Financial accounting by rajasekaran

Cover

Financial Accounting

Copyright

Contents

Preface

1 Accounting as an Information System

Objective 1: Meaning and Definition of Accounting
Objective 2: Characteristic Features of Accounting
Objective 3: Concept of Accounting as Information System
Objective 4: Characteristic Features of an Accounting System
Objective 5: Users of Financial Accounting Information
- 5.1 Investors
- 5.2 Suppliers and Creditors
- 5.3 Lenders
- 5.4 Employees
- 5.5 Customers
- 5.6 Government and Regulatory Services
- 5.7 Security Analysts and Advisors
- 5.8 Public
- 5.9 Management
Objective 6: Branches of Accounting
- 6.1 Financial Accounting
- 6.2 Cost Accounting
- 6.3 Management Accounting
- 6.4 Tax Accounting
- 6.5 Social Responsibility Accounting
- 6.6 Other Branches of Accounting
Objective 7: Distinction Between Financial Accounting and Management Accounting
Objective 8: Objectives of Financial Accounting
Objective 9: General Purpose Statement
Objective 10: Qualitative Characteristics of Accounting Information or Financial Statements
- 10.1 Understandability
- 10.2 Relevance
- 10.3 Reliability
- 10.4 Comparability
Objective 11: Functions of Accounting
Objective 12: Advantages of Accounting
Objective 13: Limitations of Accounting
Objective 14: Bases of Accounting
Objective 15: Distinction Between Accrual Basis of Accounting and Cash Basis of Accounting
Summary
Key Terms
Reference
Objective-type Questions
Short Answer-type Questions
Essay-type Questions

2 Nature of Financial Accounting Principles

Objective 1: Need and Meaning of Accounting Principles
Objective 2: Meaning and Characteristic Features of Generally Accepted Accounting Principles (GAPP)
- 2.1 Meaning of GAPP
- 2.2 Salient Features of GAPP
Objective 3: Basic Accounting Concepts
- 3.1 Entity Concept
- 3.2 Money Measurement Concept
- 3.3 Going Concern Concept
- 3.4 Periodicity Concept (Accounting Period Concept)
- 3.5 Cost Concepts
- 3.6 Realisation Concept
- 3.7 The Accrual Concept
- 3.8 Matching Concepts
Objective 4: Basic Accounting Conventions
- 4.1 Convention of Conservatism (Prudence)
- 4.2 Convention of Consistency
- 4.3 Convention of Materiality
- 4.4 Convention of Disclosure
Summary
Key Terms
Reference

3 Accounting Standards

Objective 1: Meaning and Definition of Accounting Standards
- 1.1 Objectives of Accounting Standards
- 1.2 Development of Accounting Standards
Objective 2: Constitution of Accounting Standard Board in India
- 2.1 Formation of the Accounting Standards Board
- 2.2 Objectives and Functions
Objective 3: Scope of Accounting Standards in India
Objective 4: Procedure of Issuing Accounting Standards
Objective 5: Applicability of Accounting Standards
- 5.1 Level-I Enterprise
- 5.2 Level-II Enterprise
- 5.3 Level-III Enterprise
Objective 6: Status of the Accounting Standards Issued by the Institute of Chartered Accountants of India
Objective 7: Compliance with Accounting Standards
Objective 8: Implementation of Accounting Standards
Objective 9: Salient Features of “General Purpose Financial Statements”
Objective 10: Benefits of Accounting Standards
Objective 11: AS-1 – Disclosure of Accounting Policies
- 11.1 Disclosure of Significant Accounting Policies
- 11.2 Disclosure of Fundamental Accounting Assumptions
- 11.3 Selection of Accounting Policies
- 11.4 Disclosure of Changes in Accounting Policies
Objective 12: Case Study
- 12.1 Convention
- 12.2 Basis of Accounting
- 12.3 Depreciation
- 12.4 Inventories
- 12.5 Revaluation of Assets
- 12.6 Investments
- 12.7 Sale
- 12.8 Turnover
- 12.9 Investment Income
- 12.10 Retirement Benefits
- 12.11 Provision for Income Tax
- 12.12 Lease Rentals
- 12.13 Research and Development
- 12.14 Foreign Currency Transaction
- 12.15 Claims
- 12.16 Financial and Management Information System
Objective 13: Accounting Standard-2 (AS–2) Revised and Valuation of Inventories
- 13.1 Valuation of Inventories
Objective 14: Accounting Standard-3 (AS–3) and Cash Flow Statements
Objective 15: AS–4: Contingencies and Events Occurring after Balance Sheet Date
Objective 16: AS–5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
Summary
Key Terms
Reference

