Admission of a Partner - Delhi

Admission of a Partner Meaning According to Section 31 of Indian Partnership Act 1932 "A Partner can be admitted only consent of all the Existing Partners." Adjustments required when a New Partner is Admitted a. Calculation of New Profit Sharing Ratio / Sacrificing Ratio. b. Valuation and Treatment of Goodwill. c. Revaluation of Assets and Liabilities. d. Adjustment of accumulated Profits, Reserve and Losses. e. Necessary Adjustment of Capital Accounts of Partners. Change in Profit Sharing Ratio A New Partner Acquires his share from the Old Partner in any of the following Manners; (i) In their old Profit Selling Ratio (ii) In a Particular Ratio or Surrendered Ratio (iii) In a particular fraction from some of the partner

Accounting Treatment of Goodwill 1. When Goodwill (Premium) is paid by

No Entry

the New Partner Privately 2. When Goodwill brought in Cash by the New Partner

(i) Cash/Bank A/c

...Dr.

To Premium for Goodwill A/c (ii) Premium for Goodwill A/c

... Dr.

To Sacrificing Partners' Capital A/c (In Sacrificing Ratio) To Sacrificing Partners' Current A/c s (When Capital is Fixed) 3. Goodwill Withdrawn by the Sacrificing (Old) Partners 4. Goodwill not brought in Cash

Sacrificing Partners' Capital A/c s To Cash/Bank A/c New Partner's Capital or Current A/c To Sacrificing Partners' Capital or current A/c [Sacrificing Ratio]

5. Goodwill brought in Kind

...Dr.

Assets A/c ...Dr. To Premium for Goodwill A/c

195

... Dr.

Hidden or inferred goodwill Sometimes the value of goodwill is not given at the time of admission of a new partner. In such a situation, goodwill is calculated on the basis of net worth of the business. Hidden goodwill is the excess of desired total capital of the firm over the actual combined capital of all partners’. For Example Capital of L and M are ` 2,00,000 and ` 1,50,000 respectively. They admit N as a Partner for 1/5 share with ` 1,00,000 as his Capital. On the basis of N’s Capital, total Capital of the Firm should be ` 5,00,000 (1,00,000 × 5/1). But the actual Capital of the Firm is ` 4,50,000 (2,00,000 +1,50,000 +1,00,000). Hence, Hidden Goodwill: = ` 5,00,000 - ` 4,50,000 = ` 50,000

Revaluation of Assets and Reassessment of Liabilities Accounting Entries (i) For increase in the value of Assets

Assets A/c (Individually)

.... Dr.

To Revaluation (or P & L Adjustment) A/C (ii) For a decrease in the value of Assets

Revaluation A/c

....Dr.

To Assets A/c (Individually) (iii) For an increase in the amount of Liabilities

Revaluation A/c

....Dr.

To Liabilities A/c (Individually) (iv) For a decrease in the amount of Liabilities

Liability A/c (Individually)

....Dr.

To Revaluation A/c (v) For an accounting unrecorded Assets

Assets A/c (Individually)

....Dr.

To Revaluation A/c (vi) For accounting unrecorded Liabilities

Revaluation A/c

....Dr.

To Liability A/c (Individually)

Revaluation Account Particulars

`

Particulars

`

To Decrease in value of assets

.....

To increase in value of liabilities

.....

By Increase in value of assets

.....

By Decrease in value of liabilities

.....

To Unrecorded liabilities

.....

By Unrecorded assets

.....

To Profit transfer to the old Partner's

.....

By Loss transfer to the old Partner's

.....

Capital A/c s (in the old ratio)

.....

Capital A/c s (in the old ratio)

.....

196

RESERVES AND ACCUMULATED (UNDISTRIBUTED) PROFITS /LOSSES Accounting Entries (i) For transfer of Reserves and Accumulated Profits: Profit and Loss

...Dr.

Reserve Fund A/c or General Reserve

...Dr.

Workmen Compensation Reserve

...Dr. [Excess of Reserve Liabilities]

Investment Fluctuation Reserve A/c

...Dr. [Excess of Reserve over the difference between Book Value

over Actual

and market Value] To Old Partners' Capital A/c s

[In old Ratio]

(Being the reserve and profit transferred to old partners in their old ratio) (ii) For transfer of Reserves and Accumulated Losses: Old Partners' Capital A/c s

...... Dr.

To Profit and Loss A/c

[In old Ratio]

To Deferred Revenue Expenditure A/c (Like Advertisement Expenditure) (Being the accumulated losses transferred to old partners in their old ratio

Adjustment of Partners' Capital Case 1. Calculation of New Partner's Capital on the basis of Old Partners Step 1. Calculate the adjustment closing capitals of old Partners (after all adjustments have been made) Step 2. Calculate the total closing Capital of New Firm as under: Total capital of New Firm = Combined adjusted Closing Capitals of Old Partners X Reciprocal of remaining share of profit of old partners. Step 3. Calculate the proportionate Capital of New Partner as under: New Partner's Capital =Total capital of new firm x New partner's proportion of share of profit.

Case 2. Adjustment of Old Partners’ Capital on the basis of New Partner's Capital Step 1. Calculate total capital of new firm on the basis of new partner's capital i.e. new partner's capital X Reciprocal of proportion of share profit of new partner.

197

Step 2. Calculate the new capital of old partners by dividing the total capital in their new profit sharing ratio. Step 3. Calculate the adjusted closing capitals of old partners (i.e. after all adjustments have been made) Step 4. Calculate the surplus /deficiency in each of the old partner's capital account by comparing the new capital with their adjusted old capital which is adjusted through cash or transferred to their Current A/c

Adjustment of Surplus/Deficiency through Cash: (a) If Capital of Old Partners falls short (Deficit), bring in cash: Cash/Bank A/c

....Dr.

To Partners' Capital A/c s (b) If capital of old partner has a surplus, withdraw cash: Partners' Capital A/cs

....Dr.

To Cash/Bank A/c Adjustment of Surplus/Deficiency through Partner's Current Account: (a) If the existing capital is more than his required capital (surplus) Partner's Capital A/c

....Dr.

To Partner's Current A/c (b) If the existing capital is less than his required capital (deficit) Partner's Current A/c

....Dr.

To Partner's Capital A/c If Current Account shows a Credit Balance, it is taken to the Liabilities side of the Balance Sheet. However, if Current Account shows a Debit Balance, it is placed on the Assets side of the Balance Sheet.

Retirement and Death of a Partner Meaning Retirement of a Partner means living the firm by a partner. A Partner may retire from the firm in the following conditionsI. If there is an agreement about the retirement. II. If all the partners consent to his retirement. III. If the partnership is at will, by giving a notice in writing to all the other partners in advance.

198

Adjustment for Retirement of a Partner (a) Finding out the New Profit-Sharing Ratio and Gain Ratio. (b) Treatment of Goodwill. (c) Revaluation of Assets and Reassessment of Liabilities. (d) Treatment related to Unrecorded Assets and Liabilities. (e) Adjustments in respect to Accumulated Profits and Losses. (f) Ascertain of Share of Profits or Losses up to the date of Retirement/Death. (g) Adjustment of Capital if required. (h) Settlement of Capital, if required. (i) Change in Profit- Sharing Ratio New Profit-Sharing Ratio The New Profit-sharing Ratio on Retirement of a Partner is the Ratio in which the continuing or remaining Partners decide to share the future Profits and Losses. New Share of a Partner = Old Share + Acquired Share Case 1. When one Partner Retires and the New Profit -Sharing Ratio among the Remaining Partners is not given. Case 2. When Remaining Partners Purchase the Share of the Retiring Partner in a Specific Ratio. Gaining Ratio Ratio in which the Continue Partner acquires the Retiring of Deceased Partners' Share. Calculation of Gaining Ratio under different situations is given below: (i) When No Agreement Exists In this case gain to the continuing partners is in the old profit-sharing ratio. (ii) When the New Profit-sharing Ratio is given In this case, the gaining ratio is calculated by deducting the old ratio from the new ratio. Gaining Ratio=New Ratio - Old Ratio

Accounting Treatment of Goodwill When a Partner Retires (or Dies) his Share of Profit is acquired by the Remaining Partners. The following Entry is recorded for this purpose: Remaining Partner's A/cs

....Dr. [Gaming Ratio]

To Retiring Partners' Capital

[Retiring Partner's Share of Goodwill]

All Partners' Capital/Current A/cs

...Dr. [Old Ratio] 199

To Goodwill (or Premium) A/c Revaluation of Assets and Reassessment of Liabilities (Same as admission) Adjustment for Reserves and Undistributed profits/Losses For Distribution of Accumulated Profits: General Reserve A/c

.....Dr.

Reserve Fund A/c

.....Dr.

Profit and Loss A/c

.....Dr. To All Partners' Capital A/c s

For Distribution of Accumulated Losses; All Partners' Capital A/c

....Dr. To Profit and Loss A/c

Accounting treatment of joint life policy; Case 1. When there is no Joint Life Policy is present in the Balance Sheet but Joint Life Policy will paper in the Balance Sheet after Retirement. Joint Life Policy A/c

....Dr.

(Surrender Value of J.L.P.)

To All Partners'Capital A/cs

(Old Ratio)

Case 2. When there is no Joint Life Policy in the present Balance Sheet and Joint Life Policy will not be shown in the Balance Sheet after Retirement. In this situation adjustment is carried out through Partners' Capital Accounts by passing the following entry: Continuing Partners' Capital A/cs

....Dr. (Gaining Ratio)

To Retiring Partner's Capital A/c

(Share of Surrender Value)

Case 3. When there is Joint Life Policy in the Balance Sheet: In this case, Joint Life Policy is treated as an asset. Any Revaluation of Joint Life Policy is carried out through Revaluation Account. Calculation of amount due to the Retiring Partner (i)

Capital on the date of the last Balance Sheet.

(ii)

Interest or salary, if any, payable to him.

(iii) Share of profit or losses till the date of retirement. (i) If the amount is paid in Cash or by Cheque; (iv) Share in the profits or losses on revaluation of assets and reassessment of liabilities. (v)

Share in the goodwill of the firm.

(vi) Share in the general reserve or profits and losses account appearing in the Balance Sheet. 200

Settlement of the Account Due to the Retiring Partner Retiring Partner's Capital A/c

....Dr.

To Cash/BankA/c (ii) If the amount is not paid in cash; Retiring Partner's Capital A/c

....Dr.

To Retiring Partner's Loan A/c Construction of Retiring Partner's Loan Account (i) For Interest due; Interest on Loan A/c

....Dr.

To Retiring Partner's Loan A/c (ii) For payment of Instalment with Interest: Retiring Partner's Loan A/c

....Dr.

To Cash /Bank A/c Adjustment of partners’ capital in new profit sharing ratio Adjustment of Partner's Capital in New Profit Sharing Ratio (i) If Capital of Remaining Partner falls short, bring in Cash: Cash/BankA/c

....Dr.

To Remaining Partner's Capital A/c (ii) If capital of remaining partner has a surplus, withdraw Cash: Remaining Partner's Capital A/c

....Dr.

To Cash/Bank A/c (iii) If the deficit in their capital account is adjusted by transferring to their current accounts: Remaining Partner's Current A/c

...Dr.

To Remaining Partner's Capital A/c (iv) If the surplus in their capital accounts is adjusted by transferring to their Current Capital Account Remaining Partner's Capital A/c

....Dr.

To Remaining Partner's Current A/c Note: If no information is given then any surplus or deficiency should be adjusted in cash and not by transferring it to partner's current account.

201

Death of a Partner The Accounting Procedures on the Death of a Partner are very similar to the Retirement of a Partner. From Accounting Point of view the following point are Important; (i) Calculation of New Ratio and Gaining Ratio. (ii) Treatment of Goodwill. (iii) Revaluation of Assets and Reassessment of Liabilities. (iv) Distribution of Accumulated Profits and Losses. (v) Treatment of Joint Life Policy: Insurance amount is distributed among all partners including deceased partner in their old ratio. (vi) Interest on capital, share of profit to the deceased partner till the date of death, drawings, interest on drawings, is credited or debited to the deceased partner's account. (vii) Preparation of deceased partner's capital account and its settlement Having given effect to the above 6 points, the balance in the Deceased Partner's Capital Account is transferred to his Executor's Account and may be paid in cash or transferred to his Loan Account. Note: The Executors of the Deceased Partner are entitled to the following: (a) Balance of Capital and Current Account of the Deceased Partner. (b) Share of Accumulated Profit/Loss. (c) Share of Revaluation Profit/Loss. (d) Share of Goodwill of the Firm. (e) Share of Profit from the date of last Balance Sheet to the date of Death, (f) Share of Joint Life Policy taken by the Firm.

Date of death is important/actor while calculating the balance of deceased Partner. Date is considered

Date is not considered

(i) To calculate Share of Profit

(i) To calculate Share of Goodwill

(ii) To calculate Interest on Capital

(ii) To calculate Share of General Reserves

(iii) To calculate Interest on Drawings

(iii) To calculate Share of Joint Life Policy

(iv) To calculate Interest on Deceased

(iv) To calculate Share of Profit and Loss A/c

Partner’s loan A/c

(given in Balance Sheet)

202

Dissolution of Firm Meaning According to section 39 of Indian Partnership Act 1932, "Dissolution of a firm means the dissolution of partnership among all the partners of the firm along the closing the firm's business". In case of dissolution of a firm the assets are realized and the liabilities are paid.” Mode of Dissolution of a Firm (1) Dissolution by Mutual Agreement among the Partners. (2) Compulsory Dissolution (a) If all the Partners or all Except One Partner become Insolvent. (b) If Business of the Firm become Unlawful. (3) Dissolution on the Happening of the Certain Contingencies. (a) On the Expiry of the Term for which the Firm was Formed. (b) On the completion of venture (s) for which the firm was formed. (c) On the death of a partner; and (d) On the adjudication of a partner as an insolvent. (4) Dissolution by Notice in Case of Partnership at Will. A Court may pass order for the Dissolution of the Firm on the following Grounds when; (i) A Partner becomes a Person of Unsound Mind. (ii) A Partner is Permanently Incapacitated. (iii) A Partner is Found Guilty of Misconduct. (iv) Partnership Agreement is Breached Persistently by Some Partner. (v) The Court Finds the Dissolution of the Firm Justified. Settlement of accounts Section-48 of the Indian Partnership Act 1932, deals with the Settlement of Account at a time of Dissolution of Firm. (i) Treatment of Losses; Losses are to be paid first out of Profit, then out of Capital, and lastly if necessary by the Partners Individually in the Proposition of their Profit- Sharing Ratio. (ii) Application of Assets; The amount realized from the Assets of the Firm including any sum of money contributed by the Partners to makeup Deficiencies of Capital shall be applied in the following manner. 203

(a)

First to Pay Firm's Debt to the Third Parties, i.e. Outside Parties,

(b)

Then to Pay Loan from Partners,

(c)

Then to pay Capital of Partners.

