Você está na página 1de 22

2012

ACCOUNTING
SHORT NOTES ON ACCOUNS
This document contains brief notes on different topics of accounts.

AUK 1/1/2012

Accounting
Accounting is the process of recording, classifying and summarising all the business transaction of financial nature (money).

Obj ec t iv e o f A cc ou n t i ng : To maintain accounting records. To calculate results of operation. To ascertain financial position. To communicate financial information to its users.

Fu nc t i on s o f Ac c ou n t i ng : Keeping systematic records. Protecting properties of the business. Communicating the financial results. Meeting legal requirements.

Ad v a n t ag es of ac c ou n ti n g: Maintenance of business records. Preparation of financial statements. Comparison of results. Decision making. Planning and control operations. Providing information to interested groups. Taxation problems. Valuation of business. Good evidence in court.

Lim i t at i on of ac co u n t in g: Accounting measures only those events which are financial nature (money). Accounting sometimes base on estimations and it is not necessary that estimation may always 100% correct. Fixed assets are shown on its cost value (purchase value) and not on its present market value hence true financial position is not reflected.

1|Page

C l a ss if ic a ti o n o f A cc o u n ti ng : -

Traditional Approach
Personal a/c Dr- the receiver Cr- The giver. Eg: - Mr.x, Bank etc. Real a/c Dr- What comes in Cr- What goes out. Eg:- Goods, Machinery and furniture. Nominal a/c Dr- expenses and losses Cr- all income and gains. Eg: - salaries, rent.

Accounting Equation Approach


Assets a/c Dr- increase Cr- decrease Liabilities a/c Dr- Decrease Cr- increase Capital a/c Dr- Decrease Cr- increase

Revenue a/c Dr- Decreases Cr- increases Expenditure a/c Dr- increases Cr- decreases

Acc ou n ti n g cy cl e : Journalizing ->Ledger posting ->Balancing->Trail balance->Income


statement (P/L a/c) ->Position statement (Balance statement).

J ou r n al : It is a book in which transaction are recorded in chronological order. It is also known as


book of original entry. All the entries are first recorded into it.
Sl.No Adjustment Journal entry for adjustment Stock A/c Dr TO Trading A/c Adjustment in Trading and P&L A/c Trading A/c Cr. Side as closing stock Trading A/c Dr P&L A/c Dr side as add to concerned expenses. Trading A/c Dr P&L A/c Dr side as less from concerned expenses. P&L A/c Cr side as add to concerned income. P&L A/c Cr side as less from concerned income. P&L A/c Dr side as to depreciation. Adjustment in Balance sheet Asset side as closing stock.

Closing stock

Outstanding expanses.

Expenses A/c Dr To Outstanding exp A/c

Liabilities side as Outstanding expenses.

Prepaid Expenses.

Prepaid A/c Dr To Expenses A/c

Asset side as prepaid expenses.

Outstanding income (Accrued income).

Outstanding income A/c Dr To Income A/c Income A/c Dr To Income Received in advance A/c

Asset side as outstanding income Liabilities side as income received in advance. Asset side as less from concerned asset.

Income received in advance (Received but not earned)

Depreciation

Depreciation A/c Dr To Asset A/c

2|Page

Appreciation

Asset A/c Dr To Appreciation A/c Interest on capital A/c Dr To Capital A/c Drawing A/c Dr To Interest on drawing

P&L A/c Cr side as By Appreciation. P&L A/c Dr side as to interest on capital. P&L A/c side as interest on drawings

Interest on capital

Asset side as add to concerned asset. Liabilities said as Add to capital. Liabilities side as Add to Drawing Then less the total drawing from capital. Liabilities side as add to loan.

Interest on drawing

10

Interest on loantaken(reverse if loan given) Additional Bad Debts.

Interest on loan A/c Dr To Loan A/c Bad debts A/c Dr To S.Debtors A/c

11

12

Provision for Doubtful debts.