4a Accounting Process – Journal

Objective 1: Concept of Accounting Process and Stages
Objective 2: Recording of Business Transactions and its Classification
- 2.1 Meaning of Business Transaction
- 2.2 Classification of Business Transactions
- 2.3 Another Way of Classification of Business Transactions
Objective 3: Meaning of Account and its Classification
- 3.1 Meaning of Account
- 3.2 Classification of Accounts
Objective 4: Classification of Accounts
- 4.1 Personal Accounts
- 4.2 Impersonal Accounts
- 4.3 Nominal Accounts Treated as Personal Accounts
Objective 5: Meaning of Double Entry and Double Entry System
- 5.1 Meaning of Double Entry
Objective 6: Methods of Recording Business Transactions
- 6.1 Traditional Approach
- 6.2 Accounting Equation Approach
Objective 7: Traditional Approach for Recording Business Transactions and Debit–Credit Rules for Three Types of Accounts
Objective 8: Meaning and Format of Journal
- 8.1 Meaning of Journal
- 8.2 Format of Journal
Objective 9: Meaning of Journalising
9.1 Meaning
9.2 Process in Journalising
Objective 10: Analysis of Business Transactions
Objective 11: Recording the Results of Analysis
Objective 12: Types of Entries
- 12.1 Simple Entry
- 12.2 Compound Entry
- 12.3 Opening Entry
Objective 13: Source Documents – Formats, Uses and Methods of Recording
- 13.1 Cash Memo
- 13.2 Invoice
- 13.3 Receipt
- 13.4 Debit Note
- 13.5 Credit Note
- 13.6 Voucher
- 13.7 Pay-in-slip
- 13.8 Cheque
Objective 14: Recording of Trade Discount and Cash Discount
Objective 15: Accounting Equation Approach – Meaning and Classification of Accounts
- 15.1 Meaning of Accounting Equation
- 15.2 Classifications of Accounts
Objective 16: Rules of Debit and Credit as per Accounting Equation Approach
- 16.1 Accounting Equation Reaming and Features
Objective 17: Analysis of Business Transactions Applying Accounting Equation Technique
Summary
Key Terms
Exercises

4b Accounting Process – Ledger

Objective 1: Meaning of “Ledger”
Objective 2: Standard Form of Ledger and its Contents
- 2.1 Explanation of Ledger Account Format
Objective 3: Meaning of Posting
Objective 4: Procedure of Posting
Objective 5: Distinction Between Journal and Ledger
Objective 6: Posting of an Opening Entry
Objective 7: Balancing an Account and Procedure for Balancing
- 7.1 Balancing of Different Accounts
- 7.2 Procedure for Balancing
Summary
Multiple-choice Questions
Exercises

4c Accounting Process – Subsidiary Books

Objective 1: Meaning of Subsidiary Books
Objective 2: Kinds and Purposes of Subsidiary Books
Objective 3: Advantages of Subsidiary Books (or) Special Journals
Objective 4: Difference Between Subsidiary Books and Ledger
Objective 5: Meaning and Type of Cash Book
- 5.1 Meaning
- 5.2 Types of Cash Book
Objective 6: Meaning, Format and Recording of Transactions in Single Column Cash Book
- 6.1 Meaning
- 6.2 Format of Single Column Cash Book
- 6.3 Balancing of Cash Book
Objective 7: Meaning and Format of Double Column Cash Book (Cash Book with Discount and Cash Column)
Objective 8: Method of Entering Bank Transactions in Two Columns (Bank and Discount Column)
Objective 9: Meaning of Triple Column Cash Book with Discount, Cash and Bank Columns and Procedure of Recording Business Transactions in Triple Column Cash Books
Objective 10: Meaning, Salient Features and Advantages of Petty Cash Book
- 10.1 Meaning
- 10.2 Advantages
- 10.3 Salient Features
Objective 11: Format and Method of Recording Transactions in the Analytical Form of Petty Cash Book
- 11.1 Format of Analytical Petty Cash Book of…
- 11.2 Explanations of Column and Procedure for Recording
- 11.3 Balancing Procedure
- 11.4 Passing of Journal Entries
- 11.5 Posting to Ledger
Objective 12: Purchases Book – Meaning and Format and Methods of Preparing Purchase Book and Ledger Accounts
- 12.1 Meaning of Purchase Book
- 12.2 Format
Objective 13: Meaning, Format and Features of Sales Book
- 13.1 Format of Sales Book
- 13.2 Explanation and Procedure for Recording Transaction
Objective 14: Meaning and Features of Purchases Returns Book
- 14.1 Explanation and Procedure for Recording Purchases Returns Transactions
- 14.2 What is an ‘Allowance’?
Objective 15: Meaning and Features of Purchases Returns Book
- 15.1 Format
Objective 16: Meaning of Bills of Exchange Specimen and Meaning of Some Important Terms
- 16.1 Bills of Exchange
- 16.2 Specimen or Format of Bill of Exchange
- 16.3 Meaning of Important Terms
Objective 17: Procedure of Recording Transactions in B/R and B/P Books
- 17.1 Bills Receivable and Bills Payable Books
- 17.2 Bills Receivable Book
- 17.3 Bills Payable Book
- 17.4 Posting of Bills Receivable and Bills Payable Books
Objective 18: Journal Proper and Different Kinds of Entries
Summary
Exercises