(d)

Lastly the Surplus (if any) shall be Distributed among the Partners in their Profit-sharing Ratio.

Payment of Firm’s Debts and private Debts; Section-49 of IPA1932 deals the following is applied in Case of Firm's Debt and Private Debt. (i) Firm's Property is applied first in payment of Firm's Debts and if there is any surplus, then the share of each Partner is applied in the payment of his Private Debts or paid to him. (ii) Partner's Private Property is applied first in payment of his Private Debts and the Surplus (if any), in payment of Firm's Debts if the Firm's Liabilities exceed the Firm's Assets.

Accounting Treatment of Dissolution of a Partnership Firm The following necessary Accounts are prepared at the time of Dissolution of a Firm; (1) Realisation Account: It is a Nominal Account which is prepared at a time of Dissolution to determine the Profit or Loss on Realisation of Assets and payment of Liabilities. The following necessary Steps are adopted for Accounting Treatment of Realisation Account; Step 1. Entry for transfer of all accounts except Partner's Loan A/c, Partners' Capital A/c s, Undistributed Profit or Losses and Cash/Bank A/c given in the balance sheet: (a) For Transfer of Assets to Realisation A/c; Realisation A/c

......Dr. (at its Book value)

To Various Assets A/c (Individually by name) (b) For Transfer of Outside Liabilities to Realisation A/c; Various Liabilities A/c (Individually by name)

......Dr. (at its Book value)

To Realisation A/c Step 2. Entry for collection of sale proceeds from assets (a) For Cash Sales of Assets; Cash/Bank A/c

......Dr.

To Realisation A/c

204

(b) For Assets taken over by a Partner; Partner's Capital A/c

......Dr.

To Realisation A/c (c) When the Assets are given away to any of the Creditors towards the Full / Partial Payment of his Dues, there may be Three Situations; (i) When a creditor accepts an asset as full and final settlement, no journal entry is required. (ii) When a creditor accepts his payment by taking over an assets and part of his payment in cash, the following entry will be made for cash payment only; Realisation A/c

......Dr.

To Cash/Bank A/c (iii) When a creditor accepts an asset where value is more than the amount due to him, he will pay cash. Entry will be as follows; Cash/BankA/c

.......Dr.

To Realisation A/c Step 3. Entry for payment of Dissolution/Realisation expenses (a) For cash payment of expenses: Realisation A/c

......Dr.

To Cash/Bank A/c Note: Realised against assets can be more than, less than or equal to Book value of the asset. (b) For payment of expenses made by a partner or fixed amount for expenses is credited to partner's capital account: Realisation A/c

.......Dr.

To Partner's Capital A/c (c) If any partner is to bear all expenses ofrealisation himself no journal entry is required. (d) If the realisation expenses are paid by the firm on the behalf of bearing partner: Partner's Capital A/c

......Dr,

To Cash/Bank A/c (e) When Realisation Expenses are borne by one Partner and paid by another Partner: Bearing Partner's Capital A/c

.......Dr.

To Paying Partner's Capital A/c Step 4: Entry for payment of outside liabilities (a) For Cash Payment of Liabilities : Realisation A/c

.......Dr.

To Cash/Bank A/c 205

(b) For Liabilities Taken Over by a Partner: RealisationA/c

.......Dr.

To Partner's Capital A/c Step 5: Entry for Closing of Realisation Account (a) Realisation Account Shows Profit: (When the Credit Side is Bigger) Realisation A/c

.....Dr. (amount of profit)

To Partner's Capital A/c s

(share of partners'profit)

(b) Realisation Account shows Loss;(When the Debit side is Bigger) Partners1 Capital A/c

.......Dr. (share of partners'loss)

To Realisation A/c

(amount of loss)

Note: In the Case of Dissolution. Goodwill is like other Assets .So Same Treatment will be given as given to other assets. Realisation Account Dr.

Cr.

Particulars To Various Assets A/c s except Cash Bank,

Rs. ....

Particulars

Rs.

By Various Liabilities A/c s except

Dr. balance of Partner's Capital /Current A/c s,Undistributed profit, Partner's Capital/ Loan to Partner and Fictitious Assets

....

To Cash/Bank A/c (Payment of dissolution expenses)

....

To Cash /Bank A/c(Payment of outside and unrecorded liabilities)

Current A/c s, Loan from Partner

....

By Provision for any Assets, e.g., provision

....

for doubtful debts, Joint Life Policy fund etc. By Cash/Bank A/c (Receipt on realization

....

of assets and unrecorded assets.)

To Partner's Capital A/c (Liability taken over

By Partner's Capital A/c (Assets taken

by a partner or any expenses paid by him

over by a partner)

or remuneration payable to him)

....

To Profit transferred to Partner's Capital A/c

....

....

By Loss transferred to Partner's Capital A/c

....

....

(2) Partners Loan Account If partner has given any loan to the firm it will be shown credit side of partners loan account. Partner's loan A/c .......Dr. To Cash/Bank A/c (Being partner's loan paid off) 206

(3) Partners Capital Account Balance of partners' capital accounts and current accounts are recorded in this account. If partners have taken over firm's assets, these are recorded in the debit side of their capital accounts or if they pay liabilities of the firm, these are credited in their capital accounts. (a) On Transfer of Undistributed Profits and Reserves Profit and Loss A/c

.......Dr.

Reserve Fund A/c To Partners' Capital A/c (b) In case of accumulated losses Partners'Capital A/c s

.......Dr.

To profit and Loss A/c Final Settlement with Partners (a) On Bringing Cash by Partners for Deficiency in Capital Cash/Bank

.......Dr.

To Partners' Capital A/c s (b) On Payment to Partners or Closing the Partners' Capital Accounts Partners' Capital A/c s

.......Dr.

To Cash/Bank A/c (4) Cash and Bank account This is an account which show the cash balance at a time of Dissolution of the Firm. The opening balance of cash or bank will be shown on debit side of cash/ bank account. All the receipts from sale of the assets and amount brought in by partners are shown on debit side while all the payment of liabilities expenses and amount paid to partners' are shown on credit side. (i) Partner’s Loan account; Partner's Loan A/c

.......Dr.

To Cash/Bank A/c (Being partner's loan paid off) (ii) Partners' capital accounts; (a) If Capital Account shows Debit Balance: Cash/BankA/c

.......Dr.

To Partner's Capital A/c (Being deficit amount of Capital brought in Cash) 207

(b) If Capital Account shows Credit Balance: Partner's Capital A/c

.......Dr.

To Cash /Bank A/c (Being final payment made to a partner) (iii) Cash or bank account: (a) For cash deposited into bank; Bank A/c

.......Dr.

To Cash A/c (b) For cash withdrawn from bank: Cash A/c

.......Dr.

To Bank A/c

Accounting Treatment of Provision and Undistributed Profit and Loss (i)Transfer of Provision to Realistion Account: (a) Provision which has a credit balance will be transferred to the credit side of realisation account and the following entry will be passed: Provision for Depreciation A/c

Dr

Provision for Bad Debts A/c

Dr.

Provision for Discount on Debtors A/c

Dr.

Investment Fluctuation Fund A/c

Dr.

Joint Life Policy Fund A/c

Dr.

To Realisation A/c (b) Provision which has a debit balance will be transferred to the debit side of Realization account and the following entry will be passed: RealisationA/c

Dr.

To Provision for Discount on Creditors A/c (For provision against liabilities transferred to realisation account) (ii) Transfer of Undistributed Profit/ Losses to Partner's Capital Accounts: (a) Undistributed Profits such as General Reserve, Reserve Fund, Credit balance of Profit & Loss Account etc. are not to be transferred to Realisation Account. These accounts are transferred to partners’ capital or current accounts in their profit sharing ratio. The entry will be passed as follows: 208

General Reserve A/c

Dr.

Reserve Fund A/c

Dr.

Profit & Loss A/c

Dr.

Workmens' Compensation Fund

Dr.

To Partners’ Capital/Current A/c s (Being transfer of undistributed profits to partners1 accounts in their profit sharing ratio) (b) Similarly if Undistributed Losses or Fictitious Assets, i.e. Debit balance of Profit & Loss A/c, Advertisement Expenses A/c etc. are given in the Assets side of Balance Sheet, the following entry will be passed; Partners’ Capital /Current A/cs

Dr.

To Profit & Loss A/c To Advertisement Expenses A/c (Being transfer of undistributed loss to partners1 accounts in their profit sharing ratio) Accounting Treatment for Unrecorded Assets and Unrecorded Liabilities (i) Unrecorded Assets: (a) If cash is realised from Unrecorded Assets: Cash/BankA/c

Dr.

To Realisation A/c (b) If Unrecorded Assets are taken over by a Partner: Partner's Capital A/c

Dr.

To Realisation A/c Unrecorded liabilities: (a) If cash payment is made for unrecorded liabilities: Realisation A/c

Dr.

To Cash/Bank A/c (b) If unrecorded liability is taken over by a partner: RealisationA/c

Dr. To Partner's Capital A/c

Note: Both Unrecorded Assets and Unrecorded Liabilities are not transferred to Realisation Account because they have no Account in the Books. Accounting Treatment of Goodwill In the case of Dissolution of a Firm, Goodwill should be treated just like other Assets and is transferred to the Realisation account. If any amount is realised for Goodwill, Cash /Bank Account is debited and the Realisation account is credited. If Goodwill is purchased by one of the Partners, the concerned Partner's Capital Account is debited and Realization Account is credited. 209

Memorandum Balance Sheet This is preparing to ascertain Sundry Assets, when the Partner's' Capitals and other Liabilities are given but not the total of Sundry Assets. However, the value realised from the Assets is given. In such a case, Sundry Assets have to be ascertained. It is calculated by preparing the old Balance Sheet. The amounts of Capitals and other Liabilities are added. The same sum total is the total amount of Assets. Such a Balance Sheet is also called Memorandum Balance Sheet.

UNIT 3

Accounting for Share Capital Share Capital of a Company The total Capital of the Company is divided into small units, each unit is called a Share. For Example; The total Share Capital of a Company is ` 10,00,000 is divided into 1,00,000 Units of ` 10 each then Each Unit of ` 10 is called a Share of ` 10 each. SHARE CAPITAL Meaning It is the amount that a Company can raise or has raised by Issue of Shares. Types of Share Capital (i) Authorized Capital -This is the maximum Capital for which a Company authorized to issue during its life time. It is mentioned in the Memorandum of Association. (ii) Issued Capital- It is that part of Authorized Capital which is offered for Subscription. (iii) Subscribed Capital- It is a part of Issued Capital which is Subscribed for by the Public. (iv) Called up capital - It is that part of Subscribed Capital which is called up by the Company. (v) Paid-up-Capital - It is that part of Called-up-Capital that the members of the Company have paid. (vi) Unpaid Calls or Calls-in-arrears - It is the amount which has been called for by the Company but has not been paid up by the Shareholders. (vii) Reserve capital (Section 99 of 1C A 1956) - It is the Capital which has not been called up by Company and the Company has decided not to call unless, until Company wound up. Issue of shares A Company collects its Capital by Issue of Shares. A Public Company can issue shares to the public but a private company can not issue its shares to public. A company can issue its share in two following ways; 210

(i) Issue of Shares for cash, and (ii) Issue of Shares for consideration other than Cash. (1) Issue of Shares for Cash Share of a Company may be issued in any of the following three ways; (i) Issue of Shares at Par: If the shares are issued for an amount equal to the face value of share, they are said to be issued at par i.e. face value of a share is ` 10 and issue price is also ` 10. Accounting treatment For Share Application money received: Bank A/c To Share Application A/c For Allotment of Shares: Share Application A/c To Share Capital A/c For Share Allotment money due: Share Allotment A/c To Share Capital A/c For Share allotment money received: Bank A/c To Share Allotment A/c For Call money due: Share (First/Final) Call A/c To Share Capital A/c For Call money received: Bank A/c To Share (First/Final) Call A/c

....Dr.

....Dr.

....Dr.

....Dr.

....Dr.

....Dr.

(ii) Issue of shares at Premium (Section 78) When the shares are issued more than the face value, e.g. A ` 100 share may be issued at ` 105, it is said to have at premium of ` 5. Accounting Treatment (i) When amount of premium is payable with the application money: Bank A/c ... Dr. [With the total application money including premium money] To Share Application A/c (ii) When the share are allotted: Share Application A/c ... .Dr. [With the total application money including premium]

211

To Share Capital A/c

[With the application money Payable towards share capital]

To Securities Premium A/c [With the amount of premium paid with application] (iii) Shares Issued at Discount (Section 79) When the shares are issued at a price less than its face value, e.g. A ` 10 share is issued for ` 9 then it is called issued at a 10% discount Accounting Treatment Share Allotment A/c

....Dr. [With the amount due]

Discount on issue of Shares A/c

.... Dr. [With the amount of discount]

To Share Capital A/c Note: The share, whether issued at par or at a premium, or at a discount may be payable either in installments or in full on application. Accounting Entries for Issue of Shares Payable in Lump Sum: When Share are issued at par payable in one installment, are said to have been issued in lump sum. (i) BankA/c

...Dr.

To Share Application & Allotment A/c (Being Application & Allotment money received) (ii) Share Application & Allotment A/c

...Dr.

To Share Capital A/c (Being the share allotted and money transferred Share Capital A/c) Over Subscription of Shares Oversubscription means, the number of share applied is more than the number of share offered for subscription. However the company can not allot shares more than those offered for subscription. There three alternatives are followed by company; (i) Rejection of Excess Applications: In this alternative some applications are accepted in full and excess applications are rejected and their application money is refunded. For example 10,000 shares were issued while application money received for 15,000 shares, the excess 5,000 are not accepted and their application money is refunded. (ii) Partial or Pro-Rata Allotment: In this case applicants are allotted in fixed proportion.

