Book-Keeping and Accountancy पुस्तपालन व लेखाकर्म

Quick summary

This chapter explains what a partnership firm is, the rules of the Indian Partnership Act, 1932, and how partners keep their capital accounts. It then shows how to prepare the final accounts of a partnership firm: Trading Account, Profit and Loss Account, Profit and Loss Appropriation Account and Balance Sheet, along with adjustments.

Key points

• A sole trader has limited capital, limited skill and unlimited liability, so two or more persons join together to form a partnership (भागीदारी).
• Partnership is defined in Section 4 of the Indian Partnership Act, 1932: a relation between persons who agree to share the profits of a business carried on by all or any of them acting for all.
• Minimum 2 partners; maximum 50 partners (Companies Act 2013, as amended in 2014).
• Main features: agreement, lawful business, sharing of profits and losses, mutual agency (every partner is agent and principal), unlimited liability.
• The written agreement is called the Partnership Deed. It should be in writing so it can be used as proof in court.
• If there is no deed (or the deed is silent): profits and losses are shared equally; no interest on capital; no salary or commission to partners; no interest on drawings; interest on a partner's loan to the firm is 6% p.a.
• Two methods of capital accounts: Fixed Capital Method (capital stays the same; interest, salary, drawings, share of profit go to a separate Current Account) and Fluctuating Capital Method (all such items go to the Capital Account, so the balance changes).
• Final accounts are prepared in the same way as for a sole trader, plus a Profit and Loss Appropriation Account that divides the net profit among partners.
• Common adjustments: closing stock, outstanding and prepaid expenses, depreciation, bad debts and R.D.D. (Reserve for Doubtful Debts), interest on capital and drawings, partner's salary, goods taken by partner.

Important terms

• Partnership Deed – written agreement between partners containing terms such as capital, profit-sharing ratio, salary, interest.
• Mutual agency – each partner can bind the firm and other partners by his acts done for the business.
• Current Account – account of a partner (under fixed capital method) recording interest, salary, drawings and share of profit.
• R.D.D. – Reserve for Doubtful Debts; a provision kept from profit for debts that may not be recovered.
• Interest on capital – reward to partners on capital invested, allowed only if the deed says so.

Formats and formulas

• Interest on capital = Capital × Rate × Period/12
• Interest on drawings (equal monthly drawings at the start of each month) = Total drawings × Rate × 6.5/12; (at the end of each month) = Total drawings × Rate × 5.5/12; (in the middle) = Total drawings × Rate × 6/12
• New R.D.D. = (Debtors − further bad debts) × rate
• Closing stock is valued at cost price or market price, whichever is lower.

5 important questions

Q1. Define partnership as per the Indian Partnership Act, 1932.

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all (Section 4).

Q2. State any four provisions that apply in the absence of a partnership deed.

1. Profits and losses are shared equally. 2. No interest is allowed on capital. 3. No salary or commission is paid to any partner. 4. Interest on a partner's loan is allowed at 6% p.a.

Q3. Distinguish between Fixed Capital Method and Fluctuating Capital Method (any three points).

Fixed: capital balance generally stays the same; two accounts per partner (Capital and Current); Current A/c may show a debit balance. Fluctuating: balance changes every year; only one account (Capital A/c); capital account normally shows a credit balance.

Q4. A and B have capitals of ₹1,00,000 and ₹60,000. Interest on capital is 5% p.a. Calculate interest.

A: 1,00,000 × 5/100 = ₹5,000. B: 60,000 × 5/100 = ₹3,000. These are debited to P&L Appropriation A/c and credited to the partners' capital (or current) accounts.

Q5. How is the adjustment "Goods worth ₹6,000 sold but not recorded" shown in final accounts?

Add ₹6,000 to Sales in the Trading Account (credit side) and add ₹6,000 to Debtors on the asset side of the Balance Sheet.

Exam tip

In practical problems, write every adjustment twice (once in an account, once in the Balance Sheet) and show working notes for R.D.D. and depreciation — they carry marks.

