Sales bank
Goods supplied Furniture
to head office / Depreciati
Sales to H O on on
Salaries Furniture
145,850 145,850
22
DEPARTMENTAL ACCOUNTS
1. Separately identified
4. Un-allocable
Separately identified
It depends upon the size of the entity that it can
separately identify its expenses with each of the
department. A large entity will be incurring most of
the operating expenses that are department specific
e.g. carriage inward, receiving and handling, wages
and salaries, electricity, telephone, repair and
maintenance, entertainment, advertisement, sales
promotion, selling commissions, research and
development cost etc.
Obvious just ratio
Most of the expenses are allocated on the most
logical basis that is obvious and also just. Nature
of the expenses and nature of the business will
determine the basis for division. Some important
basis and expenses are given below:
S# Basis Expenses
1 Sales/Work-done Revenue Selling and
distribution
expenses
After sales service
Discount allowed
Carriage/freight
outward
Bad debts
Selling commissions
Advertisement
2 Number of Employees Salaries and wages
Staff welfare
Canteen/cafeteria facility
Group insurance
24
3 Area Occupied Building rent
Building depreciation
Building insurance
Building repair and
maintenance
Air conditioning and
heating
Property tax
Inter-com
4 Purchases of Carriage/freight inward
goods/raw material Import duties
Custom tax
Receiving and handling
cost
Discount received (income)
Un-allocable
These are the expenses which provide economic
benefits to the business entity on the whole; these
cannot be identified with a specific department. Such
expenses are often incurred against financial
facilities. Examples include; loss on disposal of
investments, damages paid for infringement of law,
interest on loan and bank overdrafts etc.
There are certain financial incomes as well that
cannot be identified or allocated among the
25
department e.g. interest on investment, profit on
disposal on investments, profit on fixed deposits
etc.
All these types of expenses and incomes are shown in
a general profit and loss account where profits or
losses of each department are clubbed to ascertain
the operating results of the business on the whole.
Allocation of income tax expense
Unlike other operating expenses income tax expense is
divided on the basis of departmental operating
profits. Some students having knowledge of income tax
law may possibly get confused that nevertheless there
are certain expenses or losses admissible from the
tax stand point that are shown in the general profit
and loss account have not yet been deducted from the
departmental operating results then why this income
tax expense is being charged before subtracting
certain expenses.
1. Expenses incurred for the direct benefit of particular. Expenses incurred specially for a
particular department should be charged to that department. Instances of such item are
special advertisement, special insurance of stock, special departmental salaries etc, etc.
2. Expenses incurred for the benefit more then one department but which can be allocated
to them on some obviously just principal the treatment of such expenses can be as
follows.
a. Expenses, which clearly depend upon sales, should be allocated on the basis of
sales some times such expenses are allocated on the basis of number of units sold.
occupied. Such expenses will include rent and rate, insurance on building, repair
etc.
c. Lighting, heating etc. should be allocated on the basis of numbers of points unless
metered separately. If numbers of points are not available, allocation can be made
on the basis of area.
department accordingly.
3. Expenses incurred for the benefit of more then one department but which can not be
allocated on some obviously just principle. The allocation of such expenses should be
arbitrary. Salary paid to the manager, expenses of the Accounting Department etc, are the
instances of this type of expenses. They have to be allocated according to the turn over,
or the cost of goods sold, or the number of articles sold.
4. Expenses which can not be allocated in reasonable manner. Some times expenses like
interest on capital, debenture interest, legal expenses, share transfer, office expenses and
other lie items can not be satisfactorily allocated. In such a case no allocation should be
27
made, as nothing will be gained by an arbitrary allocation. Profits revealed by various departments
are brought down in one account and these unallocated expenses should be debited there. Non
departmental profit should also be credited in this account.
Particulars X Y
Rupees Rupees
Othe
Opening Stock (1-1- 250,000 75,000 r
2007) Info
Purchases (Outside 1,000,000 20,000 rmat
supplier) ion:
Sales (Outside customer 1,200,000 300,000
) 1.
