Tybaf Sem Vi Financial-Accounting-Vii

31
T.Y.B.COM.
(ACCOUNTING & FINANCE)
SEMESTER - VI (CBCS)
FINANCIAL
ACCOUNTING -VII
© UNIVERSITY OF MUMBAI
Prof. Ravindra Kulkarni

Vice-Chancellor,
University of Mumbai,
Prin. Dr. Ajay Bhamare Prof. Santosh Rathod

Pro Vice-Chancellor, I/c Director,
University of Mumbai, CDOE, University of Mumbai,
Programme Co-ordinator : Dr. Rajashri Pandit

Asst. Prof. in Economic,
Incharge Head Faculty of Commerce,
CDOE, University of Mumbai, Mumbai
Course Co-ordinator & : Mr. Ganesh Akaram Ghadigaonkar

Re - Editor B.Com (Accounting & Finance)
CDOE, University of Mumbai, Mumbai
Course Writer : Mr. Ganesh Akaram Ghadigaonkar

Prof. M . A. Gandhi
Dr. V. N. Yadav
Prof. Ashok A. Gujar
Prof. Shital Khadakar
Dr. Deepak S. Sharma
Mr. Kaustubha Kishorkumar Sawant
Dr. Sandeep Poddar
Mr. Gorakh Ingale (C.A.)
Dr. Saraswati Moorthy
Prof. Ashok Mahadik
Dr. Sanchita Sushanta Roy
Ms. Neha Bhatia
Ms. Komal Tiwari
Mr. Vinayak Vijay Joshi
April 2024, Print - 1
Published by : I/c Director,

Centre for Distance and Online Education,
University of Mumbai,
Vidyanagari, Mumbai - 400 098.
DTP Composed : Mumbai University Press

Printed by Vidyanagari, Santacruz (E), Mumbai
CONTENTS
Unit No. Title Page No.
1 Final Accounts for Electricity Company 1
2. Final Accounts for Co-Operative Society 33
3. Investment Accounting (W.R.T Accounting Standard -13) 95
4. Mutual Fund - 1 130
5 Mutual Fund - 2 146
6. Introduction to IFRS 156

Revised Syllabus of Courses of B.Com. (Accounting and Finance)
Programme at Semester VI
with effect from the Academic Year 2023-2024
2. Core Courses (EC)
1. Financial Accounting VII
Modules at a Glance
Sr. Modules No. of
No. Lectures
01 Final Account for Electricity Company 15
Final Accounts for Co-Operative Society:
02 (Co-Operative Housing Society and Consumer Co-Operative 15
Society)
03 Investment Accounting (w.r.t. Accounting Standard - 13) 10
04 Mutual Fund 08
05 Introduction to IFRS and Indian Accounting Standards 12
Total 60
Sr. No. Modules / Units
1 Final Account for Electricity Company
Final Accounts as per Double Account System
Final Accounts as per Electricity Rules
Receipt & Expenditure on Capital Account
General Balance Sheet
Contingency Reserve
Disposal of Surplus (As per Electricity Rules): Norms regarding Disposal of Surplus
Replacement of Assets
Simple practical problems
Final Accounts for Co-Operative Society
2
(Co-Operative Housing Society and Consumer Co-Operative Society)
Provisions of Maharashtra State Co-Operative Societies Act and rules. Accounting
provisions including appropriation to various funds
Format of Final Accounts Form N
Simple practical problems on preparation of final accounts of a Co-Operative
housing society & Consumer Co-Operative Society
3 Investment Accounting (w.r.t. Accounting Standard- 13)
For shares (variable income bearing securities)
For debentures/Preference. shares (fixed income bearing securities)
Accounting for transactions of purchase and sale of investments with ex and cum
interest prices and finding cost of investment sold and carrying cost as per
weighted average method (Excl. brokerage).
Columnar format for investment account.
4 Mutual Fund
Introduction, Historical Background SEBI Guidelines, Organisation, NAC Scheme,
Types of Mutual Fund Schemes, , FOF Scheme, Load or No-Load Scheme,
Investment Valuation norms, Pricing of units, Contents of Balance sheet and
revenue Account, Evaluation of mutual funds, Disposal of Investments,
Recognition of Income, Accounting policies and entries.
5 Introduction to IFRS
Accounting standards: Role/objectives of accounting standards, Development of
accounting standards in India - Requirements of international accounting
standards - International organizations engaged in accounting harmonization -
IASB - FASB - Role of IASB in developing IFRS, Applicability, Interpretation, Scope
and compliance of Accounting Standards
Indian Accounting standards (Ind AS) :
Introduction, Road map, First time adaptation of Indian Accounting Standard,
Conceptual framework
Comparison of Ind AS, IFRS and AS
IFRS : Introduction, scope Purpose & Objective of financial statement-its Frame
work-its assumption, characteristics, element, recognition & measurement.,
first time adoption of IFRS
Convergence of Ind-As and IFRS
1
FINAL ACCOUNTS FOR ELECTRICITY
COMPANY
Unit Structure :
1.0 Objective
1.1 Double Account System
1.2 Final Account as per Electricity Rules
1.3 Revenue Account
1.4 Net Revenue Account
1.5 Capital Account (Receipt and Expenditure On Capital Account)
1.6 General Balance Sheet
1.7 Contingency Reserve
1.8 Disposal of Surplus
1.9 Calculation of clear profit
1.10 Reasonable Return
1.11 Capital Base
1.12 Replacement Account
1.13 Unit End Question
1.0 LEARNING OBJECTIVES

1. Double Account System
2. Learn Provisions of Indian Electricity Act, 2003
3. Learn about financial statement under Electricity Act
1.1 DOUBLE ACCOUNT SYSTEM

A double-entry accounting system is a method of bookkeeping that
records each financial transaction twice, once as a debit and once as a
credit. This system is based on the principle that every transaction affects
at least two accounts, with one account being debited and another being
credited.
The double-entry accounting system provides accuracy and accountability

in financial reporting. It enables businesses to track their financial
1
Financial Accounting - VII transactions accurately, maintain records for compliance and auditing
purposes, and generate reliable financial statements for decision-making.
1.2 FINAL ACCOUNTS AS PER ELECTRICITY RULES
The final accounts prepared as per electricity rules would be specific to the
regulations and requirements governing the accounting practices within
the electricity industry. These rules may vary depending on the
jurisdiction or country. Here's a general outline of what final accounts
might include in accordance with electricity rules:
1. Revenue Statement:
- This statement summarizes the revenue generated from electricity
sales and related services.
- It may include revenues from various sources such as residential,
commercial, industrial customers, as well as revenue from other
services like connection fees, late payment charges, etc.
- Revenue may be further categorized based on tariff structures,
demand charges, and consumption levels.
2. Expenditure Statement:
- This statement details the expenditures incurred in the generation,
transmission, distribution, and maintenance of electricity
infrastructure.
- Expenditures may include fuel costs, maintenance expenses, labor
costs, depreciation, administrative expenses, and other operational
costs.
- It may also include regulatory fees, taxes, and any other statutory
payments.
3. Profit and Loss Account:

- The profit and loss account summarizes the financial performance of
the electricity company over a specific period.
- It includes revenues, operating expenses, non-operating incomes,
and expenses, resulting in net profit or loss.
- The format and presentation may adhere to specific guidelines
provided by regulatory authorities overseeing the electricity industry.
4. Balance Sheet:
- The balance sheet provides a snapshot of the electricity company's
financial position at a specific date.
- It includes assets such as power plants, transmission lines,
distribution networks, cash, accounts receivable, and other tangible
and intangible assets.
- Liabilities may include loans, bonds, accounts payable, accrued
expenses, and provisions.
- Equity represents the shareholders' equity or retained earnings of the
company.
2
5. Cash Flow Statement: Final Accounts for
- The cash flow statement outlines the inflows and outflows of cash Electricity Company
and cash equivalents during the accounting period.
- It categorizes cash flows into operating, investing, and financing
activities, providing insights into the company's liquidity,
investment, and financing activities.
6. Notes to Financial Statements:

- These notes provide additional explanations, disclosures, and details
regarding the items presented in the financial statements.
- They may include significant accounting policies, assumptions,
contingencies, and other relevant information necessary for
understanding the financial position and performance of the
electricity company.
These final accounts prepared in accordance with electricity rules aim to

provide transparency, accountability, and compliance with regulatory
requirements specific to the electricity industry. They serve as essential
tools for management, investors, regulators, and other stakeholders to
assess the financial health and performance of electricity companies.
1.3 REVENUE ACCOUNT

This account is similar to the Profit and Loss Account of Trading or
Manufacturing concern.
Revenue Account
For the year ended ……………….
Particulars Rs Particulars Rs.

A. Generation By Sale of Energy for Lighting
To Fuel By Sale of Energy for Power
To Oil Wastage, Water By Sale of Energy under
To Repairs and Maintenance Special
Contracts
B. Distribution By Public Lighting
To Salary of Engineers By Rental of Meters
To Wages and Gratuities By Rent Receivable
To Repairs and Maintenance By Transfer Fees
By Other Items
C. Public Lamps By Miscellaneous Receipts
To Attendance and Repairs By Sale of Ashes
To Renewals ByReconnection and
DisconnectionFees
D. Rent, Rates and Taxes
To Rent Payable
3
Financial Accounting - VII To Rates and Taxes
E. Management Expenses
To Director's Remuneration
To Management
To General Establishment
To Auditor of the Company
F. Law Charges
To Law Charges
G. Depreciation
To Lease
To Buildings
To Plant
To Meters, etc.
H. Special Charges
ToBad Debts
To Balance Carried to Net
RevenueAccount
1.4 NET REVENUE ACCOUNT
This is similar to the Profit and Loss Appropriation Account of a Trading

or manufacturing concern except the treatment of interest on debenture
and loans. It is treated as appropriation of profit.
Net Revenue Account for the year ended ……….
Particular Rs. Particulars Rs.

To Balance from last By Balance from last
year’s account year’s Account
To Interest on loans By Balance brought from
To Contingency Reserve Revenue A/c
To Interest on Debentures By Interest on Bank
To Dividends Account
To Balance Carried to By Balance Carried to
Balance Sheet General Balance Sheet
1.5 CAPITAL ACCOUNT (RECEIPT AND

EXPENDITURE ON CAPITAL ACCOUNT)
Under the Indian Electricity Act, receipts and expenditure on the capital
account for an electricity company would typically involve investments
4
and expenses related to capital assets such as power plants, transmission Final Accounts for
lines, substations, and other infrastructure. Electricity Company
Receipts & Expenditure on Capital Account for the year ended……

Particulars Exp. Up Exp. Total Particulars Receipt Receipt Total
to end During Exp Up to During Rec.
of the Rs. end of the Rs.
previous year previous year
year Rs. year Rs.
Rs. Rs.
To By
Preliminary Ordinary
Expenses Shares
To Land By Pref.
To Building Shares
To Plant By
To Debentures
Transformer By Loans
To Meters By Calls-in
To Gen. advance
Stores By Other
To Special Receipts
Items
To Bal of By Balance
Capital A/c of Capital
carried to A/c carried
Gen. Balance to Gen.
Sheet Balance
Sheet
1.6 GENERAL BALANCE SHEET

GENERAL BALANCE SHEET AS ON …...................
Previous Particulars Current Previous Particulars Current

Year Year Year Year
(Rs.) (Rs.) (Rs.) (Rs.)
1.Capital raised and 1.Capital amount
apppropriated vide expended on
work in use -
statement I or I-A Statement II
Reserves and Less: Accumulated
Surplus Provisions for
2.Non-statutory Depreciation
Reserve Statement V
3.Contingencies
Reserve Fund as per Net Block
2.Balance of
Written Down cost
Statement VI. of
5
Financial Accounting - VII 4.Tariffs & Dividend
Control Reserve as obsolete,inadequat
per e etc., assets
Statement VII Statement IIA
5.Consumer Rebate
Reserve as per Stat CURRENT
VIII ASSETS
6.Special
appropriations(as 3.Capital works in
permitted by the progress
state Government) 4.Stores and
reserve as per St IX materil in hand
7. Balance of Net
revenue and (a) Fuel coal and
appropriations oil etc at cost
account as per (b) General Stores
Statement X at or below cost
CURRENT
LIABLITIES AND CURRENT
PROVISIONS AT ASSETS
5.Debtors for
COST amounts paid in
8.Balance due on advance on
construction of Plant, account of contract
6.Sundry debtors
machinery, etc for electricity
supplied
9.Creditors on open
accounts(as per 7.Other debtors(as
schedule per schedule
attached) attached)
8.Accounts
receivable(to be
10.Consumer security
deposits specified)
9.Investment in
statutory
11.Accounts payable
(to be specified) securities at cost
(a) Contingencies
Reserve Fund
12.Temporary
accommodations,ban Investment,(M.V.
k On Closing date)
Overdraft and other (b)Depreciation
finances Reserve Fund
6
Investment,(M.V. Final Accounts for
On Closing date) Electricity Company
13.Other Current and ('c) Other
accrued liabilities Investment
(Market Value on
(to be specified) Closing Date)
10.Special
Deposits.
14.Contingent
Liabilities and (a) In respect of
outstanding taxation
commitments, if any (b) Others to be
to be stated on the specified)
face of this 11.Balance at
balanceSheet Bank
(a) Deposit
account
(b) Current
account and at
call
12.Cash in hand
14.Defered
Payment
1.7 CONTINGENCY RESERVE

Under the Indian Electricity Act, the contingency reserve is a provision
that electricity companies are required to maintain as a safeguard against
unforeseen expenses or emergencies. The contingency reserve is intended
to ensure the financial stability and reliability of the electricity supply.
Here's an overview of the contingency reserve under the Indian Electricity
Act:
1. Purpose:
- The primary purpose of the contingency reserve is to provide
financial resources to address unexpected events or emergencies that
may impact the operation or maintenance of electricity
infrastructure.
- It serves as a buffer to mitigate risks associated with sudden changes
in operating conditions, equipment failures, natural disasters, or
other unforeseen circumstances.
2. Regulatory Requirement:
- The Indian Electricity Act mandates electricity companies to
establish and maintain a contingency reserve as per the regulations
set forth by regulatory authorities such as the Central Electricity
7
Financial Accounting - VII Regulatory Commission (CERC) or State Electricity Regulatory
Commissions (SERCs).
- Every electricity supply company has to maintain a contingency
reserve. A sum equal to not less than 1/4% or not more than 1/2% of
the original cost of fixed assets must be transferred from the
Revenue Account to the Contingencies Reserve A/c. The maximum
amount in this account should not exceed 5% of the original cost of
the fixed assets. The amount of Contingencies Reserve is to
beinvested in trust securities.
3. Funding:
- The contingency reserve is typically funded through allocations from
the company's profits or revenues.
- Contributions to the contingency reserve are made periodically,
ensuring that sufficient funds are available to meet potential
contingencies.
4. Utilization:
- The contingency reserve can be utilized by the electricity company
to cover unexpected expenses or losses incurred due to emergencies
or unforeseen events.
- Examples of situations where the contingency reserve may be used
include repairs of damaged infrastructure, replacement of equipment,
or addressing sudden changes in demand or supply conditions.
5. Disclosure and Reporting:

- Electricity companies are required to disclose information regarding
the contingency reserve in their financial statements and regulatory
filings.
- Reporting requirements may include details on the amount of funds
allocated to the contingency reserve, utilization of funds, and any
changes in the reserve balance over time.
6. Regulatory Oversight:
- Regulatory authorities monitor the establishment and management of
the contingency reserve to ensure compliance with statutory
requirements.
- They may review the adequacy of the reserve, its utilization, and the
company's overall financial health to assess its ability to handle
contingencies effectively.
Overall, the contingency reserve plays a crucial role in ensuring the

financial resilience and operational continuity of electricity companies
operating under the Indian Electricity Act. It provides a mechanism to
manage risks and uncertainties inherent in the electricity sector, thereby
contributing to the stability and reliability of the power supply.
8
Illustration: 1 Final Accounts for
Electricity Company
The following balances are extracted from the books of M/S Reliance
Electric Company Ltd.
i) Fixed assets Expenditure up to 1-1-2022

(a) Land and Building Rs. 12,00,000, (b) Machinery Rs. 18,00,000
ii) Additions during the year-Machinery Rs. 3,50,000
iii) Depreciation Fund

(a) Machinery Rs. 3,60,000, (b) Buildings Rs. 1,20,000
iv) Authorised Capital Rs. 60,00,000 divided into equity shares of Rs.
100 each.
v) Issued and fully paid-up 30,000 equity shares of Rs. 100 each
(including 2,500 equity shares issued during the year)
vi) 7.5% Debentures Rs. 11,00,000 secured by a charge on Fixed Assets.
vii) Sundry Creditors Rs. 3,50,000; Reserve Fund Rs. 6,00,000,

Reserve Fund Investments at costRs. 6,00,000;(Market Value Rs.
6,25,000)
viii) Stock Rs. 4,50,000 Sundry Debtors Rs. 9,00,000; Cash at Bank
Rs.4,30,500 Cash in HandRs. 1,00,000
ix) Profit and Loss Account (Cr.) Rs. 3,00,500
You are instructed to prepare
1) The Balance Sheet as on December 31, 2022 according to Schedule III

to the Companies Act, 2013 under the Single Account System (previous
figures year's not required)
2) a) Capital Account
b) General Balance Sheet as on the same date under the Double Account
System.
9
Financial Accounting - VII Solution
Balance Sheet of Reliance Electric Co. Ltd.
as on 31 December, 2022
Liabilities Rs. Rs Assets Rs Rs
Fixed Assets
Share Land and
Capital Buildings (at 1,200,000
Cost)
Authorised Less Accumulated
Capital Depreciation 120,000 1,080,000
60,000 Equity
Shares Rs. 6,000,000
100 each
Machinery (at
Cost) 1,800,000
Issued, Addition During
Subscribed the year 350,000
and Paid-up
30,000 Equity
Shares of 3,000,000 2,150,000
Rs.100 each
Fully Paid
Less Accumulated
Depreciation 360,000 1,790,000
Reserves and
Surplus
al Reserve Investments
Fund 600,000
b) Profit and Reserve Fund
Loss A/c 300,500 900,500 600,000
Investments (at
cost)
Secured (Market Value Rs.
Loans 6,25,000)
7.5%
Debentures
( Secured by a Current Assets,
charge on 1,100,000 Loans and
Fixed Assets) Advances
Stock
450,000
Unsecured Sundry Debtors
Loans - 900,000
Cash at Bank
430,500
Current Cash at Hand
Liabilities 100,000 1,880,500
and
Provision
Sundry
Creditors 350,000
Miscellaneous
Expenditure
5,350,500 5,350,500
10
Receipts and Expenditure on Capital Account Final Accounts for
for the year ended 31 December, 2022 Electricity Company
Expenditure Exp upto Exp Total Exp Receipts Rec upto Rec Total Rec
01.02.2022 During 01.02.2022 During
the the year
year
Rs. Rs. Rs. Rs. Rs. Rs.
To Land & By Equity

Bldg. 1,200,000 - 1,200,000 Shares 2,750,000 250,000 3,000,000
To Machinery 1,800,000 350,000 2,150,000 By 7% Deb 1,100,000 1,100,000
3,000,000 350,000 3,350,000 3,850,000 250,000 4,100,000
To Balance on 750,000
capital A/c
4,100,000
General Balance Sheet of Reliance Electric Co Ltd

As on 31st Dec 2022
Liabilities Rs Assets Rs
Capital A/c Capital A/c

amt received 4,100,000 Amt Expended on Works 3,350,000
Sundry Creditors 350,000 Stock 450,000
Net Revenue A/c 300,500 Sundry Debtors 900,000
Res. Fund A/c 600,000 Res. Fund Invt 600,000
Depreciation Fund A/c Cash at Bank 430,500
for Machinery 360,000 Cash in Hand 100,000
for Builiding 120,000
5,830,500 5,830,500
Illustration : 2
From the following balances as on 31st December, 2022. Prepare the
Revenue Account, Net Revenue Account, Capital Account and General
Balance Sheet of TATA power Co. Ltd.
Particulars Rs. Particulars Rs.
Balance as on 1st January

2022 Expenses of management 15,840
Land 198,000 Cost of Distribution 6,600
Machinery 792,000 Depreciation 26,400
Mains 264,000 Sale of Current 171,600
Expenditure During the Year 0 Meter Rent 6,600
11
Financial Accounting - VII Land 6,600 Interest on Debentures 13,200
Machinery 6,600 Interim Dividend 26,400
67,320 Net Revenue Account as on 1

Mains 1.2022 37,620
724,680
Share Capital — Ordinary
Shares Depreciation Fund 330,000
Debentures 264,000 Sundry Debtors 0
Sundry Creditors 1,320 For Energy Supplied 52,800
0 Others 660
46,200
Cost of Generation Cash Balance 6,600
Rent, Rates and Taxes 6,600 0
Solution:
Revenue Account of TATA Power Co. Ltd.

for the year ended 31st December, 2022

To Cost of Generation 46,200 By Sale of Current 171,600
To Cost of Distribution 6,600 By Meter Rent 6,600
To Rent, Rates and Taxes 6,600
To Management Expenses 15,840
To Depreciation 26,400
To Net Revenue A/c —
Transferred 76,560
178,200 178,200
Net Revenue Account for the year ended 31 st December, 2022

To Interest on
Debentures 13,200 By Balance b/d 37,620
To Interim Dividend 26,400 By Revenue A/c 76,560
To Balance c/d 74,580
114,180 114,180
12
Final Accounts for
TATA Power Co. Ltd. Electricity Company
Receipts and Expenditure on Capital Account
for the Year ended 31 st December, 2022
Expenditure Expenditure Receipts Receipts

up to 01-01- during the Total up to 01- during Total
Expenditure 2022 year Expenditure Receipts 01-2022 the year receipts
By Ordinary
To Land 198,000 6,600 204,600 Share 724,680 0 724,680
To
Machinery 792,000 6,600 798,600 By Debentures 264,000 0 264,000
To Mains 264,000 67,320 331,320 Total Receipts 988,680 0 988,680
By Balance on
Capital A/c 345,840
Total
Expenditure 12,54,000 80,520 13,34,520 13,34,520
General Balance Sheet of TATA Power Co Ltd

as on 31st December 2022
Capital Account Capital A/c

Expenditure on
Amt Recd 9,88,680 works 13,34,520
Sundry Creditors 1,320 Sundry Debtors
Net Revenue A/c 74,580 For Current - 52800
Depreciation Fund
A/c others 660 53,460
Opening - 303600 cash balance 6,600
Add - 26400 3,30,000
13,94,580 13,94,580
Illustration : 3
From the following balances as on 31st December, 2022. Prepare the
Revenue Account, Net Revenue Account, Capital Account and General
Balance Sheet of T power Co. Ltd.

Balance as on 1st January
2022 Expenses of management 19,008
Land 237,600 Cost of Distribution 7,920
Machinery 950,400 Depreciation 31,680
13
Financial Accounting - VII
Mains 316,800 Sale of Current 205,920
Expenditure During the
Year - Meter Rent 7,920
Land 7,920 Interest on Debentures 15,840
Machinery 7,920 Interim Dividend 31,680

Net Revenue Account as on 1
Mains 80,784 1.2022 45,144
Share Capital — Ordinary 869,616

Shares Depreciation Fund 396,000
Debentures 316,800 Sundry Debtors -
Sundry Creditors 1,584 For Energy Supplied 63,360
- Others 792
Cost of Generation 55,440 Cash Balance 7,920
Rent, Rates and Taxes 7,920 -
Solution:
Revenue Account of T Power Co. Ltd.
for the year ended 31st December, 2022
To Cost of Generation 55,440 By Sale of Current 205,920

To Cost of Distribution 7,920
By Meter Rent 7,920
To Rent, Rates and Taxes 7,920
To Management Expenses 19,008
To Depreciation 31,680
To Net Revenue A/c —
Transferred 91,872
213,840 213,840
Net Revenue Account for the year ended 31 st December, 2022
To Interest on Debentures 15,840 By Balance b/d 45,144
To Interim Dividend 31,680 By Revenue A/c 91,872
To Balance c/d 89,496
137,016 137,016
14
T Power Co. Ltd. Final Accounts for
Receipts and Expenditure on Capital Account Electricity Company
for the Year ended 31 st December, 2022
Expenditure Expenditur Receipts Receipts
up to 01-01- e during the Total up to 01- during Total
Expenditure 2022 year Expenditure Receipts 01-2022 the year receipts
By
Ordinary
To Land 237,600 7,920 245,520 Share 869,616 - 869,616
To By
Machinery 950,400 7,920 958,320 Debentures 316,800 - 316,800
Total
To Mains 316,800 80,784 397,584 Receipts 1,186,416 - 1,186,416
By Balance
on
Capital A/c 415,008
Total
Expenditure 1,504,800 96,624 1,601,424 1,601,424
General Balance Sheet of T Power Co Ltd

as on 31st December 2022
Capital Account Capital A/c
Amt Recd 1,186,416 Expenditure on works 1,601,424
Sundry Creditors 1,584 Sundry Debtors
Net Revenue A/c 89,496 For Current - 63360
Depreciation Fund A/c others 792 64,152
Opening - 364320 cash balance 7,920
Add - 31680 396,000
1,673,496 1,673,496
1.8 DISPOSAL OF SURPLUS
The excess of 'clear profit over 'reasonable return' to the extent of 20% of
reasonable return is to be disposed of as under: Any excess over 20% of
reasonable return should be refunded to the customer.
i) 1/3 of the surplus (not exceeding 5% of reasonable return) at the
disposal of the undertaking
ii) Of the balance, 1/2 is to be transferred to the Tariffs and Dividend
Control Reserve.
15
Financial Accounting - VII iii) The balance is to be transferred to the Consumer's Rebate Reserve for
reduction of rates or for special rebate.
iv) In case the clear profit is less than the reasonable returns, the Tarrifs
and Dividend Control Reserve can be utilized for dividend.
1.9 CALCULATION OF CLEAR PROFIT
Sl Particulars Rs.
I) A: Net Revenue by Sale of Electricity For

Cash and Credit
1 Domestic or Residential
(a) Lights and Fans
(b) Heating and Small power
2 Commercial
(a) Lights and Fans
(b) Heating and Small power
3 Industrial
(a) Low and Medium Voltage
(b) High Voltage
4 Public Lighting
5 Public Water works & Sewage pumping
6 Irrigation
7 Traction
8 Supplies in Bulk to distributing Licensees
Total Revenue by Sale of Electricity
B.Miscellaneous Revenue from Consumers:

1 Rents from,
(a) Meters,
(b) Electric Motors,fittings,appliances and
other apparatus hired to consumers
2 Service Connection Fees
3 Public Lighting Maintenance
Total Miscellaneous Revenue from Consumers
C.Other Revenues
1 Sale of Stores
2 Repair of lamps and other apparatus
3 Commission for the collection Of Electricity Duty
4 Other Miscellaneous Items (to be Specified)
Total Miscellaneous Revenue from Consumers
Total Operating Revenues (A+B+C)

II) Deduct: Expenditure
D.Hydraulic Power Generation
16
(a)Operation Final Accounts for
(b)Maintenance Electricity Company
© Depreciation of Hydraulic Power
Generating Plant & Equipment
E.STEAM POWER GENERATION

(a) Operation
(b)Maintenance
© Depreciation of Steam Power
Generating Plant & Equipment
F.INTERNAL COMBUSTION POWER GENERATION

(a) Operation
(b)Maintenance
© Depreciation of Internal
combustion Power Generating
Plant & Equipment (from stat V)
G. POWER PURCHASED
H.TRANSMISSION(HIGH OR EXTRA- HIGH VOLTAGE)

(a) Operation and Maintenance
I.DISTRIBUTION(HIGH VOLTAGE)
J.DISTRIBUTION(M & L VOLTAGE)

K.PUBLIC LIGHTING
(a) Operation and Maintenance.
(b) Depreciation on P.L.System
L. CONSUMER SERVICING,METER READING

BILLING,COLLECTING
M. ACCOUNTING SALES PROMOTING
N.GENERAL ESTABLISHMENT CHARGES
O.OTHER CHARGES
Interest paid and accrued on
(a) Loans advanced by State
Electricity Board
(b) Depreciation Fund
('c) Consumer Security Deposits
17
Financial Accounting - VII Bad Debts Written Off
Other Items (to be specified)
Total OTHER CHARGES
P.MANAGEMENT EXPENSES
Director Fees and Expenses
and Debenture Trustees fees.ifany
Managing Agents Ordinary
remuneration
Managing Agents Office Allowances
Total Management Expenses
TOTAL EXPENDITURE
(D+E+F+G+H+I+J+K+L+M+N+O+P)
III BALANCE ( I - II)
IV Specific Appropriations
i) past losses
ii) All taxes on income and profits
iii) amount written-off in respect of fictitious & intangible Assets
iv) Contribution to contingency reserve
v) Contribution towards arrears depreciation
vi) Contribution to Development reserve
vii) Other permitted by State Government
V CLEAR PROFIT (III - IV)
1.10 REASONABLE RETURN
The Electricity (Supply) Act, 1948, imposes restrictions on electricity

undertakings on earning too high a profit, by means of the concept of
reasonable return, which stipulates the following:
1. A yield at the standard rate which is the Bank Rate stipulated by the
Reserve Bank of India from time to time, plus 2% on the Capital Base.
2. Income derived from investments excluding investments made against

the ContingenciesReserve
3. An amount equal to 1/2% on any loans advanced by the State

Electricity Board.
4. Anamount equal to 1/2% on the amounts borrowed from organizations

or institutions approved by the State Government
18
5. An amount equal to 1/2% on the amounts realized by the issue of Final Accounts for
debentures. Electricity Company
6. An amount equal to 1/2% on the accumulations in the Development

Reserve.
7. Any other amount as may be allowed by the Central Government,

having regard to the prevailing tax structure in the country.
1.11 CAPITAL BASE
i) Original cost of fixed assets available for use

Less: Contribution, if any, made by the customers for
the construction of service lines
ii) The cost of intangible assets.
iii) The amount of investments made compulsorily on

account of contingencies reserve
iv) The original cost of work-in-progress
v) Working capital which is equal to the sum of:

a) 1/12 of the sum of stores,materials, and supplies
including fuel on hand at the end of each month of
the accounting year,
b) 1/2 of the sum of cash and bank balance and call
and short-term deposit at the end of each month of
accounting year but does not exceed in the
aggregate an amount equal to 1/4 of the
expenditure (already listed in previous page)
Deduct
i) Accumulated depreciation on tangible assets and

amounts written-off intangible assets
ii) Loan advanced by Electricity Board
iii) Security deposits of customers held in cash
iv) Debentures issued by the undertaking
v) Amount standing to the credit of tariffs and Dividend

Control Reserve
vi) Loan borrowed from organizations or institutions

approved by the State Government
19
Financial Accounting - VII vii) Balance of Development Reserve
viii) Amount carried forward for distribution to consumers
Capital Base
Illustration 4
The following balances relate to an electricity company and pertain to its
accounts for the year ended 31.12.2023
Share Capital 11,000,000 Depreciation Reserve on 8,800,000

fixed Assets
Reserve Fund (invested 6,600,000 Consumers' Deposits
in 5% Gov.Securities at 8,250,000
par)
contingencies Reserve — 2,200,000 Amounts contributed by
Invested in 6% State consumers towards fixed 220,000
Govt. Loans assets
- Intangible assets
550,000
Loan from State 3,300,000 Tariff and Dividend
Electricity Board Control Reserve 660,000
11% Debentures 880,000 Current Assets —
Monthly Average 2,200,000
Development Reserve 1,100,000 0
Fixed Assets 22,000,000 0
The company earned a post tax profit of Rs. 10 lakhs. Show how the
profits of the company will be dealt Y\ith under the provisions of the
Electricity Act, assuming that the Bank rate during the year was 8%.
Solution
Calculation of Capital Base
Particulars Rs. Rs.

Original cost of fixed assets
22,000,000
Less : Amount contributed by the customers
220,000 21,780,000
Cost of Intangible assets 550,000
Original cost of work-in-progress 0
Investment against contingencies reserve 2,200,000
Monthly average of Current Assets (assumed not to
cover book debts and amounts due to suppliers) 2,200,000
26,730,000
20
Deduct Final Accounts for
Amount written-off on account of depreciation 8,800,000 Electricity Company
Loan from SEB 3,300,000
11% Debentures 880,000
Security deposits of Customers 8,250,000
Balance of Tariff and Dividend Control Reserve 660,000
Balance of Development Reserve 1,100,000 22,990,000
Total
3,740,000
Rs. Rs.
1. Reasonable Return
Yield at standard rate i.e., 3. Disposal of Surplus
8% + 2% on capital base 374,000
Profit after tax 1,000,000
Income from Reserve Fund Less : Reasonable 730,400
Returns
Investment (@ 5%) Surplus 269,600
330,000
1/2 % on Loan from SEB Excess upto 20% of 146,080
16,500 Reasonable return
(@20%)
1/2 % on Debentures Amount to be credited -
4,400 to
1/2 % on Development Customers Rebate 123,520
Reserve 5,500 Reserve
730,400
2, Final Distribution of 4. Allocation of
Profit Surplus of
Refunded to customers 1/3 of the disposal of 36,520
the Company (Note 1)
(123,520 + 54780) 1/2 of the bal. to Tariff 54,780
178,300 and
Dividend Control
Reserve
Transferred to Tariff and 1/2 of the bal. to be 54,780
Dividend Control Reserve 54,780 credited to
Customers Rebate
Reserve
At the disposal of the Co. 146,080
(Rs. 730400 + 36520)
766,920
1,000,000
Note 1
1/3 of Rs.146080 = Rs.48693 but it must not exceed 5% of reasonable
return i.e 5% of Rs.730400 = Rs. 36520 will be at the disposal of the
company.
21
Financial Accounting - VII Illustration 5
The following balances relate to an electricity company and pertain to its
accounts for the year ended 31.12.2023
Share Capital Depreciation Reserve

12,100,000 on fixed Assets 9,680,000
Reserve Fund (invested in Consumers' Deposits
5% Gov.Securities at par) 7,260,000 9,075,000
contingencies Reserve — Amounts contributed by
Invested in 6% State Govt. 2,420,000 consumers towards 242,000
Loans fixed assets
Intangible assets
- 605,000
Loan from State Electricity Tariff and Dividend
Board 3,630,000 Control Reserve 726,000
11% Debentures Current Assets —
968,000 Monthly Average 2,420,000
Development Reserve 0
1,210,000
Fixed Assets 0
24,200,000
The company earned a post tax profit of Rs.11 lakhs. Show how the
profits of the company will be dealt with under the provisions of the
Electricity Act, assuming that the Bank rate during the year was 8%.
Solution
Calculation of Capital Base
Particulars Rs. Rs.

Original cost of fixed assets
24,200,000
Less : Amount contributed by the customers 242,000 23,958,000
Cost of Intangible assets 605,000
Original cost of work-in-progress 0
Investment against contingencies reserve 2,420,000
Monthly average of Current Assets (assumed
not to cover book debts and amounts due to 2,420,000
suppliers)
29,403,000
Deduct
Amount written-off on account of depreciation 9,680,000
Loan from SEB 3,630,000
11% Debentures 968,000
Security deposits of Customers 9,075,000
Balance of Tariff and Dividend Control
Reserve 726,000
22
Balance of Development Reserve
Final Accounts for
1,210,000 25,289,000
Electricity Company
Total
4,114,000
Rs. Rs.
1. Reasonable Return
Yield at standard rate i.e., 3. Disposal of Surplus
8% + 2% on capital base 411,400
Profit after tax 1,100,000
Income from Reserve Fund Less : Reasonable 803,440
Returns
Investment (@ 5%) Surplus 296,560
363,000
1/2 % on Loan from SEB Excess upto 20% of 160,688
18,150 Reasonable return
(@20%)
1/2 % on Debentures Amount to be credited to -
4,840
1/2 % on Development Customers Rebate 135,872
Reserve 6,050 Reserve
803,440
2, Final Distribution of 4. Allocation of
Profit Surplus of
Refunded to customers 1/3 of the disposal of the 40,172
Company (Note 1)
(135872 + 60258) 1/2 of the bal. to Tariff 60,258
196,130 and
Dividend Control
Reserve
Transferred to Tariff and 1/2 of the bal. to be 60,258
Dividend Control Reserve 60,258 credited to
Customers Rebate
Reserve
At the disposal of the Co. 160,688
(Rs. 803440 + 40172)
843,612
1,100,000
Note 1
1/3 of Rs.160688 = Rs.53563 but it must not exceed 5% of reasonable
return i.e 5% of Rs.803440 = Rs. 40172 will be at the disposal of the
company.
1.12 REPLACEMENT ACCOUNT
In an Electricity company an asset once appeared in a Capital account

cannot be reduced even after its replacement or disposal. So, when no
extension or improvement is involved the entire replacement cost is
23
Financial Accounting - VII charged to revenue and if some extension is involved, the difference is to
be capitalised. i.e. the difference between the actual amount spent and the
amount that would have been spent had the old asset been constructed
now. For this the following calculations and journal are necessary.
1.12.1 PROCEDURES FOR THE REPLACEMENT OF AN ASSET
Three procedures for the replacement of an asset
(i) The original cost of the asset will remain intact
(ii) The estimated cost of replacement of the old asset is ascertained. At

the same time, the estimated cost is reduced by the sale proceeds of
old materials, if any, or by the value of materials re-used in the new
construction. The balance is charged to Revenue Account.
(iii) The difference between the total cost of the entire work and the
estimated replacement cost of the old asset in original manner is
charged to Capital Account, ie, capitalized.
In addition to above, the additions and improvements are capitalized.

