CPT Accounts-Imp Info on Accounting Topics

IMPORTANT INFORMATION ON
ACCOUNTING TOPICS

IMPORTANT INFORMATION
Lucas . F. Pacioli is regarded as the founder of Book-Keeping .

Sub-fields of Accounting are :
1 Book -Keeping .
2 Financial Accounting .
3 Management Accounting .
4 Cost Accounting .
5 Social Accounting .

Three Fundamental Accounting Assumption are:
1. Going concern
2. Consistency
3. Accrual

Major considerations governing in selection & application of Accounting Policies are :
1 Prudence
2 Substance Over Form
3 Materiality

Accounting Standards cannot Override the Statute .

Four Qualitative Characteristics of Financial Statements : are Understandability, Relevance
Reliability and Comparability .

Amended Cash Book means adjusting the cash book all the errors like wrong amt. recorded in C.B, Entry posted twice,
over/under casting of Balances and ommissions like bank chgs, interest debited by bank, direct receipt or payment by bank
dishonour of cheques/Bills etc but it does not refer to any changes in pass book.

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ACCOUNTING TOPICS

Revenue Expenditure : The characteristics of Revenue Expenditure is as under :

1 Expenses incurred for smooth running of day to day business.
2 Are recurring in nature.
3 The benefit of the expenses expires within one accounting Year.
4 Only maintains the Earning Capacity of the business.
5 Revenue Expenditure is shown in Trading, Profit & Loss account.
eg: Salaries, Wages, Rent, Purchases.

If an expenditure incurred is huge but no benefit is derived by the business than such expenditure should be
treated as Revenue Expenditure and should be written of to Profit & Loss a/c.

Capital Expenditure : The characteristics of Capital Expenditure is as under :

1 Expenses incurred for increasing the Earning Capacity of the business or for decreasing the Operating
expenses permanently .
2 Are non-recurring in nature.
3 The benefit of the expenses does not expire within one accounting Year, but spreads over more than one Year..
4 For Increasing the life of the asset.
5 Capital Expenditure is shown as Assets in Balance Sheet on Assets side .
eg: Purchase of Fixed Assets like Building, Machinery, Furniture.

Deferred Revenue Expenditure : The characteristics of Deferred Revenue Expenditure is as under :
1 It is Revenue in nature.
2 The benefit of the expenses does not expire in the same accounting year, but is spread over more than one year,
normally 3 to 5 years .
3 The period for which the expediture would provide benefit cannot be precisely estimated.
eg: Heavy advertising expenditure to launch a New Product in the Market say Rs.6,00,000 and it is estimated
that the benefit will be available for for 3 years.


ACCOUNTING TOPICS

Note : If no method of depreciation is mentioned in the problem , then follow Straight Line Method(S.L.M )
of depreciation for solving the problem .

Formula for calculation depreciation or Rate of Depreciation under different methods :

Cost of Asset--------" C " .
Scrap Value of Asset--------" S " .
Useful Life of Asset--------" N " .

Depreciation under S.L.M = ( C- S ) / N
Depreciation Rate under S.L.M = Depreciation under S.L.M X 100 / C .

Depreciation Rate under W.D.V = 1- N th root of ( S / C ) X 100 .

Depreciation under Sum of Digits Method =(cost-scrap) X remaining life/Sum of digits
Sum of digit=n(n+1)/2
where n is No. of years of Depn

Depreciation under Depletion Method = (Cost-Scrap)*Actual Qty Extracted)/Total Expected Qty.
Depletion Method of depreciation is used for Wasting Assets like Mines .

Renewal of Bill Cancelling of Old Bill & Issuing a new Bill instead .

Due-Date of a Bill : is the date on which the Bill expires .
For Bills otherwise than on demand 3 days of grace is allowed to arrive at the due date .
Note : If the due date falls on a Public holiday, due date will be the preceeding day .
In case the due date falls on a day of sudden holiday, the due date will be the next day .