Closing stock (31-12- 150,000 50,000 Depr
07) ecia
tion is charged on building @ 20% p.a. Cost of
building is Rs. 105,000 and occupancy ratio is 2/3
and 1/3 for X and Y respectively.
1. Fluctuating Capital.
2. Fixed Capital.
Fluctuating Capital:
Particulars A B Particular A B
s
3. Calculation of goodwill
Stocks xxx
Furniture xxx
Machinery xxx
Partner‟s Capital Account xxx
The admission of a new partner may have an effect on
the following items also
1. Interest on capital
36
2. Partner‟s salary
Goodwill
Goodwill may arise from such attributes of a business
as good reputation, good customer relationship,
strategic location, skill of its employees, dynamic
management, durability of its products, effective
advertisement, patented manufacturing process,
outstanding credit rating, training program of the
employees, and good relationship with suppliers and
employees, etc.
Goodwill may be described as the aggregate of those
intangible attributes of a business that contribute
to the superior earning capacity of the business.
Goodwill is the outcome of an impression created in
the mind of each customer and related persons.
Average Profit Method for calculating goodwill:
After calculating average profit, it is multiplied by
a number (times) 3, or 4, or 5, whatever, as agreed.
The product will be the value of the goodwill.
For example:
Goodwill is three times of the average profit of
previous five years.
Let‟s suppose:
Average profit = 100 / 5 = 20
Goodwill = 20 x 3 = 60
PARTNERSHIP ACCOUNTS (Cont.)
Valuation of Goodwill
39
Methods to be adopted in valuing goodwill will depend
upon the circumstances of each particular case. At
the time of valuation of goodwill, the partnership
deed should be examined and valuation should be done
in such a manner as must have been agreed upon by the
partners.
Goodwill Calculation methods
Journal Entry
Goodwill A/c 135,000
A‟s capital A/c 81,000
B‟s capital A/c 54000
Working
A‟s share = 135,000 x 3/5 = 81,000
B‟s share = 135,000 x 2/5 = 54,000
41
Important Note
Following should be taken in to account when doing
the above treatment for goodwill:
Retirement of Partner
Issues Relating to Retiring Partner
Step 1. Calculation of goodwill
Step 2. Revaluation of goodwill/raise the goodwill
Step 3. Revaluation of net assets
Step 4. Preparation of partner's capital account
Step 5.Transfer of retiring partner‟s capital account
into his loan account
Step 6. Make part payment or full payment of his loan
account (depending upon the cash availability)
46
Step 7. Prepare post retirement balance sheet
Let us understand the accounting treatment by
retiring Laiquee (Solved Question # 1):
Total Profit Distribution:
Transfer capital account to loan account
Retiring partner capital A/c
Retiring partner Loan A/c
Transfer Laiquee‟s capital account to loan account
Laiquee‟s capital A/c 5,260
Laiquee‟s loan A/c 5,260
Part payment of Laiquee loan
Laiquee‟s loan A/c 2,000
Cash A/c 2,000
“Hire
Purchase”
Definition: The hire purchase system is a system under which the purchase is paid in number of
installments as soon as the contract is entered into and the first installment is paid the
hire purchaser acquires position (not the owner ship) of the goods. After the payment of the final
installment the hire purchaser becomes the full fledged owner of the goods. So long as he
does not become the owner, the installments paid by him are considered to be the payments
for hire. In case the hire purchaser fails to pay any particular installment, the seller or vendor
can take away the goods, and the installments already paid become forfeited. Thus, the
essential features of a hire purchase system are
a. The position of goods (not the owner ship) is transferred to the hire purchaser
the goods remains the property of seller until the buyer as paid the entire installments.
If default is made by the hire purchaser in payments, the seller can take away the
goods.
c. The hire purchaser is responsible for keeping the goods in good condition so long as
d. As the seller retains the ownership of goods he must get them insured against loss or
damage.