Moreover, the auxiliary mains, subsidiary, subsidiary permanent ways,
etc, are also to be capitalized. Improvement is the excess amount spent
over the cost of replacement with asset of equal efficiency
1.12.2 ACCOUNTING TREATMENT FOR THE REPLACEMENT

OF AN ASSET
Under Single Account System, when a new asset is replaced in place of an

old one, the old asset is written-off and the new one is capitalised.
But under Double Account System, the procedure is quite different. Under
this method, there is no need to write-off loss when an asset is abandoned,
i.e., depreciation is not charged to the asset account instead, the amount is
credited to Depreciation Reserve Account.
In other words, the asset will continue in the books at its book value
(original cost). The value of the asset will increase as soon as extension or
additions to the assets are made.
JOURNAL ENTRIES:
i) For the total amount spent on new asset:
New Asssets/ Works A/c Dr.
Replacement A/c Dr. (amt. of Capital expenditure)
To Bank A/c (amt. of revenue expenditure)
(actual amount paid)
ii) For sale of old material / asset:
Bank A/c Dr. (amt. of sale of material or assets
To Replacement A/c
iii) For amt. spent on extension/ new asset
only: (actual amount)
24
New Asssets/ Works A/c Dr.
Final Accounts for
To Bank A/c
Electricity Company
iv) For the value of old materials used in new
construction:
New Asssets/ Works A/c Dr. (amount of material used)
To Replacement A/c
v) For closing Replacement A/c
Revenue A/c Dr.
To Replacement A/c
Illustration 6:
An electricity company laid down a main at a cost of Rs. 50,000. Some
years later, the company laid down an auxiliary main for 1/5th of the
length of the old main at a cost of Rs. 15,000. It also replaced the rest of
the length of the old main at a cost of Rs. 60,000. The cost of materials
and labour has gone up by 20%. Sale of old materials realised Rs. 800
only. Old materials valued at Rs 1,000 were used in renewal and those
valued at Rs. 500 were also used in the construction of the auxiliary main.
Show necessary Journal Entry
Solution:
In the Books of ………
Journal
Date Particulars LF Dr. Cr.
Mains A/cDr. 27,000
Replacement A/cDr. 48,000
To Bank A/c (15,000 + 60,000) 75,000
(BeingCash spent on the
mainsamounting to Rs. 75,000
including Rs. 45,000 for current cost
of replacement)
Mains A/cDr. 1,500

To Replacement A/c 1,500
(Being Old materials used in
auxiliary main and also
reconstruction)
Bank A/c Dr. 800

To Replacement A/c 800
(Being Sale proceeds of old
materials)
Revenue A/Dr. 45,700

(Being Net current cost of
replacement transferred i.ebal fig)
25
Working note:
Capital Charge to be calculated as under:
Extension:
Cost of auxiliary main 15,000
Add : Amt of old material used 500 15,500
Cost of replacement of old main 60,000
Add : Amt of old material used 1,000
61,000
Less: Estimated current cost of portion replaced in
original position –
Original Cost = (50000 x 4/5) = 40,000
Add : increased cost @ 20% = 8,000 48,000 13,000
28,500
Revenue Charge:
Estimated current cost of replacement (as above) 48,000
Less: Amt of material used
- In renewal 1,000
- In auxiliary line 500 1,500
46,500
Less: Sale of old materials 800
45,700
Illustration 7:
An Electric Supply Co, rebuilds its Mains at the cost of Rs. 19,90,000.
This includes value of Rs. 13,800 material old Main used for new one. The
original Mains were constructed at a cost of Rs. 9,90.000. The ratio of
material and labour there was 7: 3. The increase in material prices is 12%
and wage rates 15%. Materials worth Rs. 25,200 from old works were sold
Show journal entries under Double Account System for the above and
determine the net cost of replacement.
Solution:
In the books of …..

Journal
Replacement A/cDr. 19,76,200
To Cash/ Bank A/c 19,76,200
(Being Cash spent on purchase of new
material)
Cash/ Bank A/cDr. 25,200

(Being Cash received on sale of old machine)
Revenue A/cDr. 10,82,175

Mains/Works A/c Dr. 8,68,825
To Replacement A/c 19,51,000
(Being allocation of amount between revenue
and capital ie
19,76,200 – 25,200 = 19,51,000)
26
Final Accounts for
Working note Electricity Company
Cost of Replacement
Total Rs. Ratio Material Labour
Rs Rs.
Original Cost 9,90,000 7:3 6,93,000 2,97,000
Add: Increase in cost:

- Material @12.5% of 6,93,000 1,31,175 86,625
- Labour 15% of 2,97,000 44,550
11,21,175 7,79,625 3,41,550

Less : Sale of Material 25,200
Reuse of Material 13,800 39,000
New Cost of replacement 10,82,175
Illustration 8
Chennai Electric Company Ltd. decides to replace its old plant with a
modern one with a larger capacity. The plant was installed in 1940 at a
cost of Rs. 40 lakhs. The components of materials, labour and overhead
being in the ratio 5:3:2. It is ascertained that the costs of material and
labour have gone up by 50% and 100%, respectively. The proportion of
overheads to total costs is expected to remain the same as before.
The cost of the new plant as per improved designs Rs. 90 lakhs and in
addition materials recovered from the old plant having value of Rs.
2,00,000 was used in the construction of the new plant. The old plant was
scrapped and sold for Rs. 7,50,000.
The accounts of the company are maintained under Double Account

System
Show the entries in the books of Chennai Electric Company
Solution:
In the Books of Chennai Electric Co. Ltd. Journal

Plant A/c Dr. 22,50,000
Replacement A/c Dr. 67,50,000
To Bank A/c 90,00,000
(Cost spent on the plant including
purchase of new plant)
Plant A/c Dr. 2,00,000

(Old plant used)
Bank A/c Dr. 7,50,000

(Cash received on sale of old plant)
27
Financial Accounting - VII Revenue A/c Dr. 58,00,000
(Net current cost of replacement
transferred, i.e., balance of
Replacement A/c)
Working Note:
1. Calculation showing the elements of cost of old plant
Total cost Rs. 40,00,000
Materials = Rs. 40,00,000 × 5/10 = Rs. 20,00,000
Labour = Rs. 40,00,000 × 3/10 = Rs. 12,00,000
Overhead = Rs. 40,00,000 × 2/10 = Rs. 8,00,000
2. Calculation showing the current cost of replacement of old plant
Material = Rs. 20,00,000+ 50% of Rs. 20,00,000

= Rs. 20,00,000 + Rs. 10,00,000 = Rs. 30,00,000
Labour = Rs. 12,00,000+ 100% of Rs. 12,00,000

= Rs. 12,00,000+ Rs. 12,00,00 = Rs. 24,00,000
Overhead = 2/10th or 1/5 th of total cost or = 1/4th of Total Materials

and Labour cost, i.e..
= 1/4thx (30,00,000+ Rs. 24,00,000) Rs. 54,00,000
= Rs. 13,50,000
Total Current Cost Rs.
Material 30,00,000
Labour 24,00,000
Overhead 13,50,000
67,50,000
3. Allocation of current cost of new plant:

Rs.
Cost of new plant 90,00,000
Less: Current cost of old plant replaced 67,50,000
22,50,000
28
1.13 UNIT END QUESTION Final Accounts for
Electricity Company
OBJECTIVE QUESTION
a) Multiple Choice Question
1. Balance Sheet of Electricity Company is presented in
a) Schedule III Format b) Three parts
c) Four Parts d) Five parts
2. Fixed Assets are shown at cost in

a) Revenue A/c b) Capital A/c
c) Net Revenue A/c d) Balance Sheet
3. Premium on issue of securities is retained as

a) Reserves & Surplus b) Revenue Item
c) Net Revenue Item d) General Balance Sheet item
4. Depreciation is shown as a depreciation in

a) Reserve A/c b) Profit & Loss A/c
c) General Balance Sheet d) Capital A/c
5. Depreciation on fixed asset is credited to

a) Depreciation Fund b) Revenue A/c
c) Fixed Asset A/c d) Capital A/c
6. Operating result is shown by

a) Profit & Loss statement b) Net Revenue A/c
c)Balance Sheet d) Capital A/c
7. Preliminary Expenses are treated as

a) Reserve Expenditure b) Other Current Assets
c) Deferred Revenue A/c d) None of the above
8. Under Double A/c system old asset continues to appear at

a) Original cost b) Replacement price
c) Market price d) None
1. Book value of old asset is w/off under

a) Double Account system b) Single Account system
c) Double Entry system d) Single Entry System.
29
2. The Electricity Act 2003 has replaced

a) Indian Electricity Act 1910 b) Electricity supply Act, 1948
c) Electricity rules 1956 d) All of the above
[Ans (1-a), (2-d), (3-a), (4-b), (5-a), (6-a), (7-b), (8-a), (9-b), (10-d)]
a) State with Reasons whether the following statements are True or

False:
1. Under Double Account System P & L A/c is prepared
2. Sale of energy is credited to P & L statement.
3. Law Charges are debited to P & L statement.
4. Balance of P & L statement is carried to Balance Sheet.
5. Net Revenue A/c represents P & L Appropriation A/c
6. Preliminary Expenses on formation are treated as other current assets
7. Depreciation is shown in the P & L statement.
8. Rental of meter is shown in P & L statement.
9. Balance Sheet is presented in schedule III format.
10. Under Single Account System book value of old asset is written off.
[Ans. True: 2, 3, 4, 5, 6, 7, 8, 9, 10, False: 1]

b) Theory Questions:
1. Final A/c as per electricity rules
2. Explain Revenue A/c
3. Discuss Capital A/c
4. Contingency Reserve
5. Discuss Disposal of Surplus
6. How to calculate clear profit
7. Explain reasonable return
8. Discuss Replacement of A/c
PRACTICAL PROBLEM
1. The Oriental Gas Co. Ltd. incurred an expenditure of Rs. 23,10,000 to
rebuild a part of their works. The relevant part of the old works had
cost originally Rs. 9,00,000. The capacity of the new works is double
the capacity of the old one. A sum of Rs. 1,80,000 is realised by the
sale of old materials, and old materials of the value of Rs. 90,000 are
further used in the construction of the new works. The cost of
materials and labour has gone up by 30% and 20%, respectively, since
the old works were built. The cost constitutes 3/5th for materials and
the balance for labour.
Show journal entries to record the above transactions.
2. Wind Mill Ltd. supplying electricity maintains its accounts on double

account basis. It incurred an expenditure of Rs. 25,00,000 to renovate
its works. The relevant part of old works had cost Rs. 10,00,000. The
capacity of new works will be double the capacity of old works. A sum
30
of Rs. 5,00,000 is realised by the sale of old material. Old materials of Final Accounts for
the Value of Rs. 2.00,000 are used in the new works. Electricity Company
Cost escalation (since old works were built) is as follows:

Material 20%, Labour 25%
The cost constitutes 3/5th for materials and 2/5th labour
Show:
(a) the amount of improvement to be capitalised
(b) the amount to be written-off to revenue, and
(c) Journal Entries to second the transactions.
3. From the following balances as on 31 December, 2022. Prepare the

Revenue Account, Net Revenue Account, Capital Account and
General Balance Sheet of Raju Power and Light Co. Ltd.

Balance as on 1st
Expenses of management
January 2022 20,909
Land Cost of Distribution

261,360 8,712
Machinery Depreciation
1,045,440 34,848
Mains Sale of Current
348,480 226,512
Expenditure During the
Meter Rent
Year - 8,712
Land Interest on Debentures

8,712 17,424
Machinery Interim Dividend
8,712 34,848
Net Revenue Account as
Mains
88,862 on 1 1.2022 49,658
Share Capital — Depreciation Fund

956,578 435,600
Ordinary Shares
Debentures Sundry Debtors
348,480 -
Sundry Creditors For Energy Supplied
1,742 69,696
Others
- 871
Cost of Generation
60,984 Cash Balance 8,712
Rent, Rates and Taxes
8,712 -
31
Financial Accounting - VII 4. B Electricity Ltd. earned a profit of 26,95,000 for the year ended 31
March, 2022 after debenture interest at 14% on 5,00,000. Calculate
the reasonable return after taking into consideration the following facts
also
 Fixed Assets (Original Cost) Rs. 2,00,00,000
 Formation and Other Expenses Rs 10,00,000
 Monthly Average of Current Assets (Net)Rs 50,00,000
 Reserve Fund (represented by 8% Government Securities)Rs
20,00,000
 Contingencies Reserve InvestmentsRs 5,00,000
 Loan from Electricity BoardRs 30,00,000
 Total Depreciation on Fixed Assets, written off to dateRs 40,00,000
 Tariffs and Dividends Control ReserveRs 1,00,000
 Security Deposits received from CustomersRs 4,00,000
 Assume the bank rate to be 10%

32
2
FINAL ACCOUNTS FOR
CO-OPERATIVE SOCIETY
Unit Structure :
2.1 Introduction
2.2 Maharashtra state Co-operative society Act and Rules.
2.3 Types of Co-operative Society
2.4 Calculation of Net Profit
2.5 Appropriation of Net Profit
2.6 Explanation of various items in the final Accounts & other
related matters.
2.7 Applicability of various Taxes
2.8 Solved Problem
2.9 Exercises
2.1 INTRODUCTION
Co-operative society came into existence due to the exploitation of the
economically and socially weaker section of the society; by manufactures/
big businessmen/ whole/ Retailers.
The Co-operative movement first started in Europe; particularly
in England and Germany.
When weaker section of society are finding out difficult with less earning;
they were organised them self for mutual help. These organizations lead to
firm a Co-operative society.
In Maharashtra Co-op movements, give way to Co-op. Sugar Factories,
Left Irrigation, and Co-op Housing Society.
A Co-operating society is a voluntary organisation formed for the purpose
of promoting & protecting interest of its members. The main objective of
Co-operative society is to protecting interest of its members. it does earn
profit which may be partly distributed among its members and partly kept
as reserves.
A Co-operative society can be defined as an association of people usually
of a limited means, who have voluntarily joined the
33
Financial Accounting - VII organisation making equitable contribution to the capital required and
excepting a share and risks and benefits of the organisation. Normally a
Co-operative society is a service organizations is not interested in making
profit.
A Co-operative society is most important form of organisation in
Indian economic screen. Co-operative societies are covered by different
state Laws which differs from state to state. In Maharashtra, we have
State Co-operative Societies Act & Rule 1961.
2.2 MAHARASHTRA STATE CO-OPERATIVE

SOCIETIES ACT
The Co-operative Credit Societies Act, 1904 was first Law was comes in
forces. At present, Co-operative societies are established in numerous
economic activities such as : Banking, farming, credit, housing,
marketing, consumer co-op, etc. There has been a central legislation,
i.e. The Co-operative societies Act,
1912. However, most of states have enacted their separate Co- operative
societies Act. In state of Maharashtra have separate Act, known as The
Maharashtra Co-operative Societies Act, 1960. The Maharashtra Co-
operative societies Rules 1961 and Maharashtra Ownership Flats Act,
1963.
These Acts has define various important terms, Accounting system and
final Accounts format and so on.
2.2.1 Definitions :
Under Maharashtra Co-operative societies Act.
1) Co-operative Society : Under section 2(27) of the Act Society
means a co-operative society registered or deemed to be registered
under this Act. Co-operative society is distinct from its members.
2) Members : Member means a person joining in an
application for the registration of a Co-operative society which is
subsequently registered or a person dually admitted to a membership
of existing society and includes associate member or nominal member.
a) Associate Member means a member who holds jointly a share of
society with others. such members name appears in share
certificate subsequent to the name of member. (i.e. 2nd name)
b) Nominal member means a person admitted to membership as
such after registration in accordance with its Laws.
c) Sympathizer member means a person who sympathies with
aims and objects of the society.
34
3) Co-operative Year : The Act has Fixed 30th June, as accounting Final Accounts for
Co-Operative Society
year. However most of societies, with prior approval of Registrar of
Co-operative society follows 31st March, (i.e. financial year) as the
year ending to confirm with Income Tax Act. On March 31st.
4) Working Capital : Under section 2(31) of the Act, working
capital means funds at the disposal of society inclusive of paid-up
share capital, funds built up out of profits a money raised by
borrowing & other means.
5) Bye Law : Under Section 2(5) Bye Law means bye-law
registered under Act for the time being in force and includes registered
amendments of such bye law. The provisions of bye laws can not
be contrary to the provisions of Co-operative society Act. The bye
laws generally includes various provisions relating to internal
management & object of society.
The Bye-laws generally includes the following clauses for internal
management of Co-operative society.
a) Name and Address
b) Area of operation
c) The manner in which the funds of society raised and limits of its
funds.
d) Objects of society
e) Minimum amount of share capital held by each member.
f) Terms and Qualifications for admissible to a member.
g) Nomination to be made by existing member.
h) Right, duties and liabilities of member as well as its managing
committee members.
i) Maximum Loan admissible to a member.
j) Disposal of net profit.
k) Responsibility for maintaining and preserving the records.
Audit : As per Rule 69 of Co-operative society audit shall be conducted
by the certified auditors. The certified auditors includes the following :
a) Practing Chartered Accounts.
b) A person holding Government diploma in Co-operative dept. of
accounts & audits.
c) Retired officers of the state Government Co-operative
department of accounts & audit.
35
Financial Accounting - VII 2.2.2 Management and Administration
In any Co-operative society, it is not possible that members should look
for day to day administration like a company, management of the day to
day vests in the hands of managing committee. (sec. 73), however some
powers are vested in General Body.
 General Body : General Body of Co-operative society is Final

Authority. The following important powers are only with General
Body.
1. Amalgamation of one society with other society.
2. Amendment of bye-laws by 2/3 majority.
3. Adoption of accounts, appropriation of profits.
4. Sanction of written off the Bad debts and Loss.
 Managing Committee : Members of society elects some

members and form managing committee, to look for the whole of
the day to day management of society. For division of labour, different
sub-committees are formed such as purchase committee,
Repair & maintenance committee, Accounts committee etc. as
per need & type of the society.
The administrative functions includes following :

a) Proper custody and maintenance of records as well as
properties of society.
b) To summon all meetings, including Annual General Body and
records the proceedings.
2.2.3 Accounting System :

The Accounting System of Co-operative societies are on same time than
of any commercial system.
Rule No. 65 of Maharashtra Co-operative societies Act gives a specific list
of the following books to be maintain by society.
• Accounting Books / Records

• Cash Book
• General Ledger & Personal Ledger
• Stock Register
• Property Register.
b) Register of members. c) Minutes Books.
36
And any other register which may be require as per needs of society as Final Accounts for
well as which are specified by the Government. Co-Operative Society
2.2.4 According to Rule 61 of the Act, & Rules; the society has to
prepare, financial statements within 45 days of the close of accounting
year. It contains.
i) Receipts & disbursement A/c
ii) Profit & Loss A/c
iii) Balance Sheet
Rule 62 provides prescribed form of financial statement (in form N)
2.3 STATUTORY FORMATS OF FINAL ACCOUNTS

I) Trading A/c : There is no prescribed format for trading A/c. it should
prepared in the usual manner disclosing gross profit or gross loss as the
case may be.
FORMAT OF PROFIT AND LOSS A/C (N TYPE)
Particulars Amt Amt Particulars Amt Amt

To Gross Loss (if .-- .-- By Gross Profit (if . .
any) To Interest Paid -- -- any) --
Add : Outstanding By Interest Recd.
Less : Prepaid -- -- On --
To Bank Charges -- -- Loans/investment
To Salaries -- -- By Dividend on --
and -- -- Shares
Allowances By other Incomes -
To Contribution -- -- a) Share Transfer fee --
To Provident Fund b) Rent Received -- --
To Managing -- -- c) Discount and --
Director’s Interest
Allowance and -- -- Received --
Salaries -- -- d) Income from --
To -- -- sale of
Managing Forms --
Committee’s -- -- e) Sundry Income --
Remuneration By Net Loss --
To Rent, Rates & -- -- transferred
Taxes
To Postage
and
Telegram
37
Financial Accounting - VII To Audit Fees -- --
To Printing & -- --
Stationery -- --
To Supervision -- --
Charges
To Depreciation -- --
on
Assets -- --
To Reserve for
Doubtful -- --
Debts
To Other
Expenses & Fees, if
any
To Net Profit
transferred
Balance Sheet (N Type)
Fig. of Liabilities Amt. Fig. of Assets Amt.

Previous Previous
Year Year
-- Share capital -- -- Cash Balance --
Authorized, On hand
Issued
& paid-up by
Purchased At Bank
the
Government
Purchased by (also
Co- operative called
Societies
Purchased -- Deposits)
Investments --
by individuals
Shares in Advance Government
Securities
-- Less : Calls Shares in
in Co- operative
Arrears institutions
Add : Calls Fixed Deposits
in with
Advance
Subscription / -- Banks
Provident --
Deposits towards Fund
Shares Investment
-- Reserve Fund (including
and advances
to provident fund)
38
Final Accounts for
-- Other Funds, -- -- Loans -- Co-Operative Society
And & Advances
Reserve Fund Loans
Building Fund Cash Credits
Development Dues from
Fund the Managing
Committee
Reserve for Dues
Doubtful Debts from
Depreciation -- Employees
Sundry Debtors --
Fund
Dividend Fund For Credit Sales
Bonus For Advances
Equalisation
Fund
Other Current Assets --
Equalisation
-- Fund
Staff Tool and
Provident equipments
Fund
Debentures Closing Stock
Cash Credit Work in Progress
Overdrafts -- Fixed Assets
Loans Land and
Building
Government Plant &
Loans Machinery
Other Livestocks
Secured
-- Loans
Unsecured -- Deadstocks
Loans
From Banks Vehicles
From -- Other Expenses --
Government &
Bills Payable Losses (not
written off)
Others Preliminary
Expenses
-- Deposits Advances
Fixed Deposits Payment of Taxes
Savings Deposits Goodwill
-- Recurring Deferred
Deposits Revenue
Expenses
39
Financial Accounting - VII Other Deposits Expenses in
connection with
issue of
Debentures
-- Current -- -- Other Debtors --
Liabilities
& Provisions
Sundry Liabilities Advances paid
Outstanding Interest
Salaries etc. Accrued but not
Advances received
Other Dues
-- Unclaimed -- -- Losses
Dividend
-- Interest due -- Add : Current --
but not paid Loss
-- Other Liabilities --
-- Profit & --
Loss
Appropriation
Opening Balance
Add : Current
years profit
d) Section 66 requires the societies to maintain Reserves fund, by

transferring annually 25% of net profit.
e) Rule 52 empowers the society to create Bonus/Dividend
Equalisation fund, amount not exceeding 2% of paid up capital may be
transferred each year, however accumulated balance should not exceed
9% of paid up capital.
f) Any society should not pay dividend exceeding 15% of the capital.
However, after getting approval from registrar of co- operative
societies. Society can pay higher rate of dividend.
g) Section 69 of the Act provider that society may set aside amount
not exceeding 20% of the net profit for charitable purpose.
i) Investment of funds.
Section 70 provides that funds of co-operative society shall be invested
in a specific form only as given below.
i) Central Bank or State co-operative Bank.
ii) Trust Securities
iii) Any security issued by other societies having limited liabilities.
40
iv) Co-operative Bank Final Accounts for
v) Specified by order of the Government.
2.4 TYPES OF CO-OPERATIVE SOCIETIES :

The Maharashtra Co-operative societies Act classifies societies under
various categories as under :
2.4.1 Credit Co-operative Society :

This is oldest type of co-operative in India. It come into existence around
1904 with the passing of co-operative societies Act 1904.
The main purpose of this type of societies is to provide loans to members,
at low rate of interest.
2.4.2 Consumers co-operative society :

It is formed by consumers. The consumers co-operative society purchases
in bulk and in large quantities and sells it to members / to consumers at
reasonable prices and also good quality.
Therefore consumers co-operative society eliminate intermediaries
between buyers and sellers / manufacturers.
Categories :
Consumers co-operative society can be classified as under :
1) Primary Consumers society :

Such societies meets needs of direct customers. The controller goods
purchased from central stores to which affiliated and others in bulk
purchases in open market and sales at reasonal price to members, in some
cases to non-members also.
2) Central Whole Stores :

These type of society deal in whole-sale business, and fulfil the needs of
primary society.
3) Departmental stores :
In cities super market / Departmental stores are set up which stock are
requirement of consumers under one roof. These type of societies need
substantial amount for capital.
2.4.3 Industrial Co-operative Society :

It is organised by small producers to carry out certain production activities
e.g. sugar mills / milk / cotton cloths co- operative societies.
41
Financial Accounting - VII 2.4.4 Agricultural Marketing Society :
i) It means that a society which is marketing agricultural produce
ii) At least ¾ of its member are agriculturist.
2.4.5 Co-operative Bank :
For doing banking business as per section 5 of Bank Companies Act. / For
doing Banking business permission of R.B.I. required.
2.4.6 Co-operative Housing Societies :
These type of societies are formed for the purpose providing to its
members dwelling houses or flats acquired by its members with
common amenities and services. In Maharashtra house construction
activities are regulated by Maharashtra Ownership Flat Act, 1963.
2.4.7 Apex society
2.4.8 Central Bank
2.4.9 Farming society
2.4.10 Crop protection society
2.4.11 Federal society: It is a society which has not less than five
members are societies and has also regulated 80% of voting rights is held
by co-operative societies.
2.4.12 Lift Irrigation society.
2.5 CALCULATION OF NET PROFIT

2.5.1 Net Profit
In accordance with Rule 49 A, net profit can be arrived at, by
deductions the following expanses losses from the gross profit:
1. All interest paid + Accrued
2. All establishment & administrate expenses.
3. Depreciation
4. Provision for Taxation
5. Contribution to the education fund.
6. R.D.D.
7. Contribution to the Co-operative cadre employment fund.
8. Investment fluctuation fund.
9. Provision for capital Redemption fund.
10. Provision for retirement benefits to the employees of the society.
11. Contribution to sinking fund.
Net profit plus balance of profits brought forwards from previous
year, shall be available for appropriation.
42
2.5.2 Appropriation of profits: Final Accounts for
As per section 65(2) states that net profit may be appropriation by society,
only after its approval in General Body.
Society may appropriate its profit for transfer to Reserve fund, or any
other fund, Bonus / Dividend to its members on their shares.
According section 68, every society shall contribute annually towards the
education fund and Rule No. 53 prescribed the rate of contribution.
Class of society Rate

1 Primary Consumers society 2 ps. Per ` 100 of working
capital, maximum `1000/-
2 Urban Credit society 10% of the working capital,
subject to maximum `500/-
3 Co-operative Sugar Factory 25 ps. Per ton of sequence
crused subject to maximum
`25,000/-
4 Backword class Housing `1, per member
society class Housing `10 per member
society.
5 Urban Credit Society 1/10 % of working capital subject
to maximum of `1000
2.6 EXPLANATIONS OF VARIOUS IMPORTANT

ITEMS IN FINAL ACCOUNTS.
2.6.1 Liabilities Side :
1. Share Capital :
Contribution by government and other co-operative societies should be
shown separately.
Terms of redemption or conversion of any redeemable Preference
should be shown.
Calls received in advance should be added to share capital.
2. Reserve Fund & other Funds :

Funds Statutory Reserves funds and other funds should be shown
separately.
Bad and doubtful Debts reserve should be shown under this head, not to
deducted from sundry Debtors.
Any addition or deduction should be shown separately.
43
Financial Accounting - VII 3. Secured Loans :
Nature of security should be shown in each case.
If loan have been guaranteed by government or other Co- operative
society etc. should mentioned.
4. Contingent liabilities which have not been provided should be
shown by way of note on liability side.
5. Credit Balance in profit & Loss A/c :
Should be shown on liabilities side at last item.
2.6.2 Assets side :

Fixed Deposits and call deposits with central Bank should be shown under
heading “Investment” not as Balance with Bank.
1. Investments :
The nature of each investment and mode of valuation should be
maintained.
Investment of staff P.F. is to be shown under separate heading.
Quoted and unquoted investment should be separately.
2. Sundry Debtors :
Sundry Debtors are shown under separate head, and not under the head
current assets, it includes advances to members of other debtors.
3. Current Assets :
Current Assets includes various type of stock in trade; only.
Mode of valuation should be of each type of stock should be maintained.
4. Fixed Assets:
Fixed Assets are shown in order of permantancy.
Under each head, cost of fixed at the beginning of year, additions or sale if
any should be mentioned. Total balance in accumulated depreciation
should deduct from cost of fixed Assets.
Goodwill is not be shown as Fixed Assets. However it is to be shown
under the head miscellaneous Expenses.
5. Accumulated losses, after adjusting the reserves should be shown on
Assets side.
Current year losses should shown separately on Assets side.
44
6. Maximum cash Balance : Final Accounts for
Rule 107 C prescribed the maximum amounts of cash allowable to be kept
by different types of society. i.e. Rs. 5,000 by Sugar Factory, Rs. 300 by
housing society.
7. Payment by Cheques :
As per Rule 107 D, all payments exceeding ` 1000 shall be made by
cheques, except loan sanction to members.
8. Federation :
Housing societies have to compulsorily become member of the District
Housing Federation.
2.7 APPLICABILITY OF VARIOUS TAXES :

A Co-operative society is liable to file return of income & pay income
Tax if it has a taxable income.
 As all Co-operative societies are subject to audit, therefore the due

date for filing return of income for them is September 30th.
 Under section 194 C, while making payments to employee,

contractors etc., society should deduct Income Tax, if payments
exceeds particular amount, & pay TDS to the credit of Central
Government on or before 7th of the subsequent month.
 Some societies provides various services to members as well as

non-members. these charges are recovered from members other
persons, may be subject to service Tax. The above charges collected
by society may be chargeable to service tax under the category “Club
or Association service.”
 MVAT and Profession Tax – The definition of person under

section 2(17) of MVAT, includes society. Thus society is a
person under MVAT. If particular society is dealer a its turnover
exeeds prescribed limited under MVAT, then it may required to
register and pay tax.
 Similarly, a society charged in any profession, trade etc.,

providing services to non-members may required to obtain certificate
of enrolment and pay professional Tax.
 If society have employed persons, with monthly salaries / wages

exceeding 5,000 on more, than society is required to deduct profession
tax and pay it to Government in such case also, society has to obtain
certificate of Registration under profession Tax Act.

45
4.8 SOLVED PROBLEMS
Illustration 1 :
Actual Financial statement of Ketan Co-operative Housing Society Ltd. are given herewith, to get idea about the manner in
which the are prepare.
The Ketan Co-operative Housing Society Limited
Balance Sheet as on 31st March, 2011
Previous Liabilities Amount Rs. Amount Rs. Previous Assets Amount Rs. Amount Rs.
year & Ps. & Ps. Year & Ps. & Ps.
Cash & Bank Balances
20,00,000.00 Authorised Capital 20,00,000.00 3,67,138.77 Union Bank of India 17,076.27
2,80,500.00 Issued, Subscribed 2,80,500.00 Maharashtra State Co-
& Paid up 8,663.45 operative Bank Ltd. 8,712.45
Reserve & Other 63,929.90 Central Bank of India 45,482.90
Funds
4,26,362.00 Building Repair 4,26,362.00 0.00 Cash on Hand 0.00
Fund
4,39,732.12 71,271.62
Reserve Fund Investments (At Cost)
0.00 Opening Balance 2,53,433.38 Shares Of
2,53,433.38 Add: Trf. Fees & 10,500.00 100.00 Bombay Co-op. Housing 100.00
Admission Fees
2,53,433.38 2,63,933.38 Federation Ltd. Maharashtra
Sinking Funds 5,000.00 Co-op. 5,000.00
Housing
8,91,574.00 Opening Balance 9,93,472.00 Society Ltd.
7,436.00 Add: Additions 7,436.00 Fixed Deposit with
During The Year
94,462.00 Accrued Interest On 86,176.00 2,20,302.00 Union Bank of India 2,46,541.00
F.D.
9,93,472.00 10,87,084.00 Maharashtra State Co-op.
10,14,800.00 Bank Ltd. 11,17,200.00
60,004.00 Reserve for 60,004.00 1,56,821.00 Central Bank of India 2,13,906.00
Construction Cost
78,000.00 Premium shares 78,000.00 1,18,275.00 Accrued Interest on F.D. 1,07,564.00
Unsecured Loans 15,25,298.00 16,90,311.00
4,67,500.00 Contribution to 4,67,500.00 11,40,000.00 Bonds of Rural 11,40,000.00
Capital Cost Electrification Corp. Ltd.
Secured Loans 36,920 Accrued Interest On Bonds 37,594.00
6,27,000.00 Debentures 6,27,000.00 Loans & Advances Members
Dues
Members 8,95,068.00 (As Per Schedule) 11,27,760.00
Contribution To:
1,43,100.00 Lease Land 1,43,100.00 38,000.00 Staff Loan 31,000.00
Major Repairs 2,563.00 Advances Against Exp. 2,563.00
50,473.48 Opening Balance 1,10,559.48 10,970.00 B.e.s.t. Deposit 10,970.00
6,87,786.00 Add : Additions 1,66,000.00 Deposit With Registrar of
During The Year
7,38,259.48 2,76,559.48 1,305.00 Co-op Societies 1,305.00
6,27,700.00 Less : Trf. To 2,76,559.48 5,300.00 Water Deposit With B.M.C. 5,300.00
Income & Exp. A/c
1,10,559.48 0.00 1,050.00 Electricity Deposit 1,050.00
Tax Deducted At Source 1,443.00
Deposit cum Fixed Assets
Advances
2,345.00 Tax Deducted At 0.00 9,59,755.00 (As Per Schedule) 9,09,028.00
Source
1,29,918.00 Payable To 0.00
Contractors
2,00,905.00 Outstanding 1,45,703.00
Expenses
3,33,168.00 1,45,703.00
Suspense Account
(B-28)
4,86,912 Opening Balance 7,09,240.00
Add
2,22,328.00 Dues From Other 2,84,170.00
Member
7,09,240.00 9,93,410.00
22,600 Retention Money 0.00
35,500.00 Garbage & Debris 40,500.00
Deposit
55,000.00 Deposit for Major 90,000.00
Repairs
1,13,100.00 1,30,500.00
Income &
Expenditure A/c
7,38,398.39 As per Last Balance 4,66,186.26
sheet
18,778.75 Less : Deficit For the 1,39,677.02
Year
2,53,433.38 Transferred To 0.00
Reserve Fund
0.00 Add : Excess for the 0.00
year
4,66,186.26 3,26,509.24
50,61,615.12 50,29,595.62 50,61,615.12 50,29,595.62
As Per Our Report of Even Date Attached For The Ketan Co-operative Housing Society Ltd.
Chartered Accountants
The Ketan Co-operative Housing Society Ltd.
Income And Expenditure Account for the year ended 31st March, 2011
Previous Year Expenditure Amount Previous Year Income Amount

Rs. P. Rs. P.
TO PROPERTY EXPENSES BY CONTRIBUTION

FROM MEMBERS
89,439.00 Municipal Taxes Water 98,504.00 92,719.00 Municipal Taxes 1,01,802.00
1,68,459 Charges Electricity 2,03,579.00 7,13,116.00 Maintenance 7,25,116.00
2,00,613.00 Expenses Repairs & 2,00,233.00 2,50,396.00 Water Charges 2,10,078.00
2,56,333.00 Maintenance 1,07,159.00 BY OTHER COLLECTION
0.00 Major Repairs Expenses 3,79,778.00
21,700.00 Ground Rent 21,700.00 2,232.00 Service Charges 1,478.00
10,892.00 Pest Control Charges 17,110.00 6,151.00 Interest on Members Dues 5,370.00
TO ADMINISTRATIVE EXPENSES 48,350.00 Half Rent 72,175.00
3,78,780.00 Salary & Staff Welfare 4,31,912.00 6,500.00 Transfer fees 0.00
25,102.00 Security Charges 30,750.00 BY OTHER INCOME

INTEREST
22,336.00 Insurance Premium 29,453.00 On Saving Bank 7,442.00
22,871.00 Office Expenses 13,047.00 8,974.00 On Fixed Deposit 23,523.00
0.00 Meeting Expenses 24,576.00 27,677.25 On Bonds 84,510.00
3,251.00 Audit Fees 3,251.00 91,535.00 Miscellaneous Income 2,371.00
258.00 Education Fund 258.00 1,140.00 Sale of Scrap 0.00

24,815.00 Festival Expenses 36,431.50 26,500.00 Sundry Balances W/back 11,183.00
0.00 Printing, Stationery & Photocopy 7,604.00 0.00 BY TRF FROM MAJOR 2,76,559.48
REAIRS FUND
4,000.00 Legal & Professional Fees 2,550.00 BY EXCESS OF 1,39,677.02

EXPENDITURE OVER
INCOME
0.00 Name Plate Making Charges Postage 11,790.00
170.00 Telegram & Bank Charges 697.00 18,778.75
175.00 Administrative Expenses Depreciation 175.00
48,877.00 Sundry Balance W/off 50,727.00
16,498.00 TO EXCESS OF INCOME OVER 0.00

EXPENDITURE
0.00 0.00
12,94,069.00 16,71,284.50 12,94,069.00 16,71,284.50
As Per Our Report of Even Date Attached For The Yash Co-op. Housing Society Ltd.
Chartered Accounts
Income & Expenditure Account For The Year Ended 31/03/2011
Previous Expenditure Wing A Amount B Previous Income Wing Amount B Rs. P.