Retirement of Bills of Exchange : When the acceptor of the Bill, makes the payment of the Bill before the
due date ,the acceptor gets rebate or interest or discount for premature payment of the Bill.


ACCOUNTING TOPICS

Accounting Standards Board ( ASB) : established on 21st April, 1977 .
Bodies represented in ASB are :
1 Dept. of Company Affairs (DCA)
2 Comptroller & Auditor General of India (C & AG)
3 Central Board of Direct Taxes (CBDT)
4 Institute of Cost & Works Accountants of India ( ICWAI)
5 Institute of Company Secretary of India ( ICSI)
6 Associated Chambers of Commerce & Industry (ASSOCHAM ), Confederation of Indian Industry (CII),
& Federation of Chambers of Commerce and Industry (FICCI ) .
7 R.B.I
8 Securities & Exchange Board of India (SEBI)
9 Standing Conference of Public Enterprises (SCOPE)
10 Indian Banks Association .(IBA)

Questions may be asked which bodies represents ASB or Which do not represent ASB .
eg : Which of the following bodies are not represented in ASB ?
1 ICWAI
2 MUL
3 ICSI
4 SEBI
Ans : Option (2).

Which of the following bodies is represented in ASB ?
1 CGA
2 LIC
3 Trade Unions
4 UTI
Ans : Option (1).


ACCOUNTING TOPICS

Transaction means events that can be expressed in Money's woth (Monetary terms.)
Non-Monetary transactions are outside the scope of Financial Accounting .

Accounting Equation
Assets = Equity + Liabilities
Fixed Assets+Current Assets = Equity+ Long Term Liabilities + Current Liabilities.

Disclosure of Accounting Policies AS-1
Valuation of Inventories AS-2
Cash Flow Statement AS-3
Depreciation Accounting AS-6
Accounting for Research & Development AS-8 Discontinued
Revenue Recognition AS-9
Accounting for Fixed Assets AS-10

Advantages of Accounting Standards :
1 Reduction in Variations 2 Facilities Comparison
3 Disclosure beyond the required Law .

Arguments against Accounting Standards :
1 Restriction on choice of alternative treatment . 2 Rigidity
3 Cannot Override the Statue .

Objectives of Financial Accounting
1 To ascertain Operating result of Business(i.e Profit or Loss ).
2 To ascertain Financial position of the business (i.e Assets and Liabilities ).
3 To maintain control over the assets of the business.
4 Cash Planning.
5 Providing information to tax authories, govt. agencies and other Users of Financial Statement .


ACCOUNTING TOPICS

Format of B.R.S taking Debit/ Favourable balance as per Bank column of Cash Book as starting point

B.R.S as on (particular date ) (for eg: B.R.S as on 30th November,2010.)
Particulars Details Amount

Closing Debit Balance as per Bank column of Cash Book xxxx
Add a Cheques issued but not presented for payment xxx
b Cheques deposited into Bank but not recorded in Cash Book xxx
c Interest directly credited by Bank xxx
d Bills Receivable directly collected by the Bank xxx
e Direct payment by a Customer into the Bank but not recorded in the Cash Book xxx
f Cheque issued returned on techinical grounds xxx
g A Wrong credit given by the Bank in the Pass Book xxx xxx
xxxx
Less a Cheques deposited but not yet collected by the Bank xxx
b Cheques received & recorded in the Bank column of Cash Book but not yet sent
to Bank for Collection xxx
c Bank Charges, Interest on Overdraft debited in Pass Book only xxx
d Payments(eg :Insurance Premium) directly made by Bank under standing instruction xxx
e A Wrong debit given by the Bank in the Pass Book xxx
f Discounted Bills dishonoured but not recorded in the Cash Book xxx
g Chequesdeposited for Collection, returned dishonoured and recorded in Pass Book only xxx xxx
Closing Balance as per Bank Statement/Pass Book xxx