47
It‟s the system, under which the purchase price has to pay by the purchaser in
a number of periodical installments which easily resembles the hire purchase system, is
called installments purchase system.
COMPANY ACCOUNTS
How a company differs from other organizations? This
is the question that will make able the
students/readers to understand company accounts. In
the upcoming section of this chapter, emphasis will
be put on the points of difference from accounting
perspective.
Company style of business entity is a bigger setup
comparing with the sole proprietorship and
partnership. People with business ideas join their
hands with people having money. Jointly they form a
business in which the investors (normally) do no take
interest in the day to day management affairs.
Salient Features of Limited Liability Companies
48
Following are the salient features that make a
limited liability company different from other
business entities.
1) Separate legal entity
Unlike sole proprietorship and Partnership
organizations the Company style of business is an
incorporated organization that enjoys a separate
legal entity. It means that from the legal point of
view company and owners of the company are two
different persons.
This concept is often confused with the “Business
entity concept” which is merely an accounting concept
and is used to record financial information of an
entity. Whereas, “Separate legal entity” signifies
that a company has a legal status and it can sue and
can be sued in its own name.
2) Limited liabilities
Owners of a Company style of business enjoy an
advantage that if a company runs into financial
difficulties, they cannot be forced to make further
contributions to the company. Even they are not asked
to make good any financial losses suffered by the
company.
Liabilities of the owners of a company are limited to
the amount of paid up share capital (amount
contributed by them). Maximum risk exposed to an
owner of a company is the loss of contributed capital
money.
3) Board of directors
Management affairs of a company are run by a board of
directors that is elected or appointed by the owners.
The board of directors runs the company on behalf of
its owners, in a way it can be said that directors
act like stewards.
Directors are responsible for decision making, for
running day to day business affairs, for managing
financial issues.
4) Sources of finance
49
Like other business organizations a company also gets
its finances from owners and lenders but the circle
of its owners and lenders is very large.
5) Capital from owners
At the time of its incorporation the company makes an
estimate of the total amount of capital that will be
required in the business. This capital is split into
shares and hence is known as share capital. People
(investors) who want to become owner of the company
contribute in the share capital. Contributors of the
share capital are known as share holders or members
of the company. A limited liability company is
jointly owned by its members.
6) Borrowings from lenders
Large business projects are undertaken by the company
style of business which need huge amount of finance.
Such financial requirements are often cannot be met
with the contributed share capital alone. For this
purpose a company borrows finances from the financial
institutions (like Banks etc.) and also a company can
borrow from public in general by issuing
loan/debenture certificates. Holders of these
certificates are known as debenture holders.
7) Legal formalities
Company style of business entity undertakes huge
ventures that involve contracts with suppliers,
customers, lender and so many other concerns. Also it
has large number of share holders. This might create
certain difficulties to the management and to the
related parties as well. Therefore incorporation of
Limited Liability Company requires certain legal
formalities and is tied up in more tight regulations
to run the entity, which are not required to be
abided by the sole proprietorship and partnership
style of business entities.
8) Reporting requirements
As a limited liabilities company is involved in
transactions with a huge number of stake holders,
therefore its directors are required to publish and
circulate financial statements with regular intervals
50
which may be a quarter, six months or a year,
depending upon the nature of the company.
Finances of a Limited Liability Company
A company gathers its finances from two sources:
1. Owned Equity
2. Borrowed Equity
1) Owned Equity
Owned equity comprises of:
i. Capital Reserves
Share premium (unrealized profit)
Share premium
Companies having strong background often issue their
shares at a price that is more than the nominal
(face) value. Excess of the issue price over the
nominal value is known as share premium.
Note: Remember one very important tip; share capital
a/c always credits with its nominal (face) value
only, any excess received as resources will be
credited to the share premium a/c.
Questions
Rafi Ltd Co issues 100,000 ordinary share capital @
Rs 10 each with a premium @ Rs 7 per share.
Record the above transaction in the books of
accounts.
