Business Management - Financial Accounting

Contents
1.0 Rectification of Errors.....................................................................................................................2
2.0 Capital and Revenue........................................................................................................................6
3.0 Final Accounts.................................................................................................................................9
4.0 Provision and Reserves..................................................................................................................17
5.0 Measurement of Business Income.................................................................................................20
6.0 Bills of Exchange and Promissory Notes.......................................................................................26
7.0 Inventory Valuation.......................................................................................................................34
8.0 Analysis of Changes in Income.....................................................................................................38
9.0 Accounting for Consignment.........................................................................................................40
10.0 Joint Venture..................................................................................................................................44
11.0 Non-Trading Accounts...................................................................................................................47
12.0 Single Entry...................................................................................................................................51
13.0 Leasing..........................................................................................................................................54
14.0 Investment Account.......................................................................................................................57
15.0 Insolvency Accounts......................................................................................................................60
16.0 Stock Exchange Transactions........................................................................................................64
17.0 Accounts of Private Individuals.....................................................................................................69
18.0 Co-Operative Societies..................................................................................................................72
19.0 Insurance Claims...........................................................................................................................75
20.0 Government Accounting................................................................................................................77
21.0 Contract Account...........................................................................................................................82
22.0 Departmental Accounting..............................................................................................................87
23.0 Voyage Accounting........................................................................................................................90
24.0 Royalty Accounts...........................................................................................................................92

1.0 Rectification of Errors
Financial accounting deals with recording and maintaining every monetary transaction
of an organization. However, sometimes, a few entries might be either incorrect or used
at the wrong place. In financial accounting, the process of correcting such mistakes is
known as Rectification of Errors.
Types of Errors
Two most common types of errors, which are usually occurred at the time of preparation
of Financial Statements, are discussed below.
Error which Effect only One Account
 Omission of posting of balance in a Trial Balance.
 Error of carried forward of balance.
 Error of casting and posting.
Error which Effect Two or more Accounts
The nature of errors, which occur during the preparation of Financial Statements are −
 Error of posting in wrong account.
 Error of principle.
 Error of omission.
Methods of Rectification of Errors
There are three types of methods used in rectification of Errors −
Replacing Correct Figure by Striking Off the Wrong Figure
For example, cash payment of Rs. 989 on the account of stationery purchased written
as Rs. 998, will be corrected as −
Cash Book
By Stationery A/c 998

989
Through Journal Entry
Normally, there are three types of errors, which can be rectified by passing Journal
Entries −
Short credited or debit in one account and excess debit or credit in another account. For
example, purchase of stationery for Rs. 989 wrongly debited to purchase of raw material
account will be corrected as follows −
Journal Entry
Stationery Account Dr. 989

989
To Purchase Account
(Being Cash purchase of stationery wrongly debited to Purchase
account, now rectified)
If, by mistake one account is debited as well as credited with wrong amount
simultaneously. For example, Cash purchase of stationery of Rs. 989 booked with an
amount of Rs. 489 will be corrected as follows −
Journal Entry

500
To Purchase Account
(Being purchase of stationery for Rs. 989 wrongly written as Rs. 489
now rectified)
If there is an omission of recording a transaction, it can be rectified by passing journal

entry to book that omitted transaction. For example, omission of recording transaction of
purchase of raw material for Rs. 5000 from Mr. X will be recorded and corrected by
passing the following journal Entry −
Journal Entry

5000
To X Account
(Being omitted entry of purchase of Rs. 5000 from Mr. X now
recorded and rectified)
If there is a Mistake that Effects Trial Balance
Before closing the books and transferring the difference in suspense account and After
the agreed difference is transferred into the suspense account, following accounting
treatment will be done −
Earlier entry debited or credited with fewer amount will be rectified by repeating that
entry with difference amount to complete that amount. For example, entry done with Rs.
500 instead of Rs. 5000 will be rectified by doing same entry with an amount of Rs.
4500. In case, where entry wrongly debited or credited to other account may be rectified
by doing reversal of old entry to nullify earlier effect.
If expense booked with less amount entry then −
Particular Expense Account Dr 4,500
To Cash/Personal Account 4,500
(Being wrong amount of posting, rectified with Difference amount

Rs. 4,500 (5000-500)
If income is booked with less amount, it will be rectified as −
Cash/Personal account Dr 4,500
To Income Account 4,500
(Being wrong amount of posting now Rectified. 4500 (5000-500)
If posting done in wrong account that will be rectified as follows −
Stationery Account Dr.**

To Office Expenses Account**
(Being wrongly debited earlier in office account, now Rectified and posted in stationery
account)
In case (ii) where difference has already been transferred to suspense account, further
amount will be debited or credited to respective account and correspondingly suspense
account will be debited or credited. Thus, these entries would reduce/nil the balance of
suspense account.
Effect of Errors on Agreement of Trial Balance
The errors by which there is no change on both side of trial balance or wrong effect on
trial balance with same amount will not lead to effect on agreement of Trial Balance.
Errors of omission, error of posting with wrong amount on both side, or Error of
principles are the example of such errors. To find out such errors is a challenging job for
any book keeper or an accountant.
Effects of Errors on Financial Statements
Effect of error depends on the nature of effected accounts. If errors relate to nominal
account, it will either increase or reduce the profit and rectification will reduce excess
profit or Loss. Effect of error on Trading and Profit account ultimately effect the Balance-
Sheet of a company too, because reduced profit or excess profit ultimately transferred
to capital account, which is a part of the Balance Sheet.
There are some errors, which effect Trading or Profit and Loss account and Balance
sheet simultaneously, like entry of depreciation will affect profit as well as value of the
Fixed Assets.
Some entry may effect on Balance sheet only like, for instance omission of entry of cash
paid to purchase fixed assets will affect Balance Sheet of a firm only.
Rectification of Errors after Preparation of Final Accounts
To remain unaffected Profit or Loss of the current financial year, the errors, which took
place in last financial years are adjusted and rotated through a Profit & Loss adjustment
account. Balance of this account directly transferred to capital account of firm without
affecting the current year profit or loss.
2.0 Capital and Revenue
One of the major aspects of preparing a correct financial statement is to distinguish

revenue and capital in regard to revenue income, revenue expenditure, revenue
payments, revenue profits, and revenue losses of the company with capital income,
capital receipts, capital profit, or capital losses.
In fact, without differentiating, we cannot think of correctness of a financial statement.

Ultimately, it will mislead the end results where no one can conclude anything. As per
this principle, a revenue item should be recorded in the Trading and Profit & Loss
account and a capital item should be recorded in the Balance-Sheet of respective firm.
Capital Expenditure
Capital expenditure is the expenditure incurred to acquire fixed assets, capital leases,
office equipment, computer equipment, software development, purchase of tangible and
intangible assets, and such kind of any value addition in business with the purpose to
enhance the income. However, to decide nature of the capital expenditure, we need to
pay attention on −
The expenditure, which benefit cannot be consumed or utilized in the same accounting
period, should be treated as capital expenditure.
Expenditure incurred to acquire Fixed Assets for the company.
Expenditure incurred to acquire fixed assets, erection and installation charges,

transportation of assets charges, and travelling expenses directly relates to the
purchase fixed assets, are covered under capital expenditure.
Capital addition to any fixed assets, which increases the life or efficiency of those assets
for example, an addition to building.
Revenue Expenditure
Revenue expenditure is the expenditure incurred on the fixed assets for the
‘maintenance’ instead of increasing the earning capacity of the assets. Examples of
some of the important revenue expenditures are as follows –
Wages/Salary
Freight inward & outward
Administrative Expenditure
Selling and distribution Expenditure
Assets purchased for resale purpose
Repairs and renewal expenditure which are necessary to keep Fixed Assets in good
running and efficient conditions
Revenue Expenditure Treated as Capital Expenditure
Following are the list of important revenue expenditures, but under certain
circumstances, they are treated as a capital expenditure −
 Raw Material and Consumables − If those are used in making any fixed assets.
 Cartage and Freight − If those are incurred to bring Fixed Assets.
 Repairs & Renewals − If incurred to enhance life of the assets or efficiency of

the assets.
 Preliminary Expenditures − Expenditure incurred during the formation of a

business should be treated as capital expenditure.
 Interest on Capital − If paid for the construction work before the commencement
of production or business.
 Development Expenditure − In some businesses, long period of development

and heavy amount of investment are required before starting the production
especially in a Tea or Rubber plantation. Usually, these expenditure should be
treated as the capital expenditure.
 Wages − If paid to build up assets or for the erection and installation of Plant and
Machinery.
Deferred Revenue Expenditure
Some non-recurring and special nature of expenditure for which heavy amount incurred
and benefit for the same will spread in up-coming years, to be treated as capital
expenditure and will be shown as the assets of the firm. Part of the expenditure should
be debited to Profit & Loss account every year. For example, if heavy amount paid for
the advertisement of a product, which benefits are expected to be received in next four
years, then it should be debited as ¼ of the part in Profit & Loss account as the revenue
expenses and balance ¾ will be shown as the assets in the Balance-Sheet.
Capital and Revenue Profit
The premium received on issue of shares, and the profit on sale of fixed assets are the
major examples of capital profit and should not be treated as revenue profit. Capital
profit should be transferred to the capital reserve account, which is used to set off
capital losses in future if any.
Capital and Revenue Receipts
Sale of fixed assets, capital employed or invested, and loans are the example of capital
receipts. On the other hand, sale of stock, commission received, and interest on
investment received are the main examples of revenue receipts. Revenue receipts will
be credited to the profit and loss account and on the other hand, capital receipts will
affect the Balance-sheet.
Capital and Revenue Losses
Discount on issue of shares and losses on sale of fixed assets are the capital loss and
would be set off against the capital profits only. Revenue losses on normal business
activity are part of the profit and loss account.
3.0 Final Accounts
Final Accounts are the accounts, which are prepared at the end of a fiscal year. It gives
a precise idea of the financial position of the business/organization to the owners,
management, or other interested parties. Financial statements are primarily recorded in
a journal; then transferred to a ledger; and thereafter, the final account is prepared (as
shown in the illustration).
Usually, a final account includes the following components −
 Trading Account
 Manufacturing Account
 Profit and Loss Account
 Balance Sheet
Now, let us discuss each of them in detail –
Trading Account
Trading accounts represents the Gross Profit/Gross Loss of the concern out of sale and
purchase for the particular accounting period.
Study of Debit side of Trading Account
Opening Stock − Unsold closing stock of the last financial year is appeared in debit
side of the Trading Account as “To Opening Stock“of the current financial year.
Purchases − Total purchases (net of purchase return) including cash purchase and
credit purchase of traded goods during the current financial year appeared as “To
Purchases” in the debit side of Trading Account.
Direct Expenses − Expenses incurred to bring traded goods at business

premises/warehouse called direct expenses. Freight charges, cartage or carriage
charges, custom and import duty in case of import, gas, electricity fuel, water, packing
material, wages, and any other expenses incurred in this regards comes under the debit
side of Trading Account and appeared as “To Particular Name of the Expenses”.
Sales Account − Total Sale of the traded goods including cash and credit sales will
appear at outer column of the credit side of Trading Account as “By Sales.” Sales should
be on net releasable value excluding Central Sales Tax, Vat, Custom, and Excise Duty.
Closing Stock − Total Value of unsold stock of the current financial year is called as
closing stock and will appear at the credit side of Trading Account.
Closing Stock = Opening Stock + Net Purchases - Net Sale
Gross Profit − Gross profit is the difference of revenue and the cost of providing
services or making products. However, it is calculated before deducting payroll,
taxation, overhead, and other interest payments. Gross Margin is used in the US
English and carries same meaning as the Gross Profit.
Gross Profit = Sales - Cost of Goods Sold
Operating Profit − Operating profit is the difference of revenue and the costs generated
by ordinary operations. However, it is calculated before deducting taxes, interest
payments, investment gains/losses, and many other non-recurring items.
Operating Profit = Gross Profit - Total Operating Expenses
Net Profit − Net profit is the difference of total revenue and the total expenses of the
company. It is also known as net income or net earnings.
Net Profit = Operating Profit - (Taxes + Interest)
Format of Trading Account
Trading Account of M/s ABC Limited

(For the period ending ……….)
Particulars Amount Particulars Amount
To Opening Stock XX By Sales XX
To Purchases XX By Closing Stock XX
To Direct Expenses XX By Gross Loss c/d XXX
To Gross Profit c/d XXX
Total XXXX Total XXXX

Manufacturing Account
Manufacturing account prepared in a case where goods are manufactured by the firm
itself. Manufacturing accounts represent cost of production. Cost of production then
transferred to Trading account where other traded goods also treated in a same manner
as Trading account.
Important Point Related to Manufacturing Account

Apart from the points discussed under the section of Trading account, there are a few
additional important points that need to be discuss here −
Raw Material − Raw material is used to produce products and there may be opening
stock, purchases, and closing stock of Raw material. Raw material is the main and
basic material to produce items.
Work-in-Progress − Work-in-progress means the products, which are still partially

finished, but they are important parts of the opening and closing stock. To know the
correct value of the cost of production, it is necessary to calculate the correct cost of it.
Finished Product − Finished product is the final product, which is manufactured by the
concerned business and transferred to trading account for sale.
Raw Material Consumed (RMC) − It is calculated as.
RMC = Opening Stock of Raw Material + Purchases - Closing Stock
Cost of Production − Cost of production is the balancing figure of Manufacturing account as per the
format given below.
Manufacturing Account
(For the year ending……….)
To Opening Stock of Work-in- XX By Closing Stock of Work-in- XX
Progress Progress
To Raw Material Consumed XX By Scrap Sale XX
To Wages XXX By Cost of Production XXX

To Factory overhead xx (Balancing figure)
Power or fuel xx
Dep. Of Plant xx
Rent- Factory xx
Other Factory Exp. Xx XXX
Profit and Loss Account
Profit & Loss account represents the Gross profit as transferred from Trading Account
on the credit side of it along with any other income received by the firm like interest,
Commission, etc.
Debit side of profit and loss account is a summary of all the indirect expenses as incurred by the firm
during that particular accounting year. For example, Administrative Expenses, Personal Expenses,
Financial Expenses, Selling, and Distribution Expenses, Depreciation, Bad Debts, Interest, Discount, etc.
Balancing figure of profit and loss accounts represents the true and net profit as earned at the end of the
accounting period and transferred to the Balance Sheet.
Profit & Loss Account of M/s ………

(For the period ending ………..)
To Salaries XX By Gross Profit b/d XX
To Rent XX
To Office Expenses XX By Bank Interest received XX
To Bank charges XX By Discount XX
To Bank Interest XX By Commission Income XX
To Electricity Expenses XX By Net Loss transfer to XX
Balance sheet
To Staff Welfare Expenses XX
To Audit Fees XX
To Repair & Renewal XX
To Commission XX
To Sundry Expenses XX
To Depreciation XX
To Net Profit transfer to XX
Balance sheet
Balance Sheet
A balance sheet reflects the financial position of a business for the specific period of
time. The balance sheet is prepared by tabulating the assets (fixed assets + current
assets) and the liabilities (long term liability + current liability) on a specific date.
Assets
Assets are the economic resources for the businesses. It can be categorized as –
Fixed Assets − Fixed assets are the purchased/constructed assets, used to earn profit
not only in current year, but also in next coming years. However, it also depends upon
the life and utility of the assets. Fixed assets may be tangible or intangible. Plant &
machinery, land & building, furniture, and fixture are the examples of a few Fixed
Assets.
Current Assets − The assets, which are easily available to discharge current liabilities
of the firm called as Current Assets. Cash at bank, stock, and sundry debtors are the
examples of current assets.
Fictitious Assets − Accumulated losses and expenses, which are not actually any
virtual assets called as Fictitious Assets. Discount on issue of shares, Profit & Loss
account, and capitalized expenditure for time being are the main examples of fictitious
assets.
Cash & Cash Equivalents − Cash balance, cash at bank, and securities which are
redeemable in next three months are called as Cash & Cash equivalents.
Wasting Assets − The assets, which are reduce or exhausted in value because of their
use are called as Wasting Assets. For example, mines, queries, etc.
Tangible Assets − The assets, which can be touched, seen, and have volume such as
cash, stock, building, etc. are called as Tangible Assets.
Intangible Assets − The assets, which are valuable in nature, but cannot be seen,
touched, and not have any volume such as patents, goodwill, and trademarks are the
important examples of intangible assets.
Accounts Receivables − The bills receivables and sundry debtors come under the
category of Accounts Receivables.
Working Capital − Difference between the Current Assets and the Current Liabilities
are called as Working Capital.
Liability
A liability is the obligation of a business/firm/company arises because of the past

transactions/events. Its settlement/repayments is expected to result in an outflow from
the resources of respective firm.
There are two major types of Liability −
Current Liabilities − The liabilities which are expected to be liquidated by the end of
current year are called as Current Liabilities. For example, taxes, accounts payable,
wages, partial payments of long term loans, etc.
Long-term Liabilities − The liabilities which are expected to be liquidated in more than
a year are called as Long-term Liabilities. For example, mortgages, long-term loan,
long-term bonds, pension obligations, etc.
Grouping of Assets and Liabilities
There may be two types of Marshalling and grouping of the assets and liabilities −
In order of Liquidity − In this case, assets and liabilities are arranged according to their
liquidity.
In order of Permanence − In this case, order of the arrangement of assets and

liabilities are reversed as followed in order of liquidity.
Financial Statements with Adjustments Entries and their Accounting