Quick summary

Clubs, hospitals, schools, libraries and charitable trusts work for service, not for profit. This chapter explains how such 'Not for Profit' concerns keep accounts: the Receipts and Payments Account, the Income and Expenditure Account and the Balance Sheet, with adjustments like outstanding subscription and capitalisation of entrance fees.

Key points

• Main aim is service to members or society, not profit. Their money comes from subscriptions, donations, grants, entrance fees and legacies.
• They use public money, so they must keep proper books and are answerable to members and society.
• Instead of 'Capital' they have a Capital Fund, made up of surplus, legacies, entrance fees (if capitalised) and donations received for capital fund.
• Receipts and Payments Account is a summary of the cash book. It starts with opening cash and bank balance and ends with closing balance. It records all cash receipts and payments — capital and revenue — of the current, past and future years.
• Income and Expenditure Account is like the Profit and Loss Account. It records only revenue items of the current year on accrual basis. Excess of income over expenditure is Surplus; the opposite is Deficit.
• Capital receipts (e.g., specific donations for building, life membership fees, sale of fixed assets) go to the Balance Sheet, not to the I&E Account.
• Entrance fees are treated as the problem says — revenue income, capital, or a part (e.g., 50%) capitalised.
• Legacy = gift received under a will after the donor's death. General legacy may be revenue; a legacy to be capitalised goes to Capital Fund.
• Implied adjustments: depreciation, outstanding/prepaid expenses, accrued income, subscription outstanding/received in advance, stock of stationery or sports material consumed.

Important terms

• Subscription – regular fee paid by members; revenue income.
• Specific donation – donation for a particular purpose; capital receipt shown on liabilities side.
• Endowment fund – a fund whose income is used for a stated purpose.
• Surplus / Deficit – excess of income over expenditure / expenditure over income.

Formats and formulas

• Capital Fund (opening) = Total opening assets − Total opening liabilities
• Subscription income for the year = Received in the year − outstanding of last year received now + outstanding for current year − received in advance for next year + advance of last year relating to current year
• Stationery consumed = Opening stock + Purchases − Closing stock

5 important questions

Q1. What is a Not for Profit concern? Give two examples.

An organisation set up for service to members or society, not for earning profit, e.g., a sports club, a charitable hospital.

Q2. State three features of a Receipts and Payments Account.

It is a real account summarising cash and bank; it records both capital and revenue items; it starts with the opening and ends with the closing cash/bank balance.

Q3. Entrance fees received ₹50,000; 50% to be capitalised. Show treatment.

₹25,000 is added to Capital Fund in the Balance Sheet and ₹25,000 is credited as income in the Income and Expenditure Account.

Q4. Subscription received during 2019-20 ₹40,000, which includes ₹2,000 for 2018-19 and ₹3,000 for 2020-21. Outstanding for 2019-20 is ₹4,000. Find subscription income.

40,000 − 2,000 − 3,000 + 4,000 = ₹39,000 credited to I&E A/c.

Q5. Distinguish between Profit organisation and Not for Profit organisation (two points).

Objective: profit vs. service. Result: Profit/Loss vs. Surplus/Deficit; Capital vs. Capital Fund.

Exam tip

Always prepare the opening Balance Sheet first to find the Capital Fund, and read "Additional Information" carefully — each item has two effects.

Quick summary

A partnership firm changes its form when a new partner joins, a partner retires or dies, or the profit-sharing ratio changes. This chapter covers admission of a new partner: new profit-sharing ratio, sacrifice ratio, goodwill, revaluation of assets and liabilities, and adjustment of capitals.