51
1. Balance Sheet
2. Income Statement
3. Statement of Changes in Equity
4. Cash Flow Statement
5. Notes
Questions
Simple Co. has been trading for a number of years
manufacturing domestic appliances. Its trial balance
for the year ending 31 August 2005 is noted below,
along with some additional information.
Simple Co.
Trial Balance
st
As at 31 August 2005
Dr. Cr.
(Rs. 000) (Rs. 000)
Sales 14,345
Opening inventories 1,456
Purchases 4,239
Manufacturing wages 2,386
Other manufacturing costs 646
Selling and distribution costs 1,895
Administration costs 998
Interest expense 400
Interim dividend paid 900
Long-term investments 900
Non-current assets at cost 6,579
Depreciation 2,756
Questions
Straight Co. has been trading for a number of years
manufacturing steel girders. Its trial balance for
st
the year-ending 31 March 2006 is noted below, along
with some additional information.
Straight Co.
Trial Balance
st
As at 31 March 2006
Dr. Cr.
(Rs. 000) (Rs. 000)
Sales 28,353
Opening inventories 3,206
Purchases 8,162
Manufacturing wages 7,333
Other manufacturing costs 974
Selling and distribution costs 2,020
Administration costs 635
Investment income 246
Interest paid on the bank 50
overdraft
Interim dividend 800
Long-term investment 2,885
Fixed assets at cost 15,753
Depreciation 4,396
“A share is the interest of the share holder in the company, it is measured by the sum of
money for the purpose of liability in the first place and of interest (dividend) in the second place
a company‟s capital is divided into a number of equal parts called as a share”.
Nature of Share:
b. The share capital non refundable except in the case of winding up and reduction of
capital.
Class of Share:
Before passing of the company ordinance 1948, a company use to issue three types of
shares.
1. Ordinary Share.
2. Preference Share.
3. Deferred Share.
The company‟s ordinance now allows the company to issue only one type of shares normally
ordinary shares.
55
1. Ordinary Share: Are also called Equity Shares. The holders of ordinary or Equity
Shares are the real owners of the company. The ordinary share holders have voting rights in the
meetings of the company, they are entitled and receive dividend and are declared by the board of
directors. The Equity Share capital can not be redeemed during the life of the company.
2. Preference Share: As the name suggest have certain preference on other types of
shares. The preferences are as under.
a. The first preference is for payment of dividend first paid to preference share
holder.
b. In case of winding up the company, the preference share holders have prior
right in regard to repayment of capital.
3. Deferred Share: Is also called Founder‟s Share were use to be issued to the promoters
of the claims of all other share holders had been not the deferred share holders.
A company may raise part of its capital by obtaining loans in the form of
debentures. Debenture means to owe a debt, “debenture is a security issues or allotted to the
interest under the seal of the company who become creditors of the company”. A debenture may
therefore be defined as a document issued by the company as an evidence of its debts. It contains
a contract of the repayment of the principle sum of the interest at a specified date to the
debenture holder.
Kinds of Debentures:
The debentures can be classified the basis of the terms and condition of their
issue by the company.
1. Ordinary or Naked Debentures: The debentures, which are issued without any
security for repayment, are known as Ordinary or Naked Debentures.
3. Redeemable Debentures: The debentures, which are repayable at the state time, are
called Redeemable Debentures.
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4. Irredeemable Debenture: A debenture, which is not payable during the life time of
the issuing company, is called Irredeemable Debenture.
the debenture.
6. Bearer Debentures: The Bearer Debentures, which does not show the name of
owner the Bond.
7. Equipment Trust Debenture: The debentures, which are issued of raise funds for
Share Debenture
1. Share Capital: The company‟s A debenture is a certificate indebtedness
ordinance defines shares as a share in
capital of the company. Issued under the scale of the company.
2. Rights: The share holder receives The right of debenture is to receive money at a
dividends when the company earns the fixed rate of interest. They can earn whit the
profit. They suffer financially when it profit or loss of company.
suffers losses.