Treatment
In order to prepare a true and fair financial statement, there are some very important
adjustments those have to be done before finalization of the accounts (as shown in the
following illustration) –
Sr.No. Adjustments Accounting Treatments
1 Closing Stock First Treatment

Unsold stock at the end of Where an opening and closing stock adjusted
Financial year called through a purchase account and the value of
Closing stock and valued at Closing Stock given in Trial Balance −
“Cost or market value
whichever is less” Closing stock will be shown as adjusted
purchase account on the debit side of Trading
account and will appear in the Balance Sheet
under current Assets.
2 Outstanding Expenses Accounting Treatment
Expenses which are due or Outstanding expenses will be added in Trading

not paid called as or Profit & Loss account in particular expense
outstanding expenses. account and will appear in liabilities side of the
Balance Sheet under the current liabilities.
3 Prepaid Expenses Accounting Treatment
Expenses which are paid in Prepaid Expenses will be deducted from the
advance are called as particular expenses as appear in Trading &
Prepaid Expenses. Profit & Loss account and will be shown in the
Balance Sheet under the current assets.
4 Accrued Income Accounting Treatment
The income, which is Accrued income will be added to a particular

earned during the year, but income under the Profit & Loss account and will
not yet received at the end be shown in the Balance Sheet as current
of the Financial Year is assets.
called as Accrued Income.
5 Income Received in Accounting Treatment
Advance
An income to be reduced by the amount of
An income received in advance income in profit & loss account and will
advance, but not earned like appear as current liabilities in the Balance
advance rent etc. Sheet.
6 Interest on Capital Accounting Treatment
Where an interest paid on Debit Side of Profit & Loss account

the capital introduced by the
proprietor or partner of the Add to capital account (Credit side of Capital
firm account).
7 Interest on Drawing Accounting Treatment
Where an interest paid on Credit Side of Profit & Loss account

the capital introduced by the
proprietor or partner of the Reduced from capital account (Debit side of
firm. Drawing account).
8 Provision for Doubtful Accounting Treatment
Debts
Debit Side of Profit & Loss Account
If there is any doubt on the
recovery from Sundry In a Balance Sheet, provision for the Doubtful
Debtors. will be deducted from the Sundry Debtors’
Account.
9 Provision for Discount on Accounting Treatment
Debtors
If there is any offer of
discount to pay the debtors In a Balance Sheet, provision for the Discount
within certain period. on Debtors will be deducted from the Sundry
Debtors Account.
10 Bad Debts Accounting Treatment
Unrecovered debts or Debit Side of Profit & Loss Account

irrecoverable debts
In a Balance Sheet, Sundry debtors will be
shown after deducting the Bad Debts.
11 Reserve for Discount on Accounting Treatment
Creditors
If there is any chance to get Credit Side of Profit & Loss Account
discount on the payment of
sundry creditors within In a Balance Sheet, Sundry Creditors will be
certain period. shown after deducting the Reserve for Discount.
12 Loss of Stock by fire Accounting Treatment
There may be three 1. If Stock is fully insured

conditions in this case
Credit Side of Trading Account
Assets side of Balance Sheet

(With full value of loss)
2. If Stock is partially insured
Credit side of Trading Account

(With Total value of Loss)
Debit side of Profit & Loss a/c

(With value of loss unrecoverable)
Asset Side of Balance Sheet

(With value recoverable)
3. If Stock is not insured
Credit Side of Trading Account
Debit side of Profit & Loss Account

13 Reserve Fund Accounting Treatment
Liabilities side of Balance Sheet

14 Free Sample to Customers Accounting Treatment
Credit side of Trading Account

15 Managerial Commission Accounting Treatment

Liabilities side of Balance Sheet as commission
payable
16 Goods on Sale or Accounting Treatment
Approval Basis
Sales Account Dr
If there is any un-approved
stock lying with the To Debtors A/c
customers at the end of
financial year. (With Sale Price)
Stock Account Dr
To Trading Account
(with cost price)

4.0 Provision and Reserves
Meaning of Provisions
“Any amount written off or retained by the way of providing depreciation or diminution in
the value of assets or for providing any known liability of which the amount cannot be
determined with substantial accuracy.”
- The Institute of Chartered Accountants of India
“Liabilities which can be measured only by using a substantial degree of estimation.”
- AS-29 issued by Institute of Chartered Accountants of India
AS 29 also defines liabilities as “a present obligation of the enterprises arising from past
events, the settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.”
Debiting Profit and Loss account, provisions are created and shown either deducting
assets side or on the liabilities side under relevant sub-head of Balance Sheet.
Provision for bad and doubtful debts, Provisions for Repair & Renewals, and Provision
for discounts & depreciation are the most common examples.
Meaning of Reserves
“That portion of earnings, receipts or other surplus of an enterprise (whether capital or

revenue) appropriated by the management for general or a specific purpose other than
a provision for depreciation or diminution in the value of assets or for a known liability.”
-ICAI
Reserve is an appropriation of profits; on the other hand, Provision is a charge against

profit. Reserves are not meant to meet out contingencies or liabilities of a business.
Reserve increases working capital of a company to strengthen the financial position.
There are two types of reserves −
Capital Reserve − Capital reserve is not readily available for distribution as the
dividends among the shareholders of the company, and it creates only out of capital
profit of the company. It is like Premium on issue of shares or debentures and Profit
prior to incorporation.
Revenue Reserve − Revenue reserves are readily available for the distribution of profit
as dividend to the shareholders of the company. Some of the examples of this are
general reserve, staff welfare fund, dividend equalization reserve, debenture redemption
reserve, contingency reserve, and investment fluctuation reserves.
Distinction between Provisions and Reserves
 Reserve can be made only out of profit and provisions are the charge to profit.
 Reserves reduce divisible profits and provisions reduce the profit.
 Reserves, if remain un-utilized for some period can be distributed as dividends,

but provisions cannot be transferred to General Reserve for the distribution.
 Purpose of provision is very specific, but reserve is created to meet out any
probable future liabilities or losses.
 Creation of provisions is legally necessary, but reserves are created to save a

concern from the future losses and liabilities.
Secret Reserves
Banking Company, Insurance Company, and Electricity Companies create secret

reserves, where the public confidence is required. In this case, to create secret reserve,
assets showed at lower cost or liabilities at higher value. Some of the examples of it are
as follows −
 By undervaluing goodwill or stock
 By excessive depreciation
 By creating excessive provisions
 Showing free reserves as creditors
 By charging capital expenditure to profit and loss account
Advantages of Secret Reserves
Some of the important advantages are given below −
Without disclosing to its shareholders, it increases working capital of a concern, which is

a clear indication of the sound financial position.
With the help of secret reserves, directors can maintain the rate of dividends during the
unfavorable time.
Non-disclosure of a big profit is useful to avoid an un-due competition.
Limitations of Secret Reserves

Major limitations or objections of secret reserves are as follows −
Due to non-disclosure of actual profit, financial statements do not presents true and fair
view of the state of affairs.
There are lots of chances of misuse of reserves by the directors for their personal
benefits.
Due to secret reserves, chances for the concealment of worst position of a company are
very high.
Company will get very lower amount of claim of insurance at the time of loss of stock or
other assets, as valuation of the assets are done at very low value to create secret
reserve.
General and Specific Reserves
Specific reserves are created and utilized for the purpose only for which they are
created, like dividend equalization reserve and debenture redemption reserve.
General reserves are created for any future contingency or to utilize at the time of
expansion of a business. Purpose of creation of General reserve is to strengthen the
financial position of the company and to increase the working capital.
Sinking Fund
For the purpose to repay of any liabilities or to replace any fixed assets after particular
period, sinking funds are created. For this, some amount are charged or appropriated
from the profit and loss account every year and invested in any outside securities.
Without any extra ordinary burden, replacement of an asset may be done in a
systematic manner or pay any known liability on maturity of the sinking fund.
Investment of Reserves
It is a controversial issue, whether a reserve should be invested in outside securities or
not. Thus, to decide anything, it is important to study the need and requirement of a firm
according to the financial position of a firm. Therefore, investment in outside securities
is justified only in a case where company has the extra fund to invest.
Nature of Reserve
In-spite of showing reserves on the liabilities side of a Balance Sheet, reserves are
actually not at all any liabilities of a firm. Reserve represents as accumulated profits,
which are available to disburse among the shareholders.
5.0 Measurement of Business Income
One of the most significant accounting concepts is “Concept of Income”. Similarly,

measurement of a business income is also an important function of an accountant.
In General term, payment received in lieu of services or goods are called income, for
example, salary received by any employee is his income. There may be different type of
incomes like Gross income, Net income, National Income, and Personal income, but we
are here more concerned for a business income. Surplus revenue over expenses
incurred is called as “Business Income.”
Objectives of Net Income
Following are the important objectives of a net income −
 Historical income figure is the base for future projections.
 Ascertainment of a net income is necessary to give portion of profit to

employees.
 To evaluate the activities, which give higher return on scarce resources are
preferred. It helps to increase the wealth of a firm.
 Ascertainment of a net income is helpful for paying dividends to the shareholders

of any company.
 Return of income on capital employed, gives an idea of overall efficiency of a

business.
Definition of Income
The most authentic definition is given by the American Accounting Association as −
“The realized net income of an enterprise measures its effectiveness as an operative

unit and is the change in its net assets arising out of a (a) the excess or deficiency of
revenue compared with related expired cost, and (b) other gains or losses to the
enterprise from sales, exchange or other conversion of assets:”.
According to the American Accounting Association, to be as business income, income

should be realized. For example, to be a business income, only appreciation in value of
assets of a company is not enough, for this, asset has really been disposed of.
Accounting Period
For the measurement of any income concerns, instead of a point of time, a span of time
is required. Creditors, investors, owners, and government, all of them require systematic
accounting reports at regular and proper intervals. The maximum interval between
reports is one year, as it helps a businessman to take any corrective action.
An accounting period concept is directly related to matching concept and realization

concept; in the absence of any of them, we could not measure income of the concerns.
On the basis of matching concept, expenses should be determined in a particular
accounting period (usually a year) and matched with the revenue (based on realization
concept) and the result will be income or loss of the accounting period.
Accounting Concept and Income Measurement
The measurement of accounting income is the subject to several accounting concepts

and conventions. Impact of accounting concepts and convention on measurement of the
accounting income is given below −
Conservatism
Where an income of one period may be shifted to another period for the measurement
of income is called as ‘conservatism approach.’
According to the convention of conservatism, the policy of playing safe is followed while
determining a business income and an accountant seeks to ensure that the reported
profit is not over stated. Measurement of a stock at cost or market price, whichever is
less is one of the important examples as applied to measurement of income. But it must
be insured that providing excessive depreciation or excessive provisions for a doubt full
debt or excessive reserve should not be there.
Consistency
According to this concept, the principle of consistency should be followed in accounting

practice. For example, in the treatment of assets, liabilities, revenues, and expenses to
insure the comparison of accounting results of one period with another period.
Therefore, the accounting profession and the corporate laws of most of the counties
require that financial statement must be made out on the basis that the figures stated
are consistent with those of the preceding year.
Entity Concept
Proprietor and business are the two separate and different entities according to the
entity concept. For example, an interest on capital is business expenditure, but for a
proprietor, it is an income. Thus, we cannot treat a business income as personal income
or vice-versa.
Going Concern Concept
According to this concept, it is assumed that business will continue for a long time.
Thus, charging depreciation on a Fixed Asset is based on this concept.
Accrual Concept
According to this concept, an income must be recognized in the period in which it was
realized and costs must be matched with the revenue of that period.
Accounting Period
It is desirable to adopt a calendar year or natural business year to know the results of
business.
Computation of Business Income
To compute business income, following are the two methods −
Balance Sheet Approach
Comparison of the closing values (Assets minus outsider’s liabilities) of a firm with the
values at the beginning of that accounting period is called as Balance Sheet approach.
In above value, an addition to capital will be subtracted and addition of drawings will be
added while computing the business income of a firm. Since, income is calculated with
the help of Balance Sheet hence called as Balance Sheet approach.
Transaction Approach
Transactions are mostly related to production or the purchase of goods and the sale of
goods and all these transactions directly or indirectly related to the revenue or to the
cost. Therefore, surplus collection of the revenue by selling goods, spent over for
production or purchasing the goods is the measure of income. This system is widely
followed by the enterprises where double entry system adopted.
Measurement of Business Income
There are following two factors which are helpful in the estimation of an income −
Revenues − Sale of goods and rendering of services are the way to generate revenue.
Therefore, it can be defined as consideration, recovered by the business for rendering
services and goods to its customers.
Expenses − An expense is an expired cost. We can say the cost that have been
consumed in a process of producing revenue are the expired cost. Expenses tell us -
how assets are decreased as a result of the services performed by a business.
Measurement of Revenue
Measurement of the revenue is based on an accrual concept. Accounting period, in

which revenue earned, is the period of revenue accrues. Therefore, a receipt of cash
and revenue earned are the two different things. We can say that revenue is earned
only when it is actually realized and not necessarily, when it is received.
Measurement of Expenses
In case of delivery of goods to its customers is a direct identification with the revenue.
Rent and office salaries are an indirect association with the revenue.
There are four types of events (given below) that need proper consideration about as an
expense of a given period and expenditure and cash payment made in connection with
those items –
 Expenditure, which are expenses of the current year.
 Some expenditure, which are made prior to this period and has become expense
of the current year.
 Expenditure, which is made this year, becomes expense in the next accounting
periods. For example, purchase of fixed assets and depreciation in next up-
coming years.
 Expense of this year, which will be paid in next accounting years. For example,
outstanding expenses.
Matching Concept
It is a problem of recognition of revenue during the year and allocation of expired cost to
the period.
Recognition of Revenue
Most frequent criteria, which are used in recognition of the revenue are as follows −
Point of Sale − Transfer of ownership title to a buyer is point of sale, in case of sale of
commodity.
Receipt of Payment − Criteria of cash basis is widely used by the attorneys,

physicians, and other professionals in which revenue is considered to be earned at the
time of collection of cash.
Instalment Method − Instalment method is widely used in retail trading specially in

consumer durables. In this system, revenue earned is treated in the same manner as is
used in any other credit sale.
Gold Mines − The accounting period in which gold is mined is the period of revenue
earned.
Contracts − Degree of contract completion, especially in long term construction

contracts is based on percentage of completion of a contract in a single accounting
year. It is based on total estimated life of the contract.
Allocation of Costs
Matching of expired revenue and expired costs on a periodic time basis is the
satisfactory basis of allocation of cost as stated earlier.
Measurement of Costs
Measurement of costs can be determined by −
Historical Costs − To determine periodic net income and financial status, historical cost
is important. Historical cost actually means - outflow of cash or cash equivalents for
goods and services acquired.
Replacement Costs − Replacing any asset at the current market price is called as
replacement cost.
Basis of Measurement of Income
Following are the two significant basis of measurement of income −
Accrual Basis − In an accrual basis accounting, incomes are recognized in a

company’s books at the time when revenue is actually earned (however, not essentially
received) and expenses is recorded when liabilities are incurred (however, not
essentially paid for). Further, expenses are compared with revenues on the income
statement when the expenses expire or title has been transferred to the buyer, and not
at the time when the expenses are paid.
Cash Basis − In a cash basis accounting, revenues and expenses are recognized at
the time of physical cash is actually received or paid out.
Change in the Basis of Accounting
We have to pass adjustment entries whenever accounting records change from cash
basis to accrual basis or vice versa specially in respect of the prepaid expenses,
outstanding expenses, accrued income, income received in advance, bad debts &
provisions, depreciation, and stock in trade.
Features of Accounting Income
Followings are the main features of accounting income −
Matching revenue with related cost or expenses is a matter of accounting income.
Accounting income is based on an accounting period concept.
Expenses are measured in terms of a historical cost and determination of expenses is

based on a cost concept.
It is based on a realization principal.
Revenue items are considered to ascertain a correct accounting income.