Year Rs. P. Year A
3,78,780.00 To Salary & Staff Welfare 2,63,923.00 1,67,989.00 4,31,912.00 Interest
89,439.00 Municipal Taxes 33,192.00 65,312.00 98,504.00 8,974.00 On saving Bank 1,447.00 5,995.00 7,442.00
1,68,459.00 Water Charges 64,620.00 1,38,959.00 2,03,579.00 6,151.00 On Members Dues 3,246.00 2,124.00 5,370.00
21,700.00 Ground Rent 8,170.00 13,530.00 21,700.00 27,677.25 On Fixed Deposit 9,038.00 14,485.00 23,523.00
2,56,333.00 Repairs & Maintenance 44,283.00 62,876.00 1,07,159.00 91,535.00 On Bonds 0.00 84,510.00 84,510.00
0.00 Major Repairs Expenses 22,481.00 3,57,297.00 3,79,778.00
Postage, Telegram & Bank 2,232.00 Service Charges 774.00 704.00 1,478.00
170.00 Charges 474.00 223.00 697.00 6,500.00 Transfer Fees Hall 6,500.00 3,500.00 10,000.00
24,315.00 Festival Expenses 29,391.00 7,040.00 36,431.50 48,350.00 Rent 0.00 72,175.00 72,175.00
2,00,613.00 Electricity Expenses 1,11,470.00 88,763.00 2,00,233.00 0.00 Membership Fees 200.00 300.00 500.00
25,102.00 Security Charges 0.00 30,750.00 30,750.00
10,892.00 Pest Control Charges 8,050.00 9,060.00 17,110.00 Members Contribution
22,336.00 Insurance Premium 14,726.50 14,726.50 29,453.00 92,719.00 Municipal Tax 33,186.00 68,616.00 1,01,802.00
3,251.00 Audit Fees 1,210.00 2,041.00 3,251.00 7,13,116.00 Maintenance 4,64,400.00 2,70,716.00 7,35,116.00
0.00 Meeting Expenses 0.00 24,576.00 24,576.00 2,50,396.00 Water Charges 80,880.00 1,29,198.00 2,10,078.00
48,877.00 Depreciation 20,290.00 30,436.20 50,727.00 7,436.00 Sinking Fund 3,340.00 4,096.00 7,436.00
22,871.00 Office Expenses & Conv. 4,778.00 8,269.00 13,047.00 6,93,186.00 Major Repairs 94,000.00 72,000.00 1,66,000.00
175.00 Administrative Exp. 175.00 0.00 175.00
0.00 Printing, Stationery & 2,504.00 5,100.00 7,604.00 1,140.00 Miscellaneous Income 296.00 2,075.00 2,371.00
Zerox
0.00 Name Patte Making 0.00 11,790.00 11,790.00 0.00 Sundry Balances 9,315.00 1,873.00 11,188.00
Expenses W/Back
4,000.00 Legal & Professional Fees 0.00 2,550.00 2,550.00 26,500.00 Sale of Scrap 0.00 0.00 0.00
7,436.00 Trf. To Sinking Fund 3,340.00 4,096.00 7,436.00 Net Consideration
From
258.00 Education Fund 96.00 162.00 258.00 0.00 Sale of Basement - 0.00 0.00 0.00
1483.25SFT
6,93,186.00 Trf. To Major Repairs Fund 94,000.00 72,000.00 1,66,000.00 Trf. From Major 94,000.00 1,82,559.48 2,76,559.48
Repairs Fund
16,498.00 Sundry Balances W/off 0.00 0.00 0.00
Trf. To Reserve Fund 6,700.00 3,800.00 10,500.00 Excess of
Expenditure over
Excess of Income Over 18,778.75 Income
0.00 Expenditure 66,747.20 (2,06,419.22) (1,39,672.02)
19,94,691.00 Total 8,00,622.00 9,14,926.48 17,15,548.48 19,94,691.00 Total 8,00,622.00 9,14,926.48 17,15,548.48
Rakesh Co-operative Consumer’s Society Ltd.
Liabilities Rs. Rs. Assets Rs. Rs.

I. Share Capital : I. Cash & Bank Balances :
Authorized Cash on Hand 25,000
20,000 shares of Rs. 10 each 2,00,000 Cash at Bank 1,70,000 1,95,000

Subscribed II. Investments 1,00,000
16,000 shares of Rs. 10 each III. Sundry Debtors 30,000

Fully paid up 1,60,000 Salary Advance 3,000
(-) Calls in Arrears (10,000) 1,50,000 IV. Current Assets :
II. Reserve Funds & Other Funds : Closing Stock 1,40,000
Reserve Fund : V. Fixed Assets
Opening Balance 15,000 Land 9,000
Add : Transfer 84,875 99,875 Furniture 48,000
Common Book Fund 5,000 Less : Depreciation (2,400) 45,600
Education Fund : Equipment 20,000 74,600
Opening Balance 8,000 VI. Other Items
Add : Transfer 100 8,100 Interest Accrued
III. Current Liabilities & Provisions : on Investment 2,000
Creditors 20,000
Outstanding Salaries 2,000
Outstanding Rent 1,000
Commission Payable 4,000 27,000
IV. Profit & Loss A/c
: Opening Balance -
Add : Net Profit for the year 3,39,500
Less : Transfer to Reserve Fund (84,875)
2,54,625 - -
5,44,600 5,44,600
Fixed Assets
Assets Rate W.d.v. As Additions Total Depreciation W.d.v.as
of on during on
dep. 01/04/10 the year 31/03/11
Buildings 5% 859733.00 0.00 859733.00 42987.00 816746.00
Suction 5% 45252.00 0.00 45252.00 2263.00 42989.00
Tank
Furniture 10% 3796.00 0.00 3796.00 380.00 3416.00
& Fixtures
Water 10% 6404.00 0.00 6404.00 640.00 5764.00
Pump
Intercom 10% 44570.00 0.00 44570.00 4457.00 40113.00
959755.00 0.00 959755.00 50727.00 909028.00
DUE FROM MEMBERS B WING AMOUNT
SMT. K. A. GUJAR 1099434.00
1099434.00
A
A WING
28331.00
SMT. N. M. GANDHI 28331.00
B 1127765.00
TOTAL (A +B) A WING B WING
OUTSTANDING EXPENSES
WATER CHARGES 15673.00 8160.00
ELECTRICITY 13665.00 17896.00
AUDIT FEES 1210.00 2041.00
GROUND RENT EDUCATION FUND 32680.00 54120.00

63324.00 82379.00
TOTAL (A WING + B WING) 145703.00
53
Financial Accounting - VII Illustration 2 :
Ashok Co-operative society Ltd. is loans and Rationing facilities to its
members. The trial balance of the society as on 31st March, 2011 is as
follows.
Trial Balance
Particulars Dr. Rs. Cr. Rs.
Share capital 40000

Bank Loan (Simple) 45000
Sahakari Sangh Share purchased 10000
Stationery and Printing 4000
Bank share purchased 2000
Dead Stock 6000
Interest on Members Loans 25000
Member’s Loan 100000
Member’s deposit 75000
Purchase of rationing Grains 208900
Discount 3000
Commission 10000
Stock of rationing grains 2000
Sale of rationing grains 206000
Office rent 20000
Salaries 12000
Traveling Expenses 4800
Freight 200
Coolie charges 2000
Bank Current A/c 21000
Bank Interest 46000
Reserve Funds 60000
Cash Balance 5100
454000 454000
54
Adjustments : Final Accounts for
1. Provide for audit fees due Rs. 2600
2. Provide depreciation on dead stock at 10%
3. Outstanding office salaries is Rs. 4000, rent Rs. 2000
4. Closing stock of rationing grains on 31.03.2011 was Rs. 106500
You are required to prepare trading, Profit & Loss A/c for the year ending
on 31.03.2011 and balance sheet as on that date.
Solution :
Ashok Co-operative Society Ltd.
Trading and Profit & Loss A/c for the year ended 31.03.2011
To Opening Stock 2000 By Sales of 206000

rationing grains
To Purchase of rationing grains 208900 By closing stock
To Freight 200 106500
To Coolies charges 2000
To Gross Profit 99400
312500 312500
4000 By Gross Profit 99400
To Printing & Stationery
To Rent, Rates & Taxes 20000
Add : Outstanding 2000
22000 By Interest on 25000
Members Loan
To Salaries & allowances 12000
Add : Outstanding Salary 4000
16000 By Discount 3000
To Bank Interest
46000
To Outstanding audit fees
2600
To Depreciation on dead stock
600
To other expenses & fees,
Traveling expenses
To Commission
4800
To Net Profit
21400
127400 127400
Balance Sheet as on 30.03.2011

Liabilities Rs. Assets Rs.
Share Capital Cash Balance 5100
Issued & paid up 40000 Bank Current A/c 21000
Reserve Fund & other Funds Investments
Depreciation Fund 600 Sahakari Sangh Share purchase 1000
Other 6000 Bank Share Purchased 2000
Staff Provident Fund NIL Provident Fund Investment NIL
Secured Loans NIL Loans & Advances
Unsecured Loans Member’s Loan 100000
Bank Loans 45000 Sundry Debtors NIL
55
Financial Accounting - VII Deposits Current Assets
Member’s deposit 75000 Stock 106500
Current Liabilities & Provision Fixed Assets
Outstanding rent rates 2000 Dead stock 6000
Outstanding audit fees 2600 Other Expenses & Losses
Outstanding office salaries 4000 Other Debtors NIL
Unclaimed dividend NIL Losses NIL
Internet due but not paid NIL
Other liabilities NIL
Profit & Loss Appropriation A/c 21400
250600 250600
Illustration : 3
From the following Trial Balance Damu Co-operative credit society Ltd.
as on 30th June 2011 and other international prepare profit and loss A/c
for the year ended 30th June, 2011 and Balance Sheet as on that date.
Trial Balance as on June 30th, 2011

Cash in hand 10700 Share Capital 800000
Cash with Bank 14000 Reserve Fund 20000
Fixed Deposit with M.S. Co- 155000 Member’s Deposits 2287200
operative Bank
Office furniture 17000 Dividend Equilisation Reserve 21000
Interest on Deposits 80000 Staff Provident fund 15000
Interest due on loans 8000 Profit & Loss Appropriation 61000
A/c
Salary and allowances 3000 Bal. 189000
Establishment for Executive Interest 1000
officer 15000 Sundry Income
Printing and stationery 1400 1500
Traveling and conveyance 1600 Education fund
Insurance premium 4000
Contribution to Provident Fund 12000
Loan due from members 3050000
3398700 3398700
1. Interest due to members deposits Rs. 12000/-

2. Interest accrued due but not received Rs. 8000/-
3. Addition to Furniture during the year Rs. 7000/- charge
Depreciation at 10% on closing Balances.
4. Salary due but not paid Rs. 4000/- whereas are employee is given
salary in advances on 30/06/2003 Rs. 1000/-
5. Audit fees unpaid for the year Rs. 5000/-
6. Authorized capital was Rs. 200000/- shares of Rs. 10 each.
56
7. Directors propose the following appropriations for the current Final Accounts for
year. Co-Operative Society
a) Dividend to share holders at 6%

b) Necessary amount to reserve Fund.
c) 5% of Net Profit (after contribution to Reserve Fund) to Co-
operative Development Fund.
d) Contribution to Dividend equalization Reserve Rs. 500/- e)
Transfer to Building Fund Rs. 2000/-
Damu Co-operative Credit Society Ltd.
Profit and Loss A/c for the year ended 30/06/2011
To Interest on Deposits 80000 By interest 189090
Add: Interest due
To Salary and allowance 12000 92000 Add: Interest due 8000 197000
Add: Outstanding 3000 By other income
Less: Advances 4000 By Sundry income 1000

To Printing and
stationery 34000
To Contribution to 1000 33000
provident fund 1400
To Depreciation on
Furniture 12000
To Outstanding
Audit Fees 1700
To Other expenses and
fees 5000
-Establishing for creative 15000
officer
-Traveling & 1600
Conveyance
-Insurance Premium 4000 20600
To Net Profit 32300
198000 198000
57
Financial Accounting - VII Damu Co-operative Society
Balance Sheet as on 30/06/2011
Share capital Cash Balance
Authorized Capital Cash in Hand 10700
200000 Shares of 2000000 Cast at Bank 14000
Rs. 10 each
Investments
Issued Capital F.D. with M.S. Co- operative Bank 155000
80000 Shares of 800000 Provident Fund Investment NIL
Rs. 10 each
Reserve Fund and Loans and Advances
other funds Loan due from Members 3050000
Reserve Fund 20000
Dividend 21000
Equalization Reserve Sundry Debtors NIL
Staff Provident 15000
Fund Current Assets
Co-operative
Development Fund 3000 Interest due on loans 8000
Education Fund Add : Interest due 8000 16000
Depreciation Fund 1500 Fixed Assets
Staff Provident 700
Fund NIL Office furniture 10000
Secured Loans Add : Addition 7000 17000
Unsecured Loans NIL Other Expenses & Losses
Deposits NIL Advance Salary 1000
Members Deposits Other Debtors
Current Liabilities & 2287200
Provisions Losses NIL
Outstanding Salary
Outstanding Audit 4000
Fees 5000
Unclaimed
Dividend NIL
Interest due but not
paid
Interest due on 2000
Member’s Deposits
Other Liabilities
P & L appropriation NIL
A/c Opening
Current Year 61000
32300
3263700 3263700
Memorandum Profit and Loss Appropriation Account

To Dividend 48000 By Balance b/d 61000
To Reserve Fund (25%) 8075 By Net Profit 32300
To Co-operative Development Fund 1211
To Dividend Equalization Fund 500
To Building Fund 2000
To Balance c/d 33514
93300 93300
58
Note : No appropriation out of current year’s profit can be made Final Accounts for
without the approval of the general body. Co-Operative Society
Illustration 4:
The following are the balance of Katha Co-operative
Housing Society Ltd. For the year ended on 30/06/2004.
Dr. Cr.
Purchase of Land 600000
Share Capital 75000
Construction of Building 1800000
Reserve Fund 11600
Architect Fees for Building 40000
Investment in Shares of Maharashtra Co- 8000
operative Society
Investment in shares of Mumbai Dist Co-op 7000
Bank
Audit Fees 1000
Contribution from Members for Land 640000
For Building 951000
For Road Construction 51000
For shares M Co-operative Housing 45000
For Administrative Expenses 11500
Land Revenue 400
Insurance Premium 5,000
Electric Charges 1,800
Printing & Stationery 1,200
Salaries to staff 2,400

Members personal A/c 14,000
Flat transfer premium 15,100
Dividend on shares 7,200
Interest on saving A/c 360
Furniture & Dead Stock 6,100
Electrical Motors & Pumps 7,200 4,000
Non Occupancy charges
Loans to members 6,20,000
Fixed Deposit with (Mumbai Dist. Co-op) 80,000
Saving A/c (MDCO-op) 3,100
Cash on Hand 750
Electrical Fittings 15,000
Wages of cleaning water 3,300
Income & Expenditure A/c (1.7.2011) 10,390
Loan from (M. Co-op Housing) 13,66,100
3202250 3202250
59
Financial Accounting - VII Adjustments :
1. Transfer of flat charges of 2 members during the year at Rs. 8000 per
Flat is Receivable from member.
2. Provide Depreciation at 10% Furniture, Electrical Motor Pumps.
3. Interest Rs. 6000 on fix deposit with Bank is due but not
received.
4. Bill of Rs. 500 for repairs of electrical motors is unpaid.
From the above mentioned information, you are required to prepare
income and expenditure account for the year ended 30/06/2011 and
Balance sheet as on that date.
Solution :
Katha Co-operative Housing Society Ltd.
Income and Expenditure Account for the year ended
30-06-2011
Dr. Cr.
Expenditure Rs. Income Rs.
To Audit Fees 1000 By Contribution of 11500
Members for Administration
Expenses
To Land Revenue 400 By Dividend on Shares 7200
To Insurance Premium 5000 By Interest on 360
Saving
To Electric Charges 1800 Account 4000
To Printing and Stationery 1200 By Non-occupancy Charges 6000
By Outstanding interest
on
To Salaries to Staff 2400 Fixed Deposit
To Wages for Cleaning 3300
Water-tanks
To Depreciation :
Furniture 610
Electric Motor & Pumps 720 1330
To Repairs of Electric Motor 500
To Excess of Income over 1213
Expenditure
29060 29060
60
Balance Sheet as at 30-06-2011 Final Accounts for
Share Capital Cash Balance
1500 Shares of Rs. 50 each fully Cash on hand 750
paid 75000 Saving A/c with Mumbai
Reserve Fund and Other Fund Dist. Co-op. Bank 3100
Reserve Funds 11600 Investments
Flat Transfer Premium 15100 Shares of Maharashtra Co- op. 8000
Add: Receivable for the year Housing Finance Society
8000 23100 Shares of Mumbai Dist. 7000
Co- op. Bank
Contribution of Members :
For Land 640000 Fixed Deposits with

Mumbai Dist. Co-op. Bank
For Construction of Building 951000 80000
Add : Outstanding Interest
For Road Construction 51000 6000 86000
For Shares of Maharashtra Co-op 45000 Loans and Advances

Housing Finance Society Loan to Members 620000
Secured Loans Transfer Premium 8000

Loan from Maharashtra Co- op. 1366100 Fixed Assets
Housing Finance Society
Other Liabilities Purchase of land 600000

Member’s Personal A/c 14000
Construction of building
Unpaid Expenses of Motor 500 1800000
Repairing
Profit & Loss Appropriation Add: Architect Fees 40000 1840000
Last Year’s Balance

10390 Furniture & Dead Stock
Add: Excess of Income of 6100
Current year 12130 22520
Less : Depreciation (610) 5490
Electric Motor & Pumps etc.

7200
Less Depreciation (720) 6480

Electric Fittings
15000
3199820 3199820
61
A cricket club gives you the following information :
Income and Expenditure Account for the year ended 31-12-2011
Dr. Cr.
Expenditure Rs. Income Rs.
To Remuneration to coach 18000 By Donations & 102000
Subscriptions
By Bar Room :
To Salaries and Wages 24000 Receipts 24000
To Rent 12000 Less : Expenses (20000) By
To Repairs 11000 Bank Interest
To Miscellaneous expenses 7000 By Hire – Club Hall 4000
To Honorarium of Secretary 18000 2000
To Depreciation on 5000 12000
Equipment
To Surplus 25000
120000 120000
Balance Sheet As at 31/12/2011

Rs. P. Liabilities Rs. P. Rs. P. Assets Rs. P.
2010 2011 2010 2011
48000 25000 2000
Capital Fund as on Equipment
31.12.2002
Entrance Fees 10000 6000 8000
Outstanding
Subscription
Surplus 25000 5000 Cash in hand 4000
48000 83000 2500 Cash at bank 10000
4000 3000 20000 Fixed Deposit 50000
Subscriptions in advance
Outstanding Liabilities :
1500 Miscellaneous Expenses 1000
2000 Salary & wages Honorarium 3000
3000 to secretary 2000
58500 92000 58500 92000
Prepare the Receipts and Payments Account of the Club for the year
ended 31st December, 2011.
62
Solution : Final Accounts for
Receipts & Payments Account
Of the Club for the year ending 31st December, 2011
Dr. Cr.
Receipts Rs. P. Payments Rs. P.
To Balance b/d By Remuneration to coach 18000
Cash in hand 5000 By Salaries and Wages 23000
(Note I)
By Rent 12000
Cash at bank 2500 By Repairs 11000
To Donations & Subscriptions 99000
(Note IV) By Miscellaneous expenses 7500
To Bar receipts 24000 (Note II)
By Honorarium to Secretary 19000
To Bank Interest 2000 (Note II)
By Fixed Deposit 30000
To Hire-Club hall 12000 By Bar expenses 20000
To Entrance Fees 10000 By Balance c/d
Cash in hand 4000
Cash at bank 10000
154500 154500
Working Notes : Rs.

I. Salaries and Wages :
As per income and expenditure account 24000
Add : outstanding at the beginning of the 2000
year 26000
Less : Outstanding at the end of the year (3000)
23000
W. Note II Misc. Exp. Hon to Sec. Donations &
Subscription
As per Income – Exp A/c 7000 18000 102000
Add: Op. Outstanding 1500 3000 6000
Add: Cl. Received in Advance - - 3000
8500 21000 111000

Less : Cl. Outstanding (1000) (2000) (8000)
Less : Op. Received in Advance - - (4000)
7500 19000 99000
63
The following is the receipts and payments of a Books & Periodicals
society for the year ended March 31, 2011.
Dr. Cr.
Receipts Rs. P. Payments Rs. P.
To Cash at bank 12500 By Salaries 2500
To Subscriptions 52500 By Printing and Stationery 1250
To Annual day Receipts 26800 By Annual day expenses 1500
To Mushaira receipts 22500 By Mushaira expenses 10000
To Dividend on shares 2500 By Telephone charges 2500
By Sundry expenses 2000
By Shares purchased 75000
By Postage and telegrams 2200
By Building maintenance 6340
By Cash at bank 13510
116800 116800
The following further information is furnished :

1. The value of the building owned by the society stood at Rs.
50000 as at 1st April, 2010 Depreciation at 5 percent has to be
provided.
2. there were 200 members paying subscription at the rate of Rs. 250
per annum each.
3. As on 1st April, 2010 subscription had been received in advance but

subscriptions were outstanding to the extent of Rs. 1000. As at 31st
March, 2011 subscriptions outstanding were Rs. 15000.
4. Postage stamps worth Rs. 250 were with the secretary at the
beginning of the year and the stamps at the end of the year were
of the value of Rs. 150.
5. The investment in shares at the beginning of the year was to the
extent of Rs. 5000.
6. The amount of Rs. 250 in respect of the annual day receipts was
yet to be received.
7. the rent of the theatre (amounting to Rs. 25000), where the
mushaira (poetic symposium) was held is still to be paid.
8. Hire of telephone to the extend of Rs. 300 is paid in advance.
You are required to prepare the income and expenditure account for
the year ended March 31, 2011 and the Balance Sheet.
64
Opening Balance Sheet as on 1st April, 2010
Capital Fund (balancing figure) 68750 Building 50000
Investment 5000
Subscriptions outstanding 1000
Postage stamps 250
Cash at bank 12500
68750 68750

31st March, 2011.
Dr. Cr.
To salaries 2500 By Subscriptions 50000
To Printing and stationery 1250 By Annual day receipts 26800
To Telephone 2500 charges Add : Due 250 27050
Less : paid in (300) 2200
advance
To Sundry expenses 2000
To Postage & 2200 telegrams Less : Expenses 1500 25550
Add stamps on 250 1/4/10 By Mushaira 22500
2450 receipts
Less : Stamps on 31- (150) 03-11 2300 Less : expenses (12500) 10000
To Building maintenance 6340 including outstanding
To Depreciation on building 2500 By Dividend on shares 2500
To Excess of income over 68960
expenditure
88050 88050
Note :
Subscriptions due for 200 members @ Rs. 250 = Rs. 50000

Subscriptions actually received during the year = 52500
Add: outstanding at the end of the year = 1500
54000
Less : outstanding at the beginning of the year = 1000
53000
Subscriptions due for the year (200 × 250) = 50000
Subscriptions received in advance = 3000
65
Financial Accounting - VII Balance Sheet of the Literary Society as on 31st March 2011.
Capital Fund 137710 Buildings 50000

Opening balance 68750 Less depreciation (2500) 47500
Add : excess of income Investments in 5000 shares
Over expenditure 68960 Add purchased 75000 during the 80000
Outstanding rent 2500 year
Subscriptions received in advances 3000 Postage stamps 150
(as per note) Subscriptions outstanding 1500
Annual receipts due 250
Prepaid telephone charges 300
Cash at Bank 13510
143210 143210
Illustration : 7
From the following Trial Balance of Hari Co-operative Purchases and
Sales Society Ltd. as on 31.3.2011; prepare Trading and Profit &
Loss Account for the year ended 31.3.2011 and Balance sheet as
on that date after considering the adjustments given thereafter.
Trial Balance as on 31.3.2011
Share capital - 3,36,000

Reserve Fund - 60,000
Creditors - 40,000
Profit and Loss A/c 1.4.2010 - 1,76,000
Opening Stock 3,92,000 -
Furniture and Equipment 1,24,000
Container Deposit 32,000
Salaries 3,00,000
Sundry Debtors 60,000
Commission 88,000
Rent and Taxes 60,000
Postage 8,000
Traveling and Conveyance 18,000
Printing and Stationery 14,000 2,000
Admission Fees - -
Purchase 63,40,000 -
Coolie Charges, Freight and Cartage 1,60,000 -
Investments 2,40,000 76,20,000
Sales - -
Cash in hand Bank 6,000 -
Balance 4,00,000 8,000
Development Fund -
82,42,000 82,42,000
Adjustments :
1. Closing Stock is valued at Rs. 4,40,000.
2. Outstanding Rent Rs. 4,000 and Commission Payable Rs. 20,000.
3. Rs. 8,000 Salary was paid as advance as on 31.3.2011.
4. Accrued Income on Investment Rs. 20,000.
5. Provide 10% depreciation on furniture and equipments.
66
Hari Co-operative Society Ltd. Trading A/c for the year ended
31.3.2011
Dr. Cr.
Rs. Rs.
To opening Stock 3,92,000 By Sales 76,20,000

To Purchases 63,40,000 By Closing Stock 4,40,000
To Coolie Charges, Freight 1,60,000
and Cartage
To Gross Profit transferred to
Profit and Loss A/c 11,68,000
80,60,000 80,60,000
Profit and Loss A/c for the year ended 31.3.2011

Dr. Cr.
Rs. Rs.
To Salaries 3,00,000 2,92,000 By Gross Profit 11,68,000

Less : Advance 8,000
To Traveling & Conveyance 18,000 By Accrued Income on 20,000
To Rent & Taxes 60,000 Investments
Add: Outstanding Rent 4,000 64,000
To Postage 8,000 By Admission Fees 2,000
To Printing & Stationery
To Provision for Audit Fees 600
To Depreciation on furniture and
Equipments 12,400
To Commission 88,000
Add: Outstanding 20,000 1,08,000
To Education Fund 170
To Net Profit 6,72,830
11,90,000 11,90,000
Profit & Loss Appropriation A/c [Memorandum] For the year ended
31.3.2011
Dr. Cr.
Rs. Rs.
To Reserve Fund (25% of N.P.) To 1,68,208 By Balance b/d 1,76,000

Balance Carried to By Net Profit 6,72,830
Balance Sheet 6,80,622
8,48,830 8,48,830
Note : Contribution to Education Fund is as per the rate prescribed.
67
Financial Accounting - VII Hari Co-operative Society Ltd. Balance Sheet as on 31.3.2011
I. Share Capital I. Cash & Bank Balance
Authorised … shares of Cash on Hand Cash at
Rs. ? Bank II. Investments 6,000
…. Each Investments
3,36,000 Container Deposits III.
Subscribed … shares of Sundry Debtors Salary 4,00,000
Rs. Advance
…. Each IV. Current Assets
II. Reserve Funds and
other Closing Stock
Funds : Reserve Fund: V. Fixed Assets 2,40,000
Opening Balance Add: 60,000 Furniture and Equipments 32,000
Transfer Development 1,68,208 2,28,208 1,24,000 60,000
Fund 8,000 Less : Depreciation 8,000
Current Liabilities 12,400
and VI. Other Items
Provisions
Creditors Outstanding Rent 40,000 Interest Accrued 4,40,000
Education Fund 4,000
170
Commission Payable
20,000
Audit Fees payable 1,11,600
P. & L A/c 600 64,770

Opening Balance
Add : Net profit for the 20,000
year 1,76,000
6,72,830
8,48,830
Less : Transfer to 1,68,208
Reserve fund 6,80,622
13,17,600 13,17,600
68
Illustration 8 : Final Accounts for
From the following Trial Balance of Rakesh Co-operative Consumers
Society Ltd., Pune as on 31.3.2011, prepare Trading and Profit & Loss
Account for the year ended on 31.3.2010 and Balance Sheet as on that
date after considering the adjustments given.
Trial Balance as on 31.3.2011

Share capital - 1,60,000
Calls in arrears 10,000 -
Reserve Fund - 15,000
Common Goods Fund - 5,000
Opening stock of Consumer’s Goods 1,10,000 -
Furniture 48,000 -
Education Fund - 8,000
Sundry Creditors - 20,000
Sundry Debtors 30,000 -
Commission Payable - 4,000
Salaries 71,000 -
Commission 17,400 -
Rent, Rate and Taxes 20,000 -
Postage 12,100 -
Land 9,000 -
Interest on Investment - 10,000
Equipment 20,000 -
Purchases 16,40,000 -
Investment 1,00,000 -
Sales - 20,60,500
Cash in hand 25,000 -
Cash at Bank 1,70,000 -
22,82,500 22,82,500
Adjustments :
1. Outstanding rent payable on 31.3.2011 was Rs. 1,000.
2. Charge 5% depreciation on furniture.
3. Closing Stock of consumer’s goods is valued at cost Rs.
1,40,000.
4. Interest accrued on Investment Rs. 2,000.
5. Outstanding salary on 31st March, 2011 was Rs. 2,000 & Rs.
3,000 paid in advance.
6. Authorized capital 20,000 shares of Rs. 10 each.
69
Financial Accounting - VII Solution :
Rakesh Co-operative Consumers Society Ltd.
Trading A/c for the year ended 31.3.2011
Dr. Cr.
R Rs.
To opening Stock s.
1,10,000 By Sales 20,60,500
To Purchases 16,40,000 By Closing Stock 1,40,000
To Gross Profit 4,50,500 -
transferred to Profit and
Loss A/c
22,00,500 22,00,500
Profit and Loss A/c for the year ended 31.3.2011

Dr. Cr.
Rs. Rs.
To Salaries 71,000 By Gross Profit 4,50,500
Add : Outstanding 2,000 By Interest on
investment 10,000
73,000 Add : Accrued 2,000
Less : Advance 3,000 12,000
To Rent, Rates and 20,000 70,000
Taxes
Add : Outstanding 1,000 21,000
Rent
To Education Fund 100
To Postage 12,100
To Depreciation on 2,400
Furniture
To Commission 17,400
To Net Profit 3,39,500
4,62,500 4,62,500
Profit & Loss Appropriation A/c [Memorandum] For the year ended
31.3.2011
Dr. Cr.
Rs. Rs.
To Reserve Fund 84,875 By Net Profit 3,39,500

To Balance Carried to 2,54,625
Balance Sheet
3,39,500 3,39,500
70
Illustration 9: Final Accounts for
From the following Trial Balance of Sadu Consumer’s Co- operative
Society Ltd. as on 31st March 2011 prepare the Final Accounts in the
prescribed format.
Particulars Dr. ` Cr. ` Particulars Dr. ` Cr. `
Share Capital 1,00,000 Purchases 12,05,000
Deposit from 50,000 Due from 56,000
Members Customers
Sales 14,50,000
Carriage inwards 4,000
Purchases 6,000 Sales Returns 3,000

Returns
Due to Suppliers 11,000 Rent (for 10 10,000
months)
Interest on 11,000
investment Audit Fees 2,000
Rebate 2,000 Sales Tax 3,000

Received
Staff Salary 50,000
Common Good 4,000
Fund Printing and 10,000
Stationery
Price fluctuation 3,000
Fund Investments 2,00,000
25,000
Reserve fund Cash 200 Stock in Trade 30,000
in Hand Cash at 76,200 Interest Paid 2,6000
Bank Furniture 10,000

16,62,000 16,62,000
Adjustments :
1. value of closing stock on 31st March, 2011 was ` 75000.

2. depreciation on Furniture @ 10% p.a. for full year.
3. Interest accrued on Deposits ` 5,000 and interest accrued on

investment ` 1,200.
4. salary includes advance of ` 6,000 paid against salary of April,

2011.
5. outstanding Sales Tax of ` 2,000. (Mar. 04, adapted)
71
In the Books of Sadu Consumer Co-operative Society Ltd.
Profit & Loss Account for the year ended 31-3-2011
Dr. Cr.
To opening Stock 30,000 By Sales
To Purchases 12,05,000 Less : Returns 14,50,000 14,47,000
Less : Returns 6,000 11,99,000 By Closing Stock (-3,000) 75,000
To Carriage Inwards 4,000
To Gross Profits 2,89,000
15,22,000 15,22,000
To Interest Paid 2,600 By Gross profit b/d By 2,89,000
Add : Outstanding 5,000
7,600, Interest Received By 12,200
To Salaries
44,000 Rebate Received 2,000
To Rent
12,000
To Sales Tax
5,000
To Audit Fees
2,000
To Printing and
10,000
Stationery
To Depreciation on
1,000
Furniture
To Net Profit Ltd. to B/s
2,21,600
3,03,200 3,03,200
Balance Sheet as at 31-3.2011

Liabilities ` Assets `
Share Capital Cash Balance
Authorized, issued & paid up 1,00,000 On hand 200
Reserve Fund and other Funds At Bank 76,200 76,400
Reserve Fund 25,000 Investments
Common Good Fund 4,000 Investments 2,00,000
Price Fluctuation Fund 3,000 32,000 Add : Interest 1,200 2,01,200
accrued
Staff Provident Fund NIL Provident Fund vestments NIL
Secured Loans NIL Loans & Advances NIL
Unsecured Loans NIL Sundry Debtors 56,000
Deposits Current Assets
Deposits from Members 50,000 Closing stock 75,000
Add : Interest Accrued 5,000 55,000 Fixed Assets
Current Liabilities & Provision Furniture 9,000
Suppliers 11,000 Other Expenses & Losses (not
w/o)
Rent Payable 2,000 Salary 6,000
Sales Tax Payable 2,000 15,000 Losses
Unclaimed Dividend NIL
Interest due but not paid NIL
Other liabilities NIL
Profit & Loss Appropriation
Opening Balance ?
Add : Current Year’s 2,21,600 2,21,600
Profit
4,23,600 4,23,600
72
From the following Trial Balance of M.K.J. Consumer Society as on 31st
March, 2011, prepare Final Accounts in the prescribed format.
Particulars ` Particulars `
Cash in Hand 80,500 Share Capital 5,00,000

Cash at Bank 20,500 Deposit from Members 5,00,000
Furniture 1,00,000 Sales 13,80,000
Purchase 12,15,000 Purchases Return 15,000
Debtors 58,000 Creditors 28,000
Carriage inward 7,000 Interest on investment 80,000
Sales Return 15,000 Rebate Received 3,000
Staff Salary for (11 55,000 Reserve Fund 12,000
Months)
Rent for (13 months) 13,000
Audit Fees 6,000
Printing and Stationery 8,000
Investments @ 10% p.a. 9,00,000
Stock in Trade 40,000
25,18,000 25,18,000
Adjustments :
1. Value of Closing stock as on 31st March, 2011 ` 85,000.