3. Voting: A share holder is entitled to vote The debenture holder has no rights of voting at
at the company‟s general meeting. any meeting of the company.
4. Owner of the Company: The share The debentures are the creditors of the company
holders except the Preference Share holders and as such they have no claim on the
are the owner of the company. ownership of the company.
5. Return of the Capital: The share holders The company gives an undertaking to payback
are allowed to sale the share a will to other the capital along with the interest a stated time
person but they are not paid back capital. to the debenture.
6. Management: The share holder The debenture holders are not entitled to
manages the offers of the company through interfere in the management and the
the created representatives called Board of administration of the company as they are not
Directors. the owner of the company.
7. Payment at the Winding up: In case the On winding up of the company, the first
company is wind up the share holder has a propriety is to payback the money to the
secondary claim of the return of money on debenture holder.
the purchased shares.
8. Islamic Sprits: The dividend paid to the The company has to pay fixed rate of interest to
share holders depends upon the profit of the the bond holders whether the company makes
company. There is no fixed rate of return on any profit or suffer the loss, which is basically
the shares of the company. As much they against the Islam.
are Islamic in character.
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1. Redemption in Installment:
A company may redeem its debenture in installment as per the term of the issue of
the debenture. The term may be in any of the following forms.
The term of issued may provide that as a form of particular the company
will be redeeming debenture of a fix amount. The decision about the holders
whose money has to be return on be taking lottery methods or drawing a lot
method.
A company may purchase its own debentures in the open market. The
advantage of this method is that the company can redeemed the debenture at its
convenience what debentures are purchased the company have to pay a higher or
low price then the paid up value of its debentures. Any such profit or loss on
redemption will be capital profit or loss. The debentures so purchased may be
cancelled or may be kept as investment is may be utilized for re-issue when
needed after wards.
2. Redemption by Conversion:
In some case converting them into new share redeems debenture or debentures
the term of issue may give the option to convert into share or debenture can be issued at
per at premium or at discount. In case the new debentures are issued at premium,
premium account is credited and discount account is debited.
The company may redeem the debenture in a lump sum after the expiry of a fixed
period. Redemption in a lump sum involves high firms and therefore it will be
58
appropriate for the company to make adequate provision for the funds of the redemption
right from the very beginning. There are two methods of such provision;
Under this method every year a fix amount is taken from the profit and loss
appropriation account. This amount is invested out side the business in creation
of good securities are refined and the sale proceed are used for redeeming
debentures usually the interest received on securities of sinking fund is also
reinvested. This company earns compound interest sinking fund table are used for
finding out which, if interest together with the interest in securities earning a
fixed rate of interest will amount to the sum required for the redemption of
debenture after the expiry of fixed period.
Under this method the company may take an insurance policy for redemption of
debentures in place of purchasing investment. The policy will be required data.
The amount of premium will have to be paid in the beginning of the year. The
question of getting interest does not arise at all and therefore, there will be no
entry for interest.
Introduction:
Right issue on invitation to the existing share holders so subscribe for further
shares to be issued by accompany. A right simply means an option to buy certain securities at a
certain specified period. A limited company having a share capital may increase its share capital
by issuing new shares.
Definition:
Share so effected to the existing shareholders are called right shares as the
existing shareholders of a public company have a first right of allotment of further shares. The
offer of such shares to the existing shareholders is known as “Privatized Subscription” or “Right
Issue”.
Following are the specific advantages of this legal right to the existing share
holders:
1. It ensures equitable distribution of share without disturbing the established equilibrium
of shareholders. The contract of the company remains in the hand of the existing
shareholders.
59
2. There is more certainty of the share being sold to the existing share holder at lower price
4. It prevents the directors to issue new shares to their relatives and friends at lower price,
on the other ensures that should get more controlling rights in the company. It better
images of the company and stimulates response from share holders and the investment
market.