P&L A/c Dr To Reserve for doubtful debts A/c

P&L A/c Dr said as to Interest on Loan P&L A/c Dr side as add to Bad debts A/c or add to new provision for bad debts. P&L A/c Dr side as To reserve for doubtful debts P&L A/c Dr side as to reserve for discount on debtors P&L A/c Cr side as by reserve for discount on creators P&L A/c Dr said as to Respective Reserve A/c P&L A/c Dr side as to commission payable P&L A/c Dr side as to expenses less balance carried forward. Trading A/c Dr side as add to purchases

Asset side as less from S.Debtors.

13

Reserve for discount on debtors

P&L A/c Dr To Reserve for discount on debtors

14

Reserve for Discount on Debtors

Reserve for discount on creditors A/c Dr To P&L A/c P&L A/c To Respective reserve A/c P&L A/c Dr To Commission payable Amount so deferred as P&L A/c Dr To Balance on the Expense A/c & carry forward Purchases A/c Dr To S.Creditors A/c Asset A/c Dr To Creditors A/c

Assets side as less from S.Debtors after additional bad debts if any. Asset side as Less from S.Debtors after provision for doubtful debts if any. Liabilities side as Respective Reserve.

15

Reserve for repairs,funds,charit y,etc.. Commission paid on profit

Liabilities side as less from S.Creditors. Liabilities side as commission payable. Asset side as unwritten off expenditure (Eg ; Adv..etc.,)

16

17

Deferred Revenue Expenditure

18

Purchase not recorded Credit purchase of an Asset not recorded

19

Liabilities side as add to S.Creditors. Asset side as add to asset & liabilities side add to creditors.

20

One expense included in others Drawing

21

Included exe A/c Dr To Exp in which it included A/c Drawing A/c Dr To Purchase A/c

Trading or P&L A/c Dr side Trading A/c Dr side as less form purchases (or) Liabilities side as less from capital.

3|Page

22

Goods drawn for office use

Office expenses A/c Dr To Purchases A/c

23

Goods distribution as free samples

Free samples A/c Dr To Trading A/c

24

Materials used for making an asset

Asset A/c Dr To purchases A/c

Trading A/c Cr side as by Drawing. Trading A/c Dr side as less from purchases and P&L A/c Dr side as to office expenses Trading A/c Cr side as by free samples & P&L A/c Dr side as to free samples Trading A/c Dr side as less from purchases

Asset side as add to concerned asset

S u bs id i ar y b o ok s : it is the sub-division of journal. Where there are large numbers of


similar transactions takes place then it is home what difficult to record all the transactions in single book of journal a it becomes bulky and voluminous hence subsidiary books are opened to record repetitive journal entries. There are 8 types of subsidiary books they are as follow:1. Purchase book: To record all credit purchases. (Not cash Purchases).
Date Name of supplier Lf Purchase invoice no Amount

2.

Purchase return book: To record all credit purchase returns. (Not for cash purchase for goods).

Date

Name of supplier

Lf

Debt note invoice no

Amount

3.

Sales book: To record all the credit sales. (Not cash sales).
Date Name of customer Lf Sales invoice no Amount

4.

Sales return book: To record all credit sales returns. (Not for cash sales goods).
Date Name of customer Lf Credit note invoice no Amount

4|Page

5. 6. 7. 8.

Cash book: To record all the cash transactions. Bills receivable: To record all bills receivable transactions. Bills payable: To record all bills payable transactions. Journal proper: To record all the transaction which are not shown in above books Eg:- opening and closing, adjustment entries.

Ledger: It is the principal book which contains all the account such as assets, liabilities, capital, revenue and expenditure which are first recorded in journal book and then transferred in ledger book by opening an account for each type of entry. All ledger accounts are balance in help to now the effect of all transections posted to each account. (Note: Normally personal and real accounts are balance. Nominal account are not usually balance but are closed by transferring to trading and P&L account). Trail Balance: It is a statement not an account. Made of checking the arithmetic accuracy of the account and useful in preparing financial statement like Trading and P&L A/c and Balance Sheet. If both side of trail balance are same then it is said that at least arithmetically correct. It can be prepared on any time as required. It is in tubular form. It is consolidate list of all ledger balances at the end of the period. There are two method of preparing trail balance they are: Totals method: in this method total of all the ledger account are shown. (Dr Total on Dr Side and Cr total on Cr side of trial balance). Balance method: in this method all the balancing figure are shown. (Dr Balance on Dr Side and Cr balance on Cr side of trail balance).