212

For Example; 10,000 shares were issued while application money received for 15000 Shares; the applicants are allotted in the ratio of 10:15 or2:3. (iii) Third Alter natives: This alternatives is the combination of the above two alternatives. In this case same applications may be accepted in full and some applications may be rejected and the remaining are allotted in proportion. Under Subscriptions of Shares Under subscription means the number of shares subscribed are less than the number of shares offered for subscription. For example number of shares offered for subscription is 10,000 while number of shares applied is 9000. Calls-in-Arrears Calls-in-Arrear is that part of called-up-money which has not been paid by the shareholders till the last date fixed for the payment. Accounting Treatment: There are two alternative methods of dealing with the accounting of calls-in-arrears; (i) Without opening Call-in-Arrears Account: It is not necessary to maintain a separate account for calls-in-arrears. For example; if share first call money at ` 2 per share on 2,000 shares is called but out of this, share first call money on 1,900 shares is received. In such a case, the following entries will be made as under: (a) For share first call money due: Share First call A/c

....Dr.

4,000

To Share Capital A/c

4,000

(b) For share first call money received: Bank A/c

....Dr.

3,800

To Share First Call A/c

3,800

(ii) By opening Calls-in-Arrears account: In some case, a separate account for calls-in-arrears is opened. If the amount of allotment/call has not been paid by some shareholders; such amount is transferred to newly opened Callsin-Arrears Account. The above example will be represented as follows: (a) For Share First Call Money Due: Share First Call A/c

....Dr.

4,000

To Share Capital A/c

4,000

213

(b) For share first call money received: Bank A/c ....

Dr.

Calls-in-Arrears A/c

....

3,800 Dr.

200

To Share First Call A/c

4,000

Accounting Entries for Calls-in-Arrears The following accounting entries are passed with respect to calls-in-arrears: (i) On non-receipt of call till the day fixed: Calls-in-Arrears A/c

.. .

Dr.

[With the amount not received]

To Relevant Call A/c (ii) On receipt of calls-in-arrears at a subsequent date: BankA/c ....Dr.

[With the calls-in-arrears received]

To Calls-in-Arrears A/c Interest on Calls-in-Arrears Account (iii) On making due the interest on calls-in-arrears: Sundry Members A/c

....Dr.

[With the amount of interest received]

To Interest on Calls-in-Arrears A/c (iv) On receipt of interest on calls-in-arrears: Bank A/c ... Dr.

[With the amount of interest received]

To Sundry Members A/c (v) On transfer of interest on calls-in-Arrears A/c to profit and Loss A/c at the end of the accounting period: Interest on Calls-in-Arrears A/c

.... Dr. [With the amount of interest]

To Profit and Loss A/c Calls-in-Advance Calls-in-Advance refer to the amount paid by shareholders in excess the amount due from them. The Journal entry passed to record this is: Bank A/c ....Dr. [With the amount of calls money received in advance] To Calls-in-Advance A/c It is adjusted as and when the respective call is made due. The entry is: Calls-in-Advance A/c

....Dr.

To Particular Calls A/c

214

Interest on Calls-in-Advance (a) When interest is paid in Cash: Interest on Calls-in-Advance A/c .... Dr. [With the amount of calls money received in advance] To Bank A/c (b) When interest is due: Interest on Calls-in- Advance A/c ....Dr. [With the amount of interest payable] To Outstanding Interest A/c To Sundry Shareholders (members) A/c (c) On transferto ProfitandLossAccountat the endof'accountingperiod: Profit and Loss A/c

..... Dr. [With the total amount of interest paid on Calls-in-Advance]

To Interest on Calls-in-Advance A/c

Issue or Shares for Consideration other than Cash Sometimes Company purchases some assets from vendors, in exchange it can issue Fully Paid Shares. In such a case, the following journal entries are required for this purpose, (a) On Purchase of Assets; Sundry Assets A/c ....Dr. To Vendor's A/c Shares can be issued to Vendors in any manner out of the following; (i)At par Vendor’s A/c

....Dr.

To Share Capital A/c (ii) At Premium Vendor's A/c

....Dr.

To Share Capital A/c To Securities Premium A/c

215

(iii) At Discount Vendor’sA/c

....Dr.

Discount on Issue of Share A/c To Share Capital A/c (b) On Purchase of Business Sundry Assets A/c ....Dr. [Agreed value of Assets] Goodwill A/c* To Liabilities A/c To Vendor* *

....Dr. [Agreed value of Liabilities] [Agreed Price Payable to the Vendor]

To Capital Reserve A/c*** *If purchase consideration is given and it is more than net assets, then difference shall be debits to Goodwill Account. ** Vendor is credited by Purchase Consideration payable to him. It may be given in the question; otherwise it will be equal to Net Assets, i.e. Sundry Assets minus Sundry Liabilities. ***If Purchase Consideration is given and it is less than Net Assets, then the difference shall be credited to Capital Reserve Account. NOTE: Number of shares to be issued=Purchase Price /Issue price of Share

Forfeiture of shares Forfeiture of Shares means the cancellation of allotment of shares due to non-payment of any call money by the Shareholder. Accounting Treatment (i) Forfeiture of shares which were origin ally issued at par; Share Capital A/c

....Dr. (total amount called up)

To Share Forfeiture A/c

(amount already received)

To Various Unpaid call A/c

(amount due but not received)

(ii) Forfeiture of shares which were originally issued at premium; (a) If premium has been paid by the shareholders Share Capital A/c ....Dr. To Share Allotment A/c

(Amount called up premium) (amount not received on allotment)

To Share Call/Calls A/c

(amount not received on calls)

To Share Forfeiture A/c

(amount received so far)

216

(b) If premium has not been paid by the shareholders: Share Capital A/c ... .Dr.

(amount called up so far less premium)

Securities premium A/c ....Dr.

(premium amount called up)

To Share Allotment A/c

(amount not received on allotment)

To Share Call/Calls A/c

(amount not received on calls)

To Share Forfeiture A/c

(amount received so far)

(iii) Forfeiture of shares which were issued at a discount: Share Capital A/c ....Dr.

(amount called up so far plus discount)

To Discount on Issue of Shares A/c

(amount of share discount)

To Share Allotment A/c

(amount not received on allotment)

To Share Call/Calls A/c

(amount not received on calls)

To Share Forfeiture A/c

(amount received so far)

Reissue of Forfeited Shares Forfeited shares become the property of the company and the directors have the authority to reissue them at par, at premium or at a discount. Journal Entries on Re-issue of Forfeited Shares (i) If the forfeited shares are re-issued at Par: Bank A/c ....Dr. To Share Capital A/c (Being forfeited shares re-issued at par) (ii) If the forfeited shares are re-issued at premium: Bank A/c ....Dr. To Share Capital A/c To Securities Premium A/c (Being forfeited shares re-issued at premium) (iii) If the forfeited shares are re-issue at discount: Bank A/c ....Dr. Share Forfeiture A/c

....Dr.

To Share Capital A/c (Being forfeited shares re-issued at discount) Transfer of balance in the Forfeited share Account After re-issue of forfeited shares, the credit balance left in the share forfeiture account is a capital profit and therefore it is transferred to Capital Reserve A/c’. 217

Share Forfeiture A/c

....Dr.

To Capital Reserve A/c (Being share forfeiture account transferred to capital reserve account). When share belonging to pro-rata category are forfeited: If the forfeited shares belonging to pro rata category are, then we faces the problem of determining the amount in arrears on allotment. For correct solution, the following steps should be taken: 1.

Calculate total share applied by the shareholder whose shares are being forfeited; (Total shares applied/Total shares allotted) X share allotted by the company to shareholder

2.

Multiply the number of shares as calculated in (1) with the amount of application money. This gives total money sent by the shareholder with the applications. This amount is forfeited on default and credited to share forfeited account.

3.

Deduct from the application money received, the amount due on application with the help of shares allotted. The result is the excess application money is available for adjustment towards allotment.

4.

Calculate the amount due on allotment and deduct from it the amount sent in advance with applications. The result is the amount in arrears on allotment. This amount is credited to share allotment account at the time of making entry for forfeiture. Calculation of capital reserve when all forfeited share were not reissued = (No. of reissued share / No. of forfeited share X profit on forfeiture)-Loss on forfeiture) UNIT 4

Accounting for Debentures Meaning According to section 2(12) of the Indian companies Act 1956 "Debenture includes debenture stock, bonds and other securities of the company whether constituting a charge on the company assets or not." Issue of Debenture A company can issue its Debenture in two following ways; (1) Issue of Debenture for cash, and (2) Issue of Debenture for consideration other than cash. (1) Issue of Debenture for cash Debenture of a company may be issued in any of the following three ways; (a) Issue of Debenture at par: If the Debentures are issued for an amount equal to its face value, they are said to be issued at par e.g. if a debenture of Rs. 100 is issued for Rs. 100, it will be known as issued at par. 218

Accounting treatment (i) For Debenture Application money received Bank A/c

....Dr.

To Debenture Application A/c (ii) For Debenture Application Money adjusted: Debenture Application A/c

....Dr.

To Debenture A/c (iii) For Debenture Allotment money due: Debenture Allotment A/c

....Dr.

To Debenture A/c (iv) For Debenture allotment money received: Bank A/c

....Dr.

To Debenture Allotment A/c (V) For Call money due: Debenture Call A/c

....Dr.

To Debenture A/c (vi) For Call money received: Bank A/c

....Dr.

To Debenture Call A/c (b) Issue of Debenture at premium When the Debentures are issued more than the face value, e.g. A Rs. 100 Debenture may be issued atRs. 105, it is said to have at premium of Rs.5. Accounting Treatment (i) When amount of premium is pay able with the application money. Bank A/c

... Dr. [With total application money including premium]

To Debenture Application A/c (ii) When the Debentures are allotted, Debenture Application A/c To Debenture A/c To Securities Premium A/c

....Dr. [with the total application money including premium] [With the application money Payable towards share capital] [With the amount application]

219

of

premium

paid

with

(c) Debenture Issued at Discount When the Debentures are issued at a price less than its face value, e. g. A ` 10 share is issued for ` 9 then it is called issued at a 10% discount. Debenture Allotment A/c

....Dr. [With the amount due]

Discount on issue of Debenture A/c

.... Dr. [With the amount of discount]

To Debenture A/c NOTE: The Debenture, whether issued at par or at a premium, or at a discount, may be payable either in installments or in fall on application.

Issue or Debentures for consideration other than cash Sometimes company purchases some assets from vendors, in exchange it can issue fully paid debentures. In such a case, the following journal entries are required for this purpose. (a) On purchase of assets: Sundry Assets A/c

....Dr.

To Vendor's A/c Debentures can be issued to vendors in any manner out of the following; (i) At par Vendor's A/c

....Dr.

To Debenture A/c (ii) At premium Vendor's A/c

....Dr.

To Debenture A/c To Securities Premium A/c (iii) At discount Vendor's A/c

....Dr.

Discount on Issue of Debenture A/c To Debenture A/c (b) On Purchase of Business Sundry Assets A/c

....Dr. [Agreed value of assets]

Goodwill A/c*

....Dr. 220

To Liabilities A/c To Vendor**

[Agreed value of liabilities] [Agreed price payable to the vendor]

To Capital Reserve A/c*** * If purchase consideration is given and it is more than net assets, then difference shall be debits to Goodwill Account. ** Vendor is credited by purchase consideration payable to him. It may be given in the question; otherwise it will be equal to net assets, i.e. sundry assets minus sundry liabilities. *** If purchase consideration is given and it is less than net assets, then the difference shall be credited to Capital Reserve account. NOTE: Number of Debentures to be issued=Amount Due to Vendor / Issue Price of Debenture Issue of Debenture as Collateral Security It means issue of debentures as an additional security. Issue of debentures as a collateral security may or may not be recorded in the books of account If it is recorded in the books of account, the entry passed is: Debenture Suspense A/c

....Dr.

To Debentures A/c Various Cases from the point of view of Redemption (i) When debentures are issued at par and are redeemable at par, i.e. redeemable value is equal to the face value: (a) Bank A/c

......Dr.

To Debenture Application A/c (b) Debenture Application A/c V

........Dr;

To Debenture A/c (ii) When debentures are issued at a discount but are redeemable at par: (a)Bank A/c

......Dr.

To Debenture Application A/c (b) Debenture Application A/c Discount on issue of Debentures A/c

......Dr.

To Debenture A/c (iii) When debentures are issued at a premium but are redeemable at par: (a)Bank A/c

......Dr.

To Debenture Application A/c 221

(b) Debenture Application A/c

...... Dr.

To Debenture A/c To Securities Premium A/c (iv) When Debentures are issued at par but are redeemable at a premium, i.e. in excess of the nominal value. (a) Bank A/c

....Dr.

To Debenture Application A/c (b) Debenture Application A/c

.....Dr.

Loss on Issue of Debentures A/c

.....Dr.

To Debentures A/c

.....Dr.[For providing premium on

To Premium on Redemption of Debentures A/c

redemption]

(v) When Debentures are issued at a discount but are redeemable at a premium: (a)Bank A/c

......Dr.

To Debenture Application A/c (b) Debenture Application A/c

......Dr.

Discount on Issue of Debentures A/c .....Dr. Loss on Issue of Debenture A/c

..... Dr.

To Debenture A/c To Premium on Redemption of Debentures A/c (vi) When Debentures are issued at a premium and are redeemable at a premium: (a) Bank A/c

...... Dr. [With the application money received]

To Debenture Application A/c (b) Debenture Application A/c .... .Dr. [With the application money] Loss on Issue of Debentures A/c .....Dr. [With premium on redemption] To Debentures A/c [With nominal value] To Securities Premium A/c

[With premium on issue]

222

Redemption of Debentures Meaning Redemption of Debenture means the repayment of the amount of Debentures to Debenture olders. Methods of Redemption of Debentures (i) By lump sum payment after stipulated period (ii) In Installments by draw in lots; (iii) By Purchase of own Debentures in the Open Market; (iv) By Conversion into Shares or new Debentures; (v) At the Option of the Company

Journal Entries on Redemption of Debenture For the amount of Debentures due; (a) When the debentures are redeemed at par: Debenture A/c

....Dr.