Key points

• Reconstitution = change in the existing agreement among partners; the firm continues.
• A new partner is admitted to get more capital, more skill, or to expand the business. He brings capital and usually a premium for goodwill.
• The old partners give up (sacrifice) a part of their share for the new partner.
• Goodwill is the value of the firm's reputation that helps it earn more than normal profit. It is an intangible asset.
• Methods of valuing goodwill in the textbook: Average Profit Method and Super Profit Method.
• Treatment of goodwill: (A) Premium Method – new partner brings cash for goodwill, shared by old partners in sacrifice ratio; (B) Valuation Method – goodwill is raised (debited to Goodwill A/c) and credited to old partners in old ratio.
• Revaluation Account (Profit and Loss Adjustment A/c) records increase/decrease in assets and liabilities. Its profit or loss is shared by old partners in old ratio.
• Accumulated profits, reserves and past losses in the Balance Sheet belong to old partners and are transferred to them in old ratio.
• Capitals may be adjusted in the new ratio; surplus is withdrawn or paid, deficit is brought in cash.

Important terms

• New ratio – ratio in which all partners share profits after admission.
• Sacrifice ratio – ratio in which old partners give up their share for the new partner.
• Super profit – average profit minus normal profit.
• Revaluation – re-valuing assets and liabilities at the time of reconstitution.

Formats and formulas

• Sacrifice = Old share − New share
• Goodwill (Average Profit Method) = Average profit × Number of years' purchase
• Super profit = Average profit − Normal profit; Normal profit = Capital employed × Normal rate/100
• Goodwill (Super Profit Method) = Super profit × Number of years' purchase
• Journal (premium in cash): Cash A/c Dr. To Premium for Goodwill A/c; then Premium for Goodwill A/c Dr. To Old Partners' Capital A/cs (sacrifice ratio)
• Increase in asset: Asset A/c Dr. To Revaluation A/c; Decrease: Revaluation A/c Dr. To Asset A/c

5 important questions

Q1. What is reconstitution of partnership? Give its forms.

Change in the existing agreement of partners. Forms: admission, retirement, death of a partner, change in profit-sharing ratio, amalgamation.

Q2. A and B share profits 3:2. C is admitted for 1/5 share. Find the new ratio (sacrifice in old ratio).

Remaining share = 1 − 1/5 = 4/5. A = 3/5 × 4/5 = 12/25; B = 2/5 × 4/5 = 8/25; C = 1/5 = 5/25. New ratio = 12:8:5.

Q3. Average profit ₹60,000; normal profit ₹40,000; goodwill = 3 years' purchase of super profit. Find goodwill.

Super profit = 60,000 − 40,000 = 20,000. Goodwill = 20,000 × 3 = ₹60,000.

Q4. Why is a Revaluation Account prepared?

To bring assets and liabilities to their true values, so that profit or loss on revaluation up to the date of admission goes only to old partners.

Q5. State the treatment of General Reserve at the time of admission.

It is distributed among old partners in the old ratio: General Reserve A/c Dr. To Old Partners' Capital A/cs.

Exam tip

In the 12-mark problem, prepare Revaluation A/c, Partners' Capital A/cs and the new Balance Sheet neatly, and show the new ratio as a working note.

Quick summary

When a partner leaves the firm by his own choice (retirement), the remaining partners continue the business. This chapter shows how to find the new ratio and gain ratio, treat goodwill, reserves and revaluation, and calculate the total amount payable to the retiring partner.

Key points

• Retirement means a partner leaves the firm with the consent of others, as per the deed or by notice.
• After retirement, the share of the retiring partner is taken by the continuing partners, so their shares increase.
• Gain (Benefit) Ratio = the ratio in which continuing partners gain the retiring partner's share. It is the opposite of sacrifice ratio.
• The retiring partner is entitled to his share of goodwill. It is usually paid by continuing partners in their gain ratio.
• General Reserve, Reserve Fund and accumulated profits are transferred to all partners (including the retiring one) in the old ratio; accumulated losses are debited in the old ratio.
• Assets and liabilities are revalued through the Revaluation Account; profit or loss is shared by all partners in the old ratio.
• Total amount payable to the retiring partner = his capital balance + share of goodwill + share of reserves + share of revaluation profit + interest/salary due − drawings and losses.
• The amount payable may be paid in cash at once, or transferred to the Retiring Partner's Loan Account and paid in instalments with interest.
• Continuing partners may adjust their capitals in the new ratio.