Limitation of trail balance: Omission of any entry in original books (journal or subsidiary book) will not affect its balance hence error is not disclosed. Posting an item on correct side with wrong account also not affect the balance of trail balance. Wrong amount in original books.

Financial Statements: basically financial statement is organised summaries of detailed information about the financial position, performance of enterprise. Traditionally financial statements are used to denote only two basic statements. 1) Trading and P&L A/c 2) Balance Sheet. But now a days two more statement are also prepared. 1) Statement of return earning 2) Statement of change in financial position (SCFP).

5|Page

Trading A/c: it is the financial statement which shows the result of buying and selling of goods during an accounting period. The help of it Gross Profit/Loss can be ascertained. Dr Trading A/c of . For the period of ending on . Particulars Rs. Particulars To Opening Stock XXXX By sales XXXXX To Purchases XXXXX Less: returns XXX Less: return XXXX XXXX By Closing Stock To Direct Expanses XXXX By Abnormal Stock To Coal, Gas & Water XXXX By Goods Lost By Fire To Fuel & Power, Motive Power XXXX By Gross Loss Tr To P&L A/c To wages & Salaries XXXX To Freight, Carriage, Duty, Cartage XXXX inwards To Gross Profit Tr To P&L A/c XXXX XXXXX Cr Rs. XXXX XXXX XXXX XXXX XXXX

XXXXX

Manufacturing A/c: It is prepare by manufacturing company to now the cost of good produced during an accounting period it is closed by transferring its balance to Dr Side of Trading A/c. Dr Date Manufacturing A/c for year ended Particulars
To opening work in progress To Row material consumed opening stock XXX Add: purchases XXX Add: cartage inwards XXX Add: Freight inwards XXX Less: Return out wards XXX To Wages To Salaries of works manager To Power, Electricity &Water To Fuel To Postage & Telephone To Depreciation on: Plant & Machinery Factory Land and Building To Repairs to: Plant & Machinery Factory Land and Building To Insurance Plant & Machinery Factory Land and Building To Rent & Taxes To General Expenses To Royalty based on production

Cr Particulars Amount

Amount

Date

By sale of scrap By Closing work in progress By Cost of production

6|Page

Profit and loss A/c: it shows the result of business operations during an accounting period of enterprises. By preparing it Net Profit/Loss can be Ascertain. Dr Date Particulars
To Gross Loss B/d To Fire insurance Premium To repairs and Maintenance To Salaries And Wages To Rent, Rates and Taxes To Lighting To Printing and Stationery To Postage and Telegrams To telephone Charges To Legal Expenses To Audit Fees To Miscellaneous Expenses To Carriage Outwards To Bank Charges To Entertainment Expenses To Bad Debts To Legal Charges To Commission Paid To Sales Promotion Expenses To General Expenses To Depreciation To Packing Expenses To Interest on loan To Loss By, theft, Fire, Embezzlement To Advertisement To Travelling Expenses To Net Profit Transferred to Capital A/c

Profit and Loss A/c for year ended Amount Date Particulars
By Gross Profit B/d By Interest Received By Discount Received By Commission Received By Rent Received By Miscellaneous Receipts By Net Loss, If any, Transferred to capital Account

Cr Amount

Loss Appropriation A/c: For distribution of profit/loss profit and loss appropriation A/c is prepared and the balance of it is transferred in balance sheet (to capital A/c If capital is fluctuation or to current A/c if capital A/cs are fixed). Dr Particulars
To Interest On Loan From Partner To Interest On Capital To Salary Or Commission To Partner To Transfer To Reserve To Net Profit Transferred To Capital/Current A/c partners