4d Accounting Process – From Journal to Trial Balance

Objective 1: Meaning of Trial Balance
Objective 2: Objectives and Salient Features of Trial Balance
2.1 Objectives of a Trial Balance
2.2 Salient Features of a Trial Balance
Objective 3: Methods of Preparation of a Trial Balance
3.1 Totals Method
3.2 Balances Method
3.3 Totals cum Balances Method
Objective 4: Concept of Errors
Objective 5: Kinds of Errors
5.1 Errors of Principle
5.2 Clerical Errors
5.3 Compensating Errors
Objective 6: Classification of Errors (Based on the Impact of Errors on Trial Balance)
Objective 7: Rectification of Errors
7.1 Rectification of Errors which do not Affect the Trial Balance
7.2 Rectification of Errors Affecting Trial Balance
Objective 8: Steps to Locate the Errors in Trial Balance
Objective 9: Meaning of Suspense Account and its Accounting Treatment
Summary
Key Terms
References
Exercises

5a Accounting Process – From Trial Balance to Final Accounts and Final Accounts of Non-corporate Business Entities

Objective 1: Accounting Process – Preparation of Final Accounts from Trial Balance
Objective 2: Trading Account
- 2.1 Trading Account: A Constituent of Final Accounts
- 2.2 Preparation of Trading Account
Objective 3: Manufacturing Account
- 3.1 Meaning of Manufacturing Account
- 3.2 Pro-forma of a Manufacturing Account
- 3.3 Differences Between Trading Account and Manufacturing Account
Objective 4: Profit and Loss Account
- 4.1 Profit and Loss Account: Meaning and Features
- 4.2 Closing Entries Relating to Profit and Loss Account
- 4.3 Pro-forma of Profit and Loss Account
- 4.4 Explanation of Some of the Terms Appearing in Profit and Loss Account
Objective 5: Balance Sheet
- 5.1 Meaning and Features of a Balance Sheet
- 5.2 Contents of the Balance Sheet
- 5.3 Grouping and Marshalling of Assets and Liabilities: Meaning of Grouping and Marshalling
- 5.4 In the Order of Liquidity
- 5.5 In the Order of Performance
Objective 6: Uses of Balance Sheet
Objective 7: Differences Between Trial Balance and Balance Sheet
- 7.1 Stock at the End or Closing Stock
- 7.2 Accrued Expenses or Outstanding Expenses
- 7.3 Prepaid Expenses
- 7.4 Accrued Income
- 7.5 Income Received in Advance (or) (Unearned Income or Unaccrued Income)
- 7.6 Description of Fixed Assets
- 7.7 Bad Debts
- 7.8 Provision for Bad and Doubtful Debts
- 7.9 Provision for Discount on Debtors
- 7.10 Provision (or) Reserve for Discount on Creditors
- 7.11 Adjustment of Interest on Capital
- 7.12 Interest on Drawings
- 7.13 Abnormal Loss of Stock
- 7.14 Insurance Premium
- 7.15 Salaries and Wages
- 7.16 Commission on Profit
- 7.17 Goods Sent on Approval: Meaning and Accounting Treatment
- 7.18 Goods-in-Transit
- 7.19 Bad Debts Written off Recovered
- 7.20 Withdrawals, Samples and Free Gifts
- 7.21 Income Tax
- 7.22 Provident Fund: Employee’s and Employer’s Contribution
Summary
Key Terms
References
Exercises