Important terms

• Retiring partner – a partner who leaves the firm while others continue.
• Gain ratio – ratio of the increase in share of continuing partners.
• Retiring partner's loan A/c – account to which the amount due is transferred if not paid immediately.
• Hidden goodwill – goodwill not stated, found from the amount paid to the retiring partner.

Formats and formulas

• Gain = New share − Old share
• If no new ratio is given, continuing partners share in their old ratio between themselves.
• Goodwill adjustment: Continuing Partners' Capital A/cs Dr. (gain ratio) To Retiring Partner's Capital A/c
• Reserve: General Reserve A/c Dr. To All Partners' Capital A/cs (old ratio)
• Settlement: Retiring Partner's Capital A/c Dr. To Cash/Bank A/c or To Retiring Partner's Loan A/c

5 important questions

Q1. What is gain ratio?

The ratio in which the continuing partners get the share of the retiring partner. Gain = New share − Old share.

Q2. A, B and C share 3:2:1. B retires. New ratio of A and C is 3:2. Find the gain ratio.

A: 3/5 − 3/6 = 18/30 − 15/30 = 3/30. C: 2/5 − 1/6 = 12/30 − 5/30 = 7/30. Gain ratio = 3:7.

Q3. How is general reserve treated on retirement of a partner?

It belongs to all partners, so it is credited to all partners' capital accounts, including the retiring partner, in the old ratio.

Q4. State the items credited to a retiring partner's capital account.

Opening capital, share of goodwill, share of general reserve/accumulated profit, share of revaluation profit, interest on capital, salary or commission due.

Q5. Why is the amount due sometimes transferred to the retiring partner's loan account?

Paying the full amount at once may disturb the firm's working capital, so it is paid later in instalments with interest.

Exam tip

Prepare Revaluation A/c first, then Partners' Capital A/cs; the balance of the retiring partner's capital account is the amount payable.

Quick summary

When a partner dies, the firm is reconstituted and the remaining partners continue the business. The amount due to the deceased partner is calculated in the same way as for a retiring partner and is paid to his Executor, Nominee or Administrator (legal heir).

Key points

• A partner ceases to be a partner on death; the firm may continue if the deed allows.
• The legal representative of the deceased partner is entitled to interest at 6% p.a. on the amount due, from the date of death to the date of payment (or a share of profits, as chosen), if not paid immediately.
• New profit-sharing ratio of the surviving partners and their gain ratio are calculated as in retirement.
• Assets and liabilities are revalued; revaluation profit or loss is shared by all partners (including the deceased) in old ratio.
• Amount due to the deceased partner includes: capital balance, share of revaluation profit, share of general reserve/accumulated profit, share of goodwill, interest on capital, salary, and share of profit up to the date of death; less drawings, interest on drawings and share of losses.
• Share of profit up to date of death is calculated on a time basis (proportion of last year's or average profit for the period) or as the problem states.
• The final balance is transferred to the Executor's (or Nominee's) Loan Account and paid after legal formalities.

Important terms

• Executor – the person who carries out the will of the deceased partner.
• Nominee / Administrator – person entitled to receive the deceased partner's dues.
• Executor's Loan Account – account showing amount payable to the executor.
• Profit up to date of death – deceased partner's share of profit from the start of the year till his death.

Formats and formulas

• Profit up to date of death = Last year's (or average) profit × Period up to death/12 × Deceased's share
• Entry for profit: Profit and Loss Suspense A/c Dr. To Deceased Partner's Capital A/c
• Settlement: Deceased Partner's Capital A/c Dr. To Deceased Partner's Executor's Loan A/c

5 important questions

Q1. Who is an executor?

The person named in the will of the deceased partner, or his legal heir, who receives the amount due from the firm.