Profit & loss Appropriation A/c Amount


XXX XXX XXX XXX XXX XXX

Cr Amount
XXX XXX

Particulars
By Net Profit As Per Profit & Loss A/c By Interest On Drawing

7|Page

Balance Sheet: it is a financial statement prepared to ascertain the financial position of business as on the given time. It is also known as position statement. It can also be said as statement of assets and liabilities. Balance Sheet of As on Liabilities Rs. Assets Capital: Fixed Assets: Equity shares Goodwill. Land and Buildings, Plant and Preference shares Machineries, Furniture and Fixture, Less: Calls unpaid Leaseholds, Livestock and Vehicles, etc. Add: Forfeited shares Investments: Reserve and Surpluses: Current Assets: Capital reserve, Capital redemption Closing stock, Accured income, Prepaid Reserve, share premium A/c, other expenses, S.Debtors, Bills receivables, reserve. Cash at bank, Cash in hand, loose Tools, Less: Loss if any Profit after providing dividend, Bonus or reserves. Secured loan (long term); Debenture, Loan and Advances from banks, subscribers. Unsecured loan (Short term): Fixed deposits, Short term Loans & Advances form bank, subsidiaries. Current Liabilities: Accrued expenses, S.Creditors, Bills Payable, unearned income, unclaimed dividends, etc. Provision: Provision for tax, dividend, contingencies, etc.

Rs

Simple Balance Sheet: Balance Sheet Of As on.. Liabilities Amount Assets Capital: Fixed Assets: Opening Balance XXX Goodwill, Land & Buildings, Plant & Add: Net Profit XXX Machinery, Furniture & Fixture, Less: Net Loss XXX Leaseholds, Livestock and Vehicles Less Drawing XXX Etc... Long term Liabilities: Investment: Loan Current Assets: Current Liabilities: Closing Stock, Accrued Income, Income received in advance, Prepaid Expenses, S.Debtors, Bills S.Creditors, Outstanding expenses, Receivable, Cash At Bank, Cash In Bill Payable, Bank Overdraft, Etc Hand, Loose tools, Etc

Amount

8|Page

Fixed Assets: Assets held for the purpose of producing goods/services and these assets are held not for the purpose of resale. (Assets in case of end of life or on its obsolescence) Eg: Land and Building, Machinery, Patents, Goodwill, Trademarks and Furniture Etc... Current Assets: These are those assets which are held in form of cash, stock and debit bills etc (Assets which are converted in cash within a short period).

Investment: it is an expenditure on assets to earn Interest, Dividend, Income or other benefits Eg: share, debenture and bonds etc. Liabilities: Those are the financial obligation of an enterprise other than the owners funds. In other words responsibility of the business. Liabilities are of two types they are: Long Term Liabilities: it refers to those liabilities which does not fall due for payment in a relatively short period i.e. normally more than 12 months from the date of balance sheet. Eg: long term loan from financial institution and debenture etc Current Liabilities: it refers to those liabilities which fall due for payment in a relatively short period i.e. normally less than 12 month months Eg: Credit bills, outstanding expenses, Bank overdraft and instalment to loan.

Capital: It is the amount invested in business by the owner. It is excess of assets over liabilities (Capital assets - Liabilities). Marshalling of Assets And Liabilities: It refers to order in which the various assets and liabilities are shown in the balance sheet. Can be arranging in two ways: In Order of liquidity: in this method the arrangement is done according to liquidity most liquid in first and least in the last. (Assets: Cash in Hand, Goodwill at last, Liabilities: Short term creditors are taken in first and long term loans at the last). In Order of Performance: opposite to liquidity order.

Expenditure and receipts: Expenditure: in general expenditure means expenditure incurred in performing business activities. Expenditure are of three types. Capital expenditure: Expenditure incurred for acquiring or extending an assets or advantage to earn long term benefits. It is done with the intention to improve productivity/earning capacity Eg: Purchase of Machinery. Revenue Expenditure: it is incurred to run the business activity. Eg: rent, salaries and Wages.