6.0 Bills of Exchange and Promissory Notes
Essentials of Bills of Exchange
Following are the essentials of a bill of exchange –
 Bill of exchange should be in written.
 The seller who makes the bill is termed as “Drawer,” the purchaser upon whom
the bill is drawn is known as “Drawee” and must be a person.
 Bill of exchange must be carrying certain amount and only in terms of money,
and not in terms of goods or services.
 Order to pay the money, should be unconditional.
Parties to Bill of Exchange
Following are the parties of ‘Bill of Exchange −”
The Drawer − Seller of goods is termed as drawer of “bills of exchange.”
The Drawee − Drawee or purchaser is a person who accepts the bill of a certain
amount to be paid after a specific time.
The Payee − Payee and drawer may be same person who gets the payment or may be
a different person. In case of same parties, will be reduced to two instead of three.
Important Terms
Stamp − Amount in excess of certain limit should be paid and signed on affixed revenue
stamp according to above specimen. In these days, threshold limit is INR 5,000/.
Amount − Amount of bill must be written in figure as well as in words as shown in

above specimen.
Date − Date on bill will be written on face of it as above.
Value and Terms − Both are essential part of it and must be written as shown above.
Acceptance of Bills-To make it a legal document, it must be signed by “Drawee.”
Acceptance may be general acceptance i.e. Drawee agrees with the full content of the
bill without any change and it may be conditional, which is called as qualified
acceptance.
Classification of Bills of Exchange
Bill of exchange may be classified as viz…
Inland Bill − Bill, which is drawn in India, both the Drawer and the Drawee are from
India and also payable in India called Inland Bill.
Foreign Bill − Bill, which is drawn outside India, drawn on a person residing in India,
payable in India or vice versa. Due date of foreign bill starts from the date on which
Drawee sees it and accepts it.
Definition of Promissory Notes
As per Section 4 of the Indian Negotiable Instrument Act, 1881
“An instrument in writing (not being a Bank note or a currency note) containing an
unconditional undertaking, signed by the maker, to pay a certain sum of money only to,
or the order of a certain person, or to the bearer of the instrument.”
Difference between Promissory Notes and Bills of Exchange
Promissory Note Bill of Exchange
It is an unconditional promise to pay Bill of Exchange is unconditional order to pay.
Debtor make the promise to pay to the Bill of Exchange drawn by a seller of goods
creditor or services and he makes an order to debtor
to make the payment.
Foreign promissory note make in a set Foreign Bills of Exchange drawn in a set of
of one only three.
Promissory note payable on demand, Bill of Exchange payable on demand does

requires stamp duty not require stamp duty.
Promissory note has only two parties Bill of exchange may have three parties,
i.e. drawer and payee drawer, drawee and may be payee.
Since debtor himself makes the promise To be a legal document, it must be accepted
to make the payment, hence no by Drawee.
acceptance required in this case
Advantages of Bills of Exchange and Promissory Notes
Followings are the important advantages of Bills of Exchange and Promissory Notes −
 Facilitation of the credit transactions is helpful in increasing the size of business.
 Both are the proof of purchase of goods or services in credit.
 Being a legal document, both can be produced in a court, in case of its dishonor.
 Since date of payment is fixed, it is helpful for both debtors and creditors; and,
they may manage their payment schedule accordingly.
 In case of any urgency of payment, creditor can get the bill discounted from the
bank.
 Being a negotiable instrument, promissory note is easily transferable from one

person to another.
Accounting Treatment
Bills of exchange and Promissory notes are treated as bills receivable and bills payable
in regards to accounting treatment −
Bills Receivable − If we have to receive the payment against bills of exchange or

promissory note, it will be called as “Bills Receivable” and will be shown in the Asset
side of Balance-sheet under Current Assets.
Bills Payable − Bills payable is current liabilities in hand of Drawee.
Accounting Entries − When the Bill received and retained in possession till due date.
Accounting entries to be done in the books of Drawer and Payee as −
Sr.No. In the Books of Drawer Entries in the Books of Acceptor

1 Customer A/c Dr Goods Purchase A/c Dr
To Sales A/c To Supplier A/c
(Being Goods sold on credit) (Being Goods Purchased on credit)
2 Bills Receivable A/c Dr Supplier A/c Dr

To Customer A/c To Bills Payable A/c
(Being Bill accepted by Customer) (Being Bill accepted drawn by
supplier of goods)
3 Cash/Bank A/c Dr Bills Payable A/c Dr

To Bills Receivable A/c To Cash/Bank
(Being Amount of bill received on due (Being Amount paid on due date and
date) bills payable received back)
When Bill is Discounted with the Bank
In the Book of Drawer − The drawer of a bill may get the bill discounted from his bank
before due date of that bill. In this case, bank charges some interest on bill amount
according to waiting time. For example, if bill is drawn on 1st January for 3 months and
drawer may get bill discounted on 1st February, in this case, bank will charge interest
for two months at applicable rate say 14% and drawer of bill may pass following entry.
Cash / Bank A/c Dr

Discount A/c Dr
To bills Receivable A/c

(Being bill discounted with bank @ 14% p.a.discount charge debited by bank for 2
months)
In the book of Drawee − Drawee has no need to pass entry on above, he just needs to
pass the entry at the time of payment on maturity of bill as explained earlier.
When Bill of Exchange Endorsed in Favor of a Creditor
If Drawer of the bill of exchange endorsed the bill to his creditor for his own liabilities
and bill is met on maturity, following journal entries will be passed −
In the book of Drawer
Creditors A/c Dr
To bills Receivable A/c
(Being bill receivable endorsed to creditor)
Note − Drawer has no need to pass any entry at the time of maturity of a Bill.
In the book of Drawee − Drawee has no need to pass any entry at the time of
endorsement of Bill. Entries will remain same as explained earlier.
Dishonor of a Bill of Exchange
In case where the acceptor of a Bill of Exchange failed to pay the bill on due date of
maturity or refused to pay, it is called as dishonor of a Bill of Exchange. As a proof of
dishonor of a Bill, payee may get a certificate from a Notary Officer appointed by the
Government for this purpose. Notary officer charges some fees in this regard called as
“Noting Charges.”
Following entries will pass in the books of Drawer and Drawee −
Sr.No In the Books of Drawer

1 If bill is kept by the Drawer with himself till the date of maturity −
Customer/Acceptor A/c Dr (with total Bill amount + Noting Charges)
To Bills Receivable A/c(with Bill Receivable amount)

To Cash/Bank(Noting Charges paid)
(Being Bills receivable dishonor and noting charges paid)

2 If bill is discounted with the bank −
To Bank A/c(with total Bill amount + Noting Charges)
(Being discounted Bills receivable dishonor and noting charges paid)

3 If bill is endorsed by the Drawer in favor of a Creditor−
To Creditor A/c(with total Bill amount + Noting Charges)
(Being endorsed Bills receivable dishonor and noting charges paid)
Entries in the Books of Acceptor/Debtors
In all above three case acceptor will pass only one journal entry −
Bills payable A/cDr(with the bills payable amount)
Noting Charges A/cDr(with Noting Charges )
To Drawer/Creditor A/c(with total Bill amount + Noting Charges)
(Being Goods Purchase on credit)
Renewal of Bill
There may be a situation when the acceptor of bill may not be in position to pay the bill
on due date and he may request drawer to cancel the old bill and draw a new bill on him
(i.e. Renewal of Bill). Drawer of bill may charge some interest on mutually agreed terms
and that amount of interest may be paid in cash or may be included in the bill amount.
Entries in the Books of Drawer and Drawee

Following accounting entries to be done in the books of Drawer and Drawee −
Sr.No. In the Books of Drawer Entries In the Books Acceptor

1 Cancellation of old bill − Cancellation of old bill −
Customer/Acceptor A/c Dr Bills Payable A/c Dr

To Bill receivable A/c To Creditor A/c
(Being old bill cancelled) (Being request for cancellation of old bill
accepted by Creditor)
2 Interest received in cash− Interest paid in cash −
Cash A/c Dr Interest A/cDr

To Interest A/c To Cash A/c
(Being interest received on (Being Interest paid on renewal of Bill)

delayed payment)
3 In case interest not payable in In case interest not payable in cash −
cash −
Customer/Acceptor A/c Dr Interest A/c Dr
To Interest A/c To Creditor A/c
(Being Interest due on renewal (Being Interest on renewal of bill due)

of bill)
4 On renewal of bill − On renewal of bill −
Bills Receivable A/c Dr Supplier A/c Dr

To Customer/Acceptor A/c To Bills Payable A/c
(Being renewal of bill including (Being Bill accepted after cancellation of a

amount of interest) new bill including interest)
Retiring of a Bill under Rebate

Sometimes, acceptor may approach to drawer of a bill to make early payment before
due date of a bill, following journal en tries will pass in this case −
Sr.No. Entry In the Books of Drawer Entries In the Books of Acceptor

1 Cash/Bank A/c Dr Payable A/c Dr
Rebate A/c Dr To Cash/Bank A/c
To Bills Receivable A/c To Rebate A/c
(Being Amount of bill received before (Being Amount paid before due
due date and rebate allowed to date on rebate)
customer)
Bill sent to Bank for Collection
To manage several numbers of bills receivable, drawer sent those bills to the bank for
collection and bank gives credit to the customer whenever a bill is collected from a drawee.
Following journal entries will be passed −
Sr.No. Entry In the Books of Drawer

1 When a bill is sent to the bank for collection −
Bills sent for Collection A/c Dr

To Bank A/c
(Being bills receivable sent to the bank for collection)
2 On collection of payment by bank −
Bank A/c Dr
To Bills sent for Collection A/c
(Being Collection of bills receivable by bank)
Accommodation Bill
A bill of exchange may be accepted to oblige a friend or any known person at the time
of his need or to provide him a loan or else to accommodate one or more parties is
called as accommodation bill.”
7.0 Inventory Valuation
The Institute of Chartered Accountant of India as per Accounting Standard-2 (Revised)

defines inventory as the assets held −
For sale in the ordinary course of a business or
In the process of production for such a sale or
In the form of materials or supplies to be consumed in the production process or in

rendering of the services.
Thus, the term inventory includes −
 Raw Material and supplies,
 Work in progress, and
 Finished goods.
Importance of Inventory Valuation
Proper valuation of inventory is important because of the following three reasons −
Importance of sufficient Inventory − An inventory represents major current asset

investment of any trading or manufacturing concern. Shortage of inventory may close
down the business. Realization of profit from resale of an inventory makes valuation of
inventory. Therefore, the point is that every business unit has to follow a proper method
of inventory valuation.
To Determine True Financial Position − Proper valuation of an inventory can only give
true and fair view of the financial position of a business unit, as it constitutes a
significant portion of the current assets.
For Proper Determination of Income − Proper determination of income and profit

depends on correct valuation of the inventories. Over valuation of closing inventory may
overstate the profit figure and vice-versa. Therefore, proper valuation of an inventory is
necessary to determine the true income and profit by the business concern.
Methods of Taking Inventory

Following are the two important methods of taking inventory –
 Periodic Inventory Method and
 Perpetual Inventory Method
Let’s discuss each of them separately −
Periodic Inventory Method
This method of stock valuation is also known as physical stock taking method or annual
stock taking method. Under this system of taking inventories, stock is determined by
physical counting at the end of the accounting period i.e. the date of preparation of final
accounts. This system is very simple and useful in small business organizations.
Perpetual Inventory Method
This system of inventory valuation records every movement of stock on the receipt and
issue of material reflecting running balances of different kind of inventories through
preparation of store ledgers for raw material, work-in- progress, and finished goods. To
insure the accuracy of store records, a periodic reconciliation of records is done by
taking physical inventories.
Valuation of Inventory at Lower Cost or Market Price
An inventory is valued at a cost or market price, whichever is lower to ensure that the
anticipated profit should not be accounted for and full provision for anticipated losses
should be done.
As per American Institute of Certified Public Accountants −
“A departure from the cost basis of pricing the inventory is required when the utility of
the goods is no longer as great as its cost. Where there is evidence that the utility of
goods, in their disposal in the ordinary course of business, will be less than cost,
whether due to physical deterioration, obsolescence, changes in price levels, or other
causes, the difference should be recognized as loss of the current period. This is
generally accomplished by stating such goods at a lower level commonly designated as
market.”
Methods of Valuation of Inventory
The following illustration shows the methods of Valuation of Inventory −
First in First out (FIFO) Method

FIFO is the most popular method of an inventory valuation, which is based on
assumption that the material first received or purchased are the first to be sold or
issued. It means, closing stock is out of the last or latest received or manufactured
goods.
Last in First out (LIFO) Method
As name suggests, closing stock is valued on the basis of oldest purchased or

manufactured items.
Average Cost Method
Average cost method is used where identification of stock with rate or value of stock is
not possible. It is of two types Viz…
 Simple Average Price Method
 Weighted Average Price Method
Highest in First out (HIFO) Method
This method is based on the assumption that the highest value of material always
consumed first and closing stock will be valued at the lowest cost of purchased or
manufactured material. This method is not a popular method of valuation of inventory
and so, used only by the business units having monopoly products or who are dealing
with the cost + contract.
Base Stock Method
Base stock means — minimum level of stock maintained by a business unit to run his
business without any interruption or which is according to AS-2 issued by The Institute
of Chartered Accountants of India as “the base stock formula proceeds on the
assumption that a minimum quantity of inventory (base stock) must be held at all times
in order to carry on business.”
Note − This method can be followed only when LIFO method is used.
Inflated Price Method
This method of valuation covers normal losses, increasing price of purchases to

calculate closing value of an inventory.
Specific Identification Method
Under this method, where identification of items with price is possible, then closing
stock will be valued accordingly.
Market Price Method
Under this method of valuation, stock is valued at current market price. It is also called
replacement price or realizable price method.
8.0 Analysis of Changes in Income
The purpose of preparing a financial statement is not only to know the net income or
losses of concern for the current year, but also to know the change in net income or
losses of a firm in comparisons to the preceding years.
There are two types of financial statements, which reflect two types of profits i.e. trading
account shows the gross profit and Profit & Loss accounts shows the net profit of the
concern for a specific accounting period. Under this chapter, we will discuss the reasons
for changes in Gross Profit Ratio.
Gross Profit Ratio (GPR)
Gross profit means, excess of sales over cost of goods sold. This ratio also indicates
the losses due to damage or mismanagement. More the ratio is high more it is good for
a financial health of a concern. Chances of higher net income are more in an
organization where ratio of gross profit is high (formula is given below) −
Gross Profit Ratio=Gross Profit Net Sales Gross Profit Ratio =Gross Profit Net Sales
Higher gross profit provides leverage to the management to meet their indirect
expenses and to spare net income for the distribution of profit and to increase the
reserves.
Gross Profit Margin
When Gross profit margin is presented in percentage, it is called as Gross profit margin
(formula is given below) −
Gross Profit Margin = Gross Profit Net Sales × 100 Gross Profit Margin = Gross Profit
Net Sales ×100
Chances of Increase in GPR may be due to following Reasons −
 Without increase in corresponding costs, if there is an increase in selling price.
 Without decrease in selling price, if there is decrease in cost of production of

products.
 There may be equal decrease or increase in selling price and cost of production
without affecting gross profit of the current year.
 There may be chances that the valuations of closing stocks are done with higher
price.
 It is also possible that the opening stock of a concern is valued at very lower rate.
 There is a possibility that given sales are inclusive of consignment sale due to
any mistake or otherwise.
 Omission of purchase invoices in the books of accounts may also be one of the
reasons for higher gross profit.
Chances of Decrease in GPR may be due to following Reasons−
 If cost price remains same, but decrease in selling price.
 Sale price remains same, but increase in cost of production.
 Personal used goods debited to purchase account.
 Closing stock may be valued at very low price.
 Opening stock may be valued at very high price.
 Any omission or mistake while valuation of closing stock.
It is necessary for survival and progress of any business to keep its margin of gross
profit high as much as possible to enable it to cover its operative expenses as well as
indirect expenses.
Analysis of Gross Profit
Analysis of changes in gross profit is the first step in determination of a net income.
Change of gross profit in current year may be due to the following reasons −
Change in sale amount may be due to following three reasons −
 Change in selling price.
 Change in quantity sold without change in sale price.
 Change in sale price as well as quantity of goods sold.
Change in cost of goods sold may be due to following reasons −
 Change in cost of production.