Note : 1) For preparing B.R.S Starting with Overdraft balance as per Pass Book / Bank Statement follow the same steps as given
above for preparing B.R.S taking Debit/ Favourable balance as per Bank column of Cash Book as starting point .
Note : 2) For preparing B.R.S Starting with Overdraft balance as per Bank column of Cash Book follow the Opposite steps as given
above for preparing B.R.S taking Debit/ Favourable balance as per Bank column of Cash Book as starting point.
(i.e items which are to be added should be deducted and items which are to deducted should be added .
Note : 3) For preparing B.R.S Starting with Favourable balance as per Bank Pass Book / Bank Statement follow the Opposite steps
as given above for preparing B.R.S taking Debit/ Favourable balance as per Bank column of Cash Book as starting point.
(i.e items which are to be added should be deducted and items which are to be deducted should be added ).


ACCOUNTING TOPICS

Company : A company is an association created by law when registered under Companies Act, having corporate
legal personality distinct from its members, perpetual succession(long life) and common seal(its own signature).

Points Private Company Public Company

Minimum Paid-Up Capital Rs. 1 Lakh Rs. 5 Lakh
Minimum No. of Members Two Seven
Minimum No. of Directors Two Three
Maximum No. of Members Fifty (excluding present employees who are members No Limit
and ex-employees who were members.

Restriction under Articles 1 Restrict to transfer of Shares. No such
of Association. 2 Prohibit an invitation to public to subscribe for any Restrictions.
Shares or Debentures.
3 Prohibit an invitation or acceptance of Deposits
from General Public .

Share: A Share is one of the smallest unit into which the Capital of a Company is divided .

Share Capital : means Capital raised by issue of Shares.

Authorised Capital: is the amt of Capital which is stated in the Capital clause of Memorandum of Association
with which a Company is registered. A Company cannot raise Capital in excess of its Authorised Capital.

Issued Capital : Part of the Authorised Capital issued to Signatories to Memorandum of Association,
Allotted for Cash or other than Cash or allotted as bonus shares.

Subscribed Capital : Part of the Issued Capital subscribed by Signatories to Memorandum of Association,
subscribed for Cash or other than Cash or subscribed as bonus shares.


ACCOUNTING TOPICS

Called-Up Capital : Part of the Subscribed Capital called by the Company .

UnCalled-Up Capital : Part of the Subscribed Capital which has not been called by the Company .

Unissued Capital :Part of Authorised Capital which has not been issued by the Company .

Reserve Capital : Refers to the part of uncalled-up capital which can be called up only in the event of
the winding up of the Company .

Equity Share : An Equity Share is a share which is not Preference Share .

Preference Share : Share which carries preferential right to receive dividend & right to receive repayment
of Capital ahead of Equity Shareholders.

Cumulative Preference Share : Share on which arrears of dividends accumulate .
The arrears of dividend on Cumulative Preference shares are shown in the Balance Sheet as contingent liability .

Participating Preference Share : Share which carries additional right to participate in the Surplus
profits and / or Surplus Assets.

Convertible Preference Share : Share which carries a right of conversion into Equity Shares.

Redeemable Preference Share : Share which is repayable in accordance with Sec.80 of Companies Act.

Note: unless otherwise stated a Preference Share is always deemed to be Cumulative, Non-Participating
and Non-Convertible .


ACCOUNTING TOPICS

Items not considered as a part of Divisible Profits
1 Securities Premium A/C.
2 Forfeited Shares A/C.
3 Profit Prior to Incorporation
4 Capital Reserve arising from Forfeiture of Shares
5 Capital Reserve arising from Revaluation of Assets
6 Unclaimed Dividend A/C .

Only fully paid Prefertence Shares can be redeemed .
Redemption of Preference Shares
1 Either out of divisible Profits,
2 Proceeds of fresh issue of Shares(Whether Equity or Preference ).
3 Premium on Redemption of Preference Shares can be adjusted against Security Premium or any Profits
(Whether divisible or not ) .
4 Transfer to CRR out of divisible profits =amt. equal to Nominal value of Preference Shares to be redeemed.
5 CRR can be utilised for issue of fully paid Bonus Shares.