9|Page

Deferred Revenue Expenditure: such expenditure yield benefits which exceed current year. These are short periods compare to capital expenditure normally written off in 35 years Eg: Heavy campaign, R&D expenditure Etc.

Receipts: in general receipts mean income. Receipts are of two types: Capital Receipts: those receipts are not routine can be earn by selling fixed assts. Revenue Receipts: those receipts are routine can be earn by selling product and services, allowing other to use assets like receiving rent, interest.

10 | P a g e

Bills of Exchange
According to negotiable instrument act 1881 A bills of exchange is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay certain sum of money only to, or to the bearer of the instrument in general when a person purchase goods for other and request to pay the amount later then the seller draw a bill on purchaser for the amount of goods sold and such bill is known as bill of exchange. There are three parties in it they are:1. 2. 3. Drawer: Who draws the bill (seller). Drawee/Acceptor: On whom the bill is draw (purchaser). Payee: To whom bill amount is to paid.

Ho n ou r: When the due bill amount is paid in time it is said that the bill is honoured. Re ti r in g o f b il l : Making the payment of bill amount before the due date is called
retiring a bill and for earlier payment drawee may get some discount on the bill amount.

D ish o no u r : When acceptor fail to make the payment on or before the due date, then the
bill is said to be dishonoured.

N ot i ng C h a r ge s: When the bill is dishonoured then the holder of the bill can get such
fact noted on the bill by notary public to prove the fact of dishonour by acceptor. Such charges are known as noting charges.

Re ne w al of b il l : When the acceptor of bill is unable to honour the bill on the due date.
He may request the drawer to cancel the original bill and draw on him a new bill for another period and for it drawer may charge interest on it.

D is cou n ti n g a bil l wi t h b a n k: if the drawer in need of money before the due


date of the bill then he will discount the bill with the bank. The bank will take the bill and pay the amount by deducting some amount as discount from the principal amount of bill. The bank gets the full amount from the acceptor on or before the due date of bill. Ex: A discounted his bill of Rs.10, 000/- for discount of 5%, then the bank pay him Rs.9, 500/- by deducting 500 as 5% discount.

Acc o mm od a ti o n o f b il l : When bill is drawn in consideration for the goods sold is


known as trade bill. But some time bills of exchange is done for mutual benefits of drawer or for both drawer and drawee, and discounts the bill with bank and distributer the amount them self as per the agreement and clears it on the due date.

11 | P a g e

Errors And There Rectification


Typ es of er r o rs : Following are the types or error cause while preparing accounts.
1. 2. 3. 4. Error of omission: Omitting to record a transaction in journal/subsidiary books or into ledger. Error of commission: Recording a transaction incorrect either fully or partially. It include posting of wrong amount or on the wrong side or to wrong account. Error of principles: Recording the transaction not according to the accounting principles. Compensating error: in this type there may be two or more errors countering each other.

Rec t if ic a ti o n o f e r ro r :
If error effecting only one A/c, then it can be rectified by giving an explanatory note not by any entry. Ex: The purchases book under casted by Rs.500/-, Then correction is done by writing Rs.500/- on debit side of purchases book. If errors affecting two account then a rectification entry is passed, Ex: A sale of Rs.10,000/- to Mr. A was wrongly debited to Mr.Bs A/c,then rectification can be done by passing the following entry: Particulars Dr Amount Cr Amount As A/c Dr 10,000 To Bs A/c 10,000 (Note: Sometime even errors affecting two account cannot be reflected by giving rectification entry. For rectification of such errors an explanatory note has to be written. Ex:Rs.100 received from A Debited To Bs A/c .in this case both has to be credited which is not possible). Date -

C re a t io n O f S u sp en s e Acc ou n t: When it is found that there are error after


preparing Trail balance and there is not enough time to rectify them then trail balance is balance by using suspense A/c if debit side is short then write suspense A/c on the credit side and vice versa. Later correction can be done and settle the suspense A/c.