 Change quantity of goods sold.
 Change in quantity as well as cost of goods sold.
9.0 Accounting for Consignment
Due to increasing size of market, it is quite obvious that manufacturers or whole sellers
cannot approach directly to every customer around the state or nation. To overcome this
limitation, manufacturers normally appoint reliable agents at every desired location to
reach the customers directly. He makes an agreement with local traders who can sell
goods on his behalf on commission basis.
Meaning and Features of Consignment
Consignment is a process under which the owner consigns/handovers his materials to

his agent/salesman for the purpose of shipping, transfer, sale etc.
Following are the points that throw more light on the nature and scope of a consignment
Here, ultimate ownership of the goods remains with the manufacturer or whole seller
who handovers goods to his agent for sale on commission basis. Consignment is
merely a transfer of possession of goods not an ownership.
Since ownership of goods remain with the manufacturer (consignor), consignee (agent)
is not responsible for any loss or destruction of goods.
The goods are sold on owner’s risk and hence, profit/loss goes to owner.
Consignee only gets re-imbursement of expenses incurred by him and commission on

sale made by him, because sale that proceeds, belongs to owner (consignor).
Why is Consignment not a Sale?
Following are the reasons that explain why consignment is not a sale –
Ownership − Ownership of goods need to be transferred from seller to buyer in case of

sale, but ownership of goods remains with the consignor, till the goods are sold by the
consignee.
Risk − In case of a consignment, normally, risk remains with the consignor in the event
of goods being lost or destroyed.
Relationship − The relation between a seller and a buyer will be of debtor and creditor
in case where goods are sold on credit basis. On the other hand, the relationship
between a consignor and a consignee is that of principal and agent.
Goods Return − Usually, the sold goods cannot be returned back; however, if there is
any manufacturing defect or any other technical fault, seller is obliged to take them
back. On the other hand, consignee may return the unsold stock of goods to consignor
anytime.
Important Terms
Pro-forma Invoice
Invoice implies that the sale has taken place, but pro-forma invoice is not an invoice.
Proforma invoice is a statement prepared by the consignor of goods showing quantity,
quality, and price of the goods. Such pro-forma invoice is issued by the consignor to
consignee regarding the goods before the sale actually takes place.
Account Sale
Statement showing the details of goods received, goods sold, expenses incurred,
commission charged, remittances made, and due balance is called Account Sale and it
is remitted by the consignee to the consignor of goods on a periodic basis.
Commission
There are three types of commission payable to consignee on sale of the goods −
Simple Commission − This is usually a fixed percentage on the total sale, calculated
as per mutually agreed terms.
Over-riding Commission − In case of an extra-ordinary sale of the goods, some

specific amount is payable to consignee in the form of an incentive is called overriding
commission. Over-riding commission is also calculated on the total sales.
Del-credere Commission − “An agreement by which an agent or factor, in

consideration of an additional premium or commission (called a del credere
commission), engages, when he sells goods on credit, to insure, warrant, or guarantee
to his principal the solvency of the purchaser, the engagement of the factor being to pay
the debt himself if it is not punctually discharged by the buyer when it becomes due.”
A del credere commission is paid by the consignor to his agent for taking additional risk
of recovery of debts from the consignee on an account of credit sales made by him
(agent) on consignor's behalf.
Direct Expenses
Expenses, which increases the cost of the goods and are of non-recurring nature and
incurred till the goods reach the warehouse of consignee may called direct expenses.
Indirect Expenses
Warehouse rent, storage charges, advertisement expenses, salaries, etc. comes under
the category of the indirect expenses. The distinctions between direct and indirect
expenses are important especially at the time of valuation of the unsold closing stock.
Advance
Amount paid in advance by a consignee to consigner as security called as advance.
Valuation of unsold Consignment
Valuation of unsold stock will be done like a closing stock of a Trading concern and
should be valued at the cost or the market price whichever is low. This stock will be
valued at −
 Proportionate cost price and
 Proportionate direct expenses.
Here, proportionate direct expenses mean — all expenses incurred by the consignor
and the expenses of consignee, which are incurred by him till the goods reach the
warehouse.
Invoicing Goods higher than Cost
Under this method, goods are charged at the cost + profit and the pro-forma invoice
also shows this higher price of such goods. To know the actual profit, at the end of an
accounting period, consignment account will be credited with excess price so charged.
Value of the stock will also be adjusted to the extent of profit element. Main reason to
adopt this policy by consignor is −
To hide actual profit from consignee.
Valuation of a stock at the consignor’s warehouse is comparatively easy in this case.
In this case, consignor usually directs consignee to sale goods on invoice price only. It
prevents different sale price to different customers.
Loss of Goods
There may be two types of losses as explained below −
Normal Loss − Normal loss may occur due to inherent characteristics of goods like
evaporation, drying up of goods, etc. It is not separately shown in the consignment
account, but included in the cost of goods sold and the closing stock by inflating the rate
per unit. To calculate the value of unsold stock, following formula is used.
Value of closing stock = Total value of goods sent Net quantity received by consignee ×
Unsold quantity Value of closing stock = Total value of goods sent Net quantity received
by consignee × Unsold quantity
Net quantity received = Goods consigned quantity – Normal loss quantity Net quantity
received = Goods consigned quantity –Normal loss quantity
Abnormal Loss − An abnormal loss may occur due to any accidental reason. It is
credited to the consignment account to calculate actual profitability. Valuation of closing
stock is done on the same basis as explained earlier i.e. proportionate cost +
proportionate direct expenses.
10.0 Joint Venture
An association of two or more persons or we may say temporary partnership combined

for the carrying out a specific business, and divide profit or loss thereof in agreed ratio is
called a Joint Venture. Concerned parties to joint venture are known as co-venturers.
The liabilities of co-venturers are limited to their profit sharing ratio or as per agreed
terms −
Major Features and Characteristics of Joint Venture
Following are the major features of a joint venture −
 There is an agreement between two or more persons.
 Joint venture is made for the specific execution of a business plan/project.
 It is a temporary partnership without the use of a firm name.
 Agreement for joint ventures is automatically dissolved as soon as specific

project is over.
 Profit & Share are shared on the same terms and conditions agreed upon.
However, in the absence of any agreement, profit & share will be divided equally.
Partnership and Joint Venture
There are following differences between partnership and joint venture −
 Partnership always carried on with firm’s name, but for the joint venture, no such
firm’s name is required.
 The persons who run the business on partnership are called as partners and the
persons who agreed to take the project as joint venture are called as co-
venturers.
 Normally, a partnership is constituted for a long period (including various

projects), whereas joint venture is formed to complete a specific job/project.
 Partnership is governed under the Partnership Act, 1932, whereas there is no
enactment of such kind for the joint ventures. However, as a matter of fact in law,
a joint venture is treated as a partnership.
 There is no limit specified for the numbers of co-venturers, but the number of
partners is limited to 10 under banking business and 20 for any other trade or
business.
 Liability of a partner is unlimited and may extent of his business and personal
estate, whereas under joint venture, liabilities of co-venturers are limited to the
particular assignment or project agreed upon.
Joint Venture and Consignment
Major differences between joint venture and consignment may be summarized as −
Relationship − The co-venturers of a Joint venture are the owners of a Joint venture,
whereas relationship of a consignor and consignee is of owner and Agent.
Sharing of Profits − There is no distribution of profit between a consignor and

consignee, consignee only gets commission on sale made by him. On the other hand,
the co-venturers of a joint venture share profits as per the agreed profit sharing ratio.
Ownership of Goods − Ownership of the goods remains with the consignor. Consignor
transfers only possession to the consignee, but every co-venturer of a joint venture is
the co-owner of the goods/project.
Contribution of Funds − Investment is done by the consignor only. On the other hand,
funds are contributed by all co-ventures in a certain agreed proportion.
Continuity of Business − In case of a joint venture, there is no continuity of the

business once project is completed. On the other hand, if, everything goes smooth,
consignment is a continuous process.
Memorandum Joint Venture Method
Important features of memorandum method are given as hereunder −
Only one personal account is opened by each co-venturer in his book named Joint
Venture account with…………… (Name of other co-venturer). Same process will be
followed by other co-venturer in his books of accounts.
Only one personal account will be opened by each co-venturer irrespective of the fact,
how many other co-venturers are exists. For example, there is a joint venture of 4
person A,B,C, & D; now, A in his books will open only one personal account named as
Joint venture with B,C, & D account.
Each party will record only those transactions in his book, which are done by him; the
transactions done by other co-venturers will be ignored.
In addition to above said personal account, a combined account named as

“memorandum joint venture account” will also be opened.
Memorandum account is merely a combined account of personal accounts opened by

each co-venturer. Debit side of personal account will be transferred to the memorandum
account and the credit side of personal account will be transferred to the credit side of
memorandum account.
Transactions done by co-venturers among themselves including cash received or paid

by one co-venturer to other will be ignored at the time of preparation of a memorandum
account.
Balance of memorandum joint venture account will represent profit or loss of the
particular business. Further, the profit or loss will be transferred to the individual co-
venturer account in their profit sharing ratio.
11.0 Non-Trading Accounts
Some of the organizations or institutions are constituted to provide valuable services to

the society with the objective not to earn profit. These organizations normally offer the
services such as education, medical, social clubs, charitable trusts, trade unions, etc.
However, we can summarize these organizations in the following three types of

categories −
Clubs, associations, or society’s works for the welfare of their members.
Charitable institutions like hospitals, students’ hostels, and other educational institutions
providing education to poor children as well as illiterate young and old groups.
Professional firms of lawyers, chartered accountants, architects, doctors, solicitors, etc.
What is Non-Trading Account?
Maintenance of proper books of accounts is necessary to safeguard the money of its

members and general public from any kind of misuse or misappropriations. It is
important to know the total receipts, total payments, and also to know financial status of
an institution. Hence, the account opened and maintained for and by the organizations
discussed above is known as Non-trading account.
Normally, registration of members, minute book, cash receipt journal, cash payment
journal, etc. are main record which is maintained by these organizations/ institutions in
their non-trading accounts. At the end of an accounting period, these institutions
prepares its final accounts, which include the following −
 Receipt and Payment Account
 Income and Expenditure Account
 Balance-Sheet
Let’s discuss each of these in detail.

Receipt and Payment Account
It is a real account. Basic rule of double entries is followed to prepare this account. It is
prepared from a cash book at the end of the accounting period. Every transaction
regarding the cash transactions is recorded in the Cash Book in a chronological order.
We may say that the Receipt and Payment account is a summary of cash payment and
cash receipts during the current year.
Income and Expenditure Account
Income and expenditure account is a nominal account and as an equivalent to Profit

and Loss account.
The essential features of an income and expenditure account are as follows −
 Expenses and losses are recorded in the debit side of it and all incomes and
gains are recorded on the credit side.
 Capital income and expenditure are excluded and revenue income and expenses
are included in it.
 It is based on a mercantile system of accounting, therefore, the income and

expenses related to preceding years or subsequent years are excluded while
preparing the income and expenditure account.
 The credit balance of an income and expenditure account shows surplus.

Further, excess of income over the expenditure and the debit balance of it show
deficit i.e. excess of the expenditure over income.
 Only nominal accounts are considered in preparation of this account.
Balance Sheet
The date on which a balance sheet is prepared, particulars of all the assets and
liabilities are recorded in the same manner as we do in any other profit making firms. Its
capital fund is made up of surplus income over expenditure and other incomes
capitalized in the given period of time. Sometimes, two balance sheets need to be
prepared viz…
 At the beginning of the accounting year to know the opening capital fund and
 At the end of the financial year to know the financial position of the organization.
Conversion of Receipt and Payment Account into Income and Expenditure
Account
Following are the steps required to convert receipt and payment account into income &
expenditure account –
Opening balance and closing balance of a receipt and payment account representing
opening cash in hand, opening cash at bank, closing cash in hand, and closing cash at
bank need to be ignored.
Items of capital receipts and capital payment will be excluded while preparing an
income and expenditure account.
Revenue items of an income and expenditure will be considered only at the time of
preparation of an income & expenditure account from the receipt and payment account.
All adjustment regarding the outstanding expenses, prepaid expenses, provision for bad
debts, provision for depreciation, income received in advance, and income receivable
will be done.
An income and expenditure relating to preceding year or subsequent year will be

ignored, and the items only related to the current year will be considered.
Items Peculiar to Non-Trading Concern
There are certain peculiar items in the case of non-trading concerns, which require a
special treatment −
Donations
Non-trading concerns may receive donations time to time. The treatment of donation
depends upon nature of donation.
There are two types of donation as explained below −
Specific Donation − Some donation may be received for any specific purpose, for
example, for the construction of a room or building and then donation is termed as
specific donation. The amount of such donation cannot be used for any other purpose. It
should be shown on liabilities side of the Balance-sheet and used only for the same
purpose it is meant for.
General Donation − When a donation is received for a common purpose is termed as

General Donation. If the amount of donation is small, it will be treated as recurring
income and will be recorded in the credit side of income & expenditure account.
Donation of the big amount should be fairly treated as capital receipts and will be shown
in the liabilities side of the Balance sheet. However, donation is of a small amount or a
big amount may depend upon the size of a concern and amount.
Legacy
Sometimes, as per the will of a person, an amount received is called as legacy. It is as

good as donation. It is of a non-recurring nature, therefore should be treated as a capital
receipt, and hence will be appeared in the liabilities side of a Balance sheet. However, it
may also be treated as an income and may be taken to income & expenditure account.
Entrance Fees
A club or society usually charge admission fees or entrance fees for the membership. In
case of club etc., admission fees or entrance fees usually charged as capital receipts,
but in case of a hospital or educational institution, it is treated as a recurring income.
Life Membership Fees
The life membership fees may be taken from the members of institution only once in
their lifetimes. On the basis of lifetime membership, members may enjoy certain
benefits. Amount received as the Life Membership might be transferred to the “Life
Membership Fees Account” of the institution and can be dealt in the accounts by any of
the following methods −
 May be taken as liabilities side of a Balance sheet as Life Membership Fees.”
 Normal subscriptions of the members may be transferred from the Life