2. Depreciation of Furniture @ 10% p.a.
3. Interest Accrued on Deposits 56,000.
4. sales Tax 4,500 to be provided.
73
M. K. J Consumer Society Limited
Balance Sheet as on 31st March 2011

Liabilities ` ` Assets ` `
I. Share Capital I. Cash Balance

Authorized Issued and 5,00,000 On hand 80,500
Paid-up At Bank 20,500 1,01,000
II. Reserve Fund and (including Deposits)
Other Funds
II. Investments
Reserve Fund 12,000 Other / 9,00,000
III. Staff Provident Fund NIL Miscellaneous
IV. Secured Loans NIL Add : Interest 10,000 9,10,000
V. Unsecured Loans NIL accrued
VI. Deposits III. Provident Fund NIL
Deposit from 5,00,000 Investments
members IV. Loans and Advances NIL
V. Sundry Debtors
Add : Interest 56,000 5,56,000 For Credit Sales 58,000
accrued on above
VII. Current Liabilities and VI. Current Assets
Provisions
Sundry 28,000 Closing Stock 85,000
Liabilities
Outstanding Expenses VII. Fixed Assets
- Salaries 5,000
- Interest 4,500 37,500 Deadstocks 1,00,000
Less : 10,000 90,000
Depreciation
VIII. Unclaimed Dividend NIL VIII. Other Expenses and NIL
Losses (not w/o)
IX. Interest due but not paid NIL IX. Other Debtors
Advances paid 1,000
X. Other Liabilities NIL X. Losses NIL
XI. Profit and Loss

Appropriation Opening
Balance ?
Add : Current 1,39,500 1,39,500
Year’s profit
Total 12,45,000 12,45,000
74
Profit and Loss Account for the Year ending 31st March 2011 Final Accounts for
To Interest Paid 56,000 By Gross Profit b/d By 2,03,000
To Salaries and Allowances Interest Received By 80,000
Add : Outstanding 55,000 Interest Accrued By Other 10,000
To Rent, Rates and Taxes 5,000 60,000 Incomes Rebate received
To Audit Fees
To Printing and Stationery 12,000 3,000
To Depreciation on Assets 6,000
furnitures 8,000
To Other Expenses and Fees 10,000
Sales tax 4,500
To Net Profit transferred
Total
Total 1,39,500
2,96,000 2,96,000
Illustration 11 :
From the following Trial Balance of Maru Co-operative society,
for the year ended 31-12-2011 as follows :
Trial Balance
Investments in Shares 50,000 Share Capital 1,00,000
Printing and Stationery 10,000 Bank Loan @ 10% 3,50,000
Interest P.A.
Interest on Members Loan 3,50,000
Investment in Bank Shares 70,000 Members Deposits 5,00,000
Fixed Assets 50,000 Sales 13,00,000
Members Loan 8,00,000 Reserves and Other Funds 4,00,000
Purchase 11,90,000
Office Rent 1,00,000
Salaries 1,00,000
Traveling Expenses 18,000
Freight 12,000
Coolie Charges 10,000
Bank Balance 3,30,000
Bank Interest Paid 2,60,000
30,00,000 30,00,000
i. Provide Audit Fees for ` 6,000/-.

ii. Provide Depreciation on fixed Assets @ 5%.
iii. Outstanding Office Salaries ` 10,000.
iv. Closing Stock ` 3,20,000.
75
Financial Accounting - VII You are required to prepare Trading, Profit and Loss Account for the
ended 31st March, 2011 and Balance Sheet as on that date.
(Oct. 05, adapted)
Solution :
Maru Co-operative Society Limited
Balance Sheet as on 31st December 2011
Liabilities ` ` Assets ` `
I. Share Capital I. Cash Balance
Authorized Issued and At Bank (including deposits) 3,30,000
Paid-up 1,00,000 II. Investments
II. Reserve Fund and
Other Funds
Reserve Fund 4,00,000 Other 1,20,000
III. Staff Provident Fund NIL III. Provident Fund NIL
Investments
IV. Secured Loans NIL IV. Loans and Advances
V. Unsecured Loans 3,50,000 Loans 8,00,000
From Banks
VI. Deposits Other Deposits 5,00,000 V. Sundry Debtors NIL
VII. Current Liabilities and VI. Current Assets Closing
Provisions Stock 3,20,000
Outstanding Expenses VII. Fixed Assets
- Salaries 10,000 Other / Miscellaneous 47,500
- Audit Fees 6,000 16,000 VIII. Other Expenses and NIL
Losses (not w/o)
VIII. Unclaimed Dividend NIL IX. Other Debtors NIL
IX. Interest due but not paid NIL X. Losses NIL
X. Other Liabilities NIL
XI. Profit and Loss
Appropriation
Opening Balance --
Add : Current 2,51,000 2,51,500
Year’s profit
Total 16,17,500 Total 16,17,500
Trading Account for the Year ended 31st December 2011

To Purchases 11,90,000 By Sales 13,00,000

To Freight 12,000 By Closing Stock 3,20,000
To Coolie Charges 10,000
To Gross Profit c/d 4,08,000
16,20,000 16,20,000
Total Total
Profit and Loss Account for the Year ending

31st December 2011
Particulars ` ` Particulars `
To Interest Paid 2,60,000 By Gross Profit b/d 4,08,000

To Salaries and Allowances 1,00,000 By Interest Received 3,50,000
Add: Outstanding 10,000 1,10,000
To Rent, Rates and Taxes 1,00,000
To Audit Fees 6,000
To Printing and Stationery 10,000
To Depreciation on Assets 2,500
To Other expenses and Fees Travelling 18,000
To Net Profit transferred 2,51,500
Total Total
7,58,000 7,58,000
76
The Balance Sheet and Receipt and Payments Accounts of Kadia
Consumer’s Co-operative Stores Ltd. Mumbai are given below :
Kadia Consumer’s Co-operative Stores Ltd. Mumbai
Share Capital 60,000 Cash 2,500

Deposits from Members 37,500 Bank 1,000
Reserve Fund 10,000 Investment (Shares of DCCB) 8,000
Interest due 200 Government Securities 5,000
Creditors 3,000 Fixed Deposits 8,500
Sales Tax due 800 Interest due 300
Salaries Payable 500 Furniture 5,000
Dividend Payable 1,500 Debtors 38,500
Profit and Loss A/c 5,800 Stock 50,500
1,19,300 1,19,300
Receipt and Payment A/c for the year ended 31st March, 2011
Receipts ` Payments `
To Balance b/d By Share Capital 1,000
Cash 2,500 By Deposit Repaid 24,000
Bank 1,000 By Purchases 5,55,000
To Share Capital 3,000 By Sales Returns 3,500
To Deposits from member 5,000 By Carriage inward 10,000
To Sales 6,50,000 By Commission 2,500
To Purchases Returns 12,500 By Interest 2,150
To Sundry Income 2,000 By Sales Tax 5,500
To Sundry Debtors 6,30,000 By Dividend paid 3,250
To Sundry Creditors 4,70,000 By Bank charges 225
To Fixed Deposits 1,000 By Salaries 17,000
To Interest 3,000 By Contribution to PF 1,200
To Dividend 800 By Travelling Expenses 5,550
By Rent 4,800
By Allowance to MD 500
By Postage & Telephones 1,490
By Printing and Stationery 4,600
By Audit Fees 750
By Sundry Expenses 385
By Debtors 6,15,000
By Creditors 4,60,000
By Furniture 5,000
By Fixed Deposits 32,000
By Balance c/d Cash 4,400
Bank 21,000
17,80,800 17,80,800
Adjustments :
a. Authorized Capital was 25,000 shares of ` 10 each.
b. Stock on 31st March, 2008 was ` 55,000.
c. Depreciate Furniture by ` 375.
d. Provide for Doubtful Debts 300.
e. Appropriation out of Profits of the year 2010-11 were as follows :
Reserve Fund ` 2,000
Dividend ` 600
Education Fund ` 1,000
77
Financial Accounting - VII Prepare Find Accounts strictly as per Rule No. 61 of Maharashtra
Co-operative Societies Rules, 1961.
(M.Com Part-1, October 2008, adapted)

Solution :
Kadia Consumer’s Co-operative Society Ltd. Trading and Profit and
Loss A/c for the year ended
31st March 2011
Dr. Cr.
To Opening stock 50,000 By Sales 6,50,000
To Purchases 5,55,000 Less : Return 3,500 6,46,500
Less : Return 12,500 5,42,500 By closing Stock 55,000
To Carriage Inward 10,000
To Gross Profit c/d 98,500
7,01,500 7,01,500
To Interest 2,150 By Gross Profit b/d 98,500
Less : Interest due (Op.) 200 1,950 By Interest 3,000
To Sales Tax 5,500 Less: Receivable 300 2,700
(Op.)
Less : Due (Op.) 800 4,700 By sundry Income 2,000
To Salaries 17,000 By Dividend 800
Less : Due (Op.) 500 16,500
To Dividend 3,250
Less : Payment 1,500 1,750
To Depreciation on 375
Furniture
To R & D 300
To Commission 2,500
To Bank charges 225
To Postage 1,490
To Contribution to PF 225 1,200
To Travelling 1,490 5,550
Expenses
To Rent 4,800
To Allowance 500
To Printing and Stationery 4,600
To Audit Fees 750
To Sundry 385
Expenses
To Education Fund 1,000
To Net Profit c/d 55,425
1,04,000 1,04,000
78
Profit & Loss Appropriation A/c Final Accounts for
Particulars ` Particulars ` Co-Operative Society
To Reserve Fund 2,000 By Opening 5,800
To Dividend Fund 600 Add : Current Year 55,425
To P/L transferred to B/S 58,625 61,225
61,225 61,225

Share Capital Cash / Bank Balances
Authorized Capital : Cash 4,400
25,000 shares of ` 10 each 2,50,000 Bank 21,000
Issued, Subscribed & paid 62,000 Investment 52,500
up Capital
Reserves and other Funds Investment in PF
Reserve Fund 12,000 Loans and Advances
Staff Provident Fund - Sundry Debtors 23,200
Secured loans - Current Assets
Unsecured loans - Stock 55,000
Deposits 18,500 Fixed Assets
Current Liabilities Furniture 10,000
Creditors 13,000 Less : Depreciation 375
Proposed Dividend 600 9,625
Unpaid Dividend - Other Items -
Interest accrued - P & L A/c -
Other Liabilities Current losses -
Education Fund 1,000
P & L A/c 58,625
1,65,725 1,65,725
79
From the following Trial Balance of Nitin Co-operative Credit Society
Ltd. as on 30th June 2011 and other information, prepare Profit and
Loss A/c for the year ended 30th June, 2011 and Balance Sheet as on that
date.
Trial Balance
Cash in Hand 700 Share Capital 7,50,000
Cash with Banks 14,000 Reserve Fund 50,000
Fixed Deposit with M.S. Co- 1,55,000 Members Deposits 22,47,750
operative Bank
Office Furniture Unpaid Dividend 2,100
Interest on Deposits 7,000 Dividend Equalization 18,000
80,000 Reserve
Interest due on Loans Staff Provident Fund
Salary and Allowances Profit & Loss Appropriation 20,000
8,000 A/c Balance 31,000
Establishment for 30,000 Interest
Executive Officer Printing and 1,78,000
Stationery Traveling Renewal Fees
and Conveyance 5,000 Sundry Income
Insurance Premium Co-operative Development 4,000
Fund 300
Contribution to Provident 400 Education Fund 2,000
Fund 600
Loan due from Members 1,000 500
2,000
30,00,000
33,03,700 33,07,700
Adjustment :
1. Interest due to members deposits ` 5,000.
2. interest accrued due but not received ` 2,000.
3. Addition to Furniture during the year ` 1,000. Charge
depreciation at 10% on closing balance.
4. Salary due but not paid 300, whereas one employee is given salary
in advance on 30-6-2011 ` 500.
5. Audit fee unpaid for the year ` 3,000.
6. Authorised Capital was ` 1,00,000 shares of 10 each.
7. Directors propose the following appropriations for the current
year.
a) Dividend to shareholders at 5%.
b) Necessary amount to Reserve Fund.
c) 5% of Net Profit (after contribution to Reserve Fund) to Co-
operative Development Fund.
d) Contribution to Dividend Equalisation Reserve ` 2,000.
e) Transfer to Building Fund ` 10,000. (Oct.07, adapted)
80
Nitin Co-operative Credit Society Ltd. Final Accounts for
Profit & Loss Account For the year ended 30-6-2011 Co-Operative Society
Dr. Cr.
To Interest on Deposits 80,000 By interest 1,78,00
0
Add: Interest due 5,000 85,000 Add: Interest due 2,000 1,80,000
To Salary and allowance 30,000 By other income

Add: Outstanding 300 -Renewal Fees 4,000
30,000 -Sundry Income 300 4,300

Less: Advances 500 29,800
To Printing and stationery 400

To Contribution to provident fund 2,000
To Depreciation on Furniture 700
To Outstanding Audit Fees 3,000
To Other expenses and fees
-Establishing for 5,000
Executive officer
-Traveling & Conveyance 600
-Insurance Premium 1,000 6,600
To Net Profit 56,800
1,84,300
1,84,300
Balance Sheet as on 30-6-2011

Share capital Cash Balance
Authorized Capital Cash in Hand 700
1,00,000 Shares of ` 10 each 10,00,000 Cast at Bank 14,000
Issued Capital Investments

75,000 Shares of ` 10 each 7,50,000 F.D. with M.S. Co-operative Bank 1,55,000
Reserve Fund and other
funds
Reserve Fund 50,000 Provident Fund NIL
Dividend Equalisation 18,000 Investment
Reserve Loans and Advances
Staff Provident Fund 20,000 Loan due from Members 30,00,000
Co-operative 2,050
Development Fund
Education Fund 500 Sundry Debtors NIL
Current Assets
Interest due on loans 8,000
81
Depreciation Fund 700 Add : Interest due 2,000 10,000
Staff Provident Fund NIL Fixed Assets
Secured Loans NIL Office furniture 6,000
Unsecured Loans NIL Add : Addition 1,000 7,000
Deposits Other Expenses & Losses
Advance Salary 500
Members Deposits 22,47,750 Other Debtors
Current Liabilities &
Provisions Losses NIL
Outstanding Salary 300
Outstanding Audit Fees 3,000
Unclaimed Dividend NIL
Unpaid Dividend 2,100
Interest due but not paid
Interest due on 5,000
Member’s Deposits
Other Liabilities NIL
P & L appropriation A/c
Opening 31,000
Current Year 56,800 87,800
31,87,200 31,87,200
4.9 EXERCISES
Theory Questions :
1. What are the special features in case of Co-operative society in
Maharashtra?
2. Write short notes on
i. Managing Committee
ii. Bye-Law of Co-operative Society.
iii. Education Fund
iv. Consumer Co-operative society
3. What are Books of Accounts maintain by Co-operative Society.
4. How is the net profit is calculated by the Co-operative Society.
5. What are the different types of Co-operative Societies.
6. Write short notes on returns of Co-operative societies?
Particulars Questions :
1. The following particulars relate to a sports club :
82
Receipts and Payments Accounts for the year ended Final Accounts for
31st December 2010.
st 8,400 By Secretary’s salary 2,000

To Balance 1 January
2,000 By Printing & Stationery 5,200
To Admission fee 09
20,000 By Publicity 3,200
To Admission fee 10
1,200 By Fire insurance 2,400
To Subscriptions 09
30,000 By Investments purchasedBy 40,000
To Subscriptions 10
800 st
To Subscriptions 11 Balance, 31 December 15,600
6000
To Rent received
68,400 68,400
31st December, 2010

To Secretary’s salary 3,000 By Admission fee 21,000

To Printing & Stationery 4,000 By Subscriptions 31,200
To Publicity 3,200 By Rents received 8,000
To Audit Fees 1,000
To Fire insurance 2,000
To Depreciation on equipment 18,000
To Balance (Excess of income over 28,600
expenditure)
60,200 60,200
The assets on 1st January, 2010 included :

`
Advance to staff 10,000
Club Grounds and Pavilion 88,000
Sports Equipment 1,50,000
Furniture and Fixtures 28,000
Prepare the opening and closing Balance Sheets
83
Financial Accounting - VII Exercise 2
From the following Trial Balance Natu Co-operative Consumers
Society Ltd. Pune as on 31-3-2011, prepare Trading and Profit and Loss
Account for the year ended on 31-3-2011 and Balance Sheet as on that
date after considering the adjustments given.
Trial Balance
Share capital Calls in - 1,60,000

arrears Reserve Fund 10,000 -
Common Goods Fund - 15,000
Opening stock of Consumer’s Goods - 5,000
Furniture Education 1,10,000 -
Fund Sundry 48,000 -
Creditors Sundry - 8,000
Debtors Commission - 20,000
Payable Salaries 30,000 -
Commission - 4,000
Rent, Rate and Taxes 71,000 -
Postage 17,400 -
Land 20,000 -
Interest on Investment 12,100 -
Equipment 9,000 -
Purchases - 10,000
Investment 20,000 -
Sales 16,40,000 -
Cash in hand 1,00,000 -
Cash at Bank - 20,60,500
25,000 -
1,70,000 -
22,82,500 22,82,500
Adjustments :
a) Outstanding rent payable on 31-03-2011 was ` 1,000.
b) Charge 5% depreciation on furniture.
c) Closing Stock of consumers’ goods is valued at cost ` 1,40,000.
d) Interest accrued on Investment ` 2,000.
e) Investment includes ` 75,000 be investment of staff P.F.
84
Exercise 3 : Final Accounts for
Co-operative Society rendering Loans and Rationing facilities to its
members has the Trial Balance as on 31.3.2011 as follows :
Trial Balance
Member Share Capital -- 14,100

Member’s Deposit -- 30,000
Dead Stock 7,000 -
Stationery and Printing 750 -
Bank share Purchased 5,000 -
Sahakari Sangh Share Purchased 2,000 -
Bank Loan (Simple) - 31,000
Members’ Loan 83,250 -
Interest on Members Loans - 53,150
Purchase of rationing Grains 1,20,000 -
Sale of rationing grains - 1,27,500
Office rent 9,000
Salaries 10,550
Traveling Expenses 1,250 -
Freight 1,300 -
Coolie charges 900 -
Bank Current A/c 33,500 -
Bank Interest 26,250 -
Reserve and Other Funds - -
Cash Balance 100 45,100
-
3,00,850 3,00,850
Adjustments :
1. Closing Stock of Rationing Grains on 31.3.2011 was
Rs. 35,000/-.
2. Outstanding Office Rent is Rs. 1,000/-.
3. Provide for Audit Fees due Rs. 600/-.
4. Provide depreciation on Deadstock at 5%.
5. Provide Bad Debts Reserve Rs. 1,500/-.
You are required to prepare Trading, Profit & Loss Account for the year
ending on 31.3.2011 and Balance Sheet as on that date.
85
Financial Accounting - VII Trial Balance of Ramkupa Co-operative Society as on
31.3.2011
Dr. Rs. Cr. Rs.
Purchases 24,00,000 Interest 89,000

Freight Inward 1,000 Transfer Fees 200
Stock (1-4-2011) 1,20,000 Dividend 23,000
Rent 5,600 Sales 28,00,000
Postage 2,000 Commission 32,000
Bank Interest 62,000 Rent received 6,000
Subscription to Periodicals 1,000 Share Capital 6,00,000
Advertisement 7,000 Reserve Fund 1,00,000
Staff Salaries 17,000 Building Fund 79,000
Electricity Charges 1,600 Bad Debts Funds 32,000
Repairs 1,000 Share Capital
Meeting Expenses 2,000 Redemption Fund 16,000
Printing & Stationery 5,700 Depreciation Fund 5,000
Traveling Expenses 1,800 Education Fund 1,000
Cash 12,200
Bank 52,000
Shares in Co-op. societies 39,000
Fixed Deposit 2,00,000
Deposit with M.S.E.B. 500
Library 300
Building 3,91,500
Debtors 4,60,000
37,83,200 37,83,200
Adjustments :
a) Closing stock was valued at Rs. 1,50,000.
b) Depreciate Building at 5% p.a.
c) Provide for audit fees Rs. 5,000 and salary Rs. 15,000.
d) Interest due but not received Rs. 700.
e) Advance salary Rs. 1,500.
f) Transfer Rs. 2,000 to Share Capital Redemption Fund.
g) Transfer to education Fund Rs. 500.
Prepare Trading and Profit & Loss Account for the year ended
31.3.2011 and Balance sheet as on that date.
86
Exercise 5 Final Accounts for
From the following Trial Balance of Bharat Co-operative Purchase and
Sales Society Ltd. as on 31.3.2011, prepare Trading and Profit & Loss
Account for the year ended 31.3.2011 and Balance Sheet as on that
date.
Dr. Rs. Cr. Rs.
Opening Stock 1,90,000 Share Capital 2,50,000
Furniture 60,000 Reserve Fund 50,000
Deposits 20,000 Creditors 30,000
Sundry Debtors 40,000 Profits & Loss A/c (1-4-2010) 90,000
Staff Salaries 1,50,000 Profit & Loss A/c (1-47-2010) 10,000
Commission 40,000 Admission Fees 2,000
Rent 20,000 Sales 39,00,000
Postage & Telegram 5,000 Co-operative Development Fund 5,000
Conveyance 10,000
Printing & Stationary 6,000
Dividend paid 6,000
Purchases 32,00,000
Freight & Cartage 90,000
Investments 1,50,000
Cash 3,000
Bank Balance 3,47,000
43,37,000 43,37,000
Adjustments :
a) Closing stock was valued at Rs. 3,00,000. b)
b) Rent payable Rs. 3,000.
c) Commission due but not paid Rs. 15,000.
d) Salary of Rs. 500 was paid in advance.
e) Outstanding audit fees amounted to Rs. 6,000.
f) The society declared 5% dividend on its paid up capital as on
31.3.2010 for the year 2009-10. It transferred 25% of its profits for the
year ended 31.3.2010 to Reserve Fund and also transferred Rs. 5,000
to Co-operative Development Fund. These appropriations were
approved in the general meeting held on 1-09-09.
g) Interest on investment due but not received Rs. 5,000.
h) The Directors propose to recommend dividend of 10% for the
current year.
i) Depreciate furniture by 5%.
87
Financial Accounting - VII Exercise 6.
From the following Trial Balance of Manu Consumers Co- operative
Society Ltd. prepare Trading and Profit & Loss Account for the year
ended 31.3.2011 and a Balance Sheet as on that date.
Dr. Rs. Cr. Rs.
Purchases : Provisions 1,29,000 Sales : Provisions 1,35,000
Cloth 25,000 Stationary 90,000
Stationary 60,000 Sugar 1,20,000
Sugar 1,14,000 Cloth 40,000
Freight & Octroi 7,000 Miscellaneous Income 500
Salary to Employees 25,000 Dividend 200
Printing & Stationary 1,500 Discount Received 3,500
Miscellaneous Expenses 500 Interest 1,200
Telephone Charges 500 Bills Payable 16,000
Commission 100 Security Deposit from 5,000
Employees 4,00,000
Repairs 400 Share capital 12,000
Meeting Expenses and 3,000 Reserve Fund
Conveyance
Contribution to Staff 3,000 Investment
Provident Fund
Professional Tax 1,000 Fluctuation Fund 10,000
Bonus to Staff 4,000 Share Capital
Discount allowed 3,300 Redemption Fund 9,000
Interest 1,000 Depreciation Fund 6,000
Cash at Bank 90,000 Staff Provident Fund 25,000
Share of M.S.C.F. 3,500
Advances 600
Loans against Rebate on Purchases 7,000
Staff provident Fund 10,000
Opening Stock 65,000
Building 2,88,000
Furniture 20,000
Staff P.F. investment 25,000
6,80,400 6,80,400
Additional Information :
a) Closing stock was valued at Rs. 6,00,000.
b) Outstanding audit fees Rs. 2,000.
c) Depreciate Building and Furniture by 5% and 10%
respectively.
d) Interest due but not received Rs. 4,000.
e) Directors propose to recommend dividend at 5%.
88
7. Ganesh Consumer’s Co-operative Stores Ltd. Parel Final Accounts for
Balance Sheet as on 31.3.2010
Share Capital 60,000 Cash 2,500
Deposits from Members 37,500 Bank 1,000
Reserve Fund 10,000 Investment (Shares of DCCB) 8,000
Interest due 200 Government Securities 5,000
Creditors 3,000 Fixed Deposits 8,500
Sales Tax due 800 Interest due 300
Salaries Payable 500 Furniture 5,000
Dividend Payable 1,500 Debtors 38,500
Profit and Loss A/c Stock 50,500
Last Year 800
2009-10 5,000 5,800
1,19,300 1,19,300
Receipts and Payments A/c for the year ended 31.3.2011

Receipts ` Payments `
To Balance b/d By Share Capital 1,000

Cash 2,500 By Deposit Repaid 24,000
Bank 1,000 By Purchases 5,55,000
To Share Capital 3,000 By Sales Returns 3,500
To Deposits from member 5,000 By Carriage inward 10,000
To Sales 6,50,000 By Commission 2,500
To Purchases Returns 12,500 By Interest 2,150
To Sundry Income 2,700 By Education Fund 5,500
To Sundry Debtors 6,30,000 By Honorarium 3,250
To Sundry Creditors 4,70,000 By Sales Tax 5,500
To Fixed Deposits 1,000 By Dividend paid 3,250
To Interest 3,000 By Bank Charges 225
To Dividend 800 By Salaries 17,000
By Contribution to Provident 1,200
Fund
By Travelling Expenses 800
Directors
Staff 4,750
By Rent 4,800
By Allowance to MD 500
By Postage & Telephones 1,490
By Printing and Stationery 4,600
By Audit Fees 750
By Sundry Expenses 385
By Debtors 6,15,000
By Creditors 4,60,000
By Furniture 5,000
By Fixed Deposits 32,000
By Balance c/d Cash 4,400
Bank 21,000
17,80,800 17,80,800
89
Financial Accounting - VII Adjustment :
a) Authorised Capital 2,00,000 shares of Rs. 10 each.
b) Stock on 31.3.2011 Rs. 1,05,000.
c) Depreciate Furniture Rs. 500.
d) Provide for Doubtful Debts Rs. 800.
e) Outstanding on 31.3.2011.
Rs.
Salaries 1,000
Interest Receivable 150
Interest Payable 100
Sales Tax due 1,200
f) Appropriation out of profits of the year 2009-2010 were as follows :
Rs.
Reserve Fund 7,000
Dividend 3,000
Honorarium 600
Education Fund 200
Prepare final accounts strictly as per MSC Act :
90
Exercise 8 Final Accounts for
Following is the trial balance of a S.I.E.S. College Employees
Consumers Co-operative Society as on 31.3.2010. Prepare Trading
Account and Profit & Loss Account for the year ended 31.3.2011 and
Balance Sheet as on that date.
Dr. Rs. Cr. Rs.
Stock (1-4-2011) 16,000 Sales Returns 6,45,900
Purchase 6,25,000 Reserve Fund 70
Carriage 3,750 Govt. Loans 9,000
Salaries 8,000 Govt. Grants 1,200
Miscellaneous Expenses 900 Education Fund 800
Interest on Govt. Loan 150 Creditors 2,000
Legal Charges 100 Building Fund 6,000
Printing & Stationery 1,000 35,330
Cash and Bank 31,000
N.S.C. VIIth issue 500
Deposit with Govt. 200
Electricity 300
Advances 4,000
Dead Stock 500
Deposit with Consumers Federation 8,900
7,00,300 7,00,300
Adjustments :
a) Audit fees due Rs. 4,000.
b) Provide depreciation on Dead Stock at 10%.
c) Provide for Bad Debts Rs. 100.
d) Stock at the end of the year is valued at Rs. 15,000.
e) Interest Accrued on investment Rs. 2,000.
91
Financial Accounting - VII Exercise 9.
Following is the trial balance of Madadev Co-operative Credit

society Ltd. on 31.3.2010.
Prepare Final Accounts for the ended 31.3.2011 after taking into
consideration additional information.
Dr. Rs. Cr. Rs.
Loans due 3,70,000 Share Capital 1,00,000
Contribution to Provident 300 Reserve Fund 10,000
Fund
Insurance 200 Deposit from Members 2,70,000
Traveling Expenses 250 Dividend payable 300
Printing & Stationary 100 Dividend
Salaries 5,000 Equalization Fund Staff 4,000
Interest due on Bonus 1,000 Provident Fund Profit & Loss 3,000
Interest on Deposits 9,000 Appropriation A/c 4,500
Furniture 900 Interest
Fixed Deposit with 29,150 Co-operative Development 25,000
Saraswat Co-op.Bank Fund 500
Cash with Bank 2,000 Education Fund 100
Cash 200 Miscellaneous Income 700
4,18,100 4,18,100
Additional Information :
a) Interest due on members’ deposits Rs. 4,000.
b) Interest due but not received Rs. 1,000
c) Outstanding salary Rs. 2,000.
d) Unpaid audit fees Rs. 1,000.
e) Authorized capital 50,000 shares of Rs. 10 each.
f) Directors propose to recommend dividend at 5%.
Objective Question : Answer in brief :

1. Define Co-operative Society.
2. Define Co-operative year.
3. Define Bye-Laws of a Co-operative society.
4. State different type of member of a society.
5. Mention two powers of managing committee of Co-operative Society.
6. What is Education Fund.
7. State different types of consumers Co-operative society.
8. Mention two items shown under heading Current Assets.
9. Give two examples of contingent Liabilities.
92
10. Who Can became Nominal member of Co-operative Society. Final Accounts for
Multiple Choice Questions :
1. Under The Maharashtra Co-operative Act, a society must
prepare final A/c for the year ended.
a) In form VI b) in forms N
c) As per schedule VI A d) in cash Basis
2. Persons who keeps custody / maintains Accounting Records.
a) The member b) The Chairman
c) Accountant d) The managing committee
3. Day to day management of society vests in
a) General Body b) Staff
c) Audit Committee d) The managing Committee
4. Explanation of a member can be done
a) by Registrar b) by the Chairman
c) General Body d) managing committee
5. As per society Act no part of profit distributed by way of
Dividend.
a) Approval of General Body b) Board of Directors
c) Majority Member d) Non & Above
6. Receipts & payment A/c can be prepared by a Co-op. Society.
a) u/s 79 of MSCA b) Rule 61 of M.S.C.S. Rule
c) not required d) u/s 50 of Income tax Act 1961
7. Under M.S.C.S. Act, a society must prepared the following
financial statement for accounting year.
a) Profit & Loss A/c b) Receipts a payment
c) Balance sheet d) All the above.
8. Under the Maharashtra Co-operative society Act, Audit of a Co-
operative society can be conducted by
a) A chartered Accounts b) Cost Accountant
c) Employee & Co-operative d) Non of above
9. A member who holds jointly share of society, a his name
appears first in share certificate.
a) Nominal member b) Associate member
c) Sympathizes member d) Non of the above
10. Amendment of Bye-Laws of the society can be done.
a) by General body ½ members
b) by passing it in managing committee meeting.
c) by Registrar of societies
d) by General Body by ⅔ majority subject to approval from
Registrar.
93
Financial Accounting - VII 11. Every society earning income, must pay Income Tax.
a) only on its Taxable income
b) Income of societies are not taxable
c) On Gross Profit, if it is consumer Co-operative society.
d) Only if it sales goods to non-member.
12. A consumer society can sale Goods
a) To member b) non-members
c) only on cash / credit d) All the above
13. Goodwill is shown in the Balance sheet of a Co-operative
society under heading.
a) Fixed Assets b) Investment
c) Miscellaneous Expenditure d) Non-of the above.
14. Cash & Bank balance shown under hading in the Balance Sheet.
a) Current Assets b) Loans a Advance
c) Sundry Assets d) Non of the above
15. Reserve for Bad a doubtful debt is shown under heading in
Balance Sheet of Co-operative society.
a) Deducted from debtors b) Reserve & other reserve
c) Contingent liabilities d) Non-of the above.