Q2. A, B and C share profits equally. C died on 30th June 2019. Last year's profit was ₹72,000. Find C's share of profit up to death (year ends 31st March).

Period = 3 months. 72,000 × 3/12 × 1/3 = ₹6,000.

Q3. State the items debited to a deceased partner's capital account.

Drawings, interest on drawings, share of revaluation loss, share of accumulated losses, and the final transfer to executor's loan account.

Q4. What interest can the executor claim if the amount is not paid at once?

Interest at 6% per annum on the amount due from the date of death till payment (as per the Act), unless the deed provides otherwise.

Q5. Distinguish between retirement and death of a partner (two points).

Retirement is voluntary; death is not. Retiring partner is paid personally; on death the amount is paid to the executor/nominee.

Exam tip

Calculate the share of profit up to death as a working note and show it clearly; examiners check the period in months.

Quick summary

Dissolution means closing the business of the firm. All assets are sold, liabilities are paid, and the remaining cash is settled with the partners. This chapter covers reasons for dissolution, the Realisation Account and settlement of accounts, including the case of an insolvent partner.

Key points

• Dissolution of partnership = change in relation among partners (firm may continue). Dissolution of firm = end of the relation among all partners; business closes.
• Reasons: by agreement; compulsory (all/all but one partner insolvent, business becomes illegal); on notice (partnership at will); on happening of contingencies (expiry of term, completion of venture, death); by order of court.
• Order of payment after sale of assets: realisation (dissolution) expenses first, then outside liabilities (creditors), then partners' loans, then partners' capitals.
• Realisation Account records sale of assets and payment of liabilities. Assets (except cash/bank) are debited at book value; liabilities (outside) credited at book value.
• Profit or loss on realisation is shared by partners in the profit-sharing ratio.
• Accumulated profits/reserves are credited and losses debited to partners' capital accounts.
• An asset taken over by a partner is credited to Realisation A/c and debited to his Capital A/c.
• Insolvent partner: a partner whose liabilities are more than his assets. As per the textbook, the deficiency in his capital account is borne by solvent partners in their profit-sharing ratio.
• Finally, Cash/Bank account closes with payment to (or receipt from) partners.

Important terms

• Realisation – converting assets into cash.
• Realisation expenses – expenses of dissolution; debited to Realisation A/c.
• Capital deficiency – debit balance in a partner's capital account at final settlement.
• Unrecorded asset – asset not shown in books; when realised, credited to Realisation A/c.
• Contingent liability – a liability that may arise in future.

Formats and formulas

• Sale of assets: Bank A/c Dr. To Realisation A/c
• Payment of liabilities: Realisation A/c Dr. To Bank A/c
• Realisation expenses: Realisation A/c Dr. To Bank A/c
• Realisation profit: Realisation A/c Dr. To Partners' Capital A/cs
• Deficiency of insolvent partner: Solvent Partners' Capital A/cs Dr. To Insolvent Partner's Capital A/c

5 important questions

Q1. Distinguish between dissolution of partnership and dissolution of firm (two points).

Partnership dissolution changes relations but business may continue; firm dissolution closes the business. The first does not need settlement of all assets; the second requires sale of all assets and payment of all liabilities.

Q2. State any four reasons for dissolution of a firm.

By mutual agreement; insolvency of all partners; business becoming illegal; order of the court.

Q3. Why is a Realisation Account prepared?

To record sale of assets, payment of liabilities and expenses, and to find profit or loss on realisation.

Q4. Assets (book value ₹1,20,000) realised ₹1,05,000; creditors ₹40,000 paid ₹38,000; expenses ₹2,000. Find realisation profit/loss.

Credit side: 40,000 + 1,05,000 = 1,45,000. Debit side: 1,20,000 + 38,000 + 2,000 = 1,60,000. Loss = ₹15,000.

Q5. Who is an insolvent partner? How is his deficiency treated?