C o rr ec t i on i n n ex t t r a d in g p e r io d : if corrections are to be made in the


next trading period, a separate A/c should be opened name as P&L adjustment A/c and the Dr and Cr in respect of nominal A/c. for error committed in previous trading period should be passed through that A/c and balance of that A/c should be transferred to capital A/c. this method will ensure that the correction of mistake of last year will not affect the profit and loss of the current year.

12 | P a g e

Consignment Accounting
When goods are sent by one person to another person, who sell them on commission basis on behalf of the person who sent that goods such transaction is known as consignment. The sender of the goods is known as consignor/principal. The receiver of goods is known as consignee/agent. Goods can be send by the consignee on cost price or on invoice price. In consignment consignor is responsible for any loss or damage to goods

Consignee get the commission and if any expenses incurred by him on sale. There are two types of commissions:1. 2. Normal commission: it is fixed rate of commission on sales. Del credere commission: it is the extra commission given to the consignee for taking responsibility for bad debts.

Consignor will open fallowing A/cs: 1. 2. 3. Consignment A/c to know the profit and loss of the consignment. Consignees A/c to know the amount due from consignee. Goods send on consignment A/c to keep a record of the goods send to the consignee.

Note: in the books of consignee journal entries for the following transection will not appear:1. 2. 3. 4. 5. For receiving goods on consignment. For expenses on consignor. Bill discounted by consignor. Consignment stock. Profit or Loss on consignment.

V al id at i on of co n si gn me nt s to ck :
Stock left with consignee valued for cost or market price whichever is less. The cost price does not mean only cost of manufacturing or purchase, but it also includes all proportionate non-recurring expenses or direct expenses whether paid by consignor or consignee. Direct expenses are those which are incurred to bring the goods in saleable condition or expenses which are normally increases the value of goods (Ex: packing and forwarding charges freight, custom duty, insurance on transit, octroi duty, cartage etc.) But expenses of recurring natural or selling expenses are not to be included in valuation of closing stock. (Ex: Godown rent, Advertisement, Salesmen salary etc...). Losses: There are two types of losses in consignment they are:-

13 | P a g e

1.

Normal loss: this is the loss of stock which is unavoidable in nature and due to inherent characteristic of commodity, such as loss may arise due to loading and unloading of goods, evaporation, drying etc. no entry of such loss are passed in the books of consignor and consignee, but such loss is consider while valuing closing stock. (Ex: 100 units are transfer @ Rs.10 each out of which 10 is normal loss and unsold stock is 8 units. Now the value of unsold stock can be find out in the following ways). Value of total goods =100*10=Rs.1000. Value after normal loss=100 -10 =90 units = Rs. 1000. Value of each units = 1000/90=11.1111. Value of unsold stock = 8*11.1111=88.888888. Abnormal loss: this is the loss of stock which is avoidable and which does not arise due to the nature of goods, such loss is caused due to fire, theft and pilferage etc. the value of abnormal loss is calculated in the same way as normal loss.

2.

14 | P a g e

Bank Reconciliation Statement.


Every business maintain a current account with the bank and issue a pass book for such a account in which bank records all the transaction done with it (All withdraw & deposit etc.) and the same transection were recorded by the business by opening a bank account ledger or in the bank column of cash book. The balance of both pass book and cash book bank column must be same, as the balance of both books are same when all the transection appear same in both books, but in real practice their balance may not be same due to some difference, hence a statement is made for reconciling the balance of both the books this statement is known as bank reconciling statement (BRS). BRS is a statement not an account. It is prepared on the date not for a particular period. No entry from BRS is transferred to any account. There is no effect of it on any account.

Reasons for difference in cash book and pass book bank column. Cheques issued but not yet presented for payment. Cheques deposited but yet not collected/cleared by bank. Interest on investments, dividends etc. credited in pass book, but no entry in cash book. Bank charges, interest on over draft, insurance premium etc. payed by the bank. Debited in pass book no entry in cash book. Amount directly deposited by customer in traders bank account not enter in cash book. Mistake in recording the transactions.