94
3
INVESTMENT ACCOUNTING
(W.R.T ACCOUNTING STANDARD -13)
Unit structure
3.0 Objectives
3.1 Introduction
3.2 Types of Investments
3.3 Terms used in Investment Accounting
3.4 Journal Entries
3.5 Investment Account
3.6 Summary
3.7 Exercise
3.8 Objective Questions – Test your Understanding
3.0 OBJECTIVES
After studying this module, the student will be able to –
 Understand the different types of Investment
 Calculate cost of acquisition on purchase of investment and ascertain
profit/loss on sale of investment
 Understand the quotation prices – cum-interest and ex- interest price
 Prepare and maintain Investment ledger in columnar form.
This module will help learner
1) Understand the various terms used in Investment Accounting
2) Prepare working notes – calculate accrued interest and determine
profit / loss on sale
3) Pass journal entries in the books of investor
4) Post transactions in investment a/c – to be prepared in columnar
format
The student will learn and understand the meaning of the various terms
used in investment accounting – short term investment, long term
investment, cost of investment , net receipts on sale of investment, profit
or loss on sale of investment , ex- interest and cum- interest quotations ,
carrying cost of investment, weighted average method, Bonus shares and
right shares received .
95
Financial Accounting - VII Expected outcomes –
The student will remember and understand the different types of
Investments
The student will learn to apply the provisions of AS -13 in accounting for
Investments
The student will learn to analyze the impact of Investment related
transactions on the Profit and loss a/c
The student will be able to evaluate the different Investment options
relating to purchase and sale of Investments
With the above knowledge, the student should feel empowered to
suggest investment options to others and make the appropriate investment
decisions
3.1 INTRODUCTION
Investment is an asset which is made with the expectation of appreciation
and getting returns. The surplus financial resources are profitably
channelized and invested based on an individual’s risk appetite. The
factors which influence the investment decision making are-
 Liquidity
 Security
 Profitability
AS-13 defines Investments as assets held for earning income by way of
dividends, interest and rentals for capital appreciation or for other benefit
to the investor.
3.2 TYPES OF INVESTMENTS

AS-13 classifies investments as under
 Government and Trust Securities issued by Government and local

authorities
 Bonds and Debentures issued by companies
 Shares issued by Companies
 Deposits with Companies or Banks
 Immoveable property
 Others- jewellery, Insurance policies
96
On the basis of period of Holding - Long term and current investments Investment Accounting
(W.R.T Accounting
Current Investments is an investment readily realizable and intended to be Standard -13)
held for not more than one year from the date on which such investment is
made. Current investments are also known as short term investments.
Long term investments are investments other than short term investment.
On the basis of nature of Return -Variable earning securities and fixed
earning securities
Variable earning securities refer to securities on which return varies from
period to period .For example Investment in Equity shares. Dividend on
Equity shares is variable in nature.
Fixed earning securities refer to the securities on which the rate of return
is fixed and it is payable on a certain date. For example- Investment in
10% Debentures interest payable on 1st November and 1st May every
year. Investment in Bonds also fall under this category.
3.3 TERMS USED IN INVESTMENT ACCOUNTING

a)Cost of investment –
`Cost of Investment’ includes purchase price and acquisition charges
which refers to the expenses related to the purchase of Investments like
brokerage, commission, fees, stamp duty .
Cost of Investment Purchase Price xxxx
Add Brokerage xxxx
Add Fees/commission xxxx
Add Stamp duty xxxx
Total cost of Investment xxxx
Brokerage is always calculated on the quotation price whether cum-
interest or ex-interest
b) Disposal of investment- cost of investment sold

When an Investment is sold off, the profit /loss has to be computed. The
net sale proceeds are compared with the carrying amount to ascertain
profit/ loss.
Net proceeds = Gross proceeds- expenses related to sales
Net Proceeds xxx
Less carrying amount of investment sold xxx
PROFIT/LOSS
97
Financial Accounting - VII c) Carrying amount of Investment
Carrying amount means the value at which Investments are carried in the
books of accounts and shown in Final accounts. It is the book value of
Investments.
Long Term Investments should be carried in the financial statements at
cost.
Current Investments are carried in the financial statements at the lower of
cost and fair value,
d) Cum- interest and ex- interest quotations

Cum-Interest and ex- interest are quotation terms used in purchase or sale
of Investments (Debentures)
Cum- interest refers to cumulative or inclusive of interest
Ex-interest refers to exclusive or without interest.
e) Calculation of cost and accrued interest

Step 1 – Calculate the period between the date of last interest paid and the
date of purchase of securities
For example----Interest is payable on 1 April and 1 October every year .
On 1 June, 600 12% debentures of FV Rs 100 were purchased. In the
above case the last interest was paid on 1 April. Accrued interest is to be
calculated for two months ---April and May
Step 2—Calculate accrued interest using the formula-
Rate of Interest x period (months) /12 months x Face value of securities
12/100 x2/12 x (600xRs 100)=60,000x2/12x12/100=1,200
Step 3 –Calculate cost - (cum interest price x no. of securities)- accrued
interest as per step 2
f) Weighted Average cost –to ascertain profit/loss

AS-13 prescribes weighted average method. When investments are
purchased at different dates at different rates or cost and a part of
Investment is sold, weighed average method is used to calculate the cost
of such investment sold.
For Example:41,200 shares purchased at different dates at a total cost of
Rs 5,34,400 out of which 1,000 shares are sold.The cost of 1,000 shares
sold is calculated as under
1,000x5,34,400/41,200= 12,971
The cost of investment sold is compared with selling price to compute
profit/loss on sale of investment.
98
g) Rights shares Investment Accounting
(W.R.T Accounting
It is an issue of shares in which the existing shareholders have a pre- Standard -13)
emptive right to subscribe for the new shares. The existing shareholder has
a right to exercise the option to buy or sell to third parties. The rights
shares are to be recorded on the debit side of Investment a/c in the
Nominal value column and cost recorded in the capital column.
h) Sale of entitlement rights-

The shareholder may decide to sell the right shares or part of right shares.
As per AS -13, profit on sale of right entitlement is directly credited to
Profit and loss a/c
i) Bonus shares –
The issue of Bonus shares is called conversion of profit into share capital
or capitalization of profits. Bonus shares are issued to existing
shareholders free of cost. Bonus shares could be issued only as fully paid
new shares. The bonus shares issued are to be recorded on the debit side of
investment account and entered in the Nominal value column only.
For example –On 1st August 2023, one Equity share was issued as bonus
for every six shares held by the shareholders. On 1st April 2023, Mr.Rajat
had an opening balance of 50,000 shares and on 1st June2023 he purchased
10,000 additional shares.Thus he had a total of 60,000 shares
(50000+10000) and is entitled to 60000/6 =10,000 bonus shares. The
nominal value of 10,000 shares received as bonus is to be recorded in the
debit side of Investment a/c in face value or nominal value column only.
As it is free of cost, no amount will be entered in the cost column.
Explain the difference between Ex- interest and Cum- interest

transactions in Investment accounting giving suitable examples
Cum- Interest and Ex- Interest Price
Cum - interest means ‘with ‘or ‘cumulative of interest’. Ex interest means
‘without’ or ‘exclusive of interest’.
Cum interest (inclusive of interest) price covers the cost of investment and
interest accrued up to the date of purchase. When interest becomes due, it
would be the right of the buyer to claim it.
Ex interest (exclusive of interest) price covers only the cost of the
investments and the buyer is liable to pay additional amount as interest
accrued up to the date of purchase of investments. Note- In case of
Government securities and debentures, the price quoted is Ex-interest
unless otherwise specified. In case of non- government securities and
debentures, it is cum- interest unless otherwise specified.
Accounting in the books - Cum- interest purchase – Investment
account will be debited with the cost only and interest account will be
99
Financial Accounting - VII debited with accrued interest(from the date of last interest paid to the date
of purchase). Bank account will be credited with quotation price.
For ExampleOn 1st April 2023, 2000 12% Debentures of Rs 100 each
@Rs 98 cum- interest were purchased. Interest is payable half- yearly on
30 June and 31 December. Accounts are closed on 31st December.
Journal entry –
Debentures a/c Dr 190,000
Accrued interest a/c Dr 6,000
To Bank a/c 196,000
(Being debentures purchased cum- interest)
Note- Here accrued interest is calculated on 2,00,000@12% for 3 months
(April, May, June)
(200,000x12% x3/12=6,000) The cum interest price (2,000x98=1,96,000)
includes this interest amount and hence cost is 1,96,000-6,000=1,90,000
Accounting in the books – Ex- interest purchase – Investment account
is debited with quotation price (plus brokerage) .Interest account is debited
with accrued interest and the bank account is credited with quotation price
plus accrued interest.
For Example - On 31st March 2023 Rs 1,00,000 6%Government bonds
(face value Rs 100 each) were purchased at Rs 95 ex- interest. Interest is
payable on 30th June and 31st December every year.
Journal entry would be-
6% Government Bonds a/c Dr 95,000
Accrued interest a/c Dr 1,500
To Bank a/c 96,500
(Being 6% Bonds purchased at Rs 95 ex- interest)
In the above example, the interest is worked out for 3 months January,
February and March (1,00,000x6%x3/12=1,500)
This interest amount is not included in the quotation price (1000 bonds
@Rs 95 ex interest) and hence the cost is 95,000+ 1,500= 96,500
In the case of sale of investments Ex interest or cum interest

Journal entry
Ex - interest sales Cum- interest sales

Bank a/c Dr (ex-interest price + Bank a/c Dr ( cum- interest price)
interest accrued) To Investment a/c (cum interest
To Investment a/c ( ex-interest price –accrued interest)
price) To Interest a/c ( Accrued interest)
To Interest ( Accrued interest)
100
In case of Cum- interest sale or ex- interest sales, the Profit or loss on sale Investment Accounting
is calculated as net sale price less weighted average cost (W.R.T Accounting
Standard -13)
5.4 JOURNAL ENTRIES
JOURNAL ENTRIES IN THE BOOKS OF THE BUYER – purchase –
sales – cum interest – ex interest
Cum –interest purchase

Investment A/cDr. (cost)
Interest A/c Dr. (accrued interest)
To Bank A/c (cum- interest price)
For Example:On 1 April 2023, 2000 12% Debentures of Rs. 100 each
were purchased at Rs 98 cum interest. Interest is payable on 30 June and
31 Dec.
Face value of Debentures purchased – 2,000 Debenture x Rs
100=2,00,000
Cum interest price at Rs 98 = 2000 Debenture x Rs 98 = 1,96,000
Accrued interest for three months- 12/100x2,00,000x3/12 = 6,000
Cost of debentures = cum interest price-accrued interest
= 1,96,000 – 6,000 = 1,90,000
Journal Entry 12% Debentures A/c Dr. 1,90,000
Accrued interest A/c Dr. 6,000
To Bank 1,96,000
Ex interest purchase
Investment A/c Dr. (ex-interest price)
Interest A/c Dr. (accrued interest)
To Bank (ex interest price+ accrued interest)
For Example:On 31st March 2023, Rs 100,000 6% Govt bonds (face
value Rs 100 each) were purchased at Rs 95 ex interest. Interest is payable
on 30 June and 31 December every year. Pass journal entries
1000 6% Govt bonds of Rs 100 each Rs. 1,00,000 face value
Ex interest price 1000x Rs 95= Rs. 95,000
Accrued interest for three months =6/100x1,00,000x3/12= Rs. 1,500
101
Financial Accounting - VII Note always calculate interest on face value of investments
Journal entry- 6% Govt bonds A/c Dr 95,000
Accrued Interest A/c Dr 1,500
To Bank A/c 96,500
Bank A/c Dr 6,000

To interest A/c 6,000
(1,00,000 x 6/100 int amt)
Cum interest sales-

Bank A/c Dr (cum interest price)
To investment a/c (cum interest price- accrued interest)
To interest (accrued interest)
For Example:On 1st April 2017, X Ltd had Rs 1,00,000 6% Govt bonds
at Rs 94 each (face value Rs 100) Interest is payable on 31 March and 30
September. The company sold Rs 30,000 bonds at Rs 95 cum-interest on
1st June 2017
Working note: The last interest was paid in March accrued interest will be
for April, May 2 months
30000 x 6/100x2/12= 300 accrued interest
Rs 30,000 bonds were sold 300 bonds of FVRs. 100 each sold at Rs 95
cum interest on 1 June 2017
Sale cum interest 300 bonds at Rs. 95=300x95= Rs. 28,500
Less accrued interest (300),
Cost 28,200
Journal entry
Bank A/c Dr 28500
To 6% Govt bonds 28200
To accrued interest 300
Ex- interest sales –
Bank A/c Dr (ex interest price +accrued interest)
To investment (ex- interest price)
To interest (accrued interest)
102
For example :On 1st April 2018, Y Ltd had Rs 1,00,000 6% Govt bonds Investment Accounting
at Rs 94 each (face value Rs 100) Interest is payable on 31 March and 30 (W.R.T Accounting
September. The company sold Rs 30,000 bonds at Rs 95 cum-interest on Standard -13)
1st June 2018.
Ex interest price 300 bonds x 95 Rs. 28,500
Add accrued interest for 2 months Rs.300
(30000x6/100x 2/12)
Total Rs. 28,800
Bank A/c Dr 28,800
To 6% Govt bonds 28,500
To accrued interest 300
Important points to be noted-
Any brokerage on sale of investments should be deducted from sale
proceeds
As per AS-13, weighted average cost is to be used for ascertaining profit
or loss on sale of investment.
Carrying amount of investments – at cost or fair value (market value)
whichever is lower
In case investments are purchased at different dates at different costs and
some part of investment is sold, the carrying amount of investment sold
should be ascertained by using FIFO or weighted average method. AS- 13
prescribes weighted average method
5.5 INVESTMENT ACCOUNT

The Investment ledger shows the details of investment. Investment
Account is prepared in columnar form showing details of face value or
nominal value of investment, the income (interest/ dividend) and the last
column showing the capital/cost column on both the debit side and credit
side of the account.
Proforma of Investment account -10% Debentures
Date Part NV Income Cost Date Part NV Income Cost
1 /4/20 To xxx xxx xxx By xxx xxx xxx
Bal Bank
To xxx xxx xxx By ---- ----- xxx
Bank P&L
To ------- ------- xxx By ---- xxx ---
P&L Bank
31/3/21 To ------- xxx ---- 31/3/21 By ---- xxx ---
P&L Bal
103
31/3/21 By ---- ---- xxx
Bal
31/3/21 By ---- ----- xx
P&L
xxx xxx xxx xxx xxx xxx
NV- Nominal value or face value of Investments

Income – Incase investments are in bonds/ debentures it is interest, in case
of investment in shares it refers to dividend
The following transactions are recorded on the debit side of Investment
Account
 Opening balance of Investments

 Purchase of Investments
 Bonus shares and rights shares issued (in case of Investment in shares )
 Profit on sale of Investment
 Transfer of Interest/ dividend to Profit and loss a/c at the end of the
year.
The following transactions are recorded on the credit side of Investment
a/c
 Sale of Investments
 Loss on sale-interest received
 Accrued interest at the end of the year
 closing balance of investments at the end of the year.
 Loss on valuation transferred to P&L a/c –
SOLVED PROBLEMS -
Illustration 1.On 1st January 2013, 1,000 -12 percent Debentures of Rs
100 each of Shiva Ltd. were held as investment by Mr Dharmesh at a cost
of Rs 91,000. Interest is payable on 31st December.
On 1st April 2013, Rs 20,000 of such debentures were purchased by
Dharmesh at Rs 98 cum-Interest.
On 1st September 2013, Rs 30,000 of such debentures were sold at Rs 96
ex-Interest.
On 1st December 2013, Rs 50,000 of such debentures were sold at Rs 99
cum-interest.
Interest is received on due date.
Prepare investment account for 12 percent debentures of Shiva Ltd. in the
books of Mr Dharmesh valuing closing stock as on 31st December 2013
applying AS-13. The debentures were quoted at Rs 93 on 31st December
2013
104
In the books Mr Dharmesh Investment Accounting
(W.R.T Accounting
Investment in 12 percent Debentures of Shiva Ltd a/c Standard -13)
Date Particulars W/ NV Int Cost Date Particulars WN NV Int Cost

N no
no
2013 2013
Jan To 100,000 - 91,000 Sep By Bank 3 30,000 2,400 28,800
1 Balance 1 A/C
B/D Dec By Bank 5 50,000 5,500 44,000
To Bank 2 20,000 600 19,000 1 A/C
Apr1 A/C By P &L 6 - - 1,833
To P &L 4 - - 1,300 Dec A/C
Sept A/C 1 [Loss]
1 [Profit] Dec By Bank 7 - 4,800 -
To P &L 31 A/C
- 12,100 -
A/C [Interest]
Dec
31 [Bal.Fig]
Dec By Bal
40,000 - 36,667
31 C/D
120,000 12700 111,300 120,000 12,700 111,300
W/N: 1 : Cost structure

Particulars Units Nominal Cost
value
Opening balance 1000 100,000 91,000
Add: Purchase 200 20000 19,000
1200 120000 110,000
Less: Sale [300] [30000] [27500]
900 90,000 82,500
Less: Sale 500 [50000] [45,833]
400 40,000 36,667
2] Cum Interest purchase price [200 X 98] 19600

Less: Interest [20000 X 12/100 X 3/12] [600]
Cost
19,000
3] Interest on ex-interest sales price
30,000 X 12/100 X 8/12 2400
4] Profit/Loss on ex-interest sale

Sale price 28800
Less: Weighted average cost [27500]
Profit 1300
5] Sale price [cum- interest] [500 X 99] 49500

Less: Interest [50000 X 12/100 X 11/12] [5500]
Proceeds [cost] 44000
6] Profit/Loss on sale
Sales price 44000
Less: weighted average cost [45833]
Loss 1833
105
Financial Accounting - VII 7] Interest on due date
40,000 X 12/100 X 12/12 4800
8] Valuation of stock
Cost price [closing balance] 36,667
Market price [400 X 93] 37,200
Therefore, valuation at cost as per AS 13; cost or market price whichever

is less.
Illustration 2. Mr. Ram Nene held on 1-1-2013 Rs 60,000 of 12
percent
Government securities [Tax Free] of Rs 100 each of Rs 56,500.
On 1-6-2013, he purchased a further of Rs 40,000 of the security at Rs 97
cum-interest.
On 31-7-2013 Rs 50,000 of the security was sold at Rs 94 ex-interest.
On 1-12-2013 Rs 20,000 of the security was again sold at Rs 96 cum-
interest.
Interest on the security was paid each year on 31st March and 30th
September and was credited by the bank on 3rd April and 4th October
respectively. The price of the security on 31/12/2013 was Rs 96.
Mr Nene closes his books on 31st December each year.
Draw investment account in the books of Mr. Nene.
In the books of Mr Ram Nene
Investment a/c in 12 % Government Securities a/c
[Due Date: 31st March and 30th September]
Date Particulars NV Int Cost Date Particulars WN NV Int Cost
WN
1-1- To 2 60,000 1800 56,500 3-4-13 By Bank 3 - 3600 -
13 Balance [Int On
B/D Due Date]
31-7-13 By Bank 5 50000 2000 47000
1-6- To Bank 4 40,000 800 38,000 [500 X
13 A/C 31-7-13 94] 6 - - 250
By P &L
A/C
31- To P &L 7300 4/10/13 [Loss] 7 - 3000 -
12- A/C By Bank
13 [Bal.Fig] [Int On
1/12/13 DueDate 8 20000 400 18800
1/12/13 By Bank 9 - - 100
By P &L
A/C
31/12/13 [Loss] 30,000 900 28350
By Bal
C/D
100000 9900 94500 100000 9900 94500
106
Working notes 1] Cost Structure Investment Accounting
(W.R.T Accounting
Particulars Units Nominal value Cost Standard -13)
Add: Purchase 400 40,000 38,000
1000 100,000 94,500
Less: Sales [500] [50000] 47,250
500 50000 47,250
Less: Sales 200 [20000] [18900]
300 30000 28,350
2] Outstanding Interest on Opening Balance [Oct/Nov/Dec]

60,000 X 12/100 X 3/12 1800
st
3] Interest on due-date [31 March] : 60,000 X 12% X 6/12= 3600
4] Cum Interest purchase price [400 X 97] 38,800
Less: Interest [40000 X 12/100 X 2/12] [April/May] [800]
Cost (38800-800) 38,000
5] Interest on ex-interest sale [50000 X 12/100 X 4/12] 2000
6] Profit/Loss on ex-interest sale
Sales price [500 X 94] 47,000
Less: Weighted average cost [47,250]
[50000 X 94500/100,000]
Loss 250
th
7] Interest on due date [30 Sept] 50,000 X 12/100 X 6/12= 3,000
8] Cum Interest sales price [200 X 96] 19,200
Less: Interest [20000 X 12/100 X 2/12] [Oct/Nov] [400]
Sales price (19200-400)
18,800
9] Profit/Loss on Cum Interest sales
Sales price 18800
Less: Weighted average cost [18900]
[47250 X 20000/50000]
Loss 100
10] Accrued Interest on closing balance
30000 X 12% X 3/12 [Oct/Nov/Dec] 900
11] Valuation of closing balance
Cost value [as per closing balance] 28350
Market value [300 X 96] 28,800
Valuation of securities is cost value or market value, whichever is less as
per AS-13
Therefore, valuation of securities is as per cost value Rs 28350
107
Financial Accounting - VII Illustration 3.
Miss Bhagawati entered into the following transactions of purchase and
sales of 12 percent Debentures of Rs 100 each of Mansi Ltd. Interest is
payable on 30th June and 31st December every year. Transactions are as
under:
Date No of Terms
Debentures
1-04-2012 800 Opening balance at the cost of Rs 76,000
1-06-2012 300 Sold at Rs 105 each cum-interest
1-09-2012 700 Purchased at Rs 98 each Ex-Interest
1-12-2012 400 Purchased at Rs 108 each Cum-Interest
1-02-2013 900 Sold at Rs 97 each Ex-Interest
Prepare Investment Account of 12 percent debentures in the books of

Bhagawati for the year ended 31st March, 2013. The market value on 31st
March, 2013 was Rs 67,500 of the said investment. Apply As-13.
Solution:
In the books of Miss Bhagawati
Investment on 12 % Debentures in Mansi Ltd account
[Due date: 30th June and 31st December]
Date Particulars W/ NV Int Cost Date Particulars W/ NV Int Cost
n n
1-4-12 To Balance B/D 2 80000 2400 76000 1-6- By Bank 3 30000 1500 30,000
12 A/C
1-6-12 To P &L A/C 4 - - 1500 30-6- By Bank 5 - 3000 -
[Profit] 12 A/C [Int On
1-9-12 To Bank A/C 6 70000 1400 68600 Due Date]
[700 X 98] 31- By Bank 8 9600
1-12- To Bank A/C 7 40000 2000 41200 12-12 A/C [Int On
12 Due Date]
1-2- By Bank 9 90000 900 87300
31-3- To P &L A/C 11300 13 A/C [900 X
13 [Bal.Fig] 97]
1-2- By P &L A/C 10 - - 1181
13 [Loss]
31-3- By P &L A/C 11 1319

13 [Loss On
Valuation]
By Balance
31-3- C/D 12 70000 2100 67500
13
190000 17100 187300 190000 17100 187300
108
Working Notes: Investment Accounting
1] Cost Structure: (W.R.T Accounting
Standard -13)
Particulars Units Nominal value Cost
Less: Sales [300] [30,000] [28500]
500 50000 47,500
Add: Purchase 700 70000 68600
1200 120000 116,100
Add: Purchase 400 40000 41200
1600 160000 157300
Less: Sale [900] [90000] [88481]
700 70000 68819
2] Outstanding Interest on Opening balance [Jan/Feb/Mar]

80,000 X 12% X 3/12 2400
3] Cum Interest Sales price [300 X 105] 31500
Less: Interest [30000 X 12% X 5/12] [Jan- May] [1500]
Sales price 30,000
4] Profit/Loss on sales
Sales price 30,000
Less: Weighted Average cost [30000 X76000/80000] [28500]
Profit 1500
5] Interest on Due date [30th June]
50,000 X 12% X 6/12 3000
6] Interest on ex-interest purchase [July/Aug]
70000 X 12% X 2/12 1400
7] Cum Interest purchase price [400 X 108] 43,200
Less: Interest [40000 X 12% X 5/12] [Jul- Nov] [2000]
Cost 41200
8] Interest on due date [31st Dec]
160000 X 12% X 6/12 9600
9] Interest on ex- interest sales [90000 X 12% X 1/12] [Jan] 900
10] Profit/Loss on sales
Sales price 87300
Less: Weighted average cost [157300 X 90000/160000] 88481
Loss 1181
11] Valuation of securities
Cost value [From the cost structure] 68,819
Market value [given] 67,500
Loss on valuation [68819 – 67500] Rs 1319
12] Accrued Interest on closing balance [Jan/Feb/Mar]
70000 X 12% X 3/12 2100
109
Financial Accounting - VII Illustration 4.
On 1st April, 2012, 200; 6 percent Debentures of Rs 100 each of Excellent
Ltd. were held as investment by Mr. Tushar at a cost of Rs 18,200.
Excellent Ltd. pays interest on 1st May and 1st November every year.
The following other transactions were entered by him during the year
ended 31st March, 2013 in regard to these Debentures.
Date No Of Transaction Rate

Debentures
1st April, 2012 100 Sale Rs 98 cum interest

1st Oct, 2012 100 Purchase Rs 104 ex-Interest
1st Dec, 2012 200 Purchase Rs 97 cum-Interest
1st Feb, 2013 100 Sale Rs 97 ex-interest
You are required to prepare investment in 6 percent Debentures in

Excellent Ltd. account for the year ended 31st March, 2013 as it would
appear in the books of Mr Tushar (Apply AS 13)
In the books of Mr Tushar
Investment in 6 percent Debentures in Excellent Ltd. a/c

[Due date: 1st May and 1st Nov]
Date Particulars W/n NV Int Cost Date Particulars W/n NV Int Cost
2012 To balance 2 20000 500 18200 2012 By bank 3 10000 250 9550
1st Apr b/d 1Apr
1st By bank 5 - 300 -

1st Oct To P & L 4 450 May [Int on due
a/c date]
1st Dec To bank 6 10000 250 10400 1st By bank 7 - 600 -
[100 X Nov [Int on due
2013 104] date]
31st 8 20000 100 19300 2013
Mar To bank 1st By bank 10000 150 9700
Feb [100 X 97]
To P & L 31st By balance 9 30000 750 29100
a/c [bal.fig] 1200 Mar c/d
50000 2050 48350 50000 2050 48350
Working Notes:
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
110
1] Cost Structure: Investment Accounting
(W.R.T Accounting
Particulars Units Nominal value Cost Standard -13)
Opening 200 20000 18200
Balance [100] [10000] [9100]
Less: Sales
100 10000 9100
Add: Purchase 100 10000 10400
200 20000 19,500
Add: Purchase 200 20000 19,300
400 40000 38,800
Less: sale [100] [10000] [9700]
300 30000 29,100
2] Outstanding Interest on Opening balance [Nov- Mar]

20,000 X 6% X 5/12
500
3] Cum Interest sales price [98 X 100] 9800
Less: Interest [10000 X 6% X 5/12] [250]
Cost 9550
4] Calculation of Profit/Loss on cum Interest sales
Sales price 9550
Less: Weighted average cost [10,000 X 18200/20000] [9100]
Profit 450
5] Interest on Due date [1st May]
10,000 X 6% X 6/12 300
6] Interest on ex – Interest purchase

10,000 X 6% X 5/12 250
7] Interest on due date [1st Nov]
20,000 X 6% X 6/12 600
8] Cum Interest Purchase price [200 X 97] 19400
Less: Interest [20000 X 6% X 1/12] [Nov] [100]
Cost 19300
9] Interest on ex Interest sale
10000 X 6% X 3/12 [Nov- Jan] 150
10] Calculation of profit/Loss
Sales price 9700
Less: Weighted average cost [10000 X 38800/40000] [9700]
Profit/Loss Nil
11] Calculation of Accrued Interest on closing balance
30,000 X 6% X 5/12 750
Illustration 5.
The following transactions of Miss Naina took place during the year ended
31-3-2014
111
Financial Accounting - VII Date Transactions
12-4-2013 Purchased 1,00,000 Equity Shares of Rs 10 each in

“ABC” Ltd for Rs 50,00,000
15-5-2013 ABC Ltd made a bonus issue of 3 equity shares for every
2 shares held
30-6-2013 Naina sold 1,25,000 Bonus shares for Rs 20 each
Prepare Equity Shares in ABC Ltd account in the books of Miss Naina for
the year ended 31-3-2015.
Solution:
In the books of Miss Naina
Investment a/c in Equity shares of ABC Ltd
Date Particulars w/n N.V Cost Date Particulars w/n N.V Cost
12- To bank 1000,000 5000,000 30- By bank 1250,000 2500,000
4-13 a/c 6-13 a/c
15- To Bonus 2 1500,000 - 31- By 1250,000 2500,000
5-13 shares 3-14 balance
c/d
2500,000 5000,000 2500,000 5000,000
Working note:
1] Cost structure
Purchases 100,000 10,00,000 50,00,000
Add: Bonus 150,000 15,00,000 Nil
shares
250,000 2500,000 50,00,000
Less: sales [125,000] [1250,000] [2500,000]
125,000 1250,000 2500,000
2] Calculation of Bonus shares

3 Bonus shares : 2 equity shares held
? : 100,000
[100,000 X 3/2] 150,000 Bonus shares of Rs 10 each= Rs 1500,000
3] Calculation of Profit/Loss on sale
Sales price 2500,000
Less: Weighted average cost 2500,000
[1250,000 X 5000,000/2500,000]
Profit/Loss NIL
112
Illustration 6. Investment Accounting
(W.R.T Accounting
Universal Plastics Traders acquired 5,000 shares of Maruti Ltd. at Rs Standard -13)
80.40 each on 15th July, 2012. On 1st December, 2012 Maruti Ltd. issued
Right Shares in the ratio of 2:5 at Rs 98 per share. Universal Plastics
Traders exercised their option for 50 percent of Right shares and applied
for the same. On 20th March, 2013 Universal Plastics Traders sold 1600
shares of Maruti Ltd at Rs 99.50 per share.
Calculate Profit/Loss on sale of shares on 20th March 2013.
In the books of Universal Traders
Investment in Equity shares of Maruti Ltd.
Date Particulars W/N Cost Date Particulars W/N Cost
2012 2013 By bank a/c 159,200
15th To bank a/c 4,02,000 20th
Jul Mar
1st To bank a/c 98,000
Dec
2013 To P & L a/c 25,867 31st By balance 3,66,667
20th [Profit] Mar c/d
Mar
5,25,867 5,25,867
Working note:
1] Cost structure
Particulars Units Cost

Purchase 5,000 4,02,000
Add: Right shares 1,000 98,000
6,000 5,00,000
Less: sales [1600] [133,333]
4,400 366,667
2] Right shares
Ratio given:
5 equity shares held : 2 right shares
5000 : ? [5000 X 2/5] 2000 right shares
[2000 X 50% = 1000 right shares at Rs 98 each = Rs 98,000]
3] Calculation of Profit/Loss on sale of 1600 equity shares

Sales price [1600 X 99.50] 159,200
Less: Weighted Average cost [1600 X 500,000/6,000] [133,333]
Profit 25,867
113
Financial Accounting - VII Illustration 7
On 1/4/2010 Aditya had 50,000 equity shares in T Ltd. The face value of
the shares were Rs 10 each but their book value was Rs 24 per share.
On 2-6-2010, Aditya purchased 10,000 equity shares in T Ltd at a
premium of Rs 6 per share.
On 1-7-2010, the directors of T Ltd. issued bonus shares at the rate of one
share for every three shares held.
On 1-1-2011, Aditya purchased 5000 right shares in T ltd of Rs 10 each at
Rs 15 per share.
On 31-1-2011, he sold 20,000 equity shares in T Ltd of Rs 10 each at Rs
30 per share. Show investment account as it would appear in the books of
Aditya for the year ended 31-3-2011
Solution:
In the books of Aditya
Investment a/c in Equity shares of T Ltd for the yr ended 31-3-11
Date Particulars WN NV Cost Date Particulars WN NV Cost
1/4/10 To 500,000 1200000 31/1/11 By bank 200,000 600,000
balance a/c
b/d
2/6/10 To bank 100,000 160,000
a/c
1/7/10 To Bonus 2 200,000 - 31/3/11 By 650,000 10,97,353
shares balance
1/1/11 To bank 50,000 75,000 c/d
a/c
To P & L
31/1/11 262,353
a/c
[Profit]
850,000 16,97,353 850,000 16,97,353
Working note:
1. Cost structure
Opening 50,000 500,000 12,00,000
balance 10,000 100,000 1,60,000
Add: Purchase
Add: Bonus 60,000 600,000 13,60,000
shares 20,000 200,000 -
Add: Right 80,000 800,000 13,60,000
shares 5,000 50,000 75,000
Less: Sales 85,000 850,000 14,35,000
[20,000] [200,000] [337,647]
65,000 650,000 10,97,353
114
2] Calculation of Bonus shares Investment Accounting
(W.R.T Accounting
3 equity shares held : 1 Bonus share Standard -13)
60,000 : [60000 X 1/3] 20,000 Bonus shares of Rs

10 each = Rs 200,000
3] Calculation of Profit/Loss
Sales price 600,000
Less: weighted average cost [200,000 X 1435000/850000] [337,647]
Profit 262,353
Illustration 8.
On 1st April, 2012 Sundar held 25,000 fully paid equity shares of Rs 10
each in X Ltd, at book value of Rs 15 per share. On 20th June, 2012 he
purchased another lot of 5,000 shares of the company at Rs 16 per share.
Afterwards X Ltd. announced a bonus issue and right issue, the following
being the terms:
Bonus issue in the ratio of 1:6 [record date 16-8-2012]
Right issue in the ratio of 3:7 [record date 31-8-2012]
The rights shares were issued at Rs 15 per share and the full amount was
payable by 30th September, 2012. Shareholders were entitled to transfer
their rights in full or in part. Accordingly, Sundar sold one third of this
entitlement to another person for a consideration of Rs 2 per share on 5th
September, 2012. After becoming ex-rights, the market price of the shares
was Rs 15.
Dividends for the year ended 31st March, 2012 at 20 percent were
declared by X Ltd. and received by Sundar on 31st October, 2012.
Dividends for shares acquired by Sundar on 20th June, 2012were
adjusted against the cost of purchase. On 15th November, 2012 Sundar
sold 25,000 shares at Rs 15 per share.
You are required to prepare Investment in equity shares in X Ltd account
in the books of Sundar.
In the books of Sundar
Investment in equity shares of X Ltd account
Date Particulars W NV Dividend Cost Date Particulars WN NV Dividend Cost
2012 2012
1-4 To bal b/d 250000 - 375000 31- By c/bank 4 50,000 10,000

10
20-6 To c/bank 50000 80,000
15-
To Bonus
115
16-8 shares 2 50,000 - 11 By c/bank 250000 375000
30/9 To c/bank 2013
To P & L 3 100000 150,000

a/c
15- 5 44,444
11
2013 To P & L
a/c 50,000 31-3 By bal c/d 200000 264,444
31-3 [bal.fig]
450000 50,000 649,444 450,000 50,000 649,444
Working note
1] cost structure
Opening balance 25000 250000 375000
Add: Purchase 5000 50,000 80,000
30000 300,000 455,000
Add: Bonus 5000 50,000 -
shares
35000 350,000 455,000
Add: Right 10,000 100,000 1,50,000
shares
45,000 450,000 6,05,000
Less: [10,000]
Adjustment
against cost
45,000 450,000 5,95,000
Less: sale [25,000] [250,000] [3,30,556]
20,000 200,000 264,444
2] Calculation of Bonus shares

1 bonus shares : 6 equity shares
? : 30,000 equity shares
[30000 X 1/6]5000 bonus shares of Rs 10 each Rs 50,000
3] Calculation of Right shares
3 Right shares : 7 equity shares
[35000 X 3/7] 15,000 right shares of Rs 10 issued at Rs 15 per share
He sold 1/3 of the right shares [15000 X 1/3] = 5000 shares were sold
116
Therefore, he retained [15000 – 5000] 10,000 right shares of Rs 10 issued Investment Accounting
at Rs 15 = Rs 150,000 (W.R.T Accounting
Standard -13)
4] Calculation of Dividend
Opening balance [25000 shares] 250,000 X 20% = Rs 50,000
Purchase on 20th June [5000 shares] 50,000 X 20% = Rs 10,000
5] Calculation of Profit/Loss
Sales price 375,000
Less: weighted average cost [250000 X 595000/450000] 330,556
Profit 44,444
Illustration 9
On 1st April 2012, Mr Vinay had 40,000 Equity shares of Rs 10 each of
Spectrum Ltd. purchased at a cost of Rs 15 per share.
On 1st May 2012, he purchased 10,000 equity share of Satyam Ltd [face
value Rs 10 each] at Rs 25 per share. On the same day he also purchased
20000 Equity shares of Spectrum Ltd. at Rs 12 each.
On 1st July, 2012 he sold 2000 equity shares of Satyam Ltd at 22 per
share. Board of directors of Spectrum Ltd announced right shares of equity
shares in ratio of one share for every three shares held at Rs 20 each, full
amount was payable by 31st August 2012. Shareholders were allowed to
renounce their right either in part or full to the outsiders. Mr Vinay
renounced 40 percent of his rights at Rs 5 per share and subscribed for the
balance. On 1st December 2012 Mr Vinay sold 5000 equity shares of
Spectrum Ltd and 2000 equity shares of Satyam Ltd at Rs 30 and Rs 27
per share respectively.
You are required to prepare:
1. Investment in equity shares of Spectrum Ltd a/c and
2. Investment in Equity shares of Satyam Ltd a/c in the books of Mr
Vinay for the year ended 31st March 2013
Solution
In the books of Mr Vinay
Investment in equity shares of Spectrum Ltd a/c
1-4-12 To balance 400,000 600,000 1-12-12 By bank 50,000 150,000
b/d
1-5-12 To bank 4 200,000 240,000
31-8-12 To bank 120,000 240,000 31-3-13 By bal c/d 1 670,000 10,05,000
1-12-12 To P & L 5
a/c - 75,000
720,000 11,55,000 720,000 11,55,000
117
Financial Accounting - VII Investment in Equity shares of Satyam Ltd a/c
1-5-12 To bank a/c 100,000 250,000 1-7-12 By bank 20000 44,000
1-12-12 To P & L a/c 6 - 4,000 1-7-12 By P&L 3 - 6,000
1-12-12 By bank 2 20000 54,000
31-3-13 By bal c/d 60,000 150,000
100,000 254,000 100,000 254,000
Working notes
1] Cost structure [Spectrum ltd]

Opening balance 40000 400,000 600,000
Add: Purchase 20000 200,000 240,000
60,000 600,000 8,40,000
Add: Right 12,000 120,000 2,40,000
shares
72,000 7,20,000 10,80,000
Less: sales [5000] [50,000] [75,000]
67,000 670,000 10,05,000
2] Cost structure [Satyam Ltd]

Purchase 10,000 100,000 250,000
Less: sales 2000 20,000 50,000
8,000 80,000 200,000
Less: sales 2,000 20,000 50,000
6,000 60,000 150,000
3] Profit/Loss on sale of 2000 shares of Satyam ltd

Sales price 44,000
Less: weighted average cost [20000 X 250000/100000] 50,000
Loss 6000

1 Right share : 3 equity shares held
[60000 X 1/3] 20,000 right shares of Rs 10 each issued at Rs 20 each
[20000 X 60%] 12000 right shares of Rs 10 at Rs 20 [Subscribed]
5] Calculation of Profit/Loss on sale of 5000 shares of Spectrum ltd
Sales price 150,000
Less: weighted average cost [50000 X 1080000/720,000] 75,000
Profit 75,000
118
6] Calculation of Profit/Loss on sale of 2000 shares of Satyam Ltd Investment Accounting
Sales price 54,000 (W.R.T Accounting
Less: Weighted average cost [20000 X 200,000/80,000] 50,000 Standard -13)
Profit 4,000
Illustration 10
Mr Arvind entered into following transactions of purchase and sale of
Equity shares of Aspi Ltd. The shares have paid up value of Rs 10 per
share
Date No of shares Terms

01-01-12 600 Buy at Rs 20 per share
25-07-12 2500 Bonus shares received
20-12-12 1500 Sale at Rs 22 per share
01-02-13 1000 Sale at Rs 24 per share
Additional Information:
1. On 15th September, 2012, dividend at Rs 3 per share was received

for the year ended 31st March, 2012
2. On 12th November 2012, the company made a rights issue of equity
shares in the ratio of one share for five shares held on payment of Rs
20 per share. He subscribed to 60% of the shares and renounced the
remaining shares on receipt of premium of Rs 3 per share.
3. Shares are to be valued on weighted average cost basis.
You are required to prepare Investment Account for the years ended 31-3-
2012 and 31-3-2013.
Solution:
In the books of Mr Arvind
Investment in equity shares of Aspi Ltd account
Date Particulars WN NV Dividend Cost Date Particulars WN NV Dividend Cost
1-1-12 To bank 6000 12,000
15-3-12 To bank 9000 22,500 31-3-12 By bal c/d 15000 34500
15000 34500 15000 34500
1-4-12 To bal b/d 15000 34500
20-5-12 To bank 10000 22,000 15-9-12 By bank 2 4500 3000
25-7-12 To bonus 25000 Nil 20-12- By bank 15000 33,000
Shares 12
12-11-12 To bank 3 6000 12000 1-02-13 By bank 10000 24000
20-12-12 To P & L 4 15455
a/c 31-3-13 By bal c/d 31000 36259
1-02-13 To P & L 12304
a/c
31-3-13 To P & L 4500
a/c
56000 4500 96259 56000 4500 96259
119
Financial Accounting - VII Working notes
1] Cost structure
Purchase 600 6000 12000
Add: Purchase 900 9000 22500
1500 15,000 34,500
Add: Purchase 1000 10,000 22,000
2500 25000 56,500
Add: Bonus shares 2500 25000 -
5000 50,000 56,500
Less: Pre- [3000]
acquisition dividend
5000 50,000 53,500
Add: Right shares 600 6000 12,000
5600 56000 65,500
Less: sale [1500] [15000] [17545]
4100 41000 47955

Less: sale [1000] [10000] [11696]
3100 31000 36259
2] Calculation of Dividend
On 31st March 2012: Mr Arvind had 1500 equity shares : Dividend = 1500
X 3 = Rs 4500
Remaining shares [2500 – 1500] 1000 shares purchased on 20-5-2012,
Dividend = 1000 X 3 = Rs 3000
1 right share : 5 equity shares held
? : 5000 equity shares
[5000 X 1/5 = 1000 right shares of Rs 10 each issued at Rs 20]
Mr Arvind subscribed for 60% shares [1000 X 60%] = 600 right shares of
Rs 10 each at Rs 20
4] Calculation of profit/loss
Sales price 33,000
Less: Weighted average cost [15000 X 65500/56000] [17,545]
Profit 15,455
5] Calculation of profit/loss
Sales price 24000
Less: weighted average price [10000 X 47955/41000] [11696]
Profit 12304
120
5.6 SUMMARY Investment Accounting
(W.R.T Accounting
 Investments are the assets held for earning income by way of dividend Standard -13)
or interest
 As per AS-13, there are different types of investments. Investments

may be classified as long term and current investment, fixed income
bearing securities and variable income bearing securities
 Cost of investment includes cost of purchase and all related acquisition

charges like brokerage /commission, stamp duty.
 Interest is always calculated on the face value of investment
 Investments may be purchased or sold on cum- interest quotation price

or ex- interest quotation price
 Brokerage is calculated on the purchase or sale of Investments.