A partner whose liabilities exceed assets. His capital deficiency is borne by the solvent partners in their profit-sharing ratio.

Exam tip

Always prepare Realisation A/c, Partners' Capital A/cs and Bank A/c — the Bank account must close with zero balance.

Quick summary

A bill of exchange is a written order used in credit trade: the seller (drawer) orders the buyer (drawee) to pay a fixed sum after a fixed time. This chapter explains the parties, due date, days of grace, dishonour, noting, and the journal entries in the books of drawer and drawee for retaining, endorsing, discounting, sending for collection, renewal and insolvency.

Key points

• Defined in Section 5 of the Negotiable Instruments Act, 1881: an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer.
• Parties: Drawer (seller who writes the bill), Drawee (buyer who accepts it), Payee (person who receives payment — often the drawer), Endorsee (person to whom the bill is transferred).
• For the drawer it is a Bill Receivable (B/R); for the drawee it is a Bill Payable (B/P).
• Bill becomes valid only after acceptance by the drawee.
• Days of grace: 3 extra days added to the term to find the due date (not for bills payable on demand). If the due date is a public holiday, it is the previous working day.
• Drawer can (a) keep the bill till due date, (b) endorse it to a creditor, (c) discount it with a bank, (d) send it to the bank for collection.
• Dishonour: drawee fails to pay on due date. Noting is done by a Notary Public; noting charges are finally borne by the drawee.
• Renewal: drawee unable to pay asks to cancel the old bill and accept a new one, often with interest.
• On insolvency of the drawee, only a part (e.g., paise in a rupee) is recovered; the rest is bad debt.

Important terms

• Term / Tenure – period of the bill.
• Maturity / due date – date on which payment must be made.
• Discounting – getting cash from bank before due date by paying a discount.
• Endorsement – transferring the bill by signing on its back.
• Noting charges – fees paid to Notary Public for recording dishonour.

Formats and formulas

• Due date = Date of drawing (or acceptance for 'after sight' bills) + Term + 3 days of grace
• Discount = Amount of bill × Rate × Unexpired period/12 (or /365 for days)
• Interest on renewal = Amount × Rate × Period of new bill
• Drawer on drawing: Bills Receivable A/c Dr. To Drawee's A/c
• Discounting: Bank A/c Dr., Discount A/c Dr. To Bills Receivable A/c
• Dishonour of discounted bill: Drawee's A/c Dr. To Bank A/c (with noting charges)

5 important questions

Q1. Define bill of exchange and state its parties.

A written unconditional order signed by the maker directing a person to pay a certain sum to a certain person or bearer. Parties: drawer, drawee, payee (and endorsee).

Q2. A bill dated 15th April 2020 is drawn for 3 months. Find the due date.

15 April + 3 months = 15 July + 3 days of grace = 18th July 2020.

Q3. A bill of ₹10,000 was discounted with the bank at 12% p.a. when 2 months were left to its due date. Find discount.

Discount = 10,000 × 12/100 × 2/12 = ₹200. The bank pays 10,000 − 200 = ₹9,800.

Q4. What is noting of a bill? Who bears noting charges?

Recording the fact of dishonour by a Notary Public on the bill. Noting charges are ultimately borne by the drawee.

Q5. Why is a bill renewed?

When the drawee cannot pay on the due date, he requests the drawer to cancel the old bill and draw a new one, usually with interest for the extra period.

Exam tip

Practise journal entries in both books (drawer and drawee) side by side; the drawee's book has no entry for endorsement, discounting or sending for collection.

Quick summary

A company raises its capital by issuing shares. This chapter explains types of shares and share capital, how shares are issued at par, premium (and the rules on discount), what happens in over- and under-subscription, calls in arrears and in advance, shares issued for consideration other than cash, and forfeiture and re-issue of shares.