Over draft: generally to old regulation and reliable customers bank allow withdrawals beyond their deposits later which is cleared by customer the negative balance of amount is called over draft. Books Cash book bank column Pass book Debit Increases in balance (Deposits). Decreases in balance (Withdrawals/payment made by bank). Increases in over draft balance (Withdrawals). Credit Decreases in balance (withdrawals) Increases in balance (Deposited/receipts collected by bank). Decreases in over draft balance (deposited).

Pass book over draft

15 | P a g e

Performa of BRS: Bank reconciliation statement of .co as on date Date . . Particulars Balance as per given book balance. ADD: Increase in balance of balance finding book. Amount XXXX XXXX XXXXX . LESS: Decreases in the balance of balance finding book. Balance as per - - - book (BALANCE FINDING BOOK) XXXX XXXX

16 | P a g e

Joint Venture
Joint venture is define as a temporary partnership between two or more persons (Real/Artificial). Who may come together for a joint consignment of goods, speculation in share and underwriting in share etc. they do not use any firms name and their business come to end as soon as the venture is over. In the absence of any agreement all parties share profit and loss equally. The parties in joint venture are known as Co-ventures. Accounting treatment: There are 3 ways of maintaining joint venture accounts. 1. When separate set of books kept for venture: In this method a separate set of books of account are maintained for joint venture. Accounting treatment in this is same as in partnership accounting. Usually this type is fallowed when all parties are at the same place and joint venture is sufficiently large. Under this method 3 type of account were opened. 1) Joint venture A/c 2) Personal A/c 3) Joint bank A/c. When records are maintain in one of the ventures book: This method is fallowed when most of the activities are done by the one of the Co-venturers and other Coventurers contribute only their share of investment. In this method Co-venturer opens 1) Joint venture A/c 2) Personal A/c of other Co-venturers. When each Co-venture records transactions affecting joint venture: Under this method each Co-venturer opens a joint venture A/c and the Personal A/c of other Coventurers. Memorandum joint venture method: This is an alternative method to the 3rd method, under this method profit or loss made on joint venture is ascertain by preparing Memorandum joint venture A/c in this account expenses are taken on Debit side and Income are on credit side. It is not on basis of double entry system as postings are not transferred from this A/c to other accounts. For preparing it each party sends a copy of transections affected by them to other Co-venture, at the profit or loss is distributed among the Co-venturers according to their share.

2.

3.

17 | P a g e

Depreciation
Depreciation is a gradual and permanent decrease in the value of an asset from any cause (carter). In general depreciation is the act of decreasing the value of asset to know its correct value at appoint of time. Generally depreciation is done yearly up to the end of the estimated life of the asset. Cause of depreciation: Wear and tear due to constant use. Efflux of time. Obsolescence. Exhaustion.

Need to prove depreciation: To know the correct profit or loss. To show fixed asset at their proper value. To make provision for replacement of asset.

Basic factor/basic for providing depreciation: The original cost of the asset. The estimated life of asset. The estimated residual or scrape value of asset at the end of its estimated life.

Methods for providing depreciation: following are the important depreciation method: 1. Fixed instalment method: this method is also known as Fixed percentage on original cost, Equal instalment method or straight line method. Under this method a fixed value of amount is depreciated from the asset value every year till the value of asset is equal to zero or to its scrape value at the end of its estimated life. Formula for getting depreciation value is cost of asset Estimated scrape value /Estimated life of the asset Reducing balance method: it is also called as diminishing balance method or written down value method. Under this method depreciation is charge at a fixed rate on the opening balance of the asset every year and at the last year depreciation value is adjusted to bring the value of asset to null or to the scrape value. Annuity method: under this method, amount paid for purchasing of asset is regarded as investment. Every year asset A/c is debited with the amount of interest and credit with amount of depreciation. The interest is calculated on the debit balance of the

2.