Membership Fees account to the subscription account as an income and the
balance may be carried forward to the following years.
 On the basis of average life of a member, the amount may be transferred to the
income and expenditure account annually and rest will be carried forward
towards the following years.
Sale of Scrap or Old Newspapers
Without any dispute, it will be treated as recurring income and will appear in the credit
side of an income and expenditure account.
Subscription
Subscription is the major source of an income for the non-trading concerns.
Subscriptions are received from the members of a club or institution. A receipt and
payment account records all the actual subscription received during the current year
and an income & expenditure account shows the subscriptions, which relates to the
current accounting period.
12.0 Single Entry
As we know, there are two systems of recording transactions in our books of accounts.
In the previous chapters, we have learned about the double entry system, now let’s
discuss another system of accounting i.e. Single Entry System (SES).
Meaning and Silent Features of SES
For every accounting transaction, everyone does not follow the principle of double entry
system of accounts. Some of the small business units do not keep their books of
accounts as per double entry system. In simple words, single entry system of accounts
mean — the business unit, which does not follow the principle of double entry system.
There are following two types of SES of accounts −
Pure Single Entry System − Personal accounts like sundry debtors and sundry
creditor’s accounts are maintained, but real and nominal accounts are not opened under
this system.
Popular Sense − Under this system, three types of treatment are done.
 Double entry system followed for cash received from the debtors and the cash
paid to the creditors.
 Single entry system followed for expenses paid, purchases of goods, purchases
of fixed assets etc.
 Provisional entries like bad debts, depreciation, etc. are not done.
Difference between SES and DES
 Single entry is an in-complete system of accounting, whereas double entry

system (DES) is a complete system of accounting transactions.
 There is no reliability on books in a single entry system, whereas double entry
system is a reliable accounting system.
 Checking of the arithmetical accuracy is possible in a double entry system

through preparation of trial balance, whereas it is not possible under a single
entry system.
 Since, single entry system does not maintain Trading, and Profit & Loss Account,
and Balance Sheet; hence, ascertainment of the actual profit and exact financial
position of the firms is not possible, on the other hand, all above is quite possible
under the double entry system of accounting.
Limitations of SES
 Single entry system of accounts do not record two-fold aspects of each and
every transactions, hence, it is not a scientific system of keeping accounting
records.
 Checking of the arithmetical accuracy is not possible due to non-preparation of a

trial balance. Preparation of a trial balance is not possible, because the method
of double entry system is not followed for each business transaction.
 Ascertainment of the actual profit of a concern is not possible, as nominal

accounts are kept under single entry system. In the absence of nominal
accounts, Trading and Profit & Loss account cannot be prepared.
 It is not possible to find the exact financial position of a firm in the absence of real
accounts, because without real accounts, it is not possible to prepare the
Balance sheet of a firm on a particular day.
 Outsiders never rely on the books of accounts of a firm.
 In case where owner of the business wants to sell his business, ascertainment of
exact value of the business is not possible, especially goodwill value of the firm.
 Single entry system is practiced only by the small business units.
Preparation of Statement of Affairs
To know the financial position of a business, the list of assets & liabilities and statement
of affairs are prepared on the last date of accounting period. As stated earlier, in the
absence of real accounts, it is not possible to prepare a Balance sheet.
Following points are required to prepare the statement of affairs −

 With the help of personal accounts, a list of debtors and creditors should be
prepared.
 Stock valuation method will be either on cost or market price, whichever is lower.
 Cash book balance should be physically verified with the cash book.
 Bank balance should also be reconciled with the Bank statements.
 Statement of affairs should contain the income received in advance and the
expenses paid in advance.
 Excess of assets over liabilities will be capital of the proprietor or firm.
 Basis for the valuation of fixed assets will be the purchased voucher and any
other available evidence.
How does the Statement of affairs Differ from Balance-Sheet?
Main difference between the statement of affairs and the Balance sheet is —reliability
on first is prepared through incomplete information and on later is based on the
scientific method of the double entry system of accounts.
Ascertainment of Profit under SES
We have the following two methods to ascertain the profit under single entry system −
I. Statement of Affairs or Net worth Method and
II. Conversion Method
Net worth Method
Under the single entry system, the ascertainment of the profit can be done without
preparing a Trading and Profit & Loss account.
Conversion Method
Under the conversion method system of accounting, change from the single entry
system to the double entry system on a particular date can be done.
13.0 Leasing
In the field of real estate, leasing is a popular term because it is advantageous to own
land and building. Today, most of the businesses run their offices on the leased
premises.
A Lease is an agreement under which lessee (the person/entity, who takes possession
of the property) get the right to use the premises for the agreed period of time in lieu of
the rent as agreed between both Lessor (owner) and lessee. Lessor has an ownership
right of assets, but still lessee has an unrestricted right to use that asset.
Every lease contract should cover the following terms −
 Period of lease.
 Timing of the payment to be made along with the amount of rent.
 About maintenance expenses, taxes, insurance, provision for renewal of lease

agreement.
The Accounting Standard 19, issued by the Council of the Institute of Chartered
Accountants of India, covers the disclosure of appropriate accounting policies in the
financial statements.
Standards 19 are mandatory in nature and applicable to all lease agreements except
some given below −
 Lands to be used under the lease agreement.
 For use of natural resources like oil, gas, timber, metal, etc.
 Video recording, films, motion picture, patents, and copyrights.
Important Terms in Leasing
Following important terms are commonly used in lease accounting –

Lessee − Lessee is a person who possess the right to use the asset in lieu of agreed
rent for a certain period of time (as per the lease agreement).
Lessor − Lessor is the owner who gives right to the lessee to use his asset/property in
lieu of rent for a certain period of time.
Lease Term − Usually, lease agreement is contracted for a fixed and non-cancellable
period called as lease term. It is also known as ‘Lease Period.’ Lease term may be
further extended as agreed with or without further amendment/s.
Fair Value − Fair value is an amount on which an asset can be exchanged or it may be
the value of liability settled.
Useful Life − It can be
 A period over which an asset could be used by the lessee.
 Expected number of units that can be produced by that asset.
Inception of Lease − It is the date on which principal provision of the lease are
committed to.
Residual Value − An estimated fair value of an asset at the end of the lease term is
called as residual value.
Minimum Lease Payment − Total payment to be made by lessee to lessor during the
lease terms excluding taxes, insurance, maintenance charges, contingent rent, etc.
Contingent Rent − It is based on a factor other than passage of time, lease payments
i.e. percentage of sale, etc.
Unguaranteed Residual Value − An expected fair value at the end of the lease period
is called as Unguaranteed Residual Value.
Advantages of Leasing
Main advantage of leasing is given hereunder −
 Lessee can use the asset without actually purchasing it, means full finance
without any margin money.
 It provides flexibility in fixation of the rent and the lease period as per the
requirements.
 In the Balance sheet of a lessee, leased assets are not shown as asset or liability
of the company, hence the credit capacity of the lessee remains un-affected.
 Leasing provides an opportunity to lessee to earn additional profit and to improve
earnings per share.
 Deduction of a rent is eligible to claim tax benefit (as business expenditure).
 Without heavy investment, lease rent can be paid out from the income generated
by the use of the assets.
 Tax benefit of the depreciation may be claimed by lessor according to the Income
Tax Act.
 Taking advantage of the full utilization of the asset is possible under a lease
agreement; chances of ignorance are high, where company purchases asset as
its own.
 In case of a closely held company, it provides better wealth planning solutions.
 It provides protection to lessee against the inflation.
 Strict provisions of the financial institutions for acquiring an asset can be avoided
through a lease agreement.
Disadvantages of Leasing
Some of the disadvantages of leasing are −
 Leasing is not very much useful for some of the new businesses, as earning
through the business comes much after the investment.
 Some of the incentives as provided by the state and the central government,
cannot be enjoyed due to lease agreement.
 The assets, whose values are likely to appreciate, should be purchased instead
of leasing.
 In case of variation clause in a lease agreement, rental structure can be changed

due to change in the rate of interest, rate of depreciation, etc.
Classification of Lease
According to AS-19, following are the two categories of Leasing −
 Operating lease
 Finance Lease
Operating Lease
Operating lease is an agreement wherein the lessor (owner) allows the renter (lessee)
to use the agreed asset for a particular period. Usually, the lease period is shorter than
the economic life of the asset. Further, lessor does not actually transfer the ownership
rights. The Lessor gives the right to the lessee to use the asset in return of regular
payments for an agreed period of time.
Finance Lease
In case where lease is able to secure for lessor the recovery of his capital outlays plus a
reasonable return on the fund invested during the lease period is called financing lease.
Finance lease in non-cancellable contract and also, lessor is not responsible for any
expenses and taxes of the leased asset.
14.0 Investment Account
Anyone can buy and sell securities from a stock exchange with the purpose to increase
his/her (monetary) assets. Sale and purchase of the securities is done through banks.
The stockbrokers help people in trading by paying the amount of commission, stamp
duty, and brokerage on it, which are the essential parts of security trading.
At the time of selling of these securities, charges should be deducted from the sale, as
proceeds to get the actual sale price. Most of the time, market price is different from the
face value of securities, which depends upon different regulating factors. If market value
of the securities is equal to face value, it is called as at par; if market value is less than
face value, it is called as on discount; and if market value is higher than face value, it is
said to be on premium.
Meaning of Investment
Investment means either buying or creating an asset with the future expectation of
capital appreciation, dividends (profit), rents, interest earnings, or some combination of
these returns. However, normally, investment inherent with some form of risk, such as
investment in equities, property, and even fixed interest securities, among other things,
are the subject to inflation risk.
Further, among all these, securities are held as long term investment to earn income. It
is said to be fixed assets, but where objective of an organization is to sell and buy
securities in short term fund to utilize its surplus fund, would come under the category of
current assets.
There may be two types of securities −
 Fixed Interest Securities − Holders of fixed interest securities get fixed rate of
interest.
 Variable Yield Securities − Under this category, return on investment may differ
from year to year.
Investment Account
Investment account is an account opened for the purpose of the investment. Further, if
the number of investment is large, a separate account for each investment should be
opened.
Investment Transactions
We normally have the following two types of investments transactions −
 Cum Dividend or Cum Interest Quotations and
 Ex-Dividend or Ex-Interest Quotations
Let’s discuss these two types of investment transactions in detail.
Cum Dividend or Cum Interest Quotations
Interest and dividend on the fixed investments accrued on regular interval, but payment
of those are made only on fixed dates. Dividends are always paid to the persons, who
are shareholder at the time of payouts. Suppose a shareholder sold his shares after
keeping those shares in his hand up to ten months, then dividends on those shares will
be paid to the buyer or we can say, to new shareholder.
So, a seller at the time of selling shares normally charge value of the accrued dividends
up to the date of sale, and this is called ‘CUM DIVIDEND” or “CUM INTEREST”. Since,
the sale price is inclusive of the value of a share and interest or dividend, therefore at
the time of entry in the books of accounts, normal price of share should be booked in
the investment account and the value of dividend or interest should be debited to
dividend or interest account.
At the time of receiving dividend or interest, dividend or interests account will be

credited, debiting cash or bank account. On the other hand, in the books of seller,
normal price of the share should be credited to Investment account and the price of
accrued dividend or interest should be credited to the dividend or interest account as
the case may be.
Ex-Dividend or Ex-Interest Quotations
The buyer of shares when he is quoted ex-dividend is not entitled to receive the
payment. It is the interval between the record date and the payment date during which
the stock trades without its dividend. Therefore, the person who owns the security on
the ex-dividend date will be awarded the payment, regardless of who currently holds the
stock.
Difference between Cum-dividend and Ex-Dividend
Major differences between them are given as hereunder −
 Cum interest or dividend prices are inclusive of the interest or dividend accrued
at the date of purchase, whereas in case of the ex-dividend, prices are excluding
value of the dividend or interest.
 The purchase price is higher than normal purchase price in case of Cum-
dividend, whereas purchase price is the real price in case of ex-dividend.
 Nothing is payable additional in case of Cum-Interest, whereas separate amount

of the dividend or interest has to be paid in case of the ex-dividend or ex-interest.
Balancing the Investment Account
Difference of debit and credit side of the investment account is Profit or Loss in case
where all the investments are sold.
In case where part of the investments are sold and the balance investments stand
unsold, it should be carried forward to the next accounting period and remaining
balance of the two sides (debit and credit) will represent profit or loss on the sale of
investment.
In case where investments are the fixed assets, then the profit or loss will be of capital
revenue or capital loss and should be treated accordingly.
Equity Share Accounts
Main features of investment account regarding the equity shares are given as
hereunder –
Bonus Shares − Bonus shares are issued by the profitable companies to the existing
shareholders of the company without any additional amount. Purpose of the bonus
share is to capitalize reserves of the company. Only number of the shares will be added
in face value column, and principle or capital column will remain unchanged.
Right Shares − Right shares are first offered to the existing shareholders of the
company as a matter of the right, hence called as right shares. As per Companies Act,
right shares can be issued after two years of the establishment of a company or after
one year of first issue.
15.0 Insolvency Accounts
Insolvency is a financial stringency i.e. when an individual or an organization/company

is no longer capable to pay the debts he/it owes. Insolvency usually leads to insolvency
proceedings, in which legal action can be taken against the insolvent, and assets may
be liquidated to pay off the outstanding debts.
When a Person / Entity can be Declared Insolvent
Before declaring an entity or a person as insolvent, a competent court defines two

conditions −
 A person or entity should be debtor and
 He/it should had done any act of insolvency.
Act of insolvency means, when a person (debtor) shows that he is not able to pay his
liabilities.
An order of adjudication must be passed by the court of law, before legally declaring any
person insolvent. To pass an order of adjudication by the court of law, a petition should
be filed by any of the creditor or creditors or by the debtor himself. Petition by the
creditor may be filled only in following conditions;
· Debt should be at least for Rs. 500/- or more
· Within three months of petition, an act of insolvency should be done by debtors.
After filing the petition, the competent court will fix date of hearing and then it may
declares that the debtor is insolvent or not. If insolvency of a person starts from an
earlier date, and not from the date of adjudication passed by the court. This is known as
Doctrine of Relation Back.
Under Presidency Towns Act, to conduct the insolvency proceedings, an official is

appointed by the court is known as Official Assigneeand in case of Provincial Insolvency
Act, known as Official Receiver. The property of the insolvent vests in the official
assignee or receiver to realize the assets and distribute the sale proceeds of the assets
in the manner given below −
· Secured creditors will be paid in full.
· Remuneration and expenses of the official receiver.