The term bonus means an extra dividend paid to shareholders in a joint stock
company from surplus profit, when a company has accumulated a large fund out of profit much
be on it needs the directors may divided to distribute a point of it amongst the shareholders in
form of bonus. Bonus can be paid either in cash or in the form of share. Cash bonus is paid by
the company when it has large accumulated profit as well as cash to pay dividend. May a time a
company is not in a position or because it‟s adverse effects on the capital of the company. In
such conditions, the free shares are issued, known as Bonus. Shares become permanently put of
its issued share capital.
(b) The profit is permanently detail in the business by capitalizing the facilities
expansion of business by employing such capital profit in the business.
(c) The capital of the company as per its balance sheet will be more realization
then it would be otherwise.
(a) The shareholders can receive dividend on the increased share holding.
(b) The shareholders receive profit without in any way affecting the company‟s
cash position, they can release cash by the sale of these shares in the market if
they so desire.
(c) The shareholders stand to gain, since receipt of bonus share dividend results
in tax advantages them to compare to cash dividend.
60
Under section 233 of the company‟s ordinance it has been made compulsory to
prepare final account and present it at every annual meeting, section 233 reveals the following
points in this regard.
Under section 233 (1) of company‟s ordinance the Directors of every company
are required to lay before the company in Annual General Meeting a Balance Sheet, Profit and
Loss account or in the case of a company not trading for profit an Income and Expenditure
account for the period. The first account must be presented at some date not later then the
eighteen months after the incorporation of the company, subsequently once at least in every
calendar year.
2. Audit of account:
Under section 233 (3) the Balance Sheet and the Profit and Loss account or
Income and Expenditure account shall be audited. The Auditor of the company and the
Auditor‟s Report shall be attached.
3. Circulation of accounts:
Under section 233 (4) every company shall be send a copy of such Balance Sheet
and Profit and Loss account or Income and Expenditure account so audited together with a
copy of the auditor‟s report and the Directors‟ Report to the registered address of the every
member of the company at last 21 days before the meeting at which such accounts and
reports are to be presented.
4. Filing of Accounts:
Under section 233 (5) every listed company shall also dispatch simultaneously
five copies of each account and report to the authority, the Registrar and the Stock Exchange
on which its quoted a non listed public company has however to file three copies of such
accounts along with Auditor‟s and Directors‟ Report with the Registrar of joint stock
companies only.
5. Directors’ Report:
Under section 236 the Directors‟ Report is a point of company‟s annual accounts.
This report shall contain the usual information regarding the efforts of the company its
operations etc. However it shall also contain the full information and explanation with
regards to any reservation, observation, qualification or adverse remarks made by the
auditors in their report on the account of the company.
61
The procedure for the formation of a joint stock company may be divided into
four stages as follows.
1. Promotion Stage:
First of all the idea of forming a company must be conceived either a person or a
group of person who are called “promoters”. A person doing the necessaries floatation work
of a company is called the “promoter”. Promoters are experts in company formation work.
They may detail investigation to find out whether the idea is really profitable. They also to
decide about the total amount of capital required to start and to run the business. They have
to prepare the necessary documents required to gain the incorporation certificate.
2. Incorporate Stage:
The documents (iv, v and vi) are not required for private companies. If the
registrar is satisfied in all matters he shall issue the certificate of incorporation. The
certificate is the conduce evidence that all the requirements in respect of registration have
been compiled with, and now private company can start its business.
After the Incorporation of the public company, the directors will file a copy of
the prospectus with the registrar. It is an invitation to the public for subscription. Investors
can get the prospectus and application form free of charge from the company‟s bankers.
They will submit the application along with the companies and directors will, and then
precedes the allotment of the shares to the applications.
A public company through incorporation can not begin its business unless it gets
the Trading certificate. This will be issued by the registrar of the following declarations are
filled by the company with the registrar.
a. Declaration by the company that the minimum subscription amounts as per prospectus
is satisfied.
b. Declaration by the company that all the directors have taken up and paid for their
qualification shares.