To Debenture holders A/c (b) When the Debentures are redeemed at a premium: Debentures A/c

....Dr.

Debenture Redemption Premium A/c ...Dr. To Debenture holders A/c (c) When the Debentures are redeemed at a discount: Debentures A/c

......Dr.

To Debenture holders A/c To Gain/Profit on Redemption of Debenture A/c For payment made to debenture holders: Debenture holders A/c

......Dr.

To Bank A/c

Sources of Funds (Finance) for the Redemption of Debentures: A company may adopt any of the following options for redeeming debentures,, (1) Redemption Out of Capital

223

(a) For the amount of Debentures due on Redemption: Debentures A/c Debenture Redemption Premium A/c

...Dr. ...Dr. (if premium is payable)

To Debenture holders A/c (b) For payment made to Debenture holders: Debenture holders A/c

...Dr.

To Bank A/c (2) Redemption out of Profit: (i) On transfer of profit to Debenture Redemption Reserve: Profit & Loss Appropriation A/c

...Dr.

To Debenture Redemption Reserve A/c (ii) On Redemption of Debentures: (a) For the amount of Debentures due on Redemption: Debenture A/c

...Dr.

To Debenture holder’s A/c (b) For payment made to Debenture holders: Debenture A/c

...Dr.

To Bank A/c (iii) When all the Debentures are Redeemed* the balance of Debenture Redemption Reserve is transferred to General Reserve. Debenture Redemption Reserve A/c

...Dr.

To General Reserve A/c (3) Redemption of Debentures by Conversion in Shares or New Debentures; (i) For amount due to Debenture holders: (a) Redemption at par: Debenture A/c

...Dr.

To Debenture holders A/c (b) Redemption at premium: Debentures A/c

...Dr.

Debenture Redemption Premium A/c

...Dr.

To Debenture holders A/c (ii) Discharging obligation by issuing shares or Debentures: 224

Debenture holders A/c

...Dr.

To Equity Share Capital A/c or To % Debentures A/c (new)

(IV) Interest on own Debentures: (i) For interest on Debentures due: Interest on debentures A/c .. .Dr.

(with total interest)

To Debentures A/c

(interest payable to outsiders)

To Interest on Own Deb. A/c

(interest payable to company itself)

(ii) For payment of interest to Debenture holders: Debenture holders A/c

...Dr.

To Bank A/c (iii) For transfer of interest on Debentures to Profit & Loss A/c: Profit & Loss A/c

...Dr.

To Interest on Debentures A/c (iv) For transfer of Interest on Own Debentures to Profit & Loss A/c: Interest on Own Debentures A/c

...Dr.

To Profit & Loss A/c UNIT -11 FINANCIAL STATEMENTS OF A COMPANY Meaning The Financial Statements are the end product of the Financial Accounting. The Financial Statements are the Summarized Statements of Accounting Data produced at the end of the Accounting Process by an enterprise to communicate the financial information in concise and capsule form about operating results and financial position of the business to the internal and external users. Financial Statements normally include: (i) Income Statement, i.e. Profit and Loss Account; and (ii) Position Statement, i.e. Balance Sheet. Balance Sheet A company’s Balance Sheet is prepared in the prescribed form, as given in Schedule VI, Part I of the Companies Act, 1956. Revised Schedule VI is given in Text Books. 225

FINANCIAL STATEMENT ANALYSIS Meaning Analysis of Financial Statements is a systematic process of identifying process of identifying the financial strengths and weaknesses of the firm by establishing of the firm by establishing the relationship between the items of Financial Statements. Objectives of Analyzing Financial Statements (i) To Judge the financial stability of an enterprise. (ii) To Assess solvency of the firm. (iii) To Assess profitability of the firm. (iv) To Compare intra-firm position and inter-firm position. (v) To Assess the future prospects of the enterprise. Limitations of Analysis of Financial Statements (i) Different accounting policies. (ii) Does not reflect the Price-level changes. (iii) Lack of Qualitative aspect. (iv) Not free from bias. (v) Window - Dressing. (vi) Historical analysis. TOOLS FOR FINANCIAL STATEMENT ANALYSIS Comparative Financial Statements: It Contain information of two or more Financial Statements (item wise) in columnar form. They also provide for columns to indicate the change in item amounts in absolute terms as well as in percentage. Objective or Purposes of Comparative Financial Statements (i) To know the nature of changes influencing financial position. (ii) To know the weaknesses and soundness about liquidity, profitability and solvency of the enterprise. (iii) To forecast and plan. Inter-Firm Comparison - When Financial Statements of two or more firms are compared, it is known as an inter-firm comparison. Intra-Firm comparison - The comparison of Financial Statements of two or more years of the same firm is referred to as an intra-firm comparison,

226

Tools for Comparison (i) Comparative Balance Sheet: Comparative Balance Sheet analysis is that study of the trend of same items group of items and computed items in two or more balance sheets of the same business enterprise on different dates. (ii) Comparative Income Statement: A Comparative Income Statement shows the operating results for a number of accounting periods so that changes in data in terms of money and percentage from one period to another may be ascertained. (iii) Common-Size Statement: In Common-Size Statement, figures reported are converted into percentages of some common base. RATIO ANALYSIS An Accounting Ratio is a Mathematical Relationship between two items or groups of items in the Financial Statements. Ratio Analysis is an important technique of Financial Analysis. It is the process of computing, determining and presenting the relationship of items and groups of items in the Financial Statements. Objectives of Ratio Analysis (i) To judge the earning capacity, financial soundness and operating efficiency of an enterprise. (ii) To simplify the accounting information. (iii) To help in comparative analysis.

Major Classification of Ratios (1) Liquidity Ratios: It measures the Short-term Solvency of the Firm. (2) Solvency Ratios: It measures Long-term Solvency of the Firm. (3) Activity Ratios: It measures Efficiency as to the Utilisation of Asset of the Firm. (4) Profitability Ratios: It measures the Profitability in relation to Sales and Investment of the Firm. (1) Liquidity Ratios

(i) Current Ratio – This ratio shows Short-term Financial Position of the Firm. Current Ratio = Current Assets /Current Liabilities It is expressed as a Number of Times.

227

A Low Ratio indicates that the enterprise may not be able to meet its current liabilities on time. A High Ratio indicates that funds are not used efficiently. 2:1 is considered to be an ideal current ratio. Current Assets: Cash and Bank Balance, Debtors (After deducting provision), Bills Receivable, Stock, Marketable Securities, Prepaid Expenses etc. Current Liabilities: Creditors, Bills Payable, Bank Overdraft, Short-term Loans, Outstanding Expenses, provision for Tax, Unclaimed Dividend etc.

(ii) Quick Ratio or Liquid Ratio or Acid Test Ratio – It is the relationship between Current Assets and Current Liabilities of the Firm. Quick or Liquidity Ratio= Liquid Assets or Quick Assets / Current Liabilities Quick Assets=Current Assets - (Stock + Prepaid Expenses) It is expressed as a number of times. Higher the quick ratio shows better short-term financial position. A quick ratio of 1:1 is usually considered an ideal ratio.

(2) Solvency Ratios (i) Debt-Equity Ratio – This ratio shows long-term financial position and soundness of the firm. Debt-Equity Ratio = Debt (Long-term Loan) /Equity (Shareholders’ funds) Debt=long-term loans ,i.e., debenture loans (loan-term) form financial institutions. Equity = shareholders fund, i.e., preference share capital equity share capital, reserves less losses and fictitious assets like preliminary expenses. It is expressed as a number of times. A Higher ratio indicates a risky financial position while a lower ratio indicates safer financial position. Satisfactory ratio is 2:1. (ii) Total Assets to Debt Ratio Total Assets to Debt Ratio establishes a relationship between total assets and total longterm debts. Total Assets to Debt Ratio = Total Assets/Long-term Debts Total Assets: It includes both fixed and current assets, it does not include fictitious assets like preliminary expenses, discount on issue of shares/ debentures and debit balance of Profit and Loss Account. Long-term Debts: Long- term debts refers to debts that will mature after one year. It includes debentures, bonds and loans from financial institutions. 228

A Higher Ratio represents higher security to lenders for extending long-term loans to the business. On the other hand, a low ratio represents a risky financial position as it means that the business depends heavily on outside loans for its existence. (iii) Proprietary Ratio – Propriety Ratio establishes the relationship between proprietor’s funds and total assets. Proprietor’s funds means share capital plus reserves and surplus both of capital and revenue nature. Proprietary Ratio = Proprietor’s Funds or Shareholder’s Funds/Total Assets (Excluding Fictitious Assets) It is expressed as a number of times. A high ratio indicates adequate safety for creditors, on the other hand a low ratio indicates inadequate or low safety cover for the creditors Pureratiois2:l.

(3) Activity Ratios (i) Stock Turnover Ratio – Inventory Turnover Ratio relationship between the costs of goods sold and average stock. Inventory (Stock) Turnover Ratio = Cost of goods/Average stock or Inventory Cost of Goods Sold-Opening Stock + Purchases* Direct Expenses Closing Stock Or Cost of Goods Sold=Sales- Gross Profit. Average Stock or Inventory = (Opening Stock + Closing Stock)/2 It is expressed as a Number of Times. This ratio measures as to how7 quickly the inventory is sold. It provides a yardstick to judge the efficiency of inventory management. (ii) Debtors Turnover Ratio Debtors Turnover Ratio is relationship between net credit sales and average debtors (or receivables) of the year. Debtors Turnover Ratio=Net credit sales/Average accounts receivable (Debtors +Bill receivable) It is expressed as a number of times. A high ratio is better since it would indicate that debts are being collected more promptly. (iii) Creditors Turnover Ratio – Creditors Turnover Ratio is relationship between the credit purchases and average creditors plus average bills payable. Creditors Turnover Ratio = Credit Purchases/Average Creditors* Average Bills Payable

229

It is expressed as a number of times. A high creditor turnover ratio may indicate strict credit terms granted by the supplier A low ratio may be an indication of liberal credit terms granted by the supplier (iv) Working Capital Turnover Ratio – Working Capital Turnover Ratio relationship between working capital and sales. Working Capital Turnover Ratio = Sale/Working Capital Working Capital = Current Assets -Current Liabilities It is expressed as a number of times. A high ratio is considered better. (v) Fixed Assets Turnover Ratio – Fixed Assets Turnover Ratio is the relationship between Fixed Assets and Net Sales. Fixed Assets Turnover Ratio = Net sales/Net Fixed Assets Net fixed Assets = Fixed Assets - Depreciation It is expressed as a number of times. A high ratio indicates efficient utilization of fixed assets. (4) Profitability Ratios (i) Gross Profit Ratio - Gross profit Ratio is relationship of gross profit on sales to net sales of a firm, which is expressed in percentage. Gross Profit Ratio = Gross Profit /Net Sales x 100 Net Sale = Gross Sales (Cash + Credit) Sales Returns. (ii) Operating Ratio The Operating Ratio is relationship between operating costs and net sales. It is expressed in percentage Operating Ratio = (Cost of goods sold + Operating expenses)/Net sales X100 Or Operating Ratio = Operating cost/Net sales X100 Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses* Manufacturing Expenses Closing Stock Or Cost of Goods Sold=Sales -- Gross Profit. Operating Expenses -- Administrative Expenses + Selling and Distribution Expenses. (iii) Net Profit ratio It shows overall efficiency of the business. Higher the net profit ratio, better the business. Net Profit Ratio=Net profit/Net sales x 100 (iv) Return on investment or Return on Capital Employed 230

It judges the overall performance of the enterprise. It measures, how efficiently the sources entrusted to the business are used. ROI = Profit before interest, Tax and Dividend/Capital Employed x 100 Capital Employed= Share capital + Reserves +Long term loans -fictitious assets- Non- operating assets. (v) Earning Per Share This ratio helps in evaluating the market price of share in the light of profit earning capacity. This ratio is expressed as per share. Earning per Share = Net profit after tax - Preference Dividend/No of Equity shares (vi) Dividend Per Share This ratio is measure the dividend distribution per equity share. Higher the DPS better it is and vice-versa. This ratio is expressed as per share. DPS = Dividend Paid to Equity shareholders/No. of Equity shares (vii) Price Earning Ratio: This ratio is found out expectation of the shareholders. A high price earning ratio indicates investors’ faith instability and appreciation of company earnings. This ratio is expressed as number of times. Price Earning Ratio = Market price per share/Earning per share

CASH FLOW STATEMENTS Meaning Cash Flow Statement is a statement which shows inflows and outflows of cash and cash equivalent during a given period. Classification of Activities: While preparing the Cash Flow Statement according to AS-3 (Revised), the activities are classified into three groups: (i) Operating Activities; (ii) Investing Activities: and (iii) financing Activities. (i) Operating Activities: Operating Activities are the principle revenue- producing activities of the enterprise and other activities that are not investing or financing activities. (ii) Investing Activities: Investing Activities are the acquisition and disposal of long-term assets. (iii) Financing Activities: Financing Activities are activities that result in change in the size composition of the owners’ capital (including preference share capital in the case of a company) borrowings of the enterprise.

231

Format of Cash Flow Statement (Indirect Method)

`

Particulars A.