Brokerage is always calculated on the quotation price whether cum-
interest or ex- interest. Any brokerage on purchase of Investments is
to be added to purchase price and in case of sale of investments, it
should be deducted from sale proceeds
 Carrying amount of investments – at cost or fair value (market value)

whichever is lower.
 Investments held as long term is valued at cost at the end of the year
 As per AS-13, weighted average cost is to be used for ascertaining

profit or loss on sale of investment.
 In case investments are purchased at different dates at different costs

and some part of investment is sold, the carrying amount of investment
sold should be ascertained by using FIFO or weighted average method.
AS 13 prescribes weighted average method
 Profit/ loss on sale of investment is to be calculated and transferred to

P&L A/C
5.7 EXERCISES
1) On 1st April 2016 Mr. Manish holds 10,000 Equity Shares of Rs. 10
each in Glenmark Ltd., at cost price of Rs.15 each. On 1st August he Sold
3,000 shares at cost price of Rs. 18 each. On 30th September Company has
announced a bonus issue of two shares for every seven shares held as on
30th September. On 10th January 2017 he purchased Right issue announced
by Company of one shares for every three held as on 10th January 2017 at
the rate of Rs. 18 each. On 21st February 2017 he purchased 2,500
additional shares of the same Company at cost price of Rs. 20 each.
Prepare Equity Shares in Glenmark Ltd A/c in the books of Mr. Manish
121
Financial Accounting - VII 2) Mr. Yash holds 10,000 – 10% Bonds of Rs. 10 each in NIVEA Ltd. as
on 1st April, 2016 at a cost of Rs. 130000. Transactions for the year are as
follow:
Date Particulars Quantity Rate Quotation
01/05/2016 Purchased 3000 12 Ex Interest
01/09/2016 Purchased 6000 15 Cum Interest
01/01/2017 Sold 5000 13 Ex Interest
Interest is payable half yearly on 30th June and 31st December every year.
The Accounting year ends on 31st March. Prepare 10% Bonds Account
for the year ending 31/03/2017.
3) On 1st April 2016 Mr. Rajesh holds 20,000 Equity Shares of Rs. 10
each in Hindustan Unilever Ltd., at total cost of Rs. 300000. On 1st July he
purchased 4,000 additional shares of the same Company at total cost of
Rs. 64,000. On 1st October Company has announced a bonus issue of one
share for every six shares held as on that date. On 1st January 2017 he
purchased Right issue, announced by Company of two shares for every
five held as on that date at the rate of Rs. 12 each. On 31st January 2017 he
Rs. 36,000. On 1st February 2017 he sold 1000 shares for Rs. 20 each.
Prepare Equity Shares in Hindustan Unilever Ltd. in the books of Mr.
Rajesh.
4) Mr. Shivam holds 1,000 – 10% Debentures of Rs. 100 each in Tech
Mahindra Ltd. as on 1st April, 2016 at a cost of Rs. 1,20,000. Interest is
payable half yearly on 30th September and 31st March every year.
Transactions for the year are as follow:
31/12/2016 Sold 700 110 Cum Interest
The Accounting year ends on 31st March. Prepare 10% Debenture

Account for the year ending 31/03/2017.
122
5) Mr. Bharat holds 20,000 – 12% Bonds of Rs. 10 each in NIPPO India Investment Accounting
Ltd. as on 1st April, 2016 at a cost of Rs. 300000. Transactions for the year (W.R.T Accounting
are as follow: Standard -13)
The Accounting year ends on 31st March. Prepare 12% Bonds Account for
the year ending 31/03/2017
6) On 1st January 2013, 1,500 -12 percent Debentures of Rs 100 each of
Shikha Ltd. were held as investment by Mr Saroj at a cost of Rs 145,000.
Interest is payable on 30th June and 31st December.
On 1st April 2013, Rs 30,000 of such debentures were purchased by Saroj
at Rs 98 cum-Interest.
On 1st September 2013, Rs 50,000 of such debentures were sold at Rs 96
ex-Interest.
On 1st December 2013, Rs 80,000 of such debentures were sold at Rs 99
cum-interest.
Interest is received on due date.
Prepare investment account for 12 percent debentures of Shikha Ltd. in the
books of Mr Saroj valuing closing stock as on 31st December 2013
applying AS-13. The debentures were quoted at Rs 93 on 31st December
2013.
5.8 OBJECTIVE QUESTIONS –TEST YOUR

UNDERSTANDING
MATCH THE GROUPS
GROUP A GROUP B
1) Debentures A) AS-13
2) IInvestment a/c B) Securities with fixed income
3) SShares C) Held for not more than one year
4) CCost of investment D) No fixed income
5) CCurrent investment E) Weighted average method
Answer-1-B 2-A 3- D 4- E 5-C
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Group A Group B
1) Investment for over 12 A) Current investment
months
2) Investment to be traded B) Face value
3) Cum-interest price C) No cost shares
4) Interest calculation D) Long term
5) Bonus shares E) Includes interest
6) Ex- interest price F) Without or exclusive of interest
Answer-1-D 2-A 3-E 4-B 5-C 6-F
1) Rights shares A) Is transferred to p&l a/c

2) Interest is calculated B) are valued at cost or MV
whichever is less
3) Profit on sale of C) Credited to p&l a/c
investment
4) Current investment D) On face value of securities
5) Sale of rights shares E )Is debited to p&l a/c
6) loss on sale of investment F) increase fv of investment
7) bonus shares issued G) issued to existing shareholders
8)AS -13 H)deals with accounting for investment
I) AS-14
J) Cost of investment
Ans-1-G 2-D 3-A 4-B 5-C 6-E 7-F 8-H
GROUP A GROUP B
1) Current investment A) Investments held for less than 12
months
2) Long term investment B) Investments held for more than
12 months
3) Variable income C) Equity shares
bearing securities
4) Fair value D) includes purchase price and

brokerage
5) Acquisition cost E)value at which asset could be
exchanged
1-A 2-B 3- C 4- E 5-D
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Investment Accounting
1)Personal investment accounting a) debit side face value/ nominal (W.R.T Accounting
value column Standard -13)
2)Equity shares b) fixed income bearing security
3)Government bonds c) debit side nominal value and

capital/cost column
4) ex- interest price d) exclusive of interest
5)Cum- interest price of e) AS 13

investment
6) Bonus shares received f) variable income bearing

securities
7) Rights shares g) includes interest

h) liquidity
1-e 2- f 3- b 4- d 5-g 6-a 7-c
MULTIPLE CHOICE QUESTIONS

1) Accounting for investments is specified in ______
A)AS-14 B)AS-11 C)AS-13 D)AS-2
ANS AS-13
2) Long term investments are shown in balance sheet at ______

A) Market value B) cost C) average cost
D) cost or market value whichever is lower
ANS – COST
3) Short term investments are shown in balance sheet at ______

A) Market value B) cost C) average cost
D) cost or market value whichever is lower
ANS–COST OR MARKET VALUE WHICHEVER IS LOWER
4) The cost of Investment sold is to be calculated as per ______________

A) method FIFO B) LIFO C) Weighted Average
D) simple average
ANS WEIGHTED AVERAGE
5) Loss on sale of Investment is

A) Debited to Investment a/c B) debited to Profit and loss a/c
C) credited to P&LA/C ignored
ANS-DEBITED TO PROFIT AND LOSS A/C
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Financial Accounting - VII 5) Cost of Investment includes _____________
A) Purchase price B) stamp duty C) brokerage D) all of the
above
ANS –ALL OF THE ABOVE
6) Interests on bonds is to be calculated on

A) Cost B) face value C) number of bonds D) market value
ANS FACE VALUE
7) Bonus shares received increases

A) Nominal value of shares held B) cost of shares sold C) market
value of shares held D) None of the above
ANS – NOMINAL VALUE OF SHARES HELD
STATE WHETHER THE FOLLOWING STATEMENTS ARE

TRUE OR FALSE
1) Cost of Investment includes expenses incidental to purchase like

brokerage, stamp duty and Taxes
TRUE
2) In the case of Bonus issue, only nominal value is entered in nominal
value column of the Investment account
TRUE
3) Sale of Right shares is credited to Investment a/c –
FALSE
4) Cum- interest price excludes interest accrued –
FALSE
5) Investments held for more than 12 months are long term investments
TRUE
6) Current Investments are valued at cost-
FALSE
7) Interest is always calculated on face value of securities –
TRUE
8) Equity shares is a fixed income bearing security-
FALSE
NUMERICAL OBJECTIVE QUESTIONS –

1) The purchase price of investment is Rs 100000 brokerage 15000
stamp duty 10000 what is the acquisition cost of investment?
Ans - Cost of investment is
purchase price 100000
Plus brokerage 15000
Plus stamp duty 10000
Total cost 125000
126
2) 1000 shares were purchased at Rs 120 per share and brokerage was Investment Accounting
paid at 2% .what is the cost of acquisition? (W.R.T Accounting
Standard -13)
Ans 1000 shares x Rs 120=120000 brokerage at
2%=2/100x120000=2400 total cost of acquisition is
120000+2400=122400
3) Mr.Rajat purchased 2000 shares of Excel Ltd @Rs 95 and paid
brokerage @2% and stamp duty Rs 20000. Out of these shares, 1000
shares are sold out @Rs 110 and brokerage @2% .Calculate cost of
Investment sold and the resulting profit/loss.
2000 shares purchased @ Rs 95=190000 add 2% brokerage
2/100x190000=3800 add stamp duty 20000 total cost of acquisition =
190000+3800+20000=213800
1000 shares sold @Rs 110=110000 less brokerage @2%
2/100x110000=2200 net sale proceeds 110000-2200= 107800
Cost of acquisition of 2000 shares =213800
Cost of acquisition of 1000 shares= 213800/2= 106900
Cost of 1000 shares 106900 sale proceeds of 1000 shares 107800
therefore profit on sale is 107800-106900= Rs 900
4) X purchased 1000 10% debentures of RS 100 each on 1 April 2015 at
96 cum- interest the previous interest date being 31 December 2015.
Compute cost of Investment
Total amount payable 1000 x Rs 96= 96000
Less Interest included in the above for 3 months January February and
March
100000x10%x3/12=100000x10/100x3/12=2500
Cost of Investment = 96000-2500=93500
3.9 EXERCISES – problems for practice

1) On 1st April 2014, Mr. Manish has 50,000 Equity Shares of P Ltd .at a
book value of Rs 15 per share (face value Rs. 10 each )He provides
you the following information-
i) On 20 June 2014 he purchased another 10000 shares of P Ltd at Rs
16 per share
ii) On 1 August 2014, P Ltd issued one Equity bonus share for every
six shares held by the shareholders.
iii) On 31 October 2014, the Directors of P Ltd announced a rights
issue which entitled the holders to subscribe to three shares for
every seven shares at Rs 15 per share. Shareholders can transfer
their rights in full or in part.
127
Financial Accounting - VII Manish sold 1/3 rd of entitlement to Umang for a consideration of Rs 2 per
share and subscribe the rest on 5 November 2015.
You are required to prepare investment a/c in the books of Manish for the
year ending 31 March 2015
(AnsBonus shares 10000 shares rights sold 10000 shares at Rs 2 per
share=20000 rights subscribed 20000 shares at Rs 15 per
share=300000 closing balance 31 March 2015 90000 shares Rs
1210000)
2) Following transactions appear in the books of Mr Joshi for 12%
Government bonds of Rs 100 each. Transactions during the year ended 31
March 2016 are as follows- On 1st April 2015, opening balance of 2400
bonds at a cost of Rs 228000
01/06/2015 sold 900 105 Cum

Interest
01/09/2015 Purchased 2100 98 Ex-
Interest
01/12/2015 Purchased 1200 108 cum
Interest
01/02/2016 sold 2700 97 Ex Interest
The Accounting year ends on 31st March. Prepare 12% Bonds Account for
the year ending 31/03/2016.Market value of the above investment as on 31
March 2016 was Rs 203456
(Ans- Interest transferred to P&L as on 31 March 2016 Rs 33900
Balance as on 31/3/16 NV 210000 cost 203456 1/6/2015 Profit on
sale 4500 1/2/2016 Loss on sale 3544 Interest accrued on 31 March
2016 Rs 6300)
3)On 1st April 2016 Mr. Rajesh holds 20,000 Equity Shares of Rs. 10 each
in Hindustan Unilever Ltd., at total cost of Rs. 300000. On 1st July he
Rs. 64,000. On 1st October Company has announced a bonus issue of one
shares for every six shares held as on that date. On 1st January 2017 he
purchased Right issue, announced by Company of two shares for every
five held as on that date at the rate of Rs. 12 each. On 31st January 2017 he
Rs. 36,000. On 1st February 2017 he sold 1000 shares for Rs. 20 each.
Prepare Equity Shares in Hindustan Unilever Ltd. in the books of Mr.
Rajesh.
128
(Ans- profit on sale 7029 balance as on 31 March 2017 40200 shares Investment Accounting
at Rs 521429 ) (W.R.T Accounting
Standard -13)
4)Mr. Shivam holds 1,000 – 10% Debentures of Rs. 100 each in Tech
Mahindra Ltd. as on 1st April, 2016 at a cost of Rs. 1,20,000. Interest is
payable half yearly on 30th September and 31st March every year.
Transactions for the year are as follow:
31/12/2016 Sold 700 110 Cum Interest
The Accounting year ends on 31st March. Prepare 10% Debenture
Account for the year ending 31/03/2017.
(Ans –loss on sale 31-12-2016 Rs 1138 and loss on sale 1/2/2017 Rs

3337 closing balance as on 31/3/17 face value 120000 cost 129292
interest transferred to P&L a/c 14167 )

129
4
MUTUAL FUND - 1
Unit Structure
4.0 Objectives
4.1 Introduction to Investment Avenues
4.2 Concept and Role of Mutual Fund
4.3 Comparison of Mutual Fund with Equity and Bond Instruments
4.4 History of Mutual Fund in India
4.5 Mutual Fund Scheme
4.6 Summary
4.7 Multiple Choice Questions
4.8 Questions
4.0 OBJECTIVES
1) To know the different investment avenues
2) To understand the concept and role of mutual fund.
3) To acquire the knowledge of Equity and Bond Instruments in
Comparison with Mutual Fund
4) To know the history of Mutual Fund in India
5) To understand how investor do the scheme selection in Mutual Funds
4.1 INTRODUCTION TO INVESTMENT AVENUES

In its broadest sense, an investment is a sacrifice of current money or other
resources for future benefits. Several avenues of investment are available
today. You can deposit money in a Saving bank account or purchase a
long-term government bond or invest in the equity shares of a company or
contribute to a provident fund account or buy a stock option or buy a stock
future or acquire a plot of land or invest in some other form.
The two key aspects of any investment are time and risk. The sacrifice
takes place now and is certain. The benefit is expected in the future and
tends to be uncertain. In some investments (like government bonds) the
time element is the dominant attribute. In other investments (like stock
options) the risk element is the dominant attribute. In yet other
investments (like equity shares) both time and risk are important. Almost
everyone owns a portfolio of investments. The portfolio is likely to
comprise financial assets (bank deposits, bonds, stocks, and so on) and
real assets (car, house, and so on). The portfolio may be the result of a
130
series of haphazard decisions or may be the result of deliberate and careful Mutual Fund - 1
planning. Your economic well-being in the long run depends significantly
on how wisely or foolishly you invest. useful in systematic and rational
investment management. It seeks to improve your abilities in the field of
investments.
As an investor you have a wide array of investment avenues available to
you. Sacrificing some rigour, they may be classified as shown in Fig 1.1
1. Non-marketable Financial Assets

A good portion of financial assets is represented by non-marketable
financial assets. They can be classified into the following broad
categories:
 Fixed Deposits in Bank
 Recurring Deposits
 Post office deposits
 Company deposits
 Provident fund deposits
2. Equity Shares
Equity shares represent ownership capital. As an equity shareholder, you
have an ownership stake in the company.
 Blue chip shares
 Mid Cap
 Small Cap
 Sector Specific shares
3. Bonds or debentures
It represent long-term debt instruments. Bond is a negotiable certificate
evidencing indebtedness. It is normally unsecured. A debt security is
generally issued by a company, municipality, or government. A bond
investor lends money to the issuer and in exchange the issuer promises to
repay the loan amount on a specified maturity date. Debentures includes
debenture stock, bonds and any other securities of a company, whether
131
Financial Accounting - VII constituting a charge on the company’s assets or not”. Following are the
different forms of Bonds or Debentures.
 Savings bonds
 Government agency securities
 PSU bonds
 Debentures of private sector companies
4. Money Market Instrument

It is a market for short term funds i.e., period of 364 days or less. The
money market is an avenue for borrowing and lending for the short term.
While on one hand money market helps in shifting big amount of money
between banks, on the other hand, it provides a mean by which the surplus
of funds of the cash rich institutions can be used by bank (at cost). A
supplier of funds to the money market can be virtually anyone with a
temporary excess of funds. Money Market Instruments are more liquid in
nature. Following are the examples of Money Market Instruments
 Treasury Bills
 Certificate of Deposits
 Commercial Papers
5. Mutual Funds
Instead of directly buying equity shares and/or fixed income instruments,
you can participate in various schemes floated by mutual funds which, in
turn, invest in equity shares and fixed income securities. There are three
broad types of mutual fund schemes:
 Open Ended Funds
 Close Ended Funds
 Growth Funds
 Income Funds
 Balanced schemes
 Money Market Mutual Funds
 Gilt Funds
 Hybrid Funds
6. Life Insurance
In a broad sense, life insurance may be viewed as an investment. Insurance
premiums represent the sacrifice and the assured sum, the benefit. The
important types of insurance policies in India are:
 Endowment assurance policy
 Money back policy
 Whole life policy
 Term assurance policy
7. Real Estate
For the bulk of the investors the most important asset in their portfolio is a
domestic house. In addition to a residential house, the more affluent
investors are likely to be interested in the following types of real estate:
 Agricultural land
 Semi-urban land
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 Commercial property Mutual Fund - 1
 A resort home
 A second house Precious Objects
 Shops
8. Precious objects
There are items that are generally small in size but highly valuable in
monetary terms. The important precious objects are:
 Gold and silver
 Precious stones - Diamond
 Art objects -Paintings
9. Financial Derivatives
A financial derivative is an instrument whose value is derived from the
value of an underlying asset. It may be viewed as a side bet on the asset.
The most important financial derivatives from the point of view of
investors are:
 Future &Options- Currency Derivative, Commodity Derivatives,
Stock and Index Future & Options
4.2 CONCEPT AND ROLE OF MUTUAL FUND

Concept
According to SEBI Regulations, 1996, “Mutual Fund means a fund
established in the form of trust to raise monies through the sale if units to
the public or a section of public under one or more schemes for investing
in securities, in accordance with regulation”.
The securities market being highly volatile requires lot of expertise and
knowledge for investment in it by investors. Thus, it is reinforced by the
Securities Market ‘put not your trust in money, put your money in trust’.
Which implies special type of investment vehicles such as Mutual Funds.
Mutual Funds are trust which pool resources from large number of
investors through issue of units for investments in capital market such as
shares, debentures and bonds and money market instruments, such as
Commercial Paper, Certificate of Deposits and Treasury Bonds. The
income earned through these investments and the capital appreciation
realized are shared by its unit holders in proportion to the number of units
owned by them. The process converts individual savings, which would
otherwise have remained idle, into funds usable in industries. The
investments are speared over wide cross section of industries and sectors
through careful analysis by experts. The diversification eliminates
unsystematic risks and the investors can expect better returns for lesser
risk. Such diversifications are usually not attainable by individuals’
investors due to fund constraints and lack of necessary expertise.
A Mutual Fund is a trust that pools the savings of several investors who
share a common financial goal. Anybody with an investible surplus of as
little as a few hundred rupees can invest in different Mutual Funds
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Financial Accounting - VII Schemes. These investors buy units of a particular Mutual Fund scheme
that has a defined investment objective and strategy. The money thus
collected is then invested by the fund manager in different types of
securities. These could range from shares to debentures to money market
instruments, depending upon the scheme’s stated objectives. The income
earned through these investments and the capital appreciation realized by
the scheme is shared by its unit in proportion to the number of units owned
by them. Thus, a Mutual Fund offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low-
cost.
Role of Mutual Fund

The Mutual Fund segment is one of the fastest expanding segments
of our Indian Economy. During the last ten-year period the industry
has grown at nearly 22 per cent CAGR. With assets of US $ 125
billion, India ranks 19th and one of the rapid growing countries of
the world. The factors leading to the development of the industry
are large market Potential, high savings rate, comprehensive
regulatory framework, tax policies, innovations of new schemes,
aggressive role of distributors, investor education awareness by
SEBI, and past performance. Mutual funds are not only providing
growth to capital market through channelization of savings of retail
investors but themselves playing active role as active investor in
Indian companies in secondary as well as primary market. Let’s
look at the mutual fund’s role in capital market development in
detail.
(1) Mutual fund as a source of household sector savings
mobilization: Mutual fund industry has come a long way to assist
the transfer of savings to the real sector of the economy. Total AUM
of the mutual fund industry clocked a CAGR of 12.4 per cent over
FY 07-16. That shows how mutual funds have played pivotal role in
mobilising retail investors’ savings into capital market in last 10
years in India. By the end of March, 2017 AUM with Mutual funds
134
are around Rs. 17.5 lakh crores. In 2017 itself, investors poured Rs. Mutual Fund - 1
3.4 lakh crores across all the categories of Mutual funds in India.
(2) Mutual Fund as Financial service or Intermediary: The
financial services sector is the second-largest component after trade,
hotels, transport and communication all combined together, and
contributes around 15 per cent to India’s GDP. With the rapid
growth, mutual funds have become increasingly important suppliers
of debt and equity funds.
(3) Mutual funds popularity among small investors: Small
investors have lots of problems like limited funds, lack of expert
advice, lack of access to information etc. Mutual funds have come
as a great help to all retail investors. It is a special type of
institutional mechanism or an investment method through which the
small as well as large investors pool their savings which are
invested under the advice of a team of professionals in large variety
of portfolios of corporate securities Safety with good return on
investment is the outcome of these professional investment in
mutual funds. It forms a significant part of the capital market,
providing the advantage of a well-diversified portfolio and expert
fund manager to a large number, particularly retail investors. An
ordinary investor who applies for shares in a IPO of any company is
not sure of any guaranteed allotment. But mutual funds who invest
in the particular capital issue made by companies get confirmed
allotment of, shares, therefore, the investment in good IPO’s can be
achieved though investment in a mutual fund.
(4) Mutual Funds as part of financial inclusion policy of Govt. of
India: Now SEBI is motivating mutual funds to spread in smaller
cities and in rural India to attract small savings and making rural
people aware of new investment avenue like mutual fund providing
good returns at low risk. So Govt. of India policy of financial
inclusion to mobilise savings of unbanked people of India is being
supported actively by mutual funds now. In its effort to encourage
investments from smaller cities, SEBI allowed AMCs to hike
expense ratio up to 0.3 per cent on the condition of generating more
than 30 per cent inflow from smaller cities. Mutual funds and AMFI
undertake Investor awareness programmes for this purpose of
financial inclusion.
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Financial Accounting - VII 4.3 COMPARISON OF MUTUAL FUND WITH EQUITY
AND BOND INSTRUMENTS
4.4 HISTORY OF MUTUAL FUND IN INDIA

A strong financial market with broad participation is essential for a
developed economy. With this broad objective India’s first mutual fund
was establishment in 1963, namely, Unit Trust of India (UTI), at the
initiative of the Government of India and Reserve Bank of India ‘with a
view to encouraging saving and investment and participation in the
income, profits and gains accruing to the Corporation from the
acquisition, holding, management and disposal of securities’.
The history of Mutual Funds in India can be broadly divided into five
distinct phases as follows:
 First Phase - 1964-1987

Unit Trust of India (UTI) was established in 1963 by an Act of Parliament.
It was set up bythe Reserve Bank of India and functioned under the
Regulatory and administrative control ofthe Reserve Bank of India. In
1978 UTI was de-linked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative control
in place of RBI. The first scheme launched by UTI was Unit Scheme
1964. At the end of 1988UTI had Rs. 6,700 crores of assets under
management.
136
 Second Phase - 1987-1993 (Entry of Public Sector Funds) Mutual Fund - 1
1987 marked the entry of non-UTI, public sector mutual funds set up by
public sector banksand Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India(GIC). SBI Mutual Fund was the
first non-UTI Mutual Fund established in June 1987followed by Can bank
Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug
89),Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of
Baroda Mutual Fund(Oct 92). LIC established its mutual fund in June
1989 while GIC had set up its mutual fundin December 1990. At the end
of 1993, the mutual fund industry had assets undermanagement of Rs.
47,004 crores.
 Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the
Indian mutual fundindustry, giving the Indian investors a wider choice
of fund families. Also, 1993 was the yearin which the first Mutual Fund
Regulations came into being, under which all mutual funds,except UTI
were to be registered and governed. The erstwhile Kothari Pioneer (now
mergedwith Franklin Templeton) was the first private sector mutual fund
registered in July 1993.The 1993 SEBI (Mutual Fund) Regulations were
substituted by a more comprehensive andrevised Mutual Fund Regulations
in 1996. The industry now functions under the SEBI(Mutual Fund)
Regulations 1996.The number of mutual fund houses went on increasing,
with many foreign mutual fundssetting up funds in India and also the
industry has witnessed several mergers and acquisitions.As at the end of
January 2003, there were 33 mutual funds with total assets of Rs.
1,21,805crores. The Unit Trust of India with Rs. 44,541 crores of assets
under management were wayahead of other mutual funds.
 Fourth Phase - February 2003- April 2014

In February 2003, following the repeal of the Unit Trust of India Act 1963
UTI wasbifurcated into two separate entities. One is the Specified
Undertaking of the Unit Trust ofIndia with assets under management of
Rs. 29,835 crores as at the end of January 2003,representing broadly, the
assets of US 64 scheme, assured return and certain other schemes.The
Specified Undertaking of Unit Trust of India, functioning under an
administrator andunder the rules framed by Government of India and does
not come under the purview of theMutual Fund Regulations.The second is
the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is
registeredwith SEBI and functions under the Mutual Fund Regulations.
With the bifurcation of theerstwhile UTI which had in March 2000 more
than Rs. 76,000 crores of assets undermanagement and with the setting up
of a UTI Mutual Fund, conforming to the SEBI MutualFund Regulations,
and with recent mergers taking place among different private sector
funds,the mutual fund industry has entered its current phase of
consolidation and growth.
137
 Fifth Phase (Since 2014)

Taking cognisance of the lack of penetration of MFs, especially in tier II
and tier III cities, and the need for greater alignment of the interest of
various stakeholders, SEBI introduced several progressive measures in
September 2012 to "re-energize" the Indian Mutual Fund industry and
increase MFs’ penetration.
In due course, the measures did succeed in reversing the negative trend
that had set in after the global melt-down and improved significantly after
the new Government was formed at the Center.
Since May 2014, the Industry has witnessed steady inflows and increase in
the AUM as well as the number of investor folios (accounts).
 The Industry’s AUM crossed the milestone of 10 Trillion ( 10

Lakh Crore) for the first time as on 31st May 2014 and in a short span
of about three years the AUM size had increased more than two folds
and crossed 20 trillion ( 20 Lakh Crore) for the first time in
August 2017. The AUM size crossed 30 trillion ( 30 Lakh Crore)
for the first time in November 2020.
 The overall size of the Indian MF Industry has grown from 7.20
trillion as on 30th September 2012 to 38.42 trillion as on 30th
September 2022, more than 5 fold increase in a span of 10 years.
 The MF Industry’s AUM has grown from 20.40 trillion as on
September 30, 2017 to 38.42 trillion as on September 30, 2022,
around 2 fold increase in a span of 5 years.
 The no. of investor folios has gone up from 6.20 crore folios as on 30-
Sep-2017 to 13.81 crore as on 30-Sep-2022, more than 2 fold increase
in a span of 5 years.
 On an average 12.67 lakh new folios are added every month in the last
5 years since September 2017.
The growth in the size of the industry has been possible due to the twin
effects of the regulatory measures taken by SEBI in re-energising the MF
Industry in September 2012 and the support from mutual fund distributors
in expanding the retail base.
MF Distributors have been providing the much needed last mile connect
with investors, particularly in smaller towns and this is not limited to just
enabling investors to invest in appropriate schemes, but also in helping
investors stay on course through bouts of market volatility and thus
experience the benefit of investing in mutual funds.
MF distributors have also had a major role in popularising Systematic
Investment Plans (SIP) over the years. In April 2016, the no. of SIP
accounts has crossed 1 crore mark and as on 30th September 2022 the
total no. of SIP Accounts are 5.84 crore.
138
4.5 MUTUAL FUND SCHEME Mutual Fund - 1
A Mutual Fund scheme invests across various type of marketable

securities as per the stated investment objective of each individual
schemes. This is an emerging as a preferred option for meeting
individual’s financial goals according to each individual’s choice of
investment horizon and risk appetite. The Mutual fundinvestment
decisions are made by professional fund managers, backed by a team of
research analysts. In return, each individual scheme charges certain
expenses to the investor of the scheme towards costs related to fund
management, operating expenses, distribution expenses, investor
awareness, etc. However, Securities & Exchange Board of India (SEBI)
has prescribed certain limits on expenses that could be charged to each
individual schemes. Further, the investors tend to benefit from
professional fund management at relatively lower costs by investing in
mutual fund schemes.
Different asset class or categories of mutual fund schemes open for the
investors to choose from:
1) By Structure
i) Open Ended Schemes
These schemes do not have a fixed maturity period. An open-endedfund
sells and repurchases units at all timesat a price linked to net asset value
(NAV). These schemes are available for subscription and repurchase on a
continuous basis. The key feature of these schemes is liquidity.
ii) Close Ended Schemes

A close-ended fund makes a one-time sale of a fixed number of units
during the initial offer period. These schemes have a stipulated maturity
period. The fund is open for subscription only during a specified period at
a time of launch of the scheme. In order to provide an exit route to the
investors, some close-ended funds give an option of selling back the units
to the mutual fund through periodic repurchase at NAV related prices
through listing on stock exchanges. These mutual funds schemes disclose
NAV generally on weekly basis.
iii) Interval Schemes

These combines the features of open-ended schemes and close ended
schemes which may be traded on the stock exchange any time or will be
open for sale or redemption during predetermined intervals at NAV related
prices.
2) Actively Managed Funds & Passive Funds

i) Actively Managed Funds
Funds where the fund manager has the flexibility to choose the investment
portfolio, within the broad parameters of the investment objective of the
139
Financial Accounting - VII scheme. Since this increases the role of the fund manager, the expenses for
running the fund turn out to be higher. Investors expect actively managed
funds to perform better than the market.
ii) Passive Funds

In this fund, investment on the basis of specified index, whose
performance it seeks to track. The proportion of each share in the
scheme’s portfolio would also be the same as the weightage assigned to
the share in the computation of the S & P BSE Sensex. The performance
of these funds tends to the concerned index. It is not designed to perform
better than the Index market. Such schemes is also called index schemes.
iii) Exchange Traded Funds