Key points

• Capital of a company is divided into small units called shares. Holders are members and owners.
• Types of shares: Equity shares (ordinary shares, voting right, dividend after preference) and Preference shares (preference for dividend and return of capital).
• Share capital classes: Authorised, Issued, Subscribed (fully paid / not fully paid), Called-up, Paid-up.
• Money is collected in stages: application, allotment, first call, final call.
• Issue at par (face value), at premium (above face value; premium goes to Securities Premium A/c), at discount (below face value — generally not allowed under the Companies Act 2013 except sweat equity).
• Over-subscription: more applications than shares offered — excess money is refunded or adjusted against allotment (pro-rata allotment).
• Under-subscription: fewer applications; shares are allotted only to applicants (subject to minimum subscription).
• Calls in arrears: amount called but not paid. Calls in advance: amount received before it is called.
• Shares may be issued to vendors for assets bought (consideration other than cash).
• Forfeiture: cancellation of shares when a shareholder fails to pay calls; amount already received goes to Share Forfeiture A/c. Forfeited shares can be re-issued.

Important terms

• Face value – nominal value printed on the share.
• Securities premium – amount received above face value; shown under Reserves.
• Pro-rata allotment – proportional allotment when shares are over-subscribed.
• Share forfeiture – cancellation of shares for non-payment of calls.

Formats and formulas

• Application: Bank A/c Dr. To Equity Share Application A/c; Equity Share Application A/c Dr. To Equity Share Capital A/c
• Allotment with premium: Equity Share Allotment A/c Dr. To Equity Share Capital A/c, To Securities Premium A/c
• Forfeiture: Equity Share Capital A/c Dr. (called-up amount) To Share Forfeiture A/c (amount received) To Calls in Arrears/Unpaid calls
• Capital reserve on re-issue = Forfeited amount − discount allowed on re-issue

5 important questions

Q1. Distinguish between equity shares and preference shares (any three points).

Dividend: equity after preference, preference at fixed rate first. Voting: equity has normal voting; preference has limited voting. Capital return on winding up: preference before equity.

Q2. What is over-subscription? How is it treated?

Applications received for more shares than offered. Excess money is refunded, or partly adjusted to allotment under pro-rata allotment.

Q3. 10,000 shares of ₹10 each issued at ₹2 premium; ₹3 on application, ₹5 on allotment (with premium), ₹4 on call. Find total premium.

Premium = 10,000 × 2 = ₹20,000, credited to Securities Premium A/c at allotment.

Q4. Explain calls in arrears and calls in advance.

Calls in arrears: called amount not paid by shareholder (deducted from called-up capital). Calls in advance: amount paid before the call (shown as a liability).

Q5. What is forfeiture of shares?

Cancellation of shares of a member who fails to pay allotment or call money; the amount already paid is not refunded and is credited to Share Forfeiture A/c.

Exam tip

Use separate accounts for Application, Allotment and each Call; prepare the Bank A/c and the share capital part of the Balance Sheet to check your answer.

Quick summary

Financial statements (Balance Sheet and Profit and Loss Account) show figures, but their meaning comes from analysis. This chapter explains the meaning, objectives and limitations of financial statement analysis, the tools — comparative statements, common-size statements, cash flow statement — and accounting ratios.

Key points

• Analysis = methodical classification of data; interpretation = explaining its meaning and significance.
• Objectives: help planning, estimate earning capacity, guide investment decisions, judge efficiency of management, give information about economic resources.
• Limitations: based on historical figures, ignore qualitative factors, affected by personal judgement, different accounting methods reduce comparability, static nature, affected by window dressing.
• Comparative statement: shows figures of two or more years side by side with absolute and percentage change.
• Common-size statement: each item shown as a percentage of a common base (total assets/liabilities in Balance Sheet; net sales in Income Statement).
• Cash flow statement: shows inflow and outflow of cash from operating, investing and financing activities.
• Ratio: relationship between two related figures. Classified as Balance Sheet ratios, Income Statement ratios and Combined/Mixed ratios.
• Ideal current ratio 2:1; ideal liquid (quick) ratio 1:1.