The proceeds of issue of debentures cannot be utilised for redemption of Preference Shares .
Security Premium a/c. cannot be used for the purpose of Redemption of Preference Shares.

Security Premium can be used by the Company :
1 to issue fully paid bonus Shares
2 to write off Preliminary expenses.
3 to write oo the expenses of, discount allowed, issue of shares or debentures.

Security Premium a/c is a Nominal a/c and appears under Reserves & Surplus on Liabilities side of Balance Sheet.
Discount on Issue of Debentures/Shares is a Nominal a/c and appears under Miscellaneous Expenditure on Asset side
of Balance Sheet .
Discount on Issue of Debentures/Shares is a Capital Loss should be written of against Security Premium a/c .
or Profit & Loss a/c .

If Purchase Consideration is(100) more than Value of Assets(90), then the difference of (10) is debited to Goodwill a/c.
If Purchase Consideration is(90) less than Value of Assets(100), then the difference of (10) is credited to Capital Reserve a/c.


ACCOUNTING TOPICS

No interest is payable on debentures issued as Collateral Security .
Debentures cannot be issued in lieu of dividend .

Which does not from part of divisible Profits ?
(a) Workmen compensation fund
(b) Workmen Accident Fund
(c) Capital Reserve arising from revaluation of assets
(d) None of these
Ans --C

Debentures which are redeemable on or after 18 months are secured by Charge.

Important points for Re-issue of Shares :
1 Loss on re-issue should not exceed the forfeited amount .
2 If the loss on re-issueis less than the amount forfeited , the surplus should be transferred to Capital Reserve Account.
3 The forfeited amount on shares not yet re-issued should be shown in the Balance Sheet as an addition to Share
Capital Account .
4 When only a portion of shares forfeited are re-issued, then the profit made on re-issue of such shares should be transferred
to Capital Reserve .
5 When the shares are re-issued at a loss , such loss is debited to " Forfeited Shares Account" .
6 If the shares are re-issued at price which is more than the face value of shares , the excess amount should be credited to
to Securities Premium Account .
7 When shares originally issued at discount , are re-issued at a loss, the loss to the extent of Original discount is debited to
Discount on Issue of Shares Account and the balance loss is debited to forfeited Shares account .

On the issue of Shares, the application money should not be less than 5 % of the nominal value of Shares.

Maximum Interest rate applicable for calls in arrears is 5 % .

Maximum Interest rate applicable for calls in advance is 6 % .


ACCOUNTING TOPICS

When shares are issued to promoters for the services offered by them, the account that will be debited with the
nominal value of shares is Goodwill Account .

Schedule VI Part I of the Companies Act, deals with format of Balance Sheet .
Schedule VI Part I I of the Companies Act, deals with format of Profit & Loss Account .

Company must receive a Minimum of 90% of Subscription .

In case a Public limited Company is required to refund the application money due to non subscription to the minimum limit,
the application money is to be refunded within 60 days of Closure of issue

Maximum rate of discount on issue of Shares shall not be more than

Rights shares are issued only to existing Shareholders .

Equity Shareholders are entitled to dividend as declared by B.O.D and approved by Shareholders in AGM

Information on Partnership contd in next page


ACCOUNTING TOPICS

Partnership
Essentials 1 Atleast 2 Competent Persons
2 Agreement (Whether express or implied )
3 For carrying out Lawful Business
4 Sharing of Profits of the business.
5 Mutual Agency

Fluctuating Capital Method : All the transactions relating to a Partner are recorded in Capital Account .
Fixed Capital Method : Transactions relating to introduction or withdrawal of Capital are recorded in Capital a/c. and
Other transactions (like interest on Capital, interest on Drawings, Salary to Partner are recorded
in Current Account .

Note : Partners Capital Accounts will always show Credit Balance .
Partners Current Accounts can show either Credit Balance or Debit Balance ..