The clauses state the name of the company. A company may adopt any name of
the company but it should not be identical to the name of an ousting company registered at the
registrar of the companies. The company‟s ordinance provides that the name of company must
and with the word “limited” only if public company, and “(private) limited” if the private
company.
According to this clause the company must have a registered office at which all
communication and notices are to be addressed. The memorandum will only state the name of
the province where office is situated.
3. Object Clause:
It is the most important clause in the memorandum. It clearly defines the phase of
the company‟s activities. Any business activity carried outside the territories specified in the
object clause of memorandum is altering view & view.
4. Liability Clause:
This clause of memorandum contains a declaration that the liability of the share
holders is limited to the extent of the value of shares holding by them.
5. Capital Clause:
This clause is required to specify the amount of share capital with which the
company proposes to be registered and secondly the division of the capital into shares of a fixed
amount.
6. Subscription Clause:
This clause contains a declaration by the subscribers that they are desirous of
forming them selves into a company and agree with the number of shares written against their
respective names. The subscriber is required to take at least one share each.
Meaning:
from in which changes in internal regulation of the company make from time to time be made.
The article of association being subordinate to the memorandum of association can not go
beyond the limit set by it.
Content of Article:
8. Declaration of dividend.
9. Convincing and conduct of meeting with reference to notice quorum, poll, promo,
resolution etc.
When an existing company takes over the business of their existing company it
knows as the absorption. The company bought over goes into liquidation. The absorbed
company will have no further separate existing.
Absorption does not involve the formation of a new company but it does require
the winding up of an existing company whose business is being purchased.
Definition:
In these cases, the person who surrender the right is known loser (land lord) and
the person who take it known as lassie.
It is the minimum amount that must be paid by the lassie to the land lord in any
particular year, whether the mine is worked or not at all. Usually there is a contract between the
loser and lassie that in case of low out put or lower sale. This minimum amount is called
“Minimum or Dead Rent”, it is also known as “Fixed Rent”, “Sleeping Rent” or “Certain Rent”.
The dead rent is helpful rent as, thus to provide the land lord of regular income. It should
however be noted that the question of dead rent arises only if the royalty falls short of dead rent.
“Short working”
When the Royalty is less then the dead rent, the difference is called “Short
Working”. It can easily be defined at the excess of dead rent over the royalty, usually it is only
during the course of a couple of initial years that short working take place.
“Interim Dividend”
An interim dividend is a dividend declared before the close of a financial year of
a company either out of accumulated profit brought forward from past years or anticipated profit
of the ear rent year. In other words interim dividend is a dividend declared at any time between
two ordinary general meetings. Interim dividend is only a payment on account of the whole
dividend for the years.
Before dividing on interim dividend the director must be careful to see that the
profit already made sufficient, justify the payment of an interim dividend and interim financial
account should be prepared which all would provision is respect of outstanding liabilities for
expenses, depreciation etc share made although the account may disclose large profits.
1. Introduction
Add:
Less:
Add
Less
Statement of Affairs
Rs. Rs.
ASSETS
LIABILITIES
Questions
Drawings 40
Particulars Rs.
Cash 115
Fixtures 4,000
Stock 16,74
0
Debtors 11,89
0
Creditors 9,052
Questions
Ali and Bilal are partners in a firm sharing profits
and losses in the proportion of 3:2. They keep their
books on the single entry system. On 31 December,
2006, the following Statement of Affairs was
extracted from their books:
Sundry
Creditors
1,00,000 1,00,000
st
On 31 December, 2007, their assets and liabilities
were: Sundry Debtors Rs 40,000; Sundry Creditors Rs
25,000 Plant & Machinery Rs 50,000; Stock Rs 30,000;
Bills Receivable Rs 5,000; Cash at Bank Rs 25,000;
Loan- Bilal Rs 25,000.