`

Cash flow from / (used in) Operating Activities: Net profit before Tax and extraordinary items Add: Noncash and non-operating items: Depreciation on fixed assets charged during the year

………… …………

Loss on sale of fixed assets and investments

………… Writing off fictitious and Intangible assets such as ………… preliminary Expenses, Discount on Issuer of Shares, Goodwill etc. Premium on Redemption of Debentures and Preference Shares Interest paid on Debentures and Long-term Loans

………… …………

Less: Non-Cash and Non-Operating Incomes: Profit on sale of fixed Assets and Investment

…………

…………

Interest Received Dividend Received

…………

Rent Received

…………

Operating profit before working capital changes

…………

Adjustment for change in Current Assets and Current ………… Liabilities ………… Add : Decrease in Current Assets (except cash and cash equivalents) Increase in Current Liabilities (except Bank Overdraft) Less: Increase in Current Assets (except cash and cash equivalents) ………… Decrease in Current Liabilities (except Bank overdraft)...... (.......) ………… Cash Generated from operations Less: income Tax paid

…………

Cash flow before Extraordinary items Add/ Less: Cash flow from Extraordinary items (.......) Net cash flow from (or used in) Operating Activities 232

…………

…………

B. Cash Flow from (used in) Investing Activities:

…………

Sale of long-term Investments Sale of Fixed Assets

…………

Interest Received Dividend Received Rent received

…………

Purchase of Fixed Assets

…………

Purchase of Long-Term Investments

…………

Net Cash Flow from /(used in) Investing Activities

…………

(C) Cash Flow from (/used in) Financing Activities:

…………

Proceeds from Issue of Shares

…………

Proceeds from Issue of Debentures

…………

Proceeds from Long-term Borrowings

…………

Repayments of Long-term Borrowings

…………

Interest paid Dividend paid

…………

Premium or Redemption of Debentures and Preference ………… Shares ………… Net cash from /(used in) Financing Activities ………… D. Net Increase (or decrease) in Cash and Cash ………… Equivalents (A+B+C ………… E. Cash and Cash Equivalents : Opening Balance ………… F. Cash and Cash Equivalents: Closing Balance(D-E) ………… ………… …………

233

…………

…………

…………

…………

Practical Implications of Revised Schedule VI on various Chapters of Class XII - Accountancy CBSE has released ‘Outline Guidance Notes regarding adoption of Revised Schedule VI to the Companies Act, 1956 in the subject of Accountancy – Effective for Board Examination, 2013’. It contains 11 practical illustrations pertaining to format of Revised Schedule VI and Comparative Statement of Profit and Loss. Besides this, an effort has been made here to illustrate the impact of Revised Schedule VI on various chapters of Class XII - Accountancy.

Chapter – Financial Statements of a Company Following examples are in addition to those given in the ‘Outline Guidance Notes’ issued by CBSE to avoid the duplication of the subject matter :Illustration – 1 State any five items which are shown under the heading ‘Reserves and Surplus’ in the Balance Sheet of a company as per revised Schedule VI to Companies Act, 1956. Solution – The items under the head, ‘Reserves and Surplus’ are now shown in ‘Notes to Accounts’ Notes to Accounts Reserves and Surplus

Rs.

Capital Reserves

......

Capital Redemption Reserve

......

Securities Premium A/c

......

Debenture Redemption Reserve

......

Revaluation Reserve

......

Statement of Profit and Loss (Dr./Cr. Balance)

......

Illustration – 2 How will you show the following items in the balance sheet of Rama Ltd. as on 31st March, 2013? i.

Company issued 10,000 equity shares of Rs. 100 each payable Rs. 50 on application and balance on allotment. Company received applications for 9,000 shares and company hopes to allot shares to all the applicants. 234

ii.

Issued 10% Debentures of Rs. 100 each for Rs. 6,00,000 which are redeemable in 3 equal annual installments commencing with this year.

iii.

Creditors for plant purchased Rs. 5,00,000 payable after 2 years

iv.

Provision for Tax for the year was Rs. 4,00,000 though as per tax authorities, the liability of tax comes to Rs. 3,00,000 only.

Solution – Balance Sheet of Rama Ltd. as at 31st March, 2013 Particulars

Note No.

Rs.

I Equity and Liabilities 1. Shareholders’ Fund

-

2. Share Application Money Pending Allotment

1

4,50,000

a) Long-term Borrowings

2

4,00,000

b) Deferred Tax Liability

3

1,00,000

c) Other Long-term Liabilities

4

5,00,000

c) Other Current Liabilities

5

2,00,000

d) Short-Term Provisions

6

3,00,000

3. Non-Current Liabilities

4. Current Liabilities.

Notes to Accounts

Rs.

Note No. 1 Share Applications Money Pending Allotment 9,000 Equity Shares of Rs. 100 each, Rs. 50 paid on application

4,50,000

Note No. 2 Long-term Borrowings 10% Debentures (2 installments)

4,00,000

Note No. 3 Deferred Tax Liability (Net) (Rs. 4,00,000 – Rs. 3,00,000 Provision for Tax

235

1,00,000

Note No. 4 Other long-term Liabilities Trade Payable for Plant

5,00,000

Note No. 5 Other Current Liabilities 10% Debentures (1 installment)

2,00,000

Note No. 6 Short-term Provisions Provision for Tax

3,00,000

Illustration – 3 Under what head and sub-head, the following items will appear in the balance sheet of a company as per schedule VI?:(i)

Profit & Loss (Dr) balance

(ii)

Raw material purchased

(iii)

Loss on Issue of Debentures

(iv)

Loan repayable on demand to Bank

(v)

Employees earned leaves payable on retirement

(vi)

Bonus payable to employees

(vii)

Employees earned leaves encashable

(viii) Proposed Dividend (ix)

Uncalled liability on partly paid shares purchased

(x)

Security Deposit

Solution S. No.

Items

Headings

Sub-headings

(i)

Profit & Loss (Dr)balance

Shareholders’ Fund

Reserves & Surplus

(ii)

Raw material purchased

Current Assets

Inventories

(iii)

Loss on Issue of Debentures

Current/Non-Current Assets

* Other Current/NonCurrent Assets

* Unamortised expenses depending on whether they will be amortised within 12 months or thereafter. 236

Current Liabilities

Short-Term borrowings

(iv)

Loan repayable on demand to Bank

(v)

Employees earned leaves payable on Non-Current Liabilities retirement

(vi)

Bonus payable to employees

Current Liabilities

Short-Term Provisions

(vii)

Employees earned leaves encashable Current Liabilities

Short-Term Provisions

(viii)

Proposed Dividend

Current Liabilities

Short-Term Provisions

(ix)

Uncalled liability on partly paid Contingent Liability & Below the Balance Sheet as commitments Commitments shares purchased

(x)

Security Deposit

Non-Current Assets

Long-Term Provisions

Long-term Advances

Loans

&

Illustration – 4 Under what heading and sub-heading will you show the following items in the Balance Sheet of a Company as per Revised Schedule VI? (i)

Building

(ii)

Computer Software

(iii)

Provident Fund

(iv)

Creditors and B/P

(v)

Calls-in-Arrears

(vi)

Calls-in-Advance

(vii)

Debtors and B/R

(viii) Goods in Transit (ix)

Bank Deposit for more than 12 months

(x)

Investment in Property

Solution S. No.

Items

Headings

Sub-headings

(i)

Building

Non-Current Assets

Fixed Assets - Tangible

(ii)

Computer Software

Non-Current Assets

Fixed Assets - Intangible

(iii)

Provident Fund

Non-Current Liabilities

Other Liabilities

237

long-term

(iv)

Creditors and B/P

Current Liabilities

Trade Payables

(v)

Calls-in-Arrears

Shareholders’ Fund

Deduction from share capital in notes to A/cs

(vi)

Calls-in-Advance

Current Liabilities

Other current liabilities

(vii)

Debtors and B/R

Current Assets

Trade Receivables

(viii)

Goods in Transit

Current Assets

Inventories

(ix)

Bank Deposit for more than 12 Current Assets months

(x)

Investment in Property

Cash & Cash equivalents in Notes

Non-Current Assets

Non-current investments

Chapter - Comparative Statements Illustration 5 Prepare Comparative Balance Sheet of Delta Ltd. from the following information as on 31st March 2011 and 2012:Particulars

31-3-2011

31-3-2012

Rs.

Rs.

I Equity and Liabilities 1. Shareholders’ Fund a) Share Capital

8,00,000

10,00,000

b) Reserves & Surplus

3,00,000

4,50,000

c) Money received against Share Warrants

1,00,000

1,00,000

Long-Term Borrowings (Debentures)

5,00,000

7,00,000

Other Long-term Liabilities

1,00,000

1,40,000

Trade Payables

2,50,000

3,60,000

Short-Term Provisions

1,50,000

2,50,000

22,00,000

30,00,000

2. Non-Current Liabilities

3. Current Liabilities

238

II Assets 1. Non-Current Assets Fixed Assets i)

Tangible

9,00,000

11,00,000

ii)

Intangibles

1,00,000

2,30,000

Non-Current Investments

3,00,000

4,50,000

Inventories

3,50,000

5,00,000

Trade Receivables

5,00,000

6,80,000

50,000

40,000

22,00,000

30,00,000

2. Current Assets

Other Current Assets

Solution: Comparative Balance Sheet of Delta Ltd. as on 31st March, 2011 and 2012 Particulars

31-3-2011

31-3-2012

Rs.

Rs.

Absolute Change Rs.

Percentag e change (%)

I Equity and Liabilities 1. Shareholders’ Fund a) Share Capital

8,00,000

10,00,000

2,00,000

25%

b) Reserves & Surplus

3,00,000

4,50,000

1,50,000

50%

c) Money received against Share Warrants

1,00,000

1,00,000

Long-term Borrowings (Debentures)

5,00,000

7,00,000

2,00,000

40%

Other Long-term Liabilities

1,00,000

1,40,000

40,000

40%

Trade Payables

2,50,000

3,60,000

1,10,000

44%

Short-term Provisions

1,50,000

2,50,000

1,00,000

66.67%

22,00,000

30,00,000

8,00,000

36.36%

-

-

2. Non-Current Liabilities

3. Current Liabilities

239

II Assets 1. Non-Current Assets Fixed Assets i.

Tangible

9,00,000

11,00,000

2,00,000

22.22%

ii.

Intangibles

1,00,000

2,30,000

1,30,000

130%

Non-Current Investments

3,00,000

4,50,000

1,50,000

50%

Inventories

3,50,000

5,00,000

1,50,000

42.86%

Trade Receivables

5,00,000

6,80,000

1,80,000

36%

50,000

40,000

-(10,000)

-20%

22,00,000

30,00,000

8,00,000

36.36%

2. Current Assets

Other Current Assets

Illustration – 6 Prepare Comparative Income Statement of X Ltd. from the following information:-

Particulars

Revenue from Operations Expenses:-

31-3-2011

31-3-2012

Rs.

Rs.

20,00,000

30,00,000

6,00,000

10,70,000

+1,00,000

(-)(50,000)

3,00,000

6,50,000

50,000

80,000

Other Expenses

2,50,000

4,50,000

Total Expenses

13,00,000

22,00,000

2,00,000

2,50,000

50%

50%

Purchase of Stock-in-Trade Change in Inventories Employee Benefits Expenses Depreciation

Other Income Tax Rate

Note – (-) represent negative figure.

240

Solution Comparative Income Statement of X Ltd. for the year ending 31-03-12 Particulars

I.

Revenue from Operations

II. Other Income III. Total Income (I+II)

31-3-2011

31-3-2012

Rs.

Rs.

20,00,000 2,00,000 22,00,000

Absolute Change Rs.

Percentage change %

30,00,000 10,00,000

50%

2,50,000

50,000

32,50,000 10,50,000

25% 47.73%

IV. Expenses: Purchase of Stock

6,00,000

10,70,000

Change in Inventories

1,00,000

(50,000)

3,20,000

45.7%

Employee Benefit Expenses

3,00,000

6,50,000

3,50,000

116.6%

50,000

80,000

Other Expenses

2,50,000

Total Expenses

Depreciation

30,000

60%

4,50,000

2,00,000

80%

13,00,000

22,00,000

9,00,000

69.23%

V. Profit Before Tax (III-IV)

9,00,000

10,50,000

1,50,000

16.67%

VI. Less : Tax @ 50%

4,50,000

5,25,000

75,000

16.67%

VII.Profit after Tax

4,50,000

5,25,000

75,000

16.67%

Comments 1. Revenue from operation during the year has increased by 50% while total expenses have gone up by 69.23%. The management should exercise control on employee benefit expenses which have gone up by 116.6%. Similarly other expenses have also gone up by 80% so it requires to be controlled in future. 2. Other income has gone up by 25% during the period under study which is quite good. 3. The disproportionate increase in employee benefit expenses and other expenses have resulted in increase in profit before tax by 16.67% only.

241

Chapter - Common Size Statements Illustration 7 Prepare Common Size Balance Sheet of Roma Ltd. from the following Balance Sheet:Particulars

31-3-2011

31-3-2012

Rs.

Rs.

a) Share Capital

5,00,000

6,00,000

b) Reserves & Surplus

1,00,000

1,50,000

3,20,000

3,50,000

Trade Payables

70,000

80,000

Short-Term Provisions

10,000

20,000

10,00,000

12,00,000

Fixed Assets

5,00,000

6,50,000

Intangibles

1,00,000

1,00,000

Inventories

2,00,000

2,10,000

Trade Receivables

1,50,000

1,70,000

50,000

70,000

10,00,000

12,00,000

I Equity and Liabilities 1. Shareholders’ Fund

2. Non-Current Liabilities Long-term borrowings (Debentures) 3. Current Liabilities

II Assets 1. Non-Current Assets

2. Current Assets

Cash & Cash Equivalent

242

Solution: Common Size Balance Sheet of Roma Ltd. as on 31st March, 2011 and 2012 Particulars

Absolute Amount 2011

2012

Rs.

Rs.

Percentage to B/S Total 2011

2012

I Equity and Liabilities 1. Shareholders’ Fund Share Capital

5,00,000

6,00,000

50%

50%

Reserves & Surplus

1,00,000

1,50,000

10%

12.5%

6,00,000

7,50,000

60%

62.5%

3,20,000

3,50,000

32%

29.17%

Trade Payables

70,000

80,000

7%

6.67%

Short-term Provisions

10,000

20,000

1%

1.67%

Total

80,000

1,00,000

8%

8.33%

10,00,000 12,00,000

100%

100%

2. Non-Current Liabilities Long-term Borrowings (Debentures) 3. Current Liabilities

Total of Balance Sheet (1+2+3) II Assets 1. Non-Current Assets Fixed Assets

5,00,000

6,50,000

50%

54.17%

Investments

1,00,000

1,00,000

10%

8.33%

Total

6,00,000

7,50,000

60%

62.50%

Inventories

2,00,000

2,10,000

20%

17.5%

Trade Receivables

1,50,000

1,70,000

15%

14.17%

50,000

70,000

5%

5.83%

4,00,000

4,50,000

40%

37.5%

10,00,000 12,00,000

100%

100%

2. Current Assets

Cash & Cash Equivalent

Total of Balance Sheet (1+2)

243

Illustration – 8 Prepare Common Size Statement of Profit and Loss of Beta Ltd. from the following information:-

Particulars

31-3-2011

31-3-2012

Rs.