5b Capital and Revenue – Expenditures and Receipts

Objective 1: Meaning of Capital Expenditure and Examples
- 1.1 Examples
Objective 2: Meaning and Features of Revenue Expenditure
- 2.1 Examples
Objective 3: Deferred Revenue Expenditure
Objective 4: Revenue Expenditure: To be Treated as Capital Expenditures
Objective 5: Distinction Between Capital Expenditure and Revenue Expenditure
Objective 6: Capital and Revenue Receipts
- 6.1 Concepts of Capital and Revenue Receipts
Objective 7: Meaning of Capitalised Expenditure
Objective 8: Capital Profit and Revenue Profit
- 8.1 Concepts of Capital Profit and Revenue Profit
Objective 9: Capital and Revenue Losses
- 9.1 Capital and Revenue Payments
Summary
Key Terms
References
Exercises

6 Accounting for Not-for-profit Organisations

Objective 1: Meaning and Salient Features of NPOs
- 1.1 Salient Features of NPOs
Objective 2: Meaning and Features of Receipts and Payments Account
- 2.1 Receipts and Payments Account
- 2.2 Features of Receipts and Payments Account
Objective 3: Preparation of Receipts and Payments Account
Objective 4: Meaning and Main Features of Income and Expenditure Account
- 4.1 Meaning
- 4.2 Main Features of Income and Expenditure Account
Objective 5: Distinction Between Receipts and Payments Account and Income and Expenditure Account
Objective 6: Accounting Treatment of Some Special Items
- 6.1 Subscription
- 6.2 Category II: Life Membership
- 6.3 Treatment of Fund Income (and Fund Expenses)
- 6.4 Legacy
- 6.5 Donations
- 6.6 Endowment Fund
- 6.7 Entrance Fees
- 6.8 Aid from Government and Other Institutions
- 6.9 Capital Expenditures
- 6.10 Current Years’ Expenditure
Objective 7: Preparation of Income and Expenditure Account from Receipts and Payments Account
Objective 8: Preparation of Opening and Closing Balance Sheets
- 8.1 Preparation of “Opening Balance Sheet”
- 8.2 Preparation of “Closing Balance Sheet”
Objective 9: Preparation of Receipts and Payments Account from Income and Expenditure Account
- 9.1 Preparation of Various Accounts
Objective 10: Preparation of Receipts and Expenditure Account for Professionals
- 10.1 General Features
- 10.2 Steps in the Preparation of Accounts of Professional Firm
Summary
Key Terms
References
Exercises
Question Bank – Exercises

7 Financial Statements from Incomplete Records (Single Entry System)

Objective 1: Meaning and Definition of Single Entry System
Objective 2: Salient Features of Incomplete Records System
- 2.1 Advantages of Incomplete Double Entry System
- 2.2 Disadvantages of Single Entry System
Objective 3: Differences Between Single Entry System (Incomplete Records System) and Double Entry System
Objective 4: Preparation of Accounts (or) Ascertainment of Profit or Loss from Incomplete Records
- 4.1 Statement of Affairs Method (or) Net Worth Method
Objective 5: Distinction Between Statement of Affairs and Balance Sheet
Objective 6: Accounting Treatment
- 6.1 Model 1: Computation of Capital
- 6.2 Model 2: Ascertainment of Profit/Loss
- 6.3 Model 3: Ascertainment of Opening Capital, Closing Capital and Profit/Loss
- 6.4 Model 4: Computation of Net Profit (After Adjustments)
- 6.5 Model 5: Cheques Issued but not Presented
- 6.6 Model 6: Bank Transactions – Adjustments
- 6.7 Model 7: Net Increase in Assets or Net Decrease in Liabilities
- 6.8 Incomplete Records and Partnership Firms
- 6.9 Model 8: Single Entry and Partnership Firm
Objective 7: Method 2: Conversion Method (or) Final Accounts Method
- 7.1 Meaning
- 7.2 Conversion Method Features
- 7.3 Procedure Under Conversion Method
- 7.4 Model: Calculation of Missing Figure – Opening Stock
- 7.5 Model: Calculation of Missing Figure – Purchases
- 7.6 Model: Calculation of Missing Figure – Credit Sales
- 7.7 Model: Calculation of Missing Figure – Bills Receivable
- 7.8 Cost of Goods Sold and Memorandum Trading Account
- 7.9 Revenue Expenses
- 7.10 Revenue Income
- 7.11 Model: Computation of Missing Figures (Combination of More Than One Item)
- 7.12 Model: Preparation of Trading and Profit and Loss Account Together with Balance Sheet
Summary
Key Terms
References
Exercises