· To Preferential Creditors.
· To unsecured creditors + partly secured creditors to the extent remain un-secured.
The Order of Discharge
Order of discharge is an order issued by the court of law to the insolvent. Normally, this
order releases the insolvent from all current and provable debts and liberates him from
the legal obligations imposed on as insolvent. The order of discharge is issued on the
basis of the report submitted by the official receiver and on the application of the
insolvent.
Interest
An interest @ 6% pa will be paid to the creditors for the period, after the order of
adjudication, if, any surplus remains, after full payment to the creditors.
Voluntary Transfer
As per the Presidency Towns Insolvency Act, any property transferred by the insolvent
without any consideration during the two years preceding the order of adjudication shall
be void. Under the Provincial Insolvency Act, such transfer became inoperative, if made
with two years of petition of the insolvency except followings −
For consideration of marriage and made before and
To purchase valuable consideration in good faith.
Insolvency Law
The Insolvency Act in India is based on English Bankruptcy Act and following two acts
are applicable on the Indian Territory −
The Presidency Towns Insolvency Act, 1909 − Applicable to Mumbai, Kolkata, and
Chennai.
The Provisional Insolvency Act, 1920 − Applicable to the rest of India except Mumbai,
Kolkata, and Chennai.
Above Insolvency Acts are applicable to any Individual, Partnership Firm, and Hindu
Undivided Family only. Companies Act, 1956 applies to Joint stock companies and the
term liquidation is used instead of Insolvency. In case of insolvency, a person is not able
to pay his liabilities but in case of liquidation, company may be liquidated even it has the
sufficient amount to pay its liabilities.
Insolvency Accounts
Under the Presidency Towns Insolvency Act, insolvent has to submit following
documents to the court of law −
 Statement of Affairs as on date of order and
 Deficiency Account.
No provision, for the submission of a Statement of Affairs under Provincial Insolvency

Act. The form of Statement of Affairs as prescribed by the rule made under Presidency
Towns Act
Difference between Balance Sheet and Statement of Affairs
Following are the main differences between Balance Sheet and Statement of Affairs −
 The value of assets is shown as books value as well as releasable value in the
statement of affairs; however, it is shown as only book value as in the case of
Balance sheet.
 In the Statement of Affairs, prepaid expenses and goodwill are not included,
whereas all fictitious assets are included in the Balance sheet.
 Statement of Affairs does not include capital, drawings, profit, or loss, interest on
capital, whereas Balance sheet includes all such items.
 Balance sheet does not show the amount of deficiency as shown in the
Statement of Affairs.
 Balance sheet is prepared at the end of accounting period, whereas Statement of

Affairs is prepared on the date on which order of adjudication is passed.
 Statement of affairs is prepared as per the rule of Insolvency Act, whereas

Balance sheet is a routine work to maintain the accounting record.
 Balance sheet of a firm does not include personal assets and liabilities, whereas
Statement of Affairs includes the same.
 Statement of Affairs includes contingent liabilities, whereas in the Balance sheet,

contingent liabilities are shown as footnote only.
Insolvency of Partnership Firm

Insolvency of the partnership firm differs from the insolvency of any individual or HUF
(Hindu undivided family). The assets of an individual are used to pay the business
liabilities, but in case of partnership firm, assets of the partners are used to pay his
personal liabilities first, and then balance, if any, may be utilized to pay the business
debts.
In case, if personal asset of a partner is in possession of any creditor as security, still

such creditor will get his dues first as unsecured creditor from the firm and then for the
balance amount, he may sell the property, owned by him to recover his dues.
16.0 Stock Exchange Transactions
Stock exchange is an organized market where sale and purchase of listed securities of
all description i.e. shares, stocks, debentures, government securities, etc. are done. It is
a government approved market place where buyer and seller of securities of all kind find
each other to buy and sell securities on the market price.
Meaning of Stock Exchange
“ An association, organization or body of individuals, whether incorporated or not,

established for the purpose of assisting, regulating and controlling business in buying,
selling and dealing in securities.”
- The Securities Contracts (Regulation) Act, 1956-A stock exchange is a common and
authorized point of exchange, which offers the services for stock brokers and traders to
buy or sell stocks, bonds, and other securities of such kind. Further, it also provides
facilities for issue and redemption of securities, other financial instruments, and capital
events. For example, payment of income and dividends.
Features and Characteristics of Stock Exchange
Following are the main features and characteristics of a stock exchange –
 Stock exchange is the market place where trading of listed securities can be
done.
 Trading of un-listed securities is not allowed.
 There are certain rules and regulations that need to be followed while trading.
 Stock exchange is an association of persons, whether incorporated or not.
 Anyone can buy or sell securities whether he is investor or speculator.
 For doing business transaction i.e. sale & purchase of securities, membership is
compulsory. Non-members are not allowed to do business transactions.
Membership can be applied only when there is a vacancy in any stock exchange
and after paying the prescribed fees of respective stock exchange, membership
can be acquired. Members of stock exchange are called as brokers and
commission charged by them for the transaction done is called as brokerage.
 Only a broker (member) can buy or sell securities, therefore, investors or

speculators can do transaction through members only.
Functions and Services of Stock Exchange
Followings functions are performed by Stock Exchange –
 Anyone can sell and buy any industrial, financial, and Government securities.
Stock Exchange is an organized ready market to do all this.
 Liquidity is provided by the stock exchange. Investors and speculators can buy
and sell their securities at any time.
 Stock exchange provides collateral value to the securities that is helpful in

borrowing from the bank on easy terms.
 Capital for the industrial growth is provided by the stock exchange that is helpful
for the investor to participate in the industrial development.
 Price list and reports are prepared and published in the newspapers and
broadcasted through the TV channels by stock exchange. It is helpful in knowing
the true value of the investments. With the help of this, an investor or speculator
can get to know the fair market value of his securities as per the latest market
trend.
 Listing of securities is encouraged by the stock exchange. Listing of securities

means — “a permission to trade” that is given by the stock exchange only after
fulfillment of the prescribed standards.
 Listed companies have to provide the financial statements, reports, and other
statements time to time to stock exchange — necessary for the maintaining the
record and deciding the value of securities.
Thus, stock exchange works as the center of providing business information at one
platform.
Procedures for Dealing at Stock Exchange
Following procedures are normally followed for dealing at stock exchange −
 No one can directly deal in stock exchange, therefore, any person who wants to
sell or buy securities, requires a broker through whom selling or buying of
securities can be done.
 After finalization of a member or a broker, intending buyer or seller of the

securities, places an order according to his choice, mentioning tentative quantity,
and price. Thereupon, broker opens a new account for each client and start
trading in the best possible way.
 After getting an order, broker tries to finalize the deal between seller and buyer.
After finalization of deal, seller and buyer of securities send a selling and buying
note respectively mentioning the detail of traded securities.
Finally, settlement of account may be done in the following three manners −
 When the settlement of account is done as per the fixed and agreed date, it is
called as “liquidation in full.”
 When only difference of agreed price and ruling price is settled on the fixed date,
it is called as “liquidation by payment of difference.”
 When a settlement is carried forward to the next settlement period, it is known as

“carried over to next settlement period”.
In case, when purchase is delayed and charge debited by the broker to purchaser is
known as “contango” (Contango charge is also known as “Badla” Charge) and in case,
where sale is delayed by the seller and charge debited by the broker is known as
“backwardation.”
Operators at Stock Exchange
Broker
As studied earlier, no one can deal directly in stock exchange and every intended seller
or buyer, who wants to sell or buy securities has to deal through members known as
brokers. Broker is duly certified by SEBI (Stock and Exchange Board of India) under its
1992 rule. Membership of the stock exchange is restricted to prescribed numbers of
members, to financially sound persons who have sufficient experience in dealing in
securities.
A broker cannot buy or sell securities on his personal capacity. He charges commission
from the parties, sellers, and buyers and deals on the behalf of his non-member clients.
Sub-broker
Sub-brokers are non-members of the stock exchange and deal only on behalf of the
members or registered brokers. Commission is received by sub-brokers on the business
procured by them out of total commission received by the brokers. Sub brokers are
known as “half commission men” and “remisiers” too.
Jobbers
Jobbers are the independent dealers, who deal in securities at their own. A jobber
cannot sell or buy securities on the behalf of others, but he deals in securities for his
own profit through fluctuation of the prices. Difference between sale price and purchase
price of securities is the profit of a jobber.
Important Terms used in Stock Exchange
Following are the significant terms more commonly used in stock exchange −
Bull − Bulls are those brokers who strongly expect price hike of securities and with this
hope, they buy shares to sell them at later stage (when price gets increased). Thus bull
market means when buying of the securities are on much higher side instead of selling
of the securities. Bulls first buy securities and sell when the price of securities is high.
Bear − Bear is pessimist, who expect fall in the price of certain securities. A Bear first
sells his securities and purchases at later stage when the price of securities are low and
the difference of both is his profit.
Stag − A cautious investor or speculator is known as a stag. Stag doesn’t sell or buy
shares in his hand, but he tries to buy shares of new company with a hope that price of
those shares will increase in the future.
Blue Chips − Shares of well-recognized, well-renowned, financially strong, and well-

established companies.
Cash Shares − Settlement of some of the transactions are completed in cash are
known as cash shares. These transactions are done by real and genuine investors who
want to buy or sell shares for the actual investment purpose.
Cleared Shares − Speculators are normally deals in such type of shares. In these types
of shares, settlement of the payments are done by the differential amounts only;
however, actual delivery of the securities may not be done.
Carry Over or Badla System − Speculator earns money by foreseeing the future. If
their expectations come true, they earn profit and if not, they lose money. Speculator
mostly does transactions on forward basis, when any speculator forwards his
transactions from one settlement date to another, he has to pay charges called “Badla
charge.” Transaction of these natures is called as Badla System.
Kerb Market − Transactions that done before and after the official hours are known as
kerb market.
Short Selling − Short selling means where the large volumes of securities are sold by
the bear speculator without actually possessing.
Arbitrage − Securities are traded at the different stock exchanges and there is normally
a little difference in prices (among different stock exchanges). Therefore, arbitrage is
practiced to take advantage of different rates.
Primary Market − Primary market is the market where new securities are issued for the
capital formation in the form of a new issue or in the form of a right issue to the existing
shareholders.
Secondary Market − Secondary market is the market where subsequent trading (sale
and purchase) of securities are done called as secondary market and the transactions
are known as secondary transactions.
Group A Shares − Actively traded shares of the reputed companies are called a Group
A shares.
Group B Shares − Not actively traded shares or the shares of different stock
exchanges are called as Group B shares.
SEBI
The Securities and Exchange Board of India (SEBI) is the regulatory board. It regulates
affairs of stock exchange in India, similar to Securities Exchange Commission of the
United States. To protect the rights of investors and to enforce an orderly growth of
securities market, SEBI came into existence by an Act of Parliament known as
“Securities and Exchange Board of India Act, 1992”.
OTCEI
The Over the Counter Exchange of India (OTCEI) was established in India in 1990. It is
the latest concept and a new way to do securities business in India similar to Electronic
Exchange in the United States. Brokers located at the different regions, communicate
through latest means of technologies such as Telephones, Faxes, Mobile phones, and
Computers.
Selectors are allowed to select the prices as shown on the computer screen among the
competitive markets, without the floor meeting of brokers. It is the most efficient,
economic, and courageous way of the trading of securities. The latest market prices of
the securities are displayed on the computer screens. Since, listing of the securities is
not required on OTCEI, hence it is the most suitable way for the small and medium size
companies
17.0 Accounts of Private Individuals
Most of the private individuals never keep their accounts to record earned income or
expenditure incurred by them. It is advisable for everyone to maintain an account to
know what he has earned during a particular period, what he spent, and what was his
saving out of that income. It is helpful to track the record of income and expenditure. It
also helps to increase the income (as need arises) and control on the expenditure.
Maintenance of Accounts by Private Individuals
Private individual should keep his books on cash basis system, ignoring accrued system
in different heads like insurance premium paid, medical insurance, school fees, taxes,
household expenses, medical expenses, clothing, salary received, bank interest,
income from mutual fund, rent received, and other income received.
Maintenance of Accounts by Professionals
A cash basis of accounting is the most suitable system for any professional including
doctor, accountant, or solicitor instead of a mercantile system to fulfill the following
purposes −
To ascertain the professional income earned by him correctly for a specific accounting
period, and also to calculate the net professional income after deducting the related
expenses from the professional income.
To correctly record all items of income and expenditure.
Following records should be maintained by a professional −
Cash Book
All receipts and payments should be recorded in a cash book, and a memorandum book
should be maintained to keep record of credit transactions. The credit transactions will
be scored off at the time of actually cash receipt or at the time of payment made and
should be entered in the cash book.
A cash book can be summarized under various heads on monthly, quarterly, half yearly,
or annual basis as per the suitability and requirements.
Stock Register
Two separate stock registers should be maintained, one for resale items and other to
keep record of the items of personal use. Resale items may be medicine, surgical items,
the stationery items, electrical items, computers, and any other items or asset.
Receipt and Expenditure Account
A receipt and expenditure account is similar to a profit and loss account; therefore, it is
prepared by the professionals to know the professional income and expenditure for a
specific period. Outstanding incomes are ignored to prepare it, but outstanding
expenses are included in it. Therefore, it is known as Receipt & Expenditure account
instead of Receipt & Payment account. It means, incomes are recorded on a cash basis
and expenditure on an accrual basis.
Maintenance of Accounts by Doctors
Doctors usually maintain a register that may also be known as diary or note book in
which all the particulars of the patients including charges, fees, physical conditions of
patient, etc. are recorded. After grouping, the extracted entries of diary are recorded in
the cash book under different heads of income. Similarly, expenses are also recorded
under various heads.
In case, where the number of doctors is two or more than two and they run their clinic in
the partnership, income may be recorded in the cash book under various heads (Doctor
Wise), similar to a petty cash book pattern. Similarly, the expenses relating to each
doctor may be recorded under various heads of the expenses.
Thus, cash book, stock register, memorandum book, Receipt and expenditure account,
and Balance sheet are prepared by the doctors.
Maintenance of Accounts of Educational Institutions
Most of the educational institutions are registered under Indian Society Registration Act,
1860. The core purpose of formation of the educational institutions is to educate people
at large and not to earn profit.
Separate collection register should be maintained to record these collections from the
above mention sources. Separate ledger for students should also be maintained for
each student to record the fees — due, received, and outstanding if any.
Normally, all accounting records are maintained on the basis of financial year i.e. from
1st April to 31st March in most of the educational institutions. Educational institutions
maintain income and expenditure account to keep the records of surplus or deficiency
and also to prepare a Balance sheet to know the financial position of the institution.
Maintenance of Accounts of Student Hostels
Hostels are run by most of the educational institutions to provide boarding facility to the
students, coming from remote places, for their education. Hostels are usually run on no
profit basis. Government also grants some fund to these hostels to provide cheaper
living space to the students.
Like any other non-profit organization, hostels also have accountants who record and
maintain their financial transactions as −
Receipt & Payment Account
Income & Expenditure Account
Balance Sheet
Maintenance of Accounts of Hospitals
Being a non-profit organization, hospitals also maintain Receipt & Payment accounts,
Income & Expenditure account, and Balance Sheet.
18.0 Co-Operative Societies
Any ten persons who are competent to contract may file an application to the Registrar
of Co-operative Societies as per Section 6 of the Co-operative Societies Act, 1912. By
law, may be framed by each society and should be registered with the Co-operative
Societies.
Effectiveness of change by the law of societies is applicable only when changes are
approved by the Registrar of Society.
Types of Society
There are two types of society −
 Limited liabilities society
 Unlimited liabilities society
Any member is not liable to pay more than the nominal value of the share held by him
and no member can own more than 20% of the shares of society.
Today, government is encouraging co-operative societies to help society at large.