Rs.

Revenue from operation

15,00,000

22,00,000

70%

74%

Expenses (%of Revenue from operation) Tax Rate @ 40%

Solution: Common Size Statement of Profit & Loss for the year ended 31st March, 2011 & 2012 Particulars

Absolute Amount

2011

2012

Rs.

Rs.

Percentage of Revenue from operation 2011

2012

A. Revenue from operation

15,00,000 22,00,000

100%

100%

B. Less : Expenses

10,50,000 16,28,000

70%

74%

C. Profit before Tax (A-B)

4,50,000

5,72,000

30%

26%

D. Less : Tax @ 40%

1,80,000

2,28,800

12%

10.4%

E. Profit after Tax (C-D)

2,70,000

3,43,200

18%

15.6%

Chapter – Ratio Analysis Here, we are discussing specific questions based on balance sheet only as per revised schedule VI to demonstrate the impact of revised schedule VI on formulae of Ratio Analysis and their computation. However, the formulae will not change if factual information is not given in Balance Sheet form.

244

Illustration – 9 From the following Balance Sheet of Z Ltd. as on 31st December, 2012. Calculate Liquidity Ratios and Debt-Equity Ratio. Particulars I.

Rs.

Equity and Liabilities 1. Shareholders’ Fund Share Capital

4,00,000

Reserves and Surplus

1,75,000

2. Non-Current Liabilities Long-term Borrowings

1,50,000

3. Current Liabilities Trade Payables

1,40,000

Other Current Liabilities

10,000

Short-term Provisions

25,000 9,00,000

II.

Assets 1. Non-Current Assets Fixed Assets

3,60,000

Investments

1,00,000

Other Non-current Assets (Unamortized expenses)

30,000

2. Current Asset Current Investments

80,000

Inventories

1,50,000

Trade Receivables

1,20,000

Cash & Cash Equivalents

50,000

Other Current Assets (Unamortized expenses)

10,000 9,00,000

245

Solution Liquidity Ratio include – (i) Current Ratio and (ii) Liquid Ratio 1. Current Ratio

=

=

=

=

2. Liquid Ratio =

=

=

=

=

Current Assets Current Liabilities

Current Assets – Other Current Assets (Unamortized expenses) Current Liabilities

(80,000 + 1,50,000 + 1,20,000 + 50,000 + 10,000) – 10,000 1,40,000 + 10,000 + 25,000

4,10,000 – 10,000 1,75,000

4,00,000 1,75,000

= 2.28 : 1

Liquid Assets Current Liabilities

Current Investments * + Trade Receivables + Cash & Cash Equivalents Current Liabilities

80,000 + 1,20,000 + 50,000 1,75,000

2,50,000 1,75,000

= 1.43 : 1

* Current Investments have been considered as Marketable Securities.

246

3. Debt-Equity Ratio

=

Long-term Loans Shareholders' Funds

where Shareholders’ Fund = (Share Capital + Reserves & Surplus + Money Received against share warrants) – other current /other non-current Assets (Unamortised expenses) = (4,00,000 + 1,75,000) – (30,000 + 10,000) = 5,75,000 – 40,000 = Rs. 5,35,000

Debt-Equity Ratio

=

1,50,000 5,35,000

= .28 : 1

Illustration – 10 From the following Balance Sheet of Alpha Ltd. for the year ended 31st March, 2012, compute (i) Debt-Equity Ratio (ii) Proprietary Ratio (iii) Total Assets to Debt Ratio and (iv) Current Ratio

Particulars I.

Rs. Equity and Liabilities 1. Shareholders’ Fund Share Capital

3,50,000

Reserves & Surplus

1,50,000

2. Application Money Pending Allotment

1,00,000

3. Non-Current Liabilities Long-term Borrowings

3,70,000

4. Current Liabilities Trade Payables

1,30,000 11,00,000

II.

Assets 1. Non-Current Assets Fixed Assets

6,00,000 247

Investments

1,00,000

Other Non-Current Assets (Unamortised expenses)

20,000

2. Current Assets Inventories

1,20,000

Trade Receivables

1,30,000

Cash and Cash Equivalents

1,20,000

Other Current Assets (Unamortised expenses)

10,000 11,00,000

Solution 1. Debt-Equity Ratio

=

Long-Term Loans Shareholders' Fund

where Shareholders’ Fund = Share Capital + Reserves & Surplus – Other Current /NonCurrent Assets (Unamortised expenses) = 3,50,000 + 1,50,000 – (20,000 + 10,000) = Rs. 4,70,000

 Debt-Equity Ratio =

2. Proprietary Ratio

=

,

,

,

,

= 0.787 : 1

Shareholders' Fund Total Assets

where Total Asset = Non-Current Assets + Current Assets – Other Current/ Non-Current Assets (Unamortised expenses) = 7,20,000 + 3,80,000 – (20,000 + 10,000) = 11,00,000 – 30,000 = 10,70,000

 Proprietary Ratio =

,

, ,

,

= 0.439 : 1 or 43.9 %

248

3. Total Assets to Debt Ratio =

4. Current Ratio

=

Total Assets Long-term Debts

=

10,70,000 3,70,000

= 2.89 : 1

Current Assets Current Liabilities

where Current Asset = Current Assets -(Other Current Assets (Unamortised expenses) – Cash & Cash Equivalent (Application Money Pending Allotment) = 3,80,000 – (10,000) – (1,00,000) = Rs. 2,70,000

 Current Ratio =

,

,

,

,

= 2.07 : 1

Note – Cash & Cash Equivalent includes “Application Money Pending Allotment”. This money is deposited in a separate scheduled bank as per provisions of Companies Act, 1956 and is not available for general use till the allotment of shares is made.

Illustration – 11 Following is the Balance Sheet of X Ltd. as on 31st December, 2012 Particulars I.

Rs. Equity and Liabilities 1. Shareholders’ Fund Share Capital

3,00,000

Reserves & Surplus

1,00,000

2. Non-Current Liabilities Long-term Borrowings

3,50,000

3. Current Liabilities Trade Payables

1,80,000

Short-term Provisions

70,000 10,00,000 249

II.

Assets 1. Non-Current Assets Fixed Assets

6,00,000

Other Non-Current Assets (Unamortised expenses)

30,000

2. Current Assets Current Investments

50,000

Inventories

1,20,000

Trade Receivables

1,10,000

Cash and Cash Equivalents

80,000

Other Current Assets (Unamortised expenses)

10,000 10,00,000

Sales during year amounted to Rs. 9,60,000 Calculate (i)

Working Capital Turnover Ratio

(ii)

Debt-Equity Ratio

Solution 1. Working Capital Turnover Ratio

a) Current Assets

=

Net Sales Net Working Capital

=

Current Investment + Inventories + Trade Receivable + Cash & Cash Equivalent

=

Rs. 50,000 + 1,20,000 + 1,10,000 + 80,000 = Rs. 3,60,000 OR Current Assets – Other Current Assets (unamortised expenses)

=

b) Current Liabilities = =

Rs. 3,70,000 – 10,000 = Rs. 3,60,000

Trade Payable + Short-term Provisions Rs. 1,80,000 + 70,000 = 2,50,000 250

c) Net Working Capital =

Current Assets – Current Liabilities

=

Rs. 3,60,000 – 2,50,000 = 1,10,000

Working Capital Turnover Ratio =

2. Debt-Equity Ratio

. ,

,

.

,

,

= 8.72 Times

=

where Shareholders’ Fund =

Debt-Equity Ratio

Shareholders’ Fund – Other Current/Other Non-Current Assets (Unamortised expenses)

=

4,00,000 – (10,000 + 30,000)

=

Rs. 3,60,000

=

.

,

,

.

,

,

= 0.97 : 1

Illustration – 12 Calculate Return on Investment from the following Balance Sheet of Brown Ltd. as on 31-3-2012 Particulars I.

Rs. Equity and Liabilities 1. Shareholders’ Fund Share Capital

4,00,000

Reserves and Surplus

3,00,000

2. Non-Current Liabilities Long-term Borrowings 8%

5,00,000

3. Current Liabilities

4,00,000 16,00,000 251

II.

Assets 1. Non-Current Assets Fixed Assets

9,00,000

10% Investments

1,50,000

Other Non-Current Assets (Unamortised expenses) 2. Current Assets

40,000 5,10,000

(including unamortised expenses Rs. 10,000) 16,00,000 Profit before tax is Rs. 1,50,000

Solution Return on Investment (ROI) =

Pro it before Interest & Tax × 100 Capital Employed

where 1. Profit before Tax (means profit after Interest on long-term borrowings) Add : Interest on long-term borrowings (8% on Rs. 5,00,000)

1,50,000 40,000 1,90,000

Less : Interest on Investments (10% on 1,50,000) Profit before Interest & Tax

2. Capital Employed

15,000 1,75,000

=

Shareholders’ Fund + Non-Current Liabilities – 10% Investment – Other Current/Other Non-Current Assets (Unamortised expenses)

=

Rs. 7,00,000 + 5,00,000 – 1,50,000 – (40,000 + 10,000)

=

Rs. 10,00,000 OR

Capital Employed

=

Non-Current Assets + Working Capital (i.e. Current Assets – Current Liabilities) – Investments – Other Current/Non-Current Assets (unamortised expenses)

252

ROI

=

Rs. 10,90,000 + (5,10,000 – 4,00,000) – 1,50,000 – (40,000+10,000)

=

Rs. 10,90,000 + 1,10,000 – 1,50,000 – 50,000

=

Rs. 10,00,000 . ,

=

=

.

, ,

,

× 100

17.5%

Note – 10% Investment is a non-operating asset.

Based on Cash Flow Statement Illustration -13 Prepare Cash Flow Statement of Z Ltd. from the following Balance Sheets:Particulars

I.

31-3-2011

31-3-2012

Rs.

Rs.

3,00,000

4,00,000

35,000

55,000

70,000

90,000

Trade Payables

95,000

1,13,000

Short-Term Provisions (for Tax)

22,000

32,000

5,22,000

6,90,000

1,12,000

1,95,000

70,000

50,000

Equity and Liabilities 1. Shareholders’ Fund Share Capital Reserves & Surplus 2. Non-Current Liabilities Long-term borrowings 3. Current Liabilities

II. Assets 1. Non-Current Assets Fixed Assets i)

Tangible - Plant

ii)

Intangibles – Goodwill 253

1,50,000

1,85,000

10,000

5,000

Current Investments (marketable securities)

14,000

46,000

Inventories

40,000

70,000

Trade Receivables

80,000

90,000

Cash & Cash Equivalent

36,000

44,000

Other Current Assets (unamortised expenses)

10,000

5,000

5,22,000

6,90,000

Investments Other Non-Current Assets (unamortised expenses) 3. Current Assets

Other Informations were :i)

Interest paid on borrowing was Rs. 7,000

ii)

Depreciation charged was Rs. 11,000

iii)

Interest received on Investment was Rs. 5,000

Solution Cash Flow Statement (Indirect Method) for the year ended 31st March, 2012 S. Particulars No. A.

Detail

Amount

(Rs.)

(Rs.)

Cash Flow from Operating Activities :Net Profit before tax & extra ordinary items: Reserves & Surplus (Rs. 55,000 – 35,000)

20,000

Add : Provision for Tax

32,000 52,000

Adjustments for :Add :

Goodwill written off

20,000

Depreciation

11,000

Unamortised expenses

10,000

(Other Current/Other Non-Current Assets) 254

(5,000 + 5,000) Interest Paid on Loan

7,000 1,00,000

Less :

Interest on Investment

5,000

Operating Profit before Working Capital Changes Add :

Increase in Current Liabilities Trade Payables

Less :

95,000

18,000

Increase in Current Assets Inventories

30,000

Trade Receivables

10,000

1,13,000

(40,000) 73,000

B.

Less : Payment of Tax (2011)

22,000

Net Cash from Operating Activities

51,000

Cash Flow from Investing Activities Interest received on Investments

5,000

Purchase of Plant

(94,000)

Purchase of Investments

(35,000)

Total

C.

(1,24,000)

(1,24,000)

Cash Flow from Financing Activities Issue of Share Capital

1,00,000

Issue of Long-term Loan

20,000

Interest paid on Loan

(7,000) 1,13,000

D.

51,000

1,13,000

Net Increase in Cash & Cash Equivalents (A+B+C)

40,000

Cash & Cash Equivalent : Opening Balance

50,000

Cash & Cash Equivalent : Closing Balance

90,000

255

Note : Marketable securities is a part of cash equivalent. Plants A/c To Balance b/d

1,12,000 By Depreciation

To Cash (Purchase)

11,000

94,000 By Balance c/d

1,95,000

2,06,000

2,06,000

Provision for Tax A/c To Cash

22,000 By Balance b/d

22,000

To Balance c/d

32,000 By Statement of P&L

32,000

54,000

54,000

Illustration -14 Prepare Cash Flow Statement from the following Balance Sheets:Particulars

31-3-2011

31-3-2012

Rs.

Rs.

1,50,000

2,00,000

Reserves & Surplus

45,000

1,00,000

Money Received against share warrants

50,000

-

20,000

-

55,000

60,000

-

5,000

20,000

25,000

3,40,000

3,90,000

1,95,000

2,33,000

10,000

5,000

I. Equity and Liabilities 1. Shareholders’ Fund Share Capital

2. Non-Current Liabilities Long-term borrowings (10% Loans) 3. Current Liabilities Trade Payables Other Current Liabilities (unclaimed dividend) Short-Term Provisions (Provision for Tax)

II. Assets 1. Non-Current Assets Fixed Assets (Plants) Other Non-Current Assets (umamortised expenses)

256

2. Current Assets Inventories

50,000

60,000

Trade Receivables

70,000

65,000

Cash & Cash Equivalent

10,000

22,000

5,000

5,000

3,40,000

3,90,000

Other Current Assets (unamortised expenses)

Additional Information:i)

Depreciation Rs. 20,000

ii)

Interim Dividend @ 10%

iii)

Tax Paid during year Rs. 18,000

iv)

Share Warrants were converted into share capital as on 1st April, 2012

Solution: Cash Flow Statement (Indirect Method) for the year ended 31st March, 2012 S. Particulars No. A.

Detail

Amount

(Rs.)

(Rs.)