8 Measurement of Business Income

Objective 1: Definition of Income
Objective 2: Revenues and Expenses
- 2.1 Revenues
- 2.2 Expenses
Objective 3: Meaning of Measurement of Business Income
- 3.1 Net Worth Method
Objective 4: Measurement of “Net Income” or “Net Profit”
Objective 5: Measurement of Net Income: Matching of Incomes and Expenses Method
- 5.1 Incomes and Expenses
Objective 6: Comparison of “Net Worth Method” and “Matching Costs Against Revenue Method”
Objective 7: Procedure for Measurement of Business Income
Objective 8: Salient Features of Business Income
Objective 9: Meaning of Economic Concept of Income
Objective 10: Salient Features of Economic Concept of Income
Objective 11: Procedure to Measure Economic Income
Summary
Key Terms
Reference

9 Revenue Recognition and Recognition of Expenses

Objective 1: Definition of Revenue
- 1.1 Meaning
Objective 2: Factors Derived from the Definition
Objective 3: Timing of Revenue Recognition
- 3.1 Recognition of Revenue
Objective 4: Guidelines for Revenue Recognition
Objective 5: Revenue Recognition at the Point of Sale
Objective 6: A Method to Ascertain Recognition of Revenue
- 6.1 Proportionate or Percentage of Completion Method
- 6.2 Installment Method of Revenue Recognition
- 6.3 Recognition at Completion of Production Process
- 6.4 Revenue Recognition on Holding of Assets
- 6.5 On Service Contracts
Objective 7: Concept of Recognition of Expenses (Costs)
- 7.1 Guidelines for Expense Recognition
Objective 8: AS–9 Revenue Recognition
- 8.1 Introduction: Salient Features of AS–9
- 8.2 Definitions
- 8.3 Explanation
- 8.4 Sale of Goods
- 8.5 Rendering of Services
- 8.6 Effect of Uncertainties on Revenue Recognition
- 8.7 Accounting Standard
Objective 9: Appendix
Summary
Key Terms
Reference

10 The Nature of Depreciation

Objective 1: Definition of Depreciation
Objective 2: Characteristic Features of “Depreciation”
Objective 3: Accounting Concept of Depreciation
Objective 4: Salient Features
Objective 5: The Causes of Depreciation
- 5.1 Physical Features
- 5.2 Functional Factors
Objective 6: Need for Depreciation
Objective 7: Factors Affecting Amount of Depreciation
Objective 8: Depreciation on Assets
- 9.1 Method 1: By Charging to Asset Account Directly
- 9.2 Method 2: By Creating Provision for Depreciation
Objective 10: Methods of Providing (Allocating) Depreciation
- 10.1 Straight Line Method: (or) Fixed (or) Equal Installment Method: Meaning, Formula, Merits, Demerits and Suitability
- 10.2 Written Down Value Method (or) Diminishing Balance Method (or) Reducing Balance Method: Meaning, Formula, Merit, Demerit and Suitability
- 10.3 Provision for Depreciation/Accumulated Depreciation: Passing of Entries and Preparation of Accounts
- 10.4 Procedure for Change in the Method of Depreciation
- 10.5 Annuity Method: Meaning and Features
- 10.6 Sinking Fund Method (or) Depreciation Fund Method: Meaning, Merits, Demerits and Suitability
Objective 11: Choice of Depreciation Method
Objective 12: Is Depreciation a Source of Income or Expense?
Objective 13: Provision: Meaning, Examples, Objectives, Accounting Treatment and Disclosure
- 13.1 Meaning
- 13.2 Examples of Provisions
- 13.3 Objectives
- 13.4 Accounting Treatment
- 13.5 Disclosure
Objective 14: Reserves
- 14.1 Meaning
- 14.2 Objectives
- 14.3 Distinction Between Provision and Reserve
- 14.4 Types of Reserves
Objective 15: Provision for Repairs and Renewals: Meaning and Accounting Treatment
Objective 16: Accounting Standard (AS)–6
- 16.1 Salient features of AS–6 (Revised)
Summary
Key Terms
References
Exercises