Interest on Capital

Calculation of Opening Capital in case of Fixed Capital
1 Closing Capital xxx
2 Add : Withdrawals of Capital xxx
3 Less : Additional Capital introduced xxx
4 Opening Capital (1 + 2 -3 ) xxxx

Calculation of Opening Capital in case of Fluctuating Capital
1 Closing Capital xxx
2 Add : Withdrawals of Capital xxx
3 Add: Drawings xxx
4 Less : Additional Capital introduced xxx
5 Less: Share of Profit xxx
6 Opening Capital (1 + 2 + 3 -4 -5 ) xxxx


ACCOUNTING TOPICS

Calculation of Interest on Capital

1 Interest on Opening Capital from beginning of accounting period to end of accounting period xxx
2 Add: Interest on Additional Capital from the date of introduction to end of accounting period xxx
3 Less: Interest on Capital Withdrawn from the date of withdrawal to end of accounting period xxx
4 Total Interest on Capital ( 1 + 2 -3 ) xxxx

Interest on Partner's Loan: Interest on Partner's Loan is to be allowed @ 6 % p.a if Partnership
Agreement is silent .

Goodwill : is the value of reputation of Firm in respect of Prifits expected in future over and above
normal profits earned by firm belonging to same industry .
Goodwill is an Intangible Asset and not a Fictitious Asset .

Valuation of Goodwill
1 Goodwill as per Average Profit Method= Average Future Maintainable Profits x Agreed No. of Years of Purchase.
Note 1. Average Future Maintainable Profit = Average Past Profits +/- Future Adjustments .
2. Average Past Profits = Total Past adjusted Profits / No. of Relevant Years.
3. Adjusted Past Profits = Past Profits +Abnormal Losses - Abnormal Gains - Interest on Non-Trading Investments -
Overvaluation of Closing Stock - Under Valuation of Stock .

2 Goodwill as per Super Profit Method= Super Profits x Agreed No. of Years of Purchase.
Note 1. Super Profit = Average Future Maintainable Profit - Normal Profit
2. Normal Profit = Return on Average Capital Employed + Partner's Remuneration .

3 Goodwill as per Annuity Method = Super Profits x Annuity Factor .

4 Goodwill as per Capitalisation of Super Profit Method = Super Profits x 100 / Normal Rate of Return .

5 Goodwill as per Capitalisation of Average Profit Method ={( Average Future Maintainable Profits / Normal Rate of Return)-
Net Assets }.


ACCOUNTING TOPICS

Admission of Partner:

Revaluation Account is prepared to ascertain the Profit / Loss in Revaluation of Assets and Liabilities .
Revaluation a/c. is debited with Decrease in Value of Assets and Increase in amount of Liabilities
Revaluation a/c. is credited with increase in Value of Assets and decrease in amount of Liabilities
Profit / Loss on Revaluation is transferred to Old Partner's Capital Account in their Old Profit Sharing Ratio .
When Revaluation Account is prepared Assets & Liabilities appear in the Balance Sheet at their Revised Figures .

Calculation of Ratio at the time of Admission of Partner
1 Sacrifice Ratio = Old Ratio - New Ratio .
2 New Ratio = Old Ratio - Sacrifice .
3 Sacrifice = New Partners Share X Sacrifice Ratio .
4 New Ratio = Old Ratio X Combined Ratio .
5 Combined Ratio = 1 - New Partners Share .

If nothing is mentioned it will be assumed that the Sacrifice of Old Partners is same as the Old Profit Sharing Ratio
& hence in such case the New Ratio would be equal to Old Ratio .

Retirement of a Partner :
Benefit Ratio = New Ratio - Old Ratio .

When date of Balance Sheet and date of retirement are different , calculate retiring Partner's Share in Profit
from date of Balance Sheet upto date of retirement . This Share in Profit is debited to Profit & Loss Suspense a/c.
& credited to Retiring Partner's Capital Account .

Deceased Partner's Share in Profit to the date of death
Share in profit = Average Profits X Period upto death X Deceased Partner's Profit Share / 12.

The amount due to deceased partner is paid to his Executors


CPT Accounts-Imp Info on Accounting Topics

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