Cash Flow from Operating Activities :Net Profit before tax & extra ordinary items: Profit (Rs. 1,00,000 – 45,000)

55,000

Add : Interim Dividend

20,000

Add : Provision for Tax

23,000 98,000

Adjustments for :Add :

Depreciation

20,000

Unamortised expenses

5,000

Operating Profit before Working Capital Changes : Add :

1,23,000

Decrease in Current Assets Trade Receivables

5,000 257

Increase in Current Liabilities Trade Payables

5,000 1,33,000

Less :

Increase in Current Assets (Inventories)

(10,000)

Inventories (10,000)

1,23,000

Tax paid (given)

(18,000)

Net Cash from operating activities

1,05,000

1,05,000

(58,000)

(58,000)

Less :

B.

Cash Flow from Investing Activities Plant Purchased

C.

Cash Flow from Financing Activities 10% Loan Paid

(20,000)

Interim Dividend Paid (Rs. 20,000 – 5,000 unclaimed)

(15,000) (35,000)

(35,000)

D.

Net Increase in Cash & Cash Equivalents (A+B+C)

12,000

E.

Cash & Cash Equivalent : Opening

10,000

F.

Cash & Cash Equivalent : Closing

22,000

Note – 1. Share Warrants have been converted into share capital. So it is neither inflow nor outflow of cash. Provision for Tax A/c To Cash (Tax Paid)

18,000 By Balance b/d

20,000

To Balance c/d

25,000 By P & L A/c (Prov.)

23,000

43,000

43,000

Plant A/c To Balance b/d To Cash (Purchased) (Bal fig.)

1,95,000 By Depreciation A/c 58,000 By Balance c/d 2,53,000

20,000 2,33,000 2,53,000

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Based on Issue of Share Capital (Presentation of Balance Sheet only) Illustration – 15 Mona Ltd. issued 25,000 shares of Rs. 10 each at a discount of 10% payable Rs. 3 on application; Rs. 4 on allotment and Rs. 2 on first and final call. Company received application for 23,000 shares and all of these were accepted. All money is duly received. Show these informations in the Balance Sheet of the Company. Solution – Balance Sheet of Mona Ltd. as at 31st March, 2012 (assumed) Particulars

Note No.

Amount Rs.

I. Equity and Liabilities 1

1. Shareholders’ Fund

2,30,000

II. Assets 2

1. Non-Current Assets Other Non-Current Assets

23,000

2. Current Assets Cash & Cash Equivalent

3

2,07,000 2,30,000

Notes to Accounts Note No. 1 Share Capital Authorised Capital ___ shares of Rs. 10 each Issued Capital 25,000 shares of Rs. 10 each

2,50,000

Subscribed and Fully paid 23,000 shares of Rs. 10 each

2,30,000 259

Note No. 2 Other Non-Current Assets Unamortised expenses

23,000

Note No. 3 Cash and Cash Equivalent Cash at Bank

2,07,000

Illustration – 16 A Ltd. issued 20,000 shares of Rs. 10 each at a premium of 10% payable Rs. 2 on application; Rs. 4 on allotment (including premium); Rs. 3 on first call and Rs. 2 on final call. All the shares were subscribed, allotted and both the calls were made. A holder of 400 shares did not pay final call while another holder of 500 shares paid the entire sum on allotment. Company also issued 10,000 shares of Rs. 10 each against purchase of plant from Raja & Co. for Rs. 1,00,000. Show these informations in the Balance Sheet of the Company. Solution – Balance Sheet of Mona Ltd. as at 31st March, 2012 (assumed) Particulars

Note No.

Amount Rs.

I.

Equity and Liabilities 1. Shareholders’ Fund Share Capital

1

2,99,200

Reserves & Surplus

2

20,000 3,19,200

II. Assets 1. Non-Current Assets Fixed Assets

3 260

1,00,000

2. Current Assets Cash & Cash Equivalent

4

2,19,200 3,19,200

Notes to Accounts Note No. 1 Share Capital Issued Capital 30,000 shares of Rs. 10 each

3,00,000

Subscribed and Fully paid 10,000 shares of Rs. 10 each each issued against purchase of plant

1,00,000

Subscribed but not fully paid 20,000 shares of Rs. 10 each Less : Calls in Arrears (400 @ Rs. 2)

2,00,000 800

1,99,200 2,99,200

Note No. 2 Reserves & Surplus Securities Premium A/c

20,000

Note No. 3 Fixed Assets – Tangible (Plant)

1,00,000

Note No. 4 Cash & Cash Equivalent Cash at Bank

2,19,200

261

Based on Debentures (Presentation of B/S) Illustration – 17 X Ltd. had Rs. 12,00,000; 11% Debentures outstanding on 1st April 2011. During the year, it took loan at Rs. 4 each from Dena Bank for which it deposited debentures of Rs. 5 lakh as collateral security. How these transactions will appear in the Balance Sheet of the company?

Solution – Balance Sheet of Mona Ltd. as at 31st March, 2012 (assumed) Particulars

Note No.

Amount Rs.

I.

Equity and Liabilities Non-Current Liabilities Long-term Borrowings

1

16,00,000

Notes to Accounts Note No. 1 Long-term Borrowings 11% Debentures Less : Debenture Suspense A/c

17,00,000 5,00,000

Bank Loan (on collateral security of Rs. 5 lakh Debentures)

12,00,000 4,00,00 16,00,000

262

Illustration – 18 Give two examples each of contingent liabilities and commitments. Solution – Contingent Liabilities 1. Claim against company not acknowledged as debt 2. Case of bonus pending in Court

Commitments 1. Uncalled liability on partly paid shares purchased 2. Dividend payable on cumulative preference shares.

263

Project Work in Commerce Group Project Work In Business Studies And Accountancy Abstract Project work has been part of curriculum of Business Studies for class XI and in Accountancy for Class XII. From this session 2011-12 CBSE has introduced project work in Accountancy for Class XI and Business Studies for class XII (session 2012-13). But it has not been taken up as seriously and methodically as it should be done to bring out desirable behavioral/constructive outcomes. If planned and executed methodically it is a source of joyful learning and brings a long lasting benefit. In our classes, taking up Individual Projects are regular feature but Group Projects have been neglected. Group projects should be taken up seriously for desirable outcomes of Cooperative and Team Learning. The present write –up gives you insights as to how this can be taken up and executed in the areas of both Business Studies and Accountancy effectively.

Introduction Project work is an important component of curriculum of Business Studies and Accountancy. Let us first look at the prescribed components of the syllabi in these two subjects before discussing how group projects can be used in the curriculum transaction.

Why Group Project Work? Group project work fulfills certain important educational objectives namely 1.

It teaches the value of team work which a pupil does not learn otherwise. Teamwork is very important for any success in the present times.

2.

It develops cooperative learning.

3.

Leadership skills take shape.

4.

Communication skills are developed.

5.

Conflict resolution and managing disagreements is also inculcated.

6.

It enables student of different abilities to work together to complete a given task

264

Steps In Group Project Work Group project work can be organized by taking the following steps: 1.

Formation of groups: These can be formed on any basis like on the basis of roll numbers, by student themselves out of their own choice, by common interest of students or on any other suitable basis.

2.

Assignment of project to the group.

3.

Project planning.

4.

Assigning task to individual student by the group leader.

5.

Work by each team member.

6.

Peer review of the work.

7.

Improving the work after peer review.

8.

Finalization of the project work.

9.

Presentation of results by the team and review by the teacher and the entire class.

Curriculum ACCOUNTANCY (CLASS XI) Unit 12: Project Work (Any One)

Periods- 22, Marks-10

1. Collection of Source Documents, Preparation of Vouchers, Recording of Transactions with the help of vouchers. 2. Preparation of Bank Reconciliation Statement with the help of given Cash book and Pass book. 3. Project Work on any Windows based Accounting package: Installing & starting the package, setting up a new Company, Setting up account heads, voucher entry, viewing and editing data. ACCOUNTANCY (CLASS XII) In this component of curriculum two units namely Ratio Analysis and Cash Flow Statement are covered. It carries a weightage of 20 marks break up of which is as under:1. Marks for Report File = 2. Marks for Viva 3. Written examination

04

= 04 = 12

265

I BUSINESS STUDIES

CLASS XI

10 Marks

The project work consists of Projects such as: 1.

Auxiliaries to Trade: Find out the names of five companies each related to different auxiliaries, i.e. Banking, Insurance, Warehousing, Transportation, Communication and Advertising from real life.

2.

Cooperative Society: Find out names of five different types of Co-operative Societies around you. Also give details of business activities of any one of them.

3.

Private, Public and Global Enterprises: Give five names each of different types of Public Sector enterprises (including all 3 types), Global enterprises, Joint Ventures and Public Private Partnerships. Also give details of business activities of any one of them.

4.

Banking-SB Account: Visit a nearby bank to find out the procedure for opening a Saving Bank Account. Collect the required documents and prepare a report on the same.

5.

Banking-Remittance: Visit a bank and remit Rs. 100 to any of your relatives. Write the formalities completed by you for the same.

6.

E-Banking: Write the procedure for transferring funds through RTGS or NEFT.

7.

External Trade: Imagine yourself to be an exporter or importer. Collect documents used in your trade. Fill them up and present in a file.

8.

Insurance: Compare life insurance policies targeting children of any two insurance companies.

9.

Social Responsibilities: Select any two companies/firms and give an account of the steps taken by them for discharging their social responsibilities.

II

BUSINESS STUDIES-

CLASS XII

10 MARKS

1.

Consumer Protection: File at least 10 complaints of consumer exploitation of different types (defective goods and deficient services). Also, mention the decisions thereof.

2.

Marketing-Objectionable Advertisements: Collect information related to five objectionable advertisements presented through any media and explains the objections.

3.

Marketing-Useful Advertisements: Collect five printed advertisements and interpret their message.

4.

Marketing-Physical Distribution: Observe the marketing plan of any two companies and find the levels adopted by them for distribution of their products.

266

5.

Consumer Protection- Role of NGO’s: As a consumer, contact an NGO for a complaint against any defective good or deficient service and report the assistance provided by them.

6.

Marketing- Sales Promotion: Select any two famous firms/companies and find out the sales promotion techniques generally adopted by them.

Group Project Work In Business Studies In Business Studies Project Work can be made very interesting if group method is used. One of the benefits is that the group project work covers a larger area. Let us take the example of group project work on Insurance. The work can be assigned to the group as under to cover the following topics assigning one to each member of the group:1.

General Principles of Insurance and need for Insurance

2.

Life Insurance: - Types of life insurance policies and their salient features.

3.

Comparison of policies offered by LIC and other companies.

4.

Fire Insurance

5.

Marine Insurance

6.

Careers in Insurance Industry

7.

Role of IRDA (Insurance Regulatory and Development Authority) in regulating and promoting Insurance business in India.

8.

Insurance Planning for a family: - How much Insurance does one need and how to decide on the same for different types of Insurance -Life and General. It is evident that this group project will cover nearly all aspects of Insurance. When the project is presented to the entire class is done then it should result in a fairly comprehensive understanding of the topic.

Group Project Work In Accountancy In accountancy also group project work can result in all the benefits listed above. Let us take an example of ‘COLLECTION OF SOURCE DOCUMENTS, PREPARATION OF VOUCHERS AND RECORDING OF TRANSACTIONS WITH THE HELP OF VOUCHERS’. The task can be divided among the students as under:1.

Collection of source documents related to Bank like Pass book, pay in slips and cheques etc. 267

2.

Collection of other source documents like cash memos, Invoices, debit note, credit notes, railway receipts and delivery challans etc.

3.

Collection of blank accounting vouchers- debit voucher, credit voucher and transfer vouchers

4.

Model transactions of banks on source documents.

5.

Model transactions on other source documents like cash memos. Invoices, debit and credit notes.

6.

Preparation of accounting vouchers based on source documents.

7.

Recording of transactions based on accounting vouchers. Thus we can notice that seven students can be assigned tasks in this group project. More students can be associated with presentation of the results and class discussion at that stage. This will result in constructivist and experiential learning where the students would be benefitted the most.

Precautions To Make Group Project Work Successful Students get many benefits when working in groups. But it is also essential to take some steps to make the group project work successful. Some of them are:1.

Discuss the skills needed to work in groups with the students like listening skills, being tolerant to other members of the group and managing disagreements etc.

2.

The method of grading the project should also be made clear to the students.

3.

Give time to the members of groups to meet together and plan their work, discuss their roles etc. This will increase their cohesiveness and increase coordination.

4.

If there are some problems in the group then they can be redesigned by transferring the students to other groups etc. This flexibility will increase group effectiveness.

5.

If the group members develop enough understanding then they can be used or other constructivist curriculum transaction activities also like discussing a case study in Business Studies and presenting the solution in class, group tests and group problem solving etc. All this will make teaching learning process more joyful and effective.

Evaluating And Grading A Group Project The work of each student needs to be assessed and also the work of a group as a whole should be evaluated. This can be done by various ways and a combination thereof:268

1.

Evaluation by peers i.e. group members.

2.

Evaluation by the students of the class when presentation of the project and question answer session is taking place.

3.

Evaluation by the teacher.

*It would be good if grades are assigned by all the above three ways and a cumulative grade is given based on the average of the three grades. This process will make evaluation more objective and effective.

Concluding Note There should be no doubt in the minds of all stake holders that if group project work is done in the ways described above it will result in effective curriculum transaction which will make teaching learning process more joyful. Be creative and think out of box while guiding students for taking up Group projects. Newspapers, Magazines, various search engines and other sources will enable Teachers and Students to take up projects which expose them to the World of Work which is the spirit behind National Curriculum Framework’ 2005

269

Frequently Asked Questions (FAQ) Business Studies -XII

Based on Business Studies Class XII Syllabus, some FAQs along with answers from different units have been given for practice and for use in Classroom interactions. Give practice to students and develop your own question bank. Unit I. Nature and Significance of Management Q.1

What is the aim of Management Process?

A.

The aim of management process is to achieve organizational goals effectively and efficiently.

Q.2

A Petrol Pump needs to be managed as much as hospital. Which characteristics of management are highlighted?

A.

management is Pervasive (Pervasive means– function which is found behind every activity)/universal is being highlighted.

Q.3

McDonalds, the fast food chain made major changes in its menu to be able to survive in the Indian Market. Which characteristics of management are reflected in this change?