11 Inventory – Valuation

Objective 1: Meaning
Objective 2: Significance of Inventory Valuation
Objective 3: Inventory Record Systems
- 3.1 Periodic Inventory System
- 3.2 Perpetual Inventory System
- 3.3 Distinction Between Periodic Inventory System and Perpetual Inventory System
Objective 4: Valuation of Inventories
- 4.1 Important Concepts
- 4.2 Cost Formulae
Objective 5: Specific Identification of Costs
Objective 6: First-in-first-out Method
- 6.1 Merits
- 6.2 Demerits
Objective 7: Last-in-first-out Method (LIFO)
- 7.1 Merits
- 7.2 Demerits
Objective 8: Weighted Average Method
- 8.1 Procedure Under Periodic Inventory System
- 8.2 Procedure Under Perpetual Inventory System
Objective 9: Choice of Inventory Valuation Methods
Objective 10: Valuation of Inventory as on the Balance Sheet
- 10.1 Method I
- 10.2 Method II
Objective 11: Accounting Standard-2 (Revised)
Summary
Key Terms
References
Exercises

12 Accounting for Hire-Purchase and Installment

Objective 1: Definition of Hire-Purchase System
- 1.1 Explanation of Important Terms
- 1.2 Contents of Hire-Purchase Agreement
- 1.3 Salient Features of Hire-Purchase System
Objective 2: Process of Calculation and Allocation of Interest
- 2.1 Situation 1
- 2.2 Situation 2
- 2.3 Situation 3
- 2.4 Situation 4
- 2.5 Situation 5
- 2.6 Situation 6
- 2.7 Rule 78
- 3.1 Journal Entries in the Books of the Buyer (or) Hire Purchase
- 3.2 Accounting Treatment in the Books of Hire Vendor
Objective 4: Default and Repossession
- 4.1 Full Repossession
- 4.2 Partial Repossession
Objective 5: Format of Hire-Purchase Sales Register for the Year Ended
Objective 6: Methods of Ascertaining Profit
- 6.1 Debtors Method
- 6.2 Stock and Debtors System
Objective 7: Installment System
- 7.1 Purchase System
Objective 8: Concepts of Operating and Financial Lease
- 8.1 Meaning
- 8.2 Lessor
- 8.3 Lessee
- 8.4 Leasing Agreement
- 8.5 Suitability
Objective 9: Salient Features of Lease
Objective 10: Advantages of Learning
Objective 11: Disadvantages of Leasing
Objective 12: Accounting Treatment Relating to Leases as per AS–19
- 12.1 Finance Lease (or) Full Pay-out Lease
- 12.2 Operating Lease (or) Non-pay-out Lease
Objective 13: Distinction Between Financial Lease and Operating Lease
Summary
Key Terms
References
Exercises

13 Accounting for Inland Branches

Objective 1: Meaning of a Branch
- 1.1 Main Objectives of Opening a Branch
Objective 2: Branch Accounting
Objective 3: Accounting for Inland Dependent Branches
- 3.1 Salient Features of Dependent Branches
- 3.2 Accounting Treatment for Dependent Branches
Objective 4: Accounting System
- 4.1 Debtors Method
Objective 5: Stock-Debtors System or Stock and Debtors Method
- 5.1 Meaning of Stock-Debtors System
- 5.2 Different Accounts and their Purpose
- 5.3 Branch Stock Account
- 5.4 Branch Adjustment Account
- 5.5 Branch Expenses
- 5.6 Stock Reserve Account
- 5.8 Final Account System
- 5.9 Item to be Shown in the Branch Account
- 5.10 Wholesale Branch Method
Objective 6: Independent Branches
- 6.1 Accounting for Fixed Assets
- 6.2 Accounting for Goods in Transit
- 6.3 Accounting for Inter-branch Transactions
Objective 7: Incorporation of Branch Trial Balance
- 7.1 Detailed Consolidated Method
- 7.2 Abridged Consolidated Method
- 7.3 Separate Final Accounts Method
Summary
Key Terms
References
Exercises