Cooperative societies are operative in various sectors like consumer, industrial,
services, marketing, etc.
Under accounting system of Co-operative societies, the term Receipt and Payment is
used for two fold aspects of double entry system.
Accounts
Following accounts usually maintained by the Co-operative societies −
 Day Book (Journal)
 Day Book (Cash Account)
 Day Book (Cash Book with Adjustment Column)
Day Book (Journal)
Day book is a book of original entries. In a day book, all types of cash or non-cash
transactions are recorded, according to the principle of double entry system.
As per the practice followed in the co-operative societies, a separate journal book is not
prepared rather all transactions are directly recorded in the day book. Day book has two
sides Receipt (debit) and payment (credit) and there are two columns in each side of a
day book, one for the cash transactions and second for the adjustment.
Transaction for the cash receipt and cash payment are recorded in cash column and
payment side respectively. Similarly, entries are done in debit and credit side of a day
book in the adjustment column.
Day Book (Ledger for Cash Account)
Since, all the cash transactions are recorded directly in a day book, it might be called as
ledger account of cash book.
Day Book with Cash and Adjustment Columns
all the cash transactions and adjustment transactions are recorded directly in a day
book, it might be called as Cash Book with Adjustment Column.
Ledger
In the co-operative societies, posting of ledger is not done on the double entry system.
Receipt side of the day book on debit side of the ledger account and payment side of
the day book posted on the credit side of the ledger account.
Closing of Ledgers
In the co-operative societies, balancing of a personal account is done at the time when
any member clear his account or a new account is opened. Totals of all other accounts
(receipt and payments) are kept as it is. Balancing of receipt and payment accounts are
not required.
Receipt and Payment Account
A receipt and payment account is the summary of a day book and prepared for a
specified period. Receipt and payment account is prepared from the totals of receipts
and payment sides of the ledger accounts.
Final Accounts
Trading & Profit and Loss account and Balance sheet are prepared from the receipt and
payment accounting after consideration of the adjustment entries. Items appear under
the receipt side are treated as income, and items of the payment side are as
expenditure.
Rules Appropriated as −
 First 25% of the net profit should be transferred to the reserve fund account.
 As per section 35 of Co-operative Societies Act, 1912, distribution of the profit
should not be more than 6.25%.
 Contribution to charitable funds as defined in section 2 of Charitable Endowment

Act, 1890, which says that contribution may be done with the prior permission of
the Registrar. Maximum contribution is restricted to 10% of the available profit,
after transferring profit to reserve account.
 Unlimited liabilities, co-operative society may distribute profit only after general or
special order of the State Government.
19.0 Insurance Claims
Every business entity keeps sufficient stock as per the need and size of its respective
business for smooth running of the business, but at the same time risk of loss by fire or
by means is also there. To safeguard the businesses from any unforeseen
circumstantial loss, most of the business entities buy insurance policy, which covers
loss of stock (by fire) — is known as stock policy.
In consideration of the premium, insurance company takes the responsibility to

compensate — if any loss occurs by fire or by other means, applicable under the
insurance terms. It is in the best interest of the firm to take fire insurance policy because
it covers wide range of losses (by fire) including Building damage, Furniture and Fixture
loss, Plant & Machinery destruction, etc.
Following are the important points to be considered for the estimation of stock −
Gross Profit on Sale
Gross profit is calculated by deducting net sales from the cost of goods sold. To know
the gross profit of the last year, “Trading” account of the last year should be referred.
Memorandum Trading Account (for Current Year)
In case of fire, Memorandum Trading account is required to find the value of estimated
Stock. It is prepared with the help of Gross Profit ratio of the last year, Opening Stock,
Purchase, Sale, and Direct Expenses.
Value of Salvaged Stock
Value of stock as calculated at step-2 will be reduced by the value of salvaged stock to
arrive at the value of Insurance Claim.
Average Clause
An average clause is applied to find out the value of a claim where value of the stock on
the date of fire is more than the value of insured stock. Average clause is applied by the
insurance companies to discourage the under insurance of stock or any other assets.
Consequential Loss Insurance
A normal fire policy only indemnifies loss of stock or assets, and fails to insure any loss
of profit suffered by the concerned business. Therefore, a consequential loss policy
should be taken to cover the Loss of profit, Loss of Fixed expenditure, etc.
Following are the important terms used in loss of profit policy −
Insured Standing Charges − Salaries to staff, Rent rates & Taxes, Wages to skilled
workers, Auditors’ fees, Directors’ fees, Advertisement Expenses, Travelling Expenses,
Interest on debentures, and unspecified expenses (not more than 5% of the specified
expenses) are the charges that have to mention on the policy form at the time of buying
policy (so that all charges get insured).
Turnover − Turnover includes sold goods or services for which amount is payable; it
also needs to be insured.
Annual Turnover − Turnover for the last 12 months, immediately preceding to the date
of fire.
Standard Turnover − Standard turnover means, turnover for the period corresponding
with the indemnity period during the preceding accounting year. It also needs to be
adjusted to notice the trend during the accounting year, in which incident took place.
· Gross Profit − It is calculated as
Gross profit = Net profit + Insured standing charges
Net Profit − To calculate net profit — profit (excluding tax), insured standing charges,
other charges, depreciation, and other provisions of such kind need to be adjusted.
Indemnity Period − Maximum twelve months (from the date of damage), during which
the result of the business affected due to damage. Period of indemnity is selected by
the insured person.
20.0 Government Accounting
Government accounting is a scientific procedure of collecting, classifying, recording,

summarizing, and interpreting all the financial transactions including revenues and
expenditures of all the government offices. It keeps the record of public funds.
Followings are the main objectives of the Government Accounting −
Information about Revenues − One of the most important functions of the

Government accounting is to maintain the transactions of generation and collection of
revenues during the financial year (and maintain all the past years’ financial data).
Under the ‘Right to Information Act,’ if someone asks to have the information regarding
the financial transactions of a government office, it is oblige to provide that.
Information about Expenditures − One of the most important objectives of the

Government accounting is to provide information about the expenditures incurred on
various heads. It is checked by the Parliament in case of Central Government and state
legislature in case of the State Government.
Information about Deposits and Loans − Government has to provide information

about the loan granted by the Government to others and repayment of the deposits.
Information about Availability of Cash − It has to provide information about the

present and the future cash availability.
Difference between Government and Commercial Accounting

There are following notable differences between the Government accounting and the commercial
accounting −
Headings Govt. Accounting Comm. Accounting

Objective Administration and Maintain the records of trading and
management of all the manufacturing of goods or to
financial activities of the provide services to calculate profits.
government.
Date Entry It has single entry system — Normally, it has double entry system
System Govt. does not work to earn — need to prepare Trading & Profit
profit; so, it does not need & Loss account and Balance Sheet
cross-check the accounting at the end of the accounting period.
records.
Basis of Accounting statements are Accounting statements are prepared

Accounting also prepared on the basis of on the basis of double entry system.
statements single entry system. Most of
the statements are merely
statements of collections of
revenue and expenditures
done, except where the
Government acts like a
banker or lender or borrower.
Important Terms and Expressions of Government Finance
Following are the important terms and expressions used in Government accounting −
Demand for Grant − Without sanction from the Parliament, no expenditure can be
incurred by any Government Authority. Public Authority can request for the grant of
expenditure to the Government, this request is called “Demand for Grant”.
Supplementary Grant − Sometimes, grants are sanctioned before the end of the
financial year, in case where annual budget might be inadequate. Supplementary
demand can be made, if need arises to meet the expenditure. For example, amount
granted for the Natural Disaster Relief fund, may be found inadequate due to
extraordinary disaster by the flood; in such a condition, an additional grant may be
asked by the concerned state or ministry.
Treasuries − Treasuries are the units of fiscal system in India. Every Indian States and
Union Territory is divided into different districts’ headquarters and every district
headquarters has one or more than one treasury. Treasuries are conducted by the State
Bank of India as an agent of the Reserve Bank of India. Central Government and State
Government keep their separate accounts and differences of Central and State Govt.
are adjusted by the Reserve Bank of India.
Votable and Non-votable Items − To incur some expenditures, Parliamentary approval

is not required; so, these expenditures may be charged from the Consolidated fund or
the Public account, these items are known as Non-votable items. Some items of
expenditure require sanction of the Parliament and cannot be incurred without its grant.
Thus, demand for grant for that expenditure may be placed to the government, such
items are called as Votable Items.
Appropriation Act − After the approval of the budget proposal in the Parliament or
Legislature, an Appropriation Bill has to be introduced, when this Bill is passed, it
becomes Appropriation Act. Now, money can be withdrawn from the Consolidated Fund
of India or the concerned State to meet the grants.
Vote on Account − In certain condition, when government has no time to place full
budget in the Parliament, then it uses the special provision of ‘Vote on Account.’ Under
this provision, government obtains the vote of the Parliament for the amount required to
incur the expenditure of the items in demand. After sanction obtained in the Parliament,
government obtains money from the Consolidated Fund of India.
Public Accounts Committee (PAC) − Public Account Committee is formed by the

Parliament and each Legislature to scrutinize the Appropriation account and Audit the
report thereon. All the reports on financial statements those are to be submitted to the
President of Indian and in the Parliament are examined by the Public Accounts
Committee (PAC). Examination by the PAC is similar to post-mortem of the reports.
Members of the PAC are appointed from the Opposition Parties of the Parliament.
Member of the ruling party cannot be part of this committee, as this committee is
working as a watchdog to look after the affairs of ruling party.
Local Government Accounting − Accounting of the Local government is based on the

concept of “fund accounting” and on the budget. Urban local government entities and
rural local government entities are two types of local government entities. Accounting of
the Local Government in India comprises budget, Receipt, and payment accounts.
Government Fund
Government of India has following three types of Funds for marinating the records of all
sorts of financial transactions −
 Consolidated Funds of India
 Contingency Funds of India
 Public Account
Consolidated Funds of India
As per the Clause 1 of the Article 266 of the Indian Constitution −
“All revenues received by the Government by way of taxes like Income Tax, Central
Excise, Customs and other receipts flowing to the Government in connection with the
conduct of Government business i.e. Non-Tax Revenues are credited into the
Consolidated Fund constituted. Similarly, all loans raised by the Government by issue of
Public notifications, treasury bills (internal debt) and loans obtained from foreign
governments and international institutions (external debt) are credited into this fund. All
expenditure of the government is incurred from this fund and no amount can be
withdrawn from the Fund without authorization from the Parliament.”
Contingency Funds of India
As per the Article 267 of the Indian Constitution −
“The Contingency Fund of India records the transactions connected with Contingency
Fund set by the Government of India. The corpus of this fund is Rs. 50 crores.
Advances from the fund are made for the purposes of meeting unforeseen expenditure
which are resumed to the Fund to the full extent as soon as Parliament authorizes
additional expenditure. Thus, this fund acts more or less like an imprest account of
Government of India and is held on behalf of President by the Secretary to the
Government of India, Ministry of Finance, and Department of Economic Affairs.”
Public Account
The Public Account is constituted under Clause 2 of Article 267 of the Indian
Constitution, which says −
“The transactions relate to debt other than those included in the Consolidated Fund of
India. The transactions under Debt, Deposits and Advances in this part are those in
respect of which Government incurs a liability to repay the money received or has a
claim to recover the amounts paid. The transactions relating to ‘Remittance’ and
`Suspense’ shall embrace all adjusting heads. The initial debits or credits to these
heads will be cleared eventually by corresponding receipts or payments. The receipts
under Public Account do not constitute normal receipts of Government. Parliamentary
authorization for payments from the Public Account is therefore not required.”
Compilation of Accounts
Treasury and other government departments, initially compile their receipt and payment
accounts on monthly basis for central government and state government separately and
then send to respective Accountant General of India.
Collection of revenue and disbursement are directly made by Railway, Defense, Post &
Telegraphs, Forest, and public departments and lump sum payments are made by
treasury through the departmental officers. Detail of accounts on monthly basis is
maintained by the departmental Accounts officers.
Monthly accounts submitted by the treasury and account officer are compiled by the
Accountant General, for the central government as a whole and for each state
separately. The compiled report shows progressive figure of each month from 1st April
to 31st March of every year. Complied accounts along with appropriation accounts are
submitted by Comptroller and Auditor General of India to the President of India, to the
Governor of each state, or to the Administrator of the Union Territory accordingly.
Principles of Government Accounting
Charges or expenditure on a new project like constructions, new equipment, plant &
machinery installation, maintenance, improvement, and service should be allocated to
the capital account as per the rule made by competent authority.
Working charges of the project should be allocated to the revenue account.
In case of renewal and replacement and cost of the genuine replacement should be
charged to capital account.
In case of damage due to extraordinary calamities, charged should be debited from the
capital account or revenue account or from both. However, it will be determined by the
government according to the case and circumstances.
Capital receipts during the new project should be credited to the capital account to
reduce the capital expenditure of the project.
CAG
Comptroller and Audit General (CAG) is an independent Constitutional body. Special

status has been given to safeguard his independence and enable him to discharge his
duty without fear or favor.
As per the Article 148 of the Constitution of India, the comptroller and Auditor-General
will be appointed by the President of India. The provision of removal of CAG is the same
as of the judges of the Supreme Court. He can be removed only on the basis of proven
misbehavior or incapacity.
As per the Article 150 of the Constitution of India — the accounts of the Union and of
the States shall be kept in such form as the President may prescribed, on the advice of
the Comptroller & Auditor General.
Article 151 of the Constitution provides that the audit reports of the Comptroller &
Auditor General relating to the accounts of the Union shall be submitted to the
President, who shall cause them to be laid before each House of Parliament.
21.0 Contract Account
Contracts are undertaken to customer’s requirements, which is generally of
constructional. For example, construction of buildings, ships, Bridges, Roads, etc. In all
the above cases, contract account is opened. A unique number is allotted to each
contract and a separate account is maintained for each individual contract.
Features of Contract Accounting
Following are the important features of a contract accounting −
Direct Costs − Direct cost is the main proportion of expenses in a contract account.
However, indirect nature of expenses is also treated as direct expenses in a contract
account.
Indirect Costs − Proportion of the indirect cost is very low in a contract accounting such
as expenses related to the head office in case of various contracts.
Cost Control − Cost control is the main challenge in a contract account especially in
the large scale contracts. For example, control over the material cost, labor cost, loss,
damages, etc. are difficult to regulate.
Surplus Material − After completion of the constructional project, if any material such
as cement, iron and steel, marbles, etc. is remained unused, is known as surplus
material. Surplus materials are normally disposed of to get back the invested amount.
Types of Contract
There are three types of contracts.
 Fixed Price Contract

 Fixed Price contract subject to Escalation Clause
 Cost Plus Contract
Recording of Costs, Value, and Profit on Contract
Recording of each contract will be done as under −
Material
Cost of “Material” will be debited from the contract account in the following manners −
 Direct purchase
 Supplied from stores

 Transfer from other project/contract
Contract account will be credited −
 Material returned to stores
 Sale proceed of surplus material
Amount will be transferred to Profit & Loss account −
Profit or Loss on sale of surplus of material
Damaged, Lost, or stolen material (except normal wastage of material that will be
charged directly to concerned contract account).
Labor
Labor or wages directly charged to concerned contract account and outstanding wages
should be debited from the contract account.
Direct Expenses
In addition to material and labor, all other expenses, which are directly attributable to the
specific contract account are called direct expenses and will be debited from the
contract account.
Plant and Machinery
Following are the two methods for charging value of Plant & machinery to a contract
account −
a) Contract account will be debited with the full value of Plant & Machinery −
Contract A/c Dr (With full value)
To Plant & Machinery A/c(With Full Value)
Contract account will be credited with the depreciated value of Plant & Machinery at the
end of the contract –
Plant & Machinery A/cDr(with Depreciated Value)
To Contract A/c
b) Contract account will be debited with hourly rate of Depreciation −

This is much better and scientific approach as compared to the first method. On the
basis of time, contract will be debited with hourly rate of depreciation.
Indirect Expenses
The expenses, which cannot be directly charged to such contract are known as indirect
expenses.
On the basis of some percentage, these expenses may be distributed among several
contracts. For example, charges of supervisor, engineer, administrative expenses etc.
Sub Contract
When a main or prime contractor assigns some specific work to another contractor as
part of the main contract called as sub contract. Sub-contractors are paid by the main
contractor. Sub-contractors normally do some specialized work, in which they are
specialized. Charges paid to the sub-contractor will be shown in the debit side of the
contract account.
Extra Work Charges
Any additional works in addition to the main contract, done by contractor as per the
requirement of the Contractee, may be charged to same contract account. However, in
case where volume of the extra work is not substantial; so, the amount received in lieu
of that extra work should be added to the contract price.
In case where extra work is of substantial amount, a separate contract account should
be prepared, as explained above.
Recording of Value and Profit on Contracts
Certification of Work Done
During the period of contract, Contractee has to pay sums of amount to contractor
especially where a contractor is engaged in a big and long term contract. This amount is
paid on the basis of certification of work done by surveyors or architects on behalf of the
Contractee, who certified the value of the work done by the contractor.
Usually, some percentage of the certified amounts is paid by Contractee and the
balance amount called as “retention money.” The retention amount remains with the
Contractee until the work is completed to safeguard and keep in favorable position.
Completed work, which is not certified is called “uncertified work.”
Following accounting procedure should be followed after getting certificate −

a) Contractee personal A/cDr
To Contract A/c
Note −
· 1. Above entry will be done with certified value
· 2. Balance amount in personal account will represent retention money as debtors.
b) Contractee personal A/cDr
Retention Money A/cDr
To Contract A/c
c) Under this method, any amount received from the Contractee till the completion of
contract will be crediting to Contractee’s personal account debiting cash/bank. Amount
so received will represent advance received from Contractee and will be shown as
(work in progress less advance received) in the Balance sheet.
Profit on Incomplete Contract
Actual ascertainment of the cost is possible only after fully completion of the contract.
Therefore, it is not possible to know the profit or loss on contract till it is completed.
However, following principles are adopted to estimate profit on uncompleted contracts −
No profit is ascertained and transferred to profit and loss account where work is
completed up to 25% of the total contract.
In case where contract is completed from 33.33% to approximately 75%, one-third

amount of the notional profit may retain to suspense account as a provision for future
loss and balance; two third is transferred to the profit and loss account. Sometime
notional profit is further reduced in the ratio of the cash received and the work certified,
the formula is −
Notional Profit × 23 × Cash Received Work Certified Notional Profit × 23 × Cash