An ETF is an amalgam financial product, a cross between a stock and a
mutual fund. ETF is a portfolio or basket of securities that replicate the
composition of indices like NIFTY, BANKNIFTY, SENSEX etc. The
units are issued to the investors in a new fund offer (NFO) after which
they are available for sale and purchase on a stock exchange. The units of
the ETD are traded at real time prices that are linked to the changes in the
underlying index.
3) SEBI- Categorisation & Rationalisation of MF Schemes
The Schemes would be broadl classified in the following groups as per
SEBI guidelines: Equity Schemes, Debt Schemes, Hybrid Schemes,
Solution Oriented Schemes, Other Schemes
 Equity Schemes
(a) An Equity scheme should invest minimum 65% of its assets in
Equity and Equity related instruments.
 Large Cap Fund: Investing in large cap stocks. The minimum
investment in equity and equity related instruments of large cap
companies shall be 80 percent of total assets.
 Mid Cap Fund: Investing in mid cap stocks.The minimum investment
in equity and equity related instruments of mid cap companies shall be
65 percent of total assets.
 Large and Mid Cap Fund:Investing in both large and mid cap stock.
Large Cap Stocks- Min 35 %, Mid Cap Stock- Min 35 % of total
assets
 Multi Cap Fund:Large Cap, Mid Cap and Small cap stocks. The
minimum investment in equity and equity related instruments shall be
65 % of total assets
 Equity Income or Dividend Yield Funds:These funds mainly invests
in stocks of companies whose dividend payout is higher. Capital
appreciationis main object and increase the higher income through the
dividends.
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 Focused Fund:Investing in maximum 30 stocks. The scheme Mutual Fund - 1
document must mention the focus stock which may be Large Cap, Mid
Cap, Small Cap, Multi Cap etc
 Diversified Equity Fund: These funds seek to invest substantially in

equities, leaving a small portion in liquid money market securities.
These funds seek to reduce the sector specific risks through
diversification.
 Speciality Fund:These funds invest in only predetermined portfolio of

securities. Most of the speciality funds tend to be concentrated funds
and are more volatile than diversified funds.
 Sector Funds: The fund’s portfolio consists of investment in only one

industry or sector of the market such as pharmaceuticals,
telecommunication, Financial Services and Banking, Information
Technology etc. The returns in those funds are dependent on the
performance of the respective sectors. These funds may give higher
returns, but they are riskier compared to diversified funds.
Debt Schemes
 Overnight Fund: The investment is in overnight securities having

maturity of 1 days.
 Liquid Fund: Investment is into money market and debt securities

with maturity of upto 91 days
 Ultra Short Fund: Investing in money market and debt instruments

with maturity duration between 3 monthsand 6 months.
 Low Duration Fund: Investing in debt and money market instruments

with Macaulay duration between 6 months and 12 months.
 Money Market Fund: Investing in money market instruments having

Macaulayup to 1 year.
 Short Duration Fund: Investing in debt and money market

instruments with Macaulay duration between 1 year and 3 years.
 Medium Duration Fund: Investing in debt and money market

instruments with Macaulay duration of the portfolio being between 3
years and 4 years. Portfolio Macaulay duration under anticipated
adverse situation is 1 year to 4 years.
 Medium to Long Duration Fund: Investing in debt and money

market instruments with Macaulay duration between 4 years and 7
years. Portfolio Macaulay duration under anticipated adverse situation
is 1 year to 7 years.
 Long Duration Fund: Investing in debt and money market

instruments with Macaulay duration greater than 7 years.
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Financial Accounting - VII  Dynamic Bond: An open-ended dynamic debt scheme investing
across duration.
 Corporate Bond Fund: An open-ended debt scheme predominantly

investing in AA+ and above rated corporate bonds. The minimum
investment in corporate bonds shall be 80 percent of total assets (only
in AA+ and above rated corporate bonds)
Hybrid Schemes
 Aggressive Hybrid Fund/ Balanced Fund: Investment in equity 65

% to 80 % of total assets while investment in debt instruments shall be
between 20 % and 35 % of total assets.
 Dynamic Asset Allocation or Balanced Advantage: It is an open-

ended dynamic asset allocation fund with investment in equity/debt
that is managed dynamically.
 Multi Asset Allocation: An open-ended scheme investing in at least

three asset classes with a minimum allocation of at least 10 percent
each in all three asset classes. Foreign securities are not treated as a
separate asset class in this kind of scheme.
 Arbitrage Fund: The minimum investment in equity and equity

related instruments shall be 65 percent of total assets. They
simultaneously buy and sell securities in different markets to take
advantage of the price difference. Returns are more in line with money
market returns, rather than equity market returns. Moderately Low
Risk Category. Arbitrage funds are not meant for equity risk exposure,
but to lock into a better risk-return relationship than liquid funds and
ride on the tax benefits that equity schemes offer.
Solution Oriented Schemes
 Retirement Fund: An open-ended retirement solution oriented

scheme having a lock-in of 5 years or till retirement age (whichever is
earlier).
 Children's Fund: An open ended fund for investment for children

having a lock-in for at least 5 years or till the child attains age of
majority (whichever is earlier).
Other Schemes
 Gold Exchange Traded Funds (GETFs) - Gold Exchange Traded

Funds offer investors an innovative, cost-efficient and secure way to
access the gold market. Gold ETFs are intended to offer investors a
means of participating in the gold bullion market by buying and selling
units on the Stock Exchanges, without taking physical delivery of
gold. GOLD ETF invests in 99.99% pure GOLD. NAV of GOLD ETF
depends on Real Prices of GOLD Bullion. Gold funds invest in gold
and gold-related securities.
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 Real estate funds invest in real estate: Commodity funds invest in Mutual Fund - 1
asset classes like food crops, spices, fibres, industrial metals, energy
products or precious metals as may be permitted by their investment
charter. Direct investing in Commodities is not allowed in India.
 Fund of Funds (FOFs):Fund of Funds are schemes that invest in

other mutual fund schemes. Minimum investment in the underlying
fund - 95% of total assets.
4.6 SUMMARY
A mutual fund is a fund that pools money from various investors and is
managed by a team of fund managers. The fund is invested in a bucket of
stocks- domestic market as well as international markets (NASDAQ,
TAIWAN etc.), bonds, and cash equivalents. The assets of the fund are
chosen around a particular theme. The fund is continuously adjusted as per
the performance of the underlying assets.
The amount contributed by each investor is invested in stocks/ securities/
bonds of the bucket, proportionate to their weights in the bucket. The
investor, however, doesn’t have any ownership of the underlying asset.
They just own the units of the mutual fund.
While looking at Mutual Funds vs Bonds, we have seen that while bonds
offer nearly risk-free fixed returns, Mutual funds come with a potential of
high returns at relatively higher risk. Individual stocks beat them both with
the highest risk and returns. One must weigh the nuances of Mutual Funds
Vs Bonds Vs Stocks against their risk appetite, goals, and investment
horizon before choosing the right mix.
4.7 MULTIPLE CHOICE QUESTIONS

1. ___________ is a type of investment vehicle consisting of a portfolio of
stocks, bonds, or other securities.
A) Government Securities B) Mutual Funds
C) Derivatives D) Shares
2. Mutual funds in India are permitted to invest in___________

A) Securities B) Securities and gold
C) Securities other than real estate D) Securities, gold, real estate
3. Phase 1 of Mutual funds in India extended from ……………..

A. 1964- 1987 b. 1961- 1987
C. 1964- 1988 d. 1961- 1988
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Financial Accounting - VII 4. Phase 2 of Mutual funds in India extended from ……………….
A. 1987-1994 B. 1987-1993
C. 1988-1995 D. 1987-1992
5. Phase 3 of Mutual funds in India extended from ……………….

A. 1996-2004 B. 1994-2000
C. 1995-2002 D. 1993-2003
6. Phase 4 of Mutual funds in India extended from ……………….

A. 2003-2014 B. 2004-2013
C. 2004-2012 D. 2002-2011
7. The history of mutual funds in India can be broadly divided into

………. phases.
a. 4 b. 6
c. 7 d. 5
8. The funds in which units can be purchased only during the initial offer
period are called
A) Open-Ended Funds B) Close-Ended Funds
C) Interval Funds D) Fixed maturity plan
9. ______________ are considered high-risk funds but also tend to

provide high returns.
A) Equity Funds B) Money Market Funds
C) Balanced or Hybrid Funds D) Debt Funds
10. ____________ are funds that invest in company debentures,

government bonds and other fixed-income assets.
A) Equity Funds B) Money Market Funds
C) Balanced or Hybrid Funds D) Debt Funds
11. Which type of fund is more volatile?

A) Large-cap funds B) Mid-cap funds
C) Small-cap funds D) Hybrid Funds
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12. Investors can enter and exit under _______ at any time Mutual Fund - 1
A) Fixed maturity plan B) Open-Ended Funds
C) Close-Ended Funds D) Interval fund
13. Mutual Fund schemes are first offered to investors through.

A) Stock exchange B) New Fund Offer
C) Initial Public Offer D) AMFI
14 In ____________ funds, the money is invested primarily in short-term

or very short-term instruments e.g. T-Bills, CPs etc.
A) Growth funds B) Income funds
C) Liquid funds D) Tax-Saving Funds (ELSS)
15. Transaction cost is ………… with investment in Mutual Funds.

A) High B) Low
C) Very high D) Nil
Solution- 1- B, 2- D, 3-A, 4- B, 5-D, 6- A, 7- D, 8- B, 9- A, 10- D, 11- A,
12-B, 13 – B, 14- C, 15- B
4.8 QUESTION
1) What is the Concept of Mutual Fund? Explain the role of mutual fund?
2) Write a note on History of Mutual Fund in India.
3) Explain the comparison of Mutual Fund with Equity and Bond
Instruments
4) Explain the different types of mutual fund schemes

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5
MUTUAL FUND - 2
Unit Structure
5.0 Objectives
5.1 Investment Valuation norms
5.2 Pricing of Units
5.3 Net Asset Value
5.4 NAV Calculation
5.5 Evaluation of Mutual Funds
5.6 Disposal of Investments
5.7 Accounting Policies
5.8 Summary
5.9 Multiple Choice Questions
5.10 Questions
5.0 OBJECTIVES
1) To understand investment’s value
2) To understand how units in mutual fund are priced
3) To understand how to achieve financial goals and objectives
4) To understand disposal of investment
5) To understand accounting policies under mutual fund
5.1 INVESTMENT VALUATION NORMS

Investment valuation norms refer to the standards and methodologies used
to determine the value of an investment. These norms are crucial for
investors, financial analysts, and companies to make informed decisions
about buying, selling, or holding investments. While specific norms may
vary depending on the type of investment, industry, and regulatory
requirements, some common valuation norms include:
1. Market-based valuation: This approach relies on comparing the
investment to similar assets that have recently been bought or sold in
the market. Common metrics include price-to-earnings (P/E) ratio,
price-to-book (P/B) ratio, and dividend yield.
2. Income-based valuation: Also known as the income approach, this
method estimates the present value of future cash flows generated by
the investment. Discounted Cash Flow (DCF) analysis is a popular
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income-based valuation method used to estimate the intrinsic value of Mutual Fund - 2
an investment.
3. Asset-based valuation: This approach involves estimating the value
of the investment based on the underlying assets it holds. For example,
in real estate investment, asset-based valuation considers the market
value of properties owned by the investment.
4. Relative valuation: This method compares the valuation of the
investment to similar investments in the same industry or sector. It
helps in understanding whether the investment is overvalued or
undervalued relative to its peers.
5. Cost-based valuation: This approach determines the value of the
investment based on the cost of acquiring or creating it. However, this
method may not reflect the true economic value, especially if market
conditions have changed since the investment was made.
6. Discounted cash flow (DCF) analysis: DCF analysis estimates the
present value of all future cash flows generated by an investment,
discounted at an appropriate rate. This method is widely used in
valuation, especially for assessing the value of businesses and projects.
7. Industry-specific valuation metrics: Certain industries have unique
valuation metrics tailored to their characteristics. For example, in the
technology sector, metrics like price-to-sales ratio and user growth rate
are commonly used for valuation.
8. Regulatory requirements: Valuation norms may also be influenced
by regulatory bodies such as the Financial Accounting Standards
Board (FASB) in the United States or the International Financial
Reporting Standards (IFRS) globally. These standards provide
guidelines on how investments should be valued for financial reporting
purposes.
5.2 PRICING OF UNITS

The pricing of units in a mutual fund typically depends on the type of fund
and regulatory requirements in the country where the fund is domiciled.
The two common methods for pricing units in mutual funds are:
1. Forward Pricing: This is the most widely used method in mutual
funds. Under forward pricing, the price of mutual fund units is
determined at the end of each trading day, based on the net asset value
(NAV) of the fund. The NAV is calculated by dividing the total value
of the fund's assets (including cash, securities, and any other
investments) minus liabilities (such as expenses and fees) by the total
number of units outstanding.
2. Backward Pricing: Also known as historical pricing or historic NAV,
this method calculates the NAV of mutual fund units based on the
fund's value at the end of the previous trading day.
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5.3 NET ASSET VALUE (NAV)
Net asset value (NAV) is the value of a fund's assets less the value of its
liabilities (NAV). The term "net asset value," which is frequently used in
regard to mutual funds, is used to calculate the worth of the assets owned.
The SEC mandates that mutual funds and unit investment trusts (UITs)
compute their NAV at least once per business day.
Calculating Net Asset Value
The following is the NAV formula:
Where:
 Value of assets is the value of all the securities in the portfolio
 Value of liabilities is the value of all liabilities and fund expenses (such
as staff salaries, management expenses, operational expenses, audit
fees, etc.)
5.4 NAV CALCULATION – WHAT IS IT?

The Net Asset Value (NAV) is the market value of a share in a specific
mutual fund and is frequently linked to investments in mutual funds. By
dividing the difference between a company's assets and liabilities by the
number of outstanding shares, you can get NAV. Investors can determine
whether a fund is undervalued or overvalued using NAV. It determines
how much of a specific fund you'll get when you take your investment out.
NAV Calculation: The Formulae
The net asset value, or NAV, of a mutual fund is calculated by dividing its
net assets by the total number of outstanding units. The following is the
mathematical formula for calculating mutual fund NAV:
Net Asset Value = (Assets – Liabilities)/Total Number of Outstanding
Units
Here, the assets include the value of securities held and liquid cash, equity,
debentures, bonds, exchange bills, commercial papers, any interest or
dividend earned. The liabilities include expenses in the form of money
payable, interest payable, fund management expenses etc. Fund Managers
calculate the NAV of a mutual fund at the end of the market day.
The NAV of a mutual fund is always calculated at the end of the market
day. This is because the market value of securities changes on a daily
basis. Hence, the NAV of a mutual fund also changes daily.
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Example 1 Mutual Fund - 2
Suppose the market value of the securities of a mutual fund scheme is Rs
500 lakh. The mutual fund issues 10 lakh units of Rs 10 each to its
investors. So, the NAV per unit of the fund is Rs 50.
1. Choose the date of the valuation.

Every day the stock market is open, a mutual fund, hedge fund, or ETF's
net asset value (NAV) changes due to changes in the investment value of
the fund. You must use fund data for the calculation on a date that is
pertinent to your needs for your net asset value estimate to be valuable.
Select a precise date and make sure that all the figures you need to
determine the net asset value of your fund originate from that date.
2. Calculate the total value of the fund’s securities at the end of the
valuation date.
The stocks, bonds, and other securities that the fund owns are its holdings
in securities. You can find out the value of your fund's investment in each
type of security at the end of the valuation date because these securities'
values are posted on a daily basis.
• The value of any cash on hand at the time of valuation, as well as any
short- or long-term assets held by the fund, should be included in this
total.
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Financial Accounting - VII 5.5 EVALUATION OF MUTUAL FUND
Evaluating mutual funds involves assessing various factors to determine
their suitability for an investor's goals, risk tolerance, and investment
strategy. Here are some key aspects to consider when evaluating mutual
funds:
1. Performance: Analyze the fund's historical performance compared to
relevant benchmarks and peer funds. Look for consistent performance
over different market cycles rather than just short-term gains. Consider
both absolute returns and risk-adjusted returns (such as Sharpe ratio or
alpha) to understand how well the fund has performed relative to its
level of risk.
2. Investment Objectives and Strategy: Understand the fund's
investment objectives, strategy, and asset allocation. Ensure that the
fund's investment approach aligns with your own investment goals and
risk tolerance. For example, if you're seeking long-term growth, a fund
focused on high-growth stocks may be suitable, whereas if you're more
risk-averse, a balanced fund with a mix of stocks and bonds might be
more appropriate.
3. Risk Profile: Assess the fund's risk profile, including its volatility,
downside risk, and exposure to different types of risk (such as market
risk, credit risk, and liquidity risk). Evaluate how the fund's risk
characteristics match your own risk tolerance and investment horizon.
4. Expense Ratio: Consider the fund's expense ratio, which represents
the annual fees and expenses charged by the fund. Lower expense
ratios can significantly impact your overall returns over time, so look
for funds with competitive expense ratios relative to their peers.
5. Manager Experience and Track Record: Evaluate the fund
manager's experience, expertise, and track record. Look for managers
with a consistent investment approach and a demonstrated ability to
generate alpha over the long term.
6. Fund Size and Liquidity: Consider the fund's size and liquidity, as
larger funds may face challenges in executing trades efficiently,
especially in less liquid markets. However, very small funds may also
pose risks in terms of operational capacity and economies of scale.
7. Tax Efficiency: Assess the fund's tax efficiency, especially if
investing in taxable accounts. Look for funds with low turnover ratios
and tax-efficient investment strategies to minimize the impact of taxes
on your investment returns.
8. Portfolio Holdings: Review the fund's portfolio holdings to
understand its underlying investments, sector allocations, and
concentration risks. Ensure that the fund's holdings are diversified and
in line with your own investment preferences.
150
9. Performance Consistency: Evaluate the fund's consistency in Mutual Fund - 2
meeting its investment objectives and delivering returns over time.
Look for funds with stable performance patterns and avoid those with
significant fluctuations or underperformance relative to peers.
10. Regulatory and Compliance Considerations: Finally, consider any
regulatory and compliance factors that may impact the fund's
operations, such as regulatory oversight, fund structure, and adherence
to investment mandates.
5.6 DISPOSAL OF INVESTMENTS

The disposal of investments by a mutual fund refers to the process of
selling securities or other assets held within the fund's portfolio. This
disposal can occur for various reasons and is a fundamental aspect of
managing the mutual fund's investment strategy. Here are some common
reasons why mutual funds dispose of investments:
1. Portfolio Rebalancing: Mutual fund managers regularly review and
adjust the fund's portfolio to maintain the desired asset allocation and
investment strategy. This may involve selling investments that have
become overvalued or no longer fit the fund's investment criteria and
using the proceeds to purchase other securities that offer better
prospects or align more closely with the fund's objectives.
2. Meeting Redemption Requests: When investors redeem their shares
in the mutual fund, the fund may need to sell investments to raise cash
to meet these redemption requests. The fund may sell securities in
proportion to their holdings in the portfolio, ensuring that all investors
are treated fairly.
3. Profit Taking or Loss Mitigation: Mutual funds may dispose of
investments to realize gains or losses for tax purposes or to lock in
profits when market conditions are favorable. Conversely, they may
also sell underperforming investments to mitigate losses or reduce
exposure to certain sectors or asset classes.
4. Change in Investment Strategy: If there is a change in the
fund'sinvestment objectives or strategy, the fund manager may need to
dispose of certain investments that no longer align with the new
mandate. This could involve selling securities that are no longer
considered suitable or are deemed to pose excessive risk under the
revised strategy.
5. Maturity or Redemption of Securities: When bonds or other fixed-
income securities held by the mutual fund mature or are redeemed by
the issuer, the fund receives the principal amount plus any accrued
interest. The fund may then decide to reinvest the proceeds in similar
securities or allocate them to other investments based on prevailing
market conditions.
151
Financial Accounting - VII 6. Market Conditions: Mutual fund managers may opportunistically
dispose of investments based on changing market conditions or
macroeconomic factors. For example, they may sell securities in
response to interest rate changes, geopolitical events, or economic
indicators that could affect the performance of the fund.
5.7 ACCOUNTING POLICIES

Mutual funds accounting is a critical matter for the financial system, given
the increasing preference for mutual funds over direct holdings of
securities such as stocks and bonds by the investing public. In particular,
many, if not most, individual investors and retail clients have the majority
of their savings in employer-sponsored 401(k) plans, which typically offer
a selection of mutual funds as the investment choices. The end product of
mutual funds accounting is the accurate pricing of these investment
vehicles and the correct assignment of investment income to holders
thereof. These are thus, the major concerns for the chief financial officers
(CFOs), controllers, and operations managers of mutual fund companies.
Aspects of Mutual Funds Accounting

Numerous fundamental duties related to mutual fund accounting may be
carried out by internal staff members or contracted out to other service
providers, such custodian banks. These procedures consist of:
 Daily calculating the net asset value, or market value, of its investment
portfolio (NAV).
 Planning for and documenting every revenue, including interest and
dividends.
 Tracking interest that is due on bonds and other fixed-income assets
that are held in the investment portfolio.
 Appropriately amortizing bond purchase discounts or premiums. See
the in-depth justification below.
 Keeping track of all transactions involving securities, such as purchases
and sales of portfolio investments.
 Tracking all long- and short-term capital gains that are a result of
transactions involving securities in the fund.
 Keeping track of all financial inputs and outflows related to purchases
and redemptions of shares by investors.
 Maintaining records of the shares owned, and transactions made, by
each shareholder in the fund.
 Tracking distributions of income and capital gains made to
shareholders in the fund.
152
In the best mutual funds accounting departments, these activities will be Mutual Fund - 2
highly automated. However, some manual input, reviews, and adjustments
may still be necessary.
5.8 SUMMARY
 It's important for investors and analysts to consider a combination of
these valuation methods and norms to arrive at a comprehensive
understanding of an investment's value. Different methods may yield
different valuation estimates, and triangulating multiple approaches
can help mitigate biases and uncertainties. Additionally, staying
updated on changes in regulations and industry practices is crucial for
ensuring accurate valuation assessments.
 It's important for investors to understand how units in a mutual fund

are priced, as well as any associated fees or expenses. This information
is typically provided in the fund's prospectus or offering documents.
Additionally, investors should be aware of any specific rules or
regulations that govern mutual fund pricing in their country or region.
By considering these factors and conducting thorough due diligence,
investors can make informed decisions when evaluating mutual funds
and selecting those that best fit their investment needs and preferences.
It's also important to regularly review and monitor your investments to
ensure they continue to align with your financial goals and objectives.
It's important for investors to understand that the disposal of
investments by a mutual fund is a normal part of its investment process
and is typically carried out by the fund manager in accordance with the
fund's investment objectives and guidelines. However, frequent or
large-scale disposals may have implications for the fund's
performance, liquidity, and tax efficiency, so investors should monitor
such activities and assess their impact on their investment holdings.

1. Which investment valuation method relies on comparing the
investment to similar assets that have recently been bought or sold in
the market?
b. Cost-based valuation
c. Income-based valuation
d. Market-based valuation
e. Discounted cash flow (DCF) analysis
2. Under net asset method, value of a share depends on ...........

a. Net Assets available to equity shareholders
b. Net assets available to debentures holders
c. Net assets available to preference shareholders
d. None of the above
153
Financial Accounting - VII 3. Net asset value is also called as ............
a. asset backing value
b. Intrinsic value
c. Liquidation value
d. (A) and (B) and (C)
4. While deciding net asset value, fictitious assets ............

a. Should not be considered
b. Should be considered
c. Added to total assets
5. Yield value depends on ..........

a. Paid-up equity share capital
b. future maintainable profit
c. Normal rate of return
6. Fair value of a share is equal to ...........

a. Intrinsic value only
b. Yield value only
c. Average of intrinsic and yield value
7. Value of a partly paid equity share is equal to ..............

a. Value of fully paid share-calls unpaid per share
b. Calls in arrears per share
c. Paid-up value per share
8. To calculate Net Assets

a. Fictitious Assets are excluded
b. Fictitious Assets are included
c. Tangible Assets are excluded
d. Intangible Assets are excluded
9. Yield value is subject to ……………………….

a. Gross profits
b. Operating profits
c. Net profit
d. Losses
10. When a mutual fund disposes of an investment, it is most likely due

to:
a. Meeting redemption requests from investors
b. Rebalancing the fund's portfolio
c. Realizing gains or losses for tax purposes
d. All of the above
154
True or False: Mutual Fund - 2
1. To calculate Net Assets Fictitious Assets are excluded:
True
2. Yield value is subject to Losses:
False
3. Value of a partly paid equity share is equal to Value of fully paid share-
calls unpaid per share:
True
4. Under net asset method, value of a share depends on Net Assets
available to equity shareholders:
True
5.10 BRIEF QUESTIONS

1. How NAV is calculated? State the examples.
2. Define Mutual fund accounting with a suitable example.
3. Explain Types of Mutual fund scheme
4. Explain Investment valuation norms
5. Expalin how to evaluate mutual fund
6. Disposal of Investment

155
6
INTRODUCTION TO IFRS
Unit Structure :
6.1 Meaning of Accounting Standards
6.2 Accounting Standards in Brief
6.3 Meaning of IFRS
6.4 Objectives of IFRS
6.5 Scope of IFRS
6.6 List of IFRS
6.7 Challenges of IFRS
6.8 Convergence with IFRS
6.9 Benefits of IFRS
6.10 Framework for the preparation and presentation of Financial
Statements.
6.11 First-time adoption of IFRS
6.12 Introduction to Borrowing Cost
6.13 Meaning & Definition of Borrowing Cost
6.14 Comparison of Ind AS, IFRS and AS
6.15 Multiple Choice Question
6.16 Brief Question
6.1 MEANING OF ACCOUNTING STANDARDS

Accounting standards are the written policy documents issued by the
regulatory authority, experts accounting body or by the government
covering various aspects of recognition, treatment, measurement,
presentation & disclosure of accounting transactions and events in the
financial statements. The accountant has to adhere to various accounting
standards while preparing financial statements of the entities.
Accounting standard provide framework and standard accounting policies
so that the financial statement of different enterprises become comparable.
The accounting standards deals with the issues of –
i. Recognition of events and transactions in the financial statements;
ii. Measurement of these transactions and events;
156
iii. Presentation of these transactions and events in the financial Introduction to IFRS
statements in a manner that is meaningful and understandable to the
reader; and
iv. The disclosure requirements which should be there to enable public at
large and the stakeholders and the potential investors in particular, to
get insight into what these financial statement are trying to reflect and
thereby facilitating them to take prudent and informed business
decisions.
6.2 ACCOUNTING STANDARDS IN BRIEF

AS-1-Disclosure of Accounting Policies: Accounting Policies refer to
specific accounting principles and the method of applying those principles
adopted by the enterprises in preparation and presentation of the financial
statements.
AS-2-Valuation of Inventories: The objective of this standard is to
formulate the method of computation of cost of inventories / stock,
determine the value of closing stock / inventory at which the inventory is
to be shown in balance sheet till it is not sold and recognized as revenue.
AS 3-Cash Flow Statements: Cash flow statement is additional
information to user of financial statement. This statement exhibits the flow
of incoming and outgoing cash. This statement assesses the ability of the
enterprise to generate cash and to utilize the cash. This statement is one of
the tools for assessing the liquidity and solvency of the enterprise.
AS 4-Contingencies and Events occurring after the balance sheet
date: In preparing financial statement of a particular enterprise,
accounting is done by following accrual basis of accounting and prudent
accounting policies to calculate the profit or loss for the year and to
recognize assets and liabilities in balance sheet. While following the
prudent accounting policies, the provision is made for all known liabilities
and losses even for those liabilities / events, which are probable.
Professional judgment is required to classify the likehood of the future
events occurring and, therefore, the question of contingencies and their
accounting arises. Objective of this standard is to prescribe the accounting
of contingencies and the events, which take place after the balance sheet
date but before approval of balance sheet by Board of Directors. The
Accounting Standard deals with Contingencies and Events occrring after
the balance sheet date.
AS 5-Net Profit or Loss for the Period, Prior Period Items and change
in Accounting Policies: The objective of this accounting standard is to
prescribe the criteria for certain items in the profit and loss account so that
comparability of the financial statement can be enhanced. Profit and loss
account being a period statement covers the items of the income and
expenditure of the particular period. This accounting standard also deals
with change in accounting policy, accounting estimates and extraordinary
items.
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Financial Accounting - VII AS 6-Depreciation Accounting: It is a measure of wearing out,
consumption or other loss of value of a depreciable asset arising from use,
passage of time. Depreciation is nothing but distribution of total cost of
asset over its useful life.
AS 7-Construction Contracts: Accounting for long term construction
contracts involves question as to when revenue should be recognized and
how to measure the revenue in the books of contractor. As the period of
construction contract is long, work of construction starts in one year and is
completed in another year or after 4-5 years or so. Therefore question
arises how the profit or loss of construction contract by contractor should
be determined. There may be following two ways to determine profit or
loss: On year-to-year basis based on percentage of completion or on
completion of the contract.
AS 8-Accounting for Research & Development: Accounting for
research & development, is withdrawn from the date of AS 26, Intangible
assets, becoming mandatory for respective enterprises.
AS 9-Revenue Recognition: The standard explains as to when the
revenue should be recognized in profit and loss account and also states the
circumstances in which revenue recognition can be postponed. Revenue
means gross inflow of cash, receivable or other consideration arising in the
course of ordinary activities of an enterprise such as the sale of goods,
rendering of services, and use of enterprises resources by other yielding
interest, dividend and royalties. In other words, revenue is a charge made
to customers / clients for goods supplied and services rendered.
AS 10-Accounting for Fixed Assets: AS 10 prescribes accounting for
fixed assets used by entity in the business. AS defines term fixed asset. It
is an asset, which is held with intention of being used for the purpose of
producing or providing goods and services not held for sale in the normal
course of business and expected to be used for more than one accounting
period.
AS 11-The Effects of changes in Foreign Exchange Rates : Effect of
Changes in Foreign Exchange Rate shall be applicable in Respect of
Accounting Period commencing on or after 01-04-2004 and is mandatory
in nature. This accounting Standard applicable to accounting for
transaction in foreign currencies in translating in the financial statement of
foreign operations. Effect of changes in foreign exchange rate, an
enterprises should disclose following aspects:
a) Amount Exchange Difference included in Net profit or Loss;
b) Amount accumulated in foreign exchange translation reserve;
c) Reconciliation of opening and closing balance of Foreign Exchange
translation reserve;
AS 12-Accounting for Government Grants: Accounting standard 12
deals with accounting for government grants both capital and revenue
from government. Government Grants are assistance by the Govt. in the
form of cash or kind to an enterprise in return for past or future
compliance with certain conditions. Government assistance, which cannot
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be valued reasonably, is excluded from Govt. grants,. Those transactions Introduction to IFRS
with Government, which cannot be distinguished from the normal trading
transactions of the enterprise, are not considered as Government grants.
AS 13-Accounting for Investments: AS 13 provides accounting
principles for investments in the financial statement and related disclosure
requirements. As per AS 13 Investment means the assets held for earning
income by way of dividend, interest and rentals, for capital appreciation or
for other benefits.
AS 14-Accounting for Amalgamation: This standard prescribes
accounting for amalgamation. This accounting standard deals with
accounting to be made in books of Transferee Company in case of
amalgamation. The standard is applicable when acquired company is
dissolved and separate entity ceased exist and purchasing company
continues with the business of acquired company
AS 15-Employee Benefits: Accounting Standard 15 prescribes the
accounting and disclosure for employee benefits. This Standard covers all
forms of employee benefits i.e. Short term employee benefits (Salaries,
Leave, bonus, housing, mediclaim etc.), Post employment benefits
(gratuity, pension, post employment medical care etc.) and other long term
employee benefits and termination benefits.
AS 16-Borrowing Costs : Enterprises are borrowing the funds to acquire,
build and install the fixed assets and other assets, these assets take time to
make them useable or saleable, therefore the enterprises incur the interest
(cost on borrowing) to acquire and build these assets. The objective of the
Accounting Standard is to prescribe the treatment of borrowing cost
(interest + other cost) in accounting, whether the cost of borrowing should
be included in the cost of assets or not.
AS 17-Segment Reporting: An enterprise needs in multiple
products/services and operates in different geographical areas. Multiple
products / services and their operations in different geographical areas are
exposed to different risks and returns. Information about multiple
products/ services and their operation in different geographical areas are
called segment information. Such information is used to assess the risk
and return of multiple products/services and their operation in different
geographical areas. Disclosure of such information is called segment
reporting.
AS 18-Related Party Disclosure: Sometimes business transactions
between related parties lose the feature and character of the arms length
transactions. Related party relationship affects the volume and decision of
business of one enterprise for the benefit of the other enterprise. Hence
disclosure of related party transaction is essential for proper understanding
of financial performance and financial position of enterprise.
AS 19-Accounting for leases: Lease is an arrangement by which the
lesser gives the right to use an asset for given period of time to the lessee
on rent. It involves two parties, a lessor and a lessee and an asset which is
to be leased. The lessor who owns the asset agrees to allow the lessee to
use it for a specified period of time in return of periodic rent payments.
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Financial Accounting - VII AS 20-Earning Per Share: Earning per share (EPS) is a financial ratio
that gives the information regarding earning available to each equity share.
It is very important financial ratio for assessing the state of market price of
share. This accounting standard gives computational methodology for the
determination and presentation of earning per share, which will improve
the comparison of EPS. The statement is applicable to the enterprise
whose equity shares or potential equity shares are listed in stock exchange.
AS 21-Consolidated Financial Statements: The objective of this
statement is to present financial statements of a parent and its subsidiary
(ies) as a single economic entity. In other words the holding company and
its subsidiary (ies) are treated as one entity for the preparation of these
consolidated financial statements. Consolidated profit/loss account and
consolidated balance sheet are prepared for disclosing the total profit/loss
of the group and total assets and liabilities of the group. As per this
accounting standard, the conslidated balance sheet if prepared should be
prepared in the manner prescribed by this statement.
AS 22-Accounting for Taxes on Income: This accounting standard
prescribes the accounting treatment for taxes on income. Traditionally,
amount of tax payable is determined on the profit/loss computed as per
income tax laws.
AS 23-Accounting for Investments in Associates in consolidated
financial statements: The accounting standard was formulated with the
objective to set out the principles and procedures for recognizing the
investment in associates in the consolidated financial statements of the
investor, so that the effect of investment in associates on the financial
position of the group is indicated.
AS 24-Discontinuing Operations: The objective of this standard is to
establish principles for reporting information about discontinuing
operations. The focus of the disclosure of the Information is about the
operations which the enterprise plans to discontinue rather than disclosing
on the operations which are already discontinued. However, the disclosure
about discontinued operation is also covered by this standard.
AS 25-Interim Financial Reporting (IFR): Interim financial reporting is
the reporting for periods of less than a year generally for a period of 3
months.
AS 26-Intangible Assets : An Intangible Asset is an Identifiable non-
monetary Asset without physical substance held for use in the production
or supplying of goods or services for rentals to others or for administrative
purpose
AS 27-Financial Reporting of Interest in joint ventures: Joint Venture
is defined as a contractual arrangement whereby two or more parties carry
on an economic activity under 'joint control'. Control is the power to
govern the financial and operating policies of an economic activity so as to
obtain benefit from it. 'Joint control' is the contractually agreed sharing of
control over economic activity.
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AS 28 Impairment of Assets: The dictionary meaning of 'impairment of Introduction to IFRS
asset' is weakening in value of asset. In other words when the value of
asset decreases, it may be called impairment of an asset. As per AS-28
asset is said to be impaired when carrying amount of asset is more than its
recoverable amount.
Carrying Amount means book value of Asset
Recoverable Amount means Market value of Asset
AS 29-Provisions, Contingent Liabilities And Contingent
Assets: Objective of this standard is to prescribe the accounting for
Provisions, Contingent Liabilities, Contingent Assets, Provision for
restructuring cost
Provision: It is a liability, which can be measured only by using a
substantial degree of estimation
Liability: A liability is present obligation of the enterprise arising from
past events the settlement of which is expected to result in an outflow
from the enterprise of resources embodying economic benefits.
6.3 MEANING OF IFRS

 IFRSs are principle-based standards.
 The principle-based standards have distinct advantage that the
transactions cannot be manipulated easily to achieve a particular
accounting.
 The Financial Accounting Standards Board (FASB), USA, is having a
convergence project with the IASB and is broadly adopting the
principle-based approach instead of rule-basedapproach.
 IFRSs lay down treatments based on the economic substance of
various events and transactions rather than their legal form.
 The application of this approach may result into events and
transactions being presented in a manner different from their legal
form.
 To illustrate, as per IAS 32, preference shares that provide for
mandatory redemption by the issuer are presented as a liability.
6.4 OBJECTIVES OF IFRS:

WHY IFRS?
A single set of accounting standards would enable internationally to
standardize training and assure better quality on a global screen, it would
also permit international capital to flow more freely, enabling companies
to develop consistent global practices on accounting problems. It would
be beneficial to regulators too, as a complexity associated with needing to
understand various reporting regimes would be reduced.
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Financial Accounting - VII OBJECTIVES OF IFRS:
6.4.1 The main objective of IFRS is to develop in the public the interest
of a single set of high quality, understandable and enforceable
global accounting standards that require high quality, transparent
and comparable information in financial statements and other
financial reporting to help participants in the world's capital
markets and other users make economic decisions.
6.4.2 To promote the use and rigorous application of those standards; in
fulfilling the objectives associated with it.
6.4.3 To take account of, as appropriate, the special needs of small and
medium-sized entities and emerging economies.
6.4.4 To bring about convergence of national accounting standards and
International Accounting standards and IFRS to high quality
solutions.
6.5 SCOPE OF IFRS