14 Dissolution of Partnership

Objective 1: Dissolution of Partnership
- 1.1 When May a Partnership be Dissolved?
- 1.2 Dissolution of a Firm
- 1.3 Dissolution by Notice
- 1.4 Dissolution by Court
Objective 2: Distinction Between Dissolution of Partnership and Dissolution of Firm
Objective 3: Treatment of Some Accounts at the Time of Dissolution
- 3.1 Treatment of Loss: Section 48 (a)
- 3.2 Treatment of Assets: Section 48 (b)
- 3.3 Treatment of Firm’s Debts and Private Debts
- 4.1 Preparation of Realisation Account
- 4.2 Meaning and Features of Realisation Account
- 4.3 Procedure to Record Entries for Various Items and Preparation of Realisation Account
Objective 5: Accounting Treatment on Dissolution
- 5.1 Account Treatment on Dissolution of a Firm
- 5.2 Realisation Account
- 5.3 Cash or Bank Account (Ledger)
- 5.4 Partner’s Capital Account
- 5.5 Partners Loan Account: (Loan by Partner)
Objective 6: Goodwill
- 6.2 Unrecorded Assets and Liabilities
- 6.3 Memorandum Balance Sheet
Objective 7: Preparation of Balance Sheet as on the Date of Dissolution
- 7.1 Preparation of Balance Sheet as on the Date of Dissolution
- 7.2 Accounting Procedure
- 7.3 Assets and Liabilities Taken Over by Partner(s) Accounting Procedure
Objective 8: Return of Premium (Goodwill) (Section 51)
- 8.1 Gift of Firm – Asset to Partners
- 8.2 Gift to a Partner
Objective 9: Insolvency of Partner(s)
- 9.1 Meaning of Insolvency
- 9.2 Garner vs. Murray Rule
- 9.3 Students Should Remember these Criteria
- 9.4 Accounting Procedure when Capitals are Fixed
- 9.5 Accounting Procedure when Capitals are Fluctuating or Floating
Objective 10: All Partners are Insolvent
- 10.1 Acconting Treatment
- 10.2 Use of Algebraic Equation
Objective 11: Minor and Partnership Dissolution
- 11.1 Minor’s Status in Partnership Dissolution
- 11.2 Minor and Insolvency
- 11.3 Garner vs. Murray Rule in Case of Commission to a Partner as Expense of the Business
Objective 12: Sale of Partnership Firm to a Limited Company
- 12.1 Meaning
- 12.2 Salient Features
- 12.3 Meaning and Computation of “Purchase Consideration”
- 12.4 Procedure
- 12.5 Accounting Entries
- 12.6 Purchase Consideration
Objective 13: Piecemeal Distribution
- 13.1 Meaning of Piecemeal Distribution
- 13.2 Proportionate or Surplus Capital Method
- 13.3 Maximum Possible Loss Method
Summary
Key Terms
References
Exercises

15 Financial Statement Analysis

Objective 1: Meaning of Financial Statement Analysis
Objective 2: Types or Classification of Financial Statement Analysis
- 2.1 Type 1 – According to the Material Used
- 2.2 Type 2 – According to Modus Operandi
- 2.3 Type 3 – According to the Objective of the Analysis
- 2.4 Distinction Between Horizontal Analysis and Vertical Analysis
- 2.5 Distinction Between Inter-firm and Intra-firm Analysis
Objective 3: Process of Financial Statement Analysis
- 3.1 Re-arrangement
- 3.2 Comparison
- 3.3 Analysis
- 3.4 Interpretation
Objective 4: Purposes and Significance of Financial Analysis
- 4.1 Earning Capacity
- 4.2 Managerial Efficiency
- 4.3 Solvency
- 4.4 Inter-firm Comparison
- 4.5 Budgets and Forecasts
Objective 5: Tools or Techniques of Financial Statement Analysis
- 5.1 Comparative Financial Statements
- 5.2 Common Size Financial Statements
- 5.3 Trend Percentages
- 5.4 Ratio Analysis
- 5.5 Cash Flow Statement
- 5.6 Funds Flow Statement
Objective 6: Comparative Financial Statements
- 6.1 Objectives of Comparative Financial Statements
- 6.2 Meaning of Comparative Balance Sheet
Objective 7: Comparative Income Statement – Special Features
- 7.1 Objectives of Comparative Income Statements
- 7.2 Preparation of Comparative (P and L A/c) Income Statement
- 7.3 Percentage of Change is Calculate this Way
- 7.4 Computation of Percentage Change
Objective 8: Meaning of Common Size Statements
- 8.1 Preparation of Common Size Balance Sheet
- 8.2 Accounting Treatment of Sources and Uses of Funds in the Preparation of Common Size Statements (Balance Sheet)
Objective 9: Meaning and Computation of Trend Percentages
- 9.1 Trend Ratios
- 9.2 Steps Involved in Computation of Trend Percentages
- 9.3 Limitations of Trend Ratios (Percentage)
Objective 10: Various Users of Financial Statements
Objective 11: Limitations of Financial Statement Analysis
Objective 12: Financial Statements of a Company – Types and Formats
- 12.1 Contents of Annual Report
- 12.2 Report of Board of Directors
- 12.3 Auditor’s Report
- 12.4 Balance Sheet
- 12.5 Profit and Loss Account
- 12.6 Notes to Accounts
- 12.7 Cash Flow Statement
- 12.8 Segment Report
Summary
Key Terms
References
Exercises