You are required to prepare a Profit and Loss
st
Statement for the year ended 31 December, 2007 and a
Statement of Affairs as at that date after taking
into consideration the following:
a) Cash Book
i. Cash Account
e) Year-end adjustments
i. Closing stock
v. Disposal of Assets
Income Statement
Sales
Purchases
Gross Profit
Operating Expenses
Adjusted with:
Other Income
Adjusted with:
Balance Sheet
As on December 31 20x7
Source of Information Rs.
Assets
Fixed Assets S O A-opening
Investments S O A-opening
Total Result
Owner‟s Equity
Liabilities
Loans
Current liabilities
Total Result
Rs. Rs.
xxx xxx
Cash Book
Liability
Sales xxx
Less: Cost of goods sold
Opening Stock xxx
CGS xxx
a). Depreciation
xxx
Solved Questions
Rs. Rs.
48,500 48,500
Debtors Account
Rs. Rs.
Closing
balance c/f
30,000 30,000
SINGLE ENTRY
a) Cash Book
i. Cash Account
e) Year-end adjustments
i. Closing stock
Questions
From the following information, find out the credit
sales:
Rupees
Questions
From the following cash transactions ascertain the
amount of cash sales:
Rupees
Questions
From the following information, find out the Credit
purchases:
Rupees
Questions
From the following information, calculate opening
stock:
Rupees
Purchases 20,000
Sales 30,000
SINGLE ENTRY
CALCULATION OF MARKUP AND MARGIN
Cost Structure
Gross profit
Markup rate
Markup rate is the rate of gross profit over the cost
of goods sold, it is expressed in %age and it is
formulated like this:
G P x100 = %
COGS
In calculating markup rate, the cost of goods sold is
kept equal to 100%. Suppose the markup rate is 25%
then the cost structure in markup will be like this:
Sales 125%
COGS 100%
G P 25%
Margin rate
Margin rate is the rate of gross profit over the
sales revenue, it is expressed in %age and it is
formulated like this:
G P x100 = %
Sales
Sales 100%
COGS 75%
G P 25%
Sales 125%
COGS 100%
G P 25%
125
Cost of goods sold = Sales – Gross profit
= 80,000 – 16,000
= 64,000
125
Rs.
COGS 75%
G P 25%
Purchases 155,000
150,000
75
= 150,000 + 50,000
= 200,000
75
Due to varying size of businesses different comparison of two businesses is not possible.
Certain techniques have to be applied in simplifying the financial statements and making
them comparable. These include financial ratio analysis and common-size financial
statements.
Ratios are divided into different categories such as liquidity ratios, profitability ratios, etc.
Liquidity is the ability of a business to pay its current liabilities using its current assets.
Information about liquidity of a company is relevant to its creditors, employees, banks, etc.
current ratio, quick ratio, cash ratio and cash conversion cycle are key measures of liquidity.
Solvency Ratios
Solvency is a measure of the long-term financial viability of a business which means its
ability to pay off its long-term obligations such as bank loans, bonds payable, etc..
Information about solvency is critical for banks, employees, owners, bond holders,
institutional investors, government, etc.. Key solvency ratios are debt to equity ratio, debt to
capital ratio, debt to assets ratio, times interest earned ratio, fixed charge coverage ratio, etc.
Profitability Ratios
Profitability is the ability of a business to earn profit for its owners. While liquidity ratios and
solvency ratios are relationships that explain the financial position of a business profitability
ratios are relationships that explain the financial performance of a business. Key profitability
ratios include net profit margin, gross profit margin, operating profit margin, return on assets,
return on capital, return on equity, etc.
Activity ratios
Activity ratios explain the level of efficiency of a business. Key activity ratios include
inventory turnover, days sales in inventory, accounts receivable turnover, days sales in
receivables, etc.
Performance ratios include cash flows to revenue ratio, cash flows per share ratio, cash return
on assets, etc. and they aim at determining the quality of earnings.
Coverage Ratios
Coverage ratios are supplementary to solvency and liquidity ratios and measure the risk
inherent in lending to the business in long-term. They include debt coverage ratio, interest
coverage ratio (also known as times interest earned), reinvestment ratio, etc.