3.

18 | P a g e

4.

5.

6.

7.

8.

9.

asset at the beginning of the year and depreciation is calculated on basis of annuity table. The same amount is charged every year as depreciation depends upon the rate of interest and the period over which the asset is written off. The amount of depreciation is so adjusted that at the end of working life of the asset its book value is reduce to zero or to its breakup value, if any. Depreciation fund method: under this method depreciation is kept aside and invested in readily available securities, interest from those securities also reinvested and at the end of assets estimated life these securities were sold to bring a replacement for concern asset. The amount of depreciation is calculated on the basis of Sinking fund Table. Insurance policy Method: this method is similar to above 4th method the difference is in Depreciation fund method amount of depreciation is invested in securities where as in this method an Insurance policy is taken for a fixed period (i.e. up to the estimated life of asset) and every year the premium is paid. At the end of estimated life of asset a new asset is brought with the amount of policy. Sum of digit method: under this method depreciation is calculated with the help of following. Formula (remaining life of asset (including current year)/sum of the digit of the life of the asset in years* cost of asset). Revaluation method: under this method assets are re-value every year and the difference between opening and closing balance of an asset is depreciation of that asset. This method is used in case of Bottles, Corks, Loose tools and livestock etc Depletion method: This method is used in case of mines, quarries etc. the rate of depreciation is calculated as cost of mine/the total quantity of the minerals expected to be available. Machine Hour Rate: under this method life of the machine is fixed in term of hours, and the depreciation is calculated on the basis of expected usage hours. Can be calculated as (cost of machine/total working hours expected).

19 | P a g e

Reserves
Reserves is an amount kept aside out of profit to meet future expenses like providing additional working capital, strengthen liquid resources, equalising dividends. It is an appropriation of profit. It is not created to meet any known liability or contingency. This may be considered as undistributed profit. It is created only when there is profit.

Types of reserves: Capital Reserves: it is a reserve created out of capital profit and generally not available for distribution as dividend among shareholder. such reserves arises by profit on sale of fixed assets, premium received on issued share and debentures, profit made on redemption of debenture in the market at a discount, profit prior to incorporation etc. Revenue reserves/General reserves/Dividend equalisation reserves: Any reserves available for distribution as dividend to shareholders. Secret reserve: There are reserves which not appear on the face of balance sheet, they are created by an understatement of assets or overstatement of liabilities. Such reserves are created in those concerns where public confidence is required for its working such as banking and insurance companies. Sinking Funds: it is a kind of reserve created to reduce liabilities. The main purpose of it is to have sum of money accumulated for the future. Created by keeping aside a certain sum of money every year. This fund can be used for redemption of loan and for replacing a depreciating asset. Provision: it is a charge against profit created to meet expected losses or expected contingency or outstanding liability. Ex: provision for bad & doubtful debts, provision for repairs and renewals etc

20 | P a g e

Accounting Principles
Principals: accounting principles are divided into two categories Accounting Convention: it denotes customs tradition and they serve as a guide to the preparation of accounting statements. Accounting Concepts: there are the basic a condition upon which accounting is based. Accounting convention 1. 2. Convention of consistency: some rules/practices of accounting every year Convention of discloser: accounting must be prepared and presented in such a manner that all material information must be disclosed. Convention of materiality: only useful material fact should be shown unused/unimportant item either left out or should be merged with other items. Convention of conservation: it is based on playing safe policy. All expected or possible losses should be taken and unearned or unrealised profit should be left out. 1. 2. 3. Accounting concepts Business entity concept: business and owners are different entities. Going concern concept: business should run forever until liquidity. Money measurement concept: only transection related to money is considered and taken in book of A/c. non-monetary transection are left out. Cost concept: assets are noted in books of A/c on the cost of purchases of it but not the market price. Dual aspect concept: every transaction has two flood effects one on the debit side and one on the credit side. Accounting period concept: periodically book are maintain to know result of business.

3.

4.

4.

5.

6.

21 | P a g e