16 Accounting Ratios

Objective 1: Meaning of Ratio Analysis – A Systematic Use of Ratios to Interpret the Performance of Entities
- 1.1 Meaning of Ratio and Ratio Analysis
- 1.2 Ratio Analysis
Objective 2: Advantages and Uses of Ratio Analysis
Objective 3: Limitations of Ratio Analysis
Objective 4: Classification of Ratios or Types of Ratios
Objective 5: Liquidity Ratios
- 5.1 Current Ratio – Relationship of Current Assets to Current Liabilities
- 5.2 Liquid Ratio or Quick Ratio or Acid Test Ratio
- 5.3 Absolute Liquid Ratio – Relationship of Absolute Liquid Assets to Liquid Liabilities
Objective 6: Solvency Ratios (Long-term Solvency)
- 6.1 Debt Equity Ratio
- 6.2 Total Assets to Debt Ratio
- 6.3 Proprietary Ratio
Objective 7: Profitability Ratios
- 7.1 Gross Profit Ratio
- 7.2 Net Profit Ratio
- 7.3 Operating Profit Ratio
- 7.4 Operating Ratio
Objective 8: Activity Ratios
- 8.1 Inventory Turnover Ratio
- 8.2 Debtors Turnover Ratio or Receivables Turnover Ratio
- 8.3 Working Capital Turnover Ratio
Objective 9: Ratios: Advanced Level
- 9.1 Turnover Ratio
- 9.2 Cash Cycle – Combined Effect of Turnover Ratios
- 9.3 Leverage Ratios
- 9.4 Profitability Ratios
Summary
Key Terms
References
Multiple-choice Questions
Exercises

17 Cash Flow Statement

Objective 1: Meaning of Cash Flow and Cash Flow Statement
Objective 2: Uses of Cash Flow Statement
Objective 3: Limitations of Cash Flow Statement
- 3.1 Meaning of Cash Flow, Cash and Cash Equivalents
Objective 4: Preparation of Cash Flow Statements
Objective 5: Cash Flow Statement: Preparation
- 5.1 Direct Method Pro-forma or Format of Cash Flow Statement for the Year Ended
- 5.2 Indirect Method Pro-forma or Format Cash Flow Statement for the Year Ended
- 5.3 Calculation of Cash Outflow on Purchases
- 5.4 Cash Outflow on Expenses Incurred
- 5.5 Adjustments
- 5.6 Cash Flow from Investing Activities
- 5.7 Cash Flow from Investing Activities
- 5.8 Cash Flow from Financing Activities
- 5.9 Accounting Treatment of Special Items
Objective 6: Important Steps (stages) in the Preparation of Cash Flow Statement
- 6.1 Stage I: A. Cash Flow from Operating Activities
- 6.2 Stage II: B. Cash Flow from Investing Activities
- 6.3 Stage III: C. Cash Flow from Financing Activities
- 6.4 Stage IV: Net Increase/Decrease in Cash and Cash Equivalents
- 6.5 Stage V: Cash and Cash Equivalents at the Beginning of the Year to be Added
- 6.6 Stage VI: Cash and Cash Equivalents at the End of the Year to be Recorded
Objective 7: Some Important Hints
Summary
Key Terms
References
Exercises