All International Accounting Standards (IASs) and Interpretations issued
by the former IASC (International Accounting Standard Committee) and
SIC (Standard Interpretation Committee) continue to be applicable unless
and until they are amended or withdrawn. IFRSs apply to the general
purpose financial statements and other financial reporting by profit-
oriented entities -- those engaged in commercial, industrial, financial, and
similar activities, regardless of their legal form. Entities other than profit-
orientedbusiness entities may also find IFRSs appropriate.
General purpose financial statements are intended to meet the common
needs of shareholders, creditors, employees, and the public at large for
information about an entity's financial position, performance, and cash
flows. Other financial reporting includes information provided outside
financial statements that assists in the interpretation of a complete set of
financial statements or improves users' ability to make efficient economic
decisions. IFRS apply to individual company and consolidated financial
statements. A complete set of financial statements includes a balance
sheet, an income statement, a cash flow statement, a statement
showing either all changes in equity or changes in equity other than those
arising from investments by and distributions to owners, a summary of
accounting policies, and explanatory notes.
If an IFRS allows both a 'benchmark' and an 'allowed alternative'
treatment, financial statements may be described as conforming to IFRS
whichever treatment is followed. In developing Standards, IASB intends
not to permit choices in accounting treatment. Further, IASB intends to
reconsider the choices in existing IASs with a view to reducing the
number of those choices. IFRS will present fundamental principles in bold
face type and otherguidance in non-bold type (the 'black-letter'/'grey-letter'
distinction). Paragraphs of both types have equal authority. The
provision of IAS 1 that conformity with IAS requires compliance with
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every applicable IAS and Interpretation requires compliance with all Introduction to IFRS
IFRSs as well.
6.6 LIST OF IFRS

 IFRS 1: First-time Adoption of International Financial Reporting
Standards
 IFRS 2: Share-based Payment
 IFRS 3: Business Combinations
 IFRS 4: Insurance Contracts
 IFRS 5: Non-current Assets Held for Sale and Discontinued
Operations
 IFRS 6: Exploration for and Evaluation of Mineral Resources
 IFRS 7: Financial Instruments: Disclosures
 IFRS 8: Operating Segments
 IFRS 9: Financial Instruments
International Accounting Standards (IAS)
IAS relates to standards on various aspects of accounting issues.
These are mainly relevant for maintenance of accounts as well as
disclosure of Information.
 IAS 1: Presentation of Financial Statements.
 IAS 2: Inventories
 IAS 7: Cash Flow Statements
 IAS 8: Accounting Policies, Changes in Accounting Estimates and
Errors
 IAS 10: Events After the Balance Sheet Date
 IAS 11: Construction Contracts
 IAS 12: Income Taxes
 IAS 16: Property, Plant and Equipment (summary)
 IAS 17: Leases
 IAS 18: Revenue
 IAS 19: Employee Benefits
 IAS 20: Accounting for Government Grants and Disclosure of
Government Assistance
 IAS 21: The Effects of Changes in Foreign Exchange Rates
 IAS 23: Borrowing Costs
 IAS 24: Related Party Disclosures
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Financial Accounting - VII  IAS 26: Accounting and Reporting by Retirement Benefit Plans
 IAS 27: Consolidated Financial Statements
 IAS 28: Investments in Associates
 IAS 29: Financial Reporting in Hyperinflationary Economies
 IAS 31: Interests in Joint Ventures
 IAS 32: Financial Instruments: Presentation
 IAS 33: Earnings per Share
 IAS 34: Interim Financial Reporting
 IAS 36: Impairment of Assets
 IAS 37: Provisions, Contingent Liabilities and ContingentAssets
 IAS 38: Intangible Assets
 IAS 39: Financial Instruments: Recognition and Measurement
 IAS 40: Investment Property
 IAS 41: Agriculture
6.7 CHALLENGES OF IFRS

Economic Environment
 Some IFRSs require fair value approach to be followed, examples
include:
o IAS 39, Financial Instruments: Recognition and Measurement
o IAS 41, Agriculture
 The markets of many economies such as India normally do not have
adequate depth and breadth for reliable determination of fair values.
 With a view to provide further guidance on the use of fair value
approach, the IASB is developing a document.
 Till date, no viable solution of objective fair value measures is
available.
SME concerns
SMEs face problems in implementing IFRSs because of:
 Scarcity of resources and expertise with the SMEs to achieve
compliance
 Cost of compliance not commensurate with the expected benefits
Keeping in view the difficulties faced by the SMEs, the IASB is
developing an IFRS for SMEs.
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Training to Preparers Introduction to IFRS
 Some IFRSs are complex.
 There is lack of adequate skills amongst the preparers and users of
Financial Statements to apply IFRSs.
 Proper implementation of such IFRSs requires extensive education
of preparers
Interpretation
 A large number of application issues arise while applying IFRSs.
 There is a need to have a forum which may address the application
issues in specific cases.
6.8 CONVERGENCE WITH IFRS:

 Indian Accounting Standards (ASs) are formulated on the basis of the
IFRSs.
 While formulating ASs, the endeavor of the ICAI remains to converge
with the IFRSs.
 The ICAI has till date issued 29 ASs corresponding to IFRSs.
 Some recent ASs, issued by the ICAI, are totally at par with the
corresponding IFRSs, e.g., the Standards on ‘Impairment of Assets’
and ‘Construction Contracts’.
 While formulating Indian Accounting Standards, changes from the
corresponding IAS/ IFRS are made only in those cases where these are
unavoidable considering:
o Legal and/ or regulatory framework prevailing in the country.
o To reduce or eliminate the alternatives so as to ensurecomparability.
o State of economic environment in the country
o Level of preparedness of various interest groups involved in
implementing the accounting standards.
6.9 BENEFITS OF IFRS

The forces of globalization prompt more and more countries to open their
doors to foreign investment and as businesses expand across borders the
need arises to recognize the benefits of having commonly accepted and
understood financial reporting standards. Following are some of the
benefits of adopting IFRS -
 Transparency and comparability
 Low cost of capital
 Eliminates need for multiple reporting
 True value of acquisition
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Financial Accounting - VII  Cross border transaction
 Sets a benchmark
 Improvement in planning and forecasting
6.10 FRAMEWORK FOR THE PREPARATION AND

PRESENTATION OF FINANCIAL STATEMENTS
This Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users. The Framework
deals with: The objective of financial statements; the qualitative
characteristics that determine the usefulness of information in financial
statement; The Definition, recognition and measurement of the elements
from which financial statements are constructed; and Concept of capital
and capital maintenance. The Objective of Financial statements is to
provide useful information to users of financial statements in making
economic decision. Financial Statements are prepared to provide
information on Financial Position, Operating Performance and changes in
financial position of an entity Financial Statements are normally prepared
on the assumption that entity is a going concern and will continue in
operation for the foreseeable future, and prepared on accrual basis of
accounting. The four Qualitative characteristics are Understandability,
relevance; reliability and comparability are the attributes that make the
financial information useful to users. The elements directly related to the
measurementof financial position are assets, liabilities and equity. An item
that meets the definition of an element should be recognized if: it is
probable that any future economic benefit associated the item will flow to
or from the entity. The item has a cost or value that can be measured with
reliability. Measurement is the process of determining the monetary
amounts at which each element in the financial statements is to be
recognized and carried in the Balance Sheet and Income statement. The
concept of capital maintenance is concerned with how an entity defines
the capital that it seeks to maintain. It provides the linkage between the
concepts of capital and the concepts of profit because it provides the point
of referenceby which profit is measured.
6.11 IFRS -1: FIRST TIME ADOPTION OF IFRS

An entity shall prepare and present an opening IFRS statement of
financial position at the date of transition to IFRSs. This is the starting
point for its accounting under IFRSs. An entity shall prepare an opening
IFRS balance sheet at the date of transition to IFRSs. This is the starting
point for its accounting under IFRSs. An entity need not present its
opening IFRS balance sheet in its first IFRS financial statements. In
general, the IFRS requires an entity to comply with each IFRS effective at
the end of its first IFRS reporting period. In particular, the IFRS requires
an entity to do the following in the opening IFRS statement of financial
position that it prepares as a starting point for its accounting under IFRSs:
recognize all assets and liabilities whose recognition is required by IFRSs.
not to recognize items as assets or liabilities if IFRSs do not permit such
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recognition; IFRS-1. IFRS-1 reclassify items that it recognized under Introduction to IFRS
previous GAAP as one type of asset, liability or component of equity, but
are different type of asset, liability or component of equity under IFRSs.
Apply IFRSs in measuring all recognized assets and liabilities. The IFRS
grants limited exemptions from these requirements in specified areas
where the cost of complying with them would be likely to exceed the
benefits to users of financial statements. The IFRS also prohibits
retrospective application of IFRSs in some areas; particularly where
retrospective application would require judgments by management about
past conditions after the outcome of a particular transaction is already
known. The IFRS requires disclosures that explain how the transition from
previous GAAP to IFRSs affected the entities reported financial position,
financial performance and cash flows.
OBJECTIVE OF THIS STANDARD: The objective of this IFRS is to
specify the financial reporting by an entity when it undertakes a share-
based payment transaction. In particular, it requires an entity to reflect in
its profit or loss and financial position the effects of share-based
payment transactions, including expenses associated with transactions in
which share options are granted to employees.
IFRS -2: SHARE-BASED PAYMENTS

The IFRS requires an entity to recognize share-based payment transactions
in its financial statements, including transactions with employees or other
parties to be settled in cash, other assets, or equity instruments of the
entity. There are no exceptions to the IFRS, other than for transactions to
which other Standards apply. This also applies to transfers of equity
instruments of the entity’s parent, or equity instruments of another entity
in the same group as the entity, to parties that have supplied goods or
services to the entity. This IFRS sets out measurement principles and
specific requirements for three types of share-based payment transactions:
equity-settled share-based payment transactions, in which the entity
receives goods or services as consideration for equity instruments of the
entity (including shares or share options); (b) cash-settled share-based
payment transactions, in which the entity acquires goods or services by
incurring liabilities to the supplier of those goods or services for amounts
that are based on the price (or value) of the entity’s shares or other equity
instruments of the entity; and (c) transactions in which the entity receives
or acquires goods or services and the terms of the arrangement provide
either the entity or the supplier of those goods or services with a choice of
whether the entity settles the transaction in cash or by issuing equity
instruments.
The IFRS also sets out requirements if the terms and conditions of an
option or share grant are modified (e.g. an option isreprised) or if a grant is
cancelled, repurchased or replaced with another grant of equity
instruments. For example, irrespective of any modification, cancellation
or settlement of a grant of equity instruments to employees, the IFRS
generally requires the entity to recognize, as a minimum, the services
received measured at the grant date fair value of the equity instruments
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Financial Accounting - VII granted. For cash- settled share-based payment transactions, the IFRS
requires an entity to measure the goods or services acquired and the
liability incurred at the fair value of the liability. Until the liability is
settled, the entity is required to re measure the fair value of the liability at
each reporting date and at the date of settlement, with any changesin value
recognized in profit or loss for the period.
IFRS -3: BUSINESS COMBINATIONS:

The objective of the IFRS is to enhance the relevance, reliability and
comparability of the information that an entity provides in its financial
statements about a business combination and its effects. It does that by
establishing principles andrequirements for how an acquirer:
(a) Recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any non- controlling
interest in the acquire;
(b) Recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase.
(c) Determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.
Points: Core principle an acquirer of a business recognizes the assets
acquired and liabilities assumed at their acquisition-date fair values and
discloses information that enables users to evaluate thenature and financial
effects of the acquisition. Applying the acquisition method a business
combination must be accounted for by applying the acquisition method,
unless it is a combination involving entities or businesses under common
control. One of the parties to a business combination can always be
identified as the acquirer, being the entity that obtains control of the other
business (the acquiree). Formations of a joint venture or the acquisition of
an asset or a group of assets that does not constitute a business are not
business combinations.
IFRS -4: INSURANCE CONTRACTS:

The objective of this IFRS is to specify the financial reporting for
insurance contracts by any entity that issues such contracts (described in
this IFRS as an insurer) until the Board completes the second phase of its
project on insurance contracts. In particular, this IFRS requires: limited
improvements to accounting by insurers for insurance contracts. disclosure
that identifies and explains the amounts in an insurer’s financial
statements arising from insurance contracts and helps users of those
financial statements understand the amount, timing and uncertainty of
future cash flows from insurance contracts.
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IFRS -5: NON-CURRENT ASSETS HELD FOR SALE AND Introduction to IFRS
DISCONTINUED OPERATIONS:
The objective of this IFRS is to specify the accounting for assets held for
sale, and the presentation and disclosure of discontinued operations. In
particular, the IFRS requires: assetsthat meet the criteria to be classified
as held for sale to be measured at the lower of carrying amount and fair
value less costs to sell, and depreciation on such assets to cease; and assets
that meet the criteria to be classified as held for sale to be presented
separately in the statement of financial position and the results of
discontinued operations to be presented separately in the statement of
comprehensive income.
IFRS-6: EXPLORATION FOR AND EVALUATION OF
MINERALS:
The objective of this IFRS is to specify the financial reporting for the
exploration for and evaluation of mineral resources. POINTS:
Exploration and evaluation expenditures are expenditures incurred by an
entity in connection with the exploration for and evaluation of mineral
resources before the technical feasibility and commercial viability of
extracting a mineral resource are demonstrable. Exploration for and
evaluation of mineral resources is the search for mineral resources,
including minerals, oil, natural gas and similar non-regenerative resources
after the entity has obtained legal rights to explore in a specific area, as
well as the determination of the technical feasibility and commercial
viability of extracting the mineral resource. Exploration and evaluation
assets are exploration and evaluation expenditures recognized as assetsin
accordance with the entity’s accounting policy.
FRS-7: FINANCIAL INSTRUMENTS DISCLOSURE:

The objective of this IFRS is to require entities to provide disclosures in
their financial statements that enable users to evaluate: the significance of
financial instruments for the entity’s financial position and performance;
and the nature and extent of risks arising from financial instruments to
which the entity is exposed during the period and at the reporting date, and
how the entity manages those risks. The qualitative disclosures describe
management’s objectives, policies and processes for managing those risks.
The quantitative disclosures provide information about the extent to which
the entity is exposed to risk, based on information provided internally to
the entity's key management personnel. Together, these disclosures
provide an overview of the entity's use of financial instruments and the
exposures to risks they create.
IFRS-8: OPERATING SEGMENTS:

This IFRS shall apply to:
(a) The separate or individual financial statements of an entity: whose
debt or equity instruments are traded in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local
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Financial Accounting - VII and regional markets), or that files, or is in the process of filing, its
financial statements with a securities commission or other regulatory
organization for the purpose of issuing any class of instruments in a
public market.
(b) The consolidated financial statements of a group with a parent: whose
debt or equity instruments are traded in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local
and regional markets), or that files, or is in the process of filing, the
consolidated financial statements with a securities commission or
other regulatory organization for the purpose of issuing any class of
instruments in a public market. IFRS-8
IFRS - Indian Context

Convergence with IFRS has gained momentum in recent years all over the
World.
India is committed to adopt IFRS from 2011.
United States of America has announced its intention to adopt IFRS from
2014 and it also permits foreign private filers in the U.S. Stock Exchanges
to file IFRS compiled Financial Statement, without requiring the
presentation of reconciliation statement.
In this scenario of globalization, India cannot insulate itself from the
developments taking place worldwide. In India, so far as the ICAI is
concerned, its aim has always been to comply with the IFRS to the extent
possible with the objective to formulate sound financial reporting
standards. The ICAI, being a member of the International Federation of
Accountants (IFAC), considers the IFRS and tries to integrate them, to the
extent possible, in the light of the laws, customs, practices and business
environment prevailing in India. The Preface to the Statements of
Accounting Standards, issued by the ICAI, categorically recognizes the
same. Now, as the world globalizes, it has become imperative for India
also to make a formal strategy for convergence with IFRS with the
objective to harmonize with globally accepted accounting standards.
In the present era of globalization and liberalization, the World has
become an economic village. The globalization of the business world and
the attendant structures and the regulations, which support it, as well as
the development of e-commerce make it imperative to have a single
globally accepted financial reporting system. A number of multinational
companies are establishing their businesses in various countries with
emerging economies and vice versa.
The entities in emerging economies are increasingly accessing the global
markets to fulfill their capital needs by getting their securities listed on the
stock exchanges outside their country. Capital markets are, thus, becoming
integrated consistent with this World-wide trend. The use of different
accounting frameworks in different countries, which require inconsistent
treatment and presentation of the same underlying economic transactions,
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creates confusion for users of financial statements. This confusion leads to Introduction to IFRS
inefficiency in capital markets across the world. Therefore, increasing
complexity of business transactions and globalization of capital markets
call for a single set of high quality accounting standards. High standards
of financial reporting underpin the trust investors place in financial and
non-financial information. Thus, the case for a single set of globally
accepted accounting standards has prompted many countries to pursue
convergence of national accounting standards with IFRS.
The paradigm shift in the economic environment in India during last
few years has led to increasing attention being devoted to accounting
standards as a means towards ensuring potent and transparent financial
reporting by any corporate.
ICAI, being a premier accounting body in the country, took upon itself the
leadership role by establishing ASB, more than twenty five years back, to
fall in line with the international and national expectations. Today,
accounting standards issued by the Institute have come a long way.
The ICAI as the accounting standard - setting body in the country has
always made efforts to formulate high quality Accounting Standards and
has been successful in doing so. Indian Accounting Standards have
withstood the test of time. As the world continues to globalize, discussion
on convergence of national accounting standards with International
Financial Reporting Standards (IFRS) has increased significantly.
At present, the ASB of ICAI formulates the AS based on IFRS. However,
these standards remain sensitive to local conditions, including the legal
and economic environment. Accordingly, AS issued by ICAI depart from
corresponding IFRS in order to ensure consistency with legal, regulatory
and economic environment of India.
Formation of IFRS Task Force by the Council of ICAI Recommendation
of the IFRS Task Force submitted to the Council Full adoption of IFRS
from accounting period commencing on or after 1 April 2011 Proposed to
be applicable to listed entities and public interest entities such as banks,
insurance companies and large sized entities Involvement of various
regulators (MCA, RBI, IRDA, Tax authorities and SEBI)
Draft Schedule VI and Accounting Standard 1 (Exposure Draft) consistent
with IFRSs Convergence Strategy presented by Technical Directorate of
ICAI on 02.02.2009:
– ICAI has begun the process of issuing IFRS equivalent AS with
following proposed changes:
1. Removal of alternative treatments
2. Additional disclosures, where required
3. AS number will continue but IFRS number will be given in
parenthesis
171
Financial Accounting - VII 4. IFRICs will be issued as appendices
– ICAI has constituted a Group in liaison with government & regulatory
authorities and this group has constituted separate core groups to
identify inconsistencies between IFRS and various relevant acts.
An entity:
i Whose equity or debt securities are listed or are in the process of
listing on any stock exchange, whether in India or outside India; or
ii Which is a bank (including a cooperative bank), financial institution, a
mutual fund, or an insurance entity; or
iii Whose turnover (excluding other income) exceeds rupees one hundred
crores in the immediately preceding accounting year; or
iv Which has public deposits and/or borrowings from banks and financial
institutions in excess of rupees twenty five crores at any time during
the immediately preceding accounting year; or
v Which is a holding or a subsidiary of an entity which is covered in (i)
to (iv) above Transition to IFRS – Things to remember
First year of reporting:
Accounting period commencing on or after 1 April 2011 (Normally 1
April 2011 – 31 March 2012)
Date of adoption:
The first day of the first reporting financial year (1 April 2011)
Date of reporting:
The last day of the first reporting financial year (31 March 2012)
Comparative year:
Immediately preceding previous year (1 April 2010 – 31 March 2011)
Date of transition:
The beginning of the earliest period for which an entity presents full
comparative information (1 April 2010)
First time adoption of IFRS on the date of reporting envisages-
1. Restatement of opening balances as at 1 April 2010
2. Presentation of comparative financial statements for the year2010-
11
3. Preparation and presentation of financial statements for the first year
of reporting 2011-12
4. Explicit and unreserved statement of compliance with IFRS
All the above statements (as stated in 1 to 3 above) have to be drawn as
per the IFRS in force on the date of reporting.
172
6.12 INTRODUCTION TO BORROWING COST Introduction to IFRS
Business enterprises borrow funds for acquiring, constructing, building,

fixed & other assets. These assets take time to make them usable or
saleable. Interest has to be paid on borrowed funds immediately from the
date of borrower. Also there are other costs associated with borrower. This
accounting standard aims at prescribing the treatment of borrowing cost.
6.13 MEANING AND DEFINITION OF BORROWING

COST
Borrowing costs are defined as interest and other cost incurred associated
with borrowing of funds. These includefollowing cost/charges:
1. Interest and commitment charge on borrowing.
2. Amortization of discounts or provision relating to borrowing.
3. Amortization of ancillary costs incurred in connection with
arrangement of borrower.
4. Finance charges when the assets are acquired under financeleases.
5. Exchange difference arising from foreign currency borrowings to the
extent they are regarded as an adjustment to interest costs.
This standard does not deal with cost of owners’ equity or preference
share capital.
Qualifying assets:
An asset which takes substantial period of time to get ready for its
intended use or sale is called as qualifying asset.
Examples of qualifying assets:

1. Any tangible fixed asset which is in construction process or
acquired fixed asset which is not ready for use or sale.
e.g. plant and machinery
2. Any tangible asset which are in development stage or acquiredbut not
ready for use e.g. patents
3. Investment property
4. Inventories that require a substantial period to bring them into
saleable condition.
As per these accounting standard borrowing costs, which is directly
related to the acquisition, construction or production of qualifying assets
should be capitalized. Amount of borrowing cost eligible for capitalization
is equal to actual borrowing cost incurred during the period less any
income on temporary investment onborrowing account.
173
Financial Accounting - VII Conditions for capitalization of borrowing cost:
1. The borrowing cost which is directly attributable to acquisition,
construction or production of qualifying asset is eligible for
capitalization. Directly attributable cost are those cost which could
have been avoided if the expenditure on the qualifying assets had not
been made.
2. Qualifying asset will give future economic benefits to the enterprise.
Borrowing cost eligible for capitalization

a) Specific Borrowings
Amount of borrowing cost to be capitalized:
Actual borrowing cost incurred during the period… xx
Less:
Income on temporary investment out of borrowed amount… (xx)
Xx
b) General borrowings:
When the amount borrowed is generally used for acquisition of
qualifying assets.
The borrowing cost to be capitalized should be decided by applying a
capitalization rate to the expenditure of that asset. The capitalization rate
should be weighted average cost of borrowing. The amount of borrowing
cost capitalized during a period shall not exceed the amount of borrowing
cost incurred during the period.
Commencement of capitalization of borrowing costs:Conditions:

Following 3 conditions must be fulfilled before the commencement of
capitalization of borrowing cost.
a) Activities which are essential to prepare the assets for itsintended use
should be in progress.
b) Borrowing cost is incurred.
c) Expenditure for acquisition, construction or production of a
qualifying asset is being incurred.
This expenditure includes payment of cash, transfer of other assets or
assumption of interest bearing liabilities. Progress payment received and
grants received towards the cost incurred should be deducted from the
expenditure.
Suspension of capitalization of borrowing costs Capitalization of
borrowing costs should be suspended during extended periods in which
active development is interrupted. However capitalization of borrowing
cost is not suspended when a temporary delay is a necessary part of the
process of getting an asset ready for its intended use or sale.
174
Cessation of capitalization: Introduction to IFRS
1. Capitalization of borrowing cost should cease when all the activities
necessary to prepare the qualifying asset for its intended use or sale are
substantially completed. It means all relevant activities which are
essential for intended use or sale of qualifying assets should be
completed.
2. Construction of the qualifying asset is carried on in parts/phase and
each part/phase can be used independently, required activities are
completed for such phase and it is ready for intended use or sale,
capitalization of borrowing cost for such part/phase will cease.
Disclosure in financial statements:

The financial statement should disclose:
1. The accounting policy adopted for borrowing cost
2. The amount of borrowing cost capitalized during the period
Substantial period:
The “substantial period” of time essentially depends upon the facts and
circumstances of each case. However, ordinarily a period of 12 months is
considered as substantial period of time. Sometimes a shorter or longer
period can be justified on the basis of facts and circumstances of each
case. In deciding the period, time which an asset takes, technologically
and commercially to get it ready for its intended use or sale should be
considered.
Fees paid for payment of loan

The prepayment fees paid for liquidating high cost debt and availing low
cost debt in place of high cost debt cannot be capitalized because it is not a
borrowing cost as per AS16.
Exchange difference:
Borrowing cost may include exchange differences arising from foreign
currencies borrowings to the extent that they are regarded as an adjustment
to interest cost.
AS16 covers exchange difference on the amount of principal of the
foreign currency borrowings to the extent of differences between interest
on local currency borrowings and interest on foreign currency borrowings.
175
Financial Accounting - VII Illustrations
1. On 20-04-2010, KIC Ltd. obtained loan from the bank for Rs. 25,
00,000 to be utilized as under:-
Construction of shed Rs.10,00,000

Purchase of Machinery Rs.7,50,000
Working Capital Rs.5,00,000
Advance for purchase of Rs.2,50,000
Tempo
On 31stMarch, 2011, construction of shed was completed and machinery

installed. Delivery of Tempo was not received. Total interest charged by
the bank for the year ending 31stMarch, 2011 was Rs.4, 50,000. Show the
treatment of interest under AS 16.
SOLUTION:-
AS 16 provide that:
i. A qualifying asset is an asset which takes a substantial period of time
to get ready for intended use or sale.
ii. Assets which are ready for their intended use or sale when
acquired are not qualifying assets.
iii. Borrowing cost that is directly attributable to acquisition, construction
or production of a qualifying asset should be capitalized as part of
cost of the asset.
Account Spent on Qualifying Interest to be Interest to be

asset ornot capitalized charged toProfit
& LossA/c.
Construction of Shed Yes

Purchase of Machinery No
Working Capital No
Advance for purchase No
of Tempo
2. Yoga Ltd. obtained a term loan of Rs. 2320 lakhs for purchase of
machinery on 1-4-2010. The loan was immediately utilized as Rs.1624
lakhs for purchase of machinery which was ready for use on 31-3-2011,
Rs. 232 lakhs for advance payment to the supplier for additional
machinery and the balance 464 lakhs for financing working capital. Total,
Interest on loan for the year ended 31st March ,2011 came to Rs.208.80
Lakhs
176
Calculate Introduction to IFRS
i) Average borrowing rate
ii) Interest to be capitalized
iii) Interest to be shown as expenses.
Solution:-
(Rs. In lakhs)
i) Average borrowing rate = 208.80/2320 x100 = 9%
ii) Interest to be capitalized :9% of Rs.1624 Lakhs
146.16
iii) Interest to be considered as an expenses9% of (232+ 464) = 696 lakhs
62.64
208.80
3. Rani Ltd. borrowed Rs. 300 crores on 1-4-2010 for construction of
boiler plant @11%p.a. The plant is expected to be completed in 4 years.
The weighted Average cost of capital is 13% p.a. The accountant of
Rani Ltd. capitalized interest of Rs.39 crores for the accounting period
ending on 31-3-2011. Due to surplus fund out of Rs.300 crores in
income of Rs. 7.00crores wasearned and credited to Profit & Loss A/c.
Comment on above with reference to AS 16.
SOLUTION :
As the company has borrowed Rs.300 crores for construction of a boiler
plant it is a specific borrowing as per AS 16. In case a specific borrowing
as per AS 16. In case a specific borrowing the total amount of borrowing
cost incurred during the period less any income on the temporary
investment on borrowed is to be capitalized. Interest to be capitalized is
33.00 less 7.00 =26 crores . The interest earned Rs.7.00 crores cannot be
shown as income. It should be deducted from interest cost incurred for the
purpose of capitalization.
6.14 COMPARISON OF IND AS, IFRS AND AS

Ind AS (Indian Accounting Standards), IFRS (International Financial
Reporting Standards), and AS (Accounting Standards) are accounting
frameworks used by different entities to prepare and present financial
statements. While Ind AS and IFRS are principles-based standards
developed by different accounting bodies, AS was the previous set of
accounting standards in India, which is now being phased out with the
adoption of Ind AS. Here's a comparison of these accounting frameworks:
177
Financial Accounting - VII 1. Scope and Applicability:
- Ind AS: Ind AS are applicable to certain classes of companies in India,
primarily listed companies and certain other large entities. They are
converged with IFRS with some exceptions and modifications.
- IFRS: IFRS are globally recognized accounting standards used in
many countries around the world. They are issued by the International
Accounting Standards Board (IASB) and are applicable to entities that
prepare financial statements according to IFRS.
- AS: AS were the previous accounting standards issued by the Institute
of Chartered Accountants of India (ICAI) and were applicable to
companies in India before the adoption of Ind AS. However, many of
the concepts in AS were based on older accounting principles and
were not fully converged with IFRS.
2. Framework and Principles:

- Ind AS: Ind AS are based on the principles of fairness, transparency,
relevance, reliability, and comparability. They focus on substance over
form and provide detailed guidance on various accounting topics.
- IFRS: IFRS are also principles-based standards that aim to provide
transparent and comparable financial information across different
jurisdictions. They focus on the principles of relevance, reliability,
comparability, and understandability.
- AS: AS were more rules-based compared to Ind AS and IFRS. They
provided specific rules and guidelines for accounting treatment
without emphasizing the underlying principles as much as Ind AS and
IFRS.
3. Recognition and Measurement:

- Ind AS: Ind AS are more aligned with IFRS in terms of recognition
and measurement principles. They include detailed guidance on fair
value measurement, impairment, financial instruments, leases, and
revenue recognition, among others.
- IFRS: IFRS provides principles for the recognition and measurement
of assets, liabilities, income, and expenses. It includes standards such
as IFRS 9 (Financial Instruments), IFRS 15 (Revenue from Contracts
with Customers), and IFRS 16 (Leases), which provide guidance on
specific topics.
- AS: AS provided guidance on recognition and measurement, but they
were often less detailed and converged with IFRS to a lesser extent
compared to Ind AS.
4. Disclosure Requirements:
178
- Ind AS: Ind AS include extensive disclosure requirements aimed at Introduction to IFRS
providing users of financial statements with relevant information to
assess the entity's financial position and performance.
- IFRS: IFRS also include comprehensive disclosure requirements,
which are designed to provide transparency and enhance comparability
between different entities.
- AS: AS had disclosure requirements, but they were generally less
detailed compared to Ind AS and IFRS.
5. Transition and Implementation:

- Ind AS: The adoption of Ind AS in India involved a transition period
during which companies were required to convert their financial
statements from AS to Ind AS. This process required careful planning
and consideration of the differences between the two frameworks.
- IFRS: Many countries have adopted IFRS, either fully or partially,
which has involved a transition process similar to the adoption of Ind
AS in India.
- AS: AS were the previous accounting standards in India and were
gradually phased out with the adoption of Ind AS. Companies were
required to transition from AS to Ind AS according to the timelines
specified by the regulatory authorities.
Overall, while Ind AS and IFRS share many similarities in terms of
principles and requirements, AS differed in some key aspects, including
recognition, measurement, and disclosure. The adoption of Ind AS in India
has brought the country closer to international accounting standards and
improved the comparability and transparency of financial reporting.

1) The accounting standards are mandatory for
A. Companies
B. Partnership concern
C. Charitable organizations
D. Sole proprietorship
2) Accounting standards refers to specific accounting :

A. Principle
B. Methods of applying those principles
C. Both a and b
D. None
3) Construction Contract :
A. AS-5
B. AS-6
C. AS-7
D. AS-9
179
Financial Accounting - VII 4) Accounting standards ----------- the status
A. Can over-ride
B. Cannot over-ride
C. May over-ride
D. None
5) Revenue Recognition is
A. AS-9
B. AS-12
C. AS-10
D. AS-11
6) AS-8 on accounting for research and development :

A. Is replaced by As-26
B. Is applicable only to listed companies
C. Is mandatory for research institutions
D. Is still in use
7) The purpose of accounting standards is to :

A. Harmonies accounting policies
B. Eliminate the non comparability of financial statements
C. Improve reliability of financial statements
D. All of the above
8) AS-2 is on :
A. Disclosure of accounting policies
B. Valuation of inventories
C. Revenue recognition
D. Depreciation accounting
9) AS are issued by
A. Central Government
B. Company Law Board (CLB)
C. ICAI
D. Income Tax Department
10) Till date the no of Standards issued are

A. 29
B. 30
C. 31
D. 32
11) Accounting Standard 6 is on :

A. Disclosure of accounting policies
B. Depreciation
C. Valuation of Inventories
D. Contingent Asset and Contingent Liabilities
180
6.16 BRIEF QUESTIONS Introduction to IFRS
1. Explain Accounting Standard in brief.

2. What is IFRS and discuss objectives of IFRS.
3. List out IFRS, IAS
4. Discuss Benefits and Challenges of IFRS
5. Discuss IFRS-1, First time adoption of IFRS
6. Define Borrowing Cost and discuss borrowing cost eligible for
capitalization
7. Discuss comparison of IFRS, Ind AS and AS.

181

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31

Prof. Ravindra Kulkarni

Prin. Dr. Ajay Bhamare Prof. Santosh Rathod

Programme Co-ordinator : Dr. Rajashri Pandit

Course Co-ordinator & : Mr. Ganesh Akaram Ghadigaonkar

Course Writer : Mr. Ganesh Akaram Ghadigaonkar

April 2024, Print - 1

Published by : I/c Director,

DTP Composed : Mumbai University Press

1 Final Accounts for Electricity Company 1

2. Final Accounts for Co-Operative Society 33

3. Investment Accounting (W.R.T Accounting Standard -13) 95

4. Mutual Fund - 1 130

5 Mutual Fund - 2 146

6. Introduction to IFRS 156

2. Core Courses (EC)

1. Financial Accounting VII

05 Introduction to IFRS and Indian Accounting Standards 12

1.0 LEARNING OBJECTIVES

1.1 DOUBLE ACCOUNT SYSTEM

The double-entry accounting system provides accuracy and accountability

1.2 FINAL ACCOUNTS AS PER ELECTRICITY RULES

3. Profit and Loss Account:

6. Notes to Financial Statements:

These final accounts prepared in accordance with electricity rules aim to

1.3 REVENUE ACCOUNT

Particulars Rs Particulars Rs.

1.4 NET REVENUE ACCOUNT

This is similar to the Profit and Loss Appropriation Account of a Trading

Net Revenue Account for the year ended ……….

Particular Rs. Particulars Rs.

1.5 CAPITAL ACCOUNT (RECEIPT AND

Receipts & Expenditure on Capital Account for the year ended……

1.6 GENERAL BALANCE SHEET

Previous Particulars Current Previous Particulars Current

1.7 CONTINGENCY RESERVE

5. Disclosure and Reporting:

Overall, the contingency reserve plays a crucial role in ensuring the

i) Fixed assets Expenditure up to 1-1-2022

ii) Additions during the year-Machinery Rs. 3,50,000

iii) Depreciation Fund

vi) 7.5% Debentures Rs. 11,00,000 secured by a charge on Fixed Assets.

vii) Sundry Creditors Rs. 3,50,000; Reserve Fund Rs. 6,00,000,

ix) Profit and Loss Account (Cr.) Rs. 3,00,500

You are instructed to prepare

1) The Balance Sheet as on December 31, 2022 according to Schedule III

To Land & By Equity

To Machinery 1,800,000 350,000 2,150,000 By 7% Deb 1,100,000 1,100,000

3,000,000 350,000 3,350,000 3,850,000 250,000 4,100,000

General Balance Sheet of Reliance Electric Co Ltd

Capital A/c Capital A/c

Balance as on 1st January

Land 198,000 Cost of Distribution 6,600

Machinery 792,000 Depreciation 26,400

Mains 264,000 Sale of Current 171,600

Expenditure During the Year 0 Meter Rent 6,600

Machinery 6,600 Interim Dividend 26,400

67,320 Net Revenue Account as on 1