Important terms

• Current assets – assets converted into cash within a year (stock, debtors, B/R, cash).
• Liquid (quick) assets – current assets minus stock and prepaid expenses.
• Liquid liabilities – current liabilities minus bank overdraft (and advances received).
• Window dressing – showing a better picture of the business than reality.

Formats and formulas

• Current Ratio = Current Assets ÷ Current Liabilities
• Liquid Ratio = Liquid Assets ÷ Liquid Liabilities
• Gross Profit Ratio = Gross Profit ÷ Net Sales × 100
• Net Profit Ratio = Net Profit ÷ Net Sales × 100
• Operating Ratio = (Cost of Goods Sold + Operating Expenses) ÷ Net Sales × 100
• Operating Profit Ratio = 100 − Operating Ratio
• Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses − Closing Stock
• Return on Capital Employed / ROI = Net Profit before Interest and Tax ÷ Capital Employed × 100

5 important questions

Q1. State any four objectives of financial statement analysis.

To help planning; to estimate earning capacity; to help investment decisions; to judge efficiency of management.

Q2. Current assets ₹2,40,000; current liabilities ₹1,20,000. Find current ratio and comment.

2,40,000 ÷ 1,20,000 = 2:1, which equals the ideal ratio — short-term position is satisfactory.

Q3. Net sales ₹9,40,000; cost of goods sold ₹7,00,000; operating expenses ₹60,000. Find operating ratio.

(7,00,000 + 60,000) ÷ 9,40,000 × 100 = 80.85%.

Q4. What is a common-size statement?

A statement in which each item is expressed as a percentage of a common total, e.g., net sales = 100 or total assets = 100, so firms and years can be compared.

Q5. State any three limitations of financial statement analysis.

Based on past data; ignores non-monetary factors; may be affected by window dressing.

Exam tip

Write the formula first, then substitution, then the answer with % or ':1' — each step gets marks.

Quick summary

Computers have changed how accounts are kept. This chapter explains the Computerized Accounting System (CAS), its features, importance and components, compares manual and computerised accounting, and describes how accounting software is sourced and why legal (licensed) software should be used instead of pirated software.

Key points

• CAS uses computer hardware and software to record, classify and summarise transactions and produce reports.
• Features: speed, accuracy, reliability, storage of large data, automatic posting and reports, security through passwords, up-to-date information.
• Importance: saves time and labour, instant reports, easy correction, better decision-making, real-time data, scalability.
• Components: hardware, software, people (users), procedures, data, and the database/network.
• In manual accounting, entries are journalised and posted by hand; in CAS, only voucher entry is done and ledger, trial balance and final accounts are produced automatically.
• Types of accounting software packages: Ready-to-use, Customised, Tailored, and Free & Open Source.
• Ready-to-use: cheap, easy, suitable for small businesses, limited flexibility. Customised: ready software modified for a user. Tailored: developed specially for a large organisation.
• Legal / licensed software comes with support, updates and security; pirated software is illegal, may contain viruses and has no support.

Important terms

• Hardware – physical parts like CPU, keyboard, printer.
• Software – programs that instruct the computer.
• Accounting package – software made for accounting work.
• Piracy – illegal copying and use of software.

Formats and formulas

5 important questions

Q1. What is a Computerised Accounting System?

A system in which accounting transactions are recorded and processed with the help of computer hardware and accounting software.

Q2. State any four features of CAS.

Speed, accuracy, large storage, automatic generation of reports (also security and up-to-date information).

Q3. Name the types of accounting software packages.

Ready-to-use, customised, tailored, and free and open-source software.

Q4. Distinguish between manual and computerised accounting (two points).

Manual is slow and error-prone; CAS is fast and accurate. Manual reports are prepared by hand; CAS generates them instantly.

Q5. Why should licensed software be preferred over pirated software?

It is legal, gets updates and support, is secure from viruses, and protects the firm's data.

Exam tip

Short-answer questions here are theory-only; learn the four types of software packages with one advantage each.