Received Work Certified
In case where a contract is almost completed, proportion of an estimated profit is

transferred to the profit & loss account by one of the most popular formula as given
below −
Estimated Profit × Work Certified Contract Price Estimated Profit × Work Certified
Contract Price
Note − In case of any loss that should be transferred to Profit & Loss account.
Work in Progress
Uncompleted contracts at the end of the financial year, which are known as work-in
progress will be accounted as −
Work-in-progress will be shown at the asset side of the Balance sheet on the account of
expenses incurred the un-completed contracts.
Value of the work-in-progress will be inclusive of Profit.
Cash received from the Contractee will be deducted from the value of work-in progress.
Contractee will be treated as a debtor only after completion of the contract.
Contractee will not be shown as creditor on account of cash received from him.
Cost of plant and material at the site will be shown separately as “Plant at site” and
“Material at site” on the asset side of the Balance sheet.
Modern Approach on Profit on Uncompleted Record

Following are the two methods of calculating the profits on uncompleted contracts −
Where profit is ascertained only after completion of the contract or after substantially
completion of the contract is called ‘completion contract method.’
Under the second approach, it is ascertained at the end of each and every accounting
period on percentage basis, which comes before completion of the entire contract.
Cost Plus Contract

In some cases, it is not possible in advance to know the exact cost of contracts;
therefore, cost plus contract clause need to be applied, in which the value of contract is
ascertain by adding certain percentage of the profit in cost.
Escalation Clause
An Escalation clause is applied to cover up the changes in price due to change in prices
of the raw material or change in utilization of the production capacity. Escalation clause
safeguards both the contractor and the contractee against any unfavorable change in
the cost or the price.
Target Costing
Under this method of a contract, contractee gives target of the production with target of
the expenditure. Contractor cannot increase the cost of contract without increasing the
production. It means, expenditure is fixed with the target of the production.
22.0 Departmental Accounting
Departmental stores have many types of stores under a single roof, for example one
departmental store may have a cosmetic store, shoe store, stationery store, readymade
departmental store, grocery stores, medicines, and many more.
It is essential to know the profit and loss account of each departmental store at the end
of the accounting year. However, it can be done by maintaining the department wise
Trading & Profit and Loss account.
Objectives of Departmental Accounting
Following are the main objectives of the departmental accounting −
To know the financial position of each and every department separately, it is helpful to
make a comparison.
Calculate commission of the managers department wise.
Evaluate performance, planning, and control.
Advantages of Departmental Accounting
Following are the advantages of a department accounting −
 It is helpful in evaluating the result of each department.
 It helps to know the profitability of each department.
 Investors and outsiders may know the detailed information.
 It is helpful in making comparison of each expenses (same department) of the

different accounting years and different expenses (other departments) of the
same accounting year.
Methods of Departmental Account
There are two methods of keeping Departmental Accounts −
 Separate Set of Books for each department
 Accounting in Columnar Books form

Separate Set of Books for each Department
Under this method of accounting, each department is treated as a separate unit and
separate set of books are maintained for each unit. Financial results of each unit are
combined at the end of accounting year to know the overall result of the store.
Due to high cost, this method of accounting is followed only by very big business
houses or where to do so is compulsory as per the law. Insurance business is one of the
best examples, where to follow this system is compulsory.
Accounting in Columnar Books Form
Small trading unit generally uses this system of accounting, where accounts of all
departments are maintained together by central accounts department in the columnar
books form. Under this method, sale, purchase, stock, expenses, etc. are maintained in
a columnar form.
It is necessary that to prepare a departmental Trading and Profit and Loss Account,
preparation of subsidiary books of accounts having different columns for the different
department is required. Purchase Book, Purchase Return Book, Sale Book, Sales
return books etc. are the examples of the subsidiary books.
Allocation of Department Expenses
Some expenses, which are specially incurred for a particular department may be
charged directly to the respective department. For example, hiring charges of the
transport for delivery of goods to customer may be charged to the selling and
distribution department.
Some of the expenses may be allocated according to their uses. For example, electricity
expenses may be divided according to the sub meter of each department.
Following are the examples of some expenses, which are not directly related to any
particular department may be divide as −
Cartage Freight Inward Account − Above expenses may be divided according to

purchase of each department.
Depreciation − Depreciation may be divided according to the value of assets employed

in each department.
Repairs and Renewal Charges − Repair and renewal of the assets may be divided
according to the value of the assets used by each department.
Managerial Salary − Managerial salary should be divided according to the time spent
by the manager in each department.
Building Repair, Rents & Taxes, Building Insurance, etc.− All the expenses related
to the building should be divided according to the floor space occupied by each
department.
Selling and Distribution Expenses − All the expenses relating to selling and
distribution expenses should be divided according to the sales of each department,
such as freight outward, travelling expenses of sales personals, salary and commission
paid to salesmen, after sales services expenses, discount and bad debts, etc.
Insurance of Plant & Machinery − The value of such Plant & Machinery in each
department is the basis of the insurance.
Employee/worker Insurance − Charges of a group insurance should be divided

according to the direct wage expenses of each department.
Power & Fuel − Power & fuel will be allocated according to the working hours and
power of the machine (i.e. Hours worked x Horse power).
Inter-Department Transfer
An inter-department analysis sheet is prepared at a regular interval such as weekly or

monthly basis to record all the inter-departmental transfers of goods and services. It is
necessary, as each department is working as a separate profit center. Transfer of the
prices of such transactions can be cost base, market price, or duel basis.
Inter-Department Transfer Price
There are three types of transfer prices –
Cost based transfer price − Where the transfer price is based on standard, actual, or
total cost, or marginal cost is called cost based transfer price.
Market based transfer price − Where the goods are transferred at selling price from
one department to another is known as market based price. Therefore, unrealized profit
on the goods sold is debited from the selling department in the form of a stock reserve
for both the opening and the closing stock.
Dual pricing system − Under this system, the goods are transferred on the selling
price by the transferor department and booked at the cost price by the transferee
department.
23.0 Voyage Accounting
To know the financial results of a marine business, voyage accounting is prepared.

Voyage account is similar to a Profit and Loss account; all expenses are debited to
Voyage account and all incomes are credited to Voyage account. Voyage account is
prepared to ascertain the profit or Loss of voyage. It covers both inward and outward
travelling. It is very important that separate Voyage account should be prepared for
each vessel.
Income
Following are the main sources of income of a Voyage −
Freight − Freight charges are the main income collected against the transportation of
the goods.
Passage Money − Passage money is collected from the passengers, in case it is

passengers’ vessel.
Primage − Primage is an additional freight in the form of surcharge on the freight.
Expenses
Following are the various ways of expenses of a vessel −
Brokerage & Commission − Brokerage and commission is calculated on the freight

charges including primage and it is paid to the charters agent. Address commission is
payable to the brokers on procurements of freight from the different parties.
Insurance − The insurance charges on proportionate basis might be debited from the
voyage account. For example, if insurance is for one year and journey of voyage is for
three month, insurance charges will be debited from the voyage account on 14th14th
ratio.
Stores − Stores, which are purchased for voyage are debited from the voyage account
on consumption basis i.e. opening stock + purchases – closing stock.
Depreciation − Depreciation on ship is charged from the voyage account in the

proportion of the period of a journey.
Bunker Cost − Cost of water, coal, diesel, fuel, etc. used for the purpose of voyage is
called bunker cost and may debited from the voyage account.
Port Charges − Port authorities charge fees for allowing ships to use port for the
loading/unloading the cargo. This fee amount is debited from the voyage account.
Stevedoring Charges − Loading and unloading of cargo called stevedoring charges

and should be debited from the voyage account.
Voyage in Progress
At the end of the accounting year where voyage is not completed and is still in progress,
following accounting treatments are required −
Freight Received
Total freight received credited to the voyage account and the provision for incomplete
voyage is debited from the voyage account. Provision is created for the voyage-in-
progress in proportion of the incomplete journey.
Expenses
To complete matching concept, an income as well as expenses related to the

incomplete voyage might be carried forward to the next accounting year on the
respective account. Provision for the income earned should be debited from the voyage
account and provision for the expenses should also be credited to the voyage account.
24.0 Royalty Accounts
Royalty is payable by a user to the owner of the property or something on which an

owner has some special rights. A royalty agreement is prepared between the owner and
the user of such property or rights. If payment is made to purchase the right or property
that will be treated as capital expenditure instead of a Royalty.
Payment made by the lessee on account of a royalty is normal business expenditure

and will be debited to the Royalty account. It is a nominal account and at the end of the
accounting year, balance of Royalty account need to be transferred to the normal
Trading and Profit & Loss account. Royalty, based on the production or output, will
strictly go to the Manufacturing or Production account. In case, where the Royalty is
payable on sale basis, it will be part of the selling expenses.
Types of Royalties
There are following types of Royalties −
Copyright − Copyright provides a legal right to the author (of his book/s), the
photographer (on his photographs), or any such kind of intellectual works. Copyright
royalty is payable by the publisher (lessee) of a book to the author (lessor) of that book
or to the photographer, based on the sale made by the publisher.
Mining Royalty − Lessee of a mine or quarry pays royalty to lessor of the mine or
quarry, which is generally based on the output basis.
Patent Royalty − Patent royalty is paid by the lessee to lessor on the basis of output or
production of the respective goods.
Basis of Royalty
In case of the patent, publisher of the book pays royalty to the author of the book on the
basis of number of books sold. So, holder of patent gets royalty on the basis of output
and the mine owner gets royalty on the basis of production.
Important Terms
Following are the important terms, which are used in Royalty agreements −
Royalty
A periodic payment, which may be based on a sale or output is called Royalty. Royalty
is payable by the lessee of a mine to the lessor, by publisher of the book to the author of
the book, by the manufacturer to the patentee, etc.
Landlord
Landlords are the persons who have the legal rights on mine or quarry or patent right or
copybook rights.
Tenet
An Author or publisher; lessee or patentor who takes out rights (usually commercial or
personal rights) from the owner on lease against the consideration is called tenet..
Minimum Rent
According to the lease agreement, minimum rent, fixed rent, or dead rent is a type of
guarantee made by the lessee to the lessor, in case of shortage of output or production
or sale. It means, lessor will receive a minimum fix rent irrespective of the reason/s of
the shortage of production.
Payment of royalty will be minimum rent or actual royalty, whichever is higher
Shortworkings
Difference of minimum rent and actual royalty is known as shortworkings where

payment of Royalty is payable on the basis of minimum rent due to shortage in the
production or sale. For example, if calculated royalty is Rs. 900,000/- as per sale of
books based on the above example, but royalty payable is Rs. 1000,000 as per
minimum rent, shortworking will be Rs. 100,000 (Rs. 1,000,000 – Rs. 9,00,000).
Ground Rent
The rent, paid to the landlord for the use of land or surface on the yearly or half yearly
basis is known as Ground Rent or Surface Rent.
Right of Recouping
It may contain in the royalty agreement that excess of minimum rent paid over the
actual royalty (i.e. shortworkings), may be recoverable in the subsequent years. So,
when the royalty is in excess of the minimum rent is called the right of recoupment (of
shortworkings).
Right of recoupment will be decided for the fixed period or for the floating period. When
the right of recoupment is fixed for the certain starting years from the date of royalty
agreement, it is said to be fixed or restricted. On the other hand, when the lessee is
eligible to recoup the shortworkings in next 2 or 3 years from the year of its
commencement, it is said to be floating.
Shortworking will be shown on the asset side of Balance sheet up to allowable year of
recouping after that it will be transferred to profit & loss account (after expiry of
allowable period).
Lease Premium
An Extra payment in addition to royalty, if any, paid by lessee to lessor is called Lease
premium and will be treated as capital expenditure and it will be written off on yearly
basis through profit and loss account as per the suitable method.
TDS (Tax Deducted at Source)
If there is an applicability of TDS (Tax deducted at source) as per Income Tax Act,
lessee will make the payment to lessor after deducting TDS as per applicable rate and
lessee is liable to deposit it to the credit of Central Government. Amount of royalty will
be gross amount of royalty (inclusive of TDS), that will be charged to profit and loss
account.
For example, if royalty amount is 1,000,000/-& rate of TDS is 10%, then lessee will pay
Rs. 900,000/- to lessor. Amount of royalty charge to profit and loss account will be Rs.
1,000,000/- and balance amount of Rs. 100,000/- will be deposited in the credit of
central Government account.
Stoppage of Work
Sometime, there may be stoppage of work due to conditions beyond control like strike,
flood, etc. in this case, minimum rent is required to be revised as provided in the
agreement.
Revision of the minimum rent will be −
Reduction of minimum rent in the proportion of the stoppage of work;
On the basis of fixed percentage; or
By a fixed amount in the year of stoppage.
Sub Lease
Sometime, landlord or lessor allows lessee to sublet some part of the mine or land as a
sub-lessee. In this case, lessee will become lessor for sub lessee and lessee for main
landlord.

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Contents

1.0 Rectification of Errors.....................................................................................................................2

2.0 Capital and Revenue........................................................................................................................6

3.0 Final Accounts.................................................................................................................................9

4.0 Provision and Reserves..................................................................................................................17

5.0 Measurement of Business Income.................................................................................................20

6.0 Bills of Exchange and Promissory Notes.......................................................................................26

7.0 Inventory Valuation.......................................................................................................................34

8.0 Analysis of Changes in Income.....................................................................................................38

9.0 Accounting for Consignment.........................................................................................................40

10.0 Joint Venture..................................................................................................................................44

11.0 Non-Trading Accounts...................................................................................................................47

12.0 Single Entry...................................................................................................................................51

14.0 Investment Account.......................................................................................................................57

15.0 Insolvency Accounts......................................................................................................................60

16.0 Stock Exchange Transactions........................................................................................................64

17.0 Accounts of Private Individuals.....................................................................................................69

18.0 Co-Operative Societies..................................................................................................................72

19.0 Insurance Claims...........................................................................................................................75

20.0 Government Accounting................................................................................................................77

21.0 Contract Account...........................................................................................................................82

22.0 Departmental Accounting..............................................................................................................87

23.0 Voyage Accounting........................................................................................................................90

24.0 Royalty Accounts...........................................................................................................................92

Error which Effect only One Account

 Omission of posting of balance in a Trial Balance.

 Error of carried forward of balance.

 Error of casting and posting.

Error which Effect Two or more Accounts

 Error of posting in wrong account.

Methods of Rectification of Errors

There are three types of methods used in rectification of Errors −

Replacing Correct Figure by Striking Off the Wrong Figure

By Stationery A/c 998

Stationery Account Dr. 989

Stationery Account Dr. 500

If there is an omission of recording a transaction, it can be rectified by passing journal

Stationery Account Dr. 5000

If expense booked with less amount entry then −

Particular Expense Account Dr 4,500

To Cash/Personal Account 4,500

(Being wrong amount of posting, rectified with Difference amount

If income is booked with less amount, it will be rectified as −

Cash/Personal account Dr 4,500

To Income Account 4,500

(Being wrong amount of posting now Rectified. 4500 (5000-500)

If posting done in wrong account that will be rectified as follows −

Stationery Account Dr.**

Effect of Errors on Agreement of Trial Balance

Effects of Errors on Financial Statements

Rectification of Errors after Preparation of Final Accounts

One of the major aspects of preparing a correct financial statement is to distinguish

In fact, without differentiating, we cannot think of correctness of a financial statement.

Expenditure incurred to acquire Fixed Assets for the company.

Expenditure incurred to acquire fixed assets, erection and installation charges,

Freight inward & outward

Selling and distribution Expenditure

Assets purchased for resale purpose

Revenue Expenditure Treated as Capital Expenditure

 Cartage and Freight − If those are incurred to bring Fixed Assets.

 Repairs & Renewals − If incurred to enhance life of the assets or efficiency of

 Preliminary Expenditures − Expenditure incurred during the formation of a

 Development Expenditure − In some businesses, long period of development

Deferred Revenue Expenditure