A.

Management is Dynamic in nature. (Hint: Indians are more inclined towards Indian spices and hence had no/less taste for non-spicy fast food) Therefore McDonalds made changes in its menu to suit to Indian taste, therefore, the initiative and changes are proactive and dynamic in nature)

Q.4

Suman works at middle level, give any two designations of this level.

A.

i) Purchase Manager

Q.5

The dabbawallas of Mumbai is a successful business enterprise. Which process has led to their success?

A.

Co-ordination is the process which had led to their success.

ii) Divisional Manager

(As teacher explain students that here control/monopoly function should not be highlighted instead it is the process and co-ordination at various levels which has led to the success.) Unit II- Principles of Management Q.1

For which of his works is Taylor most remembered for?

A.

Taylor is most remembered for his Time and Motion studies.

270

Q.2

“Management Principles enable a better understanding of the relation between human and material resources in accomplishing organizational goals”. Which nature of management principles has been highlighted here?

A.

The nature of management principles which has been highlighted here is ‘Mainly Behavioral.

Q.3

What is the focus of Scientific Management?

A.

The focus of Scientific Management is to increase Productivity through Scientific processes and methods. (Hint: Scientific Management runs on Scientific Principles)

Q.4

Hira and Harish are typists in a company having same educational qualification. Hira is getting Rs. 3000 p.m. and Harish Rs. 4000 p.m. for the same working hours. Which Principle of management is violated in this case?

A.

Principle of Equity

Q.5

In an organization, persons with technical mastery and intelligence are given planning work. Those with good health are given execution work. What technique of management is this?

A.

Functional Foremanship.

Q.6

In a situation of financial crisis, an organization is trying to cut down its costs. But the employers are demanding more salary. The organization decided not to

A.

Principle of subordination of Individual interest to General/Organasation Interest.

Unit III- Management and Business Environment Q.1

State any two salient features of the New Trade Policy of India?

A.

Abolishing of Service Tax on all Exports; Simplification of Export Procedure.

Q.2

How do social trends present various opportunities and threats to business enterprises? Give examples.

A.

Health & Fitness trends have created demand for health foods & gymnasium.

Q.3

List the broad features of the new industrial policy of India in 1991?

A.

De- licensing, De- reservation, Disinvestment, FDI.

Unit IV- Planning Q.1

Give two broad categories of Limitations of Planning.

A.

Planning has following two types of limitations 1. Internal

Q.2

2. External

“ABC Ltd. has a plan of profit maximization and has devoted to it a lot of money and time. But the competition starts increasing and it could not change his plan to beat its

271

competitors because huge amount of money it has already devoted to the pre-decided plan causing the occurrence of losses in the organization”. Which limitation of planning is highlighted in case mentioned above? A.

Planning leads to rigidity.

Q.3

“Natural disaster like floods in Gujarat has been responsible for failure of production in sales plan of Textile Industry”. Which limitation of planning is highlighted above?

A.

Planning does not work in dynamic environment.

Q.4

In which type of plan should the steps are followed in a chronological order?

A.

In ‘Procedures’ the steps are performed in a chronological order.

Q.5

Which type of plan does not allow for any discretion or flexibility?

A.

‘Rules’ do not allow any discretion or flexibility.

Q.6

“A. Co. needs a detailed plan covering the entire gamut of activities for its new project – “Construction of a Mall” What type of plan is being referred to?

A.

‘Programme’ is the type of plan that is being referred here.

Q.7

Which plan quantifies future facts and figures?

A.

‘Budget’ quantifies future facts and figure.

Q.8

Which plan defines the organization’s direction and scope in the long-run in terms of the external environment?

A.

Strategy

Q.9

Which plan may be defined as the general response to a particular problem or situation?

A.

A ‘Policy’ may be defined as the general response to a particular problem or situation.

Q.10

Which plan serves as a guide for overall business planning?

A.

Objectives serve as a guide for overall business planning.

Unit V -Organizing Q.1

Why is delegation pre-requisite to the efficient functioning of an organization? Identify the management principle here?

A.

It is because it enables the manager to use his style on high priority activities. (Here the management by Exception” Principle is exercised.) Management of Exception: Top Management must focus on priority issues which require decision making whereas the least priority at execution/middle level is delegated.

Q.2

What happens if a company continues with the same organizational structure for a long time?

A.

Continuation with the same structure leads to stagnancy which is detrimental to growth

272

Unit VI Q.1

If a worker is paid according to the number of units produced by him/her, which wage payment plan is used here?

A.

Performance- based plan is used here. (Wages are paid as per the no. of units produced in a given time)

Q.2

Quality of production is not as per standards. On investigation it was observed that most of the workers were not fully aware of proper operation of the machinery. Which element of staffing is being ignored here?

A.

Training element of staffing is ignored here.

Unit VII- Directing Q.1

In which Communication Network is a subordinate allowed to communicate with his immediate superior as well as his superior’s superior?

A.

Inverted ‘V’.

Q.2

What are the types of networks that could be formed informally in a grapevine network?

A.

Single strand, Gossip, Probability, Cluster.

Q.3

In which kind of Informal Communication Network is a sequence followed while communicating?

A.

Single Strand

Q.4

Name the Informal Communication Network Communication is done by all to all, on a non-selective basis.

A.

Gossip/Grapevine

Q.5

In which Informal Communication Network does person randomly communicate with the other?

A.

Probability

Q.6

Which is the type of Informal Communication Network where an individual will communicate with only those whom he trusts the most?

A.

Cluster

Q.7

Give two examples of organizational facilities which will encourage free flow of communication.

A.

Suggestion Box, Complaint Box.

273

Unit VIII Controlling Q.1

Which two sets of ‘Process of Control’ are concerned with compelling events to confirm to the plan?

A.

1. Comparison of actual Performance with Standards 2. Taking corrective Action

Unit IX Financial Management Q.1

Define Financial Management

Q.2

State the Primary objective of Financial Management

Unit X- Financial Markets Q.1

What is settlement cycle of NSE?

A.

T+2 (Trading Day + 2 days)

Q.2

Who carries out the clearing and settlement operations of NSE?

A.

NSCCL

Unit XI- Marketing Q.1

What is referred to as Essence of Market?

A.

Exchange is referred to as Essence of Market.

Q.2

Identify the type of product which is purchased frequently, immediately with least time and effort.

A.

Convenience Product

Q.3

Which type of goods facilitates the developing or managing the finished products?

A.

Supplies or Business Services.

Q.4

ABC Ltd. keeps the price of the products at lower levels so that more people are attracted to buy its product, which objective of pricing is the firm trying to achieve?

A.

‘Obtaining market share leadership’ – objective

Q.5

If a car manufacturer offers to sell a particular brand of car at a discount of Rs. 10000 for a Ltd. Period. What kind of Sales Promotion activity is used?

A.

Rebate

Q.6

By offering a scheme such as “Buy two get one free” to consumers. What kind of Sales Promotion Activity is the seller implementing?

A.

Quantity Gift.

274

Q.7

If the offer is of a pack of half kg of rice with the purchase of a bag of Atta, What kind of Sale Promotion activity is in effect?

A.

Product Combination

Q.8

What is the non-personal form of promotion where the information is disseminated by an independent source?

A.

Publicity

Q.9

If a company offers a packet of a recently launched brand of biscuits for free. What kind of ‘Sale Promotion’ activity is being undertaken?

A.

Sampling

Q.10

According to critics, which tools of promotion may undermine social values and promote materialism.

A.

Advertising

Q.11

Automobiles Ltd. Offered to sell their new bike at about Rs. 4000 less than usual price is an example of which of the technique of Sales Promotion.

A.

Rebate

Unit XII Q.1

Who is referred to as a King in a free Market Economy?

A.

A consumer is referred to as a king in a free market economy.

Q.2

What do you mean by ‘Caveat de emptor’

A.

‘Caveat emptor’ means ‘Let the buyer beware’.

Q.3

Which act provides safeguards to consumers against unfair trade practices?

A.

The consumer Protection Act, 1986 provides safeguards to consumers against unfair trade practices.

Q.4

Which Act provides safeguards in case the goods purchased do not comply with express or implied conditions or warranties?

A.

It is the Sale of Goods Act, 1930.

Q.5

Which Act provides for the setting up of three tier judicial machinery for redressal of consumer complaint?

A.

The Consumer Protection Act, 1986.

Q.6

Which Act aims to check adulteration of food articles and ensure their purity.

A.

The Prevention of Food Adulteration Act, 1954.

Q.7

Which Act provides protection of consumers against the malpractice of underweight or under-measure?

A.

The Standards of Weights and Measures Act, 1976. 275

Q.8

Which Act has repeated and replaced the Trade and Merchandise Marks Act, 1958.

A.

The Trade Marks Act, 1999.

Q.9

What does the Trade Marks Act, 1999 aim at?

A.

It prevents the use of fraudulent marks on products.

Q.10

What does the Competition Act, 2002 aim at?

A.

It provides protection to the consumer in case of practice adopted by business firms which hamper competition in the market.

Unit XII Q.1

Who is referred to as a king in a free Market Economy?

A.

A consumer is referred to as a king in a free market economy.

Q.2

What do you mean by ‘Caveat emptor’

A.

‘Caveat emptor’ means ‘Let the buyer beware’.

Q.3

Which act provides safeguards to consumers against unfair trade practices?

A.

The consumer Protection Act, 1986 provides safeguards to consumers against unfair trade practices.

Q.4

Which Act provides safeguards in case the goods purchased do not comply with express or implied conditions or warranties?

A.

It is the Sale of Goods Act, 1930.

Q.5

Which Act provides for the setting up of three tier judicial machinery for redressal of consumer complaint?

A.

The Consumer Protection Act, 1986.

Q.6

Which Act aims to check adulteration of food articles and ensure their purity?

A.

The Prevention of Food Adulteration Act, 1954.

Q.7

Which Act provides protection of consumers against the malpractice of underweight or under-measure?

A.

The Standards of Weights and Measures Act, 1976.

Q.8

Which Act has repeated and replaced the Trade and Merchandise Marks Act, 1958.

A.

The Trade Marks Act, 1999.

Q.9

What does the Trade Marks Act, 1999 aim at?

A.

It prevents the use of fraudulent marks on products.

Q.10

What does the Consumer Protection Act, 2002 aim at?

A.

It provides protection to the consumer in case of practice adopted by business firms which hamper competition in the market. 276

Using Commerce Laboratory and Internet for Enhancing Teaching Learning Process and for Personal Development

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List of Useful Websites For Commerce Teachers The list contains useful websites for commerce teachers where they can find good teaching resources for curriculum transaction of Business Studies and Accountancy as per stated objectives fulfilling the requirements of Constructive experiential learning. Internet is a very widely used source of information. If the teacher and students of commerce make use of the websites listed in this article they can contribute to joyful and useful learning of the subject.

Suggested Websites The following websites (URL’s) can be accessed by teachers and students alike for better learning in commerce subjects (Business Studies and Accountancy):1. www.google.com:- This website is the master of all searches on the world wide web. It is used to locate other websites which have the desired information. The trick lies in selection of appropriate search words so that the exact required information is accessed. 2. www.edudel.nic.in:- This the website of Directorate of Education which helps in getting information regarding the latest developments in Govt. schools of Delhi. It also helps the students and teachers in their day to day affairs. 3. www.cbse.nic.in:- This is the website of Central Board of Secondary Education which gives information regarding the latest curriculum, learning materials and examination related queries of teachers and students. 4. www.education.gov.in:- This is the official website of Ministry of Human Resource Development. It gives the required information on government of India policy on education etc. 5. www.righttoeducation.in:- This website gives all the required information regarding Right to Education which is the biggest educational reform and affects all those engaged in the field of education alike. 6. www.nseindia.com/in.:- This is the website of national stock exchange which gives all the stock market information of interest to all those connected with commerce education. 7. www.bseindia.com/in.:_ This website is of Bombay stock exchange which is also useful for getting information about the stocks listed in it. 8. www.incometaxindia.gov.in:- This is the website of Income Tax Department which will help to get information in Income Tax with which all of us are affected. The resource available on it can be used by commerce teachers as teaching resources. 9. www.mce.gov.in:- This is the website of Ministry of Corporate Affairs which gives information on all the legislations affecting the Corporate sector in India, like schedule VI (Presentation of company’s Financial Statements etc.). Appropriate teaching tools can be found on this website. 10. www.youtube.com:- This is the most popular website for locating useful videos in accountancy and business studies which can be used by teachers for class room transaction. 283

11. www.nios.ac.in:- This is the website of national institute of open schooling which has very useful lessons in both business studies and accountancy. 12. www.businesstoday.com/in:- This website contains useful material on business news and case studies which can be used profitably by all the teachers and students. 13. www.businessindia.com/in:- This website contains useful resources from this popular business magazine which is useful in locating many relevant teaching resources. 14. www.khelostocks.com:- This website is useful for learning stock market operations. It also gives its registered user virtual money which can be used for demo live stock trading like placing a buy and sell orders and then seeing the actual gain or loss in its portfolio. 15. www.wsj.com:- This is the website of a very popular New York financial news paper ‘The Wall Street Journal’ which will help in keeping in touch with the global financial trends. 16. www.ocw.mit.edu:- This website contains ‘Open Course Ware’ of Massachusetts Institute of Technology and its associated institutes like ‘Sloan School of Management’. It will be useful in locating appropriate business resources. 17. www.yojna.in:- This is the website of a popular magazine of planning commission which contains useful articles on economic policy. 18. www.rbi.gov.in:- This is the website of ‘Reserve Bank of India’ which will help in locating useful resources on Govt. Monetary and Fiscal policy. 19. www.india.gov.in:- This is the website of Government of India which contains links to all other government websites. 20. www.ted.com:- This website contains videos of speeches of many business leaders and innovative people which will help the users to gain useful insight into many issues. *The list is not exhaustive. Besides the websites given above, there are many other websites which can be used for effective curriculum transaction of commerce subjects. Explore on your own other relevant websites.

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CLASS Outline Guidance Notes regarding adoption of Revised Schedule VI to the Companies Act 1956 in the subject of

Accountancy (Effective for Board Examination 2013)

Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110 092 India

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Statement

the required the

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(a) Share Capital 9,00,000 